SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER: 1-12727
-----------------
SENTRY TECHNOLOGY CORPORATION
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 96-11-3349733
------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
350 WIRELESS BOULEVARD, HAUPPAUGE, NEW YORK 11788
-------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 232-2100
-------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS: ON WHICH REGISTERED:
- -------------------- ---------------------
Common Stock, $.001 par value American Stock Exchange
Class A Preferred Stock, $.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes /x/ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
At March 26, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $11,644,000, based upon
the closing price of such securities on the American Stock Exchange on that
date. At March 26, 1998, the Registrant had outstanding 9,750,760 shares of
Common Stock and 5,079,244 shares of Class A Preferred Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS.
FORMATION OF THE COMPANY
At a special meeting of shareholders of Knogo North America Inc., a
Delaware corporation ("Knogo"), and a special meeting of shareholders of Video
Sentry Corporation, a Minnesota Corporation ("Video"), each held on February 12,
1997, the shareholders of Knogo and the shareholders of Video, respectively,
approved the Amended and Restated Agreement and Plan of Reorganization and
Merger, dated as of November 27, 1996, as subsequently amended (the "Merger
Agreement"), by and among Knogo, Video, Sentry Technology Corporation, a
Delaware corporation (the "Registrant," the "Company" or "Sentry"), Strip Merger
Corp., a Delaware corporation, and Viking Merger Corp., a Minnesota corporation,
and the transactions contemplated thereby.
Pursuant to the Merger Agreement, on February 12, 1997 (the "Effective
Date"), each of Knogo and Video became a wholly-owned subsidiary of Sentry, with
(a) each former Knogo shareholder being entitled to receive one share of Sentry
Common Stock, par value $.001 per share ("Sentry Common Stock"), and one share
of Sentry Class A Preferred Stock, par value $.001 per share ("Sentry Class A
Preferred Stock"), for each 1.2022 shares held of Knogo Common Stock, par value
$.01 per share, and (b) each former Video shareholder being entitled to receive
one share of Sentry Common Stock for each share held of Video Common Stock, par
value $.01 per share. This series of transactions is referred to herein
collectively as the "Merger."
The Merger was accounted for under the purchase method of accounting.
Although Video shareholders received a majority voting interest in Sentry based
upon their common stock ownership percentage, generally accepted accounting
principles requires consideration of a number of factors, in addition to voting
interest, in determining the acquiring entity for purposes of purchase
accounting treatment. As a result of these factors, further described in Note 1
to the Consolidated Financial Statements, and solely for accounting and
financial reporting purposes, the Merger was accounted for as a reverse
acquisition of Video by Knogo. Accordingly, the financial statements of Knogo
are the historical financial statements of Sentry and the results of Sentry's
operations include the results of operations of Video Sentry after the Effective
Date.
GENERAL
Sentry, incorporated in October 1996, is a holding company for Video and
Knogo and their respective subsidiaries. Accordingly, the business of Sentry is
the business conducted by Video and Knogo and their respective subsidiaries.
Prior to the Effective Date, Sentry had not conducted any business activities,
other than those incident to its formation, its execution of the Merger
Agreement and related agreements, and the taking of other actions in connection
with the Merger.
VIDEO
Video designs, manufactures, markets, installs and services a programmable
traveling closed circuit television ("CCTV") surveillance system that delivers a
high quality video picture which is used in a wide variety of applications.
Video also acts as a system integrator of conventional CCTV products that it
markets, installs and services. Video's predecessor was founded in 1990 and made
its first sales in 1992.
Video's proprietary CCTV system, called SentryVision(R), is well suited for
loss prevention surveillance in retail stores and distribution centers and
security surveillance for monitoring and deterring illegal and unsafe activities
in a variety of other locations such as parking garages, correctional facilities
and public transit terminals. The SentryVision(R) system may also be employed in
a broad range of operational and process monitoring applications in commercial
manufacturing and industrial settings. As of December 31, 1997, 815
SentryVision(R) systems had been installed in approximately 322 customer
locations nationwide. Current customers include Lowe's Home Centers, Target
Stores, Eckerd Corporation, Mills Fleet Farm, Winn Dixie, Estee Lauder, Kohl's
Department Stores and Marsh Supermarket. The Company believes that, by expanding
surveillance coverage, the SentryVision(R) systems have enabled customers to
significantly reduce inventory shrinkage, increase theft apprehension rates and
improve merchandising flexibility. Based on the price of its system and the
experience of Video's customers to date, the Company believes the
SentryVision(R) system is a cost-effective loss prevention solution which can
improve the profitability of its customers.
The Company believes that the SentryVision(R) system is the only proven,
commercially accepted, traveling CCTV system currently available. The
SentryVision(R) system consists of two CCTV cameras mounted on a camera carriage
assembly designed to move horizontally through a tinted enclosure that conceals
the camera's location. The system's unique, cable-free design allows the camera
to move freely and rapidly through the enclosure while transmitting a continuous
video signal to provide increased surveillance coverage. The Company believes
the major advantage of the SentryVision(R) traveling surveillance system over
conventional fixed-mount or pan/tilt/zoom ("PTZ") dome surveillance cameras is
the system's ability to provide uninterrupted security monitoring and
surveillance over large areas and over areas which have numerous visual
obstructions, often at a lower system cost. The SentryVision(R) system permits
the monitoring of activities in areas that traditionally have been difficult to
monitor, such as aisles with overhead signs, hidden corridors, areas between
vehicles, and other obstructed areas. The system is configured to meet each
customer's specific surveillance needs and is often integrated with the
customer's existing peripheral surveillance equipment.
KNOGO
Knogo is engaged in the design, manufacture, sale, installation and
servicing of a complete line of electronic article surveillance ("EAS")
equipment. Knogo was incorporated in Delaware in October 1996, while its
corporate predecessors had been in business for over 30 years. Knogo's immediate
predecessor, also named Knogo North America, Inc. (the "Knogo Predecessor") was
created in connection with an Amended and Restated Agreement and Plan of Merger
(the "Sensormatic Merger Agreement"), dated as of August 14, 1994, among
Sensormatic Electronics Corporation ("Sensormatic"), Knogo Corporation ("Old
Knogo") and the Knogo Predecessor. Pursuant to the Sensormatic Merger Agreement,
Old Knogo merged with and into Sensormatic on December 29, 1994 (the
"Sensormatic Merger"). Immediately prior to the Sensormatic Merger, Old Knogo
contributed to the Knogo Predecessor all of Old Knogo's operations in the United
States, Canada and Puerto Rico (the "Territory") and distributed all of the
stock of the Knogo Predecessor to the former shareholders of Old Knogo (the
"Spinoff").
Certain information in this Annual Report on Form 10-K is presented as if
the Sensormatic Merger and Spinoff were consummated on March 1, 1993. In
addition, certain information reflects that, at the time of the Spinoff, the
Knogo Predecessor changed its fiscal year end from February 28 to December 31.
The EAS systems which Knogo manufactures are based upon three distinct
technologies. One system, the Swept Radio Frequency ("Knoscape RF(TM)") system,
uses medium frequency transmissions in the two to nine megahertz range. The
second system, the Dual Radio Frequency ("Ranger(TM)") system, uses ultra-high
frequency radio signals in the 902 megahertz and 928 megahertz bands. The third
system, Micro-Magnetics ("Knoscape MM(TM)"), uses very low frequency
electromagnetic signals in the range of 218 hertz to nine kilohertz. Knogo also
manufactures a non- electronic dye-stain pin ("KnoGlo(TM)"). In addition, prior
to the Effective Date, Knogo marketed a CCTV system, known as "The KNOGO
Surveillor(TM)." Effective April 1, 1996, Knogo became an authorized distributor
of the library security systems and related products of Minnesota Mining and
Manufacturing Company ("3M").
The principal application of Knogo's products is to detect and deter
shoplifting and employee theft in supermarket, department, discount, specialty
and various other types of retail stores including bookstores, video, liquor,
drug, shoe, sporting goods and other stores. The use of these products reduces
inventory shrinkage by deterring shoplifting, increases sales potential by
permitting the more open display of greater quantities of merchandise, reduces
surveillance responsibilities of sales and other store personnel and, as a
result, increases profitability for the retailer. In addition, Knogo's EAS
systems are used in non-retail establishments to detect and deter theft, in
office buildings to control the loss of office equipment and other assets, in
nursing homes and hospitals for both asset and patient protection, and in a
variety of other applications.
Knogo has also devoted resources to the development of its asset protection
business in non-traditional areas, particularly in the area of manufactured hard
goods such as printed circuit boards, computer processor and memory chips and
related components. While no significant revenue has been received to date in
connection with this line of business, the Company believes the potential for
growth in this market may be considerable.
THE SENTRYVISION(R) SYSTEM
The SentryVision(R) system consists of a camera carriage unit, a continuous
track with a tinted enclosure and electronic control equipment. The carriage
unit moves within the enclosure and carries two pan/tilt/zoom CCTV cameras,
electronic transmission components and motor drives. The carriage track and
enclosure are designed to custom lengths for more complete viewing. Using
Video's patented transmission technology, the carriage unit transmits a video
signal from the camera(s) through two copper conductors running inside the
enclosure to a receiver unit located at one end of the carriage track. The
copper conductors also carry power to the camera carriage, eliminating the need
for power or communication cables. From the receiver unit, the video signals are
relayed to a central monitoring location by wire or fiber optics, where a system
operator can position or move the camera carriage to obtain the best vantage
point while viewing and recording the continuous, live video pictures. The
system design supports conventional peripheral devices, such as videocassette
recorders, alarm inputs, fixed cameras, PTZ dome cameras, switches/multiplexers,
and voice intercom systems.
The SentryVision(R) system typically employs two high resolution cameras
facing opposite directions and operates at variable speeds up to 15 feet per
second. The system is designed to allow three control modes: manual control,
automated control or automatic patrol. This configuration enables the system to
respond to control commands provided externally to the system through a serial
interface port. In addition, the SentryVision(R) system utilizes the RS-232
communication protocol, which allows the SentryVision(R) carriage control to be
integrated with any industry standard controller. In the manual control mode,
the combination of carriage movement, camera PTZ features, and the ability to
view from each side of the enclosure, enables the user to manually follow and
record persons engaging in suspected activities from a central control station.
Under the automated control mode, the system operates as a component in an
automated control system. When engaged in the automatic patrol mode, which is
still under development by the Company, the carriage is expected to
automatically travel through pre-programmed "tours" of a facility, affording
precise camera views of intended target locations. The Company anticipates that
such tours may be programmed for full end-to-end facility observation, random
view facility observation, or user-defined facility observation with a series of
stops at precise locations focusing on precise views.
RETAIL MARKET APPLICATIONS. Video sold its first systems in 1992 for
installation in parking garage security surveillance applications, but quickly
moved its market focus into the retail sector. In this sector, the Company has
identified a number of specific market segments for which the SentryVision(R)
systems are well suited for loss prevention surveillance, including home
centers, mass merchandise chains, supermarkets and drug stores, as well as
related distribution centers. The key application is inventory loss prevention
in the stores, stock rooms and distribution centers.
The SentryVision(R) system is typically installed in retail stores which
use a checkout area at the front of the store and product display configurations
and high merchandise shelving which form rows and aisles. Video specializes in
designing system applications which are customized to fit a customer's specific
needs and which integrate the customer's existing surveillance equipment (PTZ
dome and fixed-mount cameras) with the SentryVision(R) system. The flexibility
of the system allows the customer to specify target-coverage areas ranging from
stock rooms to total store coverage and focus on shoplifting or employee theft.
The SentryVision(R) system is installed near the ceiling along the rows of cash
registers and between the ends of the merchandise aisles. This allows the
retailer to easily observe both the cash handling activities of cashiers in the
checkout area and customer activities between the merchandise rows, despite the
presence of hanging signs and other obstructions. The entire sales floor can be
monitored efficiently by focusing up and down the aisles and by moving the
carriage horizontally from aisle to aisle, or from cash register to cash
register. In addition, with the use of camera tilt and zoom lens features,
activities in each area can be monitored in greater detail. Results from Video's
current installations indicate significant improvements in detecting shoplifting
and employee theft. Customers using the SentryVision(R) system have reported
significant reductions in theft-related inventory shrinkage.
- HOME CENTERS. Video has installed 588 systems in 220 store
locations for six customers in the home center segment of
the retail market. Home centers represent Video's fastest
growing market segment. In the past three years, the
SentryVision(R) system has been installed in 192 locations
for Lowe's Home Centers, a 445 store chain, and in 23
locations for Mills Fleet Farm, a 32 store regional
hardware, home supply and discount retail chain. Both
companies required systems for total floor coverage, with
Lowe's Home Centers choosing to integrate track cameras with
PTZ dome and fixed-mount cameras, while Mills Fleet Farm
chose to use only the track camera system. Video received
SECURITY magazine's "Best" award for New Security
Installation in June 1994 for its installation in the Mills
Fleet Farm store in Brooklyn Park, Minnesota.
According to industry publications, the home centers market
consists of approximately 5,100 companies operating over
20,000 stores in the United States, with the top ten
companies operating over 5,500 stores. Typical systems for
home centers installations range in price from $20,000 to
$30,000 for smaller stores and from $80,000 to $150,000 for
larger stores requiring more carriage runs to provide
adequate coverage.
- MASS MERCHANDISE CHAINS. Video has installed 48 systems in
24 store locations for ten customers in this segment,
including Target Stores and TJ Maxx. The targeted coverage
varies extensively in these installations from only stock
rooms to total store coverage. According to industry
publications, in 1996 the mass merchandise market in the
United States had approximately 140 companies operating over
10,000 store locations, with the top nine companies
operating approximately 7,400 of these stores. Typical
systems for mass merchandise stores range in price from
$20,000 to $30,000 for smaller stores or target coverage
areas and from $90,000 to $130,000 for large systems.
- SUPERMARKETS. Video has installed 24 systems in 23 store
locations for seven supermarket customers. The targeted
coverage in most of these installations has been the entire
retail space. The supermarket segment of the market is very
fragmented in the United States. According to industry
publications, in 1996 approximately 2,000 companies operated
nearly 35,000 stores, with over half of those companies
having fewer than four stores. The top 28 companies operate
more than half of the total stores. Typical systems for
supermarket installations range in price from $15,000 to
$20,000 for smaller stores to $40,000 to $50,000 for larger
stores.
- DRUG STORES. Video has installed 23 systems in 23 store
locations for two drug store customers, including a major
national drug store chain of approximately 1,750 stores. The
targeted coverage area for these customers is the entire
store. According to industry publications, in 1996 the drug
store market consisted of approximately 1,500 companies
operating approximately 21,000 stores. Typical systems for
the drug store market range in price from $15,000 to $25,000
for smaller stores and from $40,000 to $50,000 for larger
stores.
- DISTRIBUTION CENTERS. Video also provides loss prevention
surveillance for retail distribution centers and warehouses,
and has installed 54 systems in 27 distribution centers for
18 different customers. Traveling through a facility from an
overhead position, the SentryVision(R) system can monitor
activities occurring between the stacked rows of cartons or
lines of hanging garments. The system can also move a
surveillance camera into position to monitor shipping and
receiving docks and parked delivery trucks. To achieve
surveillance capabilities equivalent to those of the
SentryVision(R) system, a conventional PTZ dome system or
fixed-mount CCTV camera would have to be installed at every
desired vantage point, requiring numerous cameras,
additional equipment and wiring and increased installation
and operating costs. Even though the potential number of
retail distribution centers is much smaller than the related
number of store locations, the Company believes that such
distribution center installations, in addition to providing
an important revenue source, provide a potential point of
entry into the retail stores of a number of major retailers.
Typical systems for distribution center installations range
in price from $40,000 to $50,000 for a small system to over
$200,000 for a large system.
- SECURITY SURVEILLANCE. Video has installed 74 systems in
three parking garages for two customers. The coverage area
is the total parking ramp including in and around the parked
cars. In addition, Video has installed one system in a bus
terminal to provide coverage of the maintenance area of the
garage. In 1997, the Company installed systems at the U.S.
Postal Service, the Federal Reserve System and two systems
at the Texas Department of Criminal Justice, the first
correctional facility customer for the Company. The Company
has made additional proposals to correctional facilities,
airport terminals, airport baggage handling and baggage
claim areas as well as airport parking facilities.
While the security surveillance and operation and process monitoring
markets may significantly benefit from the increased security, surveillance and
monitoring provided by the SentryVision(R) system, such applications have been
limited to date. The Company believes future orders in these additional markets
may be characterized by long lead times between proposals and shipments, and
that marketing and other related expenses may be incurred in periods prior to
the recognition of any matching sales.
CONVENTIONAL CCTV SYSTEM
Conventional CCTV is cost effective and the most widely used loss
prevention system in North America. Conventional CCTV uses all the basic
components of the video surveillance industry including fixed and dome cameras,
VCR's, monitors, switches, multiplexers and controllers. As all of this
equipment is manufactured for Video by outside vendors, the Company can provide
its customers with state-of-the-art equipment for specific applications at
favorable costs. The Company believes that, while less profitable than
SentryVision(R) and traditional EAS products, the CCTV products complement the
Company's other surveillance systems and provide retailers with further
protection against internal theft and external shoplifting activities. CCTV
systems can also be electronically connected to EAS systems, causing a video
record to be generated when an alarm is triggered.
Remote video surveillance or remote digital CCTV is another potential
growth area for Video. These systems allow customers to monitor remote sites
using existing communication lines and a PC-based system. Video camera images
are stored and manipulated digitally, substituting the PC for the VCR and
eliminating the videotape. Video markets the Remote Watch(TM) Pro system with
software developed by Alpha Systems Lab, a third-party vendor.
Video's customers include ten of the top 20 United States retailers.
According to STORES magazine, the top 20 retailers have approximately 45,000
stores. The Company's strategy is to build upon Video's initial retail sales by
implementing a direct sales program targeting the retail market, including the
top 100 United States retailers.
EAS SYSTEMS
EAS systems consist of detection devices which are triggered when articles
or persons tagged with wafers or tags pass through the detection device. The
principal application of the Knoscape RF(TM) and Ranger(TM) systems is to detect
and deter theft of soft goods such as clothing, while the Knoscape MM(TM)
systems are primarily used to detect and deter the theft of hard goods including
packaged goods and books.
At December 31, 1997, the approximate number of Knogo's Knoscape RF(TM) and
Ranger(TM) systems sold or leased in the Territory exceeded 13,700. At that
date, the approximate number of Knogo's Knoscape MM(TM) systems sold or leased
in the Territory exceeded 9,300.
SWEPT AND DUAL RADIO FREQUENCY DETECTION SYSTEMS
Knogo manufactures and distributes the Knoscape RF(TM) system, the
principal application of which is to detect and deter shoplifting and employee
theft of clothing in retail establishments. Knogo also manufactures and
distributes the Ranger(TM) system, which the Company believes is a particularly
useful and cost efficient EAS system for soft-goods retail stores with wide
mall-type exit areas which ordinarily would require multiple Knoscape RF(TM)
systems for adequate protection. The Knoscape RF(TM) and Ranger(TM) systems
consist of radio signal transmission and monitoring equipment installed at exits
of protected areas, such as doorways, elevator entrances and escalator ramps.
The devices are generally located in panels or pedestals anchored to the floor
for a vertical arrangement or mounted in or suspended from the ceiling and
mounted in or on the floor for a horizontal arrangement. The panels or pedestals
are designed to harmonize with the decor of the store. The monitoring equipment
is activated by tags, containing electronic circuitry, attached to merchandise
transported through the monitored zone. The circuitry in the tag interferes with
the radio signals transmitted through the monitoring system, thereby triggering
alarms, flashing lights or indicators at a central control point, or triggering
the transmission of an alarm directly to the security authorities. By means of
multiple installations of horizontal Knoscape RF(TM) systems or installation of
one or more Ranger(TM) systems, the Company's products have the ability to
protect any size entrance or exit.
Tags are manufactured in a variety of sizes and types and are attached
directly to the articles to be protected by means of specially designed fastener
assemblies. A tag is removed from the protected article, usually by a clerk at
the checkout desk, by use of a decoupling device specially designed to
facilitate the removal of the fastener assemblies with a minimum of effort.
Removal of the tag without a decoupler is very difficult and unauthorized
removal will usually damage the protected article and thereby reduce its value
to a shoplifter. Optional reminder stations automatically remind the store
clerk, by means of audiovisual indicators, to remove the tag when the article is
placed on the cashier's desk.
Knoscape RF(TM) and Ranger(TM) systems generally have an economic useful
life of six years (although many of Knogo's systems have been operating for
longer periods), have a negligible false alarm rate and are adaptable to meet
the diversified article surveillance needs of individual retailers.
MAGNETIC DETECTION SYSTEMS
The primary application of Knoscape MM(TM) systems is to detect and deter
theft in "hard goods" applications such as supermarkets, bookstores and in other
specialty stores such as video, drug, liquor, shoe, record, sporting goods and
similar stores.
Knoscape MM(TM) systems use detection monitors which are activated by
electromagnetically sensitized strips. The MM targets are typically attached to
the articles to be protected when price tags are affixed and are easily
camouflaged on a wide array of products. The detection monitors used by the
Knoscape MM(TM) systems are installed at three to five foot intervals at the
exits of protected areas. The magnetic targets can be supplied in many forms and
are attractively priced, making them suitable for a variety of retail
applications. In addition, the MM targets can be manufactured to be activated
and deactivated repeatedly while attached to the articles to be protected, which
the Company believes is a particularly desirable feature for use with items such
as compact discs, CD-Roms and videotapes, which may be "checked-out" and later
returned. Accurate deactivation is also very important when the item to be
protected is a personal accessory that will be carried by its owner from place
to place, such as pocket books, pens, lipstick, shoes, camera film and cameras.
The Knoscape MM(TM) system offers retailers several features not available
in Knoscape RF(TM) and Ranger(TM) systems. Since the target is very small,
relatively inexpensive and may be inserted at the point of manufacture or
packaging, it provides retailers with a great deal of flexibility and is
practical for permanent attachment to a wide variety of hard goods, especially
low profit-margin products. The target can be automatically deactivated at
check-out, eliminating the risk of triggering alarms when merchandise leaves the
store and saving sales personnel valuable time. Since the targets can be
incorporated directly into a price tag, they are convenient to use.
OTHER LOSS PREVENTION PRODUCTS
KNOGLO(TM)
KnoGlo(TM), a non-electronic, dye-stain pin, releases an indelible liquid
when tampered with. Used with passive locking mechanisms without electronics,
KnoGlo(TM) is often a retailer's first step in loss prevention. KnoGlo(TM) is
also employed in stores with EAS systems as an extra layer of protection. Such
protection is useful in problem areas (near mall door openings, for example) or
where users must maximize selling space.
BOOKINGS
Of Sentry's bookings in the Territory for the year ended December 31, 1997,
approximately 46% were attributable to the SentryVision(R) system, 15% to the
CCTV system, 14% to the Knoscape RF(TM) system, 9% to 3M library security
systems, 8% to the Knoscape MM(TM) system, 6% to the Ranger(TM) system and 2% to
KnoGlo(TM). For the year ended December 31, 1996 approximately 23% were
attributable to the CCTV system, 15% to the Knoscape RF(TM) system, 14% to 3M
library security systems, 30% to the Knoscape MM(TM) system, 16% to the
Ranger(TM) system and 2% to KnoGlo(TM). For the year ended December 31, 1995
approximately 12% were attributable to CCTV system, 21% to the Knoscape RF(TM)
system, 48% to the Knoscape MM(TM) system, 13% to the Ranger(TM) system, 2% to
KnoGlo(TM) and 4% to the Express system (a self-check system for libraries
("Express") which was sold by the Knogo Predecessor in March 1996).
MAJOR CUSTOMERS
Although the composition of the Company's largest customers has changed
from year to year, a significant portion of the Company's revenues has been
attributable to a limited number of major customers. Sales to Sensormatic
accounted for 10%, 20% and 41% of total revenues in 1997, 1996 and 1995
respectively. In 1997, Lowe's Home Centers accounted for 18%, and in 1996
Goody's Family Clothing accounted for 13%, of total revenues, respectively. No
other customers accounted for more than 10% of the Company's sales during 1997,
1996 or 1995. While the Company believes that one or more major customers could
account for a significant portion of the Company's sales for at least the next
two years, the Company anticipates that its customer base will continue to
expand and that in the future the Company will be less dependent on major
customers.
PRODUCTION
VIDEO
Video's manufacturing operations consist primarily of the assembly of its
camera carriages and control units using materials and manufactured components
purchased from third parties. Video is not dependent upon any particular
supplier for these materials or components. Some parts are stock,
"off-the-shelf" components, and other materials and system components are
designed by Video and manufactured to Video's specifications. Final assembly
operations are conducted at the Company's facilities in Cidra, Puerto Rico or
Hauppauge, New York. System components and parts include cameras, circuit
boards, electric motors and a variety of machined parts. Each system component
undergoes a quality assurance check by Video prior to its shipment to an
installation site. Video is not subject to any state or federal environmental
laws, regulations or obligations to obtain related licenses or permits in
connection with its manufacturing and assembly operations.
Product installation and service are performed and monitored by the
Company's customer service department. Installations typically take from three
days to three weeks and consist of mounting the enclosures, installing the
controller unit, installing the carriage assembly, and connecting control and
transmission cables to the central monitoring location. Items such as high
voltage power termination wiring are typically the responsibility of the end
user.
KNOGO
Knogo produces at the Company's facilities in Cidra, Puerto Rico and, to a
lesser extent, Hauppauge, New York, or purchases through suppliers, its Knoscape
RF(TM), Ranger(TM), Knoscape MM(TM), KnoGlo(TM) and CCTV systems, or their
components. Production consists of assembling electronic and mechanical
components and printed circuitry which Knogo purchases from various suppliers.
Knogo's specially designed tools, plastic cases for the tags, and the target
bands used in Knogo's system for patient and personnel control, are produced to
Knogo's specifications by independent contractors using existing molds and
tooling. Knogo is not dependent on any one supplier or group of suppliers of
components for its systems. The Company's policy is to maintain Knogo's
inventory at a level which is sufficient to meet projected demand for its
products. The Company does not anticipate any difficulties in continuing to
obtain suitable components for Knogo at competitive prices in sufficient
quantities as and when needed.
In January 1996, Knogo acquired a controlling interest in K&M Converting
Corp. ("KMCC"). KMCC is a joint venture entered into with Marian Rubber Products
Co., Inc. ("Marian"). KMCC is the exclusive converter of magnetic material into
disposable targets or labels used in Knogo's EAS systems.
MARKETING
The Company markets its products for Video and Knogo, jointly, through the
direct efforts of approximately 30 salespersons located in select metropolitan
areas across the United States and Canada, as well as through participation in
trade shows, advertising in trade publications and by targeted direct mailings.
The Company's customers include some of the major retail stores and store chains
in North America.
VIDEO
To date, all SentryVision(R) and conventional CCTV Systems have been sold
on a direct sale basis. Typical billing arrangements for SentryVision(R) systems
have been invoicing 50% of total cost upon shipment of the product and 50% on
the completion of the installation. In 1998, the Company expects to also
introduce a leasing program for customers, using a third party leasing company.
While most of the current SentryVision(R) and conventional CCTV sales have
been made to home centers, retail chains and distribution centers, the Company's
1998 marketing plan for Video also emphasizes correctional facilities, public
and private garages and commercial and industrial prospects.
Beginning in late 1997, the Company began marketing its SentryVision(R)
product line in selected territories in the United States and Canada through
independent sales representatives. The Company intends to hire up to 11 sales
representatives in 1998 who will be compensated on a commission only basis.
In addition, the Company began to market SentryVision(R) internationally
using independent distributors. The distribution agreements generally appoint a
distributor for a specified term as the exclusive distributor for a specified
territory. The agreements require the distributor to purchase a specified dollar
amount of the Company's product during the term of the agreement. The Company
sells its products to independent distributors at prices below those charged to
end-users because distributors typically make volume purchases and assume
marketing, customer training, installation, servicing and financing
responsibilities. During 1997, agreements were made with independent
distributors for South America, Central America, the Caribbean, South Africa and
Korea.
During 1997 Video placed in service 148 SentryVision(R) systems and 1,812
CCTV cameras and peripherals.
KNOGO
Knogo EAS systems are marketed on both a direct sales and lease basis, with
direct sales representing the majority of the business. The terms of the
standard leases are generally from one to five years. The sales prices and lease
rates vary based upon the type of system purchased or leased, number and types
of targets included, the sophistication of the system employed and, in the case
of a lease, its term. In the case of the Knoscape MM(TM) systems, detection
targets which are permanently attached to the item to be protected are sold to
the customer even when the system is leased. Therefore, in the case of either a
sale or lease of a Knoscape MM(TM) system, as the customer replenishes its
inventory, additional targets will be required for those items to be protected.
The Company also markets a more expensive, removable, reusable detection tag for
use with the Knoscape MM(TM) systems on certain products such as clothing and
other soft goods.
During the year ended December 31, 1997, Knogo placed in service in the
Territory over 600 Knoscape RF(TM), Ranger(TM), and Knoscape MM(TM) systems. The
Company does not believe that the loss of any one EAS customer would have a
material adverse effect on the Company's business.
The Company believes that the supermarket industry is a significant
potential market in North America for EAS systems, and believes Knogo's
technology and service capabilities give the Company an important advantage in
the supermarket sector.
The Company believes the library market continues to be a significant
growth market for magnetic technology. In March 1996, 3M and the Knogo
Predecessor entered into a strategic alliance to provide universal asset
protection to libraries across North America. The Company believes that this
strategic alliance has strengthened service to library customers. The agreement,
effective April 1, 1996, permits Knogo to act as a distributor of all of 3M's
library products, including the 3M Tattle-Tape(TM) Security Strips, detection
systems, 3M SelfCheck System hardware and software and other 3M library
materials flow management products and accessories to public, academic and
government libraries. In addition, under the agreement 3M provides service and
installation for all new and existing Knogo library customers throughout North
America.
In May 1997, Sentry commenced a joint venture with Talon Medical Ltd.
("Talon") whereby Talon has agreed to serve as Sentry's exclusive distributor of
EAS systems to the healthcare industry in North America. Talon, a Texas- based
medical device company, will promote KIDSTAT(TM), a perimeter control and infant
identification system which can help prevent infant abduction and accidental
infant switching in hospitals. According to reports published by The National
Center for Missing and Exploited Children, infant abductions occur approximately
12 to 18 times per year, and accidental infant switches may occur over 20,000
times per year.
In September 1995, Knogo and Asset Management Technologies ("AMT"), a loss
prevention consultant to the computer industry, signed an exclusive marketing
agreement to provide EAS technology services to the computer industry. The
Company believes that the integration of Knogo's SecureBoard(TM) system into an
overall loss prevention program in the computer industry would significantly
curb thefts of PC boards, memory chips and other computer components. Using
SecureBoard(TM) technology, licensed KNOGO ENABLED(TM) board manufacturers can
embed EAS material into an internal layer of a printed circuit board, making
SecureBoard(TM) the first EAS system to be compatible with high volume printed
circuit board manufacturing processes. While marketing continues, no significant
revenue was produced from this market to date.
BACKLOG
The Company's backlog of orders was approximately $10.3 million at December
31, 1997 as compared with approximately $1.7 million at December 31, 1996. The
increase is due primarily to orders for the Company's SentryVision(R) systems.
The Company anticipates that substantially all of the backlog at the end of 1997
will be delivered during 1998. In the opinion of management, the amount of
backlog is not indicative of intermediate or long-term trends in the Company's
business.
SERVICE
Installation, repair and maintenance services for Video and Knogo are
performed primarily by the Company's personnel. All products sold or leased are
covered either by a short warranty period or an extended warranty period.
Generally, Video's products provide for a one-year warranty and Knogo's products
for a 90-day warranty. After the warranty period, the Company offers to its
customers the option of entering into a maintenance contract with the Company or
paying for service on a per call basis.
COMPETITION
The Company operates in a highly competitive market with many companies
engaged in the business of furnishing security services designed to protect
against shoplifting and theft. In addition to EAS systems using the concept of
tagged merchandise, such services use, among other things, conventional PTZ dome
and fixed mount CCTV systems, mirrors, guards, private detectives and
combinations of the foregoing. The Company competes principally on the basis of
the nature and quality of its products and services and the adaptability of
these products to meet specific customer needs and price requirements.
To the Company's knowledge, there are several other companies that market,
directly or through distributors, traditional closed circuit video systems
and/or EAS equipment to retail stores, of which Sensormatic, Checkpoint Systems,
Inc., Phillips, Inc., Pelco Manufacturing, Inc., and Ultrak, Inc. are the
Company's principal competitors. Many of the Company's competitors have far
greater financial resources, more experienced marketing organizations and a
greater number of employees than the Company.
In connection with the Spinoff and Sensormatic Merger, Knogo agreed with
Sensormatic that Knogo will not compete with Sensormatic in selling EAS and
conventional CCTV products in areas outside of the Territory through the period
ending December 29, 1999. However, the agreement does not affect Sentry's
ability to sell its SentryVision(R) system worldwide.
PATENTS AND OTHER INTELLECTUAL PROPERTY
VIDEO
Video's core United States patent, which expires in 2011, covers the
cable-free transmission of the video signal to and from the carriage. This
technology prevents degradation of the video signal which can result from
movement and prolonged friction caused by the carriage. A U.S. patent
application, filed in 1997, is pending for improvements made to such technology.
Video also has a corresponding Australian patent which was issued in 1995. The
Company also has pending five patents for additional corresponding foreign
patents. The Company intends to seek patent protection on specific aspects of
the SentryVision(R) system. In addition, the Company intends to seek patent
protection in the future for certain aspects of new systems which may be
developed for Video. There can be no assurance that any patents applied for will
be issued, or that the patents currently held, or new patents, if issued, will
be valid if contested or will provide any significant competitive advantage to
Video.
The Company is not aware of any infringement of patents or intellectual
property held by third parties. However, if Video is determined to have
infringed on the rights of others, Video and/or the Company may be required to
obtain licenses from such other parties. There can be no assurance that the
persons or organizations holding desired technology would grant licenses at all
or, if licenses were available, that the terms of such licenses would be
acceptable to the Company. In addition, the Company could be required to expend
significant resources to develop non-infringing technology.
The Company is aware of an Australian patent and an Australian patent
application describing certain aspects of a product which in some respects is
similar to the SentryVision(R) system. The Company's patent attorneys have
advised it that the Australian patent and Australian patent application appear
to have lapsed. To the Company's knowledge, the holder of the Australian patent
is not currently marketing, within the United States or Europe, the product
covered by the Australian patent. In addition, no issued patents or patent
applications corresponding to the Australian patent or the Australian patent
application have been uncovered in the United States or any other foreign
country.
The Company is also aware of a British patent application from a third
party disclosing aspects of a device which is in some respects similar to the
SentryVision(R) system. The Company's patent attorneys have advised it that the
British patent application appears to have lapsed. In addition, no issued
patents or patent applications corresponding to the British patent application
have been uncovered in the United States or any other foreign country. To the
Company's knowledge, the applicant is not currently marketing the product
described in the application.
Video has also relied on the registration of trademarks and tradenames, as
well as on trade secret laws and confidentiality agreements with its employees.
While the Company intends to continue to seek to protect Video's proprietary
technology and developments through patents, trademark registration, trade
secret laws and confidentiality agreements, the Company does not rely on such
protection to establish and maintain Video's position in the marketplace. The
Company's management believes that improvement of Video's existing products,
reliance upon trade secrets and on unpatented proprietary know-how, and the
development of new products will be as important as patent protection in
establishing and maintaining a competitive advantage.
KNOGO
Knogo has 23 United States and Canadian patents and three patent
applications relating to (i) the method and apparatus for the detection of
movement of articles and persons and accessory equipment employed by Knogo in
its Knoscape RF(TM), Ranger(TM) and Knoscape MM(TM) systems, (ii) various
specific improvements used in the Knoscape RF(TM), Ranger(TM) and Knoscape
MM(TM) systems and (iii) various electrical theft detection methods, apparatus
and improvements not presently used in any of Knogo's EAS systems. Although
patent protection is advantageous to Knogo, the Company's management does not
consider any single patent or patent license owned or held by Knogo to be
material to its operations, but believes that Knogo's competitive position
ultimately will depend on its experience, know-how and proprietary data,
engineering, marketing and service capabilities and business reputation, all of
which are outside the scope of patent protection.
Sensormatic and Knogo license certain patent rights and technology of Old
Knogo to each other, for use in their respective territories, pursuant to the
License Agreement dated December 29, 1994, entered into in connection with the
Sensormatic Merger. In addition, Sensormatic has rights to manufacture and sell
SuperStrip within the Territory.
RESEARCH AND DEVELOPMENT
At December 31, 1997, Sentry had 17 employees located in the United States
engaged either full- or part-time in research and engineering and product
development. The Company may from time to time retain consultants for specific
project assistance. For the years ended December 31, 1997, 1996 and 1995,
approximately $1,658,000, $1,686,000 and $1,537,000, respectively, was expended
on Company-sponsored research.
VIDEO
Historically, research and development has been conducted by the Company's
engineering, technical and support staff, and by independent contractors. These
activities have been integrated during 1997 with Knogo's research and
development arm. To date, Video's research and development efforts have focused
on developing and improving its traveling camera CCTV security surveillance
system.
During 1997, the majority of the Company's research and development
expenditures were directed first to the integration of the Video engineering
documentation with Knogo methods and practices and second to an effort to
improve the reliability, performance, and manufacturability of the
SentryVision(R) product. Improvements made to the SentryVision(R) system as a
result of the 1997 research and development effort include the following:
- upgrade of video cameras to one-piece, auto focus digital control
versions
- replacement of mechanical end of track sensors with magnetic sensors
- phase 1 drive mechanism update with belt drive
- phase 2 drive mechanism update using 2 drive motors
- carriage pre-set recall capability for parking garage applications
- improved brush block assembly
- digital carriage to controller communication upgrade
- redesign of major portions of the electronics for lower cost and
improved performance.
The Company believes that as a result of these changes there has been an
over-all improvement in customer satisfaction and a simultaneous reduction in
field service support costs.
While the major effort in 1997 was directed at the SentryVision(R) product,
the Company also supports a large base of previous generation Video Sentry
systems. These systems had been troubled by high failure rates of one particular
PC board on the moving carriage. In 1997 an entirely redesigned replacement for
the problem assembly was developed and the Company believes these problems have
been fully resolved.
While continuing to support and upgrade the installed base of the current
generation SentryVision(R) system and the previous generation systems, the
Company recognizes the need to develop newer versions of these systems which
will offer substantial improvements in cost, performance, and ease of
installation. A two phase approach to this goal is currently being implemented
by the research and development group. The first, and more immediate of these
two efforts will be to build on the improvements already made to the current
SentryVision(R) product while maintaining compatibility with the existing
system. The second, a longer term project, is the development of a substantially
new system which offers better performance and lower cost by exploiting PC
control technologies and dramatic reduction in the size of the carriage and
associated track. Completion of the first of these projects, and significant
progress on the second, is anticipated for 1998.
KNOGO
The Company also continued its research and development activities with
respect to its EAS products. In 1997, these included continued work on the
Knoscape-MM system relating to its introduction into the market, development of
the Knoscope-RF systems for hospital applications and additional retail
environments, and efforts to improve performance of the Ranger(TM) systems.
During 1997, Knogo entered into an agreement with a third party pursuant to
which Knogo is developing a low-cost 8MHz system for lower-tier retail
environments. This work is nearing completion and is expected to be in
production during the second quarter of 1998.
REGULATION
Because Knogo's EAS systems and Video's surveillance and CCTV systems use
radio transmission and electromagnetic wave principles, such systems are subject
to regulation by the Federal Communications Commission ("FCC") under the
Communications Act of 1934. In those instances where it has been required,
certification of such products by the FCC has been obtained. As new products are
developed by the Company, application will be made to the FCC for certification
or licensing when required. No assurance can be given that such certification or
licensing will be obtained or that current rules and regulations of the FCC will
not be changed in an adverse manner.
Sentry's business plan calls for the sale and use of Sentry's products in
domestic markets and, where consistent with contractual obligations, in
international markets. Sentry's products may be subject to regulation by
governmental authorities in various countries having jurisdiction over
electronic and communication use. Sentry intends to apply for certification of
its products to comply with the requirements under the regulations of the
countries in which it plans to market its products. No assurance can be given
that such certification will be obtained or that current rules and regulations
in such countries will not be changed in a manner adverse to Sentry.
The Company believes it is in material compliance with applicable United
States, state and local laws and regulations relating to the protection of the
environment.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries employed 266
full-time employees, of whom four were engaged in executive capacities, 28 in
administrative and clerical capacities, 16 in engineering, research and
development, 93 in production, 43 in marketing and sales and 82 in customer
service. None of the Company's employees are employed pursuant to collective
bargaining agreements. The Company believes that its relations with its
employees are good.
ITEM 2. PROPERTIES.
The Company's principal executive, sales and administrative offices, and
its United States production, research and development and distribution
facilities are located in Hauppauge, New York, in a 68,000 square foot facility
leased by the Company. The Company owns a 55,000 square foot manufacturing
facility in Cidra, Puerto Rico and a one- story building consisting of
approximately 6,000 square feet in Villa Park, Illinois, where its CCTV design
office is located. The former facilities of Video in Eden Prairie, Minnesota
have been sublet through the period ending with the termination of the overlease
on March 31, 1999.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company is involved in ordinary, routine litigation incidental
to its business, it is not presently a party to any other legal proceeding, the
adverse determination of which, either individually or in the aggregate, would
be expected to have a material adverse affect on the Company's business or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year ended December 31, 1997, there
were no matters submitted to a vote of the Company's security holders, through
the solicitation of proxies or otherwise.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) Price Range of Common Stock.
The following table sets forth, for the periods indicated, the high, low
and closing sales prices per share of common stock as reported on the American
Stock Exchange composite tape.
<TABLE>
<CAPTION>
STOCK PRICES
-------------
HIGH LOW CLOSE
---- --- ------
1997
<S> <C> <C> <C>
First Quarter (commencing February 13, 1997).......... $3 7/8 $2 1/4 $3 3/8
Second Quarter........................................ 4 1/4 2 1/4 4
Third Quarter......................................... 4 2 7/16 2 5/8
Fourth Quarter........................................ 3 1 5/16 1 1/2
1998
First Quarter (through March 26, 1998)............... $2 $1 3/8 $1 1/2
</TABLE>
(b) Holders of Common Stock.
The Common Stock began trading on the American Stock Exchange on February
13, 1997 under the symbol "SKV." Prior to such date, no public market for the
Common Stock existed. As of March 26, 1998, the Company had 9,750,760 shares of
Common Stock issued and outstanding, which were held by 279 holders of record
and approximately 3,714 beneficial owners.
(c) Dividends.
The payment of future dividends will be a business decision to be made by
the Board of Directors of Sentry from time-to-time based upon the results of
operations and financial condition of Sentry and such other factors as the Board
of Directors considers relevant. Sentry has not paid, and does not presently
intend to pay or consider the payment of, any cash dividends on the Common
Stock. In addition, covenants in the Company's credit agreement prohibit the
Company from paying cash dividends without the consent of the lender.
Sentry is required to pay certain annual or semiannual dividends on the
Class A Preferred Stock. No consent of the Company's commercial lender is
required for such payment. The annual dividend rate on each share of the Class A
Preferred Stock has been fixed at five percent (5%) of the $5.00 per share face
value (the "Face Value") of such stock, payable as described below. The holders
of shares of the Class A Preferred Stock are entitled to receive dividends on
the following dates (each, a "dividend payment date"): February 12, 1998 and
1999, August 12, 1999 and 2000, February 12, 2000 and 2001; the 12 month period
ending on each of the first two dividend payment dates is an "annual dividend
period," the six month period ending on each of the next four dividend payment
dates is a "semi- annual dividend period," and each such annual dividend period
or semi-annual dividend period is a "dividend period." Dividends (whether or not
declared) are payable in additional shares of the Class A Preferred Stock during
the two annual dividend periods ending on the first two dividend payment dates
subsequent to issuance of the Class A Preferred Stock, such that holders shall
receive a dividend of 1/20th of a share of Class A Preferred Stock for each
share of Class A Preferred Stock held. The first such dividend was paid on
February 12, 1998. Beginning with the August 12, 1999 dividend, the holders of
shares of the Class A Preferred Stock are entitled to receive, in preference to
dividends on all classes of equity securities of Sentry to which the Class A
Preferred Stock ranks prior (such securities, the "Junior Stock"), and whether
or not declared a dividend payable in cash, out of funds legally available for
the payment of dividends, of $0.25 for each share of Class A Preferred Stock
held, which dividend shall accrue semi-annually and be due in equal installments
on each of the last four dividend payment dates. Each additional share of the
Class A Preferred Stock issued as a dividend shall be valued at the Face Value.
All dividends paid with respect to shares of the Class A Preferred Stock
pursuant to this paragraph shall be paid pro rata to the holders entitled
thereto.
Whenever, at any time or times, any dividend payable shall be in arrears,
the holders of the outstanding shares of Class A Preferred Stock shall have the
right, voting separately as a class, to elect two directors of Sentry no later
than two years after such dividend shall be, and continue, in arrears. Upon the
vesting of such right of the holders of Class A Preferred Stock, the maximum
authorized number of members of the Sentry Board shall automatically be
increased by two and the two vacancies so created shall be filled by vote of the
holders of the outstanding shares of Class A Preferred Stock. The right of the
holders of Class A Preferred Stock to elect two members of the Sentry Board as
aforesaid shall continue until such time as all dividends in arrears shall have
been paid in full, at which time such right shall terminate, except as herein or
by law expressly provided, subject to revesting in the event of each and every
subsequent default of the character above described.
If the Sentry Board declares, and Sentry pays or sets funds apart for
payment of, any dividend on any of the Junior Stock, the holders of the Class A
Preferred Stock shall share equally, share and share alike, in the distribution
of any and all dividends declared on such Junior Stock, provided that for this
purpose each share of Class A Preferred Stock shall be treated as one share of
such Junior Stock.
(d) Redemption Provisions of Class A Preferred Stock.
The shares of Class A Preferred Stock may be redeemed at the option of the
Company beginning February 12, 1998, and are mandatorily redeemable on February
12, 2001. The redemption price is $5.00 per share plus the amount, if any, by
which the average of the closing prices for a share of Common Stock during the
twenty trading-day period before redemption exceeds $5.00 (such aggregate price,
the "Redemption Price").
OPTIONAL REDEMPTION. Subject to the mandatory redemption provisions of the
Class A Preferred Stock summarized below, Sentry may, at its option, redeem the
Class A Preferred Stock for cash at any time in whole at the Redemption Price,
together with accrued and unpaid dividends, if any, thereon. If Sentry completes
a Public Offering (as defined below) or an Acquisition (as defined below) more
than 35 days prior to the Mandatory Redemption Date (as defined below), then
Sentry may, at its option, redeem the Class A Preferred Stock for Common Stock
at the then applicable Redemption Price.
"Public Offering" means an underwritten public offering of Common Stock
with net proceeds resulting therefrom in excess of $12,000,000. "Acquisition"
means an acquisition by Sentry of property of or securities issued by a third
party in which the consideration paid by Sentry (i) consists, in whole or in
part, of shares of Common Stock and (ii) the aggregate value of such shares of
Common Stock exceeds $12,000,000; provided that such aggregate value shall be
based upon the number of such shares of Sentry Common Stock multiplied by the
average of the closing prices for a share of Common Stock during the twenty
trading-day period before the closing date of such Acquisition.
MANDATORY REDEMPTION. On February 12, 2001 (the "Mandatory Redemption
Date"), so long as any shares of the Class A Preferred Stock shall be
outstanding, Sentry shall redeem at the then applicable Redemption Price any
issued and outstanding Class A Preferred Stock at the Redemption Price, together
with accrued and unpaid dividends, if any, thereon, for cash or Common Stock, at
Sentry's option.
For additional information with respect to the Class A Preferred Stock, see
the information set forth under the caption "Description of Capital Stock" in
the Prospectus which forms a part of the Company's Registration Statement on
Form S-4 (Registration no. 333-20135). See also Note 1 to the Consolidated
Financial Statements.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The Company was incorporated in October 1996. However, information with
respect to the results of operations of the Company in this Form 10-K is
presented as if the Spinoff and Sensormatic Merger were consummated as of March
1, 1993. The table below sets forth selected consolidated historical financial
data of the Company for the year ended February 28, 1994, the ten-month period
ended December 31, 1994 and the years ended December 31, 1995, 1996 and 1997.
This consolidated financial data includes certain assets and liabilities of
Knogo, on a historical basis, relating to Knogo's operations in the United
States, Canada and Puerto Rico prior to February 12, 1997 and include the
results of operations of Video Sentry after that date. The selected consolidated
historical financial data should be read in conjunction with the audited
Consolidated Financial Statements of the Company included in Item 8 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7.
<TABLE>
<CAPTION>
(Amounts in thousands except for per share data)
Year ended Ten Months
February Ended Year
28, December 31, Ended December 31,
---------- ------------ ----------------------------------------
1994 1994 1995 1996 1997
========== ============ ========== ============= ==========
SUMMARY OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales, service, rentals and other ................ $ 18,243 $ 13,724 $ 17,361 $ 18,612 $ 21,996
Sales to affiliates/Sensormatic .................. 11,375 6,957 12,043 4,651 2,570
Total revenues ................................... 29,618 20,681 29,404 23,263 24,566
Cost of sales .................................... 14,631 10,041 14,425 11,935 12,882
Customer service expenses ........................ 3,984 3,353 3,235 2,932 4,772
Selling, general and administrative
expenses ......................................... 9,227 9,548 8,235 7,345 9,629
Gain on sale of assets ........................... -- -- -- 2,462 --
Write-off of in-process research and
development ...................................... -- -- -- -- 13,200
Income (loss) before income taxes ................ 762 (2,858) 1,941 1,847 (17,743)
Net income (loss) ................................ 123 (2,833) 1,731 1,183 (17,917)
Preferred stock dividends ........................ -- -- -- -- 1,067
Net income (loss) available to
common shareholders .......................... 123 (2,823) 1,731 1,183 (18,984)
Net income (loss) per common share:
basic ....................................... * * 0.37(1) 0.25(1) (2.08)
diluted ..................................... * * 0.35(1) 0.23(1) (2.08)
SELECTED BALANCE SHEET DATA:
(at end of period)
Total assets .................................. $ 34,583 $ 26,522 $ 29,338 $ 32,857 $ 35,937
Property, plant and equipment, net ............ 12,830 9,842 9,081 7,288 6,948
Long term bank debt ........................... -- -- -- -- --
Obligations under capital leases .............. 688 945 748 3,546 3,313
Redeemable cumulative preferred stock......... -- -- -- -- 25,254
Total common shareholders' equity ............. 27,055 20,888 22,669 25,248 1,792
See the notes to the Consolidated Financial Statements included elsewhere
herein.
</TABLE>
* Historical per share data for earnings and dividends have not been
presented for periods prior to the year ended December 31, 1995 as Knogo
was not a publicly-held company during these periods.
(1) Restated in order to reflect the effect of the recapitalization of
Knogo common stock for Sentry common stock, as well as the adoption of
Statement of Financial Accounting Standard No. 128 "Earnings per Share".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Consolidated revenues were 6% higher in the year ended December 31, 1997
than in the year ended December 31, 1996. Revenues from customers other than
Sensormatic were $20,820,000 or 85% of total revenues as compared to $17,525,000
or 75% of total revenues in the prior year. This represents a 19% increase in
revenues from non-Sensormatic customers in 1997 over the prior year. The backlog
of unfilled orders expected to be delivered within 12 months was $10.3 million
at December 31, 1997 compared to $1.7 million at December 31, 1996.
Sales increased 18% primarily as a result of the SentryVision(R) traveling
CCTV surveillance system acquired during the Merger which represented $4.3
million or 24% of sales in 1997. Sales of traditional CCTV products were flat at
$3.6 million in both 1997 and 1996 and represented 20% and 24% of sales,
respectively. Sales of EAS systems declined 23% to $7.7 million or 43% of sales
in 1997 as compared to $9.3 million or 61% in 1996. Sales of 3M library systems
were also flat at $2.3 million in both years representing 13% of sales in 1997
and 15% in 1996. EAS System sales declined as a result of both competitive
pressures and the focus of Knogo's marketing force on the commencement of
SentryVision(R) marketing efforts.
Sales to Sensormatic decreased 45% to $2.6 million in 1997 as compared to
$4.7 million in 1996. During the first six months of 1997 and in the year ended
1996 when the Supply Agreement was in place, Sensormatic did not meet its
minimum order amounts and, accordingly, the Company recorded in other revenues
the cumulative profits on the shortfall payable to the Company pursuant to the
agreement. These amounts represented $1.2 million and $1.1 million in 1997 and
1996. Although the Supply Agreement officially expired as of June 30, 1997 and
minimum purchase obligations ended, Sensormatic continued to purchase certain
EAS products from the Company after that period. Sensormatic has indicated it
will continue to purchase certain EAS products from the Company in the future.
In addition, during 1997, Sentry signed a multi-year agreement with Sensormatic
to be the Company's exclusive distributor of SentryVision(R) systems in Latin
America and the Caribbean. This agreement marks the Company's first venture
outside of North America since the merger between Knogo and Video was
consummated.
The increase in service revenues and other of 18% or $0.6 million in 1997
as compared to 1996 was primarily related to increase in maintenance contracts
from the SentryVision(R) customer base.
Cost of sales to customers other than Sensormatic were 62% of such sales in
1997 as compared to 59% in 1996. The increase in cost of sales percentage is
primarily related to the change in product mix. Although the Company made
significant cost reductions through better vendor sourcing and engineering
improvements to the SentryVision(R) product line since the Merger, these systems
still carry lower margins than traditional EAS products. Cost of sales was also
negatively impacted by lower fixed cost absorption due to lower production
levels during the year at the Company's Puerto Rico manufacturing facility. The
gross margins on sales to Sensormatic under the Supply Agreement was fixed at
35%. Margins on the sales to Sensormatic in the second half of the year after
the agreement expired were substantially the same.
Customer service expenses were 63% greater in 1997 as compared to 1996
due to the addition of the Video customer service staff as well as new hires,
technical updates made to the existing installed Video customer base and cross
training for existing staff on EAS and CCTV (including SentryVision(R)) product
lines.
The increase in selling, general and administrative expenses to $9.6
million in 1997 from $7.3 million in 1996 was primarily a result of higher sales
and marketing costs associated with the promotion of the new SentryVision(R)
systems and the amortization of goodwill and intangibles acquired in the Merger
of $1,429,000 in 1997.
The Company's research and development costs, which remained substantially
the same in dollar terms, were directed primarily towards improvements in the
SentryVision(R) systems during the year.
At the consummation of the Merger in the first quarter of 1997, Sentry
recorded for that period a non- recurring charge of $13,200,000 relating to
purchased in process research and development. The amount was based on the
purchase price allocation and a valuation of existing technology and technology
in-process. The charge for in-process research and development equaled its
estimated current fair value based on risk adjusted cash flows of specifically
identified technologies for which the technological feasibility has not been
established and alternative future uses did not exist.
The Company had net interest expense in the current year as compared to net
interest income in 1996. Interest income was $139,000 in 1997 as compared to
$164,000 in 1996. As a result of the Merger, the Company reduced the amount of
its temporary investments. Interest expense was $307,000 in 1997 as compared to
$144,000 in 1996. The increase is primarily related to the capitalized lease on
the Company's corporate headquarters entered into at the end of 1996.
In the first quarter of 1996, the Company sold certain assets to 3M,
consisting of patents and technology, for a purchase price of $3.0 million. The
proceeds, net of certain costs including patent costs, inventory write downs,
new product training costs, legal and other costs, resulted in a gain of
approximately $2.5 million which is included in the results of that period.
Sentry's income taxes in 1997 represent provisions on the cumulative
earnings of the Puerto Rico manufacturing operations which cannot be offset by
operating losses of other subsidiaries. The higher amount in 1996 was primarily
related to the tax on the gain of assets to 3M which were taxed at the statutory
federal tax rate.
As a result of the foregoing, Sentry has a net loss of $17,917,000 in the
year ended December 31, 1997 as compared to net income of $1,183,000 in the year
ended December 31, 1996.
Preferred stock dividends of $1,067,000 have been accrued in 1997. These
amounts were paid-in-kind as of February 12, 1998. See Note 1 to the
Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Consolidated revenues were 21% lower in the year ended December 31, 1996
than in the year ended December, 1995. Revenues from customers other than
Sensormatic in 1996 were $17,525,000 or 75% of total revenues as compared
to $17,361,000 or 59% of total revenues in 1995. The increase in 1996 was
attributable to higher sales in the retail and 3M library market segments.
Revenues in 1996 included the minimum lease revenue ($1,500,000) under a
contract with a retail customer which provided for additional revenues if
certain shrinkage reductions are met. Since all of the equipment costs were
included in cost of sales, gross margins were adversely impacted.
Sales by product line to customers other than Sensormatic in 1996 were 61%
EAS, 24% CCTV and 15% in 3M library security systems, compared to 89%, 11% and
0%, respectively, in 1995.
Sales under the Supply Agreement with Sensormatic in 1996 were 4,651,000 or
20% of total revenues as compared to 12,043,000 or 41% of total revenues in
1995. Under the terms of the Supply Agreement, the Company expected a reduction
of approximately $4.0 million in revenues in 1996 compared to 1995. However, in
1996, Sensormatic did not meet its minimum order amounts. The Company recorded
in other revenues $1,087,000 which represented the minimum contractual margins
on the shortfall. Sales represented 85%, and service revenues and other income
15% of total revenues, in 1996 as compared to 91% and 9% in 1995.
Cost of sales to customers other than Sensormatic was 59% of such sales in
1996 as compared to 45% in 1995. The cost of sales percentage is impacted by the
mix of products sold to Knogo's third-party customers. In 1996, Knogo sold a
higher percentage of CCTV equipment and 3M library products to its third-party
customers than in 1995. These products are not manufactured directly by Knogo
and carry lower margins than the traditional EAS products it does produce. In
1996 cost of sales was also impacted by the higher initial costs recorded on the
large retail sale noted above. During 1996, there was a substantially lower
amount of sales to Sensormatic than in 1995. The gross margin on these sales was
fixed at 35% under the Supply Agreement.
Customer service expenses were lower in 1996 as compared to 1995. This was
a result of permanent staff reductions due to more efficient installations and
fewer service calls primarily attributable to the transfer of the Company's
library maintenance obligations to 3M.
The decrease in selling, general and administrative expenses in 1996 as
compared to 1995 was primarily a result of ongoing cost control measures, lower
sales promotional expenses and lower required bad debt and warranty provisions.
The increase in research and development costs in 1996 as compared to
1995 was a result of substantial efforts, particularly in the fourth quarter,
towards improving the SentryVision(R) traveling CCTV surveillance system which
the Company commenced selling in the first quarter of 1997.
The Company's interest income was $164,000 in 1996 as compared to $59,000
in 1995. The increase is due to the investment of proceeds from the sale of
assets at the end of the first quarter of 1996. These amounts are shown net of
interest expense of $144,000 and $90,000 in the respective 1996 and 1995 periods
relating to interest on the settlement of a tax audit in 1996 and payments on
capitalized leases for Knogo's computer equipment in both years.
In 1996, Sentry sold certain assets to 3M, consisting of patents and
technology, for a purchase price of $3.0 million. The proceeds, net of certain
costs including patent costs, inventory write downs, new product training costs,
legal and other costs, resulted in a gain of approximately $2.5 million which is
included in other income in 1996. See Note 16 to the Consolidated Financial
Statements.
Sentry's effective tax rate was 36% for 1996 as compared to 11% in 1995.
The increase in the rate was primarily related to the tax on the gain on the
sale of assets in 1996 which was taxed at the statutory federal tax rate and
represents a significant proportion of the taxable income in the current year.
The lower rate in 1995 was primarily due to the normal provisions on the
earnings of the Puerto Rico manufacturing operations.
As a result of the foregoing, Sentry had net income of $1,183,000 in 1996
as compared to $1,731,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs over the last three years have been related
to acquisitions, working capital and to a lesser extent, capital expenditures.
During this time, it has met these liquidity needs primarily through the
proceeds from the sale and leaseback transaction involving its corporation
headquarters and the sale of certain assets to 3M. During 1997, primarily a
result of the Merger, Sentry used approximately $5.5 million in cash. The
Company utilized $2.1 million to retire acquired Video debt and $2.4 million for
Merger related costs.
At the end of 1997, the Company entered into a two year secured revolving
credit facility with GE Capital Corporation which permits borrowings of up to a
maximum of $8.0 million, subject to availability under a borrowing base formula
consisting of accounts receivable and inventories. The credit agreement expires
on December 31, 1999. The facility is secured by a lien on substantially all of
the Company 's assets. At December 31, 1997, the Company had no borrowings under
the facility.
Going forward, Sentry will require liquidity and working capital to finance
increases in receivables and inventory associated with sales growth and, to a
lesser extent, for capital expenditures. The Company anticipates that its 1998
capital expenditures will approximate $1.0 million for product tooling and
customer service equipment.
The Company believes the liquidity provided by future operations, existing
cash and the financing arrangements described above should be sufficient to meet
the Company's capital requirements for the next twelve months.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." This Statement requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
periods beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
131 specifies new guidelines for determining a company's operating segments and
related requirements for disclosure. The Company is in the process of evaluating
the impact of the new standard on the presentation of its financial statements
and the disclosures therein. SFAS No. 131 is effective for periods beginning
after December 15, 1997.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition."
This Statement specifies certain changes for determining the recognition of
revenue for products that contain computer software. The Company is in the
process of evaluating the impact of the SOP on its revenue recognition policies.
SOP No. 97-2 is effective for periods beginning after December 15, 1997.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. On January 1, 2000,
any computer system or other equipment using date sensitive software which uses
only two digits to represent the year, may recognize "00" as the year 1900
rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.
Recognizing the potential impact, the Company began actively resolving its
Year 2000 compliance issues in early 1997. Using internal and external
resources, the Company analyzed and assessed its business systems, including
computer systems, PC's and network hardware, telephone systems, production
process controllers, access control, office equipment and the products it sells.
Upgrades to both mid-range and network computer hardware, operating systems
and related infrastructures have been completed and are now Year 2000 compliant.
All critical application software has been reviewed and Year 2000 compliant
versions have been obtained. The Company has commenced the process of
retrofitting custom modifications to the upgraded versions.
It is anticipated that all applications with forward scheduling impact will
be Year 2000 compliant by mid- 1998 with the remainder to be completed by
year-end, leaving adequate time to assess and correct any additional issues that
may emerge.
The total cost to the Company of making its systems Year 2000 compliant has
not been and is not anticipated to be material to the Company's financial
position or results of operations in any given year.
INFLATION
The Company does not consider inflation to have a material impact on the
results of operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations", and other sections of this Annual Report on Form 10-k
contain "fowrd-looking statements" (as defined in the Private Securities
Litigation Reform Act of 1995 or the "PSLRA") that are based on current
expectations, estimates and projections about the industry in which the Company
operates, as well as management's beliefs and assumptions. Words such as
"expects," "anticipates" and "believes" and variations of such words and similar
expressions generally indicate that a statement is forward-looking. The Company
wishes to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning readers that many important factors discussed below, among others,
may cause the Company's results of operations to differ from those expressed in
the forward-looking statements. These factors include: (i) the risk inherent in
the relatively small number of Video customers, such that any delay or
cancellation of orders from one or more of its customers may have a material
adverse effect on the Company's financial condition; (ii) the risk that
anticipated growth in the demand for EAS products in the supermarket sector, the
commercial and industrial sector (including in the market for protecting
high-value computer-related components) and in the hospital and health care
markets will not develop as expected, whether due to competitive pressures in
these markets or to any other failure to gain market acceptance of the Company's
EAS products; (iii) the risk arising from the large market position and greater
financial and other resources of Sentry's principal competitors, as described
under "Item 1. Business--Competition"; and (iv) the risk resulting from the
limited geographical market in which the Company may offer its EAS products,
exposing the Company to a possible business downturn caused by a general
business decline in that market; this market limitation is contractual and will
continue until December 29, 1999.
ITEMS 8 and 14(a)(1) and 14(a)(2). Financial Statements.
- ---------------------------------- ---------------------
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
SCHEDULE II - Valuation and Qualifying Accounts S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Sentry Technology Corporation
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Sentry
Technology Corporation and subsidiaries (the "Company") as of December 31, 1997
and 1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index at item 14(a)(1) and (2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Sentry Technology Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, on February 12,
1997 Sentry Technology Corporation was established to effect the merger of Knogo
North America Inc. and Video Sentry Corporation. The consolidated financial
statements as of, and for all periods prior to December 31, 1996 are the
historical financial statements of Knogo North America Inc.
DELOITTE & TOUCHE LLP
Jericho, New York
March 3, 1998
<PAGE>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 1997 1996
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,146 $ 7,658
Accounts receivable, less allowance for doubtful
accounts of $752 and $719, respectively 6,323 6,229
Net investment in sales-type leases-current portion 613 1,496
Inventories 8,297 6,926
Prepaid expenses and other current assets 387 389
-------- --------
Total current assets 17,766 22,698
NET INVESTMENT IN SALES-TYPE LEASES - Noncurrent portion 848 1,205
SECURITY DEVICES ON LEASES - Net 151 281
PROPERTY, PLANT AND EQUIPMENT - Net 6,948 7,288
GOODWILL AND OTHER INTANGIBLES, including patent costs,
less accumulated amortization of $1,848 and $292,
respectively 9,796 364
DEFERRED INCOME TAXES - 174
OTHER ASSETS 428 847
-------- --------
$ 35,937 $32,857
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,982 $ 1,101
Accrued liabilities 2,730 2,268
Obligations under capital leases-current portion 218 392
Deferred income 421 231
-------- --------
Total current liabilities 5,351 3,992
OBLIGATIONS UNDER CAPITAL LEASES-Noncurrent portion 3,095 3,154
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 445 463
-------- --------
Total liabilities 8,891 7,609
COMMITMENTS AND CONTINGENCIES (Notes 1, 12 and 13)
REDEEMABLE CUMULATIVE PREFERRED STOCK 25,254 -
COMMON SHAREHOLDERS' EQUITY:
Common stock, $0.001 par value; authorized 40,000
shares, issued and outstanding 9,751 and 4,802
shares, respectively 10 5
Additional paid-in capital 16,785 22,329
Retained earnings (accumulated deficit) (15,003) 2,914
-------- --------
1,792 25,248
-------- --------
$ 35,937 $32,857
======== =======
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
REVENUES:
<S> <C> <C> <C>
Sales $ 17,965 $ 15,208 $ 14,625
Sales to Sensormatic 2,570 4,651 12,043
Service revenues and other 4,031 3,404 2,736
-------- -------- --------
24,566 23,263 29,404
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales 11,177 8,897 6,630
Cost of sales to Sensormatic 1,705 3,038 7,795
Customer services expenses 4,772 2,932 3,235
Selling, general and administrative expenses 9,629 7,345 8,235
Research and development 1,658 1,686 1,537
Purchased in-process research and development (Note 1) 13,200 - -
Interest (income) expense 168 (20) 31
-------- -------- --------
42,309 23,878 27,463
-------- -------- --------
OPERATING PROFIT (LOSS) (17,743) (615) 1,941
OTHER INCOME - Gain on sale of assets (Note 16) - 2,462 -
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (17,743) 1,847 1,941
INCOME TAXES 174 664 210
-------- -------- --------
NET INCOME (LOSS) (17,917) 1,183 1,731
PREFERRED STOCK DIVIDENDS 1,067 - -
-------- -------- --------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $(18,984) $ 1,183 $ 1,731
======== ======= ========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (2.08) $ 0.25 $ 0.37
======== ======= ========
Diluted $ (2.08) $ 0.23 $ 0.35
======== ======= ========
WEIGHTED AVERAGE COMMON SHARES:
Basic 9,114 4,796 4,726
===== ===== =====
Diluted 9,114 5,074 4,897
===== ===== =====
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED TOTAL REDEEMABLE
ADDITIONAL EARNINGS COMMON CUMULATIVE
COMMON STOCK PAID-IN (ACCUMULATED SHAREHOLDERS' PREFERRED
SHARES AMOUNT CAPITAL DEFICIT) EQUITY STOCK
BALANCE, JANUARY 1, 1995
<S> <C> <C> <C> <C> <C> <C>
(Restated - Note 1) 4,698 $ 5 $20,883 $ - $20,888 $ -
Net income - - - 1,731 1,731 -
Final distribution of common stock
(Restated-Note 1) 28 - (16) - (16) -
Exercise of stock options
(Restated-Note 1) 32 - 66 - 66 -
----- ----- -------- ------- -------- -------
BALANCE, DECEMBER 31, 1995
(Restated-Note 1) 4,758 5 20,933 1,731 22,669 -
Net income - - - 1,183 1,183 -
Repayment of obligations under
section 16(b) of the Securities and
Exchange Act of 1934 - - 220 - 220 -
Income tax benefit related to
revaluation of corporate
headquarters - - 978 - 978 -
Exercise of stock options
(Restated-Note 1) 44 - 198 - 198 -
----- ----- -------- ------- -------- -------
BALANCE, DECEMBER 31, 1996
(Restated-Note 1) 4,802 5 22,329 2,914 25,248 -
Net loss - - - (17,917) (17,917) -
Shares issued to Video Sentry
shareholders in connection with
the merger (Note 1) 4,842 5 19,449 - 19,454 -
Preferred shares issued to former
Knogo N.A. shareholders in
connection with the merger (Note 1) - - (24,009) - (24,009) 24,009
Shares issued to employee benefit
plan 28 - 83 - 83 -
Repayment of obligations under
Section 16(b) of the Securities and
Exchange Act of 1934 - - 15 - 15 -
Preferred stock dividends (Note 1) - - (1,067) - (1,067) 1,067
Exercise of stock options 79 - (15) - (15) 178
----- ----- -------- ------- -------- -------
BALANCE, DECEMBER 31, 1997 9,751 $10 $16,785 $(15,003) $ 1,792 $25,254
===== === ======= ======== ======= =======
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY COORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(17,917) $1,183 $1,731
Adjustments to reconcile net income (loss) to net cash provided by
(used in)operating activities:
Write-off purchased in-process recearch and development 13,200 - -
Deprecition and amortization of security devices and property,
plant and equipment 1,166 1,135 1,103
Amortization of intangibles 1,570 60 64
Deferred income taxes 174 (462) 152
Provision for bad debts 73 91 352
Income tax benefit related to the revaluation of coorporate headquarters - 978 -
Other - (58) -
Changes in operating assets and liabilities:
Accounts receivable 537 3,279 (5,209)
Net investment in sales-type leases 1,240 (170) (730)
Inventories (485) (836) 381
Prepaid expenses and other assets 443 33 628
Accounts payable and accrued liabilities (620) (1,895) 1,032
Deferred income 169 (138) 48
------- --------- ---------
Net cash provided by (used in) operating activities (450) 3,200 (448)
------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments made to acquire Video Sentry (2,417) - -
Purchase of property, plant and equipment - net (288) (378) (202)
Proceeds from sale of corporate headquaters - 4,536 -
Security devices on lease (2) (56) 21
Intangibles (52) (188) (25)
------- --------- --------
Net cash provided by (used in) investing activities (2,759) 3,914 (206)
------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of acquired debt (2,136) - -
Proceeds from shareholder repayment of obligations under
Section 16(b) of the Securities Exchange Act of 1934 15 220 -
Repayment of obligations under capital leases (428) (283) (245)
Exercise of stock options and warrants 163 198 66
Other 83 - (16)
------- --------- ---------
Net cash provided by (used in)financing activities (2,303) 135 (195)
-------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,512) 7,249 (849)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,658 409 1,258
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,146 $7,658 $ 409
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 310 $ 248 $ 86
========= ========= ==========
Income taxes $ - $ 90 $ 26
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Caption lease obligation incurred for the purchase of building, office
equipment and other assets $ 165 $3,081 $ 48
========= ======== ===========
Common stock issued to acquire Video Sentry $19,454 $ - $ -
========= ======== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION
Sentry Technology Corporation ("Sentry"), a Delaware corporation, was
established to effect the merger of Knogo North America Inc.
("Knogo N.A.") and Video Sentry Corporation ("Video Sentry") which was
consummated on February 12,1997 (the "Effective Date"). The merger resulted
in Knogo N.A. and Video Sentry becoming wholly owned subsidiaries of
Sentry. The term "Company" refers to Sentry as of and subsequent to
February 12, 1997 and to Knogo N.A. prior to such date. Video Sentry is
engaged in the design, developments and marketing of a traveling closed
circuit television security surveillance system primarily in North America.
Pursuant to the merger agreement, Sentry issued one share of common stock
for each one share of Video Sentry common stock outstanding at the
Effective Date. Sentry also issued one share of common stock and one share
of Class A Preferred Stock for each 1.2022 shares of Knogo N.A. common
stock outstanding. The Sentry Class A Preferred Stock has a face value of
$5.00 per share and a cumulative dividend rate of 5.0% (the first two years
of which are paid-in-kind). The preferred stock is non-voting and subject
to mandatory redemption four years from the date of issuance and optional
redemption by Sentry at any time after one year from the date of issuance.
The redemption price will be equal to $5.00 per preferred share (plus
accrued and unpaid dividends as of the redemption date) plus the amount, if
any, by which the market price of Sentry's common stock at the time of
redemption exceeds a hurdle price based on the price of Sentry Common Stock
one year after the Effective Date. The minimum hurdle price is $5.00 per
share and the maximum is $6.50. The preferred stock is non convertible, but
the redemption price may, in certain circumstances, be paid in common stock
at Sentry's option. The total number of Sentry preferred shares authorized
is 10,000,000. Undeclared and unpaid cumulative dividends totaled
approximately $1,067,000 as of December 31, 1997.
The merger was accounted for under the purchase method of accounting and,
accordingly, the acquired assets and assumed liabilities have been recorded
at their estimated fair market values at the date of acquisition. Goodwill
and other intangible assets in the amount of approximately $10,950,000 have
been capitalized and nonrecurring charges of approximately $13,200,000
relating to in-process research and development have been expensed. The
goodwill and other intangibles are being amortized using the straight-line
method over a useful life of seven years. Although Video Sentry
shareholders have a majority voting interest in Sentry based upon their
common stock ownership percentage, generally accepted accounting principles
requires consideration of a number of factors, in addition to voting
interest, in determining the acquiring entity for purposes of purchase
accounting treatment. Such other factors to be considered include: (i) key
Sentry management positions are held by individuals previously holding
similar such positions in Knogo N.A.; (ii) the assets, revenues and net
earnings of Knogo N.A. significantly exceed those of Video Sentry; and
(iii) the market value of the securities received by the former holders of
Knogo N.A. Common Stock significantly exceeds the market value of the
securities received by the former holders of Video Sentry Common Stock. As
a result of these other factors, and solely for accounting and financial
reporting purposes, the merger has been accounted for as a reverse
acquisition of Video Sentry by Knogo N.A.. Accordingly the financial
<PAGE>
statements of Knogo N.A. are the historical financial statements of Sentry
and the results of Sentry's operations will include the results of
operations of Video Sentry after the Effective Date. Common stock,
additional paid-in capital and the weighted average common shares have been
retroactively restated to the earliest year presented in order to reflect
the effect of the recapitalization of Knogo N.A. common stock for Sentry
common stock.
The following unaudited pro forma information for the years ended December
31, 1997 and 1996 includes the operations of the Company and Video Sentry
as if the merger had occurred on January 1, 1996. This pro forma
information gives effect to the amortization expense associated with
goodwill and other intangible asset acquired, dividends accrued on the
Sentry Class A Preferred Stock, adjustments related to the fair market
value of the assets acquired and liabilities assumed, and the related
income tax effects. In addition, this pro forma information excludes the
effect of the one-time charges totaling $13,200,000 relating to
purchased in-process research and development.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996
(In Thousands, Except per Share Amounts)
<S> <C> <C>
Revenues $24,619 $25,899
======= =======
Net loss $ 5,378 $ 4,900
======= =======
Net loss available to common shareholders $ 6,596 $ 6,112
======= =======
Net loss per common share $ (0.68) $ (0.64)
======= =======
Weighted average common shares 9,684 9,613
===== =====
</TABLE>
The Company anticipates that current cash reserves, cash generated by
operations, and its bank credit facility will be adequate to finance the
Company's anticipated working capital requirements as well as future
capital expenditure requirements for at least the next 12 months.
2. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - The Company is engaged in one segment and line of business: the
design, manufacture, distribution, installation and service of systems
designed to deter theft and to detect the unauthorized movement of articles
and persons.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly owned and majority owned
subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION - The Company manufactures security devices which it
offers for sale or lease. Revenue related to the sale of equipment is
recorded at the time of shipment or upon acceptance by a third-party
leasing company of a customer lease and the related equipment. In addition,
in accordance with Statement of Financial Accounting Standard ("SFAS") No.
13, "Accounting for Leases," lease contracts which meet the following
criteria are accounted for as sales-type leases: collection is reasonably
assured, there are no important uncertainties, and (l) the present value of
the rental payments over the term of the lease is at least 90% of the fair
value of the equipment or (2) the lease term is equal
<PAGE>
to 75% or more of the estimated economic life of the equipment or (3) the
lease contains a bargain purchase option. Under this method, revenue is
recognized as a sale at the time of installation or acceptance by the
lessee in an amount equal to the present value of the required rental
payments under the fixed, noncancellable lease term. The difference
between the total lease payments and the present value is amortized over
the term of the lease so as to produce a constant periodic rate of return
on the net investment in the lease.
The operating method of accounting for leases is followed for lease
contracts not meeting the above criteria. Under this method of accounting,
aggregate rental revenue is recognized over the term of the lease (usually
12-48 months), which commences with date of installation or acceptance by
the lessee.
The Company has sold certain of its lease receivables subject to recourse
to third-party investors. The uncollected principal balance of the
receivables sold totaled approximately $63,000 and $183,000 at December 31,
1997 and 1996, respectively. Receivables sold are supported by the
underlying equipment value and credit worthiness of customers. The Company
records the receivables sold at their estimated net realiabel value.
Service revenues are recognized as earned and maintenance revenues are
recognized ratably over the service contract period. Warranty costs
associated with products sold with warranty protection are estimated based
on the Company's historical experience and recorded in the period the
product is sold.
Included in accounts receivable at December 31, 1997 and 1996 are unbilled
accounts receivable of $1,146,000 and $909,000, respectively.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
temporary investments with original maturities of less then ninety days to
be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market. Component parts and systems in inventory
available for assembly and customer installation are considered as
work-in-process.
SECURITY DEVICES ON LEASE - Security devices on lease are stated at cost
and consist of completed systems which have been installed.
DEPRECIATION AND AMORTIZATION - Depreciation of security devices on lease
and property, plant and equipment is provided for using the straight-line
method over their related estimated useful lives. The security devices
generally have estimated useful lives of six years, except for
security devices related to operating with leases with purchase options are
depreciated over the life of the lease.
GOODWILL AND OTHER INTANGIBLES - Costs and expenses incurred in obtaining
patents are amortized over the remaining life of the patents, not
exceeding l7 years, using the straight-line method. Goodwill and other
intangibles are amortized over seven years using the straight-line method.
IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with SFAS No. 121,
"Accounting For The Impairment of Long-Lived Assets and For Long-Lived
Assets To Be Disposed Of," the Company reviews its long-lived assets,
including net investment in sales type leases, security devices on lease,
property and equipment, intangible assets and other assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. To determine
recoverability of its long-lived assets, the Company evaluates the
probability that future undiscounted net cash flows, will be less than the
carrying amount of the assets. Impairment is measured at fair value.
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - It is management's belief that the
carrying amounts of the Company's financial instruments (cash and cash
equivalents, accounts receivable, net investment in sales-type leases,
accounts payable and obligations under capital leases) approximate their
fair value at December 31, 1997 and 1996 due to the short maturity of these
instruments or due to the terms of such instruments approximating
instruments with similar terms currently available to the Company.
DEFERRED INCOME - Deferred income consist of rentals related
to operating leases and maintenance contracts billed or paid in advance.
INCOME TAXES - The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes," which requires an asset and liability
approach to financial accounting and reporting for income taxes.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees."
FOREIGN CURRENCY TRANSLATION - The functional currency of the Company's
foreign entity is the US dollar. Therefore, assets and liabilities of the
foreign entity is translated using a combination of current and historical
rates. Income and expense accounts are translated primarily using the
average rate in effect during the year. Unrealized foreign exchange gains
and (losses) resulting from the translation of this entity are included in
selling, general and administrative expenses and amounted to approximately
$(111,000), $(45,000) and $20,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
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.
RECLASSIFICATIONS - Certain amounts in the prior years' consolidated
financial statements have been reclassified to conform to the 1997
presentation.
<PAGE>
3. NET INVESTMENT IN SALES-TYPE LEASES AND OPERATING LEASE DATA
The Company is the lessor of security devices under agreements expiring in
various years through 2002. The net investment in sales-type leases consist
of:
<TABLE>
<CAPTION>
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Minimum lease payments receivable $1,713 $3,152
Allowance for uncollectible minimum lease payments (86) (157)
Unearned income (195) (324)
Unguaranteed residual value 29 30
------ -------
Net investment 1,461 2,701
Less current portion 613 1,496
------ ------
Noncurrent portion $ 848 $1,205
====== ======
</TABLE>
The future minimum lease payments receivable under sales-type leases and
noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
SALES-TYPE OPERATING
YEAR ENDING LEASES LEASES
DECEMBER 31, (IN THOUSANDS)
<S> <C> <C>
1998 $ 772 $ 112
1999 598 61
2000 315 42
2001 24 10
2002 4 2
------ -------
$1,713 $ 227
====== =======
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Raw materials $2,662 $2,498
Work-in-process 3,765 2,547
Finished goods 1,870 1,881
----- -----
$8,297 $6,926
====== ======
</TABLE>
Reserves for excess and obsolete inventory totaled $1,246,000 and
$1,691,000 as of December 31, 1997 and 1996, respectively and have been
included as a component of the above amounts.
<PAGE>
5. SECURITY DEVICES ON LEASE
Security devices are stated at cost and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Security devices on lease $ 276 $ 525
Less allowance for depreciation 125 244
------ ------
$ 151 $ 281
====== ======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are summarized as
follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31,
LIVES (YEARS) 1997 1996
(IN THOUSANDS)
<S> <C> <C> <C>
Land $ 506 $ 506
Buildings and improvements 20-25 5,744 5,737
Machinery and equipment 3-10 3,727 3,472
Furniture, fixtures and
office equipment 3-10 3,661 3,467
Leasehold improvements 5-10 11 -
-------- -------
13,649 13,182
Less allowance for
depreciation 6,701 5,894
-------- -------
$ 6,948 $ 7,288
======== =======
</TABLE>
On December 24, 1996, the Company completed a sale-leaseback transaction
on the Company's corporate headquarters. (See Note 10.)
7. OTHER ASSETS
In January 1995, the Company sold its guest house in Puerto Rico for
$800,000 which approximated its carrying value. The Company holds notes
with a present value of $236,000 and $389,000 at December 31, 1997 and
1996, respectively, which are receivable in varying amounts through January
2000.
<PAGE>
8. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
(IN THOUSANDS)
<S> <C> <C>
Accrued salaries, employee benefits and payroll taxes $ 638 $ 733
Accrued merger costs 359 -
Customer deposits payable 262 237
Accrued warranty costs 237 361
Other accured liabilities 1,234 937
------ ------
$2,730 $2,268
====== ======
</TABLE>
9. LINE OF CREDIT
The Company has a revolving line of credit with a financial institution for
maximum borrowings of $8 million through December 31, 1999, which is
subject to certain limitations based on a percentage of eligible accounts
receivable and inventories as defined in the agreement. Interest is payable
monthly at the lender's Index Rate, as defined (5.9% at December 31, 1997),
plus 2.75% per annum. The Company is required to pay a commitment fee of
one quarter of one percent per annum on any unused portion of the line of
credit. Borrowings under the line of credit are secured by substantially
all of the Company's assets. The terms of the agreement, among other
matters, require the Company to maintain certain minimum cash flow and net
worth levels, a minimum working capital ratio, and place restrictions on
capital expenditures and the payment of dividends (other than dividends on
the Series A Preferred Stock described in Note 1). At December 31, 1997,
there were no amounts outstanding under the line of credit.
<PAGE>
10. OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES
On December 24, 1996, the Company completed a sale-leaseback transaction on
the Company's corporate headquarters. The Company received net proceeds of
approximately $4.5 million which approximated the carrying amount of the
land and building. The lease covers a period of 20 years with quarterly
payments of $131,000. The lease agreement allows for an increase in lease
payments for years 4 through 20 based on a formula tied to the Consumer
Price Index. Because the fair market value of the land on which the
principal premises is built was greater than 25 percent of the total fair
value of the leased premises at the inception of the lease, the land and
building have been considered separately for the purposes of applying the
criteria of SFAS No. 13. The land portion of the lease has been classified
as an operating lease. Future minimum payments related to the land portion
of the lease are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
1998 $ 148
1999 148
2000 148
2001 148
2002 148
Thereafter 2,076
------
$2,816
======
The building portion of the lease has been classified as a capital lease.
The Company also leases certain computer and office equipment and related
items under noncancellable capital lease arrangements at varying interest
rates expiring through February 2001.
Minimum annual rentals are as follows (in thousands):
YEAR ENDING
DECEMBER 31,
1998 $ 580
1999 549
2000 449
2001 377
2002 376
Thereafter 5,260
------
7,591
Less amount representing interest 4,278
-----
Present value of minimum rentals 3,313
Less current portion 218
------
Noncurrent portion $3,095
======
<PAGE>
As a result of the sale-leaseback transaction, a capitalized lease asset
and obligation in the amount of $3,033,000 was recorded at the inception of
the lease. The net book value of the building was $2,881,000 and $3,033,000
at December 31, 1997 and 1996, respectively. The capitalized lease asset is
being amortized on a straight-line basis over the 20-year lease term. The
capitalized lease obligation is being amortized under the interest method
over the 20-year lease period, utilizing an imputed interest rate of
approximately eleven percent.
The computer and office equipment and related items are included in
property and equipment and other assets with a gross value of $1,591,000
and $1,397,000 at December 31, 1997 and 1996, respectively, and a net book
value of $574,000 and $665,000 at December 31, 1997 and 1996, respectively.
<PAGE>
11. COMMON SHAREHOLDERS' EQUITY
a. EARNINGS PER SHARE ("EPS") - In 1997, the Company adopted SFAS No.
128, "Earnings Per Share." Basic EPS is determined by using the
weighted average number of common shares outstanding during each
period. Diluted EPS further assumes the issuance of common shares for
all dilutive potential common shares outstanding. The calculation for
earnings per share for the years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In Thousands, Except per Share Amounts)
<S> <C> <C> <C>
Net income (loss) $ (17,917) $1,183 $1,731
Preferred stock dividends (1,067) - -
---------- ------ -------
Net income (loss) available to
common shareholders $ (18,984) $1,183 $1,731
========== ======= =========
Weighted average common shares 9,114 4,796 4,726
========== ======= =========
Basic EPS $ (2.08) $ 0.25 $ 0.37
========== ======= =========
Net income (loss) $ (17,917) $1,183 $1,731
Preferred stock dividends (1,067) - -
---------- ------- ---------
Net income (loss) available to
common shareholders $ (18,984) $1,183 $1,731
========== ======== ===========
Weighted average common shares 9,114 4,796 4,726
Dilutive effect of common stock
options and warrants - 278 171
---------- --------- -----------
Weighted average common and
common equivalent shares 9,114 5,074 4,897
========== ========= ==========
Diluted EPS $ (2.08) $ 0.23 $ 0.35
========== ========= ===========
</TABLE>
b. STOCK OPTION PLAN - In February 1997, the Company adopted the 1997
Stock Incentive Plan of Sentry Technology Corporation (the "1997
Plan"). The 1997 Plan provides for grants up to 2,250,000 options to
purchase the Company's common stock. Awards may be granted by the
stock option committee to eligible employees in the form of stock
options, restricted stock awards, phantom stock awards or stock
appreciation rights. Stock options may be granted as incentive stock
options or nonqualified stock options. Such options become exercisable
at a rate of 20% per year over a five-year period and expire ten years
from the date of grant. All outstanding stock options were issued at
the fair value at the date of grant. At December 31, 1997, 2,214,233
common shares were reserved for issuance in connection with the
exercise of stock options.
<PAGE>
Stock option transactions for the years ended December 31, 1997, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
<S> <C> <C>
Balance, January 1, 1995 207,952 $ 2.40
Granted 233,073 2.91
Exercised (31,941) 2.06
Canceled (55,731) 2.63
------- ----
Balance, December 31, 1995 353,353 2.73
Granted 245,799 6.31
Exercised (27,117) 2.38
Canceled (19,963) 5.07
------- ----
Balance, December 31, 1996 552,072 4.26
Granted 679,500 3.07
Exercised (35,767) 3.17
Canceled (161,988) 5.23
-------- ----
Balance, December 31, 1997 1,033,817 $ 3.36
========= ======
</TABLE>
In connection with the merger described in Note 1, employees and
directors who held options to purchase Knogo N.A. common stock were
granted substitute options ("Substitute Knogo N.A. Options") under the
1997 Plan to purchase an aggregate of 552,072 shares of Sentry Common
Stock and 552,072 shares of Sentry Class A Preferred Stock at prices
determined pursuant to the formula set forth in the Merger Agreement.
Employees and directors who held outstanding options to purchase Video
Sentry common stock were granted substitute options under the 1997
Plan to purchase 195,000 shares of Sentry Common Stock at prices
determined pursuant to the formula set forth in the Merger Agreement.
At December 31, 1997, options to purchase an aggregate of 549,317
(which include 509,317 outstanding and exercisable substitute Knogo
N.A. Options) common shares were vested and currently exercisable at a
weighted average exercise price of $4.16 and an additional 484,500
options vest at dates extending through the year 2002. At December 31,
1997, options for 1,180,416 common shares were available for future
grants.
<PAGE>
In connection with the divestiture of Knogo N.A. from Knogo
Corporation on December 29, 1994, approximately 28,000 equivalent
shares of Sentry common stock were issued to former Knogo Corporation
employees who were not transferred to Knogo N.A. These shares were
distributed in settlement of the cancellation of their Knogo
Corporation stock options in 1995.
As discussed in Note 2, the Company accounts for its stock-based
awards using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements
for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal
1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions,
which significantly differ from the Company's stock options awards.
These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life of five years; stock
volatility, 74.3% in 1997, 67.1% in 1996, and 66.0% in 1995; risk free
interest rates, 6.5% in 1997, 7.5% in 1996, and 6.5% in 1995; and no
dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are
recognized as they occur. If the computed fair values of the 1997,
1996 and 1995 awards had been amortized to expense over the vesting
period of the awards, pro forma net income (loss) available to common
shareholders would have been $(19,324,000) (($2.12) per diluted share)
in 1997, $1,061,000 ($0.21 per diluted share) in 1996, and $1,710,000
($0.35 per diluted share) in 1995. However, the impact of outstanding
nonvested stock options granted prior to 1995 has been excluded from
the pro forma calculation; accordingly, the 1997, 1996 and 1995 pro
forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock
options.
c. WARRANTS - At December 31,1997, the Company had warrants to purchase
411,250 shares of common stock at exercise prices ranging from $1.33
and $4.95. Such warrants expire through October 1999. During 1997,
warrants to purchase 42,864 shares of common stock were exercised at
an exercise price of $1.17. At December 31, 1997, 411,250 common
shares were reserved for issuance in connection with the exercise of
these warrants.
<PAGE>
12. INCOME TAXES
The components of the Company's income tax provisions for the years ended
December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In Thousands)
Current:
<S> <C> <C> <C>
Federal $ - $ 811 $ 51
State - 94 9
Puerto Rico - 221 (2)
------- --------- -------
- 1,126 58
------- --------- --------
Deferred:
Federal - - -
State - - -
Puerto Rico 174 (462) 152
------- --------- --------
174 (462) 152
------- --------- --------
$ 174 $ 664 $210
======= ========= ========
The reconciliation between total tax expense and the expected U.S. Federal
income tax for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
(In Thousands)
Expected tax expense (benefit) at 34% $(6,033) $ 628 $ 660
Add (deduct):
State taxes - 94 9
Nondeductible expenses 5,024 35 37
U.S. losses producing no tax benefit 767 - -
Benefits of nontaxable income of
Puerto Rico subsidiary/losses
producing no tax benefit 242 74 (510)
Prior years' estimated tax adjustment - (217) -
Other 174 50 14
-------- -------- --------
$174 $ 664 $ 210
======== ======== =========
</TABLE>
Significant components of deferred tax assets and liabilities are
comprised of:
<PAGE>
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS (LIABILITIES)
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
(IN THOUSANDS)
ASSETS:
<S> <C> <C> <C>
Accounts receivable $ 278 $ 266 $ 372
Inventories 442 550 523
Accrued liabilities 175 181 315
Property, plant and equipment 46 14 914
Intercompany transactions 16 17 9
Net operating loss carryforwards 4,337 191 -
Tax credit carryforwards 209 209 98
------- -------- -------
Gross deferred tax assets 5,503 1,428 2,231
Less: Valuation allowance (5,455) (1,160) (2,101)
-------- -------- --------
48 268 130
------- -------- -------
LIABILITIES:
Tollgate taxes (37) (74) (409)
Security devices on lease (11) (20) (9)
------- -------- -------
Gross deferred tax liabilities (48) (94) (418)
------- -------- -------
Net deferred tax asset (liability) $ - $ 174 $ (288)
======= ======== ========
</TABLE>
The increase in the valuation allowance for the year ended December 31,
1997 was primarily attributable to the increase in net operating loss
carryforwards for which realization was not more likely than not. The
decrease in the valuation allowance for the year ended December 31, 1996
was due to the decrease in deferred tax assets for which realization was
not more likely than not.
The income tax benefit relating to the sale of the Company's corporate
headquarters reduced currently payable taxes and was credited to additional
paid-in-capital. Such amount approximated $978,000 for the year ended
December 31, 1996.
The Company's Puerto Rico manufacturing subsidiary is exempt from Federal
income taxes under Section 936 of the Internal Revenue Code (as amended
under the Small Business Job Protection Act of 1996). Under the current
law, this exemption from Federal income tax will remain in effect through
2001, will be subject to certain limits during the years 2002 through 2005,
and will be eliminated thereafter. Also, the Company was granted a partial
income tax exemption under the provisions of the Puerto Rico Industrial
Incentives Act of l978 from the payment of Puerto Rico taxes on income
derived from marketing certain products manufactured by the subsidiary. The
grant provides for a 90% exemption from Puerto Rico taxes until January 1,
2008. The Company provides tollgate taxes on the earnings of the Puerto
Rico subsidiary which it intends to remit, in the form of a dividend, to
the parent company based upon the applicable rates.
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
a. LITIGATION - The Company is a party to litigation arising in the
normal course of business. Management believes the final disposition
of such matters will not have a material adverse effect on the
consolidated financial statements.
b. SUPPLY AGREEMENT - Knogo N.A. had a supply agreement in which
Sensormatic was obligated to purchase products from Knogo N.A. in the
amount of $12,000,000 in 1995, $8,000,000 in 1996 and $4,000,000 in
1997. Such products were priced to yield a 35% gross
margin. In 1997 and 1996, Sensormatic did not meet its minimum order
amounts in accordance with the terms of the supply agreement and,
accordingly, the Company recorded in revenues the cumulative profits
on the shortfall. Although the supply agreement officially expired and
minimum purchase obligations ended as of June 30, 1997, Sensormatic
continued to purchase these products at similar margins from the
Company. Included in accounts receivable at December 31, 1997 and 1996
are amounts due from Sensormatic of $492,000 and $1,212,000,
respectively.
c. LICENSE AGREEMENT - Knogo N.A. entered into a license agreement in
which Knogo N.A. has the exclusive right to manufacture and sell
existing Knogo N.A. products within the Knogo N.A. territory, and
Sensormatic has such rights elsewhere, except that Knogo N.A. and
Sensormatic each have the right to develop and market the SuperStrip
technology in the Knogo N.A. territory.
d. 401(K) PLAN - In January 1997, the Company adopted the Sentry
Technology Corporation Retirement Savings 401(k) Plan (the "Plan").
The Plan permits eligible employees to make voluntary contributions to
a trust, up to a maximum of 15% of compensation, subject to certain
limitations, with the Company making a matching contribution equal to
a designated percentage of the eligible employee's deferral election.
The Company may also contribute a discretionary contribution, subject
to certain conditions, as defined in the Plan. The Company contributed
approximately $215,000, $110,000 and $121,000 to the Plan for the
years ended December 31, 1997, 1996 and 1995, respectively.
e. EMPLOYMENT AGREEMENTS - The Company and several key executives entered
into employment agreements for terms of two to five years for which
the Company will have a minimum commitment of $1,046,000.
14. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
The Company grants credit to customers who are principally in the retail
industry and libraries. During 1997, revenues from a single customer
represented approximately 18% of total revenues. During 1996, revenues from
a different customer represented approximately 13% of total revenues. No
other customer accounted for more than 10% of total revenues for fiscal
1997, 1996 and 1995.
15. JOINT VENTURE
In January 1996, the Company acquired a controlling interest in K&M
Converting Corp. ("KMCC"), a newly established joint venture entered into
with Marian Rubber Products Co., Inc. ("Marian"). KMCC is the exclusive
converter of magnetic material into disposable targets or labels used in
the Company's EAS systems. The Company contributed $15,000 in cash,
$430,000 in inventory, and $49,000 in machinery to KMCC and issued
approximately 17,000 equivalent shares of Sentry common stock to Marian in
exchange for 50.001% of KMCC. The acquisition was accounted for under the
purchase
<PAGE>
method of accounting and the operating results of KMCC are
included in the consolidated operating results of the Company since the
date of acquisition. Pro forma results of operations assuming KMCC was
acquired as of the beginning of each of the fiscal years ended December 31,
1996 and 1995 would not differ materially from the reported results.
16. OTHER INCOME - SALE OF ASSETS
During 1996, the Company completed the sale of certain assets (primarily
patents and technology) of its library security systems business to
Minnesota Mining and Manufacturing Company ("3M") for a purchase price of
$3,000,000, paid at closing. In connection with such sale, the Company and
3M entered into an agreement pursuant to which the Company has become a
distributor of certain of 3M's library systems products for an initial term
of three years and has agreed not to compete with 3M in the sale of
security systems products (other than closed circuit video systems) in the
library market except as otherwise contemplated by the transaction
documentation. The parties also settled certain patent litigation between
them.
The impact of the transaction resulted in an increase in cash of $3,000,000
and a pretax tax gain of approximately $2,462,000 for the year ended
December 31, 1996. The impact on the Company's historical revenues and net
income from the sale of products covered by the patents and related
technology sold is not material.
<PAGE>
SCHEDULE II
SENTRY TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------- --------- --------------------------- ---------- ---------
ADDITIONS
----------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COST AND ACCOUNTS DEDUCTIONS AT END OF
DESCRIPTIONS OF YEAR EXPENSES - DESCRIBE - DESCRIBE YEAR
Year ended December 31, 1997:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 719 $ 73 $ 8 (1) $ 48 (2) $ 752
======= ======= ======= ======== ========
Allowance for uncollectible minimum
lease payments $ 157 $ (71) $ 86
======= ====== ========
Reserve for excess and obsolete
inventory $ 1,691 $ 444 $ 889 (2) $ 1,246
======= ====== ======== ========
Year ended December 31, 1996:
Allowance for doubtful accounts $ 931 $ 91 $ 8 (1) $ 311 (2) $ 719
======= ====== ====== ======== ========
Allowance for uncollectible
minimum lease payments $ 159 $ (2) $ 157
======= ====== ========
Reserve for excess and obsolete
inventory $ 1,441 $ 470 $ 220(2) $ 1,691
======= ====== ======== ========
Year ended December 31, 1995:
Allowance for doubtful accounts $ 862 $ 352 $ 34 (1) $ 317(2) $ 931
======= ====== ====== ======= ========
Allowance for uncollectible
minimum lease payments $ 111 $ 48 $ 159
======= ====== ========
Reserve for excess and obsolete
inventory $ 1,343 $ 394 $ 296(2) $ 1,441
======= ====== ====== ========
(1) Recoveries of accounts written off.
(2) Amounts written off.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
333-34867 and 333-34929 of Sentry Technology Corporation each on Form S-8 of our
report dated March 3, 1998, appearing in this Annual Report on Form 10-K of
Sentry Technology Corporation for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Jericho, New York
March 26, 1998
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Part III information will be set forth in the Company's definitive proxy
statement for the Company's 1998 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report on
Form 10-K:
(1)(2) Consolidated Financial Statements of Company and its
subsidiaries for the year ended December 31, 1997 and
Financial Statement Schedules required to be filed by Items
8 and 14(d) of Form 10-K. See the Index to Consolidated
Financial Statements of Sentry Technology Corporation and
its subsidiaries.
(3) Exhibits required to be filed by Item 601 of Regulation S-K:
MANAGEMENT CONTRACTS OR COMPENSATORY PLANS OR ARRANGEMENTS:
10.1 1997 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.5 to Company's Registration Statement on Form S-4
(No. 333-20135).
10.2 Retirement Savings 401(k) Plan. Incorporated by reference
to Exhibit 10.6 to Company's Registration Statement on Form
S-4 (No. 333-20135).
10.3 Form of Employment Agreement, dated as of February 12, 1997,
between Company and Thomas A. Nicolette. Incorporated by
reference to Exhibit 10.1 to Company's Registration
Statement on Form S-4 (No. 333-20135)
10.4 Form of Employment Agreement, dated as of February 12, 1997,
between Company and Peter J. Mundy. Incorporated by
reference to Exhibit 10.2 to Company's Registration
Statement on Form S-4 (No. 333-20135).
10.5 Form of Employment Agreement, dated as of February 12, 1997,
between Company and Peter Y. Zhou. Incorporated by reference
to Exhibit 10.3 to Company's Registration Statement on Form
S-4 (No. 333-20135).
OTHER EXHIBITS:
2.1 Amended and Restated Agreement and Plan of Reorganization
and Merger, dated as of November 27, 1996 among Video
Corporation, Knogo North America Inc., Sentry Technology
Corporation, Viking Merger Corp. and Strip Merger Corp., as
amended by Amendment No. 1 to Amended and Restated Agreement
and Plan of Reorganization and Merger, dated as of January
10, 1997. Incorporated by reference to Exhibit 2.1 to
Company's Registration Statement on Form S-4 (No.
333-20135).
3.1 Form of Amended and Restated Certificate of Incorporation
of the Company, together with Form of Certificate of
Designations of Sentry Technology Corporation Class A
Preferred Stock. Incorporated by reference to Exhibit 3.1 to
Company's Registration Statement on Form S-4 (No.
333-20135).
3.2 Form of Bylaws of the Company. Incorporated by reference
to Exhibit 3.2 to Company's Registration Statement on Form
S-4 (No. 333-20135).
10.7 Form of Loan Agreement and related agreements among the
Company, Knogo North America Inc., Video Sentry Corporation
and General Electric Capital Corporation.
10.8 Form of Contribution and Divestiture Agreement dated
December 29, 1994 between Knogo Corporation and Knogo North
America Inc.
10.9 Form of License Agreement dated December 29, 1994 between
Knogo Corporation and Knogo North America Inc.
10.10 Form of Lease Agreement dated December 24, 1996 between
Knogo North America Inc. and NOG(NY) QRS 12-23, Inc.
10.11 Form of Distribution Agreement dated March 26, 1996 between
Knogo North America Inc. and Minnesota Mining and
Manufacturing Company.
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP
(b) No reports on Form 8-K were filed for the Company during the relevant
period.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SENTRY TECHNOLOGY CORPORATION
By: /S/ PETER J. MUNDY
--------------------------
Peter J. Mundy
Vice President-Finance,
Chief Financial Officer,
Secretary and Treasurer
Dated: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE
/S/ THOMAS A. NICOLETTE President, Chief Executive Officer
- ------------------------ and Director
Thomas A. Nicolette
/S/ ROBERT D. FURST, JR. Director
- ------------------------
Robert D. Furst, Jr.
/S/ PAUL D. MELLIN Director
- -----------------------
Paul D. Mellin
/S/ WILLIAM A. PERLMUTH Director
- -------------------------
William A. Perlmuth
/S/ ROBERT L. BARBANELL Director
- --------------------------
Robert L. Barbanell
/S/ PETER J. MUNDY Vice President-Finance,
- -------------------------- Chief Financial and
Peter J. Mundy Accounting Officer,
Secretary and Treasurer
Dated: March 26, 1998
<PAGE>
EXHIBIT INDEX
10.7 Form of Loan Agreement and related agreements among the Company, Knogo
North America Inc., Video Sentry Corporation and General Electric Capital
Corporation.
10.8 Form of Contribution and Divestiture Agreement dated December 29, 1994
between Knogo Corporation and Knogo North America Inc.
10.9 Form of License Agreement dated December 29, 1994 between Knogo
Corporation and Knogo North America Inc.
10.10 Form of Lease Agreement dated December 24, 1996 between Knogo North
America Inc. and NOG(NY)QRS 12-23, Inc.
10.11 Form of Distribution Agreement dated March 26, 1996 between Knogo
North America Inc. and Minnesota Mining and Manufacturing Company.
21 Subsidiaries of the Company.
23. Consent of Deloitte & Touche LLP
Exhibit 21
Subsidiaries
Set forth below are the names of the direct and indirect subsidiaries of Sentry
Technology Corporation, together with the percentage ownership interest of each
such corporation held by its parent.
Knogo North America Inc. (100%)
Knogo Caribe Inc. (100%)
K&M Converting Corp. (50.001%)
Video Sentry Corporation (100%)
LOAN AND SECURITY AGREEMENT
DATED AS OF DECEMBER 31, 1997
BETWEEN
GENERAL ELECTRIC CAPITAL CORPORATION
AS LENDER
AND
KNOGO NORTH AMERICA INC.
AS BORROWER
SENTRY TECHNOLOGY CORPORATION
AS CREDIT PARTY
VIDEO SENTRY CORPORATION
AS CREDIT PARTY
KNOGO CARIBE, INC.
AS CREDIT PARTY
<PAGE>
GE CAPITAL COMMERCIAL FINANCE
This LOAN AND SECURITY AGREEMENT is dated as of December 31, 1997, and agreed to
by and between KNOGO NORTH AMERICA INC., a Delaware corporation ("Borrower"),
any other Credit Party executing this Agreement, and GENERAL ELECTRIC CAPITAL
CORPORATION, a New York corporation ("Lender").
RECITALS
A. The purpose of this Agreement is to provide to Borrower revolving credit
loans including a subfacility for letters of credit (collectively, the "Loans")
having the following general description:
TRANSACTION SUMMARY AS OF THE DATE OF THIS AGREEMENT
REVOLVING CREDIT LOAN
Maximum Amount: $8,000,000
Term: Two (2) years
Revolving Credit Rate: Index Rate plus 2.75%
Letter of Credit Subfacility: $0
Borrowing Base: the sum of (A) 80% (or such lesser
percentage as may be specified by Lender
from time to time by written notice to
Borrower) of the value (as determined by
Lender) of the Eligible Accounts (other than
Eligible Deferred Accounts) of Borrower and
Video, and (B) the lesser of (i) $1,000,000
or (ii) 70% (or such lesser percentage as
may be specified by Lender from time to time
by written notice to Borrower) of the value
(as determined by Lender) of the Eligible
Deferred Accounts of Borrower and Video;
provided that Lender (without limiting its
rights to otherwise reduce the foregoing
percentage) shall reduce the foregoing
percentages (the "Accounts Advance Rates")
by one percentage point for each percentage
point that the dilution of the Accounts of
Borrower or Video (calculated as the average
dilution from the Accounts Receivable Roll
Forward Analysis (Exhibit E) over the most
recent three months) exceeds five percent
(5%); provided, that, in the event the
Accounts Advance Rates are so reduced and
dilution of the Accounts of Borrower or
Video (calculated as the average dilution
from the Accounts Receivable Roll Forward
Analysis (Exhibit E) over the most recent
three months) decreases to five percent (5%)
or less then Lender shall increase the
Accounts Advance Rates by one percentage
point for each percentage point of such
decrease except that in no event shall the
Accounts Advance Rates exceed the
percentages set forth above, PLUS
the lesser of (i) $1,500,000 or (ii) the sum
of 25% (or such lesser percentage as may be
specified by Lender from time to time by
written notice to Borrower) of the value of
the Eligible Inventory of Borrower
consisting of raw materials and finished
goods, in each case as determined by Lender,
valued on a first-in, first-out basis (at
the lower of cost or market), PLUS
the lesser of (i) $1,500,000 or (ii) the sum
of 25% (or such lesser percentage as may be
specified by Lender from time to time by
written notice to Borrower) of the value of
the Eligible Inventory of Video consisting
of raw materials and finished goods, in each
case, as determined by Lender, valued on a
first-in, first-out basis (at the lower of
cost or market).
FEES
Closing Fee: $15,000
Collateral Monitoring Fee: $10,000 per annum
Unused Line Fee: .25%
Letter of Credit Fee: N/A
Prepayment Fee: 3% in year one; and 2% in year two
The Loans described generally here are established and governed by the terms and
conditions set forth below in this Agreement and the other Loan Documents, and
if there is any conflict between this general description and the express terms
and conditions below or elsewhere in the Loan Documents, such other express
terms and conditions shall control.
B. Borrower desires to obtain the Loans and other financial accommodations from
Lender and Lender is willing to provide the Loans and accommodations all in
accordance with the terms of this Agreement.
C. Capitalized terms used herein shall have the meanings assigned to them in
Schedule A and, for purposes of this Agreement and the other Loan Documents, the
rules of construction set forth in Schedule A shall govern. All Schedules,
Disclosure Schedules, Attachments, Addenda and Exhibits (collectively,
"Appendices") hereto, or expressly identified to this Agreement, are
incorporated herein by reference, and taken together with this Agreement,
constitute but a single agreement. These Recitals shall be construed as part of
this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the parties hereto agree as follows:
1. AMOUNT AND TERMS OF CREDIT
1.1. LOANS. (a)Subject to the terms and conditions of this Agreement, from the
Closing Date and until the Commitment Termination Date (i) Lender agrees (A) to
make available advances (each, a "Revolving Credit Advance") and (B) to incur
Letter of Credit Obligations, in an aggregate outstanding amount not to exceed
the Borrowing Availability, and (ii) Borrower may at its request from time to
time borrow, repay and reborrow, and may cause Lender to incur Letter of Credit
Obligations, under this Section 1.1.
(b) Borrower shall request each Revolving Credit Advance by written
notice to Lender substantially in the form of Exhibit A (each a "Notice of
Revolving Credit Advance") given no later than 11:00 A.M. (New York City time)
on the Business Day of the proposed Revolving Credit Advance. Lender shall be
fully protected under this Agreement in relying upon, and shall be entitled to
rely upon, (i) any Notice of Revolving Credit Advance believed by Lender to be
genuine, and (ii) the assumption that the Persons making electronic requests or
executing and delivering a Notice of Revolving Credit Advance were duly
authorized, unless the responsible individual acting thereon for Lender shall
have actual knowledge to the contrary.
(c) The Revolving Credit Loan shall be evidenced by, and be repayable
in accordance with the terms of, the Revolving Credit Note and this Agreement.
(d) Borrower agrees that Lender, in making any Revolving Credit Advance
or incurring any other Obligation hereunder, shall be entitled to rely upon the
most recent Borrowing Base Certificate delivered to Lender by Borrower and other
information available to Lender. Borrower further agrees that Lender shall be
under no obligation to make any further Revolving Credit Advance or incur any
other Obligation if Borrower shall have failed to deliver a Borrowing Base
Certificate to Lender by the time specified in Section 4.1(b).
(e) Letters of Credit. Notwithstanding anything to the contrary
contained in this Agreement, including Schedule C, Borrower shall have no right
to request, and Lender shall have no obligation to incur any Letter of Credit
Obligations for the account of Borrower or any other Credit Party.
1.2. TERM AND PREPAYMENT. (a) The obligation of Lender to make Revolving Credit
Advances and extend other financial accommodations shall be in effect from the
Closing Date until the Commitment Termination Date. Upon the Commitment
Termination Date, Borrower shall pay to Lender in full, in cash: (i) all
outstanding Revolving Credit Advances and all accrued but unpaid interest
thereon; (ii) an amount sufficient to enable Lender to hold cash collateral as
specified in Schedule C; and (iii) all other non-contingent Obligations due to
or incurred by Lender. Upon payment of the amounts specified in the immediately
preceding sentence, Borrower's obligation to pay the Unused Line Fee shall
simultaneously terminate.
(b) If the Revolving Credit Loan shall at any time exceed the Borrowing
Availability, then Borrower shall immediately repay the Revolving Credit Loan in
the amount of such excess; any such excess balance outstanding shall
nevertheless constitute Obligations that are evidenced by the Revolving Credit
Note, secured by the Collateral and entitled to all of the benefits of the Loan
Documents.
(c) Borrower shall have the right, at any time upon 30 days prior
written notice to Lender and payment of the applicable Prepayment Fee to (i)
terminate voluntarily Borrower's right to receive or benefit from, and Lender's
obligation to make and to incur, Revolving Credit Advances and Letter of Credit
Obligations, and (ii) prepay all of the other Obligations. The effective date of
termination of the Revolving Credit Loan specified in such notice shall be the
Commitment Termination Date.
1.3. USE OF PROCEEDS. Borrower shall use the proceeds of the Revolving Credit
Loan for general working capital purposes, to make loans to Video subject to the
limitations set forth in Section 5(b), to make loans to Caribe subject to the
limitations set forth in Section 5(b), for general working capital, and other
corporate purposes acceptable to Lender.
1.4. SINGLE LOAN. The Loans and all of the other Obligations of Borrower to
Lender shall constitute one general obligation of Borrower secured by all of the
Collateral.
1.5. INTEREST. (a) Borrower shall pay interest to Lender on the aggregate
outstanding Revolving Credit Advances at a floating rate equal to the Index Rate
plus two and three-quarters percent (2.75%) per annum (the "Revolving Credit
Rate").
(b) Interest shall be payable on the outstanding Revolving Credit
Advances (i) in arrears for the preceding calendar month on the first day of
each calendar month, (ii) on the Commitment Termination Date, and (iii) if any
interest accrues or remains payable after the Commitment Termination Date, upon
demand by Lender.
(c) All computations of interest, and all calculations of the Letter of
Credit Fee, shall be made by Lender on the basis of a three hundred and sixty
(360) day year, in each case for the actual number of days occurring in the
period for which such interest or fee is payable. Each determination by Lender
of an interest rate hereunder shall be conclusive and binding for all purposes,
absent manifest error.
(d) Effective upon the occurrence of any Event of Default and for so
long as any Event of Default shall be continuing, upon notice to the Borrower
(except that no notice shall be required upon the occurrence of any Event of
Default specified in Sections 7.1(e), (f) or (g)) the Revolving Credit Rate and
the Letter of Credit Fee shall automatically be increased by two percentage
points (2%) per annum (such increased rate, the "Default Rate"), and all
outstanding Obligations, including unpaid interest and Letter of Credit Fees,
shall continue to accrue interest from the date of such Event of Default at the
Default Rate applicable to such Obligations.
(e) If any interest or other payment (including Unused Line Fees,
Letter of Credit Fees and Collateral Monitoring Fees) to Lender under this
Agreement becomes due and payable on a day other than a Business Day, such
payment date shall be extended to the next succeeding Business Day and interest
thereon shall be payable at the then applicable rate during such extension.
(f) In no event will Lender charge interest at a rate that exceeds the
highest rate of interest permissible under any law that a court of competent
jurisdiction shall, in a final determination, deem applicable.
1.6. CASH MANAGEMENT SYSTEM. On or prior to the Closing Date and until the
Termination Date, Borrower will establish and maintain the cash management
system described in Schedule D. All payments in respect of the Collateral shall
be made to or deposited in the blocked accounts described in Schedule D in
accordance with the terms thereof.
1.7. FEES. As compensation for Lender's costs and efforts incurred and expended
in entering into this Agreement and in consideration of Lender's making the
Loans available to Borrower, Borrower agrees to pay to Lender the Fees set forth
in Schedule E.
1.8. RECEIPT OF PAYMENTS. Borrower shall make each payment under this Agreement
(not otherwise made pursuant to Section 1.9) without set-off or counterclaim not
later than 11:00 A.M. (New York City time) on the day when due in lawful money
of the United States of America in immediately available funds to the Collection
Account. For purposes of computing interest and Fees, all payments shall be
deemed received by Lender one (1) Business Day following receipt of good funds
in the Collection Account. For purposes of determining the Borrowing
Availability, payments shall be deemed received by Lender upon receipt of good
funds in the Collection Account.
1.9. APPLICATION AND ALLOCATION OF PAYMENTS. Borrower irrevocably agrees that
Lender shall have the continuing and exclusive right to apply any and all
payments against the then due and payable Obligations in such order as Lender
may deem advisable. Lender is authorized to, and at its option may (without
prior notice or precondition and at any time or times), but shall not be
obligated to,
make or cause to be made Revolving Credit Advances on behalf of Borrower for:
(a) payment of all Fees, expenses, indemnities, charges, costs, principal,
interest, or other Obligations owing by Borrower under this Agreement or any of
the other Loan Documents, (b) the payment, performance or satisfaction of any of
Borrower's obligations with respect to preservation of the Collateral or
otherwise under this Agreement, or (c) any premium in whole or in part required
in respect of any of the policies of insurance required by this Agreement, even
if the making of any such Revolving Credit Advance causes the outstanding
balance of the Revolving Credit Loan to exceed the Borrowing Availability, and
Borrower agrees to repay immediately, in cash, any amount by which the Revolving
Credit Loan exceeds the Borrowing Availability.
1.10. ACCOUNTING. Lender is authorized to record on its books and records the
date and amount of each Loan and each payment of principal thereof and such
recordation shall constitute prima facie evidence of the accuracy of the
information so recorded. Lender shall provide Borrower on a monthly basis a
statement and accounting of such recordations but any failure on the part of the
Lender to keep any such recordation (or any errors therein) or to send a
statement thereof to Borrower shall not in any manner affect the obligation of
Borrower to repay (with applicable interest) the Loans made to Borrower under
this Agreement. Except to the extent that Borrower shall, within 30 days after
such statement and accounting is sent, notify Lender in writing of any objection
Borrower may have thereto (stating with particularity the basis for such
objection), such statement and accounting shall be deemed final, binding and
conclusive upon Borrower, absent manifest error.
1.11. INDEMNITY. Borrower and each other Credit Party executing this Agreement
jointly and severally agree to indemnify and hold Lender and its Affiliates, and
their respective employees, attorneys and agents (each, an "Indemnified
Person"), harmless from and against any and all suits, actions, proceedings,
claims, damages, losses, liabilities and expenses of any kind or nature
whatsoever (including reasonable attorneys' fees and disbursements and other
costs of investigation or defense, including those incurred upon any appeal)
which may be instituted or asserted against or incurred by any such Indemnified
Person as the result of credit having been extended, suspended or terminated
under this Agreement and the other Loan Documents or with respect to the
execution, delivery, enforcement, performance and administration of, or in any
other way arising out of or relating to, this Agreement and the other Loan
Documents or any other documents or transactions contemplated by or referred to
herein or therein and any actions or failures to act with respect to any of the
foregoing, including any and all product liabilities, Environmental Liabilities
and legal costs and expenses arising out of or incurred in connection with
disputes between or among any parties to any of the Loan Documents
(collectively, "Indemnified Liabilities"), except to the extent that any such
Indemnified Liability is finally determined by a court of competent jurisdiction
to have resulted solely from such Indemnified Person's gross negligence or
willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO THE
BORROWER OR TO ANY OTHER PARTY TO ANY LOAN DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR
THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY
THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES
WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR
TERMINATED UNDER THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR AS A RESULT OF ANY
OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
1.12. TAXES. All payments to Lender under any Loan Document shall be made free
and clear of, and without deduction for, any Taxes. If Borrower shall be
required by law to deduct any Taxes from any payment to Lender under any Loan
Document, then the amount payable to Lender shall be increased so that, after
making all required deductions (including deductions applicable to additional
sums payable under this Section 1.12), Lender receives an amount equal to that
which it would have received had no such deductions been made and Borrower shall
pay the full amount deducted to the relevant taxing authority, and promptly
furnish to Lender tax receipts evidencing such payment. Borrower shall pay and
indemnify Lender for the full amount of Taxes (including any Taxes imposed by
any jurisdiction on amounts payable under this Section 1.12) paid by Lender and
any liability (including penalties, interest and expenses) arising therefrom or
with respect thereto, whether or not such Taxes were correctly or legally
asserted.
1.13. BORROWING BASE; RESERVES. The Borrowing Base shall be determined by
Lender (including the eligibility of Accounts and Inventory) based on the most
recent Borrowing Base Certificate delivered to Lender in accordance with Section
4.1(b) and such other information available to Lender. Without limiting any
other rights and remedies of Lender hereunder or under the other Loan Documents,
the Revolving Credit Loan shall be subject to Lender's continuing right to
withhold from Borrowing Availability reserves, and to increase and decrease such
reserves from time to time, if and to the extent that in Lender's reasonable
credit judgment such reserves are necessary, including to protect Lender's
interest in the Collateral or to protect Lender against possible non-payment of
Accounts for any reason by Account Debtors or possible diminution of the value
of any Inventory or possible non-payment of any of the Obligations or for any
taxes or customs duties or in respect of any state of facts which could
constitute a Default; provided, however, that Lender shall advise Borrower
before taking any action to implement such reserves or to increase or decrease
any reserves. Lender may, at its option, implement reserves by designating as
ineligible a sufficient amount of Accounts or Inventory which would otherwise be
Eligible Accounts or Eligible Inventory, as the case may be, so as to reduce the
Borrowing Base by the amount of the intended reserves. Any actions taken by
Lender pursuant to this Section 1.13 shall be taken by Lender in the exercise of
its reasonable credit judgement.
2. CONDITIONS PRECEDENT
2.1. CONDITIONS TO THE INITIAL LOANS. Lender shall not be obligated to make any
of the Loans, or to take, fulfill, or perform any other action hereunder, until
the following conditions have been satisfied in a manner satisfactory to Lender
in its sole discretion, or waived in writing by Lender:
(a) the Loan Documents to be delivered on or before the Closing Date
shall have been duly executed and delivered by the appropriate parties, all as
set forth in the Schedule of Documents (Schedule F);
(b) Lender shall have received evidence satisfactory to it that each
Credit Party has obtained all consents and acknowledgments of all Persons and
Governmental Authorities whose consents or acknowledgments may be required prior
to the execution and delivery of this Agreement and the other Loan Documents (or
pursuant to the terms hereof or thereof) and the consummation of the
transactions contemplated hereby and thereby and that such consents or
acknowledgments remain in full force and effect;
(c) Lender shall have received evidence satisfactory to it that the
insurance policies provided for in Section 3.17 are in full force and effect,
together with appropriate evidence showing loss payable or additional insured
clauses or endorsements in favor of Lender as required under such Section;
(d) as of the Closing date Net Borrowing Availability shall be not less
than $3,000,000 after giving effect to the initial Revolving Credit Advance and
Letter of Credit Obligations (on a pro forma basis, with trade payables being
paid currently, and expenses and liabilities being paid in the ordinary course
of business and without acceleration of sales);
(e) Lender shall have received an opinion of counsel to the Borrower
with respect to the Loan Documents in form and substance satisfactory to Lender;
(f) payment by Borrower of the Closing Fee and all other fees, costs,
and expenses payable by Borrower hereunder that have accrued as of the Closing
Date; and
(g) Lender shall have received an assignment of the Video Note and the
Caribe Notes in form and substance satisfactory to Lender.
2.2. FURTHER CONDITIONS TO THE LOANS. Lender shall not be obligated to fund any
Loan, if, as of the date thereof:
(a) any representation or warranty by any Credit Party contained herein
or in any of the other Loan Documents shall be untrue or incorrect as of such
date, except to the extent that such representation or warranty is expressly
stated to relate to a specific earlier date, in which case, such representation
and warranty shall be true and correct as of such earlier date; or
(b) any event or circumstance which has had or reasonably could be
expected to have a Material Adverse Effect shall have occurred since the Closing
Date; or
(c) any Default shall have occurred and be continuing or would result
after giving effect to such Loan; or
(d) after giving effect to such Loan the Revolving Credit Loan exceeds
the Borrowing Availability; or
(e) any action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any Governmental
Authority to enjoin, restrain or prohibit, or to obtain damages in respect of,
or which is related to or arises out of, this Agreement or any other Loan
Document or the consummation of any transaction contemplated hereby or thereby
and which, in Lender's sole judgment, would make it inadvisable to consummate
any transaction contemplated by this Agreement or any other Loan Document.
The request and acceptance by Borrower of the proceeds of any Loan shall be
deemed to constitute, as of the date of such request and the date of such
acceptance, (i) a representation and warranty by Borrower that the conditions in
this Section 2.2 have been satisfied and (ii) a reaffirmation by Borrower of the
granting and continuance of Lender's Liens pursuant to the Loan Documents.
2.3. CONDITIONS TO INVENTORY LOANS. Lender shall not be obligated to make any
loans against Eligible Inventory of Borrower or Video until the following
conditions have been satisfied in a manner satisfactory to Lender in its sole
discretion, or waiver in writing by Lender:
(a) Borrower shall have provided Lender with thirty (30) days written
notice of its desire to obtain Loans against Eligible Inventory of Borrower or
Video;
(b) Lender shall have conducted a collateral examination of the
Inventory of Borrower and Video, the results of which shall be satisfactory to
Lender in all respects; and
(c) In the event Inventory located in Puerto Rico is included as
Eligible Inventory, Lender shall have received an opinion of counsel with
respect to Lender's Lien on Inventory located in Puerto Rico in form and
substance satisfactory to Lender.
3. REPRESENTATIONS, WARRANTIES AND AFFIRMATIVE COVENANTS
To induce Lender to enter into this Agreement and to make the Loans, Borrower
and each other Credit Party executing this Agreement represent and warrant to
Lender (each of which representations and warranties shall survive the execution
and delivery of this Agreement), and promise to and agree with Lender until the
Termination Date as follows:
3.1. CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each Corporate Credit Party: (a)
is, as of the Closing Date, and will continue to be (i) a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, (ii) duly qualified to do business and in
good standing in each other jurisdiction where its ownership or lease of
property or the conduct of its business requires such qualification, except
where the failure to be so qualified could not reasonably be expected to have a
Material Adverse Effect, and (iii) in compliance with all Requirements of Law
and Contractual Obligations, except to the extent failure to comply therewith
could not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect; and (b) has and will continue to have (i) the requisite
corporate power and authority and the legal right to execute, deliver and
perform its obligations under the Loan Documents, and to own, pledge, mortgage
or otherwise encumber and operate its properties, to lease the property it
operates under lease, and to conduct its business as now, heretofore or proposed
to be conducted, and (ii) all licenses, permits, franchises, rights, powers,
consents or approvals from or by all Persons or Governmental Authorities having
jurisdiction over such Corporate Credit Party which are necessary or appropriate
for the conduct of its business.
3.2. EXECUTIVE OFFICES; CORPORATE OR OTHER NAMES; CONDUCT OF Business. The
location of each Corporate Credit Party's chief executive office, corporate
offices, warehouses, other locations of Collateral and locations where records
with respect to Collateral are kept (including in each case the county of such
locations) are as set forth in Disclosure Schedule (3.2) and, except as set
forth in such Disclosure Schedule, such locations have not changed during the
preceding twelve months. As of the Closing Date, during the prior five years,
except as set forth in Disclosure Schedule (3.2), no Corporate Credit Party has
been known as or conducted business in any other name (including trade names).
No Corporate Credit Party shall change its (a) name, (b) chief executive office,
(c) corporate offices, (d) warehouses or other Collateral locations, or (e)
location of its records concerning the Collateral, or acquire, lease or use any
real estate after the Closing Date without such Person, in each instance, giving
thirty (30) days prior written notice thereof to Lender and taking all actions
deemed necessary or appropriate by Lender to continuously protect and perfect
Lender's Liens upon the Collateral.
3.3. CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The execution,
delivery and performance by each Credit Party of the Loan Documents to which it
is a party, and the creation of all Liens provided for herein and therein: (a)
are and will continue to be within such Credit Party's power and authority; (b)
have been and will continue to be duly authorized by all necessary or proper
corporate action; (c) are not and will not be in violation of any Requirement of
Law or Contractual Obligation of such Credit Party; (d) do not and will not
result in the creation or imposition of any Lien (other than Permitted
Encumbrances) upon any of the Collateral; and (e) do not and will not require
the consent or approval of any Governmental Authority or any other Person,
except those referred to in Section 2.1(c) (all of which will have been duly
obtained, made or complied with on or before the Closing Date and shall be in
full force and effect on such date). As of the Closing Date, each Loan Document
shall have been duly executed and delivered on behalf of each Credit Party party
thereto, and each such Loan Document upon such execution and delivery shall be
and will continue to be a legal, valid and binding obligation of such Credit
Party enforceable against it in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency and other similar laws
affecting creditors' rights generally, and by general principles of equity.
3.4. FINANCIAL STATEMENTS AND PROJECTIONS; BOOKS AND RECORDS. (a) The Financial
Statements delivered by each Credit Party to Lender for its most recently ended
Fiscal Year and Fiscal Month, are true, correct and complete and reflect fairly
and accurately the financial condition of such Credit Party as of the date of
each such Financial Statement in accordance with GAAP. The Projections most
recently delivered to Lender have been prepared in good faith, with care and
diligence and use assumptions that are reasonable under the circumstances at the
time such Projections were prepared and as of the date delivered to Lender and
all such assumptions are disclosed in the Projections.
(b) Borrower and each other Corporate Credit Party shall keep adequate
Books and Records with respect to the Collateral and its business activities in
which proper entries, reflecting all consolidated and consolidating financial
transactions, and payments received on any and all credits granted to, and all
other dealings with, the Collateral, will be made in accordance with GAAP and
all Requirements of Law and on a basis consistent with the Financial Statements.
3.5. MATERIAL ADVERSE CHANGE. Between the date of Borrower's most recently
audited Financial Statements delivered to Lender and the Closing Date: (a) no
Corporate Credit Party has incurred any obligations, contingent or
non-contingent liabilities, or liabilities for Charges, long-term leases or
unusual forward or long-term commitments which are not reflected in the
Projections delivered on the Closing Date and which could, alone or in the
aggregate, reasonably be expected to have a Material Adverse Effect; (b) there
has been no material deviation from such Projections; and (c) no event has
occurred which alone or in the aggregate has had or could reasonably be expected
to have a Material Adverse Effect. No Requirement of Law or Contractual
Obligation of any Credit Party has had or could reasonably be expected to have a
Material Adverse Effect and no Credit Party is in default, and to such Credit
Party's knowledge no third party is in default under or with respect to any of
its Contractual Obligations, which alone or in the aggregate has had or could
reasonably be expected to have a Material Adverse Effect.
3.6. REAL ESTATE. The real estate listed in Disclosure Schedule (3.6)
constitutes all of the real property owned, leased, or used by each Corporate
Credit Party in its business, and such Credit Party will not execute any
material agreement or contract in respect of such real estate after the date of
this Agreement without giving Lender prompt written notice thereof. Each
Corporate Credit Party holds and will continue to hold good and marketable fee
simple title to all of its owned real estate, and good and marketable title to
all of its other properties and assets, and valid and insurable leasehold
interests in all of its leases (both as lessor and lessee, sublessee or
assignee), and none of the properties and assets of any Credit Party are or will
be subject to any Liens, except Permitted Encumbrances. With respect to each of
the premises identified in Disclosure Schedule (3.2) on or prior the Closing
Date a bailee, landlord or mortgagee agreement acceptable to Lender has been
obtained.
3.7. VENTURES, SUBSIDIARIES AND AFFILIATES; OUTSTANDING STOCK AND INDEBTEDNESS.
Except as set forth in Disclosure Schedule (3.7), as of the Closing Date no
Credit Party has any Subsidiaries, is engaged in any joint venture or
partnership with any other Person, or is an Affiliate of any other Person. All
of the issued and outstanding Stock of each Corporate Credit Party (including
all rights to purchase, options, warrants or similar rights or agreements
pursuant to which any Corporate Credit Party may be required to issue, sell,
repurchase or redeem any of its Stock) as of the Closing Date is owned by each
of the Stockholders (and in the amounts) set forth on Disclosure Schedule (3.7).
All outstanding Indebtedness of each Corporate Credit Party as of the Closing
Date is described in Section 5( c).
3.8. GOVERNMENT REGULATION. No Credit Party is subject to or regulated under the
Investment Company Act of 1940, the Public Utility Holding Company Act of 1935,
the Federal Power Act or any other Federal or state statute, rule or regulation
that restricts or limits such Person's ability to incur Indebtedness, pledge its
assets, or to perform its obligations under the Loan Documents. The making of
the Loans, the application of the proceeds and repayment thereof, and the
consummation of the transactions contemplated by the Loan Documents do not and
will not violate any provision of any such statute or any rule, regulation or
order issued by the Securities and Exchange Commission.
3.9. MARGIN REGULATIONS. No Credit Party is engaged, nor will it engage,
principally or as one of its important activities, in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin security" as
such terms are defined in Regulations U or G of the Federal Reserve Board as now
and from time to time hereafter in effect (such securities being referred to
herein as "Margin Stock"). No Credit Party owns any Margin Stock, and none of
the proceeds of the Loans or other extensions of credit under this Agreement
will be used, directly or indirectly, for the purpose of purchasing or carrying
any Margin Stock, for the purpose of reducing or retiring any Indebtedness which
was originally incurred to purchase or carry any Margin Stock or for any other
purpose which might cause any of the Loans or other extensions of credit under
this Agreement to be considered a "purpose credit" within the meaning of
Regulation G, T, U or X of the Federal Reserve Board. No Credit Party will take
or permit to be taken any action which might cause any Loan Document to violate
any regulation of the Federal Reserve Board.
3.10. TAXES; CHARGES. Except as disclosed on Disclosure Schedule (3.10) all tax
returns, reports and statements required by any Governmental Authority to be
filed by Borrower or any other Credit Party have, as of the Closing Date, been
filed and will, until the Termination Date, be filed with the appropriate
Governmental Authority and no tax Lien has been filed against any Credit Party
or any Credit Party's property. Proper and accurate amounts have been and will
be withheld by Borrower and each other Credit Party from their respective
employees for all periods in complete compliance with all Requirements of Law
and such withholdings have and will be timely paid to the appropriate
Governmental Authorities. Disclosure Schedule (3.10) sets forth as of the
Closing Date those taxable years for which any Credit Party's tax returns are
currently being audited by the IRS or any other applicable Governmental
Authority and any assessments or threatened assessments in connection with such
audit, or otherwise currently outstanding. Except as described on Disclosure
Schedule (3.10), no Credit Party has executed or filed with the IRS or any other
Governmental Authority any agreement or other document extending, or having the
effect of extending, the period for assessment or collection of any Charges.
None of the Credit Parties and their respective predecessors are liable for any
Charges: (a) under any agreement (including any tax sharing agreements) or (b)
to each Credit Party's knowledge, as a transferee. As of the Closing Date, no
Credit Party has agreed or been requested to make any adjustment under IRC
Section 481(a), by reason of a change in accounting method or otherwise, which
could reasonably be expected to have a Material Adverse Effect.
3.11. PAYMENT OF OBLIGATIONS. Each Credit Party will pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all of its Charges and other obligations of whatever nature, except where
the amount or validity thereof is currently being contested in good faith by
appropriate proceedings and reserves in conformity with GAAP with respect
thereto have been provided on the books of such Credit Party and none of the
Collateral becomes subject to any Lien or forfeiture or loss as a result of such
contest.
3.12. ERISA. (a) Disclosure Schedule (3.12) lists and separately identifies all
Title IV Plans, Multiemployer Plans, ESOPs and Retiree Welfare Plans. Copies of
all such listed Plans, together with a copy of the latest form 5500 for each
such Plan, have been delivered to Lender. Each Qualified Plan has been
determined by the IRS to qualify under Section 401 of the IRC, and the trusts
created thereunder have been determined to be exempt from tax under the
provisions of Section 501 of the IRC, and nothing has occurred which would cause
the loss of such qualification or tax-exempt status. Each Plan is in compliance
with the applicable provisions of ERISA and the IRC , including the filing of
reports required under the IRC or ERISA. No Credit Party or ERISA Affiliate has
failed to make any contribution or pay any amount due as required by either
Section 412 of the IRC or Section 302 of ERISA or the terms of any such Plan. No
Credit Party or ERISA Affiliate has engaged in a prohibited transaction, as
defined in Section 4975 of the IRC, in connection with any Plan, which would
subject any Credit Party to a material tax on prohibited transactions imposed by
Section 4975 of the IRC.
(b) Except as set forth in Disclosure Schedule (3.12): (i) no Title IV
Plan has any Unfunded Pension Liability; (ii) no ERISA Event or event described
in Section 4062(e) of ERISA with respect to any Title IV Plan has occurred or is
reasonably expected to occur; (iii) there are no pending, or to the knowledge of
any Credit Party, threatened claims (other than claims for benefits in the
normal course), sanctions, actions or lawsuits, asserted or instituted against
any Plan or any Person as fiduciary or sponsor of any Plan; (iv) no Credit Party
or ERISA Affiliate has incurred or reasonably expects to incur any liability as
a result of a complete or partial withdrawal from a Multiemployer Plan; (v)
within the last five years no Title IV Plan with Unfunded Pension Liabilities
has been transferred outside of the "controlled group" (within the meaning of
Section 4001(a)(14) of ERISA) of any Credit Party or ERISA Affiliate; and (vi)
no liability under any Title IV Plan has been satisfied with the purchase of a
contract from an insurance company that is not rated AAA by the Standard &
Poor's Corporation or the equivalent by another nationally recognized rating
agency.
3.13. LITIGATION. No Litigation is pending or, to the knowledge of any Credit
Party, threatened by or against any Credit Party or against any Credit Party's
properties or revenues (a) with respect to any of the Loan Documents or any of
the transactions contemplated hereby or thereby, or (b) which could reasonably
be expected to have a Material Adverse Affect. Except as set forth on Disclosure
Schedule (3.13), as of the Closing Date there is no Litigation pending or
threatened against any Credit Party which seeks damages in excess of $50,000 or
injunctive relief or alleges criminal misconduct of any Credit Party. Each
Credit Party shall notify Lender promptly upon learning of the existence or
commencement of any Litigation commenced or to the knowledge of any Credit Party
threatened against any Credit Party that: (x) may involve an amount in excess of
$50,000; (y) could reasonably be expected to have a Material Adverse Effect
whether or not determined adversely; or (z) regardless of amount (i) is asserted
or instituted, against any Plan, its fiduciaries or its assets, or against any
Credit Party or any ERISA Affiliate in connection with any Plan, (ii) includes
any demand for injunctive relief, (iii) alleges criminal misconduct by any
Credit Party, or (iv) alleges the violation of any law regarding, or seeks
remedies in connection with, any Environmental Liabilities.
3.14. INTELLECTUAL PROPERTY. As of the Closing Date, all material Intellectual
Property owned or used by any Credit Party is listed, together with application
or registration numbers, where applicable, in Disclosure Schedule (3.14). Each
Credit Party owns, or is licensed to use, all Intellectual Property necessary to
conduct its business as currently conducted except for such Intellectual
Property the failure of which to own or license could not reasonably be expected
to have a Material Adverse Effect.
3.15. FULL DISCLOSURE. No information contained in any Loan Document, the
Financial Statements or any written statement furnished by or on behalf of any
Credit Party under any Loan Document, or to induce Lender to execute the Loan
Documents, contains any untrue statement of a material fact or omits to state a
material fact necessary to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made.
3.16. HAZARDOUS MATERIALS. Except as set forth on Disclosure Schedule (3.16), as
of the Closing Date, (a) each real property location owned, leased or occupied
by each Corporate Credit Party (the "Real Property") is maintained free of
contamination from any Hazardous Material, (b) no Corporate Credit Party is
subject to any Environmental Liabilities or, to any Credit Party's knowledge,
potential Environmental Liabilities, in excess of $50,000 in the aggregate, (c)
no notice has been received by any Corporate Credit Party identifying it as a
"potentially responsible party" or requesting information under CERCLA or
analogous state statutes, and to the knowledge of any Credit Party, there are no
facts, circumstances or conditions that may result in any Corporate Credit Party
being identified as a "potentially responsible party" under CERCLA or analogous
state statutes; and (d) each Corporate Credit Party has provided to Lender
copies of all existing environmental reports, reviews and audits and all written
information pertaining to actual or potential Environmental Liabilities, in each
case relating to any Corporate Credit Party. Each Corporate Credit Party: (i)
shall comply in all material respects with all applicable Environmental Laws and
Environmental Permits; (ii) shall notify Lender in writing within seven days if
and when it becomes aware of any Release, on, at, in, under, above, to, from or
about any of its Real Property; and (iii) shall promptly forward to Lender a
copy of any order, notice, permit, application, or any communication or report
received by it or any other Credit Party in connection with any such Release.
3.17. INSURANCE. As of the Closing Date, Disclosure Schedule (3.17) lists all
insurance of any nature maintained for current occurrences by Borrower and each
other Corporate Credit Party, as well as a summary of the terms of such
insurance. Each Corporate Credit Party shall deliver to Lender endorsements to
all of its and those of its Subsidiaries (a) "All Risk" and business
interruption insurance policies naming Lender loss payee, and (b) general
liability and other liability policies naming Lender as an additional insured.
All policies of insurance on real and personal property will contain an
endorsement, in form and substance acceptable to Lender, showing loss payable to
Lender (Form 438 BFU or equivalent) and extra expense and business interruption
endorsements. Such endorsement, or an independent instrument furnished to
Lender, will provide that the insurance companies will give Lender at least 30
days prior written notice before any such policy or policies of insurance shall
be altered or canceled and that no act or default of Borrower or any other
Person shall affect the right of Lender to recover under such policy or policies
of insurance in case of loss or damage. Each Corporate Credit Party shall direct
all present and future insurers under its "All Risk" policies of insurance to
pay all proceeds payable thereunder directly to Lender. If any insurance
proceeds are paid by check, draft or other instrument payable to Borrower and
Lender jointly, Lender may endorse Borrower's name thereon and do such other
things as Lender may deem advisable to reduce the same to cash. Lender reserves
the right at any time, upon review of each Credit Party's risk profile, to
require additional forms and limits of insurance to adequately protect Lender's
interests in accordance with Lender's normal practice for similarly situated
borrowers. Each Corporate Credit Party shall, on each anniversary of the Closing
Date and from time to time at Lender's request, deliver to Lender a report by a
reputable insurance broker, satisfactory to Lender, with respect to such
Person's insurance policies.
3.18. DEPOSIT AND DISBURSEMENT ACCOUNTS. Attachment I to Schedule D lists all
banks and other financial institutions at which Borrower, or any other Corporate
Credit Party, maintains deposits and/or other accounts, including the
Disbursement Account, and such Attachment correctly identifies the name, address
and telephone number of each such depository, the name in which the account is
held, a description of the purpose of the account, and the complete account
number. No Corporate Credit Party will establish any depository or other bank
account of any kind with any financial institution (other than the accounts set
forth on Attachment 1 to Schedule D) without Lender's prior written consent.
3.19. ACCOUNTS. As of the date of each Borrowing Base Certificate delivered to
Lender, each Account listed thereon as an Eligible Account shall be an Eligible
Account. Neither Borrower nor Video has made, and neither Borrower nor Video
will make, any agreement with any Account Debtor for any extension of time for
the payment of any Account, any compromise or settlement for less than the full
amount thereof, any release of any Account Debtor from liability therefor, or
any deduction therefrom except a discount or allowance for prompt or early
payment allowed by Borrower or Video in the ordinary course of its business
consistent with historical practice and as previously disclosed to Lender in
writing. With respect to the Accounts pledged as collateral pursuant to any Loan
Document (a) the amounts shown on all invoices, statements and reports which may
be delivered to the Lender with respect thereto are actually and absolutely
owing to the relevant Credit Party as indicated thereon and are not in any way
contingent; (b) no payments have been or shall be made thereon except payments
immediately delivered to the applicable Bank Accounts or the Lender as required
hereunder; and (c) to each Credit Party's knowledge all Account Debtors have the
capacity to contract. Each Credit Party shall notify Lender promptly of any
event or circumstance which to such Credit Party's knowledge would cause Lender
to consider any then existing Account as no longer constituting an Eligible
Account.
3.20. INVENTORY. As of the date of each Borrowing Base Certificate delivered to
Lender, all Inventory listed thereon as Eligible Inventory shall be Eligible
Inventory. Each Credit Party shall promptly notify Lender of any event or
circumstance which, to such Credit Party's knowledge, would cause Lender to
consider any then existing Inventory as no longer constituting Eligible
Inventory.
3.21. CONDUCT OF BUSINESS; MAINTENANCE OF EXISTENCE. Each Corporate Credit Party
(a) shall conduct its business substantially as now conducted or as otherwise
permitted hereunder and preserve all of its rights, privileges and franchises
necessary and desirable in connection therewith, and (b) shall at all times
maintain, preserve and protect all of the Collateral and such Credit Party's
other property, used or useful in the conduct of its business and keep the same
in good repair, working order and condition (taking into consideration ordinary
wear and tear) and from time to time make, or cause to be made, all necessary or
appropriate repairs, replacements and improvements thereto consistent with
industry practices.
3.22. FURTHER ASSURANCES. At any time and from time to time, upon the written
request of Lender and at the sole expense of Borrower, Borrower and each other
Credit Party shall promptly and duly execute and deliver any and all such
further instruments and documents and take such further action as Lender may
reasonably deem desirable (a) to obtain the full benefits of this Agreement and
the other Loan Documents, (b) to protect, preserve and maintain Lender's rights
in the Collateral, or any of it, and under this Agreement, or (c) to enable
Lender to exercise all or any of the rights and powers herein granted.
4. FINANCIAL MATTERS; REPORTS
4.1. REPORTS AND NOTICES. Each Credit Party represents, agrees and promises that
from and after the Closing Date until the Termination Date, each Credit Party
shall deliver to Lender:
(a) within 15 days following the end of each Fiscal Month, an aged
trial balance by Account Debtor and as soon as available but in no event later
than 30 days following the end of each Fiscal Month, a reconciliation of the
aged trial balance to the general ledger of such Credit Party and from the
general ledger to the Financial Statements for such Fiscal Month and such
reports as Lender may require regarding Inventory as Lender may deem appropriate
after its collateral examination referred to in Section 2.3(b), and accompanied
by supporting detail and documentation as Lender may request;
(b) as frequently as Lender may request and in any event no later than
15 days following the end of each Fiscal Month, (i) a Borrowing Base Certificate
for each of Borrower and Video in the form of Exhibit C as of the last day of
the previous Fiscal Month detailing ineligible Accounts and Inventory for
adjustment to the Borrowing Base, in each case, certified as true and correct by
the Chief Financial Officer of the appropriate Credit Party or such other
officer as is acceptable to Lender;
(c) within 15 days following the end of each Fiscal Month, an Accounts
Payable Analysis in the form of Exhibit D;
(d) within 15 days following the end of each Fiscal Month, an Accounts
Receivable Roll Forward Analysis in the form of Exhibit E;
(e) within 30 days following the end of each Fiscal Month, the
Financial Statements for such Fiscal Month, which shall provide comparisons to
budget and actual results for the corresponding period during the prior Fiscal
Year, both on a monthly and year-to-date basis, and accompanied by a
certification in the form of Exhibit J by the Chief Executive Officer or Chief
Financial Officer of the applicable Credit Party that such Financial Statements
are complete and correct, that there was no Default (or specifying those
Defaults of which he or she was aware), and showing in reasonable detail the
calculations used in determining compliance with the financial covenants
hereunder;
(f) within 90 days following the close of each Fiscal Year, the
Financial Statements for such Fiscal Year certified without qualification by an
independent certified accounting firm acceptable to Lender (except as respects
the consolidating financials for which no certification is required), which
shall provide actual annual results for the current and prior Fiscal Year and
shall be accompanied by (i) a statement in reasonable detail showing the
calculations used in determining compliance with the financial covenants
hereunder, (ii) a report from the accountants of Credit Parties to the effect
that in connection with their audit examination nothing has come to their
attention to cause them to believe that a Default has occurred or specifying
those Defaults of which they are aware, and (iii) any management letter that may
be issued;
(g) not less than 30 days prior to the close of each Fiscal Year, the
Projections, which will be prepared by Credit Parties in good faith, with care
and diligence, and using assumptions which are reasonable under the
circumstances at the time such Projections are delivered to Lender and disclosed
therein when delivered; and
(h) within 15 days following the end of each Fiscal Month, a report
detailing all Permitted Investments which is certified as true and correct by
the Chief Financial Officer of Borrower or such other officer as is acceptable
to Lender;
(i) promptly after their preparation, but no later than 10 days after
the issuance thereof, copies of any and all proxy statements, financial
statements and reports which any Credit Party sends to its shareholders and
copies of all regular, periodic and special reports and registration statements
which any Credit Party files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange; and
(j) the reports and other information described on Exhibit B on the
time frames set forth thereon.
4.2. FINANCIAL COVENANTS. No Credit Parties shall not breach any of the
financial covenants set forth in Schedule G.
4.3. OTHER REPORTS AND INFORMATION. Each Credit Party shall advise Lender
promptly, in reasonable detail, of: (a) any Lien, other than Permitted
Encumbrances, attaching to or asserted against any of the Collateral or any
occurrence causing a material loss or decline in value of any Collateral and the
estimated (or actual, if available) amount of such loss or decline; (b) any
material change in the composition of the Collateral; and (c) the occurrence of
any Default or other event which could reasonably be expected to have a Material
Adverse Effect. Each Credit Party shall, upon request of Lender, furnish to
Lender such other reports and information in connection with the affairs,
business, financial condition, operations, prospects or management of such
Credit Party or any other Credit Party or the Collateral as Lender may request,
all in reasonable detail.
5. NEGATIVE COVENANTS
Borrower and each Credit Party executing this Agreement covenants and agrees
(for itself and each other Credit Party) that, without Lender's prior written
consent, from the Closing Date until the Termination Date, neither Borrower nor
any other Credit Party shall, directly or indirectly, by operation of law or
otherwise:
(a) merge with, consolidate with, acquire all or substantially all of
the assets or capital stock of, or otherwise may combine with, any Person or
form any Subsidiary;
(b) except as otherwise permitted in this Section 5 below, make any
investment in, or make or accrue loans or advances of money to, any Person,
except that (i) Borrower and Video may hold investments comprised of notes
payable, or stock or other securities issued by Account Debtors to Borrower and
Video pursuant to negotiated agreements with respect to settlement of such
Account Debtor's Accounts in the ordinary course of business, so long as the
aggregate amount of such Accounts so settled by Borrower and Video in any Fiscal
Quarter does not exceed $50,000 and such notes and securities are delivered to
Lender as Collateral; (ii) Borrower may make loans to Video after the Closing
Date provided that (x) accurate books and records of such loans are kept in
accordance with GAAP, (y) such loans are not evidenced by any note or other
instrument unless such note or other instrument is pledged to Lender as
Collateral, and (z) the aggregate amount of such loans outstanding at any time
shall not exceed the Video Borrowing Base at such time; (iii) Borrower may make
investments (comprised of notes payable, stock or other securities) in KMCC not
to exceed $700,000 at any time outstanding provided that any notes or
instruments evidencing such Investments are pledged to Lender as Collateral;
(iv) Borrower may make Permitted Investments; (v) Borrower may make loans to
Caribe provided that (x) accurate books and records of such loans are kept in
accordance with GAAP, (y) such loans are not evidenced by any note or other
instrument unless such note or other instrument is pledged to Lender as
Collateral and (z) the aggregate amount of such loans does not exceed $1,000,000
at any time outstanding; and (vii) Borrower may make advances to Sentry
(excluding any dividends otherwise permitted to be paid pursuant to Section
5(1)) not to exceed $100,000 in any Fiscal Year.
(c) create, incur, assume or permit to exist any Indebtedness, except:
(i) the Obligations; (ii) Indebtedness other than the Obligations in an
aggregate outstanding amount not exceeding $250,000; (iii) deferred taxes; (iv)
the loans by Borrower to Video as evidenced by the Video Note and the loans by
Borrower to Video described in Section 5(b)(ii); (v) the loans by Borrower to
Caribe described in Section 5(b)(v); and (vi) other Indebtedness set forth in
Disclosure Schedule 5(c));
(d) enter into any lending, borrowing or other commercial transaction
with any of its employees, directors, Affiliates or any other Credit Party
(including upstreaming and downstreaming of cash and intercompany advances and
payments by a Credit Party on behalf of another Credit Party which are not
otherwise permitted hereunder) other than loans or advances to employees in the
ordinary course of business in an aggregate outstanding amount not exceeding
$50,000 and the loans, advances and investments permitted pursuant to Section
5(b);
(e) make any changes in any of its business objectives, purposes, or
operations which could have or reasonably be expected to adversely affect
repayment of the Obligations or have a Material Adverse Effect or engage in any
business other than that presently engaged in or proposed to be engaged in the
Projections delivered to Lender on the Closing Date;
(f) amend its charter or by-laws or other organizational documents;
(g) incur any Guaranteed Indebtedness except (i) by endorsement of
instruments or items of payment for deposit to the general account of such
Credit Party, and (ii) for Guaranteed Indebtedness incurred for the benefit of
Borrower if the primary obligation is permitted by this Agreement;
(h) create or permit any Lien on any of its properties or assets,
except for Permitted Encumbrances;
(i) sell, transfer, issue, convey, assign or otherwise dispose of any
of its assets or properties, including its Accounts or any shares of its Stock
or engage in any sale-leaseback, synthetic lease or similar transaction
(provided, that the foregoing shall not prohibit the sale of Inventory or
obsolete or unnecessary Equipment in the ordinary course of its business);
(j) take any action or omit to take any action, which act or omission
would constitute a material default or an event of default pursuant to, or
noncompliance with, any of its Contractual Obligations;
(k) cancel any debt owing to it, except for cancellation of debt not
constituting Accounts for reasonable consideration and in the ordinary course of
its business consistent with historical practice; or
(l) make or permit any Restricted Payment except for dividends payable
by Sentry commencing on August 12, 1999 on the Series A Preferred Stock as set
forth in the Certificate of Designation filed with the Secretary of State of
Delaware on February 12, 1997.
6. SECURITY INTEREST
6.1. GRANT OF SECURITY INTEREST. (a) As collateral security for the prompt and
complete payment and performance of the Obligations, each of the Borrower and
any other Credit Party executing this Agreement hereby grants to the Lender a
security interest in and Lien upon all of its property and assets, whether real
or personal, tangible or intangible, and whether now or owned or hereafter
acquired, or in which it now has or at any time in the future may acquire any
right, title, or interest, including all of the following property in which it
now has or at any time in the future may acquire any right, title or interest:
all Accounts; all bank and deposit accounts and all funds on deposit therein;
all cash and cash equivalents; all commodity contracts; all investments; all
Inventory and Equipment; all Goods; all Chattel Paper, Documents and
Instruments; all Books and Records; all General Intangibles (including all
Intellectual Property, Stock, bonds, treasury notes and other securities
contract rights, and choses in action); and to the extent not otherwise
included, all Proceeds and products of all and any of the foregoing and all
collateral security and guarantees given by any Person with respect to any of
the foregoing, but excluding in all events Hazardous Waste (all of the
foregoing, together with any other collateral pledged to the Lender pursuant to
any other Loan Document, collectively, the "Collateral"). The term "Collateral"
shall not include the Stock owned by Borrower in KMCC and the interest of
Borrower in Talon Medical, Ltd.
(b) Borrower, Lender and each other Credit Party executing this
Agreement agree that this Agreement creates, and is intended to create, valid
and continuing Liens upon the Collateral in favor of Lender. Borrower and each
other Credit Party executing this Agreement represents, warrants and promises to
Lender that: (i) Borrower and each other Credit Party granting a Lien in
Collateral is the sole owner of each item of the Collateral upon which it
purports to grant a Lien pursuant to the Loan Documents, and has good and
marketable title thereto free and clear of any and all Liens or claims of
others, other than Permitted Encumbrances; (ii) the security interests granted
pursuant to this Agreement, upon completion of the filings and other actions
listed on Disclosure Schedule 6.1 (which, in the case of all filings and other
documents referred to in said Schedule, have been delivered to the Lender in
duly executed form) will constitute valid perfected security interests in all of
the Collateral in favor of the Lender as security for the prompt and complete
payment and performance of the Obligations, enforceable in accordance with the
terms hereof against any and all creditors of and purchasers from any Credit
Party (other than purchasers of Inventory in the ordinary course of business)
and such security interests are prior to all other Liens on the Collateral in
existence on the date hereof except for Permitted Encumbrances which have
priority by operation of law; and (iii) no effective security agreement,
financing statement, equivalent security or Lien instrument or continuation
statement covering all or any part of the Collateral is or will be on file or of
record in any public office, except those relating to Permitted Encumbrances.
Borrower and each other Credit Party executing this Agreement promise to defend
the right, title and interest of Lender in and notice filings relating to leased
property and to the Collateral against the claims and demands of all Persons
whomsoever, and each shall take such actions, including (x) the prompt delivery
of all original Instruments, Chattel Paper and certificated Stock owned by
Borrower and each other Credit Party granting a Lien on Collateral to Lender,
(y) notification of Lender's interest in Collateral at Lender's request, and (z)
the institution of litigation against third parties as shall be prudent in order
to protect and preserve each Credit Party's and Lender's respective and several
interests in the Collateral. Borrower (and any other Credit Party granting a
Lien in Collateral) shall mark its Books and Records pertaining to the
Collateral to evidence the Loan Documents and the Liens granted under the Loan
Documents. All Chattel Paper shall be marked with the following legend: "This
writing and the obligations evidenced or secured hereby are subject to the
security interest of General Electric Capital Corporation."
6.2. LENDER'S RIGHTS. (a) Lender may, (i) at any time in Lender's own name or in
the name of any Credit Party, communicate with Account Debtors, parties to
Contracts, and obligors in respect of Instruments, Chattel Paper or other
Collateral to verify to Lender's satisfaction, the existence, amount and terms
of any such Accounts, Contracts, Instruments or Chattel Paper or other
Collateral, and (ii) at any time following the occurrence of a Default and
without prior notice to Borrower or any other Credit Party, notify Account
Debtors, parties to Contracts, and obligors in respect of Chattel Paper,
Instruments, or other Collateral that the Collateral has been assigned to Lender
and that payments shall be made directly to Lender. Upon the request of Lender,
each Credit Party shall so notify such Account Debtors, parties to Contracts,
and obligors in respect of Instruments, Chattel Paper or other Collateral. Each
Credit Party hereby constitutes Lender or Lender's designee as such Credit
Party's attorney with power to endorse such Credit Party's name upon any notes,
acceptance drafts, money orders or other evidences of payment or Collateral.
(b) It is expressly agreed by Borrower that, notwithstanding anything
herein to the contrary, Borrower shall remain liable under each Contract,
Instrument and License to observe and perform all the conditions and obligations
to be observed and performed by it thereunder, and Lender shall have no
obligation or liability whatsoever to any Person under any Contract, Instrument
or License (between Borrower or any other Credit Party and any Person other than
Lender) by reason of or arising out of the execution, delivery or performance of
this Agreement, and Lender shall not be required or obligated in any manner (i)
to perform or fulfill any of the obligations of Borrower, (ii) to make any
payment or inquiry, or (iii) to take any action of any kind to collect or
enforce any performance or the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times under or
pursuant to any Contract, Instrument or License.
(c) Borrower and each other Credit Party shall, with respect to each
owned, leased, or controlled property or facility, during normal business hours
and upon reasonable advance notice (unless a Default shall have occurred and be
continuing, in which event no notice shall be required and Lender shall have
access at any and all times): (i) provide access to such facility or property to
Lender and any of its officers, employees and agents, as frequently as Lender
determines to be appropriate; (ii) permit Lender and any of its officers,
employees and agents to inspect, audit and make extracts from all of Borrower's
and such Credit Party's Books and Records; and (iii) permit Lender to inspect,
review, evaluate and make physical verifications and appraisals of the Inventory
and other Collateral in any manner and through any medium that Lender considers
advisable, and Borrower and such Credit Party agree to render to Lender, at
Borrower's and such Credit Party's cost and expense, such clerical and other
assistance as may be reasonably requested with regard thereto. Borrower and each
other Credit Party shall make available to Lender and its counsel, as quickly as
practicable under the circumstances, originals or copies of all Borrower's and
such Credit Party's Books and Records and any other instruments and documents
which Lender may request. Borrower shall deliver any document or instrument
reasonably necessary for Lender, as it may from time to time request, to obtain
records from any service bureau or other Person which maintains records for
Borrower or any other Credit Party.
(d) After the occurrence and during the continuance of a Default, each
Credit Party, at its own expense, shall cause the certified public accountant
then engaged by such Credit Party to prepare and deliver to Lender at any time
and from time to time, promptly upon Lender's request, the following reports:
(i) a reconciliation of all Accounts; (ii) an aging of all Accounts; (iii) trial
balances; and (iv) test verifications of such Accounts as Lender may request.
Each Credit Party, at its own expense, shall cause its certified independent
public accountants to deliver to Lender the results of any physical
verifications of all or any portion of the Inventory made or observed by such
accountants when and if such verification is conducted. Lender shall be
permitted to observe and consult with each Credit Party's accountants in the
performance of these tasks.
6.3. LENDER'S APPOINTMENT AS ATTORNEY-IN-FACT. On the Closing Date Borrower and
each other Credit Party executing this Agreement shall execute and deliver the
Power of Attorney in the form attached as Exhibit I. The power of attorney
granted pursuant to the Power of Attorney and all powers granted under any Loan
Document are powers coupled with an interest and shall be irrevocable until the
Termination Date. The powers conferred on Lender under the Power of Attorney are
solely to protect Lender's interests in the Collateral and shall not impose any
duty upon it to exercise any such powers. Lender agrees and promises that (a) it
shall not exercise any power or authority granted under the Power of Attorney
unless an Event of Default has occurred and is continuing, (b) Lender shall only
exercise the powers granted under the Power of Attorney in respect of
Collateral, provided, except as otherwise required by applicable law, Lender
shall not have any duty as to any Collateral, and Lender shall be accountable
only for amounts that it actually receives as a result of the exercise of such
powers. NONE OF LENDER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
REPRESENTATIVES SHALL BE RESPONSIBLE TO BORROWER OR ANY OTHER CREDIT PARTY FOR
ANY ACT OR FAILURE TO ACT PURSUANT TO THE POWERS GRANTED UNDER THE POWER OF
ATTORNEY OR OTHERWISE, EXCEPT FOR ITS OR THEIR OWN GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT, NOR FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES.
Borrower and each other Credit Party executing this Agreement also hereby
authorizes Lender to file any financing or continuation statement without the
signature of Borrower or such Credit Party to the extent permitted by applicable
law.
6.4. GRANT OF LICENSE TO USE INTELLECTUAL PROPERTY COLLATERAL. For the purpose
of enabling Lender to exercise its rights and remedies under the Loan Documents,
Borrower and each other Credit Party executing this Agreement hereby grants to
Lender an irrevocable, non-exclusive license (exercisable upon the occurrence
and during the continuance of an Event of Default without payment of royalty or
other compensation to Borrower or such Credit Party) to use, transfer, license
or sublicense any Intellectual Property now owned, licensed to, or hereafter
acquired by Borrower or such Credit Party, and wherever the same may be located,
and including in such license access to all media in which any of the licensed
items may be recorded or stored and to all computer and automatic machinery
software and programs used for the compilation or printout thereof, and
represents, promises and agrees that any such license or sublicense is not and
will not be in conflict with the contractual or commercial rights of any third
Person; provided, that such license will terminate on the Termination Date.
7. EVENTS OF DEFAULT: RIGHTS AND REMEDIES
7.1. EVENTS OF DEFAULT. The occurrence of any one or more of the following
events (regardless of the reason therefor) shall constitute an "Event of
Default" hereunder which shall be deemed to be continuing until waived in
writing by Lender in accordance with Section 9.3:
(a) Borrower shall fail to make any payment in respect of any
Obligations when due and payable or declared due and payable; or
(b) Borrower or any other Credit Party shall fail or neglect to
perform, keep or observe any of the covenants, promises, agreements,
requirements, conditions or other terms or provisions contained in this
Agreement or any of the other Loan Documents, regardless of whether such breach
involves a covenant, promise, agreement, condition, requirement, term or
provision with respect to a Credit Party that has not signed this Agreement; or
(c) an event of default shall occur under any Contractual Obligation of
the Borrower or any other Credit Party (other than this Agreement and the other
Loan Documents), and such event of default (i) involves the failure to make any
payment, whether of principal, interest or otherwise, and whether due by
scheduled maturity, required prepayment, acceleration, demand or otherwise, in
respect of any Indebtedness (other than the Obligations) of such Person in an
aggregate amount exceeding the Minimum Actionable Amount, or (ii) causes (or
permits any holder of such Indebtedness or a trustee to cause) such
Indebtedness, or a portion thereof, in an aggregate amount exceeding the Minimum
Actionable Amount to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment; or
(d) any representation or warranty in this Agreement or any other Loan
Document, or in any written statement pursuant hereto or thereto, or in any
report, financial statement or certificate made or delivered to Lender by
Borrower or any other Credit Party shall be untrue or incorrect as of the date
when made, regardless of whether such breach involves a representation or
warranty with respect to a Credit Party that has not signed this Agreement; or
(e) there shall be commenced against the Borrower or any other Credit
Party any Litigation seeking issuance of a warrant of attachment, execution,
distraint or similar process against all or any substantial part of its assets
which results in the entry of an order for any such relief which remains
unstayed or undismissed for thirty (30) consecutive days; or Borrower or any
other Credit Party shall have concealed, removed or permitted to be concealed or
removed, any part of its property with intent to hinder, delay or defraud its
creditors or any of them or made or suffered a transfer of any of its property
or the incurring of an obligation which may be fraudulent under any bankruptcy,
fraudulent transfer or other similar law; or
(f) a case or proceeding shall have been commenced involuntarily
against Borrower or any other Credit Party in a court having competent
jurisdiction seeking a decree or order: (i) under the United States Bankruptcy
Code or any other applicable Federal, state or foreign bankruptcy or other
similar law, and seeking either (x) the appointment of a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for such
Person or of any substantial part of its properties, or (y) the reorganization
or winding up or liquidation of the affairs of any such Person, and such case or
proceeding shall remain undismissed or unstayed for sixty (60) consecutive days
or such court shall enter a decree or order granting the relief sought in such
case or proceeding; or (ii) invalidating or denying any Person's right, power,
or competence to enter into or perform any of its obligations under any Loan
Document or invalidating or denying the validity or enforceability of this
Agreement or any other Loan Document or any action taken hereunder or
thereunder; or
(g) Borrower or any other Credit Party shall (i) commence any case,
proceeding or other action under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, insolvency, reorganization,
conservatorship or relief of debtors, seeking to have an order for relief
entered with respect to it or seeking appointment of a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for it or
any substantial part of its properties, (ii) make a general assignment for the
benefit of creditors, (iii) consent to or take any action in furtherance of, or,
indicating its consent to, approval of, or acquiescence in, any of the acts set
forth in paragraphs (e) or (f) of this Section 7.1 or clauses (i) and (ii) of
this paragraph (g), or (iv) shall admit in writing its inability to, or shall be
generally unable to, pay its debts as such debts become due; or
(h) a final judgment or judgments for the payment of money in excess of
the Minimum Actionable Amount in the aggregate shall be rendered against
Borrower or any other Credit Party, unless the same shall be (i) fully covered
by insurance and the issuer(s) of the applicable policies shall have
acknowledged full coverage in writing within fifteen (15) days of judgment, or
(ii) vacated, stayed, bonded, paid or discharged within a period of fifteen (15)
days from the date of such judgment; or
(i) any other event shall have occurred which has had or could
reasonably be expected to have a Material Adverse Effect and Lender shall have
given Borrower notice thereof; or
(j) any provision of any Loan Document shall for any reason cease to be
valid, binding and enforceable in accordance with its terms, or any Lien
granted, or intended by the Loan Documents to be granted, to Lender shall cease
to be a valid and perfected Lien having the first priority (or a lesser priority
if expressly permitted in the Loan Documents) in any of the Collateral; or
(k) a Change of Control of any Credit Party shall have occurred.
7.2. REMEDIES. (a) If any Default shall have occurred and be continuing, then
Lender may terminate or suspend its obligation to make further Revolving Credit
Advances and to incur additional Letter of Credit Obligations. In addition, if
any Event of Default shall have occurred and be continuing, Lender may, without
notice, take any one or more of the following actions: (i) declare all or any
portion of the Obligations to be forthwith due and payable, including contingent
liabilities with respect to Letter of Credit Obligations, whereupon such
Obligations shall become and be due and payable; (ii) require that all Letter of
Credit Obligations be fully cash collateralized pursuant to Schedule C; or (iii)
exercise any rights and remedies provided to Lender under the Loan Documents or
at law or equity, including all remedies provided under the Code; provided, that
upon the occurrence of any Event of Default specified in Sections 7.1 (e), (f)
or (g), the Obligations shall become immediately due and payable (and any
obligation of Lender to make further Loans, if not previously terminated, shall
immediately be terminated) and the Obligations shall automatically begin to
accrue interest at the Default Rate, in each case, without declaration, notice
or demand by Lender.
(b) Without limiting the generality of the foregoing, Borrower and each
other Credit Party executing this Agreement expressly agrees that upon the
occurrence of any Event of Default, Lender may collect, receive, assemble,
process, appropriate and realize upon the Collateral, or any part thereof, and
may forthwith sell, lease, assign, give an option or options to purchase or
otherwise dispose of and deliver said Collateral (or contract to do so), or any
part thereof, in one or more parcels at public or private sale or sales, at any
exchange at such prices as it may deem best, for cash or on credit or for future
delivery without assumption of any credit risk. Lender shall have the right upon
any such public sale or sales and, to the extent permitted by law, upon any such
private sale or sales, to purchase for the benefit of Lender the whole or any
part of said Collateral so sold, free of any right or equity of redemption,
which equity of redemption Borrower and each other Credit Party executing this
Agreement hereby releases. Such sales may be adjourned, or continued from time
to time with or without notice. Lender shall have the right to conduct such
sales on any Credit Party's premises or elsewhere and shall have the right to
use any Credit Party's premises without rent or other charge for such sales or
other action with respect to the Collateral for such time or times as Lender
deems necessary or advisable.
(c) Borrower and each other Credit Party executing this Agreement
further agrees, upon the occurrence and during the continuance of an Event of
Default and at Lender's request, to assemble the Collateral and make it
available to Lender at places which Lender shall reasonably select, whether at
its premises or elsewhere. Until Lender is able to effect a sale, lease, or
other disposition of the Collateral, Lender shall have the right to complete,
assemble, use or operate the Collateral or any part thereof, to the extent that
Lender deems appropriate, for the purpose of preserving such Collateral or its
value or for any other purpose. Lender shall have no obligation to any Credit
Party to maintain or preserve the rights of any Credit Party as against third
parties with respect to any Collateral while such Collateral is in the
possession of Lender. Lender may, if it so elects, seek the appointment of a
receiver or keeper to take possession of any Collateral and to enforce any of
Lender's remedies with respect to such appointment without prior notice or
hearing. To the maximum extent permitted by applicable law, Borrower and each
other Credit Party executing this Agreement waives all claims, damages, and
demands against Lender, its Affiliates, agents, and the officers and employees
of any of them arising out of the repossession, retention or sale of any
Collateral except such as are determined in a final judgment by a court of
competent jurisdiction to have arisen solely out of the gross negligence or
willful misconduct of such Person. Borrower and each other Credit Party
executing this Agreement agrees that ten (10) days prior notice by Lender to
such Credit Party of the time and place of any public sale or of the time after
which a private sale may take place is reasonable notification of such matters.
Borrower and each other Credit Party shall remain liable for any deficiency if
the proceeds of any sale or disposition of the Collateral are insufficient to
pay all amounts to which Lender is entitled.
(d) Lender's rights and remedies under this Agreement shall be
cumulative and nonexclusive of any other rights and remedies which Lender may
have under any Loan Document or at law or in equity. Recourse to the Collateral
shall not be required. All provisions of this Agreement are intended to be
subject to all applicable mandatory provisions of law that may be controlling
and to be limited, to the extent necessary, so that they do not render this
Agreement invalid or unenforceable, in whole or in part.
7.3. WAIVERS BY CREDIT PARTIES. Except as otherwise provided for in this
Agreement and to the fullest extent permitted by applicable law, Borrower and
each other Credit Party executing this Agreement waives: (a) presentment, demand
and protest, and notice of presentment, dishonor, intent to accelerate,
acceleration, protest, default, nonpayment, maturity, release, compromise,
settlement, extension or renewal of any or all Loan Documents, the Notes or any
other notes, commercial paper, Accounts, Contracts, Documents, Instruments,
Chattel Paper and guaranties at any time held by Lender on which such Credit
Party may in any way be liable, and hereby ratifies and confirms whatever Lender
may do in this regard; (b) all rights to notice and a hearing prior to Lender's
taking possession or control of, or to Lender's replevy, attachment or levy
upon, any Collateral or any bond or security which might be required by any
court prior to allowing Lender to exercise any of its remedies; and (c) the
benefit of all valuation, appraisal and exemption laws. Borrower and each other
Credit Party executing this Agreement acknowledges that it has been advised by
counsel of its choices and decisions with respect to this Agreement, the other
Loan Documents and the transactions evidenced hereby and thereby.
7.4. PROCEEDS. The Proceeds of any sale, disposition or other realization upon
any Collateral shall be applied by Lender upon receipt, in the following order
of priorities: first, to reimburse or pay in full the actual expenses of Lender
incurred in connection with such sale, disposition or other realization,
including all other expenses, liabilities and advances incurred or made by
Lender in connection therewith; second, to the other Obligations in such order
as the Lender may deem advisable; third, to cash collateralize any outstanding
Letter of Credit Obligations pursuant to Schedule C; and finally, after the
indefeasible payment and satisfaction in full in cash of all of the Obligations,
and after the payment by Lender of any other amount required by any provision of
law, including Section 9-504(1)(c) of the Code (but only after Lender has
received what Lender considers reasonable proof of a subordinate party's
security interest), the surplus, if any, to Borrower or its representatives or
to whomsoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct.
8. SUCCESSORS AND ASSIGNS
Each Loan Document shall be binding on and shall inure to the benefit of
Borrower and each other Credit Party executing such Loan Document, Lender, and
their respective successors and assigns, except as otherwise provided herein or
therein. Neither Borrower nor any other Credit Party may assign, transfer,
hypothecate, delegate or otherwise convey its rights, benefits, obligations or
duties under any Loan Document without the prior express written consent of
Lender. Any such purported assignment, transfer, hypothecation, delegation or
other conveyance by Borrower or such Credit Party without the prior express
written consent of Lender shall be void. The terms and provisions of this
Agreement and the other Loan Documents are for the purpose of defining the
relative rights and obligations of Borrower, the other Credit Parties and Lender
with respect to the transactions contemplated hereby and thereby, and there
shall be no third party beneficiaries of any of the terms and provisions of any
of the Loan Documents. Lender reserves the right at any time to create and sell
participations in the Loans and the Loan Documents and to sell, transfer or
assign any or all of its rights in the Loans and under the Loan Documents.
9. MISCELLANEOUS
9.1. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement and the other
Loan Documents constitute the complete agreement between the parties with
respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and no Loan Document may be modified, altered or amended
except by a written agreement signed by Lender, Borrower and any other Credit
Party a party to such Loan Document. Borrower and each other Credit Party
executing this Agreement or any other Loan Document shall have all duties and
obligations under this Agreement and such other Loan Documents from the date of
its execution and delivery, regardless of whether the initial Loan has been
funded at that time.
9.2. EXPENSES. Borrower agrees to pay or reimburse Lender for all costs and
expenses incurred in connection with: (a) the preparation, negotiation,
execution, delivery, performance and enforcement of the Loan Documents and the
preservation of any rights thereunder; (b) collection (including the reasonable
fees and expenses of all special counsel and the fees and expenses of ,
advisors, consultants (including environmental and management consultants) and
auditors retained in connection therewith), including deficiency collections;
(c) the forwarding to Borrower or any other Person on behalf of Borrower by
Lender of the proceeds of any Loan (including a wire transfer fee of $15 per
wire transfer); (d) any amendment, extension, modification or waiver of, or
consent with respect to any Loan Document or advice in connection with the
administration of the Loans or the rights thereunder; (e) any litigation,
contest, dispute, suit, proceeding or action (whether instituted by or between
any combination of Lender, Borrower or any other Person or Persons), and an
appeal or review thereof, in any way relating to the Collateral, any Loan
Document, or any action taken or any other agreements to be executed or
delivered in connection therewith, whether as a party, witness or otherwise; and
(f) any effort (i) to monitor the Loans, (ii) to evaluate, observe or assess
Borrower or any other Credit Party or the affairs of such Person, and (iii) to
verify, protect, evaluate, assess, appraise, collect, sell, liquidate or
otherwise dispose of the Collateral including the following with respect to all
of the foregoing provisions of this Section 9.2: the fees, costs and expenses of
attorneys, accountants, environmental advisors, appraisers, investment bankers,
management and other consultants, and paralegals; court costs and expenses;
photocopying and duplicating expenses; court reporter fees, costs and expenses;
long distance telephone charges; air express charges; telegram charges;
secretarial overtime charges; and expenses for travel, lodging and food paid or
incurred in connection therewith.
9.3. NO WAIVER. Neither Lender's failure, at any time or times, to require
strict performance by Borrower or any other Credit Party of any provision of any
Loan Document, nor Lender's failure to exercise, nor any delay in exercising,
any right, power or privilege hereunder, (a) shall waive, affect or diminish any
right of Lender thereafter to demand strict compliance and performance
therewith, or (b) shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
future exercise thereof or the exercise of any other right, power or privilege.
Any suspension or waiver of a Default, or other provision under the Loan
Documents shall not suspend, waive or affect any other Default under any Loan
Document, whether the same is prior or subsequent thereto and whether of the
same or of a different type, and shall not be construed as a bar to any right or
remedy which Lender would otherwise have had on any future occasion. None of the
undertakings, indemnities, agreements, warranties, covenants and representations
of Borrower or any other Credit Party to Lender contained in any Loan Document
and no Default by Borrower or any other Credit Party under any Loan Document
shall be deemed to have been suspended or waived by Lender, unless such waiver
or suspension is by an instrument in writing signed by an officer or other
authorized employee of Lender and directed to Borrower specifying such
suspension or waiver (and then such waiver shall be effective only to the extent
therein expressly set forth), and Lender shall not, by any act (other than
execution of a formal written waiver), delay, omission or otherwise, be deemed
to have waived any of its rights or remedies hereunder.
9.4. SEVERABILITY. Wherever possible, each provision of the Loan Documents shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of any Loan Document shall be prohibited by or invalid
under applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of such Loan Document. Except as otherwise expressly
provided for in the Loan Documents, no termination or cancellation (regardless
of cause or procedure) of any financing arrangement under the Loan Documents
shall in any way affect or impair the Obligations, duties, covenants,
representations and warranties, indemnities, and liabilities of Borrower or any
other Credit Party or the rights of Lender relating to any unpaid Obligation,
(due or not due, liquidated, contingent or unliquidated), or any transaction or
event occurring prior to such termination, or any transaction or event, the
performance of which is not required until after the Commitment Termination
Date, all of which shall not terminate or expire, but rather shall survive such
termination or cancellation and shall continue in full force and effect until
the Termination Date; provided, that all indemnity obligations of the Credit
Parties under the Loan Documents shall survive the Termination Date.
9.5. CONFLICT OF TERMS. Except as otherwise provided in any Loan Document by
specific reference to the applicable provisions of this Agreement, if any
provision contained in this Agreement is in conflict with, or inconsistent with,
any provision in any other Loan Document, the provision contained in this
Agreement shall govern and control.
9.6. AUTHORIZED SIGNATURE. Until Lender shall be notified in writing by Borrower
or any other Credit Party to the contrary, the signature upon any document or
instrument delivered pursuant hereto and believed by Lender or any of Lender's
officers, agents, or employees to be that of an officer of Borrower or such
other Credit Party listed in the Secretarial Certificate in the form of Exhibit
H shall bind Borrower and such other Credit Party and be deemed to be the act of
Borrower or such other Credit Party affixed pursuant to and in accordance with
resolutions duly adopted by Borrower's or such other Credit Party's Board of
Directors, and Lender shall be entitled to assume the authority of each
signature and authority of the person whose signature it is or appears to be
unless the person acting in reliance of such signature shall have actual
knowledge of the fact that such signature is false or the person whose signature
or purported signature is presented is without authority.
9.7. NOTICES. Except as otherwise provided herein, whenever any notice, demand,
request, consent, approval, declaration or other communication shall or may be
given to or served upon any party by any other party, or whenever any party
desires to give or serve upon any other party any communication with respect to
this Agreement, each such notice, demand, request, consent, approval,
declaration or other communication shall be in writing and shall be deemed to
have been validly served, given or delivered (a) upon the earlier of actual
receipt and three (3) days after deposit in the United States Mail, registered
or certified mail, return receipt requested, with proper postage prepaid, (b)
upon transmission, when sent by telecopy or other similar facsimile transmission
(with such telecopy or facsimile promptly confirmed by delivery of a copy by
personal delivery or United States Mail as otherwise provided in this Section
9.7), (c) one (1) Business Day after deposit with a reputable overnight courier
with all charges prepaid or (d) when hand-delivered, all of which shall be
addressed to the party to be notified and sent to the address or facsimile
number indicated in Schedule B or to such other address (or facsimile number) as
may be substituted by notice given as herein provided. The giving of any notice
required hereunder may be waived in writing by the party entitled to receive
such notice. Failure or delay in delivering copies of any notice, demand,
request, consent, approval, declaration or other communication to any Person
(other than Borrower or Lender) designated in Schedule B to receive copies shall
in no way adversely affect the effectiveness of such notice, demand, request,
consent, approval, declaration or other communication.
9.8. SECTION TITLES. The Section titles and Table of Contents contained in any
Loan Document are and shall be without substantive meaning or content of any
kind whatsoever and are not a part of the agreement between the parties hereto.
9.9. COUNTERPARTS. Any Loan Document may be executed in any number of separate
counterparts by any one or more of the parties thereto, and all of said
counterparts taken together shall constitute one and the same instrument.
9.10. TIME OF THE ESSENCE. Time is of the essence for performance of the
Obligations under the Loan Documents.
9.11. GOVERNING LAW. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN
DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS ARISING UNDER THE LOAN
DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN
SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES THEREOF REGARDING CONFLICTS OF
LAWS, AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.
9.12 SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL. (a) BORROWER AND EACH
OTHER CREDIT PARTY EXECUTING THIS AGREEMENT HEREBY CONSENT AND AGREE THAT THE
STATE OR FEDERAL COURTS LOCATED IN NEW YORK COUNTY SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND
SUCH CREDIT PARTY AND LENDER PERTAINING TO THIS AGREEMENT OR ANY OF THE OTHER
LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR
ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT LENDER, BORROWER AND SUCH CREDIT
PARTY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A
COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS,
TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO
ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER. BORROWER AND EACH
OTHER CREDIT PARTY EXECUTING THIS AGREEMENT EXPRESSLY SUBMIT AND CONSENT IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT,
AND BORROWER AND SUCH CREDIT PARTY HEREBY WAIVE ANY OBJECTION WHICH IT MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON
CONVENIENS. BORROWER AND EACH OTHER CREDIT PARTY EXECUTING THIS AGREEMENT HEREBY
WAIVE PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY
SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER OR
SUCH CREDIT PARTY AT THE ADDRESS SET FORTH IN SCHEDULE B OF THIS AGREEMENT AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S OR
SUCH CREDIT PARTY'S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN
THE U.S. MAILS, PROPER POSTAGE PREPAID.
(b) BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL
TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND
EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY
(RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE
PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR
OTHERWISE BETWEEN LENDER, BORROWER AND ANY CREDIT PARTY ARISING OUT OF,
CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN
THEM IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO.
9.12. PRESS RELEASES. Each Credit Party executing this Agreement agrees that
neither it nor its Affiliates will in the future issue any press release or
other public disclosure using the name of GE Capital or its affiliates or
referring to this Agreement or the other Loan Documents without at least two (2)
Business Days' prior notice to GE Capital and without the prior written consent
of GE Capital unless (and only to the extent that) such Credit Party or
Affiliate is required to do so under law and then, in any event, such Credit
Party or Affiliate will consult with GE Capital before issuing such press
release or other public disclosure. Each Credit Party consents to the
publication by Lender of a tombstone or similar advertising material relating to
the financing transactions contemplated by this Agreement.
9.13. REINSTATEMENT. This Agreement shall continue to be effective, or be
reinstated, as the case may be, if at any time payment of all or any part of the
Obligations is rescinded or must otherwise be returned or restored by the Lender
upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of
the Borrower or any other Credit Party, or otherwise, all as though such
payments had not been made.
<PAGE>
IN WITNESS WHEREOF, this Loan and Security Agreement has been duly executed as
of the date first written above.
KNOGO NORTH AMERICA INC.,
as Borrower
By: __________________________
Name: Thomas A. Nicolette
Title: President
SENTRY TECHNOLOGY CORPORATION,
as Credit Party
By: __________________________
Name: Thomas A. Nicolette
Title: President
VIDEO SENTRY CORPORATION,
as Credit Party
By: __________________________
Name: Thomas A. Nicolette
Title: President
KNOGO CARIBE, INC.,
as Credit Party
By: __________________________
Name: Thomas A. Nicolette
Title: President
GENERAL ELECTRIC CAPITAL
CORPORATION,
as Lender
By: _________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
SCHEDULE A - DEFINITIONS
Capitalized terms used in this Agreement and the other Loan Documents shall have
(unless otherwise provided elsewhere in this Agreement or in the other Loan
Documents) the following respective meanings:
"Account Debtor" shall mean any Person who is or may become obligated with
respect to, or on account of, an Account.
"Accounts" shall mean all "accounts," as such term is defined in the Code, now
owned or hereafter acquired by any Person, including: (i) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper, Documents or Instruments),
whether arising out of goods sold or services rendered or from any other
transaction (including any such obligations which may be characterized as an
account or contract right under the Code); (ii) all of such Person's rights in,
to and under all purchase orders or receipts for goods or services; (iii) all of
such Person's rights to any goods represented by any of the foregoing (including
unpaid sellers' rights of rescission, replevin, reclamation and stoppage in
transit and rights to returned, reclaimed or repossessed goods); (iv) all moneys
due or to become due to such Person under all purchase orders and contracts for
the sale of goods or the performance of services or both by such Person or in
connection with any other transaction (whether or not yet earned by performance
on the part of such Person), including the right to receive the proceeds of said
purchase orders and contracts; and (v) all collateral security and guarantees of
any kind given by any other Person with respect to any of the foregoing.
"Accounts Payable Analysis" shall mean a certificate in the form of Exhibit D
"Accounts Receivable Roll Forward Analysis" shall mean a certificate in the form
of Exhibit E.
"Affiliate" shall mean, with respect to any Person: (i) each other Person that,
directly or indirectly, owns or controls, whether beneficially, or as a trustee,
guardian or other fiduciary, five percent (5%) or more of the Stock having
ordinary voting power for the election of directors of such Person; (ii) each
other Person that controls, is controlled by or is under common control with
such Person or any Affiliate of such Person; or (iii) each of such Person's
officers, directors, joint venturers and partners. For the purpose of this
definition, "control" of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management or
policies, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement" shall mean this Agreement including all Appendices attached or
otherwise identified thereto, restatements and modifications and supplements
thereto, and any appendices, exhibits or schedules to any of the foregoing, and
shall refer to this Agreement as the same may be in effect at the time such
reference becomes operative; provided, that except as specifically set forth in
this Agreement, any reference to the Disclosure Schedules to this Agreement
shall be deemed a reference to the Disclosure Schedules as in effect on the
Closing Date or in a written amendment thereto executed by Borrower and Lender.
"Appendices" shall have the meaning assigned to it in the Recitals of this
Agreement.
"Bank Account Agreements" shall mean the Blocked Account Agreements.
"Blocked Accounts" shall have the meaning assigned to it in Schedule D.
"Blocked Account Agreement" shall have the meaning assigned to it in Schedule D.
"Books and Records" shall mean all books, records, board minutes, contracts,
licenses, insurance policies, environmental audits, business plans, files,
computer files, computer discs and other data and software storage and media
devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral.
"Borrower" shall mean the Person identified as such in the preamble of this
Agreement.
"Borrowing Availability" shall mean, at any time, the lesser of (i) the Maximum
Amount or (ii) the Borrowing Base, in each case less reserves established by
Lender from time to time.
"Borrowing Base" shall mean at any time an amount equal to the sum at such time
of:
A) the sum of (A) 80% (or such lesser percentage as may be specified by
Lender from time to time by written notice to Borrower) of the value
(as determined by Lender) of the Eligible Accounts (other than
Eligible Deferred Accounts) of Borrower and Video PLUS (B) the lesser
of (i) $1,000,000 or (ii) 70% (or such lesser percentage as may be
specified by Lender from time to time by written notice to Borrower)
of the value (as determined by Lender) of the Eligible Deferred
Accounts of Borrower and Video; provided that Lender (without limiting
its rights to otherwise reduce the foregoing percentage) shall reduce
the foregoing percentages (the "Accounts Advance Rates") by one
percentage point for each percentage point that the dilution of the
Accounts of Borrower and Video (calculated as the average dilution
from the Accounts Receivable Roll Forward Analysis (Exhibit E) over
the most recent three months) exceeds five percent (5%); provided,
that in the event the Accounts Advance Rates are so reduced and
dilution of the Accounts of Borrower or Video (calculated as the
average dilution from the Accounts Receivable Roll Forward Analysis
(Exhibit E) over the most recent three months) decreases to five
percent (5%) or less then Lender shall increase the Accounts Advance
Rates by one percentage point for each percentage point of such
decrease except that in no event shall the Accounts Advance Rates
exceed the percentages set forth above; PLUS
B) the lesser of (i) $1,500,000 or (ii) the sum of 25% (or such lesser
percentage as may be specified by Lender from time to time by written
notice to Borrower) of the value of the Eligible Inventory of Borrower
consisting of raw material and finished goods, in each case as
determined by Lender, valued on a first-in, first-out basis (at the
lower of cost or market), PLUS
C) the lesser of (i) $1,500,000 or (ii) the sum of 25% (or such lesser
percentage as may be specified by Lender from time to time by written
notice to Borrower of the value of the Eligible Inventory of Video
consisting of raw materials and finished goods, in each case as
determined by Lender on a first in-first out basis (at the lower of
cost or market).
"Borrowing Base Certificate" shall mean a certificate in the form of EXHIBIT C.
"Business Day" shall mean any day that is not a Saturday, a Sunday or a day on
which banks are required or permitted to be closed in the State of New York.
"Capital Expenditures" shall mean all payments or accruals (including Capital
Lease Obligations) for any fixed assets or improvements or for replacements,
substitutions or additions thereto, that have a useful life of more than one
year and that are required to be capitalized under GAAP.
"Capital Lease" shall mean, with respect to any Person, any lease of any
property (whether real, personal or mixed) by such Person as lessee that, in
accordance with GAAP, either would be required to be classified and accounted
for as a capital lease on a balance sheet of such Person or otherwise would be
disclosed as such in a note to such balance sheet, other than, in the case of
Borrower, any such lease under which Borrower is the lessor.
"Capital Lease Obligation" shall mean, with respect to any Capital Lease, the
amount of the obligation of the lessee thereunder that, in accordance with GAAP,
would appear on a balance sheet of such lessee in respect of such Capital Lease
or otherwise be disclosed in a note to such balance sheet.
"Caribe" shall mean Knogo Caribe, Inc., a Delaware corporation.
"Caribe Notes" shall mean the promissory notes executed by Caribe in favor of
Borrower evidencing loans made by Borrower to Caribe.
"Cash Collateral Account" shall have the meaning assigned to it in SCHEDULE C.
"Cash Equivalents" shall mean (a) marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States of
America, 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
$500,000,000 and not subject to setoff rights in favor of such bank.
"Change of Control" shall mean, with respect to any Person on or after the
Closing Date (i) that any Person or "group" shall increase its "beneficial
ownership" (as such terms are defined under Section 13d-3 of and Regulation 13D
under the Securities Exchange Act of 1934) either directly or indirectly, by
more than twenty percent (20%) of the outstanding shares of Stock of such Person
having the right to vote for the election of directors of such Person under
ordinary circumstances, (ii) that any change in the composition of its
stockholders as of the Closing Date shall occur which would result in any
stockholder or group acquiring 49.9% or more of any class of Stock of such
Person, or (iii) that any Person (or group of Persons acting in concert) shall
otherwise acquire the power to direct the management or affairs of such Person
by obtaining proxies, entering into voting agreements or trusts, acquiring
securities or otherwise.
"Charges" shall mean all Federal, state, county, city, municipal, local, foreign
or other governmental taxes (including taxes owed to PBGC at the time due and
payable), levies, assessments, charges, liens, and all additional charges,
interest, penalties, expenses, claims or encumbrances upon or relating to (i)
the Collateral, (ii) the Obligations, (iii) the employees, payroll, income or
gross receipts of any Credit Party, (iv) the ownership or use of any assets by
any Credit Party, or (v) any other aspect of any Credit Party's business.
"Chattel Paper" shall mean all "chattel paper," as such term is defined in the
Code, now owned or hereafter acquired by any Person, wherever located.
"Closing Date" shall mean the Business Day on which the conditions precedent set
forth in Section 2 have been satisfied or specifically waived in writing by
Lender, and the initial Loan has been made.
"Closing Fee" shall have the meaning assigned to it in SCHEDULE E.
"Code" shall mean the Uniform Commercial Code as the same may, from time to
time, be in effect in the State of New York; provided, that in the event that,
by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of Lender's security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term "Code" shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions of
this Agreement relating to such attachment, perfection or priority and for
purposes of definitions related to such provisions.
"Collateral" shall have the meaning assigned to it in SECTION 6.1.
"Collateral Monitoring Fee" shall have the meaning assigned to it in Schedule E.
"Collection Account" shall mean that certain account of Lender, account number
50-232-854 in the name of GECC-CAF Depository at Bankers Trust Company, 1
Bankers Trust Plaza, New York, New York, ABA number 021-001-033.
"Commitment Termination Date" shall mean the earliest of (i) the Stated Expiry
Date, (ii) the date Lender's obligation to advance funds is terminated pursuant
to Section 7.2, and (iii) the date of indefeasible prepayment in full by
Borrower of the Obligations in accordance with the provisions of Section 1.2(c).
"Contracts" shall mean all the contracts, undertakings, or agreements (other
than rights evidenced by Chattel Paper, Documents or Instruments) in or under
which any Person may now or hereafter have any right, title or interest,
including any agreement relating to the terms of payment or the terms of
performance of any Account.
"Contractual Obligation" shall mean as to any Person, any provision of any
security issued by such Person or of any agreement, instrument, or other
undertaking to which such Person is a party or by which it or any of its
property is bound.
"Copyright License" shall mean rights under any written agreement now owned or
hereafter acquired by any Person granting the right to use any Copyright or
Copyright registration.
"Copyrights" shall mean all of the following now owned or hereafter acquired by
any Person: (i) all copyrights in any original work of authorship fixed in any
tangible medium of expression, now known or later developed, all registrations
and applications for registration of any such copyrights in the United States or
any other country, including registrations, recordings and applications, and
supplemental registrations, recordings, and applications in the United States
Copyright Office; and (ii) all Proceeds of the foregoing, including license
royalties and proceeds of infringement suits, the right to sue for past, present
and future infringements, all rights corresponding thereto throughout the world
and all renewals and extensions thereof.
"Corporate Credit Party" shall mean any Credit Party that is a corporation.
"Credit Party" shall mean Borrower, and each other Person (other than Lender)
that is or may become a party to this Agreement or any other Loan Document.
"Default" shall mean any Event of Default or any event which, with the passage
of time or notice or both, would, unless cured or waived, become an Event of
Default.
"Default Rate" shall have the meaning assigned to it in Section 1.5(d).
"Documents" shall mean all "documents," as such term is defined in the Code, now
owned or hereafter acquired by any Person, wherever located, including all bills
of lading, dock warrants, dock receipts, warehouse receipts, and other documents
of title, whether negotiable or non-negotiable.
"Eligible Accounts" shall mean as at the date of determination, all Accounts of
the Borrower and Video except any Account:
(a) that does not arise from the sale of goods or the performance of
services by Borrower or Video in the ordinary course of business of Borrower or
Video;
(b) upon which (i) Borrower's or Video's right to receive payment is
not absolute or is contingent upon the fulfillment of any condition whatsoever
or (ii) Borrower or Video is not able to bring suit or otherwise enforce its
remedies against the Account Debtor through judicial process;
(c) against which any defense, counterclaim or setoff, whether
well-founded or otherwise, is asserted or which is a "contra" Account;
(d) that is not a true and correct statement of a bona fide
indebtedness incurred in the amount of the Account for merchandise sold or
services performed and accepted by the Account Debtor obligated upon such
Account;
(e) with respect to which an invoice, acceptable to Lender in form and
substance, has not been sent;
(f) that is not owned by Borrower or Video or is subject to any right,
claim, or interest of another Person, other than the Lien in favor of Lender;
(g) that arises from a sale to or performance of services for an
employee, Affiliate, Subsidiary or Stockholder of Borrower, Video or any other
Credit Party, or an entity which has common officers or directors with Borrower,
Video or any other Credit Party;
(h) that is the obligation of an Account Debtor that is the Federal
government or a political subdivision thereof, unless Lender has agreed to the
contrary in writing and Borrower or Video, as the case may be, has complied with
the Federal Assignment of Claims Act of 1940 with respect to such obligation;
(i) that is the obligation of an Account Debtor located in a foreign
country unless such Account is supported by a letter of credit or credit
insurance acceptable to Lender;
(j) that is the obligation of an Account Debtor to whom Borrower or
Video is or may become liable for goods sold or services rendered by the Account
Debtor to Borrower or Video, to the extent of Borrower's or Video's liability to
such Account Debtor;
(k) that arises with respect to goods which are delivered on a
cash-on-delivery basis or placed on consignment, guaranteed sale or other terms
by reason of which the payment by the Account Debtor may be conditional;
(l) that is an obligation for which the total unpaid Accounts of the
Account Debtor exceed 20% of the aggregate of all Accounts, to the extent of
such excess;
(m) that is not paid within 60 days from its due date or 90 days from
its invoice date or that are Accounts of an Account Debtor if 50% or more of the
Accounts owing from such Account Debtor remain unpaid within such time periods;
(n) is an obligation of an Account Debtor that has suspended business,
made a general assignment for the benefit of creditors, is unable to pay its
debts as they become due or as to which a petition has been filed (voluntary or
involuntary) under any law relating to bankruptcy, insolvency, reorganization or
relief of debtors;
(o) that arises from any bill-and-hold or other sale of goods which
remain in Borrower's or Video's possession or under Borrower's or Video's
control;
(p) as to which Lender's interest therein is not a first priority
perfected security interest;
(q) to the extent that such Account exceeds any credit limit
established by Lender in Lender's sole discretion;
(r) as to which any of Borrower's or Video's representations or
warranties pertaining to Accounts are untrue;
(s) that represents interest payments or late charges owing to Borrower
or Video; or
(t) that is not otherwise acceptable in the sole discretion of Lender,
provided, that Lender shall have the right to create and adjust eligibility
standards and related reserves from time to time in its reasonable credit
judgment.
"Eligible Deferred Accounts" shall mean Eligible Accounts of Borrower or Video
for which extended payment terms (not in excess of 60 days past invoice date or
180 days after installation date) have been allowed by Borrower or Video in the
ordinary course of business consistent with historical practice as previously
disclosed to Lender.
"Eligible Inventory" shall mean as at the date of determination, all Inventory
of Borrower or Video, except any Inventory that:
(a) is not subject to a first priority perfected security interest of
Lender or is not owned by Borrower or Video free and clear of all Liens and
rights of others (except the Liens in favor of Lender);
(b) is not located on premises owned or operated by Borrower or Video
and referenced in Disclosure Schedule (3.2),
(c) is not located on premises where the aggregate amount of all
Inventory (valued at cost) located thereon is greater than $100,000;
(d) is located on premises with respect to which Lender has not
received a landlord or mortgagee letter acceptable in form and substance to
Lender or rent reserves acceptable to Lender (such reserve with respect to the
leased premises of Borrower located at 350 Wireless Boulevard, Hauppauge, New
York shall be in an amount equal to three (3) months payments under the relevant
lease);
(e) is in transit;
(f) is covered by a negotiable document of title, unless such document
and evidence of acceptable insurance covering such Inventory has been delivered
to Lender,
(g) in Lender's reasonable credit judgment, is obsolete, unsalable,
shopworn, damaged, unfit for further processing, is of substandard quality or is
not of good and merchantable quality, free from any defects;
(h) consists of (i ) discontinued items, (ii) slow-moving or excess
items held in inventory, or (iii) used items held for resale;
(i) does not consist of raw materials or finished goods;
(j) does not meet all standards imposed by any Governmental Authority,
including with respect to its production, acquisition or importation (as the
case may be);
(k) is placed by Borrower or Video on consignment or held by Borrower
or Video on consignment from another Person;
(l) is held for rental or lease by or on behalf of Borrower or Video;
(m) is produced in violation of the Fair Labor Standards Act and
subject to the "hot goods" provisions contained in 29 U.S.C. S 215 or any
successor statute or section;
(n) in any way fails to meet or violates any warranty, representation
or covenant contained in this Agreement or any other Loan Document;
(o) is subject to any licensing, patent, royalty, trademark, trade name
or copyright agreement with any third parties other than Inventory which is
subject to the License and Supply Agreement dated January 17, 1994 between
Allied Signal, Inc. acting through its Amorphous Metals business group and Knogo
Corporation;
(p) requires the consent of any Person for the completion of
manufacture, sale or other disposition of such Inventory by Lender following an
Event of Default and such completion, manufacture or sale constitutes a breach
or default under any contract or agreement to which Borrower is a party or to
which such Inventory is or may become subject; or
(q) is not otherwise acceptable in the sole discretion of Lender,
provided, that (i) Lender shall have the right to create and adjust eligibility
standards and related reserves from time to time in its reasonable credit
judgment.
"Environmental Laws" shall mean all Federal, state and local laws, statutes,
ordinances and regulations, now or hereafter in effect, and in each case as
amended or supplemented from time to time, and any applicable judicial or
administrative interpretation thereof relating to the regulation and protection
of human health, safety, the environment and natural resources (including
ambient air, surface water, groundwater, wetlands, land surface or subsurface
strata, wildlife, aquatic species and vegetation). Environmental Laws include
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980 (42 U.S.C. ss.ss. 9601 et seq.) ("CERCLA"); the Hazardous Material
Transportation Act (49 U.S.C. ss.ss. 1801 et seq.); the Federal Insecticide,
Fungicide, and Rodenticide Act (7 U.S.C. ss.ss. 136 et seq.); the Resource
Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et seq.) ("RCRA"); the
Toxic Substance Control Act (15 U.S.C. ss.ss. 2601 et seq.); the Clean Air Act
(42 U.S.C. ss.ss. 740 et seq.); the Federal Water Pollution Control Act (33
U.S.C. ss.ss._1251 et seq.); the Occupational Safety and Health Act (29 U.S.C.
ss.ss. 651 et seq.) ("OSHA"); and the Safe Drinking Water Act (42 U.S.C. ss.ss.
300(f) et seq.), and any and all regulations promulgated thereunder, and all
analogous state and local counterparts or equivalents and any transfer of
ownership notification or approval statutes.
"Environmental Liabilities" shall mean all liabilities, obligations,
responsibilities, remedial actions, removal costs, losses, damages, punitive
damages, consequential damages, treble damages, costs and expenses (including
all reasonable fees, disbursements and expenses of counsel, experts and
consultants and costs of investigation and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any claim, suit,
action or demand by any Person, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute or common law
(including any thereof arising under any Environmental Law, permit, order or
agreement with any Governmental Authority) and which relate to any health or
safety condition regulated under any Environmental Law, Environmental Permits or
in connection with any Release, threatened Release, or the presence of a
Hazardous Material.
"Environmental Permits" shall mean all permits, licenses, authorizations,
certificates, approvals, registrations or other written documents required by
any Governmental Authority under any Environmental Law.
"Equipment" shall mean all "equipment" as such term is defined in the Code, now
owned or hereafter acquired by any Person, wherever located, including any and
all machinery, apparatus, equipment, fittings, furniture, fixtures, motor
vehicles and other tangible personal property (other than Inventory) of every
kind and description which may be now or hereafter used in such Person's
operations or which are owned by such Person or in which such Person may have an
interest, and all parts, accessories and accessions thereto and substitutions
and replacements therefor.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974 (or any
successor legislation thereto), as amended from time to time, and any
regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to any Credit Party, any trade or
business (whether or not incorporated) which together with such Credit Party,
are treated as a single employer within the meaning of Sections 414(b), (c), (m)
or (o) of the IRC.
"ERISA Event" shall mean with respect to any Credit Party or any ERISA
Affiliate, (a) any event described in Section 4043(c) of ERISA with respect to a
Title IV Plan; (b) the withdrawal of any Credit Party or ERISA Affiliate from a
Title IV Plan subject to Section 4063 of ERISA during a plan year in which it
was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (c) the
complete or partial withdrawal of any Credit Party or any ERISA Affiliate from
any Multiemployer Plan; (d) the filing of a notice of intent to terminate a
Title IV Plan or the treatment of a plan amendment as a termination under
Section 4041 of ERISA; (e) the institution of proceedings to terminate a Title
IV Plan or Multiemployer Plan by the PBGC; (f) the failure by any Credit Party
or ERISA Affiliate to make when due required contributions to a Multiemployer
Plan or Title IV Plan unless such failure is cured within 30 days; (g) any other
event or condition which might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Title IV Plan or Multiemployer Plan or for the
imposition of liability under Section 4069 or 4212(c) of ERISA; (h) the
termination of a Multiemployer Plan under Section 4041A of ERISA or the
reorganization or insolvency of a Multiemployer Plan under Section 4241 of
ERISA; or (i) the loss of a Qualified Plan's qualification or tax exempt status.
"ESOP" shall mean a Plan which is intended to satisfy the requirements of
Section 4975(e)(7) of the IRC.
"Event of Default" shall have the meaning assigned to it in Section 7.1.
"Fees" shall mean the fees due to Lender as set forth in Schedule E.
"Financial Statements" shall mean the consolidated and consolidating income
statement, balance sheet and statement of cash flows of Sentry and its
Subsidiaries, internally prepared for each Fiscal Month, and audited for each
Fiscal Year, prepared in accordance with GAAP.
"Fiscal Month" shall mean any of the monthly accounting periods of each Credit
Party.
"Fiscal Quarter" shall mean any of the quarterly accounting periods of each
Credit Party.
"Fiscal Year" shall mean the 12 month period of each Credit Party ending
December 31 of each year. Subsequent changes of the fiscal year of any Credit
Party shall not change the term "Fiscal Year" unless Lender shall consent in
writing to such change.
"GAAP" shall mean generally accepted accounting principles in the United States
of America as in effect from time to time, consistently applied.
"GE Capital" shall mean General Electric Capital Corporation, a New York
corporation, and its successors and assigns.
"General Intangibles" shall mean all "general intangibles," as such term is
defined in the Code, now owned or hereafter acquired by any Person, including
all right, title and interest which such Person may now or hereafter have in or
under any Contract, Intellectual Property, interests in partnerships, joint
ventures and other business associations, permits, proprietary or confidential
information, inventions (whether or not patented or patentable), technical
information, procedures, designs, knowledge, know- how, software, data bases,
data, skill, expertise, experience, processes, models, drawings, materials,
Books and Records, Goodwill (including the Goodwill associated with any
Intellectual Property), all rights and claims in or under insurance policies
(including insurance for fire, damage, loss, and casualty, whether covering
personal property, real property, tangible rights or intangible rights, all
liability, life, key-person, and business interruption insurance, and all
unearned premiums), uncertificated securities, choses in action, deposit
accounts, rights to receive tax refunds and other payments and rights of
indemnification.
"Goods" shall mean all "goods," as such term is defined in the Code, now owned
or hereafter acquired by any Person, wherever located, including movables,
fixtures, equipment, inventory, or other tangible personal property.
"Goodwill" shall mean all goodwill, trade secrets, proprietary or confidential
information, technical information, procedures, formulae, quality control
standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
"Governmental Authority" shall mean any nation or government, any state or other
political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Guaranteed Indebtedness" shall mean, as to any Person, any obligation of such
Person guaranteeing any indebtedness, lease, dividend, or other obligation
("primary obligations") of any other Person (the "primary obligor") in any
manner, including any obligation or arrangement of such guaranteeing Person
(whether or not contingent): (i) to purchase or repurchase any such primary
obligation; (ii) to advance or supply funds (a) for the purchase or payment of
any such primary obligation or (b) to maintain working capital or equity capital
of the primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet condition of the primary obligor; (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation; or (iv) to indemnify the owner of such primary
obligation against loss in respect thereof.
"Guarantor" shall mean each Person which executes a guaranty or a support, put
or other similar agreement in favor of Lender in connection with the
transactions contemplated by this Agreement.
"Guaranty" shall mean any agreement to perform all or any portion of the
Obligations on behalf of Borrower or any other Credit Party, in favor of, and in
form and substance satisfactory to, Lender, together with all amendments,
modifications and supplements thereto, and shall refer to such Guaranty as the
same may be in effect at the time such reference becomes operative.
"Hazardous Material" shall mean any substance, material or waste which is
regulated by or forms the basis of liability now or hereafter under, any
Environmental Laws, including any material or substance which is (a) defined as
a "solid waste," "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous waste ," "restricted hazardous waste," "pollutant,"
"contaminant," "hazardous constituent," "special waste," "toxic substance" or
other similar term or phrase under any Environmental Laws, (b) petroleum or any
fraction or by-product thereof, asbestos, polychlorinated biphenyls (PCB's), or
any radioactive substance.
"Hazardous Waste" shall have the meaning ascribed to such term in the Resource
Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et. seq.).
"Indebtedness" of any Person shall mean: (i) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property or services
(including reimbursement and all other obligations with respect to surety bonds,
letters of credit and bankers' acceptances, whether or not matured, but not
including obligations to trade creditors incurred in the ordinary course of
business and not more than 45 days past due); (ii) all obligations evidenced by
notes, bonds, debentures or similar instruments; (iii) all indebtedness created
or arising under any conditional sale or other title retention agreements with
respect to property acquired by such Person (even though the rights and remedies
of the seller or lender under such agreement in the event of default are limited
to repossession or sale of such property); (iv) all Capital Lease Obligations;
(v) all Guaranteed Indebtedness; (vi) all Indebtedness referred to in clauses
(i), (ii), (iii), (iv) or (v) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon or in property (including accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness; (vii) the Obligations; and (viii) all liabilities
under Title IV of ERISA.
"Indemnified Liabilities" shall have the meaning assigned to it in Section 1.11.
"Indemnified Person" shall have the meaning assigned to it in Section 1.11.
"Index Rate" shall mean the latest rate for 30-day dealer placed commercial
paper (which for purposes hereof shall mean high grade unsecured notes sold
through dealers by major corporations in multiples of $1,000) which normally is
published in the "Money Rates" section of The Wall Street Journal (or if such
rate ceases to be so published, as quoted from such other generally available
and recognizable source as Lender may select). The Index Rate shall be
determined (i) on the first Business Day immediately prior to the Closing Date
and (ii) thereafter, on the last Business Day of each calendar month for
calculation of interest for the following month.
"Instruments" shall mean all "instruments," as such term is defined in the Code,
now owned or hereafter acquired by any Person, wherever located, including all
certificated securities and all notes and other evidences of indebtedness, other
than instruments that constitute, or are a part of a group of writings that
constitute, Chattel Paper.
"Intellectual Property" shall mean any and all Licenses, Patents, Copyrights,
Trademarks, trade secrets and customer lists.
"Inventory" shall mean all "inventory," as such term is defined in the Code, now
or hereafter owned or acquired by any Person, wherever located, including all
inventory, merchandise, goods and other personal property which are held by or
on behalf of such Person for sale or lease or are furnished or are to be
furnished under a contract of service or which constitute raw materials, work in
process or materials used or consumed or to be used or consumed in such Person's
business or in the processing, production, packaging, promotion, delivery or
shipping of the same, including other supplies.
"IRC" shall mean the Internal Revenue Code of 1986, and any successor thereto.
"IRS" shall mean the Internal Revenue Service, or any successor thereto.
"KMCC" shall mean K&M Converting Co., a Delaware Corporation.
"Lender" shall mean GE Capital and, if at any time GE Capital shall decide to
assign or syndicate all or any of the Obligations, such term shall include such
assignee or such other members of the syndicate.
"Letters of Credit" shall mean any and all commercial or standby letters of
credit issued at the request and for the account of Borrower for which Lender
has incurred Letter of Credit Obligations.
"Letter of Credit Fee" shall have the meaning assigned to it in Schedule E.
"Letter of Credit Obligations" shall mean all outstanding obligations incurred
by Lender, whether direct or indirect, contingent or otherwise, due or not due,
in connection with the issuance or guarantee, by Lender or another, of Letters
of Credit, all as further set forth in Schedule C. The amount of such Letter of
Credit Obligations at any time shall equal the maximum amount which may be
payable by Lender thereupon or pursuant thereto at such time and shall include
all duty, freight, taxes, costs, insurance and any other charges and expenses in
connection therewith.
"License" shall mean any Copyright License, Patent License, Trademark License or
other license of rights or interests now held or hereafter acquired by any
Person.
"Lien" shall mean any mortgage, security deed or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, lien, charge, claim, security
interest, security title, easement or encumbrance, or preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including any lease or title retention agreement, any financing
lease having substantially the same economic effect as any of the foregoing, and
the filing of, or agreement to give, any financing statement perfecting a
security interest under the Code or comparable law of any jurisdiction).
"Litigation" shall mean any claim, lawsuit, litigation, investigation or
proceeding of or before any arbitrator or Governmental Authority.
"Loan Documents" shall mean this Agreement, the Notes, the Financial Statements,
each Guaranty, the Power of Attorney, the Bank Account Agreements, and the other
documents and instruments listed in Schedule F, and all security agreements,
mortgages and all other documents, instruments, certificates, and notices at any
time delivered by any Person (other than Lender) in connection with any of the
foregoing.
"Loans" shall mean the Revolving Credit Loan including the Letter of Credit
Obligations.
"Material Adverse Effect" shall mean: (i) a material adverse effect on (a) the
business, assets, operations, prospects or financial or other condition of
Borrower or any other Credit Party taken as a whole, or the industry within
which Borrower or any other Credit Party operates, (b) Borrower's or any other
Credit Party's ability to pay or perform the Obligations under the Loan
Documents to which such Credit Party is a party in accordance with the terms
thereof, (c) the Collateral or Lender's Liens on the Collateral or the priority
of any such Lien, or (d) Lender's rights and remedies under this Agreement and
the other Loan Documents; or (ii) the incurrence by Borrower or any other Credit
Party of any liability (other than Indebtedness permitted by Section 5(c)),
contingent or liquidated, which has an actual or estimated incurrence of
liability, or dollar exposure or loss, greater than Minimum Actionable Amount to
Borrower or any other Credit Party.
"Maximum Amount" shall mean the maximum amount of credit to be provided by
Lender to or for the benefit of Borrower for aggregate Revolving Credit Advances
and Letter of Credit Obligations outstanding at any time, without regard to the
Borrowing Base or reserves, which amount, for purposes of this Agreement, is
$8,000,000.
"Minimum Actionable Amount" shall mean $250,000.
"Minimum Loan Fee" shall have the meaning assigned to it in Schedule E.
"Multiemployer Plan" shall mean a "multiemployer plan," as defined in Section
4001(a) (3) of ERISA, to which Borrower, any other Credit Party or any ERISA
Affiliate is making, is obligated to make, has made or been obligated to make,
contributions on behalf of participants who are or were employed by any of them.
"Net Borrowing Availability" shall mean at any time the Borrowing Availability
less the Revolving Credit Loan.
"Notes" shall mean the Revolving Credit Note.
"Notice of Revolving Credit Advance" shall have the meaning assigned to it in
Section 1.1(b).
"Obligations" shall mean all loans, advances, debts, expense reimbursement,
fees, liabilities, and obligations for the performance of covenants, tasks or
duties or for payment of monetary amounts (whether or not such performance is
then required or contingent, or amounts are liquidated or determinable) owing by
Borrower and any other Credit Party to Lender, of any kind or nature, present or
future, whether or not evidenced by any note, agreement or other instrument,
whether arising under any of the Loan Documents or under any other agreement
between Borrower, such Credit Party and Lender, and all covenants and duties
regarding such amounts. This term includes all principal, interest (including
interest accruing at the then applicable rate provided in this Agreement after
the maturity of the Loans and interest accruing at the then applicable rate
provided in this Agreement after the filing of any petition in bankruptcy, or
the commencement of any insolvency, reorganization or like proceeding, whether
or not a claim for post-filing or post-petition interest is allowed in such
proceeding), Fees, Charges, expenses, attorneys' fees and any other sum
chargeable to Borrower or any other Credit Party under any of the Loan
Documents, and all principal and interest due in respect of the Loans and all
obligations and liabilities of any Guarantor under any Guaranty.
"Patent License" shall mean rights under any written agreement now owned or
hereafter acquired by any Person granting any right with respect to any
invention on which a Patent is in existence.
"Patents" shall mean all of the following in which any Person now holds or
hereafter acquires any interest: (i) all letters patent of the United States or
any other country, all registrations and recordings thereof, and all
applications for letters patent of the United States or any other country,
including registrations, recordings and applications in the United States Patent
and Trademark Office or in any similar office or agency of the United States,
any State or Territory thereof, or any other country; and (ii) all reissues,
continuations, continuations-in-part or extensions thereof.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor
thereto.
"Permitted Encumbrances" shall mean the following encumbrances: (i) Liens for
taxes or assessments or other governmental Charges or levies, either not yet due
and payable or to the extent that nonpayment thereof is permitted by the terms
of Section 3.11; (ii) pledges or deposits securing obligations under worker's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (iii) pledges or deposits securing bids, tenders,
contracts (other than contracts for the payment of money) or leases to which any
Credit Party is a party as lessee made in the ordinary course of business; (iv)
deposits securing public or statutory obligations of any Credit Party; (v)
inchoate and unperfected workers', mechanics', or similar liens arising in the
ordinary course of business so long as such Liens attach only to Equipment,
fixtures or real estate; (vi) carriers', warehousemans', suppliers' or other
similar possessory liens arising in the ordinary course of business and securing
indebtedness not yet due and payable in an outstanding aggregate amount not in
excess of $25,000 at any time so long as such Liens attach only to Inventory;
(vii) deposits of money securing, or in lieu of, surety, appeal or customs bonds
in proceedings to which any Credit Party is a party; (viii) zoning restrictions,
easements, licenses, or other restrictions on the use of real property or other
minor irregularities in title (including leasehold title) thereto, so long as
the same do not materially impair the use, value, or marketability of such real
estate; (ix) Purchase Money Liens securing Purchase Money Indebtedness (or rent)
to the extent permitted under Section 5(c)(ii); (x) Liens in existence on the
Closing Date as disclosed on Disclosure Schedule 5(h) provided that no such Lien
is spread to cover additional property after the Closing Date and the amount of
Indebtedness secured thereby is not increased.; and (xi) Liens in favor of
Lender securing the Obligations.
"Permitted Investments" shall mean those investments in Cash Equivalents which
have been pledged to Lender pursuant to agreements, documents and instruments
which are in form and substance satisfactory to Lender.
"Person" shall mean any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefit
corporation, entity or government (whether Federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body or
department thereof), and shall include such Person's successors and assigns.
"Plan" shall mean, with respect to Borrower or any other Credit Party, at any
time, an employee benefit plan, as defined in Section 3(3) of ERISA, which
Borrower or any other Credit Party maintains, contributes to or has an
obligation to contribute to on behalf of participants who are or were employed
by any of them.
"Prepayment Fee" shall mean the prepayment fee assigned to it in Schedule E.
"Proceeds" shall mean "proceeds," as such term is defined in the Code and, in
any event, shall include: (i) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to Borrower or any other Credit Party from time to
time with respect to any Collateral; (ii) any and all payments (in any form
whatsoever) made or due and payable to Borrower or any other Credit Party from
time to time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of any Collateral by any governmental body, authority,
bureau or agency (or any person acting under color of governmental authority);
(iii) any claim of Borrower or any other Credit Party against third parties (a)
for past, present or future infringement of any Intellectual Property or (b) for
past, present or future infringement or dilution of any Trademark or Trademark
License or for injury to the goodwill associated with any Trademark, Trademark
registration or Trademark licensed under any Trademark License; (iv) any
recoveries by Borrower or any other Credit Party against third parties with
respect to any litigation or dispute concerning any Collateral; and (v) any and
all other amounts from time to time paid or payable under or in connection with
any Collateral, upon disposition or otherwise.
"Projections" shall mean as of any date the consolidated and consolidating
balance sheet, statements of income and cash flow for Sentry and its
Subsidiaries (including forecasted Capital Expenditures and Net Borrowing
Availability) (i) by month for the next Fiscal Year, and (ii) by year for the
following three Fiscal Years, in each case prepared in a manner consistent with
GAAP and accompanied by senior management's discussion and analysis of such
plan.
"Purchase Money Indebtedness" shall mean (i) any Indebtedness incurred for the
payment of all or any part of the purchase price of any fixed asset, (ii) any
Indebtedness incurred for the sole purpose of financing or refinancing all or
any part of the purchase price of any fixed asset, and (iii) any renewals,
extensions or refinancings thereof (but not any increases in the principal
amounts thereof outstanding at that time).
"Purchase Money Lien" shall mean any Lien upon any fixed assets which secures
the Purchase Money Indebtedness related thereto but only if such Lien shall at
all times be confined solely to the asset the purchase price of which was
financed or refinanced through the incurrence of the Purchase Money Indebtedness
secured by such Lien and only if such Lien secures only such Purchase Money
Indebtedness.
"Qualified Plan" shall mean a Plan which is intended to be tax-qualified under
Section 401(a) of the IRC.
"Real Property" shall have the meaning assigned to it in Section 3.16.
"Release" shall mean, as to any Person, any release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal, dumping, leaching
or migration of Hazardous Materials in the indoor or outdoor environment by such
Person, including the movement of Hazardous Materials through or in the air,
soil, surface water, ground water or property.
"Requirement of Law" shall mean as to any Person, the Certificate or Articles of
Incorporation and By- Laws or other organizational or governing documents of
such Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case binding upon
such Person or any of its property or to which such Person or any of its
property is subject.
"Restricted Payment" shall mean: (i) the declaration or payment of any dividend
or the incurrence of any liability to make any other payment or distribution of
cash or other property or assets on or in respect of Borrower's or any other
Credit Party's Stock; (ii) any payment on account of the purchase, redemption,
defeasance or other retirement of Borrower's or any other Credit Party's Stock
or Indebtedness or any other payment or distribution made in respect of any
thereof, either directly or indirectly; other than (a) that arising under this
Agreement or (b) if no Default shall have occurred and be continuing, or shall
result therefrom, interest and principal, when due without acceleration or
modification of the amortization as in effect on the Closing Date, under
Indebtedness described in Disclosure Schedule (5(c)) or otherwise permitted
under Section 5(c)(ii); or (iii) any payment, loan, contribution, or other
transfer of funds or other property to any Stockholder of such Person which is
not expressly and specifically permitted in this Agreement; provided, that no
payment to Lender shall constitute a Restricted Payment.
"Retiree Welfare Plan" shall mean, at any time, a Plan that is a "welfare plan"
as defined in Section 3(2) of ERISA, that provides for continuing coverage or
benefits for any participant or any beneficiary of a participant after such
participant's termination of employment, other than continuation coverage
provided pursuant to Section 4980B of the IRC and at the sole expense of the
participant or the beneficiary of the participant.
"Revolving Credit Advance" shall have the meaning assigned to it in Section
1.1(a).
"Revolving Credit Loan" shall mean at any time the sum of (i) the aggregate
amount of Revolving Credit Advances then outstanding, plus (ii) the total Letter
of Credit Obligations incurred by Lender and outstanding at such time, plus
(iii) the amount of accrued but unpaid interest thereon and Letter of Credit
Fees with respect thereto.
"Revolving Credit Note" shall mean the promissory note of Borrower dated the
Closing Date, substantially in the form of Exhibit F.
"Revolving Credit Rate" shall have the meaning assigned to it in Section 1.5(a).
"Schedule of Documents" shall mean the schedule, including all appendices,
exhibits or schedules thereto, listing certain documents and information to be
delivered in connection with the Loan Documents and the transactions
contemplated thereunder, substantially in the form of Schedule F.
"Sentry" shall mean Sentry Technology Corporation, a Delaware corporation.
"Series A Preferred Stock" shall mean the 6,000,000 shares of Series A Preferred
Stock par value $0.001 per share of Sentry.
"Stated Expiry Date" shall mean December 31, 1999.
"Stock" shall mean all certificated and uncertificated shares, options,
warrants, general or limited partnership interests, participation or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity whether voting or nonvoting,
including common stock, preferred stock, or any other "equity security" (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934).
"Stockholder" shall mean each holder of Stock of Borrower or any other Credit
Party.
"Subsidiary" shall mean, with respect to any Person, (i) any corporation of
which an aggregate of more than 50% of the outstanding Stock having ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether, at the time, Stock of any other class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time, directly or indirectly, owned
legally or beneficially by such Person and/or one or more Subsidiaries of such
Person, or with respect to which any such Person has the right to vote or
designate the vote of 50% or more of such Stock whether by proxy, agreement,
operation of law or otherwise, and (ii) any partnership or limited liability
company in which such Person or one or more Subsidiaries of such Person has an
equity interest (whether in the form of voting or participation in profits or
capital contribution) of more than 50% or of which any such Person is a general
partner or may exercise the powers of a general partner.
"Taxes" shall mean taxes, levies, imposts, deductions, Charges or withholdings,
and all liabilities with respect thereto, excluding taxes imposed on or measured
by the net income of Lender.
"Termination Date" shall mean the date on which the Revolving Credit Loan and
any other Obligations under this Agreement are indefeasibly paid in full, in
cash (other than amounts in respect of Letter of Credit Obligations if any, then
outstanding, provided that Borrower shall have funded such amounts in cash in
full into the Cash Collateral Account), and Borrower shall have no further right
to borrow any moneys or obtain other credit extensions or financial
accommodations under this Agreement.
"Title IV Plan" shall mean an "employee pension benefit plan," as defined in
Section 3(2) of ERISA (other than a Multiemployer Plan), which is covered by
Title IV of ERISA, and which Borrower, any other Credit Party or any ERISA
Affiliate maintains, contributes to or has an obligation to contribute to on
behalf of participants who are or were employed by any of them.
"Trademark License" shall mean rights under any written agreement now owned or
hereafter acquired by any Person granting any right to use any Trademark or
Trademark registration.
"Trademarks" shall mean all of the following now owned or hereafter acquired by
any Person: (i) all trademarks, trade names, corporate names, business names,
trade styles, service marks, logos, other source or business identifiers, prints
and labels on which any of the foregoing have appeared or appear, designs and
general intangibles of like nature, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, including all registrations, recordings and applications
in the United States Patent and Trademark Office or in any similar office or
agency of the United States, any State or Territory thereof, or any other
country or any political subdivision thereof, and (ii) all reissues, extensions
or renewals thereof.
"Transaction Summary" shall mean the Transaction Summary set forth in the
Recitals to this Agreement.
"Unfunded Pension Liability" shall mean, at any time, the aggregate amount, if
any, of the sum of (i) the amount by which the present value of all accrued
benefits under each Title IV Plan exceeds the fair market value of all assets of
such Title IV Plan allocable to such benefits in accordance with Title IV of
ERISA, all determined as of the most recent valuation date for such Title IV
Plan determined on the basis of a shutdown of the employees thereunder and using
the actuarial assumptions in effect for funding purposes under such Title IV
Plan, and (ii) for a period of five (5) years following a transaction which
could be covered by Section 4069 of ERISA, the liabilities (whether or not
accrued) that could be avoided by Borrower, any other Credit Party or any ERISA
Affiliate as a result of such transaction.
"Unused Line Fee" shall have the meaning assigned to it in Schedule E.
"Video" shall mean Video Sentry Corporation, a Delaware corporation.
"Video Borrowing Base" shall mean at any time an amount equal to the Borrowing
Base less the portion of the Borrowing Base attributable to the Eligible
Accounts, Eligible Deferred Accounts and Eligible Inventory of Borrower.
"Video Note" shall mean the promissory note in the principal amount of
$5,000,000 executed by Video in favor of Borrower evidencing loans made by
Borrower to Video prior to the Closing Date.
Any accounting term used in this Agreement or the other Loan Documents shall
have, unless otherwise specifically provided therein, the meaning customarily
given such term in accordance with GAAP, and all financial computations
thereunder shall be computed, unless otherwise specifically provided therein, in
accordance with GAAP consistently applied; provided, that all financial
covenants and calculations in the Loan Documents shall be made in accordance
with GAAP as in effect on the Closing Date unless Borrower and Lender shall
otherwise specifically agree in writing. That certain items or computations are
explicitly modified by the phrase "in accordance with GAAP" shall in no way be
construed to limit the foregoing. All other undefined terms contained in this
Agreement or the other Loan Documents shall, unless the context indicates
otherwise, have the meanings provided for by the Code. The words "herein,"
"hereof" and "hereunder" or other words of similar import refer to this
Agreement as a whole, including the exhibits and schedules thereto, as the same
may from time to time be amended, modified or supplemented, and not to any
particular section, subsection or clause contained in this Agreement.
For purposes of this Agreement and the other Loan Documents, the following
additional rules of construction shall apply, unless specifically indicated to
the contrary: (a) wherever from the context it appears appropriate, each term
stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, the feminine and the neuter; (b) the term "or" is not
exclusive; (c) the term "including" (or any form thereof) shall not be limiting
or exclusive; (d) all references to statutes and related regulations shall
include any amendments of same and any successor statutes and regulations; (e)
all references in this Agreement or in the Schedules to this Agreement to
sections, schedules, disclosure schedules, exhibits, and attachments shall refer
to the corresponding sections, schedules, disclosure schedules, exhibits, and
attachments of or to this Agreement; and (f) all references to any instruments
or agreements, including references to any of the Loan Documents, shall include
any and all modifications or amendments thereto and any and all extensions or
renewals thereof.
<PAGE>
SCHEDULE C - LETTERS OF CREDIT
1. Lender agrees, subject to the terms and conditions hereinafter set forth, to
incur Letter of Credit Obligations in respect of the issuance of Letters of
Credit issued on terms acceptable to Lender and supporting obligations of
Borrower incurred in the ordinary course of Borrower's business, in order to
support the payment of Borrower's inventory purchase obligations, insurance
premiums, or utility or other operating expenses and obligations, as Borrower
shall request by written notice to Lender that is received by Lender not less
than five Business Days prior to the requested date of issuance of any such
Letter of Credit; PROVIDED, that: (a) that the aggregate amount of all Letter of
Credit Obligations at any one time outstanding (whether or not then due and
payable) shall not exceed $0; (b) no Letter of Credit shall have an expiry date
which is later than the Stated Expiry Date or one year following the date of
issuance thereof; and (c) Lender shall be under no obligation to incur any
Letter of Credit Obligation if after giving effect to the incurrence of such
Letter of Credit Obligation, the Net Borrowing Availability would be less than
zero. The maximum amount payable in respect of each Letter of Credit requested
by Borrower will be guaranteed by Lender in favor of the issuing bank under
terms of a separate agreement between Lender and the issuing bank. Borrower will
enter into an application and agreement for such Letter of Credit with the
issuing bank selected by Lender. The bank that issues any Letter of Credit
pursuant to this Agreement shall be determined by Lender in its sole discretion.
2. The notice to be provided to Lender requesting that Lender incur Letter of
Credit Obligations shall be in the form of a Letter of Credit application in the
form customarily employed by the issuing bank, together with a written request
by Borrower and the bank that Lender approve Borrower's application. Upon
receipt of such notice Lender shall establish a reserve against the Borrowing
Availability in the amount of 100% of the face amount of the Letter of Credit
Obligation to be incurred. Approval by Lender in the written form agreed upon
between Lender and the issuing bank (a) will authorize the bank to issue the
requested Letter of Credit, and (b) will conclusively establish the existence of
the Letter of Credit Obligation as of the date of such approval.
3. In the event that Lender shall make any payment on or pursuant to any Letter
of Credit Obligation, Borrower shall be unconditionally obligated to reimburse
Lender therefor, and such payment shall then be deemed to constitute a Revolving
Credit Advance. For purposes of computing interest under SECTION 1.5, a
Revolving Credit Advance made in satisfaction of a Letter of Credit Obligation
shall be deemed to have been made as of the date on which the issuer or endorser
makes the related payment under the underlying Letter of Credit.
4. In the event that any Letter of Credit Obligations, whether or not then due
or payable, shall for any reason be outstanding on the Commitment Termination
Date, Borrower will either (a) cause the underlying Letter of Credit to be
returned and canceled and each corresponding Letter of Credit Obligation to be
terminated, or (b) pay to Lender, in immediately available funds, an amount
equal to 105% of the maximum amount then available to be drawn under all Letters
of Credit not so returned and canceled to be held by Lender as cash collateral
in an account under the exclusive dominion and control of Lender, (the "Cash
Collateral Account").
5. In the event that Lender shall incur any Letter of Credit Obligations,
Borrower agrees to pay the Letter of Credit Fee to Lender as compensation to
Lender for incurring such Letter of Credit Obligations. In addition, Borrower
shall reimburse Lender for all fees and charges paid by Lender on account of any
such Letters of Credit or Letter of Credit Obligations to the issuing bank.
6. Borrower's Obligations to Lender with respect to any Letter of Credit or
Letter of Credit Obligation shall be evidenced by Lender's records and shall be
absolute, unconditional and irrevocable and shall not be affected, modified or
impaired by (a) any lack of validity or enforceability of the transactions
contemplated by or related to such Letter of Credit or Letter of Credit
Obligation; (b) any amendment or waiver of or consent to depart from all or any
of the terms of the transactions contemplated by or related to such Letter of
Credit or Letter of Credit Obligation; (c) the existence of any claim, set-off,
defense or other right which Borrower or any other Credit Party may have against
Lender, the issuer or beneficiary of such Letter of Credit, or any other Person,
whether in connection with this Agreement, any other Loan Document or such
Letter of Credit or the transactions contemplated thereby or any unrelated
transactions; or (d) the fact that any draft, affidavit, letter, certificate,
invoice, bill of lading or other document presented under or delivered in
connection with such Letter of Credit or any other Letter of Credit proves to
have been forged, fraudulent, invalid or insufficient in any respect or any
statement therein proves to have been untrue or incorrect in any respect.
7. In addition to any other indemnity obligations which Borrower may have to
Lender under this Agreement and without limiting such other indemnification
provisions, Borrower hereby agrees to indemnify Lender from and to hold Lender
harmless against any and all claims, liabilities, losses, costs and expenses
(including, attorneys' fees and expenses) which Lender may (other than as a
result of its own gross negligence or willful misconduct) incur or be subject to
as a consequence, directly or indirectly, of (a) the issuance of or payment of
or failure to pay under any Letter of Credit or Letter of Credit Obligation or
(b) any suit, investigation or proceeding as to which Lender is or may become a
party as a consequence, directly or indirectly, of the issuance of any Letter of
Credit, the incurring of any Letter of Credit Obligation or any payment of or
failure to pay under any Letter of Credit or Letter of Credit Obligation. The
obligations of Borrower under this paragraph shall survive any termination of
this Agreement and the payment in full of the Obligations.
8. Borrower hereby assumes all risks of the acts, omissions or misuse of each
Letter of Credit by the beneficiary or issuer thereof and, in connection
therewith, Lender shall not be responsible (a) for the validity, sufficiency,
genuineness or legal effect of any document submitted in connection with any
drawing under any Letter of Credit even if it should in fact prove in any
respect to be invalid, insufficient, inaccurate, untrue, fraudulent or forged;
(b) for the validity or sufficiency of any instrument transferring or assigning
or purporting to transfer or assign any Letter of Credit or any rights or
benefits thereunder or any proceeds thereof, in whole or in part, even if it
should prove to be invalid or ineffective for any reason; (c) for the failure of
any issuer or beneficiary of any Letter of Credit to comply fully with the terms
thereof, including the conditions required in order to effect or pay a drawing
thereunder; (d) for any errors, omissions, interruptions or delays in
transmission or delivery of any messages, by mail, telecopy, telex or otherwise;
(e) for any loss or delay in the transmission or otherwise of any document or
draft required in order to make a drawing under any Letter of Credit; or (f) for
any consequences arising from causes beyond the direct control of Lender.
<PAGE>
SCHEDULE D - CASH MANAGEMENT
Borrower agrees to establish, and to maintain, until the Termination Date, the
cash management system described below:
1. No Corporate Credit Party: (i) shall (nor shall it permit any of its
Subsidiaries to) open or maintain any deposit, checking, operating or other bank
account, or similar money handling account, with any bank or other financial
institution except for those accounts identified in Attachment I hereto (to
include a petty cash account not to exceed $5000 during any Fiscal Month, and a
payroll account not to exceed an amount equal to one regular payroll at any
time); and (ii) shall close or permit to be closed any of the accounts listed in
ATTACHMENT I hereto, in each case without Lender's prior written consent, and
then only after such Credit Party has implemented agreements with such bank or
financial institution and Lender acceptable to Lender.
2. Commencing on the Closing Date and until the Termination Date, each Corporate
Credit Party shall deposit or, if directed by Lender, cause to be deposited
directly, in either case on the date of receipt thereof, all cash, checks,
notes, drafts or other similar items relating to or constituting proceeds of or
payments made in respect of any and all Collateral into blocked accounts in such
Credit Party's or Lender's name (collectively, the "BLOCKED ACCOUNTS") set forth
in paragraph 1 of ATTACHMENT I hereto.
3. On or before the Closing Date, each bank at which the Blocked Accounts are
held shall have entered into tri-party blocked account agreements (the "BLOCKED
ACCOUNT AGREEMENTS") with Lender and the applicable Credit Party, in form and
substance acceptable to Lender. Each such Blocked Account Agreement shall
provide, among other things, that (a) such bank executing such agreement has no
rights of setoff or recoupment or any other claim against such Blocked Account,
other than for payment of its service fees and other charges directly related to
the administration of such account, and (b) such bank agrees to sweep on a daily
basis all amounts in the Blocked Account to the Collection Account or such other
account as Lender shall designate in writing.
4. On the Closing Date, (a) the blocked account arrangements shall immediately
become operative at the banks at which the Blocked Accounts are maintained, and
(b) amounts outstanding under the Revolving Credit Loan (for purposes of the
Borrowing Availability) shall be reduced through daily sweeps, by wire transfer,
of the Blocked Accounts into the Collection Account. Borrower acknowledges that
it shall have no right to gain access to any of the moneys in the Blocked
Accounts until after the Termination Date.
5. Borrower may maintain, in its name, accounts (the "DISBURSEMENT ACCOUNTS") at
a bank or banks acceptable to Lender into which Lender shall, from time to time,
deposit proceeds of Revolving Credit Advances made pursuant to Section 1.1 for
use solely in accordance with the provisions of Section 1.3. All of the
Disbursement Accounts as of the Closing Date are listed in paragraph 2 of
Attachment I hereto.
6. Upon the request of Lender, each Corporate Credit Party shall forward to
Lender, on a daily basis, evidence of the deposit of all items of payment
received by such Credit Party into the Blocked Accounts and copies of all such
checks and other items, together with a statement showing the application of
those items relating to payments on Accounts to outstanding Accounts and a
collection report with regard thereto in form and substance satisfactory to
Lender.
7. Commencing on the Closing Date and until the Termination Date, each Corporate
Credit Party shall deposit all amounts received by such Corporate Credit Party
in Canadian dollars in the Blocked Account located at Toronto Dominion Bank (the
"Canada Blocked Account"). All amounts in the Canada Blocked Account will be
swept on a daily basis to an account of Lender located in Canada which Lender
designates in writing as a collection account for such purpose (such account,
the "Canada Collection Account"). Amounts outstanding under the Revolving Credit
Loan (for purposes of the Borrowing Availability) shall be reduced by the Dollar
Equivalent of the amounts received in the Canada Collection Account. As used
herein the term "Dollar Equivalent" shall mean the amount of lawful money of the
United States of America obtained by converting the amount of Canadian dollars
into lawful money of the United States of America at the rate calculated by
Lender commonly known as Lender's P&L rate for the purchase of lawful money of
the United States of America with such Canadian dollars, on the date of
determination thereof.
<PAGE>
SCHEDULE E - FEES
1. UNUSED LINE FEE: For each day from the Closing Date, and through but
including the Termination Date, an amount equal to the Maximum Amount less the
Revolving Credit Loan for such day multiplied by .25%, the product of which is
then divided by 360 (the "Unused Line Fee"). The Unused Line Fee for each month
(except for the month in which the Termination Date occurs) is payable on the
first day of each calendar month following the Closing Date; the final monthly
installment of the Unused Line Fee is payable on the Termination Date.
Notwithstanding the foregoing, any unpaid Unused Line Fee is immediately due and
payable on the Commitment Termination Date.
2. LETTER OF CREDIT FEE: For each day for which Lender maintains Letter of
Credit Obligations outstanding, an amount equal to the amount of the Letter of
Credit Obligations outstanding on such day, multiplied by N/A, the product of
which is then divided by 360 (the "Letter of Credit Fee"). The Letter of Credit
Fee incurred for each month is payable at the same time each payment of the
Unused Line Fee is due. Notwithstanding the foregoing, any unpaid Letter of
Credit Fee is immediately due and payable on the Commitment Termination Date.
3. CLOSING FEE; COLLATERAL MONITORING FEE: A non-refundable closing fee of
$15,000, payable at closing (the "Closing Fee"). A non-refundable annual
collateral monitoring fee of $10,000 (the "Collateral Monitoring Fee") payable
in advance on the Closing Date and on each anniversary of the Closing Date.
4. MINIMUM LOAN FEE: For each month in which the average daily outstanding
balance of the Revolving Credit Loan for such month is less than $1,000,000 (the
"Minimum Loan Amount"), an amount equal to the Minimum Loan Amount less the
actual average outstanding amount of the Revolving Credit Loan for such month
multiplied by the Revolving Credit Rate, the product of which is then divided by
360 (the "Minimum Loan Fee"). The Minimum Loan Fee for each month (except for
the month in which the Termination Date occurs) is payable on the first day of
each calendar month following the Closing Date and on the Termination Date.
Notwithstanding the foregoing, any unpaid Minimum Loan Fee is immediately due
and payable on the Commitment Termination Date.
5. PREPAYMENT FEE:
For the Revolving Credit Loan, an amount equal to the Maximum Amount multiplied
by:
3% if Lender's obligation to make further Revolving Credit Advances or
incur additional Letter of Credit Obligations is terminated (voluntarily by
Borrower, upon Default or otherwise) on or after the Closing Date and on or
before the first anniversary of the Closing Date, payable on the Commitment
Termination Date; or
2% if Lender's obligation to make further Revolving Credit Advances or
incur additional Letter of Credit Obligations is terminated (voluntarily by
Borrower, upon Default or otherwise) after the first anniversary of the Closing
Date and on or before the second anniversary of the Closing Date, payable on the
Commitment Termination Date.
Borrower acknowledges and agrees that (i) it would be difficult or impractical
to calculate Lender's actual damages from early termination of Lender's
obligation to make further Revolving Credit Advances and incur additional Letter
of Credit Obligations for any reason pursuant to Section 1.2(c) or Section 7.2
or Borrower's prepayment in whole or in part of the Loan, (ii) the Prepayment
Fees provided above are intended to be fair and reasonable approximations of
such damages, and (iii) the Prepayment Fees are not intended to be penalties.
6. AUDIT FEES: Borrower will reimburse Lender at the rate of $600 per person per
day, plus out of pocket expenses, for the audit reviews, field examinations and
collateral examinations.
<PAGE>
SCHEDULE G
FINANCIAL COVENANTS
1. MINIMUM EBITDA. Sentry and its Subsidiaries on a consolidated basis shall
maintain at the end of each fiscal period set forth below, an EBITDA of not less
than the amount set opposite such fiscal period below:
FISCAL PERIOD MINIMUM EBITDA
- -------------------------------------------------------------------------------
January 1, 1998 - March 31, 1998 $185,000
- -------------------------------------------------------------------------------
January 1, 1998 - June 30, 1998 $750,000
- -------------------------------------------------------------------------------
January 1, 1998 - September 30, 1998 $1,600,000
- -------------------------------------------------------------------------------
January 1, 1998 - December 31, 1998 $3,000,000
- -------------------------------------------------------------------------------
April 1, 1998 - March 31, 1999 $3,700,000
- -------------------------------------------------------------------------------
July 1, 1998 - June 30, 1999 $4,100,000
- -------------------------------------------------------------------------------
October 1, 1998 - Septembeer 30, 1999 $4,200,000
- -------------------------------------------------------------------------------
January 1, 1999 - December 31, 1999 $4,000,000
- -------------------------------------------------------------------------------
2. MINIMUM NET WORTH. Sentry and its Subsidiaries on a consolidated basis shall
maintain at all times Net Worth of Sentry and its Subsidiaries on a consolidated
basis of not less than $25,000,000.
3. CAPITAL EXPENDITURES. Sentry and its Subsidiaries on a consolidated basis
shall not make aggregate Capital Expenditures in any Fiscal Year in excess of $
1,000,000.
4. WORKING CAPITAL RATIO. Sentry and its Subsidiaries on a consolidating and
consolidated basis shall maintain a Working Capital Ratio not greater than 4.5
to 1.0.
As used in this Agreement (including this Schedule G covenant), the following
terms shall have the following meanings:
"EBITDA" shall mean, for any period, the Net Income (Loss) of Sentry and its
Subsidiaries on a consolidated basis for such period, PLUS interest expense, tax
expense, amortization expense, depreciation expense and extraordinary losses and
MINUS extraordinary gains, in each case, of Sentry and its Subsidiaries on a
consolidated basis for such period determined in accordance with GAAP to the
extent included in the determination of such Net Income (Loss).
"NET INCOME (LOSS)" shall mean with respect to any Person and for any period,
the aggregate net income (or loss) after taxes of such Person for such period,
determined in accordance with GAAP.
"NET WORTH" shall mean, with respect to any Person, at any date, the total
assets (excluding any assets attributable to any issuances by such Person of any
Stock after the Closing Date) minus the total liabilities, in each case, of such
Person at such date determined in accordance with GAAP.
"WORKING CAPITAL RATIO" shall mean, with respect to any Person, at any date,
accounts receivable and inventory divided by accounts payable and accrued
expenses, in each case, of such Person at such date determined in accordance
with GAAP.
<PAGE>
EXHIBIT F
FORM OF REVOLVING CREDIT NOTE
$8,000,000 as of December 31, 1997
New York, New York
For value received, the receipt and sufficiency of which are hereby
acknowledged, KNOGO NORTH AMERICA INC., a Delaware corporation ("Borrower"),
hereby promises to pay to the order of GENERAL ELECTRIC CAPITAL CORPORATION, a
New York corporation ("Lender"), $8,000,000 or such greater or lesser amount as
shall be advanced by Lender from time to time, together with interest on the
unpaid balance of such amount from the date of the initial Revolving Credit
Advance. This Note is the Revolving Credit Note issued under the Loan and
Security Agreement between Borrower and Lender of even date herewith (said
agreement, as the same may be amended, restated or supplemented from time to
time, being herein called the "Agreement") to which a reference is made for a
statement of all of the terms and conditions of the Loan evidenced hereby.
Capitalized terms not defined in this Note shall have the respective meanings
assigned to them in the Agreement. This Note is secured by the Agreement, the
other Loan Documents and the Collateral, and is entitled to the benefit of the
rights and security provided thereby.
Interest on the outstanding principal balance under this Note is payable at the
Revolving Credit Rate, or, under the circumstances contemplated by the
Agreement, at the Default Rate, in immediately available United States Dollars
at the time and in the manner specified in the Agreement. The outstanding
principal and interest under this Note shall be immediately due and payable on
the Commitment Termination Date. Payments received by Lender shall be applied
against principal and interest as provided for in the Agreement. Borrower
acknowledges that (a) Lender is authorized under the Agreement to charge to the
Revolving Credit Loan unpaid Obligations of Borrower to Lender, (b) the
principal amount of the Revolving Credit Loan will be increased by such amounts,
and (c) the principal, as so increased, will bear interest as provided for
herein and in the Agreement.
To the fullest extent permitted by applicable law, Borrower waives: (a)
presentment, demand and protest, and notice of presentment, dishonor, intent to
accelerate, acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all of the Obligations,
the Loan Documents or this Note; (b) all rights to notice and a hearing prior to
Lender's taking possession or control of, or to Lender's replevy, attachment or
levy upon, the Collateral or any bond or security that might be required by any
court prior to allowing Lender to exercise any of its remedies; and (c) the
benefit of all valuation, appraisal and exemption laws.
Borrower acknowledges that this Note is executed as part of a commercial
transaction and that the proceeds of this Note will not be used for any personal
or consumer purpose.
Upon the occurrence of any one or more of the Events of Default specified in the
Agreement, all amounts then remaining unpaid on this Note shall become, or may
be declared to be, immediately due and payable, all as provided therein.
Borrower agrees to pay to Lender all Fees and expenses described in the
Agreement.
BORROWER ACKNOWLEDGES THAT BORROWER HAS WAIVED THE RIGHT TO TRIAL BY
JURY IN ANY ACTION OR PROCEEDING ON THIS NOTE. THIS NOTE IS GOVERNED
BY THE LAW OF THE STATE OF NEW YORK.
KNOGO NORTH AMERICA INC.
By:__________________________
Name:
Title:
<PAGE>
EXHIBIT M
GUARANTEE
GUARANTEE, dated as of December 31, 1997,
made by _____________________ (the "GUARANTOR"),
in favor of GENERAL ELECTRIC CAPITAL CORPORATION,
as Lender (the "LENDER") under the Loan Agreement
referred to below.
W I T N E S S E T H:
WHEREAS, pursuant to the Loan and Security Agreement dated as of even
date herewith (as the same may be amended, supplemented, restated or otherwise
modified from time to time, the "LOAN Agreement") between Knogo North America
Inc. (the "BORROWER") and Lender, the Lender has agreed to make extensions of
credit to the Borrower upon the terms and subject to the conditions set forth
therein;
WHEREAS, it is a condition precedent to the effectiveness of the Loan
Agreement that the Guarantor guarantee payment and performance of the Borrower's
obligations under the Loan Agreement and the other Loan Documents;
WHEREAS, [Guarantor owns all of the issued and outstanding stock of
Borrower] [Guarantor will receive a portion of the proceeds of the loans made
under the Loan Agreement and will derive substantial benefit from the making of
the loans under the Loan Agreement] [Guarantor is engaged in a related business
with Borrower and will derive substantial benefit from the making of the loans
under the Loan Agreement]
NOW, THEREFORE, to induce the Lender to enter into the Loan Agreement
and to induce the Lender to make its extensions of credit to the Borrower under
the Loan Agreement and for other consideration the receipt and sufficiency of
which is hereby acknowledged, the Guarantor hereby agrees with the Lender as
follows:
1. DEFINED TERMS. (a) Unless otherwise defined herein, terms defined
in the Loan Agreement and used herein shall have the meanings given to them in
the Loan Agreement.
(b) As used herein, "OBLIGATIONS" shall mean all loans, advances,
debts, expense reimbursement, fees, liabilities, and obligations, for the
performance of covenants, tasks or duties or for payment of monetary amounts
(whether or not such performance is then required or contingent, or amounts are
liquidated or determinable) owing by Borrower and any other Credit Party to
Lender, of any kind or nature, present or future, whether or not evidenced by
any note, agreement or other instrument, whether arising under any of the Loan
Documents or under any other agreement between Borrower, such Credit Party and
Lender, and all covenants and duties regarding such amounts. This term includes
all principal, interest (including interest accruing at the then applicable rate
provided in the Loan Agreement after the maturity of the Loans and interest
accruing at the then applicable rate provided in the Loan Agreement after the
filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, whether or not a claim for post-filing or
post- petition interest is allowed in such proceeding), Fees, Charges, expenses,
attorneys' fees and any other sum chargeable to Borrower or any other Credit
Party under any of the Loan Documents, and all principal and interest due in
respect of the Loans and all obligations and liabilities of the Guarantor under
this Guarantee.
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Guarantee shall refer to this Guarantee as a whole and
not to any particular provision of this Guarantee, and section and paragraph
references are to this Guarantee unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2. GUARANTEE. (a) The Guarantor hereby unconditionally and irrevocably
guarantees to the Lender and its successors, indorses, transferees and assigns,
the prompt and complete payment and performance by the Borrower when due
(whether at the stated maturity, by acceleration or otherwise) of the
Obligations.
(b) The Guarantor further agrees to pay any and all expenses
(including, without limitation, all fees and disbursements of counsel) which may
be paid or incurred by the Lender in enforcing, or obtaining advice of counsel
in respect of, any rights with respect to, or collecting, any or all of the
Obligations and/or enforcing any rights with respect to, or collecting against,
the Guarantor under this Guarantee.
(c) The Guarantor agrees that the Obligations may at any time and from
time to time exceed the amount of the liability of the Guarantor hereunder
without impairing this Guarantee or affecting the rights and remedies of the
Lender hereunder.
(d) No payment or payments made by the Borrower, any other guarantor
or any other Person or received or collected by the Lender from the Borrower,
any other guarantor or any other Person by virtue of any action or proceeding or
any set-off or appropriation or application at any time or from time to time in
reduction of or in payment of the Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of the Guarantor hereunder which
shall, notwithstanding any such payment or payments, other than payments made by
the Guarantor in respect of the Obligations or payments received or collected
from the Guarantor in respect of the Obligations, remain liable for the
Obligations hereunder until the Obligations are indefeasibly paid in full.
(e) The Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to the Lender on account of its liability
hereunder, it will notify the Lender in writing that such payment is made under
this Guarantee for such purpose.
(f) Anything herein or in any other Loan Documents to the contrary
notwithstanding, the maximum liability of Guarantor hereunder and under the Loan
Documents shall in no event exceed the amount which can be guaranteed by
Guarantor under applicable federal and state laws relating to the insolvency of
debtors.
3. NO SUBROGATION. Notwithstanding any payment or payments made by the
Guarantor hereunder or any set-off or application of funds of the Guarantor by
the Lender, the Guarantor shall not be entitled to be subrogated to any of the
rights of the Lender against the Borrower or any other guarantor or any
collateral security or guarantee or right of offset held by the Lender for the
payment of the Obligations, nor shall the Guarantor seek or be entitled to seek
any contribution or reimbursement from the Borrower or any other Person in
respect of payments made by the Guarantor hereunder until all amounts owing to
the Lender by the Borrower on account of the Obligations are indefeasibly paid
in full. If any amount shall be paid to the Guarantor on account of such
subrogation rights at any time when all of the Obligations shall not have been
indefeasibly paid in full, such amount shall be held by the Guarantor in trust
for the Lender, segregated from other funds of the Guarantor and shall forthwith
upon receipt by the Guarantor, be turned over to the Lender in the exact form
received by the Guarantor (duly indorsed by the Guarantor to the Lender, if
required), to be applied against the Obligations, whether matured or unmatured,
in such order as the Lender may elect.
4. AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS; WAIVER OF RIGHTS.
The Guarantor shall remain obligated hereunder notwithstanding that, without any
reservation of rights against the Guarantor and without notice to or further
assent by the Guarantor, any demand for payment of any of the Obligations made
by the Lender may be rescinded and any of the Obligations continued, and the
Obligations, or the liability of any other party upon or for any part thereof,
or any collateral security or guarantee therefor or right of offset with respect
thereto, may, from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released by
the Lender, and the Loan Agreement and the other Loan Documents and any other
documents executed and delivered in connection therewith may be amended,
modified, supplemented or terminated, in whole or in part, as the Lender) may
deem advisable from time to time, and any collateral security, guarantee or
right of offset at any time held by the Lender for the payment of the
Obligations may be sold, exchanged, waived, surrendered or released. The Lender
shall not have any obligation to protect, secure, perfect or insure any Lien at
any time held by it as security for the Obligations or for this Guarantee or any
property subject thereto. When making any demand hereunder against the
Guarantor, the Lender may, but shall be under no obligation to, make a similar
demand on the Borrower or any other guarantor, and any failure by the Lender to
make any such demand or to collect any payments from the Borrower or any such
other guarantor or any release of the Borrower or such other or guarantor shall
not relieve the Guarantor of the obligations or liabilities hereunder, and shall
not impair or affect the rights and remedies, express or implied, or as a matter
of law, of the Lender against the Guarantor. For the purposes hereof "demand"
shall include the commencement and continuance of any legal proceedings.
5. GUARANTEE ABSOLUTE AND UNCONDITIONAL. The Guarantor waives any and
all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Lender upon this Guarantee
or acceptance of this Guarantee, and the Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred, or renewed,
extended, amended or waived, in reliance upon this Guarantee; and all dealings
between the Borrower and the Guarantor, on the one hand, and the Lender on the
other hand, likewise shall be conclusively presumed to have been had or
consummated in reliance upon this Guarantee. The Guarantor waives diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Borrower or the Guarantor with respect to the Obligations. The
Guarantor understands and agrees that this Guarantee shall be construed as a
continuing, absolute and unconditional guarantee of payment without regard to
(a) the validity, regularity or enforceability of the Loan Agreement, or any
other Loan Document, any of the Obligations or any other collateral security
therefor or guarantee or right of offset with respect thereto at any time or
from time to time held by the Lender (b) any defense, set-off or counterclaim
(other than a defense of payment or performance) which may at any time be
available to or be asserted by the Borrower against the Lender, or (c) any other
circumstance whatsoever (with or without notice to or knowledge of the Borrower
or the Guarantor) which constitutes, or might be construed to constitute, an
equitable or legal discharge of the Borrower for the Obligations, or of the
Guarantor under this Guarantee, in bankruptcy or in any other instance. When
pursuing its rights and remedies hereunder against any Guarantor, the Lender
may, but shall be under no obligation to, pursue such rights and remedies as it
may have against the Borrower or any other Person or against any collateral
security or guarantee for the Obligations or any right of offset with respect
thereto, and any failure by the Lender to pursue such other rights or remedies
or to collect any payments from the Borrower or any such other Person or to
realize upon any such collateral security or guarantee or to exercise any such
right of offset, or any release of the Borrower or any such other Person or any
such collateral security, guarantee or right of offset, shall not relieve the
Guarantor of any liability hereunder, and shall not impair or affect the rights
and remedies, whether express, implied or available as a matter of law, of the
Lender against the Guarantor. This Guarantee shall remain in full force and
effect and be binding in accordance with and to the extent of its terms upon the
Guarantor and the successors and assigns thereof, and shall inure to the benefit
of the Lender, and its successors, indorsees, transferees and assigns, until all
the Obligations and the obligations of the Guarantor under this Guarantee shall
have been satisfied by indefeasible payment in full in cash.
6. REINSTATEMENT. This Guarantee shall continue to be effective, or be
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations is rescinded or must otherwise be restored or returned by
the Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Borrower or the Guarantor, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Borrower or the Guarantor or any substantial part of its
property, or otherwise, all as though such payments had not been made.
7. PAYMENTS. The Guarantor hereby guarantees that payments hereunder
will be paid to the Lender without set-off or counterclaim in U.S. Dollars at
the office of the Lender located at 201 High Ridge Road, Stamford, CT 06927.
8. REPRESENTATIONS AND WARRANTIES. The Guarantor hereby represents and
warrants that:
(a) (i) it is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
the corporate power and authority and the legal right to own and operate its
property, to lease the property it operates and to conduct the business in which
it is currently engaged, (ii) it has the power and authority and the legal right
and capacity to execute and deliver, and to perform its obligations under, this
Guarantee and has taken all necessary action to authorize its execution,
delivery and performance of this Guarantee;
(b) this Guarantee constitutes a legal, valid and binding obligation
of the Guarantor enforceable in accordance with its terms, except as affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting the enforcement of creditors' rights
generally, general equitable principles and an implied covenant of good faith
and fair dealing;
(c) the execution, delivery and performance of this Guarantee will not
violate any provision of any Requirement of Law or Contractual Obligation of the
Guarantor and will not result in or require the creation or imposition of any
Lien on any of the properties or revenues of the Guarantor pursuant to any
Requirement of Law or Contractual Obligation of the Guarantor;
(d) no consent or authorization of, filing with, or other act by or in
respect of, any arbitrator or Governmental Authority and no consent of any other
Person (including, any shareholder or creditor of the Guarantor) is required in
connection with the execution, delivery, performance, validity or enforceability
of this Guarantee;
(e) no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of the
Guarantor, threatened by or against the Guarantor or against any of its
properties or revenues (1) with respect to this Guarantee or any of the
transactions contemplated hereby, (2) which could have a material adverse effect
on the business, property, or financial or other condition of the Guarantor;
(f) the statements concerning the financial condition and net worth of
Guarantor previously provided to the Lender are true and correct; there is no
event, fact, circumstance or condition known to Guarantor which is inconsistent
with such statements or is required to be disclosed in order to cause such
statements not to be misleading.
The Guarantor agrees that the foregoing representations and warranties
shall be deemed to have been made by the Guarantor on the date of each borrowing
by the Borrower under the Loan Agreement on and as of such date of borrowing as
though made hereunder on and as of such date.
9. NOTICES. All notices, requests and demands to or upon the Lender or
the Guarantor to be effective shall be in writing (or by telex, fax or similar
electronic transfer) and shall be deemed to have been duly given or made (1)
when delivered by hand or (2) if given by mail, when deposited in the mails by
certified mail, return receipt requested, or (3) if by telex, fax or similar
electronic transfer, when sent and receipt has been confirmed, addressed as
follows:
(a) if to the Lender, at its address or transmission number for
notices provided in the Loan Agreement; and (b) if to the Guarantor, at its
address or transmission number for notices set forth under its signature below.
The Lender, and the Guarantor may change their respective addresses
and transmission numbers for notices by notice in the manner provided in this
Section.
10. SEVERABILILITY. Any provision of this Guarantee which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11. INTEGRATION. This Guarantee represents the agreement of the
Guarantor with respect to the subject matter hereof and there are no promises or
representations by the Lender relative to the subject matter hereof not
reflected herein.
12. AMENDMENTS IN WRITING; NO WAIVER; CUMULATIVE REMEDIES. (a) None of
the terms or provisions of this Guarantee may be waived, amended, supplemented
or otherwise modified except by a written instrument executed by the Guarantor
and the Lender, provided that any provision of this Guarantee may be waived by
the Lender in a letter or agreement executed by the Lender or by telex or
facsimile transmission from the Lender.
(b) The Lender shall not by any act (except by a written instrument
pursuant to paragraph 12(a) hereof), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default or in any breach of any of the terms and conditions
hereof. No failure to exercise, nor any delay in exercising, on the part of the
Lender, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Lender would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
13. SECTION HEADINGS. The section headings used in this Guarantee are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
14. SUCCESSORS AND ASSIGNS. This Guarantee shall be binding upon the
successors and assigns of the Guarantor and shall inure to the benefit of the
Lender and its successors and assigns.
15. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
16. SUBMISSION TO JURISDICTION; WAIVERS. The Guarantor hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Guarantee or any other Loan Document to which it is
a party, or for recognition and enforcement of any judgment in respect thereof,
to the non-exclusive general jurisdiction of the courts of the County of New
York, State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives trial by jury and any objection that it may now or hereafter
have to the venue of any such action or proceeding in any such court or that
such action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to such Guarantor at
its address set forth under its signature below or at such other address of
which the Lender shall have been notified pursuant to Section 9; and
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction.
IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be
duly executed and delivered as of the day and year first above written.
[Guarantor]
By:
Name:
Title:
Address of Notices:
350 Wireless Blvd
Hauppauge, NY 11788 Attn:
Telephone: (516) 232-4705,
Facsimile: (516) 232-0954
<PAGE>
ATTACHMENT -1 TO SCHEDULE N-1 (Single Guarantee)
State of New York )
) ss:
County of New York )
On this 31st day of December, 1997 before me, personally came ___________ to me
known, who being duly sworn did depose and say that he is the ________________
of _____________________, the corporation described in and which executed the
above instrument, and that he signed his name thereto by order of the board of
directors of said corporation.
-------------------------------------------
Notary Public
<PAGE>
EXHIBIT M
GUARANTEE
GUARANTEE, dated as of December 31, 1997, made by _________________
(the "GUARANTOR"), in favor of GENERAL ELECTRIC CAPITAL CORPORATION, as Lender
(the "LENDER") under the Loan Agreement referred to below.
W I T N E S S E T H:
WHEREAS, pursuant to the Loan and Security Agreement dated as of even
date herewith (as the same may be amended, supplemented, restated or otherwise
modified from time to time, the "LOAN AGREEMENT") between Knogo North America
Inc. (the "BORROWER") and Lender, the Lender has agreed to make extensions of
credit to the Borrower upon the terms and subject to the conditions set forth
therein;
WHEREAS, it is a condition precedent to the effectiveness of the Loan
Agreement that the Guarantor guarantee payment and performance of the Borrower's
obligations under the Loan Agreement and the other Loan Documents;
WHEREAS, Guarantor is a wholly owned subsidiary of Borrower and will
derive substantial benefit from the making of the loans under the Loan
Agreement;
NOW, THEREFORE, to induce the Lender to enter into the Loan Agreement
and to induce the Lender to make its extensions of credit to the Borrower under
the Loan Agreement and for other consideration the receipt and sufficiency of
which is hereby acknowledged, the Guarantor hereby agrees with the Lender as
follows:
1. DEFINED TERMS. (a) Unless otherwise defined herein, terms defined
in the Loan Agreement and used herein shall have the meanings given to them in
the Loan Agreement.
(b) As used herein, "OBLIGATIONS" shall mean all loans, advances,
debts, expense reimbursement, fees, liabilities, and obligations, for the
performance of covenants, tasks or duties or for payment of monetary amounts
(whether or not such performance is then required or contingent, or amounts are
liquidated or determinable) owing by Borrower and any other Credit Party to
Lender, of any kind or nature, present or future, whether or not evidenced by
any note, agreement or other instrument, whether arising under any of the Loan
Documents or under any other agreement between Borrower, such Credit Party and
Lender, and all covenants and duties regarding such amounts. This term includes
all principal, interest (including interest accruing at the then applicable rate
provided in the Loan Agreement after the maturity of the Loans and interest
accruing at the then applicable rate provided in the Loan Agreement after the
filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, whether or not a claim for post-filing or
post-petition interest is allowed in such proceeding), Fees, Charges, expenses,
attorneys' fees and any other sum chargeable to Borrower or any other Credit
Party under any of the Loan Documents, and all principal and interest due in
respect of the Loans and all obligations and liabilities of the Guarantor under
this Guarantee.
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Guarantee shall refer to this Guarantee as a whole and
not to any particular provision of this Guarantee, and section and paragraph
references are to this Guarantee unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2. GUARANTEE. (a) The Guarantor hereby unconditionally and irrevocably
guarantees to the Lender and its successors, indorses, transferees and assigns,
the prompt and complete payment and performance by the Borrower when due
(whether at the stated maturity, by acceleration or otherwise) of the
Obligations.
(b) The Guarantor further agrees to pay any and all expenses
(including, without limitation, all fees and disbursements of counsel) which may
be paid or incurred by the Lender in enforcing, or obtaining advice of counsel
in respect of, any rights with respect to, or collecting, any or all of the
Obligations and/or enforcing any rights with respect to, or collecting against,
the Guarantor under this Guarantee.
(c) The Guarantor agrees that the Obligations may at any time and from
time to time exceed the amount of the liability of the Guarantor hereunder
without impairing this Guarantee or affecting the rights and remedies of the
Lender hereunder.
(d) No payment or payments made by the Borrower, any other guarantor
or any other Person or received or collected by the Lender from the Borrower,
any other guarantor or any other Person by virtue of any action or proceeding or
any set-off or appropriation or application at any time or from time to time in
reduction of or in payment of the Obligations shall be deemed to modify, reduce,
release or otherwise affect the liability of the Guarantor hereunder which
shall, notwithstanding any such payment or payments, other than payments made by
the Guarantor in respect of the Obligations or payments received or collected
from the Guarantor in respect of the Obligations, remain liable for the
Obligations hereunder until the Obligations are indefeasibly paid in full.
(e) The Guarantor agrees that whenever, at any time, or from time to
time, it shall make any payment to the Lender on account of its liability
hereunder, it will notify the Lender in writing that such payment is made under
this Guarantee for such purpose.
(f) Anything herein or in any other Loan Documents to the contrary
notwithstanding, the maximum liability of Guarantor hereunder and under the Loan
Documents shall in no event exceed the amount which can be guaranteed by
Guarantor under applicable federal and state laws relating to the insolvency of
debtors.
3. NO SUBROGATION. Notwithstanding any payment or payments made by the
Guarantor hereunder or any set-off or application of funds of the Guarantor by
the Lender, the Guarantor shall not be entitled to be subrogated to any of the
rights of the Lender against the Borrower or any other guarantor or any
collateral security or guarantee or right of offset held by the Lender for the
payment of the Obligations, nor shall the Guarantor seek or be entitled to seek
any contribution or reimbursement from the Borrower or any other Person in
respect of payments made by the Guarantor hereunder until all amounts owing to
the Lender by the Borrower on account of the Obligations are indefeasibly paid
in full. If any amount shall be paid to the Guarantor on account of such
subrogation rights at any time when all of the Obligations shall not have been
indefeasibly paid in full, such amount shall be held by the Guarantor in trust
for the Lender, segregated from other funds of the Guarantor and shall forthwith
upon receipt by the Guarantor, be turned over to the Lender in the exact form
received by the Guarantor (duly indorsed by the Guarantor to the Lender, if
required), to be applied against the Obligations, whether matured or unmatured,
in such order as the Lender may elect.
4. AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS; WAIVER OF RIGHTS.
The Guarantor shall remain obligated hereunder notwithstanding that, without any
reservation of rights against the Guarantor and without notice to or further
assent by the Guarantor, any demand for payment of any of the Obligations made
by the Lender may be rescinded and any of the Obligations continued, and the
Obligations, or the liability of any other party upon or for any part thereof,
or any collateral security or guarantee therefor or right of offset with respect
thereto, may, from time to time, in whole or in part, be renewed, extended,
amended, modified, accelerated, compromised, waived, surrendered or released by
the Lender, and the Loan Agreement and the other Loan Documents and any other
documents executed and delivered in connection therewith may be amended,
modified, supplemented or terminated, in whole or in part, as the Lender) may
deem advisable from time to time, and any collateral security, guarantee or
right of offset at any time held by the Lender for the payment of the
Obligations may be sold, exchanged, waived, surrendered or released. The Lender
shall not have any obligation to protect, secure, perfect or insure any Lien at
any time held by it as security for the Obligations or for this Guarantee or any
property subject thereto. When making any demand hereunder against the
Guarantor, the Lender may, but shall be under no obligation to, make a similar
demand on the Borrower or any other guarantor, and any failure by the Lender to
make any such demand or to collect any payments from the Borrower or any such
other guarantor or any release of the Borrower or such other or guarantor shall
not relieve the Guarantor of the obligations or liabilities hereunder, and shall
not impair or affect the rights and remedies, express or implied, or as a matter
of law, of the Lender against the Guarantor. For the purposes hereof "demand"
shall include the commencement and continuance of any legal proceedings.
5. GUARANTEE ABSOLUTE AND UNCONDITIONAL. The Guarantor waives any and
all notice of the creation, renewal, extension or accrual of any of the
Obligations and notice of or proof of reliance by the Lender upon this Guarantee
or acceptance of this Guarantee, and the Obligations, and any of them, shall
conclusively be deemed to have been created, contracted or incurred, or renewed,
extended, amended or waived, in reliance upon this Guarantee; and all dealings
between the Borrower and the Guarantor, on the one hand, and the Lender on the
other hand, likewise shall be conclusively presumed to have been had or
consummated in reliance upon this Guarantee. The Guarantor waives diligence,
presentment, protest, demand for payment and notice of default or nonpayment to
or upon the Borrower or the Guarantor with respect to the Obligations. The
Guarantor understands and agrees that this Guarantee shall be construed as a
continuing, absolute and unconditional guarantee of payment without regard to
(a) the validity, regularity or enforceability of the Loan Agreement, or any
other Loan Document, any of the Obligations or any other collateral security
therefor or guarantee or right of offset with respect thereto at any time or
from time to time held by the Lender (b) any defense, set-off or counterclaim
(other than a defense of payment or performance) which may at any time be
available to or be asserted by the Borrower against the Lender, or (c) any other
circumstance whatsoever (with or without notice to or knowledge of the Borrower
or the Guarantor) which constitutes, or might be construed to constitute, an
equitable or legal discharge of the Borrower for the Obligations, or of the
Guarantor under this Guarantee, in bankruptcy or in any other instance. When
pursuing its rights and remedies hereunder against any Guarantor, the Lender
may, but shall be under no obligation to, pursue such rights and remedies as it
may have against the Borrower or any other Person or against any collateral
security or guarantee for the Obligations or any right of offset with respect
thereto, and any failure by the Lender to pursue such other rights or remedies
or to collect any payments from the Borrower or any such other Person or to
realize upon any such collateral security or guarantee or to exercise any such
right of offset, or any release of the Borrower or any such other Person or any
such collateral security, guarantee or right of offset, shall not relieve the
Guarantor of any liability hereunder, and shall not impair or affect the rights
and remedies, whether express, implied or available as a matter of law, of the
Lender against the Guarantor. This Guarantee shall remain in full force and
effect and be binding in accordance with and to the extent of its terms upon the
Guarantor and the successors and assigns thereof, and shall inure to the benefit
of the Lender, and its successors, indorsees, transferees and assigns, until all
the Obligations and the obligations of the Guarantor under this Guarantee shall
have been satisfied by indefeasible payment in full in cash.
6. REINSTATEMENT. This Guarantee shall continue to be effective, or be
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations is rescinded or must otherwise be restored or returned by
the Lender upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Borrower or the Guarantor, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, the Borrower or the Guarantor or any substantial part of its
property, or otherwise, all as though such payments had not been made.
7. PAYMENTS. The Guarantor hereby guarantees that payments hereunder
will be paid to the Lender without set-off or counterclaim in U.S. Dollars at
the office of the Lender located at 201 High Ridge Road, Stamford, CT 06927.
8. REPRESENTATIONS AND WARRANTIES. The Guarantor hereby represents and
warrants that:
(a) (i) it is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation and has
the corporate power and authority and the legal right to own and operate its
property, to lease the property it operates and to conduct the business in which
it is currently engaged, (ii) it has the power and authority and the legal right
and capacity to execute and deliver, and to perform its obligations under, this
Guarantee and has taken all necessary action to authorize its execution,
delivery and performance of this Guarantee;
(b) this Guarantee constitutes a legal, valid and binding obligation
of the Guarantor enforceable in accordance with its terms, except as affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting the enforcement of creditors' rights
generally, general equitable principles and an implied covenant of good faith
and fair dealing;
(c) the execution, delivery and performance of this Guarantee will not
violate any provision of any Requirement of Law or Contractual Obligation of the
Guarantor and will not result in or require the creation or imposition of any
Lien on any of the properties or revenues of the Guarantor pursuant to any
Requirement of Law or Contractual Obligation of the Guarantor;
(d) no consent or authorization of, filing with, or other act by or in
respect of, any arbitrator or Governmental Authority and no consent of any other
Person (including, any shareholder or creditor of the Guarantor) is required in
connection with the execution, delivery, performance, validity or enforceability
of this Guarantee;
(e) no litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of the
Guarantor, threatened by or against the Guarantor or against any of its
properties or revenues (1) with respect to this Guarantee or any of the
transactions contemplated hereby, (2) which could have a material adverse effect
on the business, property, or financial or other condition of the Guarantor;
(f) the statements concerning the financial condition and net worth of
Guarantor previously provided to the Lender are true and correct; there is no
event, fact, circumstance or condition known to Guarantor which is inconsistent
with such statements or is required to be disclosed in order to cause such
statements not to be misleading.
The Guarantor agrees that the foregoing representations and warranties
shall be deemed to have been made by the Guarantor on the date of each borrowing
by the Borrower under the Loan Agreement on and as of such date of borrowing as
though made hereunder on and as of such date.
9. NOTICES. All notices, requests and demands to or upon the Lender or
the Guarantor to be effective shall be in writing (or by telex, fax or similar
electronic transfer) and shall be deemed to have been duly given or made (1)
when delivered by hand or (2) if given by mail, when deposited in the mails by
certified mail, return receipt requested, or (3) if by telex, fax or similar
electronic transfer, when sent and receipt has been confirmed, addressed as
follows:
(a) if to the Lender, at its address or transmission number for
notices provided in the Loan Agreement; and
(b) if to the Guarantor, at its address or transmission number for
notices set forth under its signature below.
The Lender, and the Guarantor may change their respective addresses and
transmission numbers for notices by notice in the manner provided in this
Section.
10. SEVERABILILITY. Any provision of this Guarantee which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11. INTEGRATION. This Guarantee represents the agreement of the
Guarantor with respect to the subject matter hereof and there are no promises or
representations by the Lender relative to the subject matter hereof not
reflected herein.
12. AMENDMENTS IN WRITING; NO WAIVER; CUMULATIVE REMEDIES. (a) None of
the terms or provisions of this Guarantee may be waived, amended, supplemented
or otherwise modified except by a written instrument executed by the Guarantor
and the Lender, provided that any provision of this Guarantee may be waived by
the Lender in a letter or agreement executed by the Lender or by telex or
facsimile transmission from the Lender.
(b) The Lender shall not by any act (except by a written instrument
pursuant to paragraph 12(a) hereof), delay, indulgence, omission or otherwise be
deemed to have waived any right or remedy hereunder or to have acquiesced in any
Default or Event of Default or in any breach of any of the terms and conditions
hereof. No failure to exercise, nor any delay in exercising, on the part of the
Lender, any right, power or privilege hereunder shall operate as a waiver
thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver by the Lender of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which the Lender would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
13. SECTION HEADINGS. The section headings used in this Guarantee are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
14. SUCCESSORS AND ASSIGNS. This Guarantee shall be binding upon the
successors and assigns of the Guarantor and shall inure to the benefit of the
Lender and its successors and assigns.
15. GOVERNING LAW. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
16. SUBMISSION TO JURISDICTION; WAIVERS. The Guarantor hereby
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this Guarantee or any other Loan Document to which it is
a party, or for recognition and enforcement of any judgment in respect thereof,
to the non-exclusive general jurisdiction of the courts of the County of New
York, State of New York, the courts of the United States of America for the
Southern District of New York, and appellate courts from any thereof;
(b) consents that any such action or proceeding may be brought in such
courts and waives trial by jury and any objection that it may now or hereafter
have to the venue of any such action or proceeding in any such court or that
such action or proceeding was brought in an inconvenient court and agrees not to
plead or claim the same;
(c) agrees that service of process in any such action or proceeding
may be effected by mailing a copy thereof by registered or certified mail (or
any substantially similar form of mail), postage prepaid, to such Guarantor at
its address set forth under its signature below or at such other address of
which the Lender shall have been notified pursuant to Section 9; and
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction.
IN WITNESS WHEREOF, the undersigned has caused this Guarantee to be
duly executed and delivered as of the day and year first above written.
[Guarantor]
By:
Name:
Title:
Address of Notices:
350 Wireless Blvd
Hauppauge, NY 11788
Attn: Peter J. Mundy
Telephone: (516) 232-4705
Facsimile: (516) 232-0954
<PAGE>
TRADEMARK SECURITY AGREEMENT
THIS TRADEMARK SECURITY AGREEMENT ("Agreement") is made as of the 31st
day of December, 1997, by and between KNOGO NORTH AMERICA INC., a Delaware
corporation ("Borrower") and GENERAL ELECTRIC CAPITAL CORPORATION ("Lender").
BACKGROUND
Lender, Borrower and various other credit parties are parties to a
Loan and Security Agreement dated as of the date hereof (as the same may
hereafter be amended, modified, restated or supplemented from time to time, the
"Loan Agreement") pursuant to which Lender may, from time to time, extend
financial accommodations to Borrower.
To secure Borrower's obligations to Lender under the Loan Agreement,
Borrower granted Lender a security interest in substantially of its assets,
including, without limitation, the Trademarks, Trademark Licenses and the
Collateral (each as defined below).
In order to induce Lender to provide Borrower the financial
accommodations described in the Loan Agreement, Borrower has agreed to execute
this Agreement to create in benefit of Lender a secured and protected interest
in the Trademarks, the Trademark Licenses and the Collateral.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Borrower
and Lender hereby agree as follows:
1. DEFINITIONS.
(a) Unless otherwise defined herein, each capitalized term used herein
that is not defined shall have the meaning given to such term in the Loan
Agreement.
(b) The words "hereof", "herein", "hereunder" and words of like import
when used in this Agreement shall refer to this Agreement and section references
are to this Agreement unless otherwise specified.
(c) All terms defined in this Agreement in the singular shall have
comparable meanings when used in the plural, and VICE VERSA, unless otherwise
specified.
2. RIGHTS AND REMEDIES. The rights and remedies of Lender with respect
to the security interest granted hereby are without prejudice to and are in
addition to those set forth in the Loan Agreement, all terms and provisions of
which are incorporated herein by reference.
3. GRANT OF SECURITY INTEREST. To secure the complete and timely
payment, performance and satisfaction of all of the Obligations, Borrower hereby
grants, pledges, assigns, transfers and conveys to Lender, a mortgage and
continuing security interest and collateral assignment, among other things, in
all of its right, title and interest now owned or hereinafter acquired whether
by assignment or otherwise in and to:
(a) All trademarks, registered trademarks, trademark applications,
service marks, registered service marks and service mark
applications, including, without limitation, the trademarks,
registered trademarks, trademark applications, service marks,
registered service marks and service mark applications listed on
SCHEDULE A attached hereto ---------- and made a part hereof, and
(i) all renewals thereof, (ii) all income, royalties, damages and
payments now and hereafter due and/or payable under and with
respect thereto, including, without limitation, payments under
all licenses entered into in connection therewith and damages and
payments for past or future infringements or dilutions thereof,
(iii) the goodwill of Borrower's business symbolized by the
foregoing and connected therewith, and (iv) all of Borrower's
rights corresponding thereto throughout the world (all of the
foregoing collectively, the "Trademarks");
(b) All license agreements with any other Person entered into in
connection with any Trademark or such other Person's trademarks
or trademark registrations or applications, whether Borrower is a
licensor or licensee under any such license agreement including,
without limitation, the license agreements listed on SCHEDULE B
and all ---------- tangible property covered by any of the
licenses (collectively, the "Trademark Licenses"); and
(c) Any and all Proceeds of the foregoing including, without
limitation, license royalties and proceeds of infringement suits,
the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all
renewals and extensions thereof.
All of the foregoing are collectively referred to as the "Collateral".
4. REPRESENTATIONS AND WARRANTIES. As long as this Agreement remains
in effect, Borrower covenants, represents and warrants that: (a) the Trademarks
are subsisting and have not been adjudged invalid or unenforceable; (b) Borrower
has used, and will continue to use for the duration of this Agreement, proper
statutory notice, where appropriate, in connection with its use of the
Trademarks; and (c) Borrower has used, and will continue to use for the duration
of this Agreement, consistent standards of quality in its manufacture of
products sold under the Trademarks.
5. RESTRICTIONS ON FUTURE AGREEMENTS. Borrower will not, without
Lender's prior written consent, enter into any agreement including, without
limitation, any license agreement, which is inconsistent with this Agreement,
and Borrower further agrees that it will not take any action, and will use its
best efforts not to permit any action to be taken by others, including, without
limitation, licensees, or fail to take any action, which would in any respect
affect the validity or enforcement of the rights transferred to Lender under
this Agreement or the rights associated with the Collateral.
6. NEW TRADEMARKS AND TRADEMARK LICENSES. Borrower represents and
warrants that, from and after the Closing Date, (except for new Trademarks and
Trademark Licenses) as to which Borrower notifies Lender as set forth below: (a)
the Trademarks listed on SCHEDULE A include all of the Trademarks owned or held
by Borrower, (b) the Trademark Licenses listed on SCHEDULE B include all of the
trademark license agreements under which Borrower is the licensee or licensor
and (c) no liens, claims or security interests in any Collateral have been
granted by Borrower to any Person other than Lender. If, prior to the
termination of this Agreement, Borrower shall (i) obtain rights to any
Trademark, (ii) become entitled to the benefit of any Trademark whether as
licensee or licensor, or (iii) enter into any new trademark license agreement,
the provisions of this Agreement shall automatically apply thereto. Borrower
shall give to Lender written notice of events described in clauses (i), (ii) and
(iii) of the preceding sentence promptly after the occurrence thereof, but in
any event not less frequently than on a quarterly basis. Borrower authorizes
Lender upon notice to Borrower, to modify SCHEDULE A and SCHEDULE B to this
Agreement in the name of and on behalf of Borrower without obtaining Borrower's
signature to such modification in order to add any future right, title or
interest in any Trademark or Trademark License acquired by Borrower. Borrower
grants Lender a power-of-attorney, irrevocable so long as the Loan Agreement and
this Agreement are in existence, to modify this Agreement by amending SCHEDULE A
and SCHEDULE B to include any such future Trademarks or Trademark Licenses.
7. ROYALTIES. Borrower hereby agrees that the use by Lender of the
Collateral as authorized hereunder in connection with Lender's exercise of its
rights and remedies under the Loan Agreement including, without limitation, the
right to prepare for sale or distribution, sell, copy or distribute any and all
Inventory now or hereafter owned by Borrower, shall be coextensive with
Borrower's rights thereunder and with respect thereto and without any liability
for royalties or other related charges from Lender to Borrower.
8. RIGHT TO INSPECT; FURTHER ASSIGNMENTS AND SECURITY INTERESTS.
Lender may during normal business hours and upon reasonable advance notice
(unless an Event of Default has occurred and is continuing, in which event no
notice shall be required and Lender shall have access at any and all times) have
access to, examine, audit, make copies (at Borrower's expense) and extracts from
and inspect Borrower's premises and examine Borrower's books, records and
operations relating to the Collateral. Borrower agrees not to sell or assign its
interests in, or grant any license (except for licenses granted by Borrower in
connection with agreements regarding the distribution of Borrower's products)
under, the Collateral without the prior and express written consent of Lender.
9. NATURE AND CONTINUATION OF LENDER'S SECURITY INTEREST; TERMINATION
OF THE LENDER'S SECURITY INTEREST. This Agreement is made for collateral
security purposes only. This Agreement shall create a continuing security
interest in the Collateral and shall terminate only when the Obligations have
been indefeasibly paid in full in cash and the Loan Agreement has been
terminated. When this Agreement has terminated, Lender shall promptly execute
and deliver to Borrower, at Borrower's expense, all termination statements and
other instruments as may be necessary or proper to terminate Lender's security
interest in the Collateral, subject to any disposition thereof which may have
been made by Lender pursuant to this Agreement or the Loan Agreement. This
Agreement shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of the Obligations is rescinded or must otherwise be
returned upon insolvency, bankruptcy or reorganization of Borrower, all as
though such payment had not been made.
10. LENDER'S RIGHTS AND DUTIES. Lender shall not have any duty with
respect to the Collateral. Lender shall not be under any obligation to take any
steps necessary to preserve rights in the Collateral against any other Person,
but Lender may do so at its option from and after the occurrence of an Event of
Default. From and after the occurrence and during the continuance of an Event of
Default, Lender shall have the right, but shall not be obligated, to bring suit
in its own name to enforce the Trademarks and the Trademark Licenses and, if the
Lender shall commence any such suit, Borrower shall, at the request of Lender,
do any and all lawful acts and execute any and all proper documents required by
Lender in aid of such enforcement. Borrower shall, upon demand, promptly
reimburse Lender for all costs and expenses incurred by Lender in the exercise
of its rights hereunder (including, without limitation, reasonable fees and
expenses of attorneys for Lender).
11. BORROWER'S DUTIES. Borrower shall at (i) its own expense
diligently prosecute all applications for renewals of the Trademarks in the
United States Patent and Trademark Office and shall pay all fees and
disbursements in connection therewith; (ii) not abandon any of the Trademarks
that are or shall be necessary or economically desirable in the operation of
Borrower's business; and (iii) maintain in full force and effect the Trademarks
and the Trademark Licenses that are or shall be necessary or economically
desirable in the operation of Borrower's business.
12. POWER OF ATTORNEY. Borrower hereby designates, appoints and
constitutes Lender and all Persons designated by Lender as Borrower's true and
lawful attorney-in-fact and authorizes Lender and all Persons designated by
Lender, in Borrower's name, to take any and all appropriate action and to
execute any agreement or instrument which Lender may deem necessary or advisable
to accomplish the purposes of this Agreement and to carry out the terms of this
Agreement including, without limitation, (i) to endorse Borrower's name on all
applications, documents, papers and instruments necessary for Lender to use the
Trademarks, or to grant or issue any exclusive or non-exclusive license under
the Trademarks to any other Person, (ii) to assign, pledge, convey or otherwise
transfer title in or dispose of any Trademark or any Trademark License to any
Person on commercially reasonable terms, (iii) to grant or issue any exclusive
or nonexclusive license under the Trademarks or, to the extent permitted, under
the Trademark Licenses, to any Person on commercially reasonable terms and (iv)
to take any other actions necessary or incidental to the powers granted to
Lender in this Agreement or the Loan Agreement. The foregoing power of attorney
may only be exercised following the occurrence and during the continuation of an
Event of Default. This power of attorney is coupled with an interest and is
irrevocable by Borrower. Borrower hereby ratifies all that such attorney shall
lawfully do or cause to be done by virtue hereof. This power of attorney shall
be irrevocable for the life of this Agreement.
13. RECORDATION OF TRADEMARK. Borrower agrees to register and record,
and shall register and record with the United States Patent and Trademark
Office, promptly after the execution of this Agreement, all Trademarks and
Trademark Licenses listed on SCHEDULE A and SCHEDULE B that have not been
registered or recorded with the United States Patent and Trademark Office as of
the effective date of this Agreement.
14. RECORDATION OF AGREEMENT. An original signed copy of this
Agreement and/or the short form version of this Agreement shall be recorded with
the United Stated Patent and Trademark Office promptly after the execution
hereof, and promptly after the registration and recording of all new Trademarks
and Trademark Licenses. In the event that it is discovered that any Trademarks
or Trademark License on SCHEDULE A and SCHEDULE B has inadvertently not been
registered or recorded pursuant to said Trademarks or Trademark License shall
immediately be registered or recorded, and a memorandum or notice of a security
interest therein shall be promptly recorded with the United States Patent and
Trademark Office.
15. NOTICES. Any notice to be given to Lender or Borrower under this
Agreement shall be given in the manner and to the parties designated in the Loan
Agreement.
16. SUCCESSORS AND ASSIGNS This Agreement shall be binding on and
shall inure to the benefit of Borrower, Lender and their respective successors
and assigns; PROVIDED HOWEVER, Borrower may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties under this
Agreement without the prior express written consent of Lender. Any such
purported assignment, transfer, hypothecation or other conveyance by Borrower
without the prior express written consent of Lender shall be void.
17. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement and
the other Loan Documents constitute the complete agreement between the parties
with respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and may not be modified, altered or amended except by a
written agreement signed by Lender and Borrower.
18. NO WAIVER. Neither Lender's failure, at any time or times, to
require strict performance by Borrower of any provision of this Agreement, nor
Lender's failure to exercise, nor any delay in exercising, any right, power or
privilege hereunder, (a) shall waive, affect or diminish any right of Lender
thereafter to demand strict compliance and performance therewith, or (b) shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or future exercise thereof or
the exercise of any other right, power or privilege. None of the undertakings,
indemnities, agreements, warranties, covenants and representations of Borrower
to Lender contained in this Agreement shall be deemed to have been suspended or
waived by Lender, unless such waiver or suspension is by an instrument in
writing signed by an officer or other authorized employee of Lender and directed
to Borrower specifying such suspension or waiver (and then such waiver shall be
effective only to the extent therein set forth), and Lender shall not, by any
act (other than execution of a formal written waiver), delay, omission or
otherwise, be deemed to have waived any of its rights or remedies hereunder.
19. SEVERABILITY. Wherever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
20. SECTION TITLES. The section titles contained in this Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.
21. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, which shall constitute an original and collectively and
separately constitute a single instrument or agreement.
22. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA. BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT
LENDER AND BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO
BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT
THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER.
BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER
AT THE ADDRESS SET FORTH IN SCHEDULE 1.1 OF THE LOAN AGREEMENT AND THAT SERVICE
SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.
23. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE BETWEEN LENDER AND BORROWER ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. ANY
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
WITNESS: KNOGO NORTH AMERICA INC.
By:___________________________
Name: Thomas A. Nicolette
Title: President
WITNESS: GENERAL ELECTRIC CAPITAL
CORPORATION
By:___________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Knogo North America Inc., the corporation described in and
which executed the foregoing instrument, and that he signed his name thereto by
order of the board of directors of said corporation.
--------------------------
Notary Public
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument, and that
he was duly authorized to sign his name thereto.
--------------------------
Notary Public
<PAGE>
SCHEDULE A
Schedule A to a Trademark Security Agreement dated as of December 31, 1997, by
and between KNOGO NORTH AMERICA INC. and GENERAL ELECTRIC CAPITAL CORPORATION.
Reg. No. or Reg. or
APPLICATION NO. TRADEMARK COUNTRY FILING DATE
See Schedule A-1 attached hereto
<PAGE>
SCHEDULE B
Schedule B to Trademark Security Agreement dated as of December 31, 1997 by and
between KNOGO NORTH AMERICA INC. and GENERAL ELECTRIC CAPITAL CORPORATION.
<PAGE>
TRADEMARK ASSIGNMENT OF SECURITY
WHEREAS, KNOGO NORTH AMERICA INC., a corporation formed under the laws
of Delaware ("Borrower") located at 350 Wireless Boulevard, Hauppauge, New York
11788, has adopted, used and is using the marks shown in the attached SCHEDULE A
(the "Trademarks") for which there are registrations or applications in the
United States Patent and Trademark Office under the numbers shown in the
attached SCHEDULE A; and
WHEREAS, Borrower is obligated to GENERAL ELECTRIC CAPITAL CORPORATION
("Lender") located at 201 High Ridge Road, Stamford, Connecticut 06927, pursuant
to (i) a certain Loan and Security Agreement dated as of December 31, 1997 among
Lender, Borrower and various other credit parties and (ii) a certain Trademark
Security Agreement dated as December 31, 1997 made by Borrower in favor of
Lender (as amended, modified, supplemented and restated from time to time, the
"Agreements"); and
WHEREAS, pursuant to the Agreements, Borrower is granting to Lender a
security interest in the Trademarks, the goodwill of the business symbolized by
the Trademarks, and the registrations and applications therefor.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, Borrower does hereby assign unto Lender and grant to
Lender a security interest in and to the Trademarks, together with the goodwill
of the business symbolized by the Trademarks, and registrations and applications
therefor, which assignment and security interest shall secure all the
Obligations as defined in the Agreements and in accordance with the terms and
provisions thereof.
Borrower expressly acknowledges and affirms that the rights and
remedies of Lender with respect to the assignment and security interest granted
hereby are more fully set forth in the Agreements.
Dated: New York, New York
December 31, 1997
KNOGO NORTH AMERICA INC.
Witness:
By:___________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION
Witness:
By:___________________________
Name:
Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came
___________________, to me known, who, being by me duly sworn, did depose and
say that he is the _______________ of Knogo North America Inc., the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the board of directors of said corporation.
------------------------------
Notary Public
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came
______________, to me known, who, being by me duly sworn, did depose and say
that he is the Duly Authorized Signatory of General Electric Capital
Corporation, the corporation described in and which executed the foregoing
instrument; and that he was authorized to sign his name thereto on behalf of
said corporation.
------------------------------
Notary Public
<PAGE>
TRADEMARK SECURITY AGREEMENT
THIS TRADEMARK SECURITY AGREEMENT ("Agreement") is made as of the 31st
day of December, 1997, by and between SENTRY TECHNOLOGY CORPORATION, a Delaware
corporation ("Sentry") and GENERAL ELECTRIC CAPITAL CORPORATION ("GECC").
BACKGROUND
GECC, Sentry, Knogo North America Inc. ("Borrower") and various other
credit parties are parties to a Loan and Security Agreement dated as of the date
hereof (as the same may hereafter be amended, modified, restated or supplemented
from time to time, the "Loan Agreement") pursuant to which GECC may, from time
to time, extend financial accommodations to Borrower.
To secure Borrower's obligations to GECC under the Loan Agreement,
Sentry executed and delivered its guaranty of the Obligations of Borrower under
the Loan Agreement and granted GECC a security interest in substantially of its
assets, including, without limitation, the Trademarks, Trademark Licenses and
the Collateral (each as defined below).
In order to induce GECC to provide Borrower the financial
accommodations described in the Loan Agreement, Sentry has agreed to execute
this Agreement to create in benefit of GECC a secured and protected interest in
the Trademarks, the Trademark Licenses and the Collateral.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Sentry and
GECC hereby agree as follows:
1. DEFINITIONS.
(a) Unless otherwise defined herein, each capitalized term used herein
that is not defined shall have the meaning given to such term in the Loan
Agreement.
(b) The words "hereof", "herein", "hereunder" and words of like import
when used in this Agreement shall refer to this Agreement and section references
are to this Agreement unless otherwise specified.
(c) All terms defined in this Agreement in the singular shall have
comparable meanings when used in the plural, and VICE VERSA, unless otherwise
specified.
2. RIGHTS AND REMEDIES. The rights and remedies of GECC with respect
to the security interest granted hereby are without prejudice to and are in
addition to those set forth in the Loan Agreement, all terms and provisions of
which are incorporated herein by reference.
3. GRANT OF SECURITY INTEREST. To secure the complete and timely
payment, performance and satisfaction of all of the Obligations, Sentry hereby
grants, pledges, assigns, transfers and conveys to GECC, a mortgage and
continuing security interest and collateral assignment, among other things, in
all of its right, title and interest now owned or hereinafter acquired whether
by assignment or otherwise in and to:
(a) All trademarks, registered trademarks, trademark applications,
service marks, registered service marks and service mark
applications, including, without limitation, the trademarks,
registered trademarks, trademark applications, service marks,
registered service marks and service mark applications listed on
SCHEDULE A attached hereto and made a part hereof, and (i) all
renewals thereof, (ii) all income, royalties, damages and
payments now and hereafter due and/or payable under and with
respect thereto, including, without limitation, payments under
all licenses entered into in connection therewith and damages and
payments for past or future infringements or dilutions thereof,
(iii) the goodwill of Sentry's business symbolized by the
foregoing and connected therewith, and (iv) all of Sentry's
rights corresponding thereto throughout the world (all of the
foregoing collectively, the "Trademarks");
(b) All license agreements with any other Person entered into in
connection with any Trademark or such other Person's trademarks
or trademark registrations or applications, whether Sentry is a
licensor or licensee under any such license agreement including,
without limitation, the license agreements listed on SCHEDULE B
and all ---------- tangible property covered by any of the
licenses (collectively, the "Trademark Licenses"); and
(c) Any and all Proceeds of the foregoing including, without
limitation, license royalties and proceeds of infringement suits,
the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all
renewals and extensions thereof.
All of the foregoing are collectively referred to as the "Collateral".
4. REPRESENTATIONS AND WARRANTIES. As long as this Agreement remains
in effect, Sentry covenants, represents and warrants that: (a) the Trademarks
are subsisting and have not been adjudged invalid or unenforceable; (b) Sentry
has used, and will continue to use for the duration of this Agreement, proper
statutory notice, where appropriate, in connection with its use of the
Trademarks; and (c) Sentry has used, and will continue to use for the duration
of this Agreement, consistent standards of quality in its manufacture of
products sold under the Trademarks.
5. RESTRICTIONS ON FUTURE AGREEMENTS. Sentry will not, without GECC's
prior written consent, enter into any agreement including, without limitation,
any license agreement, which is inconsistent with this Agreement, and Sentry
further agrees that it will not take any action, and will use its best efforts
not to permit any action to be taken by others, including, without limitation,
licensees, or fail to take any action, which would in any respect affect the
validity or enforcement of the rights transferred to GECC under this Agreement
or the rights associated with the Collateral.
6. NEW TRADEMARKS AND TRADEMARK LICENSES. Sentry represents and
warrants that, from and after the Closing Date, (except for new Trademarks and
Trademark Licenses) as to which Sentry notifies GECC as set forth below: (a) the
Trademarks listed on SCHEDULE A include all of the Trademarks owned or held by
Sentry, (b) the Trademark Licenses listed on SCHEDULE B include all of the
trademark license agreements under which Sentry is the licensee or licensor and
(c) no liens, claims or security interests in any Collateral have been granted
by Sentry to any Person other than GECC. If, prior to the termination of this
Agreement, Sentry shall (i) obtain rights to any Trademark, (ii) become entitled
to the benefit of any Trademark whether as licensee or licensor, or (iii) enter
into any new trademark license agreement, the provisions of this Agreement shall
automatically apply thereto. Sentry shall give to GECC written notice of events
described in clauses (i), (ii) and (iii) of the preceding sentence promptly
after the occurrence thereof, but in any event not less frequently than on a
quarterly basis. Sentry authorizes GECC upon notice to Sentry, to modify
SCHEDULE A and SCHEDULE B to this Agreement in the name of and on behalf of
Sentry without obtaining Sentry's signature to such modification in order to add
any future right, title or interest in any Trademark or Trademark License
acquired by Sentry. Sentry grants GECC a power-of-attorney, irrevocable so long
as the Loan Agreement and this Agreement are in existence, to modify this
Agreement by amending SCHEDULE A and SCHEDULE B to include any such future
Trademarks or Trademark Licenses.
7. ROYALTIES. Sentry hereby agrees that the use by GECC of the
Collateral as authorized hereunder in connection with GECC's exercise of its
rights and remedies under the Loan Agreement including, without limitation, the
right to prepare for sale or distribution, sell, copy or distribute any and all
Inventory now or hereafter owned by Sentry, shall be coextensive with Sentry's
rights thereunder and with respect thereto and without any liability for
royalties or other related charges from GECC to Sentry.
8. RIGHT TO INSPECT; FURTHER ASSIGNMENTS AND SECURITY INTERESTS. GECC
may during normal business hours and upon reasonable advance notice (unless an
Event of Default has occurred and is continuing, in which event no notice shall
be required and GECC shall have access at any and all times) have access to,
examine, audit, make copies (at Sentry's expense) and extracts from and inspect
Sentry's premises and examine Sentry's books, records and operations relating to
the Collateral. Sentry agrees not to sell or assign its interests in, or grant
any license (except for licenses granted by Sentry in connection with agreements
regarding the distribution of Sentry's products) under, the Collateral without
the prior and express written consent of GECC.
9. NATURE AND CONTINUATION OF GECC'S SECURITY INTEREST; TERMINATION OF
THE GECC'S SECURITY INTEREST. This Agreement is made for collateral security
purposes only. This Agreement shall create a continuing security interest in the
Collateral and shall terminate only when the Obligations have been indefeasibly
paid in full in cash and the Loan Agreement has been terminated. When this
Agreement has terminated, GECC shall promptly execute and deliver to Sentry, at
Sentry's expense, all termination statements and other instruments as may be
necessary or proper to terminate GECC's security interest in the Collateral,
subject to any disposition thereof which may have been made by GECC pursuant to
this Agreement or the Loan Agreement. This Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
the Obligations is rescinded or must otherwise be returned upon insolvency,
bankruptcy or reorganization of Borrower or Sentry, all as though such payment
had not been made.
10. GECC'S RIGHTS AND DUTIES. GECC shall not have any duty with
respect to the Collateral. GECC shall not be under any obligation to take any
steps necessary to preserve rights in the Collateral against any other Person,
but GECC may do so at its option from and after the occurrence of an Event of
Default. From and after the occurrence and during the continuance of an Event of
Default, GECC shall have the right, but shall not be obligated, to bring suit in
its own name to enforce the Trademarks and the Trademark Licenses and, if the
GECC shall commence any such suit, Sentry shall, at the request of GECC, do any
and all lawful acts and execute any and all proper documents required by GECC in
aid of such enforcement. Sentry shall, upon demand, promptly reimburse GECC for
all costs and expenses incurred by GECC in the exercise of its rights hereunder
(including, without limitation, reasonable fees and expenses of attorneys for
GECC).
11. SENTRY'S DUTIES. Sentry shall at (i) its own expense diligently
prosecute all applications for renewals of the Trademarks in the United States
Patent and Trademark Office and shall pay all fees and disbursements in
connection therewith; (ii) not abandon any of the Trademarks that are or shall
be necessary or economically desirable in the operation of Sentry's business;
and (iii) maintain in full force and effect the Trademarks and the Trademark
Licenses that are or shall be necessary or economically desirable in the
operation of Sentry's business.
12. POWER OF ATTORNEY. Sentry hereby designates, appoints and
constitutes GECC and all Persons designated by GECC as Sentry's true and lawful
attorney-in-fact and authorizes GECC and all Persons designated by GECC, in
Sentry's name, to take any and all appropriate action and to execute any
agreement or instrument which GECC may deem necessary or advisable to accomplish
the purposes of this Agreement and to carry out the terms of this Agreement
including, without limitation, (i) to endorse Sentry's name on all applications,
documents, papers and instruments necessary for GECC to use the Trademarks, or
to grant or issue any exclusive or non-exclusive license under the Trademarks to
any other Person, (ii) to assign, pledge, convey or otherwise transfer title in
or dispose of any Trademark or any Trademark License to any Person on
commercially reasonable terms, (iii) to grant or issue any exclusive or
nonexclusive license under the Trademarks or, to the extent permitted, under the
Trademark Licenses, to any Person on commercially reasonable terms and (iv) to
take any other actions necessary or incidental to the powers granted to GECC in
this Agreement or the Loan Agreement. The foregoing power of attorney may only
be exercised following the occurrence and during the continuation of an Event of
Default. This power of attorney is coupled with an interest and is irrevocable
by Sentry. Sentry hereby ratifies all that such attorney shall lawfully do or
cause to be done by virtue hereof. This power of attorney shall be irrevocable
for the life of this Agreement.
13. RECORDATION OF TRADEMARK. Sentry agrees to register and record,
and shall register and record with the United States Patent and Trademark
Office, promptly after the execution of this Agreement, all Trademarks and
Trademark Licenses listed on SCHEDULE A and SCHEDULE B that have not been
registered or recorded with the United States Patent and Trademark Office as of
the effective date of this Agreement.
14. RECORDATION OF AGREEMENT. An original signed copy of this
Agreement and/or the short form version of this Agreement shall be recorded with
the United Stated Patent and Trademark Office promptly after the execution
hereof, and promptly after the registration and recording of all new Trademarks
and Trademark Licenses. In the event that it is discovered that any Trademarks
or Trademark License on SCHEDULE A and SCHEDULE B has inadvertently not been
registered or recorded pursuant to said Trademarks or Trademark License shall
immediately be registered or recorded, and a memorandum or notice of a security
interest therein shall be promptly recorded with the United States Patent and
Trademark Office.
15. NOTICES. Any notice to be given to GECC or Sentry under this
Agreement shall be given in the manner and to the parties designated in the Loan
Agreement.
16. SUCCESSORS AND ASSIGNS This Agreement shall be binding on and
shall inure to the benefit of Sentry, GECC and their respective successors and
assigns; PROVIDED HOWEVER, Sentry may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties under this
Agreement without the prior express written consent of GECC. Any such purported
assignment, transfer, hypothecation or other conveyance by Sentry without the
prior express written consent of GECC shall be void.
17. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement and
the other Loan Documents constitute the complete agreement between the parties
with respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and may not be modified, altered or amended except by a
written agreement signed by GECC and Sentry.
18. NO WAIVER. Neither GECC's failure, at any time or times, to
require strict performance by Sentry of any provision of this Agreement, nor
GECC's failure to exercise, nor any delay in exercising, any right, power or
privilege hereunder, (a) shall waive, affect or diminish any right of GECC
thereafter to demand strict compliance and performance therewith, or (b) shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or future exercise thereof or
the exercise of any other right, power or privilege. None of the undertakings,
indemnities, agreements, warranties, covenants and representations of Sentry to
GECC contained in this Agreement shall be deemed to have been suspended or
waived by GECC, unless such waiver or suspension is by an instrument in writing
signed by an officer or other authorized employee of GECC and directed to Sentry
specifying such suspension or waiver (and then such waiver shall be effective
only to the extent therein set forth), and GECC shall not, by any act (other
than execution of a formal written waiver), delay, omission or otherwise, be
deemed to have waived any of its rights or remedies hereunder.
19. SEVERABILITY. Wherever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
20. SECTION TITLES. The section titles contained in this Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.
21. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, which shall constitute an original and collectively and
separately constitute a single instrument or agreement.
22. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA. SENTRY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN SENTRY AND GECC PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT
GECC AND SENTRY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING
IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE GECC FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF GECC.
SENTRY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND SENTRY HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. SENTRY HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SENTRY AT THE
ADDRESS SET FORTH IN SCHEDULE 1.1 OF THE LOAN AGREEMENT AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SENTRY'S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
23. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE BETWEEN GECC AND SENTRY ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. ANY
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
WITNESS: SENTRY TECHNOLOGY CORPORATION
By:___________________________
Name: Thomas A. Nicolette
Title: President
WITNESS: GENERAL ELECTRIC CAPITAL
CORPORATION
By:___________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Sentry Technology Corporation, the corporation described in
and which executed the foregoing instrument, and that he signed his name thereto
by order of the board of directors of said corporation.
--------------------------
Notary Public
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument, and that
he was duly authorized to sign his name thereto.
--------------------------
Notary Public
<PAGE>
TRADEMARK SECURITY AGREEMENT
THIS TRADEMARK SECURITY AGREEMENT ("Agreement") is made as of the 31st
day of December, 1997, by and between VIDEO SENTRY CORPORATION, a Delaware
corporation ("Video") and GENERAL ELECTRIC CAPITAL CORPORATION ("GECC").
BACKGROUND
GECC, Video, Knogo North America Inc. ("Borrower") and various other
credit parties are parties to a Loan and Security Agreement dated as of the date
hereof (as the same may hereafter be amended, modified, restated or supplemented
from time to time, the "Loan Agreement") pursuant to which GECC may, from time
to time, extend financial accommodations to Borrower.
To secure Borrower's obligations to GECC under the Loan Agreement,
Video executed and delivered its guaranty of the Obligations of Borrower under
the Loan Agreement and granted GECC a security interest in substantially of its
assets, including, without limitation, the Trademarks, Trademark Licenses and
the Collateral (each as defined below).
In order to induce GECC to provide Borrower the financial
accommodations described in the Loan Agreement, Video has agreed to execute this
Agreement to create in benefit of GECC a secured and protected interest in the
Trademarks, the Trademark Licenses and the Collateral.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Video and
GECC hereby agree as follows:
1. DEFINITIONS.
(a) Unless otherwise defined herein, each capitalized term used herein
that is not defined shall have the meaning given to such term in the Loan
Agreement.
(b) The words "hereof", "herein", "hereunder" and words of like import
when used in this Agreement shall refer to this Agreement and section references
are to this Agreement unless otherwise specified.
(c) All terms defined in this Agreement in the singular shall have
comparable meanings when used in the plural, and VICE VERSA, unless otherwise
specified.
2. RIGHTS AND REMEDIES. The rights and remedies of GECC with respect
to the security interest granted hereby are without prejudice to and are in
addition to those set forth in the Loan Agreement, all terms and provisions of
which are incorporated herein by reference.
3. GRANT OF SECURITY INTEREST. To secure the complete and timely
payment, performance and satisfaction of all of the Obligations, Video hereby
grants, pledges, assigns, transfers and conveys to GECC, a mortgage and
continuing security interest and collateral assignment, among other things, in
all of its right, title and interest now owned or hereinafter acquired whether
by assignment or otherwise in and to:
(a) All trademarks, registered trademarks, trademark applications,
service marks, registered service marks and service mark
applications, including, without limitation, the trademarks,
registered trademarks, trademark applications, service marks,
registered service marks and service mark applications listed on
SCHEDULE A attached hereto ---------- and made a part hereof, and
(i) all renewals thereof, (ii) all income, royalties, damages and
payments now and hereafter due and/or payable under and with
respect thereto, including, without limitation, payments under
all licenses entered into in connection therewith and damages and
payments for past or future infringements or dilutions thereof,
(iii) the goodwill of Video's business symbolized by the
foregoing and connected therewith, and (iv) all of Video's rights
corresponding thereto throughout the world (all of the foregoing
collectively, the "Trademarks");
(b) All license agreements with any other Person entered into in
connection with any Trademark or such other Person's trademarks
or trademark registrations or applications, whether Video is a
licensor or licensee under any such license agreement including,
without limitation, the license agreements listed on SCHEDULE B
and all ---------- tangible property covered by any of the
licenses (collectively, the "Trademark Licenses"); and
(c) Any and all Proceeds of the foregoing including, without
limitation, license royalties and proceeds of infringement suits,
the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all
renewals and extensions thereof.
All of the foregoing are collectively referred to as the "Collateral".
4. REPRESENTATIONS AND WARRANTIES. As long as this Agreement remains
in effect, Video covenants, represents and warrants that: (a) the Trademarks are
subsisting and have not been adjudged invalid or unenforceable; (b) Video has
used, and will continue to use for the duration of this Agreement, proper
statutory notice, where appropriate, in connection with its use of the
Trademarks; and (c) Video has used, and will continue to use for the duration of
this Agreement, consistent standards of quality in its manufacture of products
sold under the Trademarks.
5. RESTRICTIONS ON FUTURE AGREEMENTS. Video will not, without GECC's
prior written consent, enter into any agreement including, without limitation,
any license agreement, which is inconsistent with this Agreement, and Video
further agrees that it will not take any action, and will use its best efforts
not to permit any action to be taken by others, including, without limitation,
licensees, or fail to take any action, which would in any respect affect the
validity or enforcement of the rights transferred to GECC under this Agreement
or the rights associated with the Collateral.
6. NEW TRADEMARKS AND TRADEMARK LICENSES. Video represents and
warrants that, from and after the Closing Date, (except for new Trademarks and
Trademark Licenses) as to which Video notifies GECC as set forth below: (a) the
Trademarks listed on SCHEDULE A include all of the Trademarks owned or held by
Video, (b) the Trademark Licenses listed on SCHEDULE B include all of the
trademark license agreements under which Video is the licensee or licensor and
(c) no liens, claims or security interests in any Collateral have been granted
by Video to any Person other than GECC. If, prior to the termination of this
Agreement, Video shall (i) obtain rights to any Trademark, (ii) become entitled
to the benefit of any Trademark whether as licensee or licensor, or (iii) enter
into any new trademark license agreement, the provisions of this Agreement shall
automatically apply thereto. Video shall give to GECC written notice of events
described in clauses (i), (ii) and (iii) of the preceding sentence promptly
after the occurrence thereof, but in any event not less frequently than on a
quarterly basis. Video authorizes GECC upon notice to Video, to modify SCHEDULE
A and SCHEDULE B to this Agreement in the name of and on behalf of Video without
obtaining Video's signature to such modification in order to add any future
right, title or interest in any Trademark or Trademark License acquired by
Video. Video grants GECC a power-of-attorney, irrevocable so long as the Loan
Agreement and this Agreement are in existence, to modify this Agreement by
amending SCHEDULE A and SCHEDULE B to include any such future Trademarks or
Trademark Licenses.
7. ROYALTIES. Video hereby agrees that the use by GECC of the
Collateral as authorized hereunder in connection with GECC's exercise of its
rights and remedies under the Loan Agreement including, without limitation, the
right to prepare for sale or distribution, sell, copy or distribute any and all
Inventory now or hereafter owned by Video, shall be coextensive with Video's
rights thereunder and with respect thereto and without any liability for
royalties or other related charges from GECC to Video.
8. RIGHT TO INSPECT; FURTHER ASSIGNMENTS AND SECURITY INTERESTS. GECC
may during normal business hours and upon reasonable advance notice (unless an
Event of Default has occurred and is continuing, in which event no notice shall
be required and GECC shall have access at any and all times) have access to,
examine, audit, make copies (at Video's expense) and extracts from and inspect
Video's premises and examine Video's books, records and operations relating to
the Collateral. Video agrees not to sell or assign its interests in, or grant
any license (except for licenses granted by Video in connection with agreements
regarding the distribution of Video's products) under, the Collateral without
the prior and express written consent of GECC.
9. NATURE AND CONTINUATION OF GECC'S SECURITY INTEREST; TERMINATION OF
THE GECC'S SECURITY INTEREST. This Agreement is made for collateral security
purposes only. This Agreement shall create a continuing security interest in the
Collateral and shall terminate only when the Obligations have been indefeasibly
paid in full in cash and the Loan Agreement has been terminated. When this
Agreement has terminated, GECC shall promptly execute and deliver to Video, at
Video's expense, all termination statements and other instruments as may be
necessary or proper to terminate GECC's security interest in the Collateral,
subject to any disposition thereof which may have been made by GECC pursuant to
this Agreement or the Loan Agreement. This Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
the Obligations is rescinded or must otherwise be returned upon insolvency,
bankruptcy or reorganization of Borrower or Video, all as though such payment
had not been made.
10. GECC'S RIGHTS AND DUTIES. GECC shall not have any duty with
respect to the Collateral. GECC shall not be under any obligation to take any
steps necessary to preserve rights in the Collateral against any other Person,
but GECC may do so at its option from and after the occurrence of an Event of
Default. From and after the occurrence and during the continuance of an Event of
Default, GECC shall have the right, but shall not be obligated, to bring suit in
its own name to enforce the Trademarks and the Trademark Licenses and, if the
GECC shall commence any such suit, Video shall, at the request of GECC, do any
and all lawful acts and execute any and all proper documents required by GECC in
aid of such enforcement. Video shall, upon demand, promptly reimburse GECC for
all costs and expenses incurred by GECC in the exercise of its rights hereunder
(including, without limitation, reasonable fees and expenses of attorneys for
GECC).
11. VIDEO'S DUTIES. Video shall at (i) its own expense diligently
prosecute all applications for renewals of the Trademarks in the United States
Patent and Trademark Office and shall pay all fees and disbursements in
connection therewith; (ii) not abandon any of the Trademarks that are or shall
be necessary or economically desirable in the operation of Video's business; and
(iii) maintain in full force and effect the Trademarks and the Trademark
Licenses that are or shall be necessary or economically desirable in the
operation of Video's business.
12. POWER OF ATTORNEY. Video hereby designates, appoints and
constitutes GECC and all Persons designated by GECC as Video's true and lawful
attorney-in-fact and authorizes GECC and all Persons designated by GECC, in
Video's name, to take any and all appropriate action and to execute any
agreement or instrument which GECC may deem necessary or advisable to accomplish
the purposes of this Agreement and to carry out the terms of this Agreement
including, without limitation, (i) to endorse Video's name on all applications,
documents, papers and instruments necessary for GECC to use the Trademarks, or
to grant or issue any exclusive or non-exclusive license under the Trademarks to
any other Person, (ii) to assign, pledge, convey or otherwise transfer title in
or dispose of any Trademark or any Trademark License to any Person on
commercially reasonable terms, (iii) to grant or issue any exclusive or
nonexclusive license under the Trademarks or, to the extent permitted, under the
Trademark Licenses, to any Person on commercially reasonable terms and (iv) to
take any other actions necessary or incidental to the powers granted to GECC in
this Agreement or the Loan Agreement. The foregoing power of attorney may only
be exercised following the occurrence and during the continuation of an Event of
Default. This power of attorney is coupled with an interest and is irrevocable
by Video. Video hereby ratifies all that such attorney shall lawfully do or
cause to be done by virtue hereof. This power of attorney shall be irrevocable
for the life of this Agreement.
13. RECORDATION OF TRADEMARK. Video agrees to register and record, and
shall register and record with the United States Patent and Trademark Office,
promptly after the execution of this Agreement, all Trademarks and Trademark
Licenses listed on SCHEDULE A and SCHEDULE B that have not been registered or
recorded with the United States Patent and Trademark Office as of the effective
date of this Agreement.
14. RECORDATION OF AGREEMENT. An original signed copy of this
Agreement and/or the short form version of this Agreement shall be recorded with
the United Stated Patent and Trademark Office promptly after the execution
hereof, and promptly after the registration and recording of all new Trademarks
and Trademark Licenses. In the event that it is discovered that any Trademarks
or Trademark License on SCHEDULE A and SCHEDULE B has inadvertently not been
registered or recorded pursuant to said Trademarks or Trademark License shall
immediately be registered or recorded, and a memorandum or notice of a security
interest therein shall be promptly recorded with the United States Patent and
Trademark Office.
15. NOTICES. Any notice to be given to GECC or Video under this
Agreement shall be given in the manner and to the parties designated in the Loan
Agreement.
16. SUCCESSORS AND ASSIGNS This Agreement shall be binding on and
shall inure to the benefit of Video, GECC and their respective successors and
assigns; PROVIDED HOWEVER, Video may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties under this
Agreement without the prior express written consent of GECC. Any such purported
assignment, transfer, hypothecation or other conveyance by Video without the
prior express written consent of GECC shall be void.
17. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement and
the other Loan Documents constitute the complete agreement between the parties
with respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and may not be modified, altered or amended except by a
written agreement signed by GECC and Video.
18. NO WAIVER. Neither GECC's failure, at any time or times, to
require strict performance by Video of any provision of this Agreement, nor
GECC's failure to exercise, nor any delay in exercising, any right, power or
privilege hereunder, (a) shall waive, affect or diminish any right of GECC
thereafter to demand strict compliance and performance therewith, or (b) shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or future exercise thereof or
the exercise of any other right, power or privilege. None of the undertakings,
indemnities, agreements, warranties, covenants and representations of Video to
GECC contained in this Agreement shall be deemed to have been suspended or
waived by GECC, unless such waiver or suspension is by an instrument in writing
signed by an officer or other authorized employee of GECC and directed to Video
specifying such suspension or waiver (and then such waiver shall be effective
only to the extent therein set forth), and GECC shall not, by any act (other
than execution of a formal written waiver), delay, omission or otherwise, be
deemed to have waived any of its rights or remedies hereunder.
19. SEVERABILITY. Wherever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
20. SECTION TITLES. The section titles contained in this Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.
21. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, which shall constitute an original and collectively and
separately constitute a single instrument or agreement.
22. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA. VIDEO HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN VIDEO AND GECC PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT
GECC AND VIDEO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING
IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE GECC FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF GECC.
VIDEO EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND VIDEO HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. VIDEO HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO VIDEO AT THE
ADDRESS SET FORTH IN SCHEDULE 1.1 OF THE LOAN AGREEMENT AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF VIDEO'S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
23. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE BETWEEN GECC AND VIDEO ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. ANY
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
WITNESS: VIDEO SENTRY CORPORATION
By:___________________________
Name: Thomas A. Nicolette
Title: President
WITNESS: GENERAL ELECTRIC CAPITAL
CORPORATION
By:___________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Video Sentry Corporation, the corporation described in and
which executed the foregoing instrument, and that he signed his name thereto by
order of the board of directors of said corporation.
--------------------------
Notary Public
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument, and that
he was duly authorized to sign his name thereto.
--------------------------
Notary Public
<PAGE>
PATENT SECURITY AGREEMENT
THIS PATENT SECURITY AGREEMENT ("Agreement") is made as of the 31st
day of December, 1997 by and between KNOGO NORTH AMERICA INC., a Delaware
corporation ("Borrower") and GENERAL ELECTRIC CAPITAL CORPORATION ("Lender").
BACKGROUND
Lender, Borrower and various other credit parties are parties to a
Loan and Security Agreement dated as of the date hereof (as the same may
hereafter be amended, modified, restated or supplemented from time to time, the
"Loan Agreement") pursuant to which Lender may, from time to time, extend
financial accommodations to Borrower.
To secure Borrower's obligations to Lender under the Loan Agreement,
Borrower granted Lender a security interest in substantially of its assets,
including, without limitation, the Patents, Patent Licenses and the Collateral
(each as defined below).
In order to induce Lender to provide Borrower the financial
accommodations described in the Loan Agreement, Borrower has agreed to execute
this Agreement to create in benefit of Lender a secured and protected interest
in the Patents, the Patent Licenses and the Collateral.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Borrower
and Lender hereby agree as follows:
1. DEFINITIONS.
(a) Unless otherwise defined herein, each capitalized term used herein
that is not defined shall have the meaning given to such term in the Loan
Agreement.
(b) The words "hereof", "herein", "hereunder" and words of like import
when used in this Agreement shall refer to this Agreement and section references
are to this Agreement unless otherwise specified.
(c) All terms defined in this Agreement in the singular shall have
comparable meanings when used in the plural, and VICE VERSA, unless otherwise
specified.
2. RIGHTS AND REMEDIES. The rights and remedies of Lender with respect
to the security interest granted hereby are without prejudice to and are in
addition to those set forth in the Loan Agreement, all terms and provisions of
which are incorporated herein by reference.
3. GRANT OF SECURITY INTEREST. To secure the complete and timely
payment, performance and satisfaction of all of the Obligations, Borrower hereby
grants, pledges, assigns, transfers and conveys to Lender, a mortgage and
continuing security interest and collateral assignment, among other things, in
all of its right, title and interest now owned or hereinafter acquired whether
by assignment or otherwise in and to:
(a) All patents, patent applications, including, without limitation,
the inventions and improvements listed on SCHEDULE A attached
hereto and made a part hereof, and (i) all the reissues,
divisions, continuations, extensions and continuations-in-part
thereof, (ii) all income, royalties, damages and payments now and
hereafter due and/or payable under and with respect thereto,
including, without limitation, payments under all licenses
entered into in connection therewith and damages and payments for
past or future infringements or dilutions thereof, and (iii) all
of Borrower's rights corresponding thereto throughout the world
(all of the foregoing collectively, the "Patents");
(b) All license agreements with any other Person entered into in
connection with any Patent or such other Person's patents or
patent applications, whether Borrower is a licensor or licensee
under any such license agreement including, without limitation,
the license agreements listed on SCHEDULE B and all tangible
property covered by any of the licenses (collectively, the
"Patent Licenses"); and
(c) Any and all Proceeds of the foregoing including, without
limitation, license royalties and proceeds of infringement suits,
the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all
renewals and extensions thereof.
All of the foregoing are collectively referred to as the "Collateral".
4. REPRESENTATIONS AND WARRANTIES. As long as this Agreement remains
in effect, Borrower covenants, represents and warrants that: (a) the Patents are
subsisting and have not been adjudged invalid or unenforceable in whole or in
part; and (b) Borrower has used, and will continue to use for the duration of
this Agreement, proper statutory notice, where appropriate, in connection with
its use of the Patents.
5. RESTRICTIONS ON FUTURE AGREEMENTS. Borrower will not, without
Lender's prior written consent, enter into any agreement including, without
limitation, any license agreement, which is inconsistent with this Agreement,
and Borrower further agrees that it will not take any action, and will use its
best efforts not to permit any action to be taken by others, including, without
limitation, licensees, or fail to take any action, which would in any respect
affect the validity or enforcement of the rights transferred to Lender under
this Agreement or the rights associated with the Collateral.
6. NEW PATENTS AND PATENT LICENSES. Borrower represents and warrants
that, from and after the Closing Date, (except for new Patents and Patent
Licenses) as to which Borrower notifies Lender as set forth below: (a) the
Patents listed on SCHEDULE A include all of the Patents owned or held by
Borrower, (b) the Patent Licenses listed on SCHEDULE B include all of the patent
license agreements under which Borrower is the licensee or licensor and (c) no
liens, claims or security interests in any Collateral have been granted by
Borrower to any Person other than Lender. If, prior to the termination of this
Agreement, Borrower shall (i) obtain rights to any patentable invention, patent
application or patent for any reissue, division, continuation, renewal,
extension or continuation-in-part of any Patent or any improvement on any
Patent, (ii) become entitled to the benefit of any Patent whether as licensee or
licensor, or (iii) enter into any new patent license agreement, the provisions
of this Agreement shall automatically apply thereto. Borrower shall give to
Lender written notice of events described in clauses (i), (ii) and (iii) of the
preceding sentence promptly after the occurrence thereof, but in any event not
less frequently than on a quarterly basis. Borrower authorizes Lender upon
notice to Borrower, to modify SCHEDULE A and SCHEDULE B to this Agreement in the
name of and on behalf of Borrower without obtaining Borrower's signature to such
modification in order to add any future right, title or interest in any Patent
or Patent License acquired by Borrower. Borrower grants Lender a
power-of-attorney, irrevocable so long as the Loan Agreement and this Agreement
are in existence, to modify this Agreement by amending SCHEDULE A and SCHEDULE B
to include any such future Patents or Patent Licenses.
7. ROYALTIES. Borrower hereby agrees that the use by Lender of the
Collateral as authorized hereunder in connection with Lender's exercise of its
rights and remedies under the Loan Agreement including, without limitation, the
right to prepare for sale or distribution, sell, copy or distribute any and all
Inventory now or hereafter owned by Borrower, shall be coextensive with
Borrower's rights thereunder and with respect thereto and without any liability
for royalties or other related charges from Lender to Borrower.
8. RIGHT TO INSPECT; FURTHER ASSIGNMENTS AND SECURITY INTERESTS.
Lender may during normal business hours and upon reasonable advance notice
(unless an Event of Default has occurred and is continuing, in which event no
notice shall be required and Lender shall have access at any and all times) have
access to, examine, audit, make copies (at Borrower's expense) and extracts from
and inspect Borrower's premises and examine Borrower's books, records and
operations relating to the Collateral. Borrower agrees not to sell or assign its
interests in, or grant any license (except for licenses granted by Borrower in
connection with agreements regarding the distribution of Borrower's products)
under, the Collateral without the prior and express written consent of Lender.
9. NATURE AND CONTINUATION OF LENDER'S SECURITY INTEREST; TERMINATION
OF THE LENDER'S SECURITY INTEREST. This Agreement is made for collateral
security purposes only. This Agreement shall create a continuing security
interest in the Collateral and shall terminate only when the Obligations have
been indefeasibly paid in full in cash and the Loan Agreement has been
terminated. When this Agreement has terminated, Lender shall promptly execute
and deliver to Borrower, at Borrower's expense, all termination statements and
other instruments as may be necessary or proper to terminate Lender's security
interest in the Collateral, subject to any disposition thereof which may have
been made by Lender pursuant to this Agreement or the Loan Agreement. This
Agreement shall continue to be effective or be reinstated, as the case may be,
if at any time any payment of the Obligations is rescinded or must otherwise be
returned upon insolvency, bankruptcy or reorganization of Borrower, all as
though such payment had not been made.
10. LENDER'S RIGHTS AND DUTIES. Lender shall not have any duty with
respect to the Collateral. Lender shall not be under any obligation to take any
steps necessary to preserve rights in the Collateral against any other Person,
but Lender may do so at its option from and after the occurrence of an Event of
Default. From and after the occurrence and during the continuance of an Event of
Default, Lender shall have the right, but shall not be obligated, to bring suit
in its own name to enforce the Patents and the Patent Licenses and, if the
Lender shall commence any such suit, Borrower shall, at the request of Lender,
do any and all lawful acts and execute any and all proper documents required by
Lender in aid of such enforcement. Borrower shall, upon demand, promptly
reimburse Lender for all costs and expenses incurred by Lender in the exercise
of its rights hereunder (including, without limitation, reasonable fees and
expenses of attorneys for Lender).
11. BORROWER'S DUTIES. Borrower shall at (i) its own expense
diligently prosecute all applications for renewals of the Patents in the United
States Patent and Trademark Office and shall pay all fees and disbursements in
connection therewith; (ii) not abandon any of the Patents that are or shall be
necessary or economically desirable in the operation of Borrower's business; and
(iii) maintain in full force and effect the Patents and the Patent Licenses that
are or shall be necessary or economically desirable in the operation of
Borrower's business.
12. POWER OF ATTORNEY. Borrower hereby designates, appoints and
constitutes Lender and all Persons designated by Lender as Borrower's true and
lawful attorney-in-fact and authorizes Lender and all Persons designated by
Lender, in Borrower's name, to take any and all appropriate action and to
execute any agreement or instrument which Lender may deem necessary or advisable
to accomplish the purposes of this Agreement and to carry out the terms of this
Agreement including, without limitation, (i) to endorse Borrower's name on all
applications, documents, papers and instruments necessary for Lender to use the
Patents, or to grant or issue any exclusive or non-exclusive license under the
Patents to any other Person, (ii) to assign, pledge, convey or otherwise
transfer title in or dispose of any Patent or any Patent License to any Person
on commercially reasonable terms, (iii) to grant or issue any exclusive or
nonexclusive license under the Patents or, to the extent permitted, under the
Patent Licenses, to any Person on commercially reasonable terms and (iv) to take
any other actions necessary or incidental to the powers granted to Lender in
this Agreement or the Loan Agreement. The foregoing power of attorney may only
be exercised following the occurrence and during the continuation of an Event of
Default. This power of attorney is coupled with an interest and is irrevocable
by Borrower. Borrower hereby ratifies all that such attorney shall lawfully do
or cause to be done by virtue hereof. This power of attorney shall be
irrevocable for the life of this Agreement.
13. RECORDATION OF PATENT. Borrower agrees to register and record, and
shall register and record with the United States Patent and Trademark Office,
promptly after the execution of this Agreement, all Patents and Patent Licenses
listed on SCHEDULE A and SCHEDULE B that have not been registered or recorded
with the United States Patent and Trademark Office as of the effective date of
this Agreement.
14. RECORDATION OF AGREEMENT. An original signed copy of this
Agreement and/or the short form version of this Agreement shall be recorded with
the United Stated Patent and Trademark Office promptly after the execution
hereof, and promptly after the registration and recording of all new Patents and
Patent Licenses. In the event that it is discovered that any Patents or Patent
License on SCHEDULE A and SCHEDULE B has inadvertently not been registered or
recorded pursuant to said Patents or Patent License shall immediately be
registered or recorded, and a memorandum or notice of a security interest
therein shall be promptly recorded with the United States Patent and Trademark
Office.
15. NOTICES. Any notice to be given to Lender or Borrower under this
Agreement shall be given in the manner and to the parties designated in the Loan
Agreement.
16. SUCCESSORS AND ASSIGNS This Agreement shall be binding on and
shall inure to the benefit of Borrower, Lender and their respective successors
and assigns; PROVIDED HOWEVER, Borrower may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties under this
Agreement without the prior express written consent of Lender. Any such
purported assignment, transfer, hypothecation or other conveyance by Borrower
without the prior express written consent of Lender shall be void.
17. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement and
the other Loan Documents constitute the complete agreement between the parties
with respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and may not be modified, altered or amended except by a
written agreement signed by Lender and Borrower.
18. NO WAIVER. Neither Lender's failure, at any time or times, to
require strict performance by Borrower of any provision of this Agreement, nor
Lender's failure to exercise, nor any delay in exercising, any right, power or
privilege hereunder, (a) shall waive, affect or diminish any right of Lender
thereafter to demand strict compliance and performance therewith, or (b) shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or future exercise thereof or
the exercise of any other right, power or privilege. None of the undertakings,
indemnities, agreements, warranties, covenants and representations of Borrower
to Lender contained in this Agreement shall be deemed to have been suspended or
waived by Lender, unless such waiver or suspension is by an instrument in
writing signed by an officer or other authorized employee of Lender and directed
to Borrower specifying such suspension or waiver (and then such waiver shall be
effective only to the extent therein set forth), and Lender shall not, by any
act (other than execution of a formal written waiver), delay, omission or
otherwise, be deemed to have waived any of its rights or remedies hereunder.
19. SEVERABILITY. Wherever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
20. SECTION TITLES. The section titles contained in this Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.
21. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, which shall constitute an original and collectively and
separately constitute a single instrument or agreement.
22. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA. BORROWER HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT
LENDER AND BORROWER ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO
BE HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT
THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER.
BORROWER EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER
AT THE ADDRESS SET FORTH IN SCHEDULE 1.1 OF THE LOAN AGREEMENT AND THAT SERVICE
SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWER'S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.
23. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE BETWEEN LENDER AND BORROWER ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. ANY
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
WITNESS: KNOGO NORTH AMERICA INC.
By:___________________________
Name: Thomas A. Nicolette
Title: President
WITNESS: GENERAL ELECTRIC CAPITAL
CORPORATION
By:___________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Knogo North America Inc., the corporation described in and
which executed the foregoing instrument, and that he signed his name thereto by
order of the board of directors of said corporation.
-----------------------
Notary Public
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument, and that
he was duly authorized to sign his name thereto.
-----------------------
Notary Public
<PAGE>
PATENT ASSIGNMENT OF SECURITY
WHEREAS, KNOGO NORTH AMERICA INC., a corporation formed under the laws
of Delaware located at 350 Wireless Boulevard, Hauppauge, New York 11788
("Borrower"), owns the patents and patent applications shown in the attached
Schedule A (the "Patents"), for which there are recordings or applications in
the United States Patent and Trademark Office under the numbers shown in the
attached SCHEDULE A; and
WHEREAS, Borrower is obligated to GENERAL ELECTRIC CAPITAL CORPORATION
("Lender") located at 201 High Ridge Road, Stamford, Connecticut 06927, pursuant
to (i) a certain Loan and Security Agreement dated as of December 31, 1997,
among Lender, Borrower and various other credit parties and (ii) a certain
Patent Collateral Security Agreement dated as of December 31, 1997 made by
Borrower in favor of Lender (as amended, modified, supplemented and restated
from time to time, the "Agreements"); and
WHEREAS, pursuant to the Agreements, Borrower is granting to Lender a
security interest in the Patents, all proceeds thereof, all rights corresponding
thereto and all reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof, and the recordings and applications therefore.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, Borrower does hereby assign unto Lender and grant to
Lender a security interest in and to the Patents, and recordings and
applications therefor, which assignment and security interest shall secure all
the Obligations as defined in the Agreements and in accordance with the terms
and provisions thereof.
Borrower expressly acknowledges and affirms that the rights and
remedies of Lender with respect to the assignment and security interest granted
hereby are more fully set forth in the Agreements.
Dated: New York, New York
December 31, 1997
Witness: KNOGO NORTH AMERICA, INC.
By:___________________________
Name:
Title:
Witness: GENERAL ELECTRIC CAPITAL CORPORATION
By:___________________________
Name:
Title: Duly Authorized Siggnatory
<PAGE>
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
On this ___ day of January, 1998, before me personally came
__________________________, to me known, who, being by me duly sworn, did depose
and say that he is the _________________________ of Knogo North America, Inc.,
the corporation described in and which executed the foregoing instrument; and
that he signed his name thereto by order of the board of directors of said
corporation.
------------------------------
Notary Public
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
On this ___ day of January, 1998, before me personally came
__________, to me known, who, being by me duly sworn, did depose and say that he
is the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument; and that
he was authorized to sign his name thereto on behalf of said corporation.
------------------------------
Notary Public
<PAGE>
<PAGE>
PATENT SECURITY AGREEMENT
THIS PATENT SECURITY AGREEMENT ("Agreement") is made as of the 31st
day of December, 1997 by and between VIDEO SENTRY CORPORATION, a Delaware
corporation ("Video") and GENERAL ELECTRIC CAPITAL CORPORATION ("GECC").
BACKGROUND
GECC, Video, Knogo North America Inc. ("Borrower") and various other
credit parties are parties to a Loan and Security Agreement dated as of the date
hereof (as the same may hereafter be amended, modified, restated or supplemented
from time to time, the "Loan Agreement") pursuant to which GECC may, from time
to time, extend financial accommodations to Borrower.
To secure Borrower's obligations to GECC under the Loan Agreement,
Video executed and delivered its guaranty of the Obligations of Borrower under
the Loan Agreement and granted GECC a security interest in substantially of its
assets, including, without limitation, the Patents, Patent Licenses and the
Collateral (each as defined below).
In order to induce GECC to provide Borrower the financial
accommodations described in the Loan Agreement, Video has agreed to execute this
Agreement to create in benefit of GECC a secured and protected interest in the
Patents, the Patent Licenses and the Collateral.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Video and
GECC hereby agree as follows:
1. DEFINITIONS.
(a) Unless otherwise defined herein, each capitalized term used herein
that is not defined shall have the meaning given to such term in the Loan
Agreement.
(b) The words "hereof", "herein", "hereunder" and words of like import
when used in this Agreement shall refer to this Agreement and section references
are to this Agreement unless otherwise specified.
(c) All terms defined in this Agreement in the singular shall have
comparable meanings when used in the plural, and VICE VERSA, unless otherwise
specified.
2. RIGHTS AND REMEDIES. The rights and remedies of GECC with respect
to the security interest granted hereby are without prejudice to and are in
addition to those set forth in the Loan Agreement, all terms and provisions of
which are incorporated herein by reference.
3. GRANT OF SECURITY INTEREST. To secure the complete and timely
payment, performance and satisfaction of all of the Obligations, Video hereby
grants, pledges, assigns, transfers and conveys to GECC, a mortgage and
continuing security interest and collateral assignment, among other things, in
all of its right, title and interest now owned or hereinafter acquired whether
by assignment or otherwise in and to:
(a) All patents, patent applications, including, without limitation,
the inventions and improvements listed on SCHEDULE A attached
hereto ---------- and made a part hereof, and (i) all the
reissues, divisions, continuations, extensions and
continuations-in-part thereof, (ii) all income, royalties,
damages and payments now and hereafter due and/or payable under
and with respect thereto, including, without limitation, payments
under all licenses entered into in connection therewith and
damages and payments for past or future infringements or
dilutions thereof, and (iii) all of Video's rights corresponding
thereto throughout the world (all of the foregoing collectively,
the "Patents");
(b) All license agreements with any other Person entered into in
connection with any Patent or such other Person's patents or
patent applications, whether Video is a licensor or licensee
under any such license agreement including, without limitation,
the license agreements listed on SCHEDULE B and all tangible
property covered by any of the licenses (collectively, the
"Patent Licenses"); and
(c) Any and all Proceeds of the foregoing including, without
limitation, license royalties and proceeds of infringement suits,
the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all
renewals and extensions thereof.
All of the foregoing are collectively referred to as the "Collateral".
4. REPRESENTATIONS AND WARRANTIES. As long as this Agreement remains
in effect, Video covenants, represents and warrants that: (a) the Patents are
subsisting and have not been adjudged invalid or unenforceable in whole or in
part; and (b) Video has used, and will continue to use for the duration of this
Agreement, proper statutory notice, where appropriate, in connection with its
use of the Patents.
5. RESTRICTIONS ON FUTURE AGREEMENTS. Video will not, without GECC's
prior written consent, enter into any agreement including, without limitation,
any license agreement, which is inconsistent with this Agreement, and Video
further agrees that it will not take any action, and will use its best efforts
not to permit any action to be taken by others, including, without limitation,
licensees, or fail to take any action, which would in any respect affect the
validity or enforcement of the rights transferred to GECC under this Agreement
or the rights associated with the Collateral.
6. NEW PATENTS AND PATENT LICENSES. Video represents and warrants
that, from and after the Closing Date, (except for new Patents and Patent
Licenses) as to which Video notifies GECC as set forth below: (a) the Patents
listed on SCHEDULE A include all of the Patents owned or held by Video, (b) the
Patent Licenses listed on SCHEDULE B include all of the patent license
agreements under which Video is the licensee or licensor and (c) no liens,
claims or security interests in any Collateral have been granted by Video to any
Person other than GECC. If, prior to the termination of this Agreement, Video
shall (i) obtain rights to any patentable invention, patent application or
patent for any reissue, division, continuation, renewal, extension or
continuation-in-part of any Patent or any improvement on any Patent, (ii) become
entitled to the benefit of any Patent whether as licensee or licensor, or (iii)
enter into any new patent license agreement, the provisions of this Agreement
shall automatically apply thereto. Video shall give to GECC written notice of
events described in clauses (i), (ii) and (iii) of the preceding sentence
promptly after the occurrence thereof, but in any event not less frequently than
on a quarterly basis. Video authorizes GECC upon notice to Video, to modify
SCHEDULE A and SCHEDULE B to this Agreement in the name of and on behalf of
Video without obtaining Video's signature to such modification in order to add
any future right, title or interest in any Patent or Patent License acquired by
Video. Video grants GECC a power-of-attorney, irrevocable so long as the Loan
Agreement and this Agreement are in existence, to modify this Agreement by
amending SCHEDULE A and SCHEDULE B to include any such future Patents or Patent
Licenses.
7. ROYALTIES. Video hereby agrees that the use by GECC of the
Collateral as authorized hereunder in connection with GECC's exercise of its
rights and remedies under the Loan Agreement including, without limitation, the
right to prepare for sale or distribution, sell, copy or distribute any and all
Inventory now or hereafter owned by Video, shall be coextensive with Video's
rights thereunder and with respect thereto and without any liability for
royalties or other related charges from GECC to Video.
8. RIGHT TO INSPECT; FURTHER ASSIGNMENTS AND SECURITY INTERESTS. GECC
may during normal business hours and upon reasonable advance notice (unless an
Event of Default has occurred and is continuing, in which event no notice shall
be required and GECC shall have access at any and all times) have access to,
examine, audit, make copies (at Video's expense) and extracts from and inspect
Video's premises and examine Video's books, records and operations relating to
the Collateral. Video agrees not to sell or assign its interests in, or grant
any license (except for licenses granted by Video in connection with agreements
regarding the distribution of Video's products) under, the Collateral without
the prior and express written consent of GECC.
9. NATURE AND CONTINUATION OF GECC'S SECURITY INTEREST; TERMINATION OF
THE GECC'S SECURITY INTEREST. This Agreement is made for collateral security
purposes only. This Agreement shall create a continuing security interest in the
Collateral and shall terminate only when the Obligations have been indefeasibly
paid in full in cash and the Loan Agreement has been terminated. When this
Agreement has terminated, GECC shall promptly execute and deliver to Video, at
Video's expense, all termination statements and other instruments as may be
necessary or proper to terminate GECC's security interest in the Collateral,
subject to any disposition thereof which may have been made by GECC pursuant to
this Agreement or the Loan Agreement. This Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
the Obligations is rescinded or must otherwise be returned upon insolvency,
bankruptcy or reorganization of Borrower or Video, all as though such payment
had not been made.
10. GECC'S RIGHTS AND DUTIES. GECC shall not have any duty with
respect to the Collateral. GECC shall not be under any obligation to take any
steps necessary to preserve rights in the Collateral against any other Person,
but GECC may do so at its option from and after the occurrence of an Event of
Default. From and after the occurrence and during the continuance of an Event of
Default, GECC shall have the right, but shall not be obligated, to bring suit in
its own name to enforce the Patents and the Patent Licenses and, if the GECC
shall commence any such suit, Video shall, at the request of GECC, do any and
all lawful acts and execute any and all proper documents required by GECC in aid
of such enforcement. Video shall, upon demand, promptly reimburse GECC for all
costs and expenses incurred by GECC in the exercise of its rights hereunder
(including, without limitation, reasonable fees and expenses of attorneys for
GECC).
11. VIDEO'S DUTIES. Video shall at (i) its own expense diligently
prosecute all applications for renewals of the Patents in the United States
Patent and Trademark Office and shall pay all fees and disbursements in
connection therewith; (ii) not abandon any of the Patents that are or shall be
necessary or economically desirable in the operation of Video's business; and
(iii) maintain in full force and effect the Patents and the Patent Licenses that
are or shall be necessary or economically desirable in the operation of Video's
business.
12. POWER OF ATTORNEY. Video hereby designates, appoints and
constitutes GECC and all Persons designated by GECC as Video's true and lawful
attorney-in-fact and authorizes GECC and all Persons designated by GECC, in
Video's name, to take any and all appropriate action and to execute any
agreement or instrument which GECC may deem necessary or advisable to accomplish
the purposes of this Agreement and to carry out the terms of this Agreement
including, without limitation, (i) to endorse Video's name on all applications,
documents, papers and instruments necessary for GECC to use the Patents, or to
grant or issue any exclusive or non-exclusive license under the Patents to any
other Person, (ii) to assign, pledge, convey or otherwise transfer title in or
dispose of any Patent or any Patent License to any Person on commercially
reasonable terms, (iii) to grant or issue any exclusive or nonexclusive license
under the Patents or, to the extent permitted, under the Patent Licenses, to any
Person on commercially reasonable terms and (iv) to take any other actions
necessary or incidental to the powers granted to GECC in this Agreement or the
Loan Agreement. The foregoing power of attorney may only be exercised following
the occurrence and during the continuation of an Event of Default. This power of
attorney is coupled with an interest and is irrevocable by Video. Video hereby
ratifies all that such attorney shall lawfully do or cause to be done by virtue
hereof. This power of attorney shall be irrevocable for the life of this
Agreement.
13. RECORDATION OF PATENT. Video agrees to register and record, and
shall register and record with the United States Patent and Trademark Office,
promptly after the execution of this Agreement, all Patents and Patent Licenses
listed on SCHEDULE A and SCHEDULE B that have not been registered or recorded
with the United States Patent and Trademark Office as of the effective date of
this Agreement.
14. RECORDATION OF AGREEMENT. An original signed copy of this
Agreement and/or the short form version of this Agreement shall be recorded with
the United Stated Patent and Trademark Office promptly after the execution
hereof, and promptly after the registration and recording of all new Patents and
Patent Licenses. In the event that it is discovered that any Patents or Patent
License on SCHEDULE A and SCHEDULE B has inadvertently not been registered or
recorded pursuant to said Patents or Patent License shall immediately be
registered or recorded, and a memorandum or notice of a security interest
therein shall be promptly recorded with the United States Patent and Trademark
Office.
15. NOTICES. Any notice to be given to GECC or Video under this
Agreement shall be given in the manner and to the parties designated in the Loan
Agreement.
16. SUCCESSORS AND ASSIGNS This Agreement shall be binding on and
shall inure to the benefit of Video, GECC and their respective successors and
assigns; PROVIDED HOWEVER, Video may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties under this
Agreement without the prior express written consent of GECC. Any such purported
assignment, transfer, hypothecation or other conveyance by Video without the
prior express written consent of GECC shall be void.
17. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement and
the other Loan Documents constitute the complete agreement between the parties
with respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and may not be modified, altered or amended except by a
written agreement signed by GECC and Video.
18. NO WAIVER. Neither GECC's failure, at any time or times, to
require strict performance by Video of any provision of this Agreement, nor
GECC's failure to exercise, nor any delay in exercising, any right, power or
privilege hereunder, (a) shall waive, affect or diminish any right of GECC
thereafter to demand strict compliance and performance therewith, or (b) shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or future exercise thereof or
the exercise of any other right, power or privilege. None of the undertakings,
indemnities, agreements, warranties, covenants and representations of Video to
GECC contained in this Agreement shall be deemed to have been suspended or
waived by GECC, unless such waiver or suspension is by an instrument in writing
signed by an officer or other authorized employee of GECC and directed to Video
specifying such suspension or waiver (and then such waiver shall be effective
only to the extent therein set forth), and GECC shall not, by any act (other
than execution of a formal written waiver), delay, omission or otherwise, be
deemed to have waived any of its rights or remedies hereunder.
19. SEVERABILITY. Wherever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
20. SECTION TITLES. The section titles contained in this Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.
21. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, which shall constitute an original and collectively and
separately constitute a single instrument or agreement.
22. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA. VIDEO HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN VIDEO AND GECC PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT
GECC AND VIDEO ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING
IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE GECC FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF GECC.
VIDEO EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND VIDEO HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. VIDEO HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO VIDEO AT THE
ADDRESS SET FORTH IN SCHEDULE 1.1 OF THE LOAN AGREEMENT AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF VIDEO'S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
23. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE BETWEEN GECC AND VIDEO ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. ANY
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
WITNESS: VIDEO SENTRY CORPORATION
By:___________________________
Name: Thomas A. Nicolette
Title: President
WITNESS: GENERAL ELECTRIC CAPITAL
CORPORATION
By:___________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Video Sentry Corporation, the corporation described in and
which executed the foregoing instrument, and that he signed his name thereto by
order of the board of directors of said corporation.
-----------------------
Notary Public
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument, and that
he was duly authorized to sign his name thereto.
-----------------------
Notary Public
<PAGE>
PATENT ASSIGNMENT OF SECURITY
WHEREAS, VIDEO SENTRY CORPORATION., a corporation formed under the
laws of Delaware located at 350 Wireless Boulevard, Hauppauge, New York 11788
("Assignor"), owns the patents and patent applications shown in the attached
Schedule A (the "Patents"), for which there are recordings or applications in
the United States Patent and Trademark Office under the numbers shown in the
attached SCHEDULE A; and
WHEREAS, Assignor is obligated to GENERAL ELECTRIC CAPITAL CORPORATION
("Lender") located at 201 High Ridge Road, Stamford, Connecticut 06927, pursuant
to (i) a certain Guaranty dated as of December 31, 1997 in favor of Lender,
securing the obligations of Knogo North America Inc. pursuant to the Loan and
Security Agreement dated as of December 31, 1997, among Lender, Knogo, Assignor
and various other credit parties and (ii) a certain Patent Collateral Security
Agreement dated as of December 31, 1997 made by Assignor in favor of Lender (as
amended, modified, supplemented and restated from time to time, the
"Agreements"); and
WHEREAS, pursuant to the Agreements, Assignor is granting to Lender a
security interest in the Patents, all proceeds thereof, all rights corresponding
thereto and all reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof, and the recordings and applications therefore.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, Assignor does hereby assign unto Lender and grant to
Lender a security interest in and to the Patents, and recordings and
applications therefor, which assignment and security interest shall secure all
the Obligations as defined in the Agreements and in accordance with the terms
and provisions thereof.
Assignor expressly acknowledges and affirms that the rights and
remedies of Lender with respect to the assignment and security interest granted
hereby are more fully set forth in the Agreements.
Dated: New York, New York
December 31, 1997
Witness: VIDEO SENTRY CORPORATION
________________________ By:___________________________
Name: Thomas A. Nicolette
Title: President
Witness: GENERAL ELECTRIC CAPITAL CORPORATION
________________________ By:___________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
On this ___ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Video Sentry Corporation, the corporation described in and
which executed the foregoing instrument; and that he signed his name thereto by
order of the board of directors of said corporation.
------------------------------
Notary Public
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
On this ___ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument; and that
he was authorized to sign his name thereto on behalf of said corporation.
------------------------------
Notary Public
<PAGE>
PATENT SECURITY AGREEMENT
THIS PATENT SECURITY AGREEMENT ("Agreement") is made as of the 31st
day of December, 1997 by and between SENTRY TECHNOLOGY CORPORATION, a Delaware
corporation ("Sentry") and GENERAL ELECTRIC CAPITAL CORPORATION ("GECC").
BACKGROUND
GECC, Sentry, Knogo North America Inc. ("Borrower") and various other
credit parties are parties to a Loan and Security Agreement dated as of the date
hereof (as the same may hereafter be amended, modified, restated or supplemented
from time to time, the "Loan Agreement") pursuant to which GECC may, from time
to time, extend financial accommodations to Borrower.
To secure Borrower's obligations to GECC under the Loan Agreement,
Sentry executed and delivered its guaranty of the Obligations of Borrower under
the Loan Agreement and granted GECC a security interest in substantially of its
assets, including, without limitation, the Patents, Patent Licenses and the
Collateral (each as defined below).
In order to induce GECC to provide Borrower the financial
accommodations described in the Loan Agreement, Sentry has agreed to execute
this Agreement to create in benefit of GECC a secured and protected interest in
the Patents, the Patent Licenses and the Collateral.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, receipt of which is hereby acknowledged, Sentry and
GECC hereby agree as follows:
1. DEFINITIONS.
(a) Unless otherwise defined herein, each capitalized term used herein
that is not defined shall have the meaning given to such term in the Loan
Agreement.
(b) The words "hereof", "herein", "hereunder" and words of like import
when used in this Agreement shall refer to this Agreement and section references
are to this Agreement unless otherwise specified.
(c) All terms defined in this Agreement in the singular shall have
comparable meanings when used in the plural, and VICE VERSA, unless otherwise
specified.
2. RIGHTS AND REMEDIES. The rights and remedies of GECC with respect
to the security interest granted hereby are without prejudice to and are in
addition to those set forth in the Loan Agreement, all terms and provisions of
which are incorporated herein by reference.
3. GRANT OF SECURITY INTEREST. To secure the complete and timely
payment, performance and satisfaction of all of the Obligations, Sentry hereby
grants, pledges, assigns, transfers and conveys to GECC, a mortgage and
continuing security interest and collateral assignment, among other things, in
all of its right, title and interest now owned or hereinafter acquired whether
by assignment or otherwise in and to:
(a) All patents, patent applications, including, without limitation,
the inventions and improvements listed on SCHEDULE A attached
hereto and made a part hereof, and (i) all the reissues,
divisions, continuations, extensions and continuations-in-part
thereof, (ii) all income, royalties, damages and payments now and
hereafter due and/or payable under and with respect thereto,
including, without limitation, payments under all licenses
entered into in connection therewith and damages and payments for
past or future infringements or dilutions thereof, and (iii) all
of Sentry's rights corresponding thereto throughout the world
(all of the foregoing collectively, the "Patents");
(b) All license agreements with any other Person entered into in
connection with any Patent or such other Person's patents or
patent applications, whether Sentry is a licensor or licensee
under any such license agreement including, without limitation,
the license agreements listed on SCHEDULE B and all tangible
property covered by any of the licenses (collectively, the
"Patent Licenses"); and
(c) Any and all Proceeds of the foregoing including, without
limitation, license royalties and proceeds of infringement suits,
the right to sue for past, present and future infringements, all
rights corresponding thereto throughout the world and all
renewals and extensions thereof.
All of the foregoing are collectively referred to as the "Collateral".
4. REPRESENTATIONS AND WARRANTIES. As long as this Agreement remains
in effect, Sentry covenants, represents and warrants that: (a) the Patents are
subsisting and have not been adjudged invalid or unenforceable in whole or in
part; and (b) Sentry has used, and will continue to use for the duration of this
Agreement, proper statutory notice, where appropriate, in connection with its
use of the Patents.
5. RESTRICTIONS ON FUTURE AGREEMENTS. Sentry will not, without GECC's
prior written consent, enter into any agreement including, without limitation,
any license agreement, which is inconsistent with this Agreement, and Sentry
further agrees that it will not take any action, and will use its best efforts
not to permit any action to be taken by others, including, without limitation,
licensees, or fail to take any action, which would in any respect affect the
validity or enforcement of the rights transferred to GECC under this Agreement
or the rights associated with the Collateral.
6. NEW PATENTS AND PATENT LICENSES. Sentry represents and warrants
that, from and after the Closing Date, (except for new Patents and Patent
Licenses) as to which Sentry notifies GECC as set forth below: (a) the Patents
listed on SCHEDULE A include all of the Patents owned or held by Sentry, (b) the
Patent Licenses listed on SCHEDULE B include all of the patent license
agreements under which Sentry is the licensee or licensor and (c) no liens,
claims or security interests in any Collateral have been granted by Sentry to
any Person other than GECC. If, prior to the termination of this Agreement,
Sentry shall (i) obtain rights to any patentable invention, patent application
or patent for any reissue, division, continuation, renewal, extension or
continuation-in-part of any Patent or any improvement on any Patent, (ii) become
entitled to the benefit of any Patent whether as licensee or licensor, or (iii)
enter into any new patent license agreement, the provisions of this Agreement
shall automatically apply thereto. Sentry shall give to GECC written notice of
events described in clauses (i), (ii) and (iii) of the preceding sentence
promptly after the occurrence thereof, but in any event not less frequently than
on a quarterly basis. Sentry authorizes GECC upon notice to Sentry, to modify
SCHEDULE A and SCHEDULE B to this Agreement in the name of and on behalf of
Sentry without obtaining Sentry's signature to such modification in order to add
any future right, title or interest in any Patent or Patent License acquired by
Sentry. Sentry grants GECC a power-of-attorney, irrevocable so long as the Loan
Agreement and this Agreement are in existence, to modify this Agreement by
amending SCHEDULE A and SCHEDULE B to include any such future Patents or Patent
Licenses.
7. ROYALTIES. Sentry hereby agrees that the use by GECC of the
Collateral as authorized hereunder in connection with GECC's exercise of its
rights and remedies under the Loan Agreement including, without limitation, the
right to prepare for sale or distribution, sell, copy or distribute any and all
Inventory now or hereafter owned by Sentry, shall be coextensive with Sentry's
rights thereunder and with respect thereto and without any liability for
royalties or other related charges from GECC to Sentry.
8. RIGHT TO INSPECT; FURTHER ASSIGNMENTS AND SECURITY INTERESTS. GECC
may during normal business hours and upon reasonable advance notice (unless an
Event of Default has occurred and is continuing, in which event no notice shall
be required and GECC shall have access at any and all times) have access to,
examine, audit, make copies (at Sentry's expense) and extracts from and inspect
Sentry's premises and examine Sentry's books, records and operations relating to
the Collateral. Sentry agrees not to sell or assign its interests in, or grant
any license (except for licenses granted by Sentry in connection with agreements
regarding the distribution of Sentry's products) under, the Collateral without
the prior and express written consent of GECC.
9. NATURE AND CONTINUATION OF GECC'S SECURITY INTEREST; TERMINATION OF
THE GECC'S SECURITY INTEREST. This Agreement is made for collateral security
purposes only. This Agreement shall create a continuing security interest in the
Collateral and shall terminate only when the Obligations have been indefeasibly
paid in full in cash and the Loan Agreement has been terminated. When this
Agreement has terminated, GECC shall promptly execute and deliver to Sentry, at
Sentry's expense, all termination statements and other instruments as may be
necessary or proper to terminate GECC's security interest in the Collateral,
subject to any disposition thereof which may have been made by GECC pursuant to
this Agreement or the Loan Agreement. This Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any payment of
the Obligations is rescinded or must otherwise be returned upon insolvency,
bankruptcy or reorganization of Borrower or Sentry, all as though such payment
had not been made.
10. GECC'S RIGHTS AND DUTIES. GECC shall not have any duty with
respect to the Collateral. GECC shall not be under any obligation to take any
steps necessary to preserve rights in the Collateral against any other Person,
but GECC may do so at its option from and after the occurrence of an Event of
Default. From and after the occurrence and during the continuance of an Event of
Default, GECC shall have the right, but shall not be obligated, to bring suit in
its own name to enforce the Patents and the Patent Licenses and, if the GECC
shall commence any such suit, Sentry shall, at the request of GECC, do any and
all lawful acts and execute any and all proper documents required by GECC in aid
of such enforcement. Sentry shall, upon demand, promptly reimburse GECC for all
costs and expenses incurred by GECC in the exercise of its rights hereunder
(including, without limitation, reasonable fees and expenses of attorneys for
GECC).
11. SENTRY'S DUTIES. Sentry shall at (i) its own expense diligently
prosecute all applications for renewals of the Patents in the United States
Patent and Trademark Office and shall pay all fees and disbursements in
connection therewith; (ii) not abandon any of the Patents that are or shall be
necessary or economically desirable in the operation of Sentry's business; and
(iii) maintain in full force and effect the Patents and the Patent Licenses that
are or shall be necessary or economically desirable in the operation of Sentry's
business.
12. POWER OF ATTORNEY. Sentry hereby designates, appoints and
constitutes GECC and all Persons designated by GECC as Sentry's true and lawful
attorney-in-fact and authorizes GECC and all Persons designated by GECC, in
Sentry's name, to take any and all appropriate action and to execute any
agreement or instrument which GECC may deem necessary or advisable to accomplish
the purposes of this Agreement and to carry out the terms of this Agreement
including, without limitation, (i) to endorse Sentry's name on all applications,
documents, papers and instruments necessary for GECC to use the Patents, or to
grant or issue any exclusive or non-exclusive license under the Patents to any
other Person, (ii) to assign, pledge, convey or otherwise transfer title in or
dispose of any Patent or any Patent License to any Person on commercially
reasonable terms, (iii) to grant or issue any exclusive or nonexclusive license
under the Patents or, to the extent permitted, under the Patent Licenses, to any
Person on commercially reasonable terms and (iv) to take any other actions
necessary or incidental to the powers granted to GECC in this Agreement or the
Loan Agreement. The foregoing power of attorney may only be exercised following
the occurrence and during the continuation of an Event of Default. This power of
attorney is coupled with an interest and is irrevocable by Sentry. Sentry hereby
ratifies all that such attorney shall lawfully do or cause to be done by virtue
hereof. This power of attorney shall be irrevocable for the life of this
Agreement.
13. RECORDATION OF PATENT. Sentry agrees to register and record, and
shall register and record with the United States Patent and Trademark Office,
promptly after the execution of this Agreement, all Patents and Patent Licenses
listed on SCHEDULE A and SCHEDULE B that have not been registered or recorded
with the United States Patent and Trademark Office as of the effective date of
this Agreement.
14. RECORDATION OF AGREEMENT. An original signed copy of this
Agreement and/or the short form version of this Agreement shall be recorded with
the United Stated Patent and Trademark Office promptly after the execution
hereof, and promptly after the registration and recording of all new Patents and
Patent Licenses. In the event that it is discovered that any Patents or Patent
License on SCHEDULE A and SCHEDULE B has inadvertently not been registered or
recorded pursuant to said Patents or Patent License shall immediately be
registered or recorded, and a memorandum or notice of a security interest
therein shall be promptly recorded with the United States Patent and Trademark
Office.
15. NOTICES. Any notice to be given to GECC or Sentry under this
Agreement shall be given in the manner and to the parties designated in the Loan
Agreement.
16. SUCCESSORS AND ASSIGNS This Agreement shall be binding on and
shall inure to the benefit of Sentry, GECC and their respective successors and
assigns; PROVIDED HOWEVER, Sentry may not assign, transfer, hypothecate or
otherwise convey its rights, benefits, obligations or duties under this
Agreement without the prior express written consent of GECC. Any such purported
assignment, transfer, hypothecation or other conveyance by Sentry without the
prior express written consent of GECC shall be void.
17. COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT. This Agreement and
the other Loan Documents constitute the complete agreement between the parties
with respect to the subject matter hereof and thereof, supersede all prior
agreements, commitments, understandings or inducements (oral or written,
expressed or implied), and may not be modified, altered or amended except by a
written agreement signed by GECC and Sentry.
18. NO WAIVER. Neither GECC's failure, at any time or times, to
require strict performance by Sentry of any provision of this Agreement, nor
GECC's failure to exercise, nor any delay in exercising, any right, power or
privilege hereunder, (a) shall waive, affect or diminish any right of GECC
thereafter to demand strict compliance and performance therewith, or (b) shall
operate as a waiver thereof. No single or partial exercise of any right, power
or privilege hereunder shall preclude any other or future exercise thereof or
the exercise of any other right, power or privilege. None of the undertakings,
indemnities, agreements, warranties, covenants and representations of Sentry to
GECC contained in this Agreement shall be deemed to have been suspended or
waived by GECC, unless such waiver or suspension is by an instrument in writing
signed by an officer or other authorized employee of GECC and directed to Sentry
specifying such suspension or waiver (and then such waiver shall be effective
only to the extent therein set forth), and GECC shall not, by any act (other
than execution of a formal written waiver), delay, omission or otherwise, be
deemed to have waived any of its rights or remedies hereunder.
19. SEVERABILITY. Wherever possible, each provision of the Loan
Documents shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
20. SECTION TITLES. The section titles contained in this Agreement are
and shall be without substantive meaning or content of any kind whatsoever and
are not a part of the agreement between the parties hereto.
21. COUNTERPARTS. This Agreement may be executed in any number of
identical counterparts, which shall constitute an original and collectively and
separately constitute a single instrument or agreement.
22. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE. EXCEPT AS
OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT
AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES
THEREOF REGARDING CONFLICTS OF LAWS, AND ANY APPLICABLE LAWS OF THE UNITED
STATES OF AMERICA. SENTRY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL
COURTS LOCATED IN NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN SENTRY AND GECC PERTAINING TO THIS
AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT
GECC AND SENTRY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
HEARD BY A COURT LOCATED OUTSIDE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING
IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE GECC FROM BRINGING SUIT
OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE
OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF GECC.
SENTRY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY
ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND SENTRY HEREBY WAIVES ANY
OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER
VENUE OR FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. SENTRY HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SENTRY AT THE
ADDRESS SET FORTH IN SCHEDULE 1.1 OF THE LOAN AGREEMENT AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SENTRY'S ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
23. WAIVER OF JURY TRIAL. BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO
ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF
ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION,
SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT,
TORT, OR OTHERWISE BETWEEN GECC AND SENTRY ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR THE TRANSACTIONS RELATED THERETO. ANY
PARTY HERETO MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER
OF THEIR RIGHT TO TRIAL BY JURY.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
WITNESS: SENTRY TECHNOLOGY CORPORATION
_________________________ By:___________________________
Name: Thomas A. Nicolette
Title: President
WITNESS: GENERAL ELECTRIC CAPITAL
CORPORATION
_________________________ By:___________________________
Name: Bruce Brown
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Sentry Technology Corporation, the corporation described in
and which executed the foregoing instrument, and that he signed his name thereto
by order of the board of directors of said corporation.
-----------------------
Notary Public
STATE OF NEW YORK )
): ss.:
COUNTY OF NEW YORK )
On this ____ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument, and that
he was duly authorized to sign his name thereto.
-----------------------
Notary Public
<PAGE>
PATENT ASSIGNMENT OF SECURITY
WHEREAS, SENTRY TECHNOLOGY CORPORATION., a corporation formed under
the laws of Delaware located at 350 Wireless Boulevard, Hauppauge, New York
11788 ("Assignor"), owns the patents and patent applications shown in the
attached Schedule A (the "Patents"), for which there are recordings or
applications in the United States Patent and Trademark Office under the numbers
shown in the attached SCHEDULE A; and
WHEREAS, Assignor is obligated to GENERAL ELECTRIC CAPITAL CORPORATION
("Lender") located at 201 High Ridge Road, Stamford, Connecticut 06927, pursuant
to (i) a certain Guaranty dated as of December 31, 1997 in favor of Lender,
securing the obligations of Knogo North America Inc. ("Knogo") pursuant to the
Loan and Security Agreement dated as of December 31, 1997, among Lender, Knogo,
Assignor and various other credit parties and (ii) a certain Patent Collateral
Security Agreement dated as of December 31, 1997 made by Assignor in favor of
Lender (as amended, modified, supplemented and restated from time to time, the
"Agreements"); and
WHEREAS, pursuant to the Agreements, Assignor is granting to Lender a
security interest in the Patents, all proceeds thereof, all rights corresponding
thereto and all reissues, divisions, continuations, renewals, extensions and
continuations-in-part thereof, and the recordings and applications therefore.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, Assignor does hereby assign unto Lender and grant to
Lender a security interest in and to the Patents, and recordings and
applications therefor, which assignment and security interest shall secure all
the Obligations as defined in the Agreements and in accordance with the terms
and provisions thereof.
Assignor expressly acknowledges and affirms that the rights and
remedies of Lender with respect to the assignment and security interest granted
hereby are more fully set forth in the Agreements.
Dated: New York, New York
December 31, 1997
Witness: SENTRY TECHNOLOGY CORPORATION
________________________ By:___________________________
Name:
Title:
Witness: GENERAL ELECTRIC CAPITAL CORPORATION
________________________ By:___________________________
Name:
Title: Duly Authorized Signatory
<PAGE>
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
On this ___ day of January, 1998, before me personally came Thomas A.
Nicolette, to me known, who, being by me duly sworn, did depose and say that he
is the President of Sentry Technology Corporation, the corporation described in
and which executed the foregoing instrument; and that he signed his name thereto
by order of the board of directors of said corporation.
------------------------------
Notary Public
STATE OF NEW YORK )
ss.
COUNTY OF NEW YORK )
On this ___ day of January, 1998, before me personally came Bruce
Brown, to me known, who, being by me duly sworn, did depose and say that he is
the Duly Authorized Signatory of General Electric Capital Corporation, the
corporation described in and which executed the foregoing instrument; and that
he was authorized to sign his name thereto on behalf of said corporation.
------------------------------
Notary Public
Exhibit 10.8
CONTRIBUTION AND DIVESTITURE AGREEMENT
CONTRIBUTION AND DIVESTITURE AGREEMENT dated as of _______
___, 1994, among KNOGO CORPORATION, a New York corporation (the "Company"), and
KNOGO NORTH AMERICA INC., a Delaware corporation and a wholly-owned subsidiary
of the Company ("Knewco").
W I T N E S S E T H:
WHEREAS, the Company is engaged principally in the business of
developing, manufacturing and marketing electronic article surveillance, closed
circuit television and other products to deter and detect shoplifting and
employee theft (the "Business"); and
WHEREAS, the parties hereto are parties to the Merger
Agreement, dated as of August 14, 1994 (the "Merger Agreement"), providing for
the merger (the "Merger") of the Company with and into Sensormatic Electronics
Corporation, a Delaware corporation ("Sensormatic"); and
WHEREAS, it is contemplated that prior to the Merger, the
Company shall contribute to Knewco certain of its assets used in the Business
in the fifty states of the United States, the District of Columbia, Canada and
Puerto Rico (the "Knewco Territory") and the goodwill and operations of the
Business in the Knewco Territory, and that Knewco shall assume certain of the
liabilities relating to such assets and operations, as more particularly set
forth below; and
WHEREAS, it is further contemplated that following such
contribution and prior to the Effective Time (as such term is defined in the
Merger Agreement), the Company will divest itself of the business of Knewco
either by distributing all of the shares of Common Stock, par value $.01 per
share, of Knewco (the "Knewco Common Stock") to its stockholders (the "Knewco
Stock Distribution") or selling all of the shares of Knewco Common Stock to a
third party (the "Knewco Sale"), or an alternative transaction as contemplated
in Section 11.7 of the Merger Agreement, in either case as contemplated in
Section 3 (the "Divestiture"), so that after the Divestiture, the Company will
own no shares of capital stock of Knewco;
WHEREAS, it is the intention of the parties that following the
Divestiture, the Company will retain its assets used in, and the goodwill and
operations of, the Business outside the Knewco Territory (the "Retained
Operations"), retain the rights and liabilities relating thereto and certain
other liabilities, and retain the worldwide rights to certain technology; and
WHEREAS, the parties intend that in the event of a Knewco
Stock Distribution, the transactions contemplated hereby qualify as a tax-free
reorganization and spin-off under Sections 368(a)(1)(D) and 355 of the Internal
Revenue Code of 1986, as amended;
NOW, THEREFORE, in consideration of the mutual agreements
contained herein and in the other agreements and instruments executed in
connection with this Agreement, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
<PAGE>
1. CONTRIBUTION OF ASSETS.
1.1 CONTRIBUTION OF ASSETS. On the Divestiture Date (as
such term is defined in Section 2.1), subject to the terms and conditions of
this Agreement, the Company shall contribute, convey, assign, transfer and
deliver (collectively, "contribute") to Knewco all of the right, title and
interest of the Company in and to the business operations and related goodwill
of the Company in the Knewco Territory, and the Company's assets and properties
located in the Knewco Territory related to such Business operations, as more
particularly set forth below, subject to the exclusions set forth in Section
1.2 (the "Contributed Assets"). The Contributed Assets include the assets
reflected on the pro forma balance sheet of Knewco as of May 31, 1994 and the
schedules thereto, set forth as Annex A (the "May Pro Forma Balance Sheet"),
and include also assets acquired thereafter in the ordinary course of the
Business in the Knewco Territory and consistent with past practice, and in
accordance with the principles used to allocate assets for the purposes of the
Pro Forma Balance Sheet (the "Allocation Principles"), (as such assets shall be
reflected, as of the Divestiture Date, on the Divestiture Date Balance Sheet
(as defined in Section 7.6)), and are comprised of:
(a) real property owned in fee and leases, easements and
other rights and interests in real property owned by others, to the
extent located in the Knewco Territory, including without limitation
the facilities located in Hauppauge, New York, as set forth in
Schedule I (the "Contributed Realty");
(b) shares of all of the capital stock of Knogo Caribe
Inc. ("Caribe") (whose assets include the Cidra, Puerto Rico
manufacturing facility but will not include certain financial assets
to be transferred to the Company and/or its subsidiaries as described
in Section 1.6 (the "Caribe Financial Assets");
(c) machinery, equipment, plant, vehicles, office
furniture and equipment, computer hardware, tools, spare parts, other
chattels, fixtures and leasehold improvements located in the Knewco
Territory;
(d) inventories of raw materials, supplies,
work-in-process and finished goods located in the Knewco Territory, in
amounts appropriate to the operations of Knewco in the Knewco
Territory;
(e) accounts receivable arising from the operations of
the Business in the Knewco Territory, as listed or described on
Schedule II, which shall not include any accounts receivable due from
any subsidiaries of the Company (other than Caribe) (collectively, the
"Acquired Subsidiaries") or any accounts receivable from customers
outside the Knewco Territory or for products intended for use outside
the Knewco Territory;
(f) all purchase and other orders from, and agreements
with, customers relating to the sale, lease or maintenance of products
for use in the Knewco Territory;
(g) all other contracts, agreements, equipment leases,
licenses and other instruments relating to the operation of the
Business in the Knewco Territory, all material items of which are
listed or described on Schedule III (together with the orders and
agreements referred to in Section 1.1(f), the "Assigned Instruments);
(h) United States and Canadian patents, trademark and
trade name registrations, all applications therefor on the date
hereof, and other intellectual property of the Company,
used or useful in the Business in the Knewco Territory, as
listed or described in Schedule IV, including without limitation the
right to file patents and patent applications in the Knewco Territory
corresponding to any of the patents and patent applications of the
Company outside the Knewco Territory, or with respect to any
intellectual property retained by the Company, and all of the
Company's right to use the "Knogo" name and the Company's other
trademarks and trade names in the Knewco Territory, and any rights or
licenses held by the Company with respect to the use in the Knewco
Territory of such intellectual property owned by others (pursuant to
which Knewco shall have the exclusive right in the Knewco Territory)
(including exclusivity as to the Company and Sensormatic or any person
claiming through either of them) to make or have made, use, market,
distribute, sell, lease, install, service and maintain the Company's
products and use the "Knogo" name and the Company's other trademarks
and trade names in the Knewco Territory (collectively, the
"Contributed Intellectual Property"), subject to certain rights
relating thereto as set forth in the License Agreement referred to in
Section 2.2(j);
(i) originals or true and complete copies of books and
records, including customer and supplier lists, employee records, tax
records, credit files, quotations and bids, and all sales literature
and specifications relevant to the operation of the Business in the
Knewco Territory;
(j) all material governmental licenses, authorizations,
consents and approvals required to carry on the Business in the Knewco
Territory as now conducted, to the extent transferable;
(k) cash and cash equivalents in an amount determined
pursuant to Section 1.5;
(l) prepaid expenses and deferred charges, as such
prepaid expenses are described on Schedule V; and
(m) the goodwill of the Business in the Knewco Territory,
all as the same exist on the date of this Agreement and shall exist on the
Divestiture Date, subject only to the disposition of any assets in the ordinary
course of business. No contract or agreement which is by law not assignable
without the consent of any party thereto shall be deemed assigned pursuant to
this Agreement unless and until such consent (or a waiver therefrom) is given.
The Company agrees to use its best efforts to obtain prior to the Divestiture
Date all such consents and waivers. If any such consent or waiver is not
obtained before the Divestiture Date and the Divestiture is nevertheless
consummated, the Company agrees to continue to use its best efforts to obtain
all such consents or waivers as have not been obtained prior to such date and
further agrees to cooperate with Knewco after such date in any reasonable
arrangement (such as subcontracting, sublicensing or subleasing) designed to
provide for Knewco, on terms no less favorable than the Company is entitled to,
the benefits under the applicable contract or agreement, including, without
limitation, enforcement, at the cost and for the benefit of Knewco, of any and
all rights of the Company against any other party thereto arising out of the
breach or cancellation thereof by such party otherwise.
Failure to specifically identify on applicable Schedules
hereto any assets, property or rights of the Company that are expressly
intended to be contributed to Knewco pursuant to this Agreement shall not
exclude such assets, property or rights from the Contributed Assets.
<PAGE>
1.2 EXCLUDED ASSETS. The Contributed Assets shall not
include, in addition to the Acquired Subsidiaries, any of the assets of the
Company used in or relating to the Business outside of the Knewco Territory,
including, without limitation, the goodwill of the Business outside of the
Knewco Territory (collectively, the "Retained Assets"). Without limiting the
foregoing, the Company shall in all events retain, and the Retained Assets
shall include, all patents, trademark and trade name registrations, all
applications therefor pending on the date hereof, and all other intellectual
property used or useful in the Business outside the Knewco Territory (pursuant
to which the Company shall have the exclusive right outside the Knewco
Territory (including exclusivity as to the Company and persons claiming through
the Company) to make or have made, use, market, distribute, sell, lease,
install, service or maintain the Company's products outside the Knewco
Territory), including without limitation (i) the right to apply for, receive
and own patents in any jurisdiction outside the Knewco Territory corresponding
to any of the patents and patent applications included in the patent rights in
the Knewco Territory or other intellectual property included in the Contributed
Assets, (ii) all know-how required for the manufacture or supply of the
products used in the operation of the Business outside of the Knewco Territory,
and (iii) the exclusive right to use the "Knogo" name and the Company's
trademarks and trade names outside of the Knewco Territory (collectively, the
"Retained Intellectual Property"), certain rights relating to which shall be
the subject of the License Agreement. The parties hereto acknowledge that they
will own in common certain know-how and technical information, which shall be
included in both the Contributed Intellectual Property and the Retained
Intellectual Property (the "Common Intellectual Property"). The Common
Intellectual Property shall be subject to the exclusive rights of Knewco inside
the Knewco Territory contemplated by Section 1.1(h) and the exclusive rights of
the Company outside the Knewco Territory contemplated by this Section 1.2, and
shall be further subject to the License Agreement.
1.3 ASSUMPTION OF LIABILITIES. In connection with the
contribution of the Contributed Assets, Knewco shall assume and agree to pay,
perform and discharge, as and when due, and shall hold the Company harmless
from, all of the liabilities (including contingent liabilities) and obligations
of the Company directly relating to (i) the employees who become employees of
Knewco in connection with the Divestiture, (ii) Knewco's customers (including
customers of the Company prior to the Divestiture Date) in the Knewco
Territory, (iii) the Company's products sold or leased to such customers or
(iv) the assets and properties of the Company located in the Knewco Territory
(the items referred to in clauses (i) through (iv) being sometimes referred to
herein as the "Knewco Related Items") arising prior to and following the
Divestiture Date, except as expressly excluded below (the "Assumed
Liabilities"), including:
(a) current liabilities reflected on the May Pro Forma
Balance Sheet or accrued following the date thereof by the Company in
connection with the Business in the Knewco Territory and in accordance
with the Allocation Principles;
(b) payroll liabilities to employees of the Company
located in the Knewco Territory who become employees of Knewco for
services rendered prior to the Divestiture Date, and benefit plan
obligations, liabilities for accrued vacation, sick and holiday time,
all other compensation due to such employees, and employment-related
claims or liability to such employees (Knewco shall not assume such
employment-related liabilities of employees of the Company who do not
become employed by Knewco);
(c) the Company's obligations under the Assigned
Instruments;
(d) any liability (including contingent liabilities) of
the Company with respect to any tort, product liability, general
liability or other claim directly relating to the Knewco Related
Items;
(e) any liability under any laws concerning the disposal
or release of hazardous substances, public health and safety, or
pollution or protection of the environment arising out of or relating
to any of the Contributed Realty;
(f) all warranty obligations for products of the Company
sold or delivered in the Knewco Territory or for use in the Knewco
Territory;
(g) any liability of the Company for fines, penalties,
damages or other like amounts payable by the Company to any government
or governmental agency or instrumentality directly relating to the
Knewco Related Items;
(h) real property, personal property, sales and payroll
taxes of the Company directly relating to the Knewco Related Items;
and
(i) all other liabilities and obligations arising out of
the operation of the business of Knewco following the Divestiture
Date.
Such liabilities, subject to the exclusions set forth below, are referred to
collectively as the "Assumed Liabilities". In no event shall Knewco assume or
be deemed to have assumed any of the following debts, obligations, liabilities
or commitments of the Company:
(i) except as set forth in Section 1.3(h), any
liability for Taxes (as such term is defined in the Merger Agreement)
of the Company or any Acquired Subsidiary, and any Taxes imposed on
the Company or Caribe arising as a result of the transfer of the
Caribe Financial Assets as referred to in Section 1.6 or the
transactions contemplated by this Agreement (other than pursuant to a
Knewco Sale) or by the Merger Agreement;
(ii) any obligations of the Company to the banks
listed on Schedule VI (the "Banks") arising under their respective
loans to the Company listed on Schedule VI (the "Bank Loans");
(iii) except as provided in Section 1.3(b) and
Section 1.4, any liability to employees of the Company or to any of
the Company's employee benefit plans;
(iv) any liability of the Company or Knewco for
expenses reasonably incurred in negotiating, preparing or consummating
the Merger or the transactions contemplated in this Agreement
(including the Knewco Stock Distribution but not including the Knewco
Sale); or
(v) all other liabilities of the Company not
expressly assumed by Knewco as Assumed Liabilities.
Failure to specifically identify on applicable
Schedules hereto any liabilities or obligations of the Company that are
expressly intended to be assumed by Knewco pursuant to this Agreement shall not
exclude such liabilities or obligations from the Assumed Liabilities.
1.4 EMPLOYEE BENEFIT PLANS.
(a) On or before the Divestiture Date, Knewco
shall adopt the Company Retirement Savings 401K Plan, subject to such amendment
as Knewco deems appropriate.
(b) Knewco will assume the currently existing
severance and vacation benefit arrangements covering the Company employees who
became Knewco employees immediately after the Divestiture Date (each, a
"Transferred Employee") and, for that purpose, shall recognize service with the
Company; provided, however, that in the event any severance payments are made
by the Company in accordance with Section 1.4(c), service with the Company
shall not be recognized by Knewco for purposes of the severance arrangements
covering the recipients of such payments.
(c) The parties intend that, except as provided
below, no severance pay shall become payable as a result of the transfer of the
Transferred Employees to Knewco in connection with the consummation of the
transactions contemplated by this Agreement; however, in the event that any
severance pay shall become so payable, such severance pay shall be paid by the
Company. The Company shall remain liable for the termination payments under
the employment contracts of Robert Abbott, Arthur J. Minasy, and Thomas A.
Nicolette, provided in the case of Mr. Nicolette that he enters into an
agreement with the Company to the effect that for a two-year period (subject to
such payments being made to him) he will not compete with the Company other
than on behalf of Knewco in the Knewco Territory and to the extent Knewco is
permitted to hereunder.
(d) Knewco shall endeavor to establish as of or
promptly after the Divestiture Date medical, disability and life insurance
plans and other welfare benefits substantially comparable in the aggregate to
the corresponding insurance plans and welfare benefits maintained and/or
provided by the Company in favor of the Transferred Employees.
1.5 TARGET BOOK VALUE; ADJUSTMENTS. The net
worth of Knewco on the Divestiture Date shall equal $24,011,000.00, reduced by
the amount of any losses resulting from the Company's not conducting its
business in the Knewco Territory following the date hereof in the ordinary
course of business and consistent with past practices and policies, other than
the transactions contemplated by this Agreement and the Merger Agreement, or as
expressly consented to by Sensormatic (the "Target Book Value"). For purposes
of this Section 1.5 and Section 7.6, neither the Target Book Value nor the net
worth of the Company at the Divestiture Date shall reflect write-downs of the
Company's assets which write-downs are not reflected on the Pro Forma Balance
Sheet. For purposes of estimating the amount of cash and cash equivalents to
be contributed to Knewco for purposes of Section 1.1(k), the Company and Knewco
shall prepare an estimated balance sheet as of the Divestiture Date, reasonably
acceptable to Sensormatic, giving effect to the contribution by the Company to
Knewco of the Contributed Assets (the "Contribution") (the "Estimated Balance
Sheet"). The Estimated Balance Sheet shall be prepared in accordance with
generally accepted United States accounting principles consistently applied
("GAAP"), and the Allocation Principles, and shall be consistent with the May
Pro Forma Balance Sheet. Based on the Estimated Balance Sheet, the cash and
cash equivalents to be contributed to Knewco shall be increased or reduced in
order that the net worth of Knewco as reflected on the Estimated Balance Sheet
shall equal the Target Book Value. In addition to cash and cash equivalents,
other current assets may be reduced if required so that the net worth of Knewco
as reflected on the Estimated Balance Sheet will not exceed the Target Book
Value. Following the Divestiture Date, there shall be a final cash adjustment
as hereinafter set forth in Section 7.6.
1.6 TRANSFER OF CARIBE FINANCIAL ASSETS.
Immediately prior to the Contribution, Caribe shall transfer to the Company or
another subsidiary or subsidiaries certain cash, cash equivalents and any other
financial assets listed on Schedule VII.
1.7 ISSUANCE OF KNEWCO STOCK TO THE COMPANY. If
the Divestiture shall be effected by the Knewco Stock Distribution, Knewco
shall issue to the Company, contemporaneously with the contribution by the
Company to Knewco of the Contributed Assets and the assumption by Knewco of the
Assumed Liabilities, as contemplated in Sections 1.1 and 1.3, respectively,
such additional number of shares of Knewco Common Stock as may be required in
order for the Company to fulfill its obligations pursuant to Section 3.2 and
any additional shares required in connection with outstanding stock options of
the Company.
<PAGE>
1.8 PROCEEDS OF KNEWCO SALE. If the Divestiture shall be
effected by the Knewco Sale, the proceeds shall be retained by the Company
(except as contemplated in the Merger Agreement) and the Merger Consideration
per Share (as defined in the Merger Agreement) shall be increased in accordance
with the applicable provisions of the Merger Agreement.
2. CLOSING.
2.1 CLOSING; DIVESTITURE DATE. Subject to Section 11.1,
the closing of the transactions contemplated in this Agreement (the "Closing")
shall take place at such place and on such date (within three business days
after all of the conditions precedent set forth in Section 4 to be satisfied
prior to the Closing have been satisfied or waived) as shall be agreed upon by
the parties (the "Divestiture Date").
2.2 COMPANY DELIVERIES. At the Closing, the Company shall
execute and deliver to Knewco:
(a) an Instrument of Assignment substantially in the form
of Exhibit A hereto (the "Instrument of Assignment");
(b) bargain and sale deeds with respect to such of the
Contributed Realty as is owned in fee by the Company;
(c) assignments of the leases included in the Contributed
Realty;
(d) duly executed assignments of the United States and
Canadian patents and patent applications and trademarks listed on
Schedule IV;
(e) duly executed assignments of the Assigned Instruments;
(f) a written acknowledgement by Banks that hold any liens
(the "Bank Liens") on the Contributed Assets arising out of the Bank
Loans that such Bank Liens will be released upon consummation of the
Merger;
(g) if the Divestiture shall be effected by the Knewco
Stock Distribution, a duly executed Distribution Agency Agreement (the
"Distribution Agency Agreement") between the Company and transfer agent
(the "Distribution Agent") relating to the Knewco Stock Distribution;
(h) THE ESTIMATED BALANCE SHEET;
(i) cash and cash equivalents in an amount determined
pursuant to Section 1.5;
(j) a License Agreement substantially in the form of
Exhibit B hereto (the "License Agreement"); and
(k) a Supply Agreement substantially in the form of Exhibit
C hereto.
2.3 KNEWCO DELIVERIES. At the Closing, Knewco shall
execute and deliver to the Company:
(a) an Instrument of Assumption substantially in the form
of Exhibit D hereto (the "Instrument of Assumption");
(b) in each case where Knewco is a party to any agreement
or instrument referred to in Section 2.2, a duly executed counterpart of
such agreement or instrument;
(c) if the Divestiture shall be effected by the Knewco
Stock Distribution, a certificate or certificates representing all of the
outstanding shares of common stock of Knewco, in the number determined in
accordance with Section 3.2(f), for delivery to the Distribution Agent for
distribution pursuant to the Distribution Agency Agreement; and
(d) if the Divestiture shall be effected by the Knewco
Sale, a copy of all of the closing documents to such transaction.
3. THE DIVESTITURE.
3.1 COOPERATION PRIOR TO THE DIVESTITURE. The Company
shall effect the Divestiture either through the Knewco Stock Distribution, as
contemplated in Section 3.2, or through the Knewco Sale, as contemplated in
Section 3.3. In either case, as promptly as practicable after the date hereof
and prior to the commencement of business on the Divestiture Date, the Company
and Knewco shall take all such action as may be necessary or appropriate to
effect the Divestiture through either of such transactions as determined by the
Company, including without limitation the specific actions set forth in Section
3.2 or Section 3.3, as applicable.
3.2 THE KNEWCO STOCK DISTRIBUTION.
(a) The Company and Knewco shall prepare, and Knewco shall
file with the Securities and Exchange Commission (the "SEC"), a
registration statement on Form 10 (the "Form 10") to effect the
registration of the Knewco Common Stock pursuant to the Securities
Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder (the "Exchange Act"). The Company and Knewco shall
use reasonable efforts to cause the Form 10 to be declared effective under
the Exchange Act or, if the Company reasonably determines that the Knewco
Stock Distribution may not be effected without registering the Knewco
Common Stock pursuant to the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder (the "Securities Act"), the
Company shall use its best efforts to cause the Knewco Common Stock to be
registered pursuant to the Securities Act, and thereafter effect the
Knewco Stock Distribution in accordance with the terms of this Agreement,
including, without limitation, by preparing and filing on an appropriate
form a registration statement under the Securities Act covering the
Knewco Common Stock and using its best efforts to cause such registration
statement to be declared effective.
(b) The Company and Knewco shall cooperate in preparing,
filing with the SEC and causing to become effective any registration
statements or amendments thereto which are appropriate to reflect the
establishment of, or amendments to, any employee benefit and other plans
contemplated in this Agreement to be in effect for Knewco.
(c) The Company and Knewco shall take all such action as
may be necessary or appropriate under any applicable state securities or
"Blue Sky" laws or other applicable laws in connection with the
transactions contemplated in this Section 3.2.
(d) The Company and Knewco shall prepare, and Knewco shall
file and seek to make effective, an application to permit listing or
quotation of the Knewco Common Stock on ______________.
<PAGE>
(e) The Company's Board of Directors (or any duly appointed
committee thereof) shall in its sole discretion establish the record date
for the Knewco Stock Distribution (the "Distribution Record Date"), and the
Divestiture Date and any appropriate procedures in connection with the
Knewco Stock Distribution (subject in each case to the provisions of
applicable law); provided that in no event shall the Knewco Stock
Distribution occur prior to such time as (i) the Form 10 (or other
registration statement referred to in Section 3.2(a)) shall have been
declared effective by the SEC, (ii) the Knewco Common Stock shall have
been approved for listing or quotation in accordance with Section 3.2(d)
and (iii) the conditions set forth in Section 4 have been satisfied or
waived.
(f) Subject to Section 4, following the Distribution Record
Date, but prior to the Divestiture Date, the Company shall deliver to the
Distribution Agent one or more share certificates representing all of the
outstanding shares of Knewco Common Stock to be distributed in the Knewco
Stock Distribution and shall instruct the Distribution Agent to
distribute on the Divestiture Date one share of Knewco Common Stock for
each share of Common Stock, par value $.01 per share, of the Company, held
by holders of record of such stock on the Distribution Record Date.
Knewco agrees to provide all share certificates that the Distribution
Agent shall require in order to effect the Knewco Stock Distribution. All
shares of Knewco Common Stock issued in the Knewco Stock Distribution
shall be duly authorized, validly issued, fully paid, non-assessable and
free of preemptive rights.
(g) Immediately upon consummation of the Knewco Stock
Distribution, the Company shall not hold or beneficially own directly or
indirectly any shares of Knewco Common Stock.
3.3 KNEWCO SALE.
(a) Subject to the provisions of Section 5.9 of the Merger
Agreement, the Company's Board of Directors (or any duly appointed
committee thereof) shall in its sole discretion establish any appropriate
procedures in connection with the consideration and approval of proposals
to purchase Knewco pursuant to the Knewco Sale (subject in each case to
the provisions of applicable law) and shall approve a suitable agreement
of purchase and sale to effect such transaction with a third party
purchaser; however, any such agreement shall not commit the Company to any
liability for representations or warranties, or any indemnity or any other
obligations, to the purchaser of Knewco that survive the closing of such
transaction, other than Sensormatic's obligations under this Agreement,
in accordance with the terms hereof, and under the License Agreement and
the Supply Agreement, in accordance with their respective terms.
(b) The Company shall cause the purchaser under the Knewco
Sale to acknowledge and accept this Agreement as contemplated on the
signature page hereof.
(c) The Company and Knewco shall take all such action as
may be necessary or appropriate under any applicable federal securities
laws, state securities or "Blue Sky" laws, or other applicable laws in
connection with the transactions contemplated in this Section 3.3.
(d) Immediately upon the effectiveness of the Knewco Sale,
the Company shall not hold or beneficially own directly or indirectly any
equity interest in the Contributed Assets.
3.4 COMPANY APPROVAL OF CERTAIN KNEWCO ACTIONS. Unless
otherwise provided in this Agreement, the Company shall cooperate with Knewco
in effecting, and if so requested by Knewco the Company shall, as the sole
stockholder of Knewco, ratify any actions that are reasonably necessary or
desirable to be taken by Knewco to effectuate, prior to the Divestiture Date,
the transactions contemplated in this Agreement in a manner consistent with the
terms of this Agreement, including, without limitation, the following: (a) the
preparation and approval of the Certificate of Incorporation and By-laws of
Knewco to be in effect at the Divestiture Date; (b) the election or appointment
of directors and officers of Knewco to serve in such capacities commencing on
the Divestiture Date; (c) the adoption, preparation and implementation of
appropriate plans, agreements and arrangements for Knewco employees and Knewco
non-employee directors (including, without limitation, plans, agreements or
arrangements pursuant to which securities of Knewco would be acquired by
employees); (d) the registration under applicable securities laws of any
securities of Knewco issued or distributed pursuant to Section 3.2 and any
securities issuable pursuant to employee benefit plans as contemplated in
clause (c) above; and (e) the adoption of an appropriate purchase and sale
agreement with a third party in connection with a Knewco Sale.
3.5 TERMINATION OF CERTAIN CLAIMS.
(a) As of the effectiveness of the Divestiture, Knewco
shall have no claims against the Company based on any breach by the Company or
its affiliates of any obligations under this Agreement that occurred prior to
the effectiveness of the Divestiture, all of such claims being hereby
irrevocably waived and terminated as of such time of effectiveness; provided
that the foregoing shall not limit the Company's liability for any breach by
the Company or its affiliates of any obligation under this Agreement that
occurs following the effectiveness of the Divestiture, including, without
limitation, the Company's obligation to indemnify Knewco as set forth herein,
or under the License Agreement and the Supply Agreement.
(b) As of the effectiveness of the Divestiture, the Company
shall have no claims against Knewco based on any breach by Knewco or its
affiliates of any obligations under this Agreement that occurred prior to the
effectiveness of the Divestiture, all of such claims being hereby irrevocably
waived and terminated as of such time of effectiveness; provided that the
foregoing shall not limit Knewco's liability for any breach by Knewco or its
affiliates of any obligation under this Agreement that occurs following the
effectiveness of the Divestiture, including, without limitation, Knewco's
obligation to indemnify the Company as set forth herein, or under the License
Agreement and the Supply Agreement.
4. CONDITIONS.
4.1 GENERAL CONDITION. The respective obligations of each
party hereto to consummate the Divestiture and to perform all other obligations
set forth herein is subject to the satisfaction or waiver (as provided for
therein) of all of the conditions set forth in Section 6 and Section 7 of the
Merger Agreement (other than the Divestiture and the conditions set forth in
Sections 6.8 and 7.7 of the Merger Agreement).
4.2 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligations of the Company to consummate the Divestiture and to perform all
other obligations set forth herein is subject to the satisfaction of the
condition that Knewco shall have effected its assumption of the Assumed
Liabilities, as contemplated in Section 1.3.
4.3 CONDITIONS TO THE OBLIGATIONS OF KNEWCO. The
obligations of Knewco to consummate the transactions contemplated herein and to
perform all other obligations set forth herein is subject to the satisfaction
or waiver of the conditions that (a) the Company shall have contributed to
Knewco the Contributed Assets, as contemplated in Section 1.1, and (b) the
Company shall have obtained an acknowledgement from the Banks with respect to
the release of the Bank Liens, as contemplated in Section 2.2(f).
<PAGE>
5. ACTS AND INSTRUMENTS OF TRANSFER.
5.1 ACTS AND INSTRUMENTS. Whenever reasonably requested to
do so by Knewco, on or after the Divestiture Date, the Company shall do,
execute, acknowledge and deliver all such acts, bills of sale, assignments,
confirmations, consents, other instruments of assignment, transfer and
conveyance, and any and all such further instruments and documents, in form
reasonably satisfactory to Knewco and its counsel, as shall be reasonably
necessary or advisable to carry out the intent of this Agreement and to vest in
Knewco all the right, title and interest of the Company in and to the
Contributed Assets. The Company shall take such steps as may be required to
put Knewco in actual possession and control of the Contributed Assets as of the
time of Closing.
5.2 AUTHORIZATION TO KNEWCO. Without limiting in any
respect the right, title and interest in and to the Contributed Assets to be
acquired by Knewco hereunder, effective upon the Closing, the Company hereby
irrevocably authorizes Knewco, and its successors and assigns: to demand and
receive, from time to time, any and all of the Contributed Assets, to give
receipts and releases for or in respect of the same, to collect, assert or
enforce any claim, right or title of any kind therein or thereto and, for such
purpose, from time to time, to institute and prosecute in the name of the
Company, or otherwise, any and all proceedings at law, in equity or otherwise,
which Knewco shall deem expedient or desirable. The Company further agrees
that Knewco shall retain for its own account any amounts collected pursuant to
the foregoing authorization, and the Company agrees to pay to Knewco, if and
when received, any amounts which shall be received by the Company after the
Divestiture Date in respect of any acquired Contributed Assets.
6. CORRESPONDENCE AND RECORDS.
6.1 CORRESPONDENCE. The Company hereby authorizes Knewco,
on and after the Divestiture Date, to receive and open mail addressed to the
Company and to deal with the contents thereof in a responsible manner, provided
that such mail relates (or reasonably appears to relate) to the Business in the
Knewco Territory, the Contributed Assets or the Assumed Liabilities, but Knewco
shall deliver to the Company all other mail addressed to the Company which is
delivered to and received by it.
6.2 REFERRAL OF ORDERS. For a period of five years
beginning on the Divestiture Date, (i) Knewco agrees to use reasonable efforts
to refer to Sensormatic all orders and inquiries with respect to any products
related to the Business for use outside of the Knewco Territory, and (ii)
Sensormatic agrees to use reasonable efforts to refer to Knewco all orders and
inquiries specifically referring to any products acquired with the Business and
marketed or manufactured by Knewco following the Divestiture Date for delivery,
or expressly intended for use, in the Knewco Territory ("Knewco Products"),
with the exception of SuperStrip products; provided, however, that nothing in
this Agreement shall prohibit or in any way limit Sensormatic from marketing,
selling, leasing or in any other way dealing in any products competitive with
any of the Knewco Products anywhere in the world, including the Knewco
Territory.
6.3 RECORDS. Knewco shall have the right to examine, use
and make excerpts from any corporate minute books, books of account and other
records and documents which are not included in the Contributed Assets, or
connected with or relating to any of the Assumed Liabilities pursuant to this
Agreement, and the Company shall not destroy any such books or records without
Knewco's consent for seven years following the date of this Agreement. The
Company shall have the right to examine, use and make excerpts from any books
of account and other records and documents which are transferred to Knewco
pursuant to this Agreement for any purpose connected with or relating to any
event occurring prior to the Divestiture Date, and Knewco shall not destroy any
such books or records without the Company's consent for seven years following
the date of this Agreement.
<PAGE>
7. OTHER AGREEMENTS.
7.1 RELEASE OF BANK LIENS. The Company will obtain the
release of Contributed Assets from the Bank Liens, following consummation of
the Merger.
7.2 FURTHER ASSURANCES. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto shall use its best efforts to take, or cause to be taken, all actions,
and to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements to consummate and
make effective the transactions contemplated in this Agreement, including,
without limitation, using its best efforts to obtain the consents and approvals
to enter into any amendatory agreements and to make the filings and
applications necessary or desirable to have been obtained, entered into or made
in order to consummate the transactions contemplated in this Agreement.
Without limiting the foregoing, Knewco shall provide such cooperation and
assistance (and that of its appropriate employees, if needed) as is reasonably
requested by Sensormatic, and at Sensormatic's expense, to file and prosecute
patent applications corresponding to any of the Retained Intellectual Property
in any jurisdiction outside of the Knewco Territory, and to maintain any
resulting patents in effect, including, without limitation, execution of any
such patent applications and related documents and pleadings, and the giving of
testimony.
7.3 TRANSITION SERVICES. Following the Divestiture Date
for a period of up to six months, Knewco will continue to provide to the
Company and its subsidiaries, and their respective successors and assigns (each
a "Knogo Entity"), as any such Knogo Entity shall request, any or all
administrative services or functions, such as data processing, tax, accounting,
insurance, personnel, employee benefits and communications (collectively,
"Services") currently being provided by the Company and its subsidiaries (other
than Knewco and its subsidiaries), in connection with the Business outside of
the Knewco Territory, except that each Knogo Entity shall have the right to not
accept any Services. During such period and thereafter as reasonably requested
by Sensormatic, Knewco will provide the services of its appropriate personnel
in connection with the preparation of any tax filings of the Company or
Sensormatic and Sensormatic's year-end audit. Any of such Services shall be
provided on a reasonable cost basis and such cost basis shall be documented by
Knewco at the request of Sensormatic. Any Knogo Entity may terminate any
Services at any time upon 10 days prior written notice to Knewco. At the
request of Knewco, any Knogo Entity will enter into an agreement satisfactory
to Knewco, Sensormatic and such Knogo Entity with respect to the provision of
any Services that such Knogo Entity may request.
without repeating each and every allegation contained in the complaint.
7.4 PERSONS TO BE EMPLOYED BY KNEWCO. Knewco shall extend
an offer of employment to each of the persons listed in Schedule VIII, each
currently an employee of the Company, consisting of approximately 200 people,
commencing on the Divestiture Date and in the capacity set forth on such
Schedule opposite such person's name or a comparable capacity.
7.5 INSURANCE.
(a) Knewco will endeavor to procure insurance having terms,
conditions, exclusions and limitations substantially equivalent to the
insurance coverages currently maintained by the Company with respect to the
property and Business in the Knewco Territory and providing coverage with
respect to the property, business and operations of Knewco on and after the
Divestiture Date and with respect to any liabilities of Knewco caused by or
arising out of occurrences or events taking place on or after the Divestiture
Date.
<PAGE>
(b) On or before the Divestiture Date the parties shall
arrange for Knewco to be protected, whether by means of liability insurance
coverage having terms, conditions, exclusions and limitations substantially
equivalent to the liability insurance coverage currently maintained by the
Company with respect to the property and Business in the Knewco Territory or
by other means, with respect to any liabilities of Knewco caused by or arising
out of occurrences or events taking place prior to the Divestiture Date;
provided that (i) the cost of such protection shall be reasonable and shall be
for the Company's account and (ii) the Company and Knewco shall consult with
each other and their respective insurance brokers in order to identify the
most cost-effective means of maintaining the level of insurance previously
maintained by the Company in the most cost-effective manner (possibly including
each other as named insureds under their respective policies).
7.6 POST-CLOSING ADJUSTMENT.
(a) As promptly as practicable after the Divestiture Date
and in any event within 45 days thereafter, Knewco shall prepare (with
Sensormatic's cooperation, as appropriate) its final balance sheet at the
Divestiture Date (the "Divestiture Date Balance Sheet"). The Divestiture
Date Balance Sheet, which shall be prepared in accordance with GAAP and the
Allocation Principles, and consistent with the Estimated Balance Sheet,
shall reflect, among other things, the net worth of Knewco at the
Divestiture Date after giving effect to the Contribution (but without
giving effect to any write-downs described in Section 1.5). If
Sensormatic and Knewco are in agreement as to the net worth of Knewco, as
reflected on the Divestiture Date Balance Sheet, such net worth shall have
been finally determined in accordance with this Section 7.6 and,
accordingly, either Sensormatic or Knewco shall promptly pay to the other
the cash payment, if any, required pursuant to Section 7.6(e). If
Sensormatic and Knewco are not in agreement on such net worth, they shall
promptly thereafter jointly instruct Deloitte & Touche ("Deloitte") to
conduct an audit or, if agreed to by the parties, a review of the
Divestiture Date Balance Sheet (the "Examination"). The purpose of the
Examination shall be to determine the net worth of Knewco at the
Divestiture Date after giving effect to the Contribution and the amount of
any adjustment in the amount of cash or cash equivalents contributed to
Knewco pursuant to this Section 7.6.
(b) Sensormatic and Knewco shall jointly instruct Deloitte
to complete the Examination within 30 days after the receipt of the
Divestiture Date Balance Sheet as prepared by Knewco and to render its
report thereon (the "Report") to Knewco and Sensormatic within such
period. The Report shall include, among other things, Deloitte's
calculation of the net worth of Knewco as reflected on the Divestiture
Date Balance Sheet. Sensormatic and Knewco shall jointly instruct
Deloitte to make its work papers with respect to the Examination and the
Report available to Knewco and its advisers and to Sensormatic, Ernst &
Young and Sensormatic's other advisers.
(c) The content and conclusions of the Report shall be
conclusive and binding on Sensormatic and Knewco unless either one notifies
the other and Deloitte that it disputes the Report within 30 days after
Deloitte's delivery of the Report to it. If either Sensormatic or Knewco
timely disputes the Report, they shall promptly attempt to resolve any
differences between them with respect to the Report. If they are unable
to do so within 30 days after the date of the notice of dispute, either
Sensormatic or Knewco or both of them jointly may submit the dispute to
Price Waterhouse or, if they are unable or unwilling to act, such other
"Big Six" public accounting firm as may be selected by the American
Arbitration Association (the "Second Auditor") for resolution. The Second
Auditor shall provide Sensormatic and Knewco with the opportunity to
present their respective positions with respect to the dispute. The
determination of the Second Auditor shall be conclusion and binding on
Sensormatic and Knewco, except in the event of manifest error. In making
such determination, the Second Auditor shall be deemed to act as an
expert and not as an arbitrator.
(d) The charges of Deloitte in the conduct of the
Examination and the preparation of the Report shall be borne by
Sensormatic. The charges of the Second Auditor shall be borne by
Sensormatic and Knewco in the proportions determined by the Second
Auditor on the basis that each party shall bear the cost of the Second
Auditor's services which relate to the amount of the disputed items that
are resolved against it. Such determination by the Second Auditor shall
be binding on Sensormatic and Knewco. Sensormatic and Knewco shall
cooperate with Deloitte and the Second Auditor in the conduct of the
Examination, the preparation of the Report and any resolution of any
dispute with respect thereto by the Second Auditor.
(e) After the net worth of Knewco as reflected on the
Divestiture Date Balance Sheet has been finally determined in accordance
with this Section 7.6, (i) if such net worth exceeds the Target Book
Value, Knewco shall promptly make a cash payment to Sensormatic in the
amount of such excess, or (ii) if the Target Book Value exceeds such net
worth, Sensormatic shall promptly make a cash payment to Knewco in the
amount of such excess.
7.7 DELAYED TRANSFERS UNDER MERGER AGREEMENT. In the event
that any Acquired Subsidiary (as defined in the Merger Agreement) is managed by
Knewco on an interim basis, or is ultimately transferred to Knewco by the
Escrow Agent pursuant to Section 10.2 of the Merger Agreement, the parties
agree that any such Acquired Subsidiary shall be deemed to be covered by this
Agreement as if it were a subsidiary of Knewco, and that the Knewco Territory,
non-competition and other provisions of this Agreement shall be modified by the
parties as may be necessary to equitably adjust their respective rights and
obligations hereunder in order to enable Knewco to operate the business of any
such Acquired Subsidiary. Knewco shall abide by Section 5.1 of the Merger
Agreement with respect to any such Acquired Subsidiary, unless and until
transferred to Knewco thereunder.
8. NO WARRANTY. Except as set forth in Section 1.5 and
Section 7.1, the Company does not, in this Agreement or any other agreement,
instrument or document contemplated in this Agreement or the Merger Agreement,
make any representation or warranty, or (except as expressly set forth herein)
any covenant or agreement, with respect to:
(a) the value of any asset or thing of value to be
transferred to Knewco;
(b) the freedom from encumbrance of any asset or thing of
value to be transferred to Knewco;
(c) the absence of defenses or freedom from counterclaims
with respect to any claim, including accounts receivable, to be
transferred to Knewco; or
(d) the legal sufficiency of any assignment, document or
instrument delivered hereunder to convey title to any asset or thing of
value upon its execution, delivery and filing.
All assets to be transferred to Knewco shall be transferred "AS IS, WHERE IS"
and Knewco shall bear the economic and legal risk that any conveyance shall
prove to be insufficient to vest in Knewco good and marketable title, free and
clear of any lien, claim, equity or other encumbrance, provided that Knewco
shall in any event receive all of the Company's right, title and interest
therein.
<PAGE>
9. INDEMNIFICATION.
9.1 INDEMNIFICATION OF KNEWCO. The Company and Sensormatic
(as successor to the Company following the Merger) jointly and severally shall
indemnify, defend and hold harmless Knewco from and against any loss, damage,
liability or expense (including any related costs and expenses referred to in
Section 9.3) (collectively "Damages") (i) arising out or connected with any
breach of any covenant of the Company contained in this Agreement, (ii) arising
out of or in connection with any matter relating to the Business (other than
related to the Assumed Liabilities), or (iii) arising out of or in connection
with any matter which is specifically set forth in Schedule IX.
Without limiting the generality of the foregoing, the Company
and Sensormatic shall indemnify, defend and hold harmless Knewco, each
director, officer, employee, and agent of Knewco, and each person, if any, who
controls Knewco, within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, and each of the heirs, executors, successors
and assigns of any of the foregoing, from and against any and all Damages
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained anywhere in the proxy statement (the "Proxy
Statement") pursuant to which the Board of Directors of the Company shall
solicit proxies to be voted for the approval of the Merger and which shall also
set forth appropriate financial and other disclosure concerning the
Divestiture, Knewco, the Business, and certain other matters, and the
Registration Statement of which it forms a part (the "Registration Statement"),
but not as to any Knogo Information (as hereinafter defined) included in the
Proxy Statement or Registration Statement), or the omission or alleged omission
to state anywhere in the Proxy Statement or the Registration Statement (other
than in the Knogo Information) a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances
under which they were made, not misleading.
Knewco shall give the Company and Sensormatic prompt notice of
any claim, action, suit or proceeding which Knewco believes might give rise to
indemnification under this Section 9.1.
9.2 INDEMNIFICATION OF THE COMPANY AND SENSORMATIC. Knewco
shall indemnify, defend and hold harmless the Company and Sensormatic from and
against any Damages (i) arising out or connected with any breach of any
covenant of Knewco contained in this Agreement, (ii) arising out of or in
connection with any Assumed Liabilities, (iii) arising out of or in connection
with the Divestiture (except with respect to liabilities or obligations of the
Company or Sensormatic hereunder), or (iv) arising out of or in connection with
any matter which is specifically set forth in Schedule X.
Knewco shall indemnify, defend and hold harmless the Company
and Sensormatic, each of their respective subsidiaries, each director, officer,
employee and agent of each of the Company and Sensormatic or any of their
respective subsidiaries, and each person, if any, who controls the Company and
Sensormatic or any of their respective subsidiaries within the meaning of
Section 15 of the Securities Act or Section 20(a) of the Exchange Act, and each
of the heirs, executors, successors and assigns of any of the foregoing, from
and against any and all Damages arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in any
portion of the Proxy Statement or the Registration Statement supplied by, or
based on information supplied by, the Company or Knewco, or any Form 10 (or
other registration statement referred to in Section 3.2(a)) of Knewco (the
"Knogo Information"), or the omission or alleged omission to state in the Knogo
Information a material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they
were made, not misleading.
9.3 RELATED COSTS AND EXPENSES. Each indemnifying party
hereto (the "Indemnitor") shall, in addition to such Indemnitor's obligations
under Section 9.1 or 9.2, as applicable, indemnify and hold harmless the
indemnified party hereto (the "Indemnitee") from, against and in respect of any
and all actions, suits, proceedings, demands, assessments, judgments,
settlements, costs (including reasonable attorneys' fees and disbursements) and
legal and other expenses incurred by the Indemnitee as a result of any matter
as to which the Indemnitee is entitled to indemnification under such Sections,
or in defending any allegations or claims which, if true, would give rise to
Damages subject to indemnification thereunder, or incident to the enforcement
by the Indemnitee of this Section 9 (provided the Indemnitee prevails in such
action for enforcement).
9.4 PROCEDURES FOR ASSERTING CLAIMS, ETC. All claims for
indemnification under this Section 9 shall be asserted and resolved as follows:
(a) In the event that any claim or demand for which an
Indemnitee would be entitled to indemnification pursuant to this Section 9 is
asserted against an Indemnitee or sought to be collected from an Indemnitee by
a third party, the Indemnitee shall give the Indemnitor timely notice (to the
extent practicable), specifying the nature of such claims or demand and the
amount or the estimated amount thereof to the extent then feasible (which
estimate shall not be conclusive of the final amount of such claim or demand)
(the "Claim Notice"). For purposes of this Section 9.4(a), in the event that
any such claim is asserted directly against any Indemnitor, a Claim Notice
shall be deemed to have been given with respect to such claim by the
Indemnitee, and the Indemnitor shall promptly notify the Indemnitee of such
claim and of the Indemnitor's response under this Section 9.4(a). The
Indemnitor shall have 10 business days from receipt of the Claim Notice (the
"Notice Period") to notify the Indemnitee (i) whether or not it acknowledges in
full its liability to the Indemnitee hereunder with respect to such claim or
demand, and (ii) if the Indemnitor acknowledges such liability, whether or not
it desires, at its sole cost and expense, to defend the Indemnitee against such
claim or demand. In the event that the Indemnitor notifies the Indemnitee
within the Notice Period (and not thereafter) that it acknowledges in full such
liability and desires to defend against such claim or demand, then except as
hereinafter provided, the Indemnitor shall have the right to defend the claim
using counsel reasonably satisfactory to the Indemnitee; provided, however,
that such Indemnitee shall in any event have the right to defend any claim with
respect to which an adverse outcome could have a material adverse effect on its
business, condition (financial or otherwise) or results of operations. The
Indemnitee shall also have the right to control the defense of any claim as to
which the Indemnitor does not timely acknowledge liability in full, or as to
which it does not timely notify the Indemnitee of its desire to defend. The
party not entitled to defend may participate in, but not control, any such
defense at its sole cost and expense.
(b) No settlement or compromise of any such claim or
demand, or any related action, suit or proceeding, shall be made without the
prior consent of the Indemnitor and the Indemnitee, which consent shall not be
unreasonably withheld by either of them.
(c) In the event that an Indemnitee should have a claim
against an Indemnitor hereunder which does not involve a claim or demand being
asserted against or sought to be collected from it by a third party, such
Indemnitee shall promptly send a Claim Notice with respect to such claim to the
Indemnitor.
10. NON-COMPETITION AND CONFIDENTIALITY.
(a) Knewco agrees that, for a period of five years after
the Divestiture Date, it shall not, anywhere in France, Germany, Spain, the
United Kingdom, Belgium, The Netherlands or Italy, elsewhere in Europe or
elsewhere in the world outside the Knewco Territory (or for such lesser area or
such lesser period as may be determined by a court of competent jurisdiction to
be a reasonable limitation on the competitive activity of Knewco), directly or
indirectly:
<PAGE>
(i) market, distribute, sell, lease, install,
service or maintain any electronic article surveillance systems, including
re-usable tags, disposable labels and accessory products used in such
systems, closed circuit television systems and products, and other
products to deter and detect shoplifting and employee theft (collectively,
"Loss Prevention Products") manufactured, marketed, sold or leased by the
Company prior to the Divestiture Date, or any improvements or successors
thereto (or license any Contributed Intellectual Property);
(ii) otherwise engage in the business of or
activities relating to manufacturing, marketing, distributing, selling,
leasing, servicing or maintaining, or licensing, any Loss Prevention
Products whatsoever;
(iii) solicit or attempt to solicit business of any
customers of the Company or any Acquired Subsidiary (including prospective
customers solicited by the Company or any Acquired Subsidiary) for Loss
Prevention Products or related services the same or similar to those
offered, sold, produced or under development by the Company or any
Acquired Subsidiary as of the date hereof;
(iv) otherwise divert or attempt to divert from any
Acquired Subsidiary any business whatsoever;
(v) solicit or attempt to solicit for any business
endeavor any employee of the Company or any Acquired Subsidiary or any
former employee of the Company or any Acquired Subsidiary who becomes an
employee of Sensormatic by virtue of the Merger;
(vi) interfere with any business relationship
between the Company or any Acquired Subsidiary or Sensormatic, on the one
hand, and any other person, on the other hand; or
(vii) have any interest as a stockholder, partner,
lender or otherwise in, any person which is engaged in activities which, if
performed by Knewco, would violate this Section 10, or permit or
encourage any of its employees or employees to engage in any such
activity; provided, however, that the foregoing shall not prevent Knewco
from purchasing or owing up to 2% of the voting securities of any
corporation, the securities of which are publicly traded, that may be
deemed to be in competition with Sensormatic outside of the Knewco
Territory.
In addition, at no time (either before or after the term hereinabove set forth)
shall Knewco, or any successor thereto, do business under the "Knogo" name or a
name similar thereto outside the Knewco Territory, or utilize the Company's
other trademarks or trade names outside the Knewco Territory.
In the event of a "Change of Control" of Knewco, either
pursuant to a Knewco Sale or following the date of this Agreement, the
obligations of Knewco under this Section 10(a) shall continue with respect to
Knewco's then existing trademarks, trade names and products, and products
subsequently developed which utilize any of the Contributed Intellectual
Property, but shall not be construed to limit the activities of the acquiring
person with respect to its names and products, or new products developed by the
combined entity which do not utilize any of the Contributed Intellectual
Property.
As used in this Section 10(a), "Change of Control" means any
transaction or series of transactions pursuant to which (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the
"beneficial owner" (as such term is defined in Rule 13(d) under
the Exchange Act) of more than 50% of the combined voting power of Knewco or
(ii) the business, and substantially all of the assets, of Knewco relating to
the products used in the Business that are included in the Contributed Assets
are sold or transferred to an unaffiliated third party.
(b) Knewco acknowledges that it and its employees have
become informed of, and had access to, in addition to the Contributed
Intellectual Property, other confidential information of the Company including,
without limitation, technical know-how and other intellectual property,
marketing plans and information, pricing information, identity of customers and
prospective custom ers with respect to the Business outside of the Knewco
Territory, and identity of suppliers, and that such information, even though it
may have been or may be developed or otherwise acquired by one or more of such
employees, was and is the property of the Company except to the extent relating
solely to the Business in the Knewco Territory, and, to the extent not
proprietary to Knewco by virtue of this Agreement, Knewco shall, and shall use
its reasonable best efforts to cause any such employee to, hold the same in
trust and solely for the benefit of the Company or any successor or assign
thereof, including without limitation Sensormatic, except as hereinafter set
forth. Except in connection with the conduct of Knewco's business in the
Knewco Territory, Knewco shall not, and it shall use its reasonable best
efforts to cause its employees, affiliates or agents not to, at any time
reveal, report, publish, transfer or otherwise disclose to any person,
corporation or other entity, or use any of the Company's confidential
information, except for such information which legally and legitimately is or
becomes of general public knowledge from authorized sources other than Knewco
or its employees, affiliates or assets or legitimately acquired from third
parties not under an obligation of confidentiality to Sensormatic or the
Company or can be demonstrated to have been independently developed by Knewco
after the date hereof without reference to such confidential information.
(c) Because neither the Company (and Sensormatic, as
successor to the Company) nor Knewco have an adequate remedy at law to protect
their respective businesses from the other's competition or to protect their
respective interests in their respective trade secrets, privileged, proprietary
or confidential information (including technical know-how) and similar
commercial assets, each of the Company (and, following the Effective Time,
Sensormatic) and Knewco shall be entitled to injunctive relief, in addition to
such other remedies and relief that would, in the event of a breach of the
provisions of this Section 10, be available to them. The provisions of this
Section 10 shall survive the Divestiture Date.
For purposes of this Section 10, the term "Sensormatic"
includes Sensormatic's subsidiaries, joint ventures and other affiliates
(including those acquired pursuant to the Merger).
11. MISCELLANEOUS.
11.1 TERMINATION. This Agreement (a) may be terminated at
any time prior to the Divestiture Date by mutual written consent of the Company
and Sensormatic, or (b) shall terminate upon termination of the Merger
Agreement prior to the Merger.
11.2 ENTIRE AGREEMENT. This Agreement, together with the
schedules and exhibits hereto, and together with the Merger Agreement, the
License Agreement and the Supply Agreement, to the extent applicable, sets
forth the entire understanding of the parties with respect to its subject
matter, merges and supersedes all prior and contemporaneous understandings of
the parties hereto with respect to its subject matter, except any
confidentiality agreements executed by the Company and Sensormatic. Failure of
any party to enforce any provision of this Agreement shall not be construed as
a waiver of its rights under such or any other provision.
11.3 AMENDMENTS; WAIVERS. This Agreement (including the
Annex, Schedules and Exhibits hereto) may be amended by the parties at any time
prior to the Divestiture Date. Any such amendment shall be in writing signed
on behalf of the party or parties to be charged. At any time prior to the
Divestiture Date, either the Company or Knewco may waive compliance by the
other party with any of the agreements or conditions contained in this
Agreement. Any agreement on the part of a party to any such waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party. The failure of any party to this Agreement to assert any of its rights
under this Agreement or otherwise shall not constitute a waiver of such rights.
11.4 COMMUNICATIONS. All notices, consents and other
communications given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered by hand or by Federal Express
or a similar overnight courier to, (b) five days after being deposited in any
United States post office enclosed in a postage prepaid registered or certified
envelope addressed to, or (c) when successfully transmitted by telecopier (with
a confirming copy of such communication to be sent as provided in (a) or (b)
above) to, the party for whom intended, at the address or telecopier number for
such party set forth below, or to such other address or telecopier number as
may be furnished by such party by notice in the manner provided herein;
provided, however, that any notice of change of address or telecopier number
shall be effective only upon receipt.
If to the Company:
Knogo Corporation
350 Wireless Boulevard
Hauppauge, New York 11788
Attention: Thomas A. Nicolette
Facsimile No.: (516) 232-2812
With a copy to:
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004
Attention: David H. Kaufman
Facsimile No.: (212) 806-6006
If to Knewco:
Knogo North America Inc.
350 Wireless Boulevard
Hauppauge, New York 11788
Attention: Thomas A. Nicolette
Facsimile No.: (516) 232-2812
With a copy to:
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004
Attention: David H. Kaufman
Facsimile No.: (212) 806-6006
If to Sensormatic:
Sensormatic Electronics Corporation
500 N.W. 12th Avenue
Deerfield Beach, Florida 33442
Attention: Corporate Counsel
Facsimile No.: (305) 420-2561
and
Vice President of Corporate Development
Facsimile No.: (305) 420-2964
With a copy to:
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Attention: Anthony J. Carroll
Facsimile No.: (212) 632-5555
11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be
binding on, enforceable against and inure to the benefit of the parties hereto
and their respective successors and permitted assigns (including, without
limitation, Sensormatic as the successor to the Company pursuant to the Merger,
and a purchaser of Knewco pursuant to a Knewco Sale or subsequent successor to
Knewco's Business), and nothing herein is intended to confer any right, remedy
or benefit upon any other person. Except as contemplated in the preceding
sentence, Knewco may not assign its rights or delegate its obligations under
this Agreement without the express written consent of Sensormatic or the
Company, as applicable.
11.6 GOVERNING LAW; JURISDICTION. This Agreement shall in
all respects be governed by and construed in accordance with the laws of the
State of New York. Each of the parties hereto expressly and irrevocably
submits to the non-exclusive personal jurisdiction of the United States
District Court, Southern District of New York and to the jurisdiction of any
other competent court of the State of New York located in New York City in
connection with all disputes arising out of or in connection with this
Agreement or the transactions contemplated herein. Each party hereby waives
the right to any other jurisdiction or venue to which any of them may be
entitled by reason of its present or future domicile. The parties agree that
service of process may be made by U.S. registered mail, return receipt
requested, to a party at its address set forth in Section 11.4.
11.7 SAVINGS CLAUSE. If any provision of this Agreement is
held to be invalid or unenforceable by any court or tribunal of competent
jurisdiction, the remainder of this Agreement shall not be affected thereby,
and such provision shall be carried out as nearly as possible according to its
original terms and intent to eliminate such invalidity or unenforceability.
11.8 COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
11.9 CONSTRUCTION. Headings contained in this Agreement are
for convenience only and shall not be used in the interpretation of this
Agreement. References herein to the Agreement shall be deemed to include all
Schedules and Exhibits hereto, and references herein to Annexes, Sections,
Schedules and Exhibits are to the sections, schedules and exhibits of this
Agreement. As used herein, the singular includes the plural, and the
masculine, feminine and neuter gender each includes the others where the
context so indicates.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first set forth above.
KNOGO CORPORATION
By:
--------------------------------
Thomas A. Nicolette
President
KNOGO NORTH AMERICA INC.
By:
--------------------------------
Thomas A. Nicolette
President
Effective as of the Effective Time of the Merger, Sensormatic
Electronics Corporation, as successor to Knogo Corporation, shall become a
party to the foregoing Contribution and Divestiture Agreement and hereby
acknowledges and accepts such Agreement.
SENSORMATIC ELECTRONICS CORPORATION
By:
--------------------------------
Name:
Title:
At the effective time of a Knewco Sale, the undersigned, as the
purchaser and successor to Knogo North America Inc., hereby acknowledges and
accepts the foregoing Contribution and Divestiture Agreement and agrees to be
bound by the terms thereof and of the License Agreement, the Supply Agreement
and the other documents and instruments referred to therein.
[PURCHASER IN A KNEWCO SALE]
By:
--------------------------------
Name:
Title:
Exhibit 10.9
LICENSE AGREEMENT
AGREEMENT, dated as of , 1994, between KNOGO NORTH
AMERICA INC., a Delaware corporation ("Knewco"), and KNOGO CORPORATION, a New
York corporation ("Knogo").
W I T N E S S E T H :
WHEREAS, Knogo and Knewco are parties to the Contribution and
Divestiture Agreement, dated as of , 1994 (the "Divestiture
Agreement"), pursuant to which Knewco was formed to continue Knogo's business
operations in the Knewco Territory (as defined below);
WHEREAS, Knogo and Knewco, together with Sensormatic
Electronics Corporation, a Delaware corporation ("Sensormatic"), are parties to
the Agreement and Plan of Merger dated as of August 14, 1994 between
Sensormatic, Knogo and Knewco (the "Merger Agreement"), pursuant to which Knogo
is to be merged with and into Sensormatic;
WHEREAS, pursuant to the Divestiture Agreement, certain patent
rights, technology and other assets of Knogo were transferred to Knewco,
including the Knewco SuperStrip Patent Rights and rights in the Knewco
Territory with respect to the SuperStrip Technology (as such terms are defined
below), which may be utilized in the manufacture, sale and promotion of
material with particular application to source labelling and source embedding;
WHEREAS, Knogo wishes to obtain from Knewco certain licenses
under such patent rights and technology, including a non-exclusive license from
Knewco under the Knewco SuperStrip Patent Rights and the SuperStrip Technology
in the Knewco Territory, subject to the terms and conditions of this Agreement,
and Knewco is willing to grant such licenses;
WHEREAS, it is contemplated that Sensormatic will succeed to
the rights of Knogo pursuant to the Merger Agreement; and
WHEREAS, the execution and delivery of this Agreement is a
condition to the respective obligations of the parties under the Merger
Agreement;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements contained herein, the parties agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the
following terms have the following meanings:
(a) "Affiliate" means an entity controlled by,
controlling or under common control with a specified entity. As used herein,
the term "control" includes, but is not limited to, the right to vote directly
or indirectly 50% or more of the voting stock of an entity or the right to
direct or influence significantly such entity's management or policies.
(b) "Change of Control" means any transaction or series
of transactions pursuant to which (i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act")) becomes the "beneficial owner" (as such term is defined in Rule 13(d)
under the Exchange Act) of more than 50% of the combined voting power of Knewco
or (ii) the business, and substantially all of the assets, of Knewco relating
to the Products are sold or transferred to an unaffiliated third party.
<PAGE>
(c) "Knewco Product Patent Rights" means (i) all the
United States and Canadian patents and patent applications with respect to the
Products and the Product Technology, as listed on Schedule I (but exclusive of
the Knewco SuperStrip Patent Rights), (ii) any continuation,
continuation-in-part or division of any such patent application and any patents
issuing on any thereof, (iii) any reissues, extensions or renewals of any
patents referred to in clauses (i) or (ii) of this Section 1(c) and (iv) any
patent application filed at any time hereafter by or on behalf of Knewco in the
United States or Canada, and any patent issued thereon, with respect to any
Product Technology.
(d) "Knewco Territory" means the fifty states of the
United States of America, the District of Columbia, Puerto Rico and Canada.
(e) "Pinned Wall Patent Rights" means (i) the United
States and Canadian patents and patent applications listed on Schedule II, (ii)
any continuation, continuation-in-part or division of any such patent
application and any patents issuing on any thereof, and (iii) any reissues,
extensions or renewals of any patents referred to in clauses (i) or (ii) of
this Section 1(e).
(f) "Products" means the Products currently marketed by
Knewco or Knogo, other than SuperStrip, including those listed on Schedule III,
and including all parts and components thereof. If applicable, Products shall
include any Product embodying a Product Improvement as contemplated by this
Agreement.
(g) "Product Improvements" means all improvements,
modifications, developments, revisions or enhancements of any Product or of the
means of manufacturing such Product, whether or not covered by a patent,
including without limitation improvements to Products which enhance
performance, durability or quality, expand applications for use or reduce cost
of manufacture, which are developed or acquired by any party (by purchase,
license or otherwise), alone or together with others, and embodied in such
party's Products or used in the manufacture thereof.
(h) "Product Technology" means concepts, ideas,
inventions, designs, devices, processes, technical information and know-how,
whether or not described in the Knewco Product Patent Rights or constituting
trade secrets, existing on the date hereof, and which relate to the design,
manufacture, use, installation, service or maintenance of Products, and all
written or electronic expressions or embodiments thereof, including, without
limitation, prototypes, schematics, plans, designs, blue-prints, drawings,
specifications, software, algorithms, manuals, notebooks and records.
(i) "SuperStrip" means the SuperStrip material described
in Schedule IV. If applicable, SuperStrip shall include any SuperStrip
material embodying a SuperStrip Improvement as contemplated by this Agreement.
(j) "SuperStrip Improvements" means all improvements,
modifications, developments, revisions or enhancements of SuperStrip material
or of the means of manufacturing such material, whether or not covered by a
patent, including without limitation improvements to such material which
enhance performance, durability or quality, expand applications for use or
reduce cost of manufacture, which are developed or acquired by any party (by
purchase, license or otherwise), alone or together with others, and embodied in
the SuperStrip material sold by such party or used in the manufacture thereof.
(k) "Knewco SuperStrip Patent Rights" means (i) the
United States and Canadian patents and patent applications with respect to
SuperStrip and the SuperStrip Technology, as listed on Schedule IV-1, (ii) any
continuation, continuation-in-part or division of any such patent applications
and any patents issuing on any thereof, (iii) any reissues, extensions or
renewals of any patents referred to in clauses (i) or (ii) of this Section
1(k), and (iv) any patent application filed at any time hereafter by or
on behalf of Knewco in the United States or Canada, and any patent issued
thereon, with respect to any SuperStrip Technology.
(l) "Knogo SuperStrip Patent Rights" means (i) patents
and patent applications in any jurisdiction other than the United States and
Canada with respect to SuperStrip and the SuperStrip Technology, as listed on
Schedule IV-2, and any additional corresponding patent applications filed in
any such jurisdiction after the date hereof, (ii) any continuation,
continuation-in-part or division of any such patent applications and any
patents issuing on any thereof and (iii) any reissues, extensions or renewals
of any patents referred to in clauses (i) or (ii) of this Section 1(l).
(m) "SuperStrip Technology" means concepts, ideas,
inventions, designs, devices, processes, technical information and know-how,
whether or not described in the Knewco SuperStrip Patent Rights or Knogo
SuperStrip Patent Rights or constituting trade secrets, existing on the date
hereof, and which relate to the design, manufacture or use of SuperStrip
material or any SuperStrip label product, and all written or electronic
expressions or embodiments thereof, including, without limitation, prototypes,
schematics, plans, designs, blue-prints, drawings, specifications, software,
algorithms, manuals, notebooks and records.
(n) "Knogo Product Patent Rights" means (i) patents and
patent applications in any jurisdiction other than the United States and Canada
with respect to Products and the Product Technology (but exclusive of the Knogo
SuperStrip Patent Rights) and any additional corresponding patent applications
filed in any such jurisdiction after the date hereof, (ii) any continuation,
continuation-in-part or division of any such patent applications and any
patents issuing on any thereof and (iii) any reissues, extensions or renewals
of any patents referred to in clauses (i) or (ii) of this Section 1(n).
(o) "Trademarks" means such trademarks, trade names,
service marks, slogans, labels, logos and other trade identifying symbols,
whether or not registered with any governmental authority, which at any time
have been used, or developed for use, in connection with the Products or
SuperStrip by Knogo or Knewco. A list of the Trademarks is set forth in
Schedule V.
Unless otherwise required by the context, references to
"Knogo" in this Agreement shall be deemed to refer also to Sensormatic as the
successor to Knogo pursuant to the Merger Agreement.
2. LICENSES AND TECHNOLOGY TRANSFERS BY KNEWCO.
(a) GRANT OF LICENSES. Pursuant to the Divestiture
Agreement, Knewco obtained the Knewco Product Patent Rights and the Knewco
SuperStrip Patent Rights and all rights to the Product Technology and
SuperStrip Technology in the Knewco Territory, and Knogo retained all
corresponding patent rights and all rights to the Product Technology and
SuperStrip Technology outside the Knewco Territory.
(i) In order to permit Knogo to produce products in
the Knewco Territory, Knewco, subject to the terms and conditions of
this Agreement, grants to Knogo a fully-paid, perpetual, non-exclusive
right and license, with the right to sublicense others, to practice
and use the Knewco Product Patent Rights and the Product Technology in
the Knewco Territory to use, make and have made products, provided
that such products are marketed, distributed, sold or leased outside
of the Knewco Territory for use outside of the Knewco Territory.
(ii) Subject to the terms and conditions of this
Agreement, Knewco grants to Knogo a fully-paid, perpetual,
non-exclusive right and license, including the right to sublicense to
others, to practice and use the Knewco SuperStrip Patent Rights and
the SuperStrip Technology in the Knewco Territory to use, make, have
made, market, distribute, sell or lease
SuperStrip material and products used in conjunction therewith or
otherwise utilizing the Knewco SuperStrip Patent Rights and/or
SuperStrip Technology.
(b) FURTHER ASSISTANCE. In order to assist Sensormatic,
as successor to Knogo, in establishing its own capacity to manufacture Products
and SuperStrip, Knewco shall:
(i) transfer to Sensormatic, not later than 10 days
after the date hereof, the Product Technology and SuperStrip
Technology by delivering copies of all existing written or electronic
expressions or embodiments thereof, including, without limitation,
prototypes, schematics, plans, designs, blue-prints, drawings,
specifications, software, algorithms, manuals, notebooks and records,
and including bills of materials and components for each Product and
each version of SuperStrip, specifying the sources of supply of each
thereof. Knewco agrees that (A) prior to the date of delivery it
shall reduce to writing all Product Technology and SuperStrip
Technology which has not heretofore been expressed in written or
electronic form, (B) all such writings shall be in English and (C) all
expressions and embodiments delivered to Sensormatic shall together
constitute a clear and complete description of all of the Product
Technology and SuperStrip Technology sufficient to provide Sensormatic
with all information reasonably required by it for the manufacture
(including the design, manufacture and operation of related tooling,
equipment and processes), testing, installation, service and
maintenance of the Products and SuperStrip by Sensormatic;
(ii) conduct, without charge and at times reasonably
requested by Sensormatic, six to ten training sessions with respect to
the Products, Product Technology, SuperStrip and SuperStrip Technology
for Sensormatic personnel at Knewco's facilities in Cidra, Puerto
Rico; and
(iii) during the 18 months following the date of this
Agreement, make available, as requested by Sensormatic and without
charge, at Sensormatic's manufacturing facilities or other locations,
the services of its engineering, manufacturing and service personnel,
up to a maximum of 500 man-hours over such 18 months, with respect to
all aspects of the manufacture (including the design, manufacture and
operation of related tooling, equipment and processes), testing,
installation, service and maintenance of the Products and SuperStrip.
If requested by Sensormatic, such services may include plant tours and
inspection of manufacturing equipment and processes at Knewco's
facilities. If Sensormatic requests such services in excess of such
500 man-hours, Knewco shall provide them to Sensormatic at a daily
rate of approximately $500 calculated on the basis of the annual
salary and other direct employment costs of the individuals involved,
plus reasonable out-of-pocket expenses.
3. TRADEMARK LICENSE. Knewco grants to Knogo a
fully-paid, perpetual, non-exclusive right and license within the Knewco
Territory, with the right to sublicense others, to apply the Trademarks to
Products and any other products, provided that such Products and other products
are marketed, distributed, sold or leased outside of the Knewco Territory for
use outside of the Knewco Territory. Knewco further grants to Knogo a
fully-paid, perpetual, non-exclusive, world-wide right and license, with the
right to sublicense to others, to apply any SuperStrip trademarks and trade
names to SuperStrip or products used in conjunction with SuperStrip. The
foregoing licenses shall be subject to an obligation by Knogo to maintain the
quality of the products marketed, distributed, sold or leased under this
trademark license at reasonable standards established by Knewco. Knewco
reserves the right to inspect the quality of such products during the term of
this license.
4. ADDITIONAL LICENSES; SUPPLY ARRANGEMENTS.
(a) Subject to the terms and conditions of this
Agreement, Knogo grants to Knewco fully-paid, perpetual, non-exclusive
licenses (i) to practice and use the Knogo SuperStrip Patent Rights
and SuperStrip Technology to use, make or have made SuperStrip outside the
Knewco Territory; and (ii) to practice and use the Knogo Product Patent Rights
and Product Technology to use, make or have made products outside the Knewco
Territory; but provided in each case that such SuperStrip or other products are
marketed, distributed, leased or sold inside the Knewco Territory for use
inside the Knewco Territory, and provided in each case that Knewco notifies
Sensormatic of the location of such manufacture and the identity of the
manufacturer. Knewco shall have no right to grant sublicenses to others under
the foregoing licenses, except for the purpose of having SuperStrip or such
other products made for Knewco in accordance with this Section 4(a).
(b) If a Change of Control of Knewco occurs, Knewco or
its successor shall have the following additional rights with respect to the
Knogo SuperStrip Patent Rights and SuperStrip Technology. If Sensormatic or
any of its Affiliates, before or after such Change of Control, assigns rights
in or licenses the Knogo SuperStrip Patent Rights or SuperStrip Technology to a
party which is not its Affiliate (other than a distributor or dealer of
Sensormatic or a party which manufactures, installs or services SuperStrip for
Sensormatic, any of its Affiliates or any customers of Sensormatic or of its
Affiliates for affixing on or incorporating into such customers' own products),
Knewco or such successor shall have the further right to obtain a non-exclusive
license outside of the Knewco Territory under the Knogo SuperStrip Patent
Rights and SuperStrip Technology on the most favorable terms granted to any
such non-affiliated licensee, provided that Knewco or its successor meets and
accepts all essential economic and other terms and conditions of such
third-party license.
(c) If Sensormatic chooses to manufacture the SuperStrip
material or to have such material manufactured by others under contract to
Sensormatic, Sensormatic shall, as requested by Knewco, either: (i) supply to
Knewco its requirements for such material at the following prices: (A) during
the period commencing on the date hereof and ending on the fifth anniversary of
the date hereof, a price equal to Sensormatic's Cost (as defined below), and
(B) during the five-year period thereafter, a price equal to the lesser of (1)
Sensormatic's Cost plus 10% and (2) the most favorable prices granted by
Sensormatic to any of its customers, dealers and distributors (excluding any
trial prices or isolated transactions); or (ii) permit Knewco to purchase its
requirements for such material directly from Sensormatic's supplier, subject in
either case to reasonable arrangements governing orders, payment, forecasts,
availability, term and the like. For purposes of this Section 4(c),
"Sensormatic's Cost" shall mean the total material, components, labor and
direct, manufacturing-related overhead costs (exclusive of research and
development expenses) incurred by Sensormatic in producing the SuperStrip
material sold to Knewco, determined on a basis consistent with Sensormatic's
determination of such cost used in its financial statements and in accordance
with generally accepted accounting principles consistently applied over all
periods. Notwithstanding the foregoing, if a Change of Control of Knewco
occurs, Sensormatic shall, as requested by Knewco or its successor, either: (i)
supply to Knewco, or its successor, its requirements for such material at a
price equal to Sensormatic's Cost plus 10% for the period commencing on the
date of effectiveness of such Change of Control and ending on the second
anniversary thereof; or (ii) supply to Knewco, or its successor, its
requirements for such material for the period commencing on the date of
effectiveness of such Change of Control and ending on the fifth anniversary
thereof, at the most favorable prices granted by Sensormatic to any of its
customers, dealers and distributors (excluding any trial prices or isolated
transactions), provided that in no event shall the term of the foregoing
agreement exceed ten years from the date of this Agreement, and subject in any
case to reasonable arrangements governing orders, payment, forecasts,
availability, term and the like.
(d) If Knewco chooses to manufacture the SuperStrip
material or to have such material manufactured by others under contract to
Knewco, Knewco shall, as requested by Sensormatic, either: (i) supply to
Sensormatic its requirements for such material at a price equal to Knewco's
Cost (as defined below); or (ii) permit Sensormatic to purchase its
requirements for such material directly from Knewco's supplier, subject in
either case to reasonable arrangements governing orders, payment, forecasts,
availability, term and the like. For purposes of this Section 4(d), "Knewco's
Cost" shall mean the total material, components, labor and direct,
manufacturing-related overhead costs (exclusive of research and development
expenses) incurred by Knewco in producing the SuperStrip material sold to
Sensormatic, determined on a basis consistent with Knewco's determination of
such cost used in its financial statements and in accordance with generally
accepted accounting principles consistently applied over all periods. The term
of the foregoing agreement shall be five years from the date hereof.
5. IMPROVEMENTS; OTHER MATTERS.
(a) Knewco grants to Knogo a fully paid, non-exclusive,
perpetual right and license, including the right to sublicense others, under
any and all applicable existing or future patents and patent applications or
otherwise, (i) to practice and use in the Knewco Territory any Product
Improvements developed or acquired by Knewco or any of its Affiliates on or
before the fifth anniversary of the date hereof, in order to use, make or have
made Products embodying such Product Improvements, provided that such Products
embodying such Product Improvements are marketed, distributed, sold or leased
outside of the Knewco Territory for use outside of the Knewco Territory, and
(ii) to practice and use any such Product Improvements to make or have made,
use, market, distribute, sell, lease, install, service and maintain Products
embodying such Product Improvements outside of the Knewco Territory for use
outside of the Knewco Territory. Notwithstanding the foregoing, in the case of
any Product Improvements obtained by Knewco from third parties, this license
shall be subject to the payment by Knogo of any royalty payable by Knewco with
respect to a like use by Knewco.
(b) Knewco grants to Knogo a fully paid, non-exclusive,
perpetual right and license, including the right to sublicense others, under
any and all applicable existing or future patents and patent applications or
otherwise, (i) to practice and use in the Knewco Territory any SuperStrip
Improvements developed or acquired by Knewco or any of its Affiliates on or
before the fifth anniversary of the date hereof, in order to make or have made
products embodying such SuperStrip Improvements, provided that such products
embodying such SuperStrip Improvements are marketed, distributed, sold or
leased outside of the Knewco Territory for use outside of the Knewco Territory,
and (ii) to practice and use any such SuperStrip Improvements to make or have
made, use, market, distribute, sell, install, service and maintain products
embodying such SuperStrip Improvements outside of the Knewco Territory for use
outside of the Knewco Territory. Notwithstanding the foregoing, in the case of
any SuperStrip Improvements obtained by Knewco from third parties, this license
shall be subject to the payment by Knogo of any royalty payable by Knewco with
respect to a like use by Knewco.
(c) Knogo grants to Knewco a fully-paid, non-exclusive,
perpetual right and license, including the right to sublicense others, under
any and all applicable existing or future patents and patent applications or
otherwise, (i) to practice and use outside the Knewco Territory any Product
Improvements developed or acquired by Knogo or any of its Affiliates on or
before the fifth anniversary of the date hereof, in order to use, make or have
made Products embodying such Product Improvements, provided that such Products
embodying such Product Improvements are marketed, distributed, sold or leased
within the Knewco Territory for use within the Knewco Territory, and (ii) to
practice and use any such Product Improvements to make or have made, use,
market, distribute, sell, lease, install, service and maintain Products
embodying such Product Improvements within the Knewco Territory for use within
the Knewco Territory. Notwithstanding the foregoing, in the case of any
Product Improvements obtained by Knogo from third parties, this license shall
be subject to the payment by Knewco of any royalty payable by Knogo with
respect to a like use by Knogo.
(d) Neither Knogo nor Knewco shall have any liability to
the other or any party claiming through the other for any infringement or
misappropriation claims made by any third parties regarding Product
Improvements or SuperStrip Improvements licensed by it pursuant to this Section
5 or any other rights licensed by a party hereto to the other under this
Agreement, including the licenses pursuant to Sections 2(a) and 4. The initial
express confirmation of a grant of a license to Product
Improvements or SuperStrip Improvements pursuant to this Section 5 may,
however, be relied on by the licensee and any sublicensee as evidencing an
absence of any knowledge or belief on the part of the licensor at the time of
such confirmation that the subject matter of the licensor's Product
Improvements or SuperStrip Improvements violates any third party's patent or
other intellectual property rights.
(e) The Divestiture Agreement provides that Knewco shall
have all rights in the Product Technology and SuperStrip Technology required
for its business in the Knewco Territory and that Knogo shall have all rights
in the Product Technology and SuperStrip Technology required for its business
outside the Knewco Territory. For avoidance of doubt, each party hereto also
grants to the other fully-paid, non-exclusive, perpetual license in the
granting party's Product Technology and SuperStrip Technology, which license
shall be subject to the same provisions and limitations as to practice and use
as are set forth in Section 5(a) (in the case of such license granted to Knogo)
and Section 5(c) (in the case of such license to Knewco), subject to any
applicable provisions of this Agreement; provided, however, that such
limitations under Section 5(a) shall not apply in the case of Knogo's rights
under the Knewco SuperStrip Patent Rights and Knewco SuperStrip Technology,
which are governed by Section 2(a)(ii). Further, to the extent that the Knewco
Product Patent Rights or Knewco SuperStrip Patent Rights are applicable in
territories not included in the Knewco Territory (e.g., the U.S. Virgin
Islands), the foregoing license from Knewco to Knogo shall also include an
exclusive license to practice and use such patent rights in such territories.
6. SALES TO MANUFACTURERS FOR SOURCE LABELLING.
Notwithstanding any territorial restriction in any license granted under
Section 2(a), 4(a) or 5 of this Agreement, (i) Knewco shall have the further
right and license to sell SuperStrip or, if applicable, other label material
included in Products, to manufacturers or distributors of merchandise located
outside the Knewco Territory, but only to be embedded in or affixed to such
merchandise for source labelling purposes, and only if such merchandise is to
be sold by such manufacturers or distributors for sale and use in the Knewco
Territory, and (ii) Sensormatic shall have the further right and license to
sell any such label material included in Products to manufacturers or
distributors of merchandise located inside the Knewco Territory, but only to be
embedded in or affixed to such merchandise for source labelling purposes, and
only if such merchandise is to be sold by such manufacturers or distributors
for sale and use outside the Knewco Territory. (Sensormatic has such rights in
the Knewco Territory with respect to SuperStrip, as provided in Section
2(a)(ii).) It shall be a condition to the respective foregoing rights that
each such manufacturer or distributor agrees in writing to be bound by the
foregoing restriction applicable to the party from which such manufacturer or
distributor purchases such material.
7. CERTAIN PATENT MATTERS. Sensormatic shall not assert
the Pinned Wall Patent Rights against Knewco or any of its Affiliates of which
it owns a majority of the voting power, or customers, with respect to the
manufacture, sale or use of SuperStrip material in the Knewco Territory for use
in the Knewco Territory. The foregoing agreement shall not apply to any
successor or assign of Knewco, or any licensee or sublicensee of Knewco (other
than for the purpose of having SuperStrip made for Knewco or an Affiliate
referred to in the preceding sentence for sale and use in accordance with the
limitations applicable to Knewco under this Agreement and the Divestiture
Agreement), and shall terminate and become void in the event of a Change of
Control of Knewco.
8. CONFIDENTIALITY.
(a) CONFIDENTIALITY. Each of the parties understands and
acknowledges (i) that as a result of the transactions contemplated by this
Agreement, each of them may become informed of, and have access to,
confidential information regarding inventions, trade secrets, technical
information, know-how, plans, specifications and other information respecting
Products, Product Technology, Product Improvements, SuperStrip and SuperStrip
Technology, and (ii) that such information is held by it in trust and solely
for the benefit of the parties in accordance with their respective interests
pursuant to this Agreement and any other written agreement between them. The
parties shall not, at any time, reveal, report, publish, transfer or otherwise
disclose to any person or entity, or use, any of the other's confidential
information, except for use as contemplated by this Agreement or such other
agreements. This Section 8 shall not be construed to restrict Knogo's or
Sensormatic's disclosure or use of any information acquired or obtained by it
other than pursuant to this Agreement, including without limitation any
information acquired by Knogo pursuant to the Divestiture Agreement or any
information acquired or obtained by Sensormatic in the course of its business.
The foregoing obligations of confidentiality shall not apply
to information of a party which lawfully comes into the possession of the
receiving party and which (i) is received from a third party without violation
of any confidentiality obligations in favor of the other party with respect to
such information, (ii) can be demonstrated to have been previously known to the
receiving party, (iii) is or becomes part of public or industry knowledge
through no conduct of the receiving party or (iv) can be demonstrated to have
been independently developed by the receiving party.
(b) PERMITTED DISCLOSURE. The foregoing shall not
prohibit the disclosure by either party of confidential information to
its employees who have a need to know such information for the purposes of this
Agreement or to its counsel, so long as such persons shall be obligated to hold
such information in confidence to the same extent as provided herein.
(c) SPECIAL PRECAUTIONS. On the written request of
either party, the other shall forthwith adopt any special precautions
as may be reasonably necessary to prevent any unauthorized disclosure of any of
the requesting party's confidential information and shall cause its employees,
agents and associates to forthwith adopt such special precautions. If the
adoption of such precautions would involve unusual expense, the requesting
party shall bear the cost incurred by the other in adopting such precautions.
(d) INJUNCTIVE RELIEF. Because neither party would have
an adequate remedy at law to protect its business from the unfair
competition of the other or to protect its interests in its confidential
information and similar commercial assets, each of them shall be entitled to
injunctive relief, in addition to such remedies and relief that would, in the
event of a breach of the provisions of this Section 8 by the other, be
available to it. In the event of such a breach, in addition to any other
remedies, either party, as the case may be, shall be entitled to receive from
the breaching party payment of, or reimbursement for, its reasonable attorneys'
fees and disbursements incurred in enforcing any such provision.
(e) SURVIVAL. The provisions of this Section 8 shall
survive any termination of this Agreement.
9. ARBITRATION.
(a) GENERAL. Any controversy or claim arising out of or
relating to this Agreement shall be settled by arbitration before a
single arbitrator in New York, New York, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. Any decision or
award of the arbitrator shall be binding on the parties. Judgment on any award
rendered by the arbitrator may be entered in any court of competent
jurisdiction.
(b) PROCEDURE. Each party consents to the jurisdiction
of such arbitration and to such venue. The arbitrator shall apply the
law of the State of New York, exclusive of conflict of laws principles, to any
dispute. Nothing in this Agreement shall require the arbitration of disputes
between the parties that arise from actions, suits or proceedings instituted by
third parties. Knogo appoints Messrs. Christy & Viener, 620 Fifth Avenue, New
York, New York 10020, Attention: Kenneth W. Taber, Esq., and Knewco appoints
Messrs. Stroock & Stroock & Lavan, Seven Hanover Square, New York,
New York 10004, Attention: David H. Kaufman, Esq., as their respective
attorneys-in-fact and authorized agents solely to receive on their behalf,
service of any demands for, or any notice with respect to, arbitration
hereunder or any service of process. Service on either of such
attorneys-in-fact may be made by registered or certified mail or by personal
delivery, in any case return receipt requested, and shall be effective as
service on either party, as the case may be. Nothing herein shall be deemed to
affect any right to serve any such demand, notice or process in any other
manner permitted under applicable law.
10. DELAYED TRANSFERS UNDER MERGER AGREEMENT. In the
event that ownership of any Acquired Subsidiary (as defined in the
Merger Agreement) is managed by Knewco on an interim basis, or is ultimately
transferred to Knewco by the Escrow Agent pursuant to Section 10.2 of the
Merger Agreement, the parties agree that any such Acquired Subsidiary shall be
deemed to be covered by this Agreement as if it were a subsidiary of Knewco,
and that the Knewco Territory, non-competition and other provisions of this
Agreement shall be modified by the parties as may be necessary to equitably
adjust their respective rights and obligations in order to enable Knewco to
operate with respect to the business of any such Acquired Subsidiary. Knewco
shall abide by Section 5.1 of the Merger Agreement with respect to any such
Acquired Subsidiary, unless and until transferred to Knewco thereunder.
11. NON-AGENCY. For all purposes of this Agreement,
each party shall be an independent contractor, and not an agent, partner or
joint venturer, of the other.
12. NO ASSIGNMENT. Neither party shall assign,
subcontract or otherwise transfer this Agreement or any right or
interest in or to this Agreement without the prior consent of the other, except
that either party may assign this Agreement to any parent corporation or
wholly-owned subsidiary or to any successor to all or a substantial portion of
its business.
13. COMMUNICATIONS. All notices, consents and other
communications given under this Agreement shall be in writing and shall be
deemed to have been duly given (a) when delivered by hand or by Federal Express
or a similar overnight courier to, (b) five days after being deposited in any
United States post office enclosed in an airmail postage prepaid registered or
certified envelope addressed to, or (c) when successfully transmitted by
facsimile (with a confirming copy of such communication to be sent as provided
in (a) or (b) above) to, the party for whom intended, at the address or
facsimile number for such party set forth below, or to such other address or
facsimile number as may be furnished by such party by notice in the manner
provided herein; provided, however, that any notice of change of address or
facsimile number shall be effective only upon receipt.
If to Knogo or Sensormatic:
Sensormatic Electronics Corporation
500 N.W. 12th Avenue
Deerfield Beach, Florida 33442
Attention: Corporate Counsel
Facsimile No.: (305) 420-2561
and
Vice President of Corporate Development
Facsimile No.: (305) 420-2964
With a copy to:
Christy & Viener
620 Fifth Avenue
New York, New York 10020
Attention: Anthony J. Carroll, Esq.
Facsimile No.: (212) 632-5555
If to Knewco:
Knogo North America Inc.
350 Wireless Boulevard
Hauppauge, New York 11788
Attention: Thomas A. Nicolette
Facsimile No.: (516) 232-2812
With a copy to:
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004
Attention: David H. Kaufman, Esq.
Facsimile No.: (212) 806-6006
14. ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding of the parties with respect to its subject matter, merges and
supersedes all prior and contemporaneous understandings with respect to its
subject matter and may not be waived or modified, in whole or in part, except
by a writing signed by each of the parties. No waiver of any provision of this
Agreement in any instance shall be deemed to be a waiver of the same or any
other provision in any other instance. Failure of any party to enforce any
provision of this Agreement shall not be construed as a waiver of its rights
under such or any other provision.
15. SUCCESSORS AND ASSIGNS. This Agreement shall be
binding on, enforceable against and inure to the benefit of, the parties and
their respective successors and assigns, and nothing herein is intended to
confer any right, remedy or benefit upon any other person.
16. GOVERNING LAW. This Agreement shall in all respects be
governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and fully to be performed in such state, without
giving effect to conflicts of law principles.
17. CONSTRUCTION. Headings used in this Agreement are for
convenience only and shall not be used in the interpretation of this Agreement.
References herein to Sections and Schedules are to the sections and exhibits of
this Agreement. As used herein, the singular includes the plural.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first set forth above.
KNOGO CORPORATION
By
---------------------------------
Thomas A. Nicolette
President
KNOGO NORTH AMERICA INC.
By
---------------------------------
Thomas A. Nicolette
President
Effective as of the Effective Time under the Merger Agreement,
Sensormatic Electronics Corporation, as successor to Knogo Corporation, shall
become a party to the foregoing License Agreement and acknowledges and accepts
such Agreement.
SENSORMATIC ELECTRONICS CORPORATION
By
---------------------------------
Name:
Title:
EXHIBIT 10.10
LEASE AGREEMENT
by and between
NOG (NY) QRS 12-23, INC.,
a New York corporation,
as LANDLORD
and
KNOGO NORTH AMERICA INC.,
a Delaware corporation,
as TENANT
Premises: 350 Wireless Boulevard
Hauppauge, New York
Dated as of: December 24, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
Parties 1
1. Demise of Premises 1
2. Certain Definitions 1
3. Title and Condition 9
4. Use of Leased Premises; Quiet Enjoyment 10
5. Term 11
6. Basic Rent 11
7. Additional Rent 12
8. Net Lease; Non-Terminability 13
9. Payment of Impositions 14
10. Compliance with Laws and Easement Agreements;
Environmental Matters 15
11. Liens; Recording 17
12. Maintenance and Repair 17
13. Alterations and Improvements 18
14. Permitted Contests 19
15. Indemnification 20
16. Insurance 21
17. Casualty and Condemnation 25
18. Termination Events 27
19. Restoration 28
20. Procedures Upon Purchase 29
21. Assignment and Subletting; Prohibition
against Leasehold Financing 30
22. Events of Default 32
23. Remedies and Damages Upon Default 35
24. Notices 39
25. Estoppel Certificate 39
26. Surrender 40
27. No Merger of Title 40
28. Books and Records 40
29. Determination of Value 41
30. Non-Recourse as to Landlord 43
31. Financing 43
32. Subordination 44
33. Financial Covenants 44
34. Tax Treatment; Reporting 44
35. Miscellaneous 44
EXHIBITS
Exhibit "A" - Premises
Exhibit "B" - Machinery and Equipment
Exhibit "C" - Schedule of Permitted Encumbrances
Exhibit "D" - Rent Schedule
Exhibit "E" - Financial Covenants
Schedule 1 - Termination Values
<PAGE>
LEASE AGREEMENT, made as of this 24th day of December, 1996, between
NOG (NY) QRS 12-23, INC., a New York corporation ("LANDLORD"), with an address
c/o W. P. Carey & Co., Inc., 50 Rockefeller Plaza, 2nd Floor, New York, New York
10020, and KNOGO NORTH AMERICA INC. ("TENANT"), a Delaware corporation with an
address at 350 Wireless Boulevard, Hauppauge, New York 11788.
In consideration of the rents and provisions herein stipulated to be
paid and performed, Landlord and Tenant hereby covenant and agree as follows:
1 DEMISE OF PREMISES. Landlord hereby demises and lets to Tenant, and
Tenant hereby takes and leases from Landlord, for the term and upon the
provisions hereinafter specified, the following described property
(collectively, the "LEASED PREMISES"): (a) the premises described in EXHIBIT "A"
hereto, together with the Appurtenances (collectively, the "Land"); (b) the
buildings, structures and other improvements now or hereafter constructed on the
Land (collectively, the "IMPROVEMENTS"); and (c) the fixtures, machinery,
equipment and other property described in EXHIBIT "B" hereto (collectively, the
"EQUIPMENT").
2 CERTAIN DEFINITIONS.
"Acquisition Cost" shall mean $4,925,000.
"Additional Rent" shall mean Additional Rent as defined in Paragraph 7.
"Adjoining Property" shall mean all sidewalks, driveways, curbs, gores
and vault spaces adjoining any of the Leased Premises.
"Alterations" shall mean all changes, additions, improvements or
repairs to, all alterations, reconstructions, renewals, replacements or removals
of and all substitutions or replacements for any of the Improvements or
Equipment, both interior and exterior, structural and non-structural, and
ordinary and extraordinary.
"Appurtenances" shall mean all tenements, hereditaments, easements,
rights-of-way, rights, privileges in and to the Land, including (a) easements
over other lands granted by any Easement Agreement and (b) any streets, ways,
alleys, vaults, gores or strips of land adjoining the Land.
"Assignment" shall mean any assignment of rents and leases from
Landlord to a Lender which (a) encumbers any of the Leased Premises and (b)
secures Landlord's obligation to repay a Loan, as the same may be amended,
supplemented or modified from time to time.
"Basic Rent" shall mean Basic Rent as defined in Paragraph 6.
"Basic Rent Payment Dates" shall mean the Basic Rent Payment Dates as
defined in Paragraph 6.
"Casualty" shall mean any injury to or death of any person or any loss
of or damage to any property (including the Leased Premises) included within or
arising from the Leased Premises or arising from acts or omissions of Tenant,
Landlord or Lender on or related to the Adjoining Property.
"Commencement Date" shall mean Commencement Date as defined in
Paragraph 5.
"Condemnation" shall mean a Taking and/or a Requisition.
"Condemnation Notice" shall mean notice or knowledge of the
institution of or intention to institute any proceeding for Condemnation.
"Costs" of a Person or associated with a specified transaction shall
mean all reasonable costs and expenses incurred by such Person or associated
with such transaction, including without limitation, attorneys' fees and
expenses, court costs, brokerage fees, escrow fees, title insurance premiums,
mortgage commitment fees, mortgage points, recording fees and transfer taxes, as
the circumstances require.
"Covenants" shall mean the covenants and agreements described on
EXHIBIT "E".
"CPI" shall mean CPI as defined in EXHIBIT "D" hereto.
"Default Termination Amount" shall mean the Default Termination Amount
as defined in Paragraph 23(a)(iii).
"Default Rate" shall mean the Default Rate as defined in Paragraph
7(a)(iv).
"Easement Agreement" shall mean any conditions, covenants,
restrictions, easements, declarations, licenses and other agreements listed as
Permitted Encumbrances or as may hereafter affect the Leased Premises.
"Environmental Law" shall mean (i) whenever enacted or promulgated,
any applicable federal, state, foreign and local law, statute, ordinance, rule,
regulation, license, permit, authorization, approval, consent, court order,
judgment, decree, injunction, code, requirement or agreement with any
governmental entity, (x) relating to pollution (or the cleanup thereof), or the
protection of air, water vapor, surface water, groundwater, drinking water
supply, land (including land surface or subsurface), plant, aquatic and animal
life from injury caused by a Hazardous Substance or (y) concerning exposure to,
or the use, containment, storage, recycling, reclamation, reuse, treatment,
generation, discharge, transportation, processing, handling, labeling,
production, disposal or remediation of Hazardous Substances, Hazardous
Conditions or Hazardous Activities, in each case as amended and as now or
hereafter in effect, and (ii) any common law or equitable doctrine (including,
without limitation, injunctive relief and tort doctrines such as negligence,
nuisance, trespass and strict liability) that may impose liability or
obligations or injuries or damages due to or threatened as a result of the
presence of, exposure to, or ingestion of, any Hazardous Substance. The term
Environmental Law includes, without limitation, the federal Comprehensive
Environmental Response Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act, the federal Water Pollution Control Act, the
federal Clean Air Act, the federal Clean Water Act, the federal Resources
Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste
Amendments to RCRA), the federal Solid Waste Disposal Act, the federal Toxic
Substance Control Act, the federal Insecticide, Fungicide and Rodenticide Act,
the federal Occupational Safety and Health Act of 1970, the federal National
Environmental Policy Act and the federal Hazardous Materials Transportation Act,
each as amended and as now or hereafter in effect and any similar state or local
Law.
"Environmental Violation" shall mean (a) any direct or indirect
discharge, disposal, spillage, emission, escape, pumping, pouring, injection,
leaching, release, seepage, filtration or transporting of any Hazardous
Substance at, upon, under, onto or within the Leased Premises, or from the
Leased Premises to the environment, in violation of any Environmental Law or in
excess of any reportable quantity established under any Environmental Law or
which could result in any liability to Landlord, Tenant or Lender, any Federal,
state or local government or any other Person for the costs of any removal or
remedial action or natural resources damage or for bodily injury or property
damage, (b) any deposit, storage, dumping, placement or use of any Hazardous
Substance at, upon, under or within the Leased Premises or which extends to any
Adjoining Property in violation of any Environmental Law or in excess of any
reportable quantity established under any Environmental Law or which could
result in any liability to any Federal, state or local government or to any
other Person for the costs of any removal or remedial action or natural
resources damage or for bodily injury or property damage, (c) the abandonment or
discarding of any barrels, containers or other receptacles containing any
Hazardous Substances in violation of any Environmental Laws, (d) any activity,
occurrence or condition which could result in any liability, cost or expense to
Landlord or Lender or any other owner or occupier of the Leased Premises, or
which could result in a creation of a lien on the Leased Premises under any
Environmental Law, or (e) any violation of or noncompliance with any
Environmental Law.
"Equipment" shall mean the Equipment as defined in Paragraph 1.
"Event of Default" shall mean an Event of Default as defined in
Paragraph 22(a).
"Fair Market Value" shall mean the higher of (a) the fair market value
of the Leased Premises as of the Relevant Date as if unaffected and unencumbered
by this Lease or (b) the fair market value of the Leased Premises as of the
Relevant Date as affected and encumbered by this Lease (and assuming that the
Term has not been extended for the Renewal Term unless Tenant has exercised its
option to extend pursuant to Paragraph 5(b) of this Lease). For all purposes of
this Lease, Fair Market Value shall be determined in accordance with the
procedure specified in Paragraph 29.
"Fair Market Value Date" shall mean the date when the Fair Market
Value is determined in accordance with Paragraph 29.
"Federal Funds" shall mean federal or other immediately available
funds which at the time of payment are legal tender for the payment of public
and private debts in the United States of America.
"Hazardous Activity" means any activity, process, procedure or
undertaking which directly or indirectly (i) generates or creates any Hazardous
Substance; (ii) causes or results in (or threatens to cause or result in) the
release, seepage, spill, leak, flow, discharge or emission of any Hazardous
Substance into the environment (including the air, ground water, watercourses or
water systems), or (iii) would cause the Leased Premises or any portion thereof
to become a hazardous waste treatment, recycling, reclamation, processing,
storage or disposal facility within the meaning of any Environmental Law.
"Hazardous Condition" means any condition which would support any
claim or liability under any Environmental Law, including the presence of
underground storage tanks.
"Hazardous Substance" means (i) any substance, material, product,
petroleum, petroleum product, derivative, compound or mixture, mineral
(including asbestos), chemical, gas, medical waste, or other pollutant, in each
case whether naturally occurring, man-made or the by-product of any process,
that is toxic, harmful or hazardous or acutely hazardous to the environment or
public health or safety or (ii) any substance supporting a claim under any
Environmental Law, whether or not defined as hazardous as such under any
Environmental Law. Hazardous Substances include, without limitation, any toxic
or hazardous waste, pollutant, contaminant, industrial waste, petroleum or
petroleum-derived substances or waste, radon, radioactive materials, asbestos,
asbestos containing materials, urea formaldehyde foam insulation, lead and
polychlorinated biphenyls.
"Impositions" shall mean the Impositions as defined in Paragraph 9(a).
"Improvements" shall mean the Improvements as defined in Paragraph 1.
"Indemnitee" shall mean an Indemnitee as defined in Paragraph 15.
"Insurance Requirements" shall mean the requirements of all insurance
policies required to be maintained in accordance with this Lease.
"Land" shall mean the Land as defined in Paragraph 1.
"Law" shall mean any constitution, statute, rule of law, code,
ordinance, order, judgment, decree, injunction, rule, regulation, policy,
requirement or administrative or judicial determination, even if unforeseen or
extraordinary, of every duly constituted governmental authority, court or
agency, now or hereafter enacted or in effect.
"Lease" shall mean this Lease Agreement.
"Lease Year" shall mean, with respect to the first Lease Year, the
period commencing on the Commencement Date and ending at midnight on the last
day of the twelfth (12th) consecutive calendar month following the month in
which the Commencement Date occurred, and each succeeding twelve (12) month
period during the Term.
"Leased Premises" shall mean the Leased Premises as defined in
Paragraph 1.
"Legal Requirements" shall mean the requirements of all present and
future Laws (including but not limited to Environmental Laws and Laws relating
to accessibility to, usability by, and discrimination against, disabled
individuals) and all covenants, restrictions and conditions now or hereafter of
record which may be applicable to Tenant or to any of the Leased Premises, or to
the use, manner of use, occupancy, possession, operation, maintenance,
alteration, repair or restoration of any of the Leased Premises, even if
compliance therewith necessitates structural changes or improvements or results
in interference with the use or enjoyment of any of the Leased Premises.
"Lender" shall mean any person or entity (and their respective
successors and assigns) which may, after the date hereof, make a Loan to
Landlord or is the holder of any Note.
"Loan" shall mean any loan made by one or more Lenders to Landlord,
which loan is secured by a Mortgage and an Assignment and evidenced by a Note.
"Monetary Obligations" shall mean Rent and all other sums payable by
Tenant under this Lease to Landlord, to any third party on behalf of Landlord or
to the Lender, in its capacity as Indemnitee.
"Mortgage" shall mean any mortgage or deed of trust from Landlord to a
Lender which (a) encumbers any of the Leased Premises and (b) secures Landlord's
obligation to repay a Loan, as the same may be amended, supplemented or
modified.
"Net Award" shall mean (a) the entire award payable to Landlord or
Lender by reason of a Condemnation whether pursuant to a judgment or by
agreement or otherwise, or (b) the entire proceeds of any insurance required
under clauses (i), (ii) (to the extent payable to Landlord or Lender), (iv), (v)
or (vi) of Paragraph 16(a), as the case may be, less any expenses incurred by
Landlord and Lender in collecting such award or proceeds.
"Note" shall mean any promissory note evidencing Landlord's obligation
to repay a Loan, as the same may be amended, supplemented or modified.
"Partial Casualty" shall mean any Casualty which does not constitute a
Termination Event.
"Partial Condemnation" shall mean any Condemnation which does not
constitute a Termination Event.
"Permitted Encumbrances" shall mean those covenants, restrictions,
reservations, liens, conditions and easements and other encumbrances, other than
any Mortgage or Assignment, listed on EXHIBIT "C" hereto (but such listing shall
not be deemed to revive any such encumbrances that have expired or terminated or
are otherwise invalid or unenforceable).
"Person" shall mean an individual, partnership, association,
corporation or other entity.
"Prepayment Premium" shall mean any payment (other than a payment of
principal and/or interest which Landlord is required to make under a Note or a
Mortgage) by reason of any prepayment by Landlord of any principal due under a
Note or Mortgage, and which may be (in lieu of such prepayment premium or
prepayment penalty) a "make whole" clause requiring a prepayment premium in an
amount sufficient to compensate the Lender for the loss of the benefit of the
Loan due to a prepayment.
"Present Value" of any amount shall mean such amount discounted by a
rate per annum which is the lower of (a) the Prime Rate at the time such present
value is determined or (b) eight percent (8%) per annum.
"Prime Rate" shall mean the annual interest rate as published, from
time to time, in THE WALL STREET JOURNAL as the "Prime Rate" in its column
entitled "Money Rate". The Prime Rate may not be the lowest rate of interest
charged by any "large U.S. money center commercial banks" and Landlord makes no
representations or warranties to that effect. In the event THE WALL STREET
JOURNAL ceases publication or ceases to publish the "Prime Rate" as described
above, the Prime Rate shall be the average per annum discount rate (the
"DISCOUNT RATE") on ninety-one (91) day bills ("TREASURY BILLS") issued from
time to time by the United States Treasury at its most recent auction, plus
three hundred (300) basis points. If no such 91-day Treasury Bills are then
being issued, the Discount Rate shall be the discount rate on Treasury Bills
then being issued for the period of time closest to ninety-one (91) days.
"Relevant Date" shall mean (a) the date immediately prior to the date
on which the applicable Condemnation Notice is received, in the event of a
Termination Notice under Paragraph 18 which is occasioned by a Taking, (b) the
date immediately prior to the date on which the applicable Casualty occurs, in
the event of a Termination Notice under Paragraph 18 which is occasioned by a
Casualty, (c) the date when Fair Market Value is redetermined, in the event of a
redetermination of Fair Market Value pursuant to Paragraph 20(c), (d) the date
immediately prior to the Event of Default giving rise to the need to determine
Fair Market Value in the event Landlord provides Tenant with notice of its
intention to require Tenant to make a termination offer under Paragraph
23(a)(iii).
"Renewal Term" shall mean Renewal Term as defined in Paragraph 5(b)
hereof.
"Rent" shall mean, collectively, Basic Rent and Additional Rent.
"Requisition" shall mean any temporary requisition or confiscation of
the use or occupancy of any of the Leased Premises by any governmental
authority, civil or military, whether pursuant to an agreement with such
governmental authority in settlement of or under threat of any such requisition
or confiscation, or otherwise.
"Site Assessment" shall mean a Site Assessment as defined in Paragraph
10(c).
"State" shall mean the State of New York.
"Surviving Obligations" shall mean any obligations of Tenant under
this Lease, actual or contingent, which arise on or prior to the expiration or
prior termination of this Lease or which survive such expiration or termination
by their own terms.
"Taking" shall mean any taking or damaging of all or a portion of any
of the Leased Premises (i) in or by condemnation or other eminent domain
proceedings pursuant to any Law, general or special, or (ii) by reason of any
agreement with any condemnor in settlement of or under threat of any such
condemnation or other eminent domain proceeding, or (iii) by any other means.
The Taking shall be considered to have taken place as of the later of the date
actual physical possession is taken by the condemnor, or the date on which the
right to compensation and damages accrues under the law applicable to the Leased
Premises.
"Term" shall mean the Term as defined in Paragraph 5.
"Termination Amount" shall mean the greater of (a) Fair Market Value
or (b) the sum of the applicable Termination Value specified in Schedule 1
attached hereto and any Prepayment Premium which Landlord will be required to
pay in prepaying any Loan with proceeds of the Termination Amount.
"Termination Date" shall mean Termination Date as defined in Paragraph
18.
"Termination Event" shall mean a Termination Event as defined in
Paragraph 18.
"Termination Notice" shall mean Termination Notice as defined in
Paragraph 18(a).
3. TITLE AND CONDITION.
(a) The Leased Premises are demised and let subject to (i) the Mortgage
and Assignment presently in effect, (ii) the rights of any Persons in possession
of the Leased Premises, (iii) the existing state of title of any of the Leased
Premises, including any Permitted Encumbrances, (iv) any state of facts which an
accurate survey or physical inspection of the Leased Premises might show, (v)
all Legal Requirements, including any existing violation of any thereof, and
(vi) the condition of the Leased Premises as of the commencement of the Term,
without representation or warranty by Landlord.
(b) Tenant acknowledges that the Leased Premises is in good condition
and repair at the inception of this Lease. LANDLORD LEASES AND WILL LEASE AND
TENANT TAKES AND WILL TAKE THE LEASED PREMISES AS IS. TENANT ACKNOWLEDGES THAT
LANDLORD (WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT
MADE AND WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY
OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED
PREMISES, INCLUDING ANY WARRANTY OR REPRESENTATION AS TO (i) ITS FITNESS, DESIGN
OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE, (ii) THE QUALITY OF THE MATERIAL
OR WORKMANSHIP THEREIN, (iii) THE EXISTENCE OF ANY DEFECT, LATENT OR PATENT,
(iv) LANDLORD'S TITLE THERETO, (v) VALUE, (vi) COMPLIANCE WITH SPECIFICATIONS,
(vii) LOCATION, (viii) USE, (ix) CONDITION, (x) MERCHANTABILITY, (xi) QUALITY,
(xii) DESCRIPTION, (xiii) DURABILITY, (xiv) OPERATION, (xv) THE EXISTENCE OF ANY
HAZARDOUS SUBSTANCE, HAZARDOUS CONDITION OR HAZARDOUS ACTIVITY OR (xvi)
COMPLIANCE OF THE LEASED PREMISES WITH ANY LAW OR LEGAL REQUIREMENT; AND ALL
RISKS INCIDENT THERETO ARE TO BE BORNE BY TENANT. TENANT ACKNOWLEDGES THAT THE
LEASED PREMISES IS OF ITS SELECTION AND TO ITS SPECIFICATIONS AND THAT THE
LEASED PREMISES HAS BEEN INSPECTED BY TENANT AND IS SATISFACTORY TO IT. IN THE
EVENT OF ANY DEFECT OR DEFICIENCY IN ANY OF THE LEASED PREMISES OF ANY NATURE,
WHETHER LATENT OR PATENT, LANDLORD SHALL NOT HAVE ANY RESPONSIBILITY OR
LIABILITY WITH RESPECT THERETO OR FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES
(INCLUDING STRICT LIABILITY IN TORT). THE PROVISIONS OF THIS PARAGRAPH 3(b) HAVE
BEEN NEGOTIATED, AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY
WARRANTIES BY LANDLORD, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED
PREMISES, ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANY OTHER LAW NOW
OR HEREAFTER IN EFFECT OR ARISING OTHERWISE.
(c) Tenant represents to Landlord that Tenant has examined the title
to the Leased Premises prior to the execution and delivery of this Lease and has
found the same to be satisfactory for the purposes contemplated hereby. Tenant
acknowledges that (i) fee simple title (both legal and equitable) is in Landlord
and that Tenant has only the leasehold right of possession and use of the Leased
Premises as provided herein, (ii) the Improvements conform to all material Legal
Requirements and all Insurance Requirements, (iii) all easements necessary or
appropriate for the use or operation of the Leased Premises have been obtained,
(iv) all contractors and subcontractors who have performed work on or supplied
materials to the Leased Premises have been fully paid, and all materials and
supplies have been fully paid for, (v) the Improvements have been fully
completed in all material respects in a workmanlike manner of first class
quality, and (vi) all Equipment necessary or appropriate for the use or
operation of the Leased Premises has been installed and is presently fully
operative in all material respects.
(d) Landlord hereby assigns to Tenant, without recourse or warranty
whatsoever, all warranties, guaranties, indemnities and similar rights which
Landlord may have against any manufacturer, seller, engineer, contractor or
builder in respect of any of the Leased Premises. Such assignment shall remain
in effect until an Event of Default occurs or until the expiration or earlier
termination of this Lease, whereupon such assignment shall cease and all of said
warranties, guaranties, indemnities and other rights shall automatically revert
to Landlord.
4. USE OF LEASED PREMISES; QUIET ENJOYMENT.
(a) Tenant may occupy and use the Leased Premises for office with
related research, development, distribution, assembly and manufacturing
facilities and for no other purpose. Tenant shall not use or occupy or permit
any of the Leased Premises to be used or occupied, nor do or permit anything to
be done in or on any of the Leased Premises, in a manner which would or might
(i) violate any Law or Legal Requirement, (ii) make void or voidable or cause
any insurer to cancel any insurance required by this Lease, or make it difficult
or impossible to obtain any such insurance at commercially reasonable rates,
(iii) cause structural injury to any of the Improvements or (iv) constitute a
public or private nuisance or waste.
(b) Subject to the provisions hereof, so long as no Event of Default
has occurred and is continuing, Tenant shall quietly hold, occupy and enjoy the
Leased Premises throughout the Term, without any hindrance, ejection or
molestation by Landlord with respect to matters that arise after the date
hereof, provided that Landlord or its agents may enter upon and examine any of
the Leased Premises at such reasonable times as Landlord may select and upon
reasonable notice to Tenant (except in the case of an emergency, in which no
notice shall be required) for the purpose of inspecting the Leased Premises,
verifying compliance or non-compliance by Tenant with its obligations hereunder
and the existence or non-existence of an Event of Default or event which with
the passage of time and/or notice would constitute an Event of Default, showing
the Leased Premises to prospective Lenders and purchasers and taking such other
action with respect to the Leased Premises as is permitted by any provision
hereof.
5. TERM.
(a) Subject to the provisions hereof, Tenant shall have and hold the
Leased Premises for an initial term (such term, as extended or renewed in
accordance with the provisions hereof, being called the "TERM") commencing on
the date hereof (the "COMMENCEMENT DATE") and ending on the last day of the two
hundred fortieth (240th) calendar month next following the date hereof (the
"EXPIRATION DATE").
(b) Provided that if, on or prior to the Expiration Date, this Lease
shall not have been terminated pursuant to any provision hereof, then on the
Expiration Date Tenant shall have the option to extend the Term for an
additional period of four (4) years (the "RENEWAL TERM"). Tenant shall exercise
such option by written notice to Landlord at least one (1) year prior to the
Expiration Date. The extension of the Term shall be subject to all of the
provisions of this Lease, as the same may be amended, supplemented or modified.
(c) If Tenant does not exercise its option to extend the Term, or if
an Event of Default occurs, then Landlord shall have the right during the
remainder of the Term and, in any event, Landlord shall have the right during
the last year of the Term, to (i) advertise the availability of the Leased
Premises for sale or reletting and to erect upon the Leased Premises signs
indicating such availability and (ii) show the Leased Premises to prospective
purchasers or tenants or their agents at such reasonable times as Landlord may
select.
6. BASIC RENT. Tenant shall pay to Landlord, as annual rent for the
Leased Premises during the Term, the amounts determined in accordance with
EXHIBIT "D" hereto ("BASIC Rent"), commencing on the first day of January, 1997,
and continuing on the first day of each April, July, October and January
thereafter during the Term (each such day being a "BASIC RENT PAYMENT DATE").
Each such rental payment shall be made, at Landlord's sole discretion, (a) to
Landlord at its address set forth above and/or to one other Person, at such
addresses and in such proportions as Landlord may direct by fifteen (15) days'
prior written notice to Tenant (in which event Tenant shall give Landlord notice
of each such payment concurrent with the making thereof), and (b) by a check
hand delivered on or mailed at least ten (10) days before the applicable Basic
Rent Payment Date, or in Federal Funds. Pro rata Basic Rent for the period from
the date hereof through the last day of the month hereof shall be paid on the
date hereof.
7. ADDITIONAL RENT.
(a) Tenant shall pay and discharge, as additional rent (collectively,
"ADDITIONAL RENT"):
(i) except as otherwise specifically provided herein, all
costs and expenses of Tenant, Landlord and any other Persons specifically
referenced herein which are incurred in connection or associated with (A) the
ownership, use, non-use, occupancy, possession, operation, condition, design,
construction, maintenance, alteration, repair or restoration of any of the
Leased Premises, (B) the performance of any of Tenant's obligations under this
Lease, (C) any sale or other transfer of any of the Leased Premises to Tenant
under this Lease, (D) any Condemnation proceedings, (E) the adjustment,
settlement or compromise of any insurance claims involving or arising from any
of the Leased Premises, (F) the prosecution, defense or settlement of any
litigation involving or arising from any of the Leased Premises, this Lease, or
the sale of the Leased Premises to Landlord, (G) the exercise or enforcement by
Landlord, its successors and assigns, of any of its rights under this Lease, (H)
any amendment to or modification or termination of this Lease made at the
request of Tenant, (I) reasonable costs of Landlord's outside counsel incurred
in connection with any act undertaken by Landlord (or its counsel) at the
request of Tenant, or incurred in connection with any act of Landlord performed
on behalf of Tenant, and (J) any other items specifically required to be paid by
Tenant under this Lease;
(ii) after the date all or any portion of any installment of
Basic Rent is due and not paid, an amount equal to five percent (5%) of the
amount of such unpaid installment or portion thereof ("LATE CHARGE"); provided,
however, that with respect to the first two late payments of all or any portion
of any installment of Basic Rent in any consecutive twelve (12) month period,
the Late Charge shall not be due and payable unless the Basic Rent has not been
paid within five (5) days' following the due date thereof;
(iii) a sum net of the amount of the Late Charge (including any
late charge, default penalties, interest and fees of Lender's counsel) which are
payable by Landlord to any Lender under any Note by reason of Tenant's late
payment or non-payment of Basic Rent or by reason of an Event of Default; and
(iv) interest at the rate (the "Default Rate") of three percent
(3%) over the Prime Rate per annum on the following sums until paid in full: (A)
all overdue installments of Basic Rent from the respective due dates thereof,
(B) all overdue amounts of Additional Rent relating to obligations which
Landlord shall have paid on behalf of Tenant fifteen (15) days from the date
Landlord notifies Tenant in writing of payment thereof by Landlord, and (C) all
other overdue amounts of Additional Rent, from the date when any such amount
becomes overdue.
(b) Tenant shall pay and discharge (i) any Additional Rent referred to
in Paragraph 7(a)(i) when the same shall become due, provided that amounts which
are billed to Landlord or any third party, but not to Tenant, shall be paid
within five (5) days after Landlord's demand for payment thereof, and (ii) any
other Additional Rent, within five (5) days after Landlord's demand for payment
thereof.
(c) In no event shall amounts payable under Paragraph 7(a)(ii), (iii)
and (iv) exceed the maximum amount permitted by applicable Law.
8. NET LEASE; NON-TERMINABILITY.
(a) This is a net lease and all Monetary Obligations shall be paid
without notice or demand and without set-off, counterclaim, recoupment,
abatement, suspension, deferment, diminution, deduction, reduction or defense
(collectively, a "SET-OFF").
(b) Except as otherwise expressly provided herein, this Lease and the
rights of Landlord and the obligations of Tenant hereunder shall not be affected
by any event or for any reason, including the following: (i) any damage to or
theft, loss or destruction of any of the Leased Premises, (ii) any Condemnation
(except as provided in Paragraph 18 hereof), (iii) Tenant's acquisition of
ownership of any of the Leased Premises other than pursuant to an express
provision of this Lease, (iv) any default on the part of Landlord hereunder or
under any Note, Mortgage, Assignment or any other agreement, (v) any latent or
other defect in any of the Leased Premises, (vi) the breach of any warranty of
any seller or manufacturer of any of the Equipment, (vii) any violation of any
provision of this Lease by Landlord, (viii) the bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution or
winding-up of, or other proceeding affecting Landlord, (ix) the exercise of any
remedy, including foreclosure, under any Mortgage or Assignment, (x) any action
with respect to this Lease (including the disaffirmance hereof) which may be
taken by Landlord, any trustee, receiver or liquidator of Landlord or any court
under the Federal Bankruptcy Code or otherwise, (xi) any interference with
Tenant's use of the Leased Premises, (xii) market or economic changes or (xiii)
any other cause, whether similar or dissimilar to the foregoing, any present or
future Law to the contrary notwithstanding.
(c) The obligations of Tenant hereunder shall be separate and
independent covenants and agreements, all Monetary Obligations shall continue to
be payable in all events (or, in lieu thereof, Tenant shall pay amounts equal
thereto), and the obligations of Tenant hereunder shall continue unaffected
unless the requirement to pay or perform the same shall have been terminated
pursuant to an express provision of this Lease. All Rent payable by Tenant
hereunder shall constitute "rent" for all purposes (including Section 502(b)(6)
of the Bankruptcy Code).
(d) Except as otherwise expressly provided herein, Tenant shall have
no right and hereby waives all rights which it may have under any Law (i) to
quit, terminate or surrender this Lease or any of the Leased Premises, or (ii)
to any Set-Off of any Monetary Obligations.
9. PAYMENT OF IMPOSITIONS.
(a) Tenant shall, before interest or penalties are due thereon, pay
and discharge all taxes (including real and personal property, franchise, sales
and rent taxes), all charges for any easement or agreement maintained for the
benefit of any of the Leased Premises, all assessments and levies, all permit,
inspection and license fees, all rents and charges for water, sewer, utility and
communication services relating to any of the Leased Premises, all ground rents
and all other public charges whether of a like or different nature, even if
unforeseen or extraordinary, imposed upon or assessed against (i) Tenant, (ii)
Tenant's leasehold interest in the Leased Premises, (iii) any of the Leased
Premises, (iv) Landlord as a result of or arising in respect of the acquisition,
ownership, occupancy, leasing, use, possession or sale of any of the Leased
Premises, any activity conducted on any of the Leased Premises, or the Rent, or
(v) any Lender by reason of any Note, Mortgage, Assignment or other document
evidencing or securing a Loan and which (as to this clause (v)) Landlord has
agreed to pay (collectively, the "IMPOSITIONS"); provided, that nothing herein
shall obligate Tenant to pay (A) income, excess profits or other taxes of
Landlord (or Lender) which are determined on the basis of Landlord's (or
Lender's) net income or net worth (unless such taxes are in lieu of or a
substitute for any other tax, assessment or other charge upon or with respect to
the Leased Premises which, if it were in effect, would be payable by Tenant
under the provisions hereof or by the terms of such tax, assessment or other
charge), (B) any estate, inheritance, succession, gift or similar tax imposed on
Landlord or (C) any capital gains tax or transfer taxes (except transfer taxes
payable in connection with a sale of the Leased Premises to Tenant or its
designee pursuant to any applicable provision of this Lease) imposed on Landlord
in connection with the sale of the Leased Premises to any Person. If any
Imposition may be paid in installments without interest or penalty, Tenant shall
have the option to pay such Imposition in installments; in such event, Tenant
shall be liable only for those installments which accrue or become due and
payable during the Term. Tenant shall prepare and file all tax reports required
by governmental authorities which relate to the Impositions. Tenant shall
deliver to Landlord (1) copies of all settlements and notices pertaining to the
Impositions which may be issued by any governmental authority within ten (10)
days after Tenant's receipt thereof, (2) receipts for payment of all taxes
required to be paid by Tenant hereunder within thirty (30) days after the due
date thereof and (3) receipts for payment of all other Impositions within ten
(10) days after Landlord's request therefor.
(b) Landlord shall have the right during (but not before or after) the
occurrence of an Event of Default to require Tenant to pay to Landlord an
additional monthly sum sufficient to pay the Escrow Charges (as hereinafter
defined) as they become due. As used herein, "ESCROW CHARGES" shall mean real
estate taxes on the Leased Premises or payments in lieu thereof and premiums on
any insurance required by this Lease. Landlord shall reasonably estimate the
amount of the Escrow Charges and shall notify Tenant to pay the same to Landlord
in equal monthly installments (each an "ESCROW Payment") as nearly as
practicable, in addition to all other sums due under this Lease. As long as the
Escrow Payments are being held by Landlord the Escrow Payments shall not be
commingled with other funds of Landlord or other Persons and interest thereon
shall accrue for the benefit of Tenant from the date such monies are received
and invested until the date such monies are disbursed to pay Escrow Charges.
Landlord shall apply the Escrow Payments to the payment of the Escrow Charges in
such order or priority as Landlord shall determine or as required by law. If at
any time the Escrow Payments theretofore paid to Landlord shall be insufficient
for the payment of the Escrow Charges, Tenant, within ten (10) days after
Landlord's demand therefor, shall pay the amount of the deficiency to Landlord.
10. COMPLIANCE WITH LAWS AND EASEMENT AGREEMENTS; ENVIRONMENTAL
MATTERS.
(a) Tenant shall, at its expense, comply with and conform to, and
cause the Leased Premises and any other Person occupying any part of the Leased
Premises to comply with and conform to, all Insurance Requirements and Legal
Requirements (including all applicable Environmental Laws). Tenant shall not at
any time (i) cause, permit or suffer to occur any Environmental Violation or
(ii) permit any sublessee, assignee or other Person occupying the Leased
Premises under or through Tenant to cause, permit or suffer to occur any
Environmental Violation.
(b) Tenant, at its sole cost and expense, will at all times promptly
and faithfully abide by, discharge and perform all of the covenants, conditions
and agreements contained in any Easement Agreement on the part of Landlord or
the other beneficiary to be kept and performed thereunder. Tenant will not
alter, modify, amend or terminate any Easement Agreement, give any consent or
approval thereunder, or enter into any new Easement Agreement without, in each
case, the prior written consent of Landlord, which consent shall not be
unreasonably withheld, conditioned or delayed.
(c) Upon prior written notice from Landlord, Tenant shall permit such
persons as Landlord may designate ("SITE REVIEWERS") to visit the Leased
Premises and perform environmental site investigations and assessments ("SITE
ASSESSMENTS") on the Leased Premises for the purpose of determining whether
there exists on the Leased Premises any Environmental Violation or any condition
which could result in any Environmental Violation. Such Site Assessments may
include both above and below the ground testing for Environmental Violations and
such other tests as may be necessary, in the opinion of the Site Reviewers, to
conduct the Site Assessments. Tenant shall supply to the Site Reviewers such
historical and operational information regarding the Leased Premises as may be
reasonably requested by the Site Reviewers to facilitate the Site Assessments,
and shall make available for meetings with the Site Reviewers appropriate
personnel having knowledge of such matters. The cost of performing and reporting
Site Assessments shall be paid by Tenant.
(d) If an Environmental Violation occurs or is found to exist and, in
Landlord's reasonable judgment, the cost of remediation of the same is likely to
exceed $100,000, Tenant shall provide to Landlord, within ten (10) days after
Landlord's request therefor, reasonable financial assurances that Tenant will
effect such remediation in accordance with applicable Environmental Laws.
(e) Notwithstanding any other provision of this Lease, if an
Environmental Violation occurs or is found to exist, the Term would otherwise
terminate or expire and Landlord, after good faith efforts, shall have been
unable to relet the Leased Premises solely because of the existence of such
Environmental Violation, then, at the option of Landlord, the Term shall be
automatically extended beyond the date of termination or expiration and this
Lease shall remain in full force and effect beyond such date until the earliest
to occur of (i) the completion of remedial action to the extent necessary to
make the Leased Premises relettable, (ii) the date specified in a written notice
from Landlord to Tenant terminating this Lease or (iii) the date on which Tenant
obtains a bona-fide replacement tenant for the Leased Premises on terms
reasonably satisfactory to Landlord (and in this regard Landlord and its broker
shall reasonably cooperate with Tenant with respect to Tenant's marketing
efforts).
(f) If Tenant fails to correct any Environmental Violation which
occurs or is found to exist, Landlord shall have the right (but no obligation)
to take any and all actions as Landlord shall deem necessary or advisable in
order to cure such Environmental Violation.
(g) Tenant shall notify Landlord immediately after becoming aware of
any Environmental Violation (or alleged Environmental Violation) or
noncompliance with any of the covenants contained in this Paragraph 10 and shall
forward to Landlord immediately upon receipt thereof copies of all orders,
reports, notices, permits, applications or other communications relating to any
such violation or noncompliance.
(h) All future leases, subleases or concession agreements relating to
the Leased Premises entered into by Tenant shall contain covenants of the other
party not to at any time (i) cause any Environmental Violation to occur or (ii)
permit any Person occupying the Leased Premises through said subtenant or
concessionaire to cause any Environmental Violation to occur.
11. LIENS; RECORDING.
(a) Tenant shall not, directly or indirectly, create or permit to be
created or to remain and shall promptly discharge or remove any lien, levy or
encumbrance on any of the Leased Premises or on any Rent or any other sums
payable by Tenant under this Lease, other than any Mortgage or Assignment, the
Permitted Encumbrances and any mortgage, lien, encumbrance or other charge
created by or resulting solely from any act or omission of Landlord. NOTICE IS
HEREBY GIVEN THAT LANDLORD SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR
MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT OR TO ANYONE HOLDING OR
OCCUPYING ANY OF THE LEASED PREMISES THROUGH OR UNDER TENANT, AND THAT NO
MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH
TO OR AFFECT THE INTEREST OF LANDLORD IN AND TO ANY OF THE LEASED PREMISES.
LANDLORD MAY AT ANY TIME, AND AT LANDLORD'S REQUEST TENANT SHALL PROMPTLY, POST
ANY NOTICES ON THE LEASED PREMISES REGARDING SUCH NON-LIABILITY OF LANDLORD.
(b) Tenant shall execute, deliver and record, file or register
(collectively, "RECORD") all such instruments as may be required or permitted by
any present or future Law in order to evidence the respective interests of
Landlord and Tenant in the Leased Premises, and shall cause a memorandum of this
Lease (or, if such a memorandum cannot be recorded, this Lease), and any
supplement hereto or thereto, to be recorded in such manner and in such places
as may be required or permitted by any present or future Law in order to protect
the validity and priority of this Lease.
12. MAINTENANCE AND REPAIR.
(a) Tenant shall at all times maintain the Leased Premises and the
Adjoining Property in as good repair and appearance as they are in on the date
hereof, except for ordinary wear and tear, and fit to be used for their intended
use in accordance with the better of the practices generally recognized as then
acceptable by other companies in its industry or observed by Tenant with respect
to the other real properties owned or operated by it, and, in the case of the
Equipment, in as good mechanical condition as it was on the later of the date
hereof or the date of its installation, except for ordinary wear and tear.
Tenant shall take every other action necessary or appropriate for the
preservation and safety of the Leased Premises. Tenant shall promptly make all
Alterations of every kind and nature, whether foreseen or unforeseen, which may
be required to comply with the foregoing requirements of this Paragraph 12(a).
Landlord shall not be required to make any Alteration, whether foreseen or
unforeseen, or to maintain any of the Leased Premises or Adjoining Property in
any way, and Tenant hereby expressly waives any right which may be provided for
in any Law now or hereafter in effect to make Alterations at the expense of
Landlord or to require Landlord to make Alterations. Any Alteration made by
Tenant pursuant to this Paragraph 12 shall be made in conformity with the
provisions of Paragraph 13.
(b) If any Improvement, now or hereafter constructed, shall (i)
encroach upon any setback or any property, street or right-of-way adjoining the
Leased Premises, (ii) violate the provisions of any restrictive covenant
affecting the Leased Premises, (iii) hinder or obstruct any easement or
right-of-way to which any of the Leased Premises is subject or (iv) impair the
rights of others in, to or under any of the foregoing, Tenant shall, promptly
after receiving notice or otherwise acquiring knowledge thereof, either (A)
obtain from all necessary parties waivers or settlements of all claims,
liabilities and damages resulting from each such encroachment, violation,
hindrance, obstruction or impairment, whether the same shall affect Landlord,
Tenant or both, or (B) take such action as shall be necessary to remove all such
encroachments, hindrances or obstructions and to end all such violations or
impairments, including, if necessary, making Alterations.
13. ALTERATIONS AND IMPROVEMENTS.
(a) Tenant shall have the right, without having obtained the prior
written consent of Landlord and Lender, to make (i) Alterations or a series of
related Alterations that, as to any such Alterations or series of related
Alterations, do not cost in excess of $250,000 and (ii) to install Equipment in
the Improvements or accessions to the Equipment that, as to such Equipment or
accessions, do not in any Lease Year cost in excess of $250,000 , so long as at
the time of construction or installation of any such Equipment or Alterations no
Event of Default exists and the value and utility of the Leased Premises is not
diminished thereby. If the cost of any Alterations, series of related
Alterations, Equipment or accessions thereto in any Lease Year is in excess of
$250,000, the prior written approval of Landlord and Lender shall be required,
such approval not to be unreasonably withheld, delayed or conditioned. Tenant
shall not construct upon the Land any additional buildings without having first
obtained the prior written consent of Landlord and Lender.
(b) If Tenant makes any Alterations pursuant to this Paragraph 13 or
as required by Paragraph 12 or 17 (such Alterations and actions being
hereinafter collectively referred to as "WORK"), whether or not Landlord's
consent is required, then (i) the market value of the Leased Premises shall not
be lessened by any such Work or its usefulness impaired, (ii) all such Work
shall be performed by Tenant in a good and workmanlike manner, (iii) all such
Work shall be expeditiously completed in compliance with all Legal Requirements,
(iv) all such Work shall comply with the Insurance Requirements, (v) if any such
Work involves the replacement of Equipment or parts thereto, all replacement
Equipment or parts shall have a value and useful life equal to the greater of
(A) the value and useful life on the date hereof of the Equipment being replaced
or (B) the value and useful life of the Equipment being replaced immediately
prior to the occurrence of the event which required its replacement, (vi) Tenant
shall promptly discharge or remove all liens filed against any of the Leased
Premises arising out of such Work, (vii) Tenant shall procure and pay for all
permits and licenses required in connection with any such Work, (viii) all such
Work shall be the property of Landlord and shall be subject to this Lease, and
Tenant shall execute and deliver to Landlord any document requested by Landlord
evidencing the assignment to Landlord of all estate, right, title and interest
(other than the leasehold estate created hereby) of Tenant or any other Person
thereto or therein, and (ix) Tenant shall comply, to the extent requested by
Landlord or required by this Lease, with the provisions of Paragraph 19(a),
whether or not such Work involves restoration of the Leased Premises.
14. PERMITTED CONTESTS. Notwithstanding any other provision of this
Lease, Tenant shall not be required to (a) pay any Imposition, (b) discharge or
remove any lien referred to in Paragraph 11 or 13 or (c) take any action with
respect to any encroachment, violation, hindrance, obstruction or impairment
referred to in Paragraph 12(b) (such non-compliance with the terms hereof being
hereinafter referred to collectively as "PERMITTED VIOLATIONS"), so long as at
the time of such contest no Event of Default exists and so long as Tenant shall
contest, in good faith, the existence, amount or validity thereof, the amount of
the damages caused thereby, or the extent of its or Landlord's liability
therefor by appropriate proceedings and so long as none of the following shall
be actually threatened: (i) the collection of, or other realization upon, the
Permitted Violation so contested, (ii) the sale, forfeiture or loss of any of
the Leased Premises or any Rent to satisfy or to pay any damages caused by any
Permitted Violation, (iii) any material interference with the use or occupancy
of any of the Leased Premises, (iv) any interference with the payment of any
Rent and so long as the cancellation or increase in the rate of any insurance
policy shall not be threatened or Landlord or Tenant shall not have received a
statement by the carrier that coverage will be denied. Tenant shall provide
Landlord security which is satisfactory, in Landlord's reasonable judgment, to
assure that such Permitted Violation is corrected, including all Costs, interest
and penalties that may be incurred or become due in connection therewith. While
any proceedings which comply with the requirements of this Paragraph 14 are
pending and the required security is held by Landlord, Landlord shall not have
the right to correct any Permitted Violation thereby being contested unless
Landlord is required by law to correct such Permitted Violation and in
Landlord's reasonable judgment there does not exist a likelihood of criminal
liability. Each such contest shall be promptly and diligently prosecuted by
Tenant to a final conclusion, except that Tenant, so long as the conditions of
this Paragraph 14 are at all times complied with, has the right to attempt to
settle or compromise such contest through negotiations. Tenant shall pay any and
all losses, judgments, decrees and Costs in connection with any such contest and
shall, promptly after the final determination of such contest, fully pay and
discharge the amounts which shall be levied, assessed, charged or imposed or be
determined to be payable therein or in connection therewith, together with all
penalties, fines, interest and Costs thereof or in connection therewith, and
perform all acts the performance of which shall be ordered or decreed as a
result thereof. No such contest shall subject Landlord to the risk of any
criminal liability. With respect to Impositions, Tenant may in good faith seek a
refund, rebate or abatement of any Imposition levied in connection with the
Leased Premises as long as Tenant has arranged to pay such tax prior to its
becoming a lien on the Leased Premises.
15. INDEMNIFICATION.
(a) Tenant shall pay, protect, indemnify, defend, save and hold
harmless Landlord, Lender and all other Persons described in Paragraph 30 (each
an "INDEMNITEE") from and against any and all liabilities, losses, damages
(including punitive damages), penalties, Costs (including reasonable attorneys'
fees and costs), causes of action, suits, claims, demands or judgments of any
nature whatsoever, howsoever caused, unless caused by the gross negligence or
willful misconduct of the Indemnitee seeking indemnification, without regard to
the form of action and whether based on strict liability, negligence or any
other theory of recovery at law or in equity, arising from (i) any matter
pertaining to the acquisition (or the negotiations leading thereto), ownership,
use, non-use, occupancy, operation, condition, design, construction,
maintenance, repair or restoration of the Leased Premises or Adjoining Property,
(ii) any casualty in any manner arising from the Leased Premises or Adjoining
Property, whether or not Indemnitee has or should have knowledge or notice of
any defect or condition causing or contributing to said casualty, (iii) any
violation by Tenant of any provision of this Lease, any contract or agreement to
which Tenant is a party, any Legal Requirement or any Permitted Encumbrance or
any encumbrance Tenant consented to or the Mortgage or Assignment or (iv) any
alleged, threatened or actual Environmental Violation, including (A) liability
for response costs and for costs of removal and remedial action incurred by the
United States Government, any state or local governmental unit or any other
Person, or damages from injury to or destruction or loss of natural resources,
including the reasonable costs of assessing such injury, destruction or loss,
incurred pursuant to Section 107 of CERCLA, or any successor section or act or
provision of any similar state or local Law, (B) liability for costs and
expenses of abatement, correction or clean-up, fines, damages, response costs or
penalties which arise from the provisions of any of the other Environmental Laws
and (C) liability for personal injury or property damage arising under any
statutory or common-law tort theory, including damages assessed for the
maintenance of a public or private nuisance or for carrying on of a dangerous
activity.
(b) In case any action or proceeding is brought against any Indemnitee
by reason of any such claim, (i) Tenant may, except in the event of a conflict
of interest or a dispute between Tenant and any such Indemnitee or during the
continuance of an Event of Default, retain its own counsel at its own cost and
defend such action (it being understood that Landlord may employ counsel of its
choice to monitor the defense of any such action) and (ii) such Indemnitee shall
notify Tenant to resist or defend such action or proceeding by retaining counsel
reasonably satisfactory to such Indemnitee, and such Indemnitee will cooperate
and assist in the defense of such action or proceeding if reasonably requested
so to do by Tenant. In the event of a conflict of interest or dispute, Landlord
shall have the right to select counsel, and the cost of such counsel shall by
paid by Tenant.
(c) The obligations of Tenant under this Paragraph 15 shall survive
any termination, expiration or rejection in bankruptcy of this Lease.
16. INSURANCE.
(a) Tenant shall maintain the following insurance on or in connection
with the Leased Premises:
(i) Insurance against physical loss or damage to the
Improvements and Equipment as provided under a standard "All Risk" property
policy including but not limited to flood (if the Leased Premises is in a flood
zone) and earthquake coverage (if the Leased Premises is in an earthquake prone
zone) in amounts not less than the actual replacement cost of the Improvements
and Equipment. Such policies shall contain Replacement Cost and Agreed Amount
Endorsements and shall contain deductibles not more than $50,000 per occurrence.
(ii) Commercial General Liability Insurance (including but not
limited to Incidental Medical Malpractice and Host Liquor Liability) and
Business Automobile Liability Insurance (including Non-Owned and Hired
Automobile Liability) against claims for personal and bodily injury, death or
property damage occurring on, in or as a result of the use of the Leased
Premises, in an amount not less than $11,000,000 per occurrence/annual aggregate
and all other coverage extensions that are usual and customary for properties of
this size and type provided, however, that the Landlord shall have the right to
require such higher limits as may be reasonable and customary for properties of
this size and type.
(ii) Worker's compensation insurance covering all persons
employed by Tenant in connection with any work done on or about any of the
Leased Premises for which claims for death, disease or bodily injury may be
asserted against Landlord, Tenant or any of the Leased Premises or, in lieu of
such Worker's Compensation Insurance, a program of self-insurance complying with
the rules, regulations and requirements of the appropriate agency of the State.
(iv) Comprehensive Boiler and Machinery Insurance on any of the
Equipment or any other equipment on or in the Leased Premises, in an amount not
less than $5,000,000 per accident for damage to property. Such policies shall
include at least $5,000,000 per accident for Off-Premises Service Interruption,
Expediting Expenses, Ammonia Contamination, and Hazardous Materials Clean-Up
Expense and may contain a deductible not to exceed $50,000.
(v) Business Income/Extra Expense Insurance to include loss of
rents at limits sufficient to cover 100% of the annual rent payable to Landlord
with a period of indemnity not less than one year from time of loss. Such
insurance shall name Landlord as additional insured and Lender as loss payee
solely with respect to Rent payable to or for the benefit of Landlord under this
Lease.
(vi) During any period in which substantial Alterations at the
Leased Premises are being undertaken, builder's risk insurance covering the
total completed value including any "soft costs" with respect to the
Improvements being altered or repaired (on a completed value, non-reporting
basis), replacement cost of work performed and equipment, supplies and materials
furnished in connection with such construction or repair of Improvements or
Equipment, together with such "soft cost" endorsements and such other
endorsements as Landlord may reasonably require and general liability, worker's
compensation and automobile liability insurance with respect to the Improvements
being constructed, altered or repaired.
(vii) Such other insurance (or other terms with respect to any
insurance required pursuant to this Paragraph 16, including without limitation
amounts of coverage, deductibles, form of mortgagee clause) on or in connection
with any of the Leased Premises as Landlord or Lender may reasonably require,
which at the time is usual and commonly obtained in connection with properties
similar in type of building size, use and location to the Leased Premises.
(b) The insurance required by Paragraph 16(a) shall be written by
companies which have a Best's rating of A:X or above and are admitted in, and
approved to write insurance policies by, the State Insurance Department for the
State. The insurance policies (i) shall be for such terms as Landlord may
reasonably approve and (ii) shall be in amounts sufficient at all times to
satisfy any coinsurance requirements thereof. The insurance referred to in
Paragraphs 16(a)(i), 16(a)(iv) and 16(a)(vi) shall name Landlord as Owner and
Lender as loss payee and Tenant as its interest may appear. The insurance
referred to in Paragraph 16(a)(ii) shall name Landlord and Lender as additional
insureds. If said insurance or any part thereof shall expire, be withdrawn,
become void, voidable, unreliable or unsafe for any reason, including a breach
of any condition thereof by Tenant or the failure or impairment of the capital
of any insurer, or if for any other reason whatsoever said insurance shall
become reasonably unsatisfactory to Landlord, Tenant shall immediately obtain
new or additional insurance reasonably satisfactory to Landlord.
(c) Each insurance policy referred to in clauses (i), (iv), (v) and
(vi) of Paragraph 16(a) shall contain standard non-contributory mortgagee
clauses in favor of and acceptable to Lender. Each policy required by any
provision of Paragraph 16(a), except clause (iii) thereof, shall provide that it
may not be cancelled except after thirty (30) days' prior notice to Landlord and
Lender. Each such policy shall also provide that any loss otherwise payable
thereunder shall be payable notwithstanding (i) any act or omission of Landlord
or Tenant which might, absent such provision, result in a forfeiture of all or a
part of such insurance payment, (ii) the occupation or use of any of the Leased
Premises for purposes more hazardous than those permitted by the provisions of
such policy, (iii) any foreclosure or other action or proceeding taken by Lender
pursuant to any provision of the Mortgage, Note, Assignment or other document
evidencing or securing the Loan upon the happening of an event of default
therein or (iv) any change in title to or ownership of any of the Leased
Premises.
(d) Tenant shall pay as they become due all premiums for the insurance
required by Paragraph 16(a), shall renew or replace each policy and deliver to
Landlord evidence of the payment of the full premium therefor or installment
then due at least five (5) days prior to the expiration date of such policy, and
shall promptly deliver to Landlord certificates in form and substance
satisfactory to Landlord evidencing such insurance provided, that if requested
by any Lender, copies of policies shall also be delivered to Landlord.
(e) Anything in this Paragraph 16 to the contrary notwithstanding, any
insurance which Tenant is required to obtain pursuant to Paragraph 16(a) may be
carried under a "blanket" or umbrella policy or policies covering other
properties or liabilities of Tenant, provided that such "blanket" or umbrella
policy or policies otherwise comply with the provisions of this Paragraph 16 and
provided further that Tenant shall provide to Landlord a Statement of Values
which shall be reviewed annually and amended as necessary based on Replacement
Cost Valuations. The original or a certified copy of each such "blanket" or
umbrella policy shall promptly be delivered to Landlord.
(f) Tenant shall promptly comply with and conform to (i) all
provisions of each insurance policy required by this Paragraph 16 and (ii) all
requirements of the insurers thereunder applicable to Landlord, Tenant or any of
the Leased Premises or to the use, manner of use, occupancy, possession,
operation, maintenance, alteration or repair of any of the Leased Premises, even
if such compliance necessitates Alterations or results in interference with the
use or enjoyment of any of the Leased Premises.
(g) Tenant shall not carry separate insurance concurrent in form or
contributing in the event of a Casualty with that required in this Paragraph 16
unless (i) Landlord and Lender are included therein as named insureds, with loss
payable as provided herein, and (ii) such separate insurance complies with the
other provisions of this Paragraph 16. Tenant shall immediately notify Landlord
of such separate insurance and shall deliver to Landlord certificates in form
and substance satisfactory to Landlord evidencing such insurance.
(h) All policies shall contain effective waivers by the carrier
against all claims for insurance premiums against Landlord and shall contain
full waivers of subrogation against the Landlord.
(i) All proceeds of any insurance required under Paragraph 16(a) shall
be payable as follows:
(i) All proceeds of insurance required under clauses (ii),
(iii) and (iv) of Paragraph 16(a) and proceeds attributable to the general
liability coverage provisions of Builder's Risk insurance under clause (vi) of
Paragraph 16(a) shall be payable to the Person legally entitled to receive such
proceeds.
(ii) Proceeds of insurance required under clause (i) of
Paragraph 16(a) and proceeds attributable to Builder's Risk insurance (other
than its general liability coverage provisions) under clause (vi) of Paragraph
16(a) shall be payable to Landlord (or Lender) and applied as set forth in
Paragraph 17. Proceeds payable under clause (v) of Paragraph 16(a) shall be
payable to Landlord, or if required by the Mortgage, to Lender and, to the
extent actually received by Landlord or Lender, shall be an offset against Basic
Rent. Tenant shall apply the Net Award to restoration of the Leased Premises in
accordance with the applicable provisions of this Lease.
17. CASUALTY AND CONDEMNATION.
(a) If any Casualty to the Leased Premises occurs, Tenant shall give
Landlord and Lender immediate notice thereof. So long as no Event of Default
exists Tenant is hereby authorized to adjust, collect and compromise all claims
under any of the insurance policies required by Paragraph 16(a) (except public
liability insurance claims payable to a Person other than Tenant, Landlord or
Lender) and to execute and deliver on behalf of Landlord all necessary proofs of
loss, receipts, vouchers and releases required by the insurers and Landlord
shall have the right to join with Tenant therein. In such event Landlord agrees
to sign, upon the request of Tenant, all such proofs of loss, receipts, vouchers
and releases. Any final adjustment, settlement or compromise of any such claim
shall be subject to the prior written approval of Landlord, which shall not be
unreasonably withheld or delayed, and Landlord shall have the right to prosecute
or contest, or to require Tenant to prosecute or contest, any such claim,
adjustment, settlement or compromise. If an Event of Default exists, Tenant
shall not be entitled to adjust, collect or compromise any such claim or to
participate with Landlord in any adjustment, collection and compromise of the
Net Award payable in connection with a Casualty. In such event, Tenant agrees to
sign, upon the request of Landlord, all such proofs of loss, receipts, vouchers
and releases. Each insurer is hereby authorized and directed to make payment
under said policies, including return of unearned premiums, directly to Landlord
or, if required by the Mortgage, to Lender instead of to Landlord and Tenant
jointly, and Tenant hereby appoints each of Landlord and Lender as Tenant's
attorneys-in-fact to endorse any draft therefor. The rights of Landlord under
this Paragraph 17(a) shall be extended to Lender if and to the extent that any
Mortgage so provides.
(b) Tenant, immediately upon receiving a Condemnation Notice, shall
notify Landlord and Lender thereof. So long as no Event of Default exists,
Tenant is authorized to collect, settle and compromise the amount of any Net
Award and Landlord shall have the right to join with Tenant herein. If an Event
of Default exists, Landlord shall be authorized to collect, settle and
compromise the amount of any Net Award and Tenant shall not be entitled to
participate with Landlord in any Condemnation proceeding or negotiations under
threat thereof or to contest the Condemnation or the amount of the Net Award
therefor. No agreement with any condemnor in settlement or under threat of any
Condemnation shall be made by Tenant without the written consent of Landlord
which shall not be unreasonably withheld, conditioned or delayed. Subject to the
provisions of this Paragraph 17(b), Tenant hereby irrevocably assigns to
Landlord any award or payment to which Tenant is or may be entitled by reason of
any Condemnation, whether the same shall be paid or payable for Tenant's
leasehold interest hereunder or otherwise; but nothing in this Lease shall
impair Tenant's right to any award or payment on account of Tenant's trade
fixtures, equipment or other tangible property which is not part of the
Equipment, moving expenses or loss of business, if available, to the extent that
and so long as (i) Tenant shall have the right to make, and does make, a
separate claim therefor against the condemnor and (ii) such claim does not in
any way reduce either the amount of the award otherwise payable to Landlord for
the Condemnation of Landlord's fee interest in the Leased Premises or the amount
of the award (if any) otherwise payable for the Condemnation of Tenant's
leasehold interest hereunder. The rights of Landlord under this Paragraph 17(b)
shall also be extended to Lender if and to the extent that any Mortgage so
provides.
(c) If any Partial Casualty (whether or not insured against) or
Partial Condemnation shall occur, this Lease shall continue, notwithstanding
such event, and there shall be no abatement or reduction of any Monetary
Obligations. Promptly after such Partial Casualty or Partial Condemnation,
Tenant, as required in Paragraphs 12(a) and 13(b), shall commence and diligently
continue to restore the Leased Premises as nearly as possible to their value,
condition and character immediately prior to such event (assuming the Leased
Premises to have been in the condition required by this Lease). So long as no
Event of Default exists, any Net Award up to and including $250,000 shall be
paid by Landlord to Tenant and Tenant shall restore the Leased Premises in
accordance with the requirements of Paragraphs 12(a) and 13(b) of this Lease.
Any Net Award in excess of $250,000 shall (unless such Casualty resulting in the
Net Award is a Termination Event) be made available by Landlord (or Lender, if
required by the terms of any Mortgage) to Tenant for the restoration of any of
the Leased Premises pursuant to and in accordance with the provisions of
Paragraph 19 hereof. If any Casualty or Condemnation which is not a Partial
Casualty or Partial Condemnation shall occur, Tenant shall comply with the terms
and conditions of Paragraph 18.
18. TERMINATION EVENTS.
(a) If (i) the entire Leased Premises shall be taken by a Taking or
(ii) any substantial portion of the Leased Premises shall be taken by a Taking
or all or any substantial portion of the Leased Premises shall be damaged or
destroyed by a Casualty and, in such case, Tenant certifies and covenants to
Landlord that it will forever abandon operations at the Leased Premises (each of
the events described in the above clauses (i) and (ii) shall hereinafter be
referred to as a "TERMINATION EVENT"), then (x) in the case of (i) above, Tenant
shall be obligated, within thirty (30) days after Tenant receives a Condemnation
Notice and (y) in the case of (ii) above, Tenant shall have the option, within
thirty (30) days after Tenant receives a Condemnation Notice or thirty (30) days
after the Casualty, as the case may be, to give to Landlord written notice of
the Tenant's option to terminate this Lease (a "TERMINATION NOTICE") in the form
described in Paragraph 18(b).
(b) A Termination Notice shall contain (i) notice of Tenant's
intention to terminate this Lease on the first Basic Rent Payment Date which
occurs at least sixty (60) days after the Fair Market Value Date (the
"TERMINATION DATE"), (ii) a binding and irrevocable offer of Tenant to pay to
Landlord the Termination Amount and (iii) if the Termination Event is an event
described in Paragraph 18(a)(ii), the certification and covenants described
therein and a certified resolution of the Board of Directors of Tenant
authorizing the same. Promptly upon the delivery to Landlord of a Termination
Notice, Landlord and Tenant shall commence to determine the Fair Market Value.
(c) If Landlord shall reject such offer to terminate this Lease by
written notice to Tenant (a "Rejection"), which Rejection shall contain the
written consent of Lender, not later than thirty (30) days following the Fair
Market Value Date, then this Lease shall terminate on the Termination Date;
provided that, if Tenant has not satisfied all Basic Rent obligations on the
Termination Date, then Landlord may, at its option, extend the date on which
this Lease may terminate to a date which is no later than the first Basic Rent
Payment Date after the Termination Date on which Tenant has satisfied all such
Basic Rent obligations. Upon such termination (i) all obligations of Tenant
hereunder shall terminate except for any Surviving Obligations, (ii) Tenant
shall immediately vacate and shall have no further right, title or interest in
or to any of the Leased Premises and (iii) the Net Award shall be retained by
Landlord.
(d) Unless Tenant shall have received a Rejection not later than the
thirtieth (30th) day following the Fair Market Value Date, Landlord shall be
conclusively presumed to have accepted such offer. If such offer is accepted by
Landlord then, on the Termination Date, Tenant shall pay to Landlord the
Termination Amount and all Remaining Obligations and, if requested by Tenant,
Landlord shall (i) convey to Tenant the Leased Premises or the remaining portion
thereof, if any, and (ii) pay to or assign to Tenant Landlord's and Lender's
entire interest in and to the Net Award, all in accordance with Paragraph 20.
19. RESTORATION.
(a) Landlord (or Lender if required by any Mortgage), in either case
acting as trustee for the benefit of Landlord, Lender and Tenant, as their
interests may appear, shall hold Net Award in excess of $250,000 in a fund (the
"RESTORATION FUND") and disburse amounts from the Restoration Fund only in
accordance with the following conditions:
(i) prior to commencement of restoration, (A) the architects,
contracts, contractors, plans and specifications for the restoration shall have
been reasonably approved by Landlord and (B) Landlord and Lender shall be
provided with reasonably acceptable performance and payment bonds which insure
satisfactory completion of and payment for the restoration, are in an amount and
form and have a surety reasonably acceptable to Landlord, and name Landlord and
Lender as additional dual obligees;
(ii) at the time of any disbursement, no Event of Default shall
exist and no mechanics' or materialmen's liens shall have been filed against any
of the Leased Premises and remain undischarged, unbonded or, if filed, the title
company shall affirmatively insure over such lien or liens;
(iii) disbursements shall be made from time to time in an amount
not exceeding the cost of the work completed since the last disbursement, upon
receipt of (A) satisfactory evidence, including architects' certificates, of the
stage of completion, the estimated total cost of completion and performance of
the work to date in a good and workmanlike manner in accordance with the
contracts, plans and specifications, (B) waivers of liens, (C) contractors' and
subcontractors' sworn statements as to completed work and the cost thereof for
which payment is requested, (D) a satisfactory bringdown of title insurance and
(E) other evidence of cost and payment so that Landlord can verify that the
amounts disbursed from time to time are represented by work that is completed,
in place and free and clear of mechanics' and materialmen's lien claims;
(iv) each request for disbursement shall be accompanied by a
certificate of Tenant, signed by the president or a vice president of Tenant,
describing the work for which payment is requested, stating the cost incurred in
connection therewith, stating that Tenant has not previously received payment
for such work and, upon completion of the work, also stating that the work has
been fully completed and complies with the applicable requirements of this
Lease;
(v) Landlord may retain ten percent (10%) of the restoration
fund until fifty percent (50%) of the restoration is fully completed;
(vi) if the Restoration Fund is held by Landlord, the
Restoration Fund shall not be commingled with Landlord's other funds and shall
bear interest at a rate agreed to by Landlord and Tenant; and
(vii) such other reasonable conditions as Landlord or Lender
may impose.
(b) Prior to commencement of restoration and at any time during
restoration, if the estimated cost of completing the restoration work free and
clear of all liens, as determined by Landlord, exceeds the amount of the Net
Award available for such restoration, the amount of such excess shall, upon
demand by Landlord, be paid by Tenant to Landlord to be added to the Restoration
Fund. Any sum so added by Tenant which remains in the Restoration Fund upon
completion of restoration shall be refunded to Tenant. For purposes of
determining the source of funds with respect to the disposition of funds
remaining after the completion of restoration, the Net Award shall be deemed to
be disbursed prior to any amount added by Tenant.
(c) If any sum remains in the Restoration Fund after completion of
the restoration and any refund to Tenant pursuant to Paragraph 19(b), such sum
shall be retained by Landlord or, if required by a Note or Mortgage, paid by
Landlord to a Lender.
20. PROCEDURES UPON PURCHASE.
(a) If the Leased Premises is purchased by Tenant pursuant to any
provision of this Lease, Landlord need not convey any better title thereto than
that which was conveyed to Landlord, and Tenant shall accept such title,
subject, however, to the Permitted Encumbrances and to all other liens,
exceptions and restrictions on, against or relating to any of the Leased
Premises and to all applicable Laws, but free of the lien of and security
interest created by any Mortgage or Assignment and liens, exceptions and
restrictions on, against or relating to the Leased Premises which have been
created by or resulted solely from acts of Landlord after the date of this
Lease, unless the same are Permitted Encumbrances or customary utility easements
benefiting the Leased Premises or were created with the concurrence of Tenant or
as a result of a default by Tenant under this Lease.
(b) Upon the date fixed for any such purchase of the Leased Premises
pursuant to any provision of this Lease (any such date the "PURCHASE DATE"),
Tenant shall pay to Landlord, or to any Person to whom Landlord directs payment,
the Termination Amount therefor specified herein, in Federal Funds, less any
credit of the Net Award received and retained by Landlord or a Lender allowed
against the Termination Amount, and Landlord shall deliver to Tenant (i) a
bargain and sale deed with covenants which describes the premises being conveyed
and conveys the title thereto as provided in Paragraph 20(a), (ii) such other
instruments as shall be necessary to transfer to Tenant or its designee any
other property (or rights to any Net Award not yet received by Landlord or a
Lender) then required to be sold by Landlord to Tenant pursuant to this Lease
and (iii) any Net Award received by Landlord, not credited to Tenant against the
Termination Amount and required to be delivered by Landlord to Tenant pursuant
to this Lease; provided, that if any Monetary Obligations remain outstanding on
such date, then Landlord may deduct from the Net Award the amount of such
Monetary Obligations. If on the Purchase Date any Monetary Obligations remain
outstanding and no Net Award is payable to Tenant by Landlord or the amount of
such Net Award is less than the amount of the Monetary Obligations, then Tenant
shall pay to Landlord on the Purchase Date the amount of such Monetary
Obligations. Upon the completion of such purchase, this Lease and all
obligations and liabilities of Tenant hereunder shall terminate, except any
Surviving Obligations.
(c) If the completion of such purchase shall be delayed after (i) the
Termination Date, in the event of a purchase pursuant to Paragraph 18 or, (ii)
the date scheduled for such purchase, in the event of a purchase under any other
provision of this Lease then (x) Rent shall continue to be due and payable until
completion of such purchase and (y) if the completion is delayed for more than
one year then at Landlord's sole option, Fair Market Value shall be redetermined
and the Termination Amount payable by Tenant pursuant to the applicable
provision of this Lease shall be adjusted to reflect such redetermination.
(d) Any prepaid Monetary Obligations paid to Landlord shall be
prorated as of the Purchase Date, and the prorated unapplied balance shall be
deducted from the Termination Amount due to Landlord; provided, that no
apportionment of any Impositions shall be made upon any such purchase.
21. ASSIGNMENT AND SUBLETTING; PROHIBITION AGAINST LEASEHOLD
FINANCING.
(a)(i) Tenant shall have the right, upon thirty (30) days
prior written notice to Landlord and Lender, with no consent of Landlord or
Lender being required or necessary "PREAPPROVED ASSIGNMENT") to assign this
Lease to any Person that, immediately following such assignment has a publicly
traded unsecured senior debt rating of "BBB" or better from Moody's Investors
Services, Inc. or a rating of "Baa" or better from Standard & Poor's
Corporation, and in the event all of such rating agencies cease to furnish such
ratings, then a comparable rating by any rating agency reasonably acceptable to
Landlord and Lender.
(ii) Any assignment of this Lease except for a Preapproved
Assignment shall require the prior written consent of Landlord and Lender.
Tenant shall, not less than ninety (90) days prior to the date on which it
desires to make an assignment, submit to Landlord and Lender information
regarding the following with respect to the assignee (the "CRITERIA"): (i)
credit, (ii) capital structure, (iii) management, (iv) operating history, (v)
proposed use of the Leased Premises and (vi) risk factors associated with the
proposed use of the Leased Premises by the proposed assignee, taking into
account factors such as environmental concerns, product liability and the like.
Landlord and Lender shall review the Criteria, advise Tenant no later than the
fifteenth (15th) day following receipt of the Criteria if additional information
is required and shall approve or disapprove the proposed assignee no later than
the thirtieth (30th) day following receipt of all required information, and
Landlord and Lender shall be deemed to have approved the proposed assignment if
no response is given by the expiration of such thirty (30) day period. Landlord
and Lender shall be deemed to have acted reasonably in granting or withholding
consent if such grant or disapproval is based on their review of the Criteria.
Any purported assignment that is not a Preapproved Assignment or otherwise
consented to under this Paragraph 21(a) shall be null and void.
(b) Tenant shall have the right, without obtaining the consent of
Landlord, to have under sublease at any time up to and including but not in
excess of twenty-five percent (25%) of the net leaseable space in the Leased
Premises. Any sublease that, when added to all other subleases then in effect,
would result in more than twenty-five percent (25%) under sublease at any one
time shall require the prior written approval of Landlord and Lender.
(c) If Tenant assigns all its rights and interest under this Lease,
the assignee under such assignment shall expressly assume all the obligations of
Tenant hereunder, actual or contingent, including obligations of Tenant which
may have arisen on or prior to the date of such assignment, by a written
instrument delivered to Landlord at the time of such assignment. Each sublease
of any of the Leased Premises shall be subject and subordinate to the provisions
of this Lease. No assignment or sublease shall affect or reduce any of the
obligations of Tenant hereunder, and all such obligations shall continue in full
force and effect as obligations of a principal and not as obligations of a
guarantor, as if no assignment or sublease had been made. No assignment or
sublease shall impose any additional obligations on Landlord under this Lease.
(d) Tenant shall, within ten (10) days after the execution and
delivery of any assignment or sublease consented to by Landlord, deliver a
duplicate original copy thereof to Landlord which, in the event of an
assignment, shall be in recordable form.
(e) As security for performance of its obligations under this Lease,
Tenant hereby grants, conveys and assigns to Landlord all right, title and
interest of Tenant in and to all subleases now in existence or hereafter entered
into for any or all of the Leased Premises, any and all extensions,
modifications and renewals thereof and all rents, issues and profits therefrom.
Landlord hereby grants to Tenant a license to collect and enjoy all rents and
other sums of money payable under any sublease of any of the Leased Premises,
provided, however, that Landlord shall have the absolute right at any time
following the occurrence of an Event of Default to revoke said license and to
collect such rents and sums of money and to retain the same. Tenant shall not
accept any rents more than thirty (30) days in advance of the accrual thereof
nor do nor permit anything to be done, the doing of which, nor omit or refrain
from doing anything, the omission of which, will or could be a breach of or
default in the terms of any of the subleases.
(f) Tenant shall not have the power to mortgage, pledge or otherwise
encumber its interest under this Lease or any sublease of the Leased Premises,
and any such mortgage, pledge or encumbrance made in violation of this Paragraph
21 shall be void and of no force and effect.
(g) Landlord may sell or transfer the Leased Premises at any time
without Tenant's consent to any third party (each a "THIRD PARTY PURCHASER"). In
the event of any such transfer, Tenant shall attorn to any Third Party Purchaser
as Landlord so long as such Third Party Purchaser and Landlord notify Tenant in
writing of such transfer. At the request of Landlord, Tenant will execute such
documents confirming the agreement referred to above and such other agreements
as Landlord may reasonably request, provided that such agreements do not
increase the liabilities and obligations of Tenant hereunder.
22. EVENTS OF DEFAULT.
(a) The occurrence of any one or more of the following (after
expiration of any applicable cure period as provided in Paragraph 22(b)) shall,
at the sole option of Landlord, constitute an "EVENT OF DEFAULT" under this
Lease:
(i) a failure by Tenant to make any payment of any Monetary
Obligation, regardless of the reason for such failure;
(ii) a failure by Tenant duly to perform and observe, or a
violation or breach of, any other provision hereof not otherwise specifically
mentioned in this Paragraph 22(a);
(iii) any representation or warranty made by Tenant herein or in
any certificate, demand or request made pursuant hereto proves to be incorrect,
now or hereafter, in any material respect;
(4) a default beyond any applicable cure period or at maturity
by Tenant in any payment of principal or interest on any obligations for
borrowed money having an original principal balance of $4,000,000 or more in the
aggregate, or in the performance of any other provision contained in any
instrument under which any such obligation is created or secured (including the
breach of any covenant thereunder), (x) if such payment is a payment at maturity
or a final payment, or (y) if an effect of such default is to cause such
obligation to become due prior to its stated maturity;
(v) a default by Tenant beyond any applicable cure period in
the payment of rent under, or in the performance of any other material provision
of, any other lease that has rental obligations over the term thereof of
$2,000,000 or more if the Landlord under any such lease commences to exercise
its remedies thereunder;
(vi) a final, non-appealable judgment or judgments for the
payment of money in excess of $2,000,000 in the aggregate shall be rendered
against Tenant and the same shall remain undischarged for a period of one
hundred twenty (120) consecutive days;
(vii) The breach of any Covenant shall occur;
(viii) Tenant shall (A) voluntarily be adjudicated a bankrupt or
insolvent, (B) seek or consent to the appointment of a receiver or trustee for
itself or for the Leased Premises, (C) file a petition seeking relief under the
bankruptcy or other similar laws of the United States, any state or any
jurisdiction, (D) make a general assignment for the benefit of creditors, or (E)
be unable to pay its debts as they mature;
(ix) a court shall enter an order, judgment or decree
appointing, without the consent of Tenant, a receiver or trustee for it or for
any of the Leased Premises or approving a petition filed against Tenant which
seeks relief under the bankruptcy or other similar laws of the United States,
any state or any jurisdiction, and such order, judgment or decree shall remain
undischarged or unstayed ninety (90) days after it is entered;
(x) the Leased Premises shall have been vacated or abandoned;
(xi) Tenant shall be liquidated or dissolved or shall begin
proceedings towards its liquidation or dissolution;
(xii) the estate or interest of Tenant in any of the Leased
Premises shall be levied upon or attached in any proceeding and such estate or
interest is about to be sold or transferred or such process shall not be vacated
or discharged within ninety (90) days after it is made; or
(xiii) a failure by Tenant to perform or observe, or a violation
or breach of, or a misrepresentation by Tenant under any provision of any
Assignment or any other document between Tenant and Lender, if such failure,
violation, breach or misrepresentation gives rise to a default beyond any
applicable cure period with respect to any Loan.
(b) No notice or cure period shall be required in any one or more of
the following events: (A) the occurrence of an Event of Default under clause (i)
(except as otherwise set forth below), (iv), (v), (vi), (vii), (viii), (ix),
(xi), (xii) or (xiii) of Paragraph 22(a); (B) the default consists of a failure
to pay Basic Rent, a failure to provide any insurance required by Paragraph 16
or an assignment or sublease entered into in violation of Paragraph 21; or (C)
the default is such that any delay in the exercise of a remedy by Landlord could
reasonably be expected to cause irreparable harm to Landlord. If the default
consists of the failure to pay any Monetary Obligation under clause (i) of
Paragraph 22(a), the applicable cure period shall be three (3) days from the
date on which notice is given, provided that if the default consists of the
failure to pay Basic Rent under clause (i) of Paragraph 22(a), the applicable
cure period shall be three (3) days from the date on which notice is given, but
Landlord shall not be obligated to give notice of, or allow any cure period for,
any such default more than two (2) times within any Lease Year. If the default
consists of a default under clause (ii) of Paragraph 22(a), other than the
events specified in clauses (B) and (C) of the first sentence of this Paragraph
22(b), the applicable cure period shall be thirty (30) days from the date on
which notice is given or, if the default cannot be cured within such thirty (30)
day period and delay in the exercise of a remedy would not (in Landlord's
reasonable judgment) cause any material adverse harm to Landlord or any of the
Leased Premises, the cure period shall be extended for the period required to
cure the default (but such cure period, including any extension, shall not in
the aggregate exceed the lesser of any extended cure period provided to Landlord
under the terms of the Mortgage or one hundred twenty (120) days), provided that
Tenant shall commence to cure the default within the said thirty day period and
shall actively, diligently and in good faith proceed with and continue the
curing of the default until it shall be fully cured. If the default consists of
a default under clause (iii) of Paragraph 22(a), the applicable cure period
shall be thirty (30) days from the date on which Tenant is aware that a default
has occurred under clause (iii) of Paragraph 22(c). If the default consists of
the vacation of the Leased Premises under clause (x) of Paragraph 22(a), the
applicable cure period shall be thirty (30) days from the date of such vacation,
provided that during such thirty (30) day period Tenant diligently attempts to
sublet the Leased Premises (subject to the terms of Paragraph 21(c)).
23. REMEDIES AND DAMAGES UPON DEFAULT.
(a) If an Event of Default shall have occurred and is continuing,
Landlord shall have the right, at its sole option, then or at any time
thereafter, to exercise its remedies and to collect damages from Tenant in
accordance with this Paragraph 23, subject in all events to applicable Law,
without demand upon or notice to Tenant except as otherwise provided in
Paragraph 22(b) and this Paragraph 23.
(i) Landlord may give Tenant notice of Landlord's intention to
terminate this Lease on a date specified in such notice. Upon such date, this
Lease, the estate hereby granted and all rights of Tenant hereunder shall expire
and terminate. Upon such termination, Tenant shall immediately surrender and
deliver possession of the Leased Premises to Landlord in accordance with
Paragraph 26. If Tenant does not so surrender and deliver possession of the
Leased Premises, Landlord may re-enter and repossess the Leased Premises, with
legal process, ejectment or any other lawful means or procedure. Upon or at any
time after taking possession of the Leased Premises, Landlord may, by peaceable
means or legal process, remove any Persons or property therefrom. Landlord shall
be under no liability for or by reason of any such entry, repossession or
removal. Notwithstanding such entry or repossession, Landlord may (A) exercise
the remedy set forth in and collect the damages permitted by Paragraph
23(a)(iii) or (B) collect the damages set forth in Paragraph 23(b)(i) or
23(b)(ii).
(ii) After repossession of the Leased Premises pursuant to
clause (i) above, Landlord shall have the right to relet any of the Leased
Premises to such tenant or tenants, for such term or terms, for such rent, on
such conditions and for such uses as Landlord in its sole discretion may
determine, and collect and receive any rents payable by reason of such
reletting. Landlord may make such Alterations in connection with such reletting
as it may deem advisable in its sole discretion. Notwithstanding any such
reletting, Landlord may collect the damages set forth in Paragraph 23(b)(ii).
(iii) Landlord may, upon notice to Tenant, require Tenant to
make an irrevocable offer to terminate this Lease upon payment to Landlord of an
amount (the "DEFAULT TERMINATION AMOUNT") specified in the next sentence. The
"Default Termination Amount" shall be the greater of (A) the Fair Market Value
of the Leased Premises and (B) the sum of the Acquisition Cost and Prepayment
Premium which Landlord will be required to pay in prepaying any Loan with
proceeds of the Default Termination Amount. Upon such notice to Tenant, Tenant
shall be deemed to have made such offer and shall, if requested by Landlord,
within ten (10) days following such request deposit with Landlord as payment
against the Default Termination Amount the amount described in (B) above and
Landlord and Tenant shall promptly commence to determine Fair Market Value.
Within thirty (30) days after the Fair Market Value Date, Landlord shall accept
or reject such offer. If Landlord accepts such offer then, on the tenth (10th)
business day after such acceptance, Tenant shall pay to Landlord the Default
Termination Amount and, at the request of Tenant, Landlord will convey the
Leased Premises to Tenant or its designee in accordance with Paragraph 20. Any
rejection by Landlord of such offer shall have no effect on any other remedy
Landlord may have under this Lease.
(iv) Landlord may declare by notice to Tenant the entire Basic
Rent (in the amount of Basic Rent then in effect) for the remainder of the then
current Term to be immediately due and payable. Tenant shall immediately pay to
Landlord all such Basic Rent discounted to its Present Value, all accrued Rent
then due and unpaid, all other Monetary Obligations which are then due and
unpaid and all Monetary Obligations which arise or become due by reason of such
Event of Default (including any Costs of Landlord). Upon receipt by Landlord of
all such accelerated Basic Rent and Monetary Obligations, this Lease shall
remain in full force and effect and Tenant shall have the right to possession of
the Leased Premises from the date of such receipt by Landlord to the end of the
Term, and subject to all the provisions of this Lease, including the obligation
to pay all increases in Basic Rent and all Monetary Obligations that
subsequently become due, except that (A) no Basic Rent which has been prepaid
hereunder shall be due thereafter during the said Term and (B) Tenant shall have
no option to extend or renew the Term.
(b) The following constitute damages to which Landlord shall be
entitled if Landlord exercises its remedies under Paragraph 23(a)(i) or
23(a)(ii):
(i) If Landlord exercises its remedy under Paragraph 23(a)(i)
but not its remedy under Paragraph 23(a)(ii) (or attempts to exercise such
remedy and is unsuccessful in reletting the Leased Premises) then, upon written
demand from Landlord, Tenant shall pay to Landlord, as liquidated and agreed
final damages for Tenant's default and in lieu of all current damages beyond the
date of such demand (it being agreed that it would be impracticable or extremely
difficult to fix the actual damages), an amount equal to the Present Value of
the excess, if any, of (A) all Basic Rent from the date of such demand to the
date on which the Term is scheduled to expire hereunder in the absence of any
earlier termination, re-entry or repossession over (B) the then fair market
rental value of the Leased Premises for the same period. Tenant shall also pay
to Landlord all of Landlord's Costs in connection with the repossession of the
Leased Premises and any attempted reletting thereof, including all brokerage
commissions, legal expenses attorneys' fees, employees' expenses, costs of
Alterations and expenses and preparation for reletting.
(ii) If Landlord exercises its remedy under Paragraph 23(a)(i)
or its remedies under Paragraph 23(a)(i) and 23(a)(ii), then Tenant shall, until
the end of what would have been the Term in the absence of the termination of
the Lease, and whether or not any of the Leased Premises shall have been relet,
be liable to Landlord for, and shall pay to Landlord, as liquidated and agreed
current damages all Monetary Obligations which would be payable under this Lease
by Tenant in the absence of such termination less the net proceeds, if any, of
any reletting pursuant to Paragraph 23(a)(ii), after deducting from such
proceeds all of Landlord's Costs (including the items listed in the last
sentence of Paragraph 23(b)(i) hereof) incurred in connection with such
repossessing and reletting; provided, that if Landlord has not relet the Leased
Premises, such Costs of Landlord shall be considered to be Monetary Obligations
payable by Tenant. Tenant shall be and remain liable for all sums aforesaid, and
Landlord may recover such damages from Tenant and institute and maintain
successive actions or legal proceedings against Tenant for the recovery of such
damages. Nothing herein contained shall be deemed to require Landlord to wait to
begin such action or other legal proceedings until the date when the Term would
have expired by its own terms had there been no such Event of Default.
(c) Notwithstanding anything to the contrary herein contained, in lieu
of or in addition to any of the foregoing remedies and damages, Landlord may
exercise any remedies and collect any damages available to it at law or in
equity. If Landlord is unable to obtain full satisfaction pursuant to the
exercise of any remedy, it may pursue any other remedy which it has hereunder or
at law or in equity.
(d) Landlord shall not be required to mitigate any of its damages
hereunder unless required to by applicable Law. If any Law shall validly limit
the amount of any damages provided for herein to an amount which is less than
the amount agreed to herein, Landlord shall be entitled to the maximum amount
available under such Law.
(e) No termination of this Lease, repossession or reletting of the
Leased Premises, exercise of any remedy or collection of any damages pursuant to
this Paragraph 23 shall relieve Tenant of any Surviving Obligations.
(f) WITH RESPECT TO ANY REMEDY OR PROCEEDING OF LANDLORD OR TENANT
HEREUNDER, LANDLORD AND TENANT WAIVE ANY RIGHT TO A TRIAL BY JURY.
(g) Upon the occurrence of any Event of Default, Landlord shall have
the right (but no obligation) to perform any act required of Tenant hereunder
and, if performance of such act requires that Landlord enter the Leased
Premises, Landlord may enter the Leased Premises for such purpose.
(h) No failure of Landlord (i) to insist at any time upon the strict
performance of any provision of this Lease or (ii) to exercise any option,
right, power or remedy contained in this Lease shall be construed as a waiver,
modification or relinquishment thereof unless Tenant shall have received from
Landlord a written waiver, modification or relinquishment of its rights,
options, powers or remedies with respect to the Event of Default in question. A
receipt by Landlord of any sum in satisfaction of any Monetary Obligation with
knowledge of the breach of any provision hereof shall not be deemed a waiver of
such breach, and no waiver by Landlord of any provision hereof shall be deemed
to have been made unless expressed in a writing signed by Landlord.
(i) Tenant hereby waives and surrenders, for itself and all those
claiming under it, including creditors of all kinds, (i) any right and privilege
which it or any of them may have under any present or future Law to redeem any
of the Leased Premises or to have a continuance of this Lease after termination
of this Lease or of Tenant's right of occupancy or possession pursuant to any
court order or any provision hereof, and (ii) the benefits of any present or
future Law which exempts property from liability for debt or for distress for
rent.
(j) Except as otherwise provided herein, all remedies are cumulative
and concurrent and no remedy is exclusive of any other remedy. Each remedy may
be exercised at any time an Event of Default has occurred and is continuing and
may be exercised from time to time. No remedy shall be exhausted by any exercise
thereof.
24. NOTICES. All notices, demands, requests, consents, approvals,
offers, statements and other instruments or communications required or permitted
to be given pursuant to the provisions of this Lease shall be in writing and
shall be deemed to have been given and received for all purposes when delivered
in person or by Federal Express or other reliable 24-hour delivery service or
five (5) business days after being deposited in the United States mail, by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the other party at its address stated above or when delivery is
refused. A copy of any notice given by Tenant to Landlord shall simultaneously
be given by Tenant to Reed Smith Shaw & McClay, 2500 One Liberty Place,
Philadelphia, PA 19103, Attention: Chairman, Real Estate Department. A copy of
any notice given by Landlord to Tenant shall simultaneously be given by Landlord
to Stroock, Stroock & Lavan, 7 Hanover Square, New York, NY 10004- 2594,
Attention: David Rahm, Esquire. For the purposes of this Paragraph, any party
may substitute another address stated above (or substituted by a previous
notice) for its address by giving fifteen (15) days' notice of the new address
to the other party, in the manner provided above.
25. ESTOPPEL CERTIFICATE. At any time upon not less than ten (10)
days' prior written request by either Landlord or Tenant (the "REQUESTING
PARTY") to the other party (the "RESPONDING PARTY"), the Responding Party shall
deliver to the Requesting Party a statement in writing, executed by an
authorized officer of the Responding Party, certifying (a) that, except as
otherwise specified, this Lease is unmodified and in full force and effect, (b)
the dates to which Basic Rent, Additional Rent and all other Monetary
Obligations have been paid, (c) that, to the knowledge of the signer of such
certificate and except as otherwise specified, no default by either Landlord or
Tenant exists hereunder or if a default exists, stating the nature of such
default, (d) such other matters as the Requesting Party may reasonably request,
and (e) if Tenant is the Responding Party that, except as otherwise specified,
there are no proceedings pending or, to the knowledge of the signer, threatened,
against Tenant before or by any court or administrative agency which, if
adversely decided, would materially and adversely affect the financial condition
and operations of Tenant. Any such statements by the Responding Party may be
relied upon by the Requesting Party, any Person designated by the Requesting
Party in its request for the Certificate as an intended recipient or beneficiary
of the Certificate, any Lender or their assignees and by any prospective
purchaser or mortgagee of any of the Leased Premises. Any certificate required
under this Paragraph 25 and delivered by Tenant shall state that, in the opinion
of each person signing the same, he has made such examination or investigation
as is necessary to enable him to express an informed opinion as to the subject
matter of such certificate, and shall briefly state the nature of such
examination or investigation.
26. SURRENDER. Upon the expiration or earlier termination of this
Lease, Tenant shall peaceably leave and surrender the Leased Premises to
Landlord in the same condition in which the Leased Premises was at the
commencement of this Lease, except as repaired, rebuilt, restored, altered,
replaced or added to as permitted or required by any provision of this Lease,
and except for ordinary wear and tear and damage from Casualty that Tenant is
not required to repair pursuant to the terms of Paragraph 18. Upon such
surrender, Tenant shall (a) remove from the Leased Premises all property which
is owned by Tenant or third parties other than Landlord and (b) repair any
damage caused by such removal. Property not so removed shall become the property
of Landlord, and Landlord may thereafter cause such property to be removed from
the Leased Premises. The cost of removing and disposing of such property and
repairing any damage to any of the Leased Premises caused by such removal shall
be paid by Tenant to Landlord upon demand. Landlord shall not in any manner or
to any extent be obligated to reimburse Tenant for any such property which
becomes the property of Landlord pursuant to this Paragraph 26.
27. NO MERGER OF TITLE. There shall be no merger of the leasehold
estate created by this Lease with the fee estate in any of the Leased Premises
by reason of the fact that the same Person may acquire or hold or own, directly
or indirectly, (a) the leasehold estate created hereby or any part thereof or
interest therein and (b) the fee estate in any of the Leased Premises or any
part thereof or interest therein, unless and until all Persons having any
interest in the interests described in (a) and (b) above which are sought to be
merged shall join in a written instrument effecting such merger and shall duly
record the same.
28. BOOKS AND RECORDS.
(a) Tenant shall keep adequate records and books of account with
respect to the finances and business of Tenant generally and with respect to the
Leased Premises, in accordance with generally accepted accounting principles
("GAAP") consistently applied, and shall permit Landlord and Lender by their
respective agents, accountants and attorneys, upon reasonable notice to Tenant,
to visit and inspect the Leased Premises and examine (and make copies of) the
records and books of account and to discuss the finances and business with the
officers of Tenant, at such reasonable times as may be requested by Landlord.
Upon the request of Lender or Landlord (either telephonically or in writing),
Tenant shall provide the requesting party with copies of any information to
which such party would be entitled in the course of a personal visit.
(b) Tenant shall deliver to Landlord and to Lender within ninety (90)
days of the close of each fiscal year, annual audited financial statements of
Tenant prepared by a nationally recognized firm of independent certified public
accountants. Tenant shall also furnish to Landlord within forty-five (45) days
after the end of each of the three remaining quarters unaudited financial
statements and all other quarterly reports of Tenant, certified by Tenant's
chief financial officer, and all filings, if any, of Form 10-K, Form 10-Q and
other required filings with the Securities and Exchange Commission pursuant to
the provisions of the Securities Exchange Act of 1934, as amended, or any other
Law. All financial statements of Tenant shall be prepared in accordance with
GAAP consistently applied. All annual financial statements shall be accompanied
(i) by an opinion of said accountants stating that (A) there are no
qualifications as to the scope of the audit and (B) the audit was performed in
accordance with GAAP and (ii) by the affidavit of the president or a vice
president of Tenant, dated within five (5) days of the delivery of such
statement, stating that (C) the affiant knows of no Event of Default, or event
which, upon notice or the passage of time or both, would become an Event of
Default which has occurred and is continuing hereunder or, if any such event has
occurred and is continuing, specifying the nature and period of existence
thereof and what action Tenant has taken or proposes to take with respect
thereto and (D) except as otherwise specified in such affidavit, that Tenant has
fulfilled all of its obligations under this Lease which are required to be
fulfilled on or prior to the date of such affidavit.
29. DETERMINATION OF VALUE.
(a) Whenever a determination of Fair Market Value is required pursuant
to any provision of this Lease, such Fair Market Value shall be determined in
accordance with the following procedure:
(i) Landlord and Tenant (or Third Party Purchaser with respect
to a determination under clause (D) below) shall endeavor to agree upon such
Fair Market Value within thirty (30) days after the date (the "APPLICABLE
INITIAL DATE") on which (A) Tenant provides Landlord with notice of its
intention to terminate this Lease and purchase the Leased Premises pursuant to
Paragraph 18, (B) Landlord provides Tenant with notice of its intention to
redetermine Fair Market Value pursuant to Paragraph 20(c) or (C) Landlord
provides Tenant with notice of Landlord's intention to require Tenant to make an
offer to terminate this Lease pursuant to Paragraph 23(a)(iii). Upon reaching
such agreement, the parties shall execute an agreement setting forth the amount
of such Fair Market Value.
(ii) If the parties shall not have signed such agreement within
thirty (30) days after the Applicable Initial Date, Tenant shall within fifty
(50) days after the Applicable Initial Date select an appraiser and notify
Landlord in writing of the name, address and qualifications of such appraiser.
Within twenty (20) days following Landlord's receipt of Tenant's notice of the
appraiser selected by Tenant, Landlord shall select an appraiser and notify
Tenant of the name, address and qualifications of such appraiser. Such two
appraisers shall endeavor to agree upon Fair Market Value based on a written
appraisal made by each of them (and given to Landlord by Tenant) as of the
Relevant Date. If such two appraisers shall agree upon a Fair Market Value, the
amount of such Fair Market Value as so agreed shall be binding and conclusive.
(iii) If such two appraisers shall be unable to agree upon a
Fair Market Value within twenty (20) days after the selection of an appraiser by
Landlord, then such appraisers shall advise Landlord and Tenant of their
respective determination of Fair Market Value and shall select a third appraiser
to make the determination of Fair Market Value. The selection of the third
appraiser shall be binding and conclusive upon Landlord and Tenant.
(iv) If such two appraisers shall be unable to agree upon the
designation of a third appraiser within ten (10) days after the expiration of
the twenty (20) day period referred to in clause (iii) above, or if such third
appraiser does not make a determination of Fair Market Value within twenty (20)
days after his selection, then such third appraiser or a substituted third
appraiser, as applicable, shall, at the request of either party hereto, be
appointed by the President or Chairman of the American Arbitration Association
in New York, New York. The determination of Fair Market Value made by the third
appraiser appointed pursuant hereto shall be made within twenty (20) days after
such appointment.
(v) If a third appraiser is selected, Fair Market Value shall
be the average of the determination of Fair Market Value made by the third
appraiser and the determination of Fair Market Value made by the appraiser
(selected pursuant to Paragraph 29(a)(ii) hereof) whose determination of Fair
Market Value is nearest to that of the third appraiser. Such average shall be
binding and conclusive upon Landlord and Tenant.
(vi) All appraisers selected or appointed pursuant to this
Paragraph 29(a) shall (A) be independent qualified MAI appraisers (B) have no
right, power or authority to alter or modify the provisions of this Lease, (C)
utilize the definition of Fair Market Value hereinabove set forth above, and (D)
be registered in the State if the State provides for or requires such
registration. The Cost of the procedure described in this Paragraph 29(a) above
shall be borne entirely by Tenant.
(b) by virtue of any delay, Fair Market Value is not determined by the
expiration or termination of the then current Term, then the date on which the
Term would otherwise expire or terminate shall be extended to the date specified
for termination in the particular provision of this Lease pursuant to which the
determination of Fair Market Value is being made.
(c) In determining Fair Market Value as defined in clause (b) of the
definition of Fair Market Value, the appraisers shall add (a) the present value
of the Rent for the remaining Term (including the Renewal Term if Tenant has
exercised its option to extend pursuant to Paragraph 5(b) hereof) (with assumed
increases in the CPI to be determined by the appraisers) using a discount rate
(which may be determined by an investment banker retained by each appraiser)
based on the creditworthiness of Tenant and (b) the present value of the Leased
Premises as of the end of such Term. The appraisers shall further assume that no
default then exists under the Lease, that Tenant has complied (and will comply)
with all provisions of the Lease, and that Tenant has not violated (and will not
violate) any of the Covenants.
30. NON-RECOURSE AS TO LANDLORD. Anything contained herein to the
contrary notwithstanding, any claim based on or in respect of any liability of
Landlord under this Lease shall be enforced only against the Leased Premises and
not against any other assets, properties or funds of (i) Landlord, (ii) any
director, officer, general partner, shareholder, limited partner, beneficiary,
employee or agent of Landlord or any general partner of Landlord or any of its
general partners (or any legal representative, heir, estate, successor or assign
of any thereof), (iii) any predecessor or successor partnership or corporation
(or other entity) of Landlord or any of its general partners, shareholders,
officers, directors, employees or agents, either directly or through Landlord or
its general partners, shareholders, officers, directors, employees or agents or
any predecessor or successor partnership or corporation (or other entity), or
(iv) any Person affiliated with any of the foregoing, or any director, officer,
employee or agent of any thereof.
31. FINANCING.
(a) Tenant agrees to pay all costs and expenses incurred by Landlord
in connection with the purchase, leasing and initial financing of the Leased
Premises including, without limitation, the cost of appraisals, environmental
reports, title insurance, surveys, legal fees and expenses and Lender's
commitment fees.
(b) If Landlord desires to obtain or refinance any Loan, Tenant shall
negotiate in good faith with Landlord concerning any request made by any Lender
or proposed Lender for changes or modifications in this Lease. In particular,
Tenant shall agree, upon request of Landlord, to supply any such Lender with
such notices and information as Tenant is required to give to Landlord hereunder
and to extend the rights of Landlord hereunder to any such Lender and to consent
to such financing if such consent is requested by such Lender. Tenant shall
provide any other consent or statement and shall execute any and all other
documents that such Lender requires in connection with such financing, including
any environmental indemnity agreement and subordination, non-disturbance and
attornment agreement, so long as the same do not materially adversely affect any
right, benefit or privilege of Tenant under this Lease or materially increase
Tenant's obligations under this Lease. Such subordination, nondisturbance and
attornment agreement may require Tenant to confirm that (a) Lender and its
assigns will not be liable for any misrepresentation, act or omission of
Landlord and (b) Lender and its assigns will not be subject to any counterclaim,
demand or offset which Tenant may have against Landlord.
32. SUBORDINATION. This Lease and Tenant's interest hereunder shall be
subordinate to any Mortgage or other security instrument hereafter placed upon
the Leased Premises by Landlord, and to any and all advances made or to be made
thereunder, to the interest thereon, and all renewals, replacements and
extensions thereof, provided that any such Mortgage or other security instrument
(or a separate instrument in recordable form duly executed by the holder of any
such Mortgage or other security instrument and delivered to Tenant) shall
provide for the recognition of this Lease and all Tenant's rights hereunder
unless and until an Event of Default exists or Landlord shall terminate this
Lease pursuant to any applicable provision hereof.
33. FINANCIAL COVENANTS. Tenants hereby covenants and agrees to comply
with all the covenants and agreements described in EXHIBIT "E" hereto.
34. TAX TREATMENT; REPORTING. Landlord and Tenant each acknowledge
that each shall treat this transaction as a true lease for state law purposes
and shall report this transaction as a Lease for Federal income tax purposes.
For Federal income tax purposes each shall report this Lease as a true lease
with Landlord as the owner of the Leased Premises and Equipment and Tenant as
the lessee of such Leased Premises and Equipment including: (1) treating
Landlord as the owner of the property eligible to claim depreciation deductions
under Section 167 or 168 of the Internal Revenue Code of 1986 (the "CODE") with
respect to the Leased Premises and Equipment, (2) Tenant reporting its Rent
payments as rent expense under Section 162 of the Code, and (3) Landlord
reporting the Rent payments as rental income.
35. MISCELLANEOUS.
(a) The paragraph headings in this Lease are used only for convenience
in finding the subject matters and are not part of this Lease or to be used in
determining the intent of the parties or otherwise interpreting this Lease.
(b) As used in this Lease, the singular shall include the plural and
any gender shall include all genders as the context requires and the following
words and phrases shall have the following meanings: (i) "including" shall mean
"including without limitation"; (ii) "provisions" shall mean "provisions, terms,
agreements, covenants and/or conditions"; (iii) "lien" shall mean "lien, charge,
encumbrance, title retention agreement, pledge, security interest, mortgage
and/or deed of trust"; (iv) "obligation" shall mean "obligation, duty,
agreement, liability, covenant and/or condition"; (v) "any of the Leased
Premises" shall mean "the Leased Premises or any part thereof or interest
therein"; (vi) "any of the Land" shall mean "the Land or any part thereof or
interest therein"; (vii) "any of the Improvements" shall mean "the Improvements
or any part thereof or interest therein"; (viii) "any of the Equipment" shall
mean "the Equipment or any part thereof or interest therein"; and (ix) "any of
the Adjoining Property" shall mean "the Adjoining Property or any part thereof
or interest therein".
(c) Any act which Landlord is permitted to perform under this Lease
may be performed at any time and from time to time by Landlord or any person or
entity designated by Landlord. Each appointment of Landlord as attorney-in-fact
for Tenant hereunder is irrevocable and coupled with an interest. Except as
otherwise specifically provided herein, Landlord shall have the right, at its
sole option, to withhold or delay its consent whenever such consent is required
under this Lease for any reason or no reason. Time is of the essence with
respect to the performance by Tenant of its obligations under this Lease.
(d) Landlord shall in no event be construed for any purpose to be a
partner, joint venturer or associate of Tenant or of any subtenant, operator,
concessionaire or licensee of Tenant with respect to any of the Leased Premises
or otherwise in the conduct of their respective businesses.
(e) This Lease and any documents which may be executed by Tenant on or
about the effective date hereof at Landlord's request constitute the entire
agreement between the parties and supersede all prior understandings and
agreements, whether written or oral, between the parties hereto relating to the
Leased Premises and the transactions provided for herein. Landlord and Tenant
are business entities having substantial experience with the subject matter of
this Lease and have each fully participated in the negotiation and drafting of
this Lease. Accordingly, this Lease shall be construed without regard to the
rule that ambiguities in a document are to be construed against the drafter.
(f) This Lease may be modified, amended, discharged or waived only by
an agreement in writing signed by the party against whom enforcement of any such
modification, amendment, discharge or waiver is sought.
(g) The covenants of this Lease shall run with the land and bind
Tenant, its successors and assigns and all present and subsequent encumbrancers
and subtenants of any of the Leased Premises, and shall inure to the benefit of
Landlord, its successors and assigns. If there is more than one Tenant, the
obligations of each shall be joint and several.
(h) If any one or more of the provisions contained in this Lease shall
for any reason be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision of this Lease, but this Lease shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
(i) This Lease shall be governed by and construed and enforced in
accordance with the Laws of the State.
IN WITNESS WHEREOF, Landlord and Tenant have caused this
Lease to be duly executed under seal as of the day and year first above written.
LANDLORD:
NOG (NY) QRS 12-23, INC.,
a New York corporation
By:______________________
Title:___________________
ATTEST: TENANT:
KNOGO NORTH AMERICA INC.,
a Delaware corporation
By:______________________ By:_________________________
Title: Title:
[Corporate Seal]
<PAGE>
PREMISES
<PAGE>
EXHIBIT B
MACHINERY AND EQUIPMENT
All fixtures, machinery, apparatus, equipment, fittings and appliances of every
kind and nature whatsoever now or hereafter affixed or attached to or installed
in any of the Leased Premises (except as hereafter provided), including all
electrical, anti-pollution, heating, lighting (including hanging fluorescent
lighting), incinerating, power, air cooling, air conditioning, humidification,
sprinkling, plumbing, lifting, cleaning, fire prevention, fire extinguishing and
ventilating systems, devices and machinery and all engines, pipes, pumps, tanks
(including exchange tanks and fuel storage tanks), motors, conduits, ducts,
steam circulation coils, blowers, steam lines, compressors, oil burners,
boilers, doors, windows, loading platforms, lavatory facilities, stairwells,
fencing (including cyclone fencing), passenger and freight elevators, overhead
cranes and garage units, together with all additions thereto, substitutions
therefor and replacements thereof required or permitted by this Lease, but
excluding all personal property and all trade fixtures, machinery, office,
manufacturing and warehouse equipment which are not necessary to the operation,
as buildings, of the buildings which constitute part of the Leased Premises and
specifically excluding the following items used in production activities by
Tenant: air compressor, Kato revolving field air conditioner generator, alarm
system, compactor, security cameras and monitoring system and handheld fire
extinguishers.
<PAGE>
EXHIBIT C
PERMITTED ENCUMBRANCES
<PAGE>
EXHIBIT D
BASIC RENT PAYMENTS
1. BASIC RENT. Subject to the adjustments provided for in
Paragraphs 2, 3 and 4 below, Basic Rent payable in respect of the Term shall be
$524,000 per annum, payable quarterly in advance on each Basic Rent Payment
Date, in equal installments of $131,000 each.
2. CPI ADJUSTMENTS TO BASIC RENT. The Basic Rent shall be
subject to adjustment, in the manner hereinafter set forth, for increases in the
index known as United States Department of Labor, Bureau of Labor Statistics,
Consumer Price Index, All Urban Consumers, United States City Average, All
Items, (1982-84=100) ("CPI") or the successor index that most closely
approximates the CPI. If the CPI shall be discontinued with no successor or
comparable successor index, Landlord and Tenant shall attempt to agree upon a
substitute index or formula, but if they are unable to so agree, then the matter
shall be determined by arbitration in accordance with the rules of the American
Arbitration Association then prevailing in New York City. Any decision or award
resulting from such arbitration shall be final and binding upon Landlord and
Tenant and judgment thereon may be entered in any court of competent
jurisdiction. In no event will the Basic Rent as adjusted by the CPI adjustment
be less than the Basic Rent in effect for the three (3) year period immediately
preceding such adjustment.
3. EFFECTIVE DATES OF CPI ADJUSTMENTS. Basic Rent shall not
be adjusted to reflect changes in the CPI until the third (3rd) anniversary of
the Basic Rent Payment Date on which the first full quarterly installment of
Basic Rent shall be due and payable (the "FIRST FULL BASIC RENT PAYMENT DATE").
As of the third (3rd) anniversary of the First Full Basic Rent Payment Date and
thereafter on the sixth (6th), ninth (9th), twelfth (12th), fifteenth (15th),
eighteenth (18th) and, if the initial Term is extended, on the twenty-first
(21st) anniversaries of the First Full Basic Rent Payment Date, Basic Rent shall
be adjusted to reflect increases in the CPI during the most recent three (3)
year period immediately preceding each of the foregoing dates (each such date
being hereinafter referred to as the "BASIC RENT ADJUSTMENT DATE").
4. METHOD OF ADJUSTMENT FOR CPI ADJUSTMENT.
(a) As of each Basic Rent Adjustment Date when the average
CPI determined in clause (i) below exceeds the Beginning CPI (as defined in this
Paragraph 4(a)), the Basic Rent in effect immediately prior to the applicable
Basic Rent Adjustment Date shall be multiplied by a fraction, the numerator of
which shall be the difference between (i) the average CPI for the three (3) most
recent calendar months (the "PRIOR Months") ending prior to such Basic Rent
Adjustment Date for which the CPI has been published on or before the
forty-fifth (45th) day preceding such Basic Rent Adjustment Date and (ii) the
Beginning CPI, and the denominator of which shall be the Beginning CPI.
Seventy-five percent (75%) of the product of such multiplication shall be added
to the Basic Rent in effect immediately prior to such Basic Rent Adjustment
Date. As used herein, "BEGINNING CPI" shall mean the average CPI for the three
(3) calendar months corresponding to the Prior Months, but occurring three (3)
years earlier. If the average CPI determined in clause (i) is the same or less
than the Beginning CPI, the Basic Rent will remain the same for the ensuing
three (3) year period.
(b) Effective as of a given Basic Rent Adjustment Date,
Basic Rent payable under this Lease until the next succeeding Basic Rent
Adjustment Date shall be the Basic Rent in effect after the adjustment provided
for as of such Basic Rent Adjustment Date.
(c) Notice of the new annual Basic Rent shall be delivered
to Tenant on or before the tenth (10th) day preceding each Basic Rent Adjustment
Date.
<PAGE>
EXHIBIT E
COVENANTS
1. CORPORATE EXISTENCE; CONTROL; MERGERS, ETC.
(a) Tenant shall, and shall cause each of its Subsidiaries
to, maintain its corporate existence, rights and franchises in full force and
effect. Tenant shall not reincorporate in another jurisdiction without prior
notice to Landlord. Tenant shall, and shall cause each of its Subsidiaries to,
qualify and remain qualified as a foreign corporation in each jurisdiction in
which failure to receive or retain such qualification would have an adverse
effect on the business, operations or financial condition of the enterprise
comprised of the Tenant and its Subsidiaries taken as a whole.
(b) Except for the Sentry Merger (as defined below), the
Tenant shall not (i) consolidate or merge with any other corporation, or (ii) in
a single transaction or series of related transactions, sell or convey,
transfer, abandon or lease all or substantially all of its assets to any Person
or make any substantial change in the nature of its business (each of the
activities described in clauses (i) and (ii) above, a "CHANGE IN STRUCTURE"),
unless (A) with respect to a consolidation or merger Tenant or the successor
formed or resulting from such merger or consolidation (the "New Corporation"),
immediately after such merger or consolidation and after giving effect thereto
the Consolidated Net Worth of Tenant or the purchaser of such assets shall be
not less than the Required Net Worth or (B) with respect to the sale of all or
substantially all of the assets or property of Tenant, this Lease shall have
been assigned to and assumed by the transferee to which such sale or transfer of
assets or property shall have been made and immediately following the Change in
Structure and after giving effect thereto the transferee shall have the Required
Net Worth immediately following the Change in Structure. Tenant shall deliver to
Landlord concurrently with a Change in Structure: (i) if the Change in Structure
is a Change in Structure described in (ii) above an instrument, reasonably
satisfactory in form and substance to Landlord, executed and delivered by the
President or Vice President and the Secretary or Assistant Secretary of the New
Corporation, assuming all the obligations of Tenant under this Lease (including
obligations under this Section 1 of Exhibit E with respect to any subsequent
Change in Structure by the New Corporation), and (ii) an Officer's Certificate
to the effect that there is no condition or event which at such time would
constitute an Event of Default under this Lease and that no such condition or
event will result from such Change in Structure.
2. RESTRICTED PAYMENTS. Tenant will not, directly or
indirectly make, or cause or permit any Subsidiary of the Tenant to make, any
Restricted Payment, unless at the time thereof, and after giving effect thereto:
(i) no Event of Default shall have occurred
and be continuing; and
(ii) in the case of any Restricted Payment under
clause (a) or (b) of the definition of Restricted
Payment, EBITDAR less Consolidated Interest Expense
and Capital Expenditures for the most recently
completed four (4) fiscal quarters of Tenant,
when reduced by the amount of any
such Restricted Payment, is not less than the product
of one and one-half (1 1/2) times the amount of Rent
due and payable in the fiscal year in which such
Restricted Payment is to be made; and (iii) in the
case of any Restricted Payment of the sort described
in clause (c) of the definition of Restricted
Payment, such Restricted Payment, together with all
other Restricted Payments made from the commencement
date of the Term to the date of such Restricted
Payment does not exceed the sum of Two Million
Dollars ($2,000,000) and 50% of the Tenant's
Consolidated Net Income on a cumulative basis
beginning with and including the fiscal year in which
the Term commenced to and including the month
immediately preceding the date of such Restricted
Payment. Notwithstanding the foregoing, any and all
scheduled dividend payments to holders of Sentry A
Preferred Stock shall be permitted so long as, at the
time of such payments and after given effect thereto,
no default exists under any other financial
arrangement of Tenant.
3. COVERAGE RATIO. The Coverage Ratio of Tenant for the most
recently completed four (4) quarters of Tenant that occur during the Term shall
not be less than 1.50 to 1.
4. NET WORTH. The Consolidated Net Worth of Tenant shall not
as of the end of any fiscal quarter of Tenant that occurs during the Term be
less than the Required Net Worth.
5. DEBT TO EQUITY RATIO. The Debt to Equity Ratio of Tenant
shall not on the last day of each fiscal quarter of Tenant that occurs during
the Term shall be less than 1.50 to 1.0; provided that if, on a pro forma basis,
the Coverage Ratio for the prior fiscal year of Tenant, after giving effect to
the Interest on new Indebtedness sought to be incurred in the current fiscal
quarter, is less than 1.5 to 1.0, then Tenant shall incur no new Indebtedness
the result of which shall be to reduce such pro forma Coverage Ratio to less
than 1.5 to 1.0.
6. FISCAL YEAR. Tenant shall not change its fiscal year
without the prior written consent of Landlord.
7. DEFINITIONS. For the purpose of this Exhibit "E" the
following terms shall have the following meanings and capitalized terms not
otherwise defined in this Exhibit "E" shall have the definitions set forth in
Paragraph 2 of the Lease:
"Affiliate" shall mean, with respect to a corporation, (i)
any officer or director thereof and any person, trust, corporation, partnership,
venture or other entity who or which is, directly or indirectly, the beneficial
owner of more than 10% of any class of shares or other equity security of such
corporation, or (ii) any person, trust, corporation, partnership, venture or
other entity which, directly or indirectly controls or is controlled by or under
common control with such corporation, or (iii) any general partner, general
partner of a general partner, partnership with a common general partner, or
co-venturer of or with any person or entity described in (i) or (ii) above, or
(iv) if any general partner or co-venturer is a corporation, any person, trust,
corporation, partnership, venture or other entity which is an Affiliate as
defined above or such corporation, or (v) if any of the foregoing is a natural
person, his or her parents, spouse, children, siblings and their children, and
spouse's parents, children, siblings and their children.
"Capital Expenditures" of any Person shall mean, for any
period, all expenditures (whether paid in cash or accrued as liabilities during
such period) of such Person during such period which would be classified as
capital expenditures in accordance with GAAP (including, without limitation,
expenditures for maintenance and repairs which are capitalized).
"Closing Date" shall mean December 23, 1996.
"Consolidated Interest Expense" for any period shall mean
interest expense of Tenant and its Subsidiaries on a consolidated basis for such
period on a consolidated basis, determined in accordance with GAAP, except that
such determination shall be exclusive of any obligations for dividends,
interest, appreciation or other obligations to holders of preferred stock,
however paid or characterized, and whether or not accounted for as interest in
accordance with GAAP.
"Consolidated Net Income" shall mean, for any period, the
aggregate net income (or loss) of Tenant and its Subsidiaries for such period on
a consolidated basis, determined in accordance with GAAP.
"Consolidated Net Worth" shall mean, at any date, the net
worth of Tenant and its Subsidiaries on a consolidated basis, determined in
accordance with GAAP, except that from and after the Sentry Merger the Sentry
Class A Preferred Stock (as described in the Proxy) will be treated as equity.
"Controls", "controlled by" and "under common control with"
each refers to the effective power, directly or indirectly, to direct or cause
the direction of the management and policies of the person, trust, corporation,
partnership, venture or other entity in question, whether by contract or
otherwise.
"Coverage Ratio" shall mean the ratio of EBITDAR to the sum
of Consolidated Interest Expense and Rent.
"Debt to Equity Ratio" of Tenant at the end of any period
shall mean the ratio of Indebtedness of Tenant and its consolidated Subsidiaries
to Shareholder's Equity.
"EBIDTAR" means, for any period, the following each
calculated for such period: (a) Consolidated Net Income PLUS income and
franchise taxes; PLUS (b) Consolidated Interest Expense paid or accrued; PLUS
(c) amortization and depreciation deducted in determining Consolidated Net
Income; PLUS (e) Basic Rent; PLUS (f) without duplication, other non-cash
charges (excluding accruals in the normal course of business) deducted in
determining Consolidated Net Income; MINUS (f) without duplication, other
non-cash credits increasing Consolidated Net Income.
"GAAP" shall mean generally accepted accounting principles
as in effect from time to time in the United States of America.
"Indebtedness" of any Person shall mean, as of any date, all
obligations which would in accordance with GAAP be classified as debt, and shall
include (a) all obligations of such Person for borrowed money, (b) all
obligations of such person in respect of letters of credit, surety bonds or
similar obligations issued for the account of such Person, (c) all obligations
of such Person as lessee, user or obligor under any lease of real or personal
property which, in accordance with GAAP, are or should be capitalized on the
books of the lessee, user or obligor (excluding, in the case of Tenant, any
lease classified in accordance with GAAP as an operating lease), (d) all
obligations of such Person in respect of any interest rate or currency swap,
rate cap or other similar transaction (valued in an amount equal to the highest
termination payment, if any, that would be payable by such Person upon
termination for any reason on the date of determination), and (e) all
obligations of others similar in character to those described in clauses (a)
through (d) of this definition to the extent such Person is liable, contingently
or otherwise, as obligor, guarantor or in any other capacity, or in respect of
which obligations such Person assures a creditor against loss or agrees to take
any action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business), including,
without limitation, all obligations of such Person to advance funds to, or to
purchase property or services from, any other Person in order to maintain the
financial condition of such other Person and, in the case of Tenant, all
Indebtedness which is non-recourse to the credit of Tenant but which is secured
by the assets or property of Tenant (but excluding any such non-recourse
Indebtedness of Subsidiaries of Tenant in which Tenant has no liability). Any
Indebtedness which is extended or renewed (other than by an option created with
the original creation of such Indebtedness) will be deemed to have been created
when extended or renewed.
"Person" shall mean an individual, partnership, association,
corporation or other entity.
"Required Net Worth" shall mean the product of four (4)
times the lesser of the Acquisition Cost or the then Termination Value.
"Restricted Payment" shall mean and include (a) any direct
or indirect purchase, redemption or other acquisition or retirement for value of
any equity security of Tenant or any option, warrant or right to acquire any
such equity security, or any security convertible into or exchangeable for any
such equity security, (b) any dividend, distribution, loan advance, extension of
credit or other payment of transfer, whether in cash or property and whether
direct or indirect, to or for the benefit any Person holding an equity interest
in the Tenant, whether or not such interest is evidenced by a security, or any
Affiliate of any such Person, and (c) any direct or indirect purchase,
redemption, prepayment or other acquisition or retirement for value, prior to
its stated maturity, scheduled repayment or scheduled sinking fund payment of
any Indebtedness of the Tenant or any Subsidiary held by any Person described in
clause (b) above, other than payments in reduction of principal Indebtedness
incurred under revolving credit arrangements.
"Sentry Merger" shall mean the merger of Tenant with Video
Sentry Corporation resulting in the formation of Sentry Technology Corporation,
as described in preliminary proxy materials provided by Tenant to Landlord by
letter dated December 6, 1996.
"Shareholder's Equity" shall mean, at any date, the amount
which, in conformity with GAAP, would be set forth opposite the caption "total
shareholder's equity" (or any like caption) on a consolidated balance sheet of
Tenant at such date.
"Subsidiary" of any Person means a corporation a majority of
the Voting Stock of which is at the time owned, or the management of which is
otherwise controlled, directly or indirectly, through one or intermediaries, or
both, by such Person.
"Voting Stock" means shares of stock of a corporation having
ordinary voting power to elect the board of directors or other managers of such
corporation.
EXHIBIT 10.11
3M LIBRARY SYSTEMS
DISTRIBUTION AGREEMENT
This Agreement is made between Minnesota Mining and Manufacturing Company,
acting through its Safety & Security Systems Division Electronic Article
Surveillance Systems Project, having its principal place of business at 3M
Center, St. Paul, Minnesota 55144 1000 (3M) and Knogo North America Inc., a
corporation which has its principal office at 350 Wireless Blvd., Hauppauge,
Long Island, New York (KNOGO), as follows:
WHEREAS, 3M and KNOGO have entered into an Assets Purchase Agreement, of even
date herewith, whereby 3M has purchased and KNOGO has transferred and assigned
to 3M certain of KNOGO's assets, including intellectual property, customer
lists, and service agreements with KNOGO's library customers (the "Assets
Purchase Agreement"); and
WHEREAS, in contemplation of the Assets Purchase Agreement, 3M and KNOGO entered
into a Letter of Intent dated January 22, 1996; and
WHEREAS, as provided in the Assets Purchase Agreement, 3M desires to appoint
KNOGO, and KNOGO wishes to accept appointment, as a nonexclusive distributor of
3M's Library Security Systems and related products in the Market defined below,
pursuant to the terms of this Agreement;
NOW, THEREFORE, in consideration of the foregoing representations, and of the
following mutual and reciprocal promises and agreements, the parties state and
agree as follows:
1. SCOPE OF AGREEMENT
A. This Agreement defines the relationship between 3M and KNOGO with
respect to KNOGO's purchase and resale of the 3M Library Systems Products
identified in Exhibit A, which is attached and made part of this Agreement
(collectively, the "PRODUCTS"). New, additional or replacement products offered
by 3M for sale to its library customers shall be added to this Distribution
Agreement upon mutual written agreement of the parties, upon specific terms
negotiated in good faith and substantially similar to the terms of this
Agreement.
B. The geographic market covered by this Agreement is the United States,
Canada and Puerto Rico (the "Market"). Under no circumstances shall KNOGO either
directly or indirectly advertise, promote or sell the PRODUCTS outside the
Market, or assist any other person to do so. If KNOGO subsequently learns that a
customer within the Market is selling PRODUCTS outside of the Market, KNOGO
agrees to immediately cease selling PRODUCTS to that customer.
C. 3M does and will continue to sell the PRODUCTS directly and indirectly
through distributors, sales agents, buying consortia and others in the Market.
2. 3M'S OBLIGATIONS TO KNOGO.
3M agrees to:
A. Sell or license (as appropriate) PRODUCTS to KNOGO under the terms of
this Agreement and to use all reasonable efforts to promptly fill KNOGO's orders
for PRODUCTS. 3M will license the data transfer protocol and interface software
developed by 3M for use with 3M's Patron SelfCheck System to KNOGO at no charge
during the term of this Agreement.
B. Make available to KNOGO without charge the services of a 3M sales
representative knowledgeable of the PRODUCTS who will provide PRODUCT
information and sales and s marketing training and support for KNOGO'S sales
representatives, as well as assisting KNOGO's specific customer presentations
and proposals.
C. Provide KNOGO at no charge reasonable quantities of literature,
brochures, presentation materials and other like marketing materials that 3M
will prepare from time to time for, the purpose of assisting KNOGO to introduce
and promote the PRODUCTS.
D. Provide without charge to KNOGO and its designated employees or agents
technical training and certification as to the operation of the PRODUCTS.
E. Provide to KNOGO's customers installation and service of PRODUCTS;
except as provided in paragraph 3(B) below with respect to first year service on
certain PRODUCTS, all service charges will be billed directly by 3M to end
customers.
F. For PRODUCTS sold by KNOGO, provide satisfactory evidence of the
installation at end customer locations.
3. KNOGO'S OBLIGATIONS TO 3M.
KNOGO agrees:
A. To vigorously and enthusiastically promote the sale of the PRODUCTS
through every lawful and proper means, devoting through its sales force at least
the same level of energy and resources that KNOGO devoted to the sale of its own
library security systems and products prior to this Agreement;
B. Throughout the term of this Agreement, KNOGO shall not sell or promote
to library customers any other library security systems products, accessories or
services which compete with or substitute for the use of the PRODUCTS. Within
five (5) days after the Effective Date, the parties, through their respective
sales management, shall prepare a Transition Sales Plan the provides the details
by which KNOGO and 3M will cooperate in the promotion and sale of PRODUCTS and,
whenever possible with respect to any pending but unbilled KNOGO orders, the
substitution of comparable 3M products for KNOGO's library security systems,
products, accessories, and services. Specifically, but without limitation, the
Transition Sales Plan shall provide as follows:
(i) With respect to Knogo hardware and library security systems
accessories, other than its patron self-check product (the "Express"), KNOGO
shall use all reasonable efforts to persuade its customers, and any prospective
customers to whom KNOGO has offered to sell KNOGO products, to accept the 3M
PRODUCTS in every case in which the KNOGO products have not been delivered and
installed as of the date of this Agreement. This includes specifically those of
KNOGO's products for which it has received a purchase order, contract, or notice
of award under a formal or informal bidding process, as well as those case in
which KNOGO has made proposals or offers to sell its library products, excepting
only the immediate obligation to supply the Dallas Public Library. KNOGO shall
invite 3M to participate in its efforts, and the parties shall jointly make
sales calls and presentations to customers to attempt to persuade the customer
to accept comparable 3M PRODUCTS. If despite the cooperative and diligent
efforts of the parties a customer to whom KNOGO is contractually obligated
demands KNOGO products, then KNOGO may fulfill its contractual obligations by
supplying KNOGO products, but only to the extent of the number and type of KNOGO
products it is contractually required to supply. For those accounts who agree to
accept 3M PRODUCTS in place of KNOGO's products, KNOGO agrees to purchase from
3M the PRODUCTS at the prices stated in Exhibit A. KNOGO understands and agrees
that it will fulfill its obligations hereunder even though, in some cases, its
cost for the PRODUCTS paid to 3M may be lower than its bid or contract price at
which KNOGO has offered to sell its products to KNOGO's customer.
(ii) With respect to any sales, consignments, trials, or offers to sell
KNOGO Express self-check units, KNOGO agrees that KNOGO will not sell, but will
use all of its reasonable efforts to at its own cost remove and retake
possession of and destroy all KNOGO Express units and any related software or
accessories, except for those which have been shipped, installed and billed to
the following specific end customers: Paso Robles, Salt Lake City Public
Library, Vancouver Public Library, U.C. Davis, Alhambra Public Library, George
Mason University, Springfield Green City., Addison Public Library, Palmdale City
Library, Ventura County, Cleveland Heights, SUNY-New Paltz, and Newport Beach
("Installed Expresses"). With respect to the Installed Expresses, KNOGO and 3M
shall cooperate to persuade such customers, whenever possible through the
reasonable efforts of 3M and KNOGO, to trade Installed Expresses for 3M's
Self-Check PRODUCTS. 3M will bear the cost of trading out Installed Expresses.
This paragraph is in addition to, and not in conflict with or limitation of, the
KNOGO's obligations under paragraph 5.4 of the Assets Purchase Agreement.
C. To license 3M software PRODUCTS in accordance with the License Agreement
attached as Exhibit B and made part of this Agreement. KNOGO shall present and
use its best efforts to ensure that all of its customers abide by the terms of
that Agreement.
D. KNOGO shall provide financial information reasonably requested by 3M or
its credit provider and will make payment to 3M within the agreed credit terms.
KNOGO agrees not to make deductions from invoices until a credit memorandum
authorizing the deduction is issued by 3M.
E. To hold in confidence and not disclose to others 3M's confidential
marketing plans, promotional programs, planned product introductions, pricing,
or other 3M confidential information without 3M's prior written approval.
F. To not disparage PRODUCTS or cast PRODUCTS in an unfavorable light, and
KNOGO will not misrepresent, either directly or by omission, the capabilities,
qualities or characteristics of PRODUCTS
G. To use 3M's trademarks and tradenames (e.g., "3M," "Patron Self Check")
in a manner that distinguishes the 3M mark, does not imply that KNOGO is a part
of or owned by 3M, and otherwise as 3M directs. KNOGO is encouraged to obtain
3M's approval of advertising z containing any 3M trademark prior to publication.
Upon expiration or termination of this Agreement, KNOGO agrees to remove and
discontinue the use of any 3M trademark.
4. PRICES AND CONDITIONS OF SALE.
A. PRICES. The price of PRODUCTS and other terms and conditions of sale
(including KNOGO discounts, shipping, and minimum order requirements) are as
stated in Exhibit A to this Agreement. Some of the PRODUCTS include as part of
the price thereof an amount attributable to the provision of service during the
first twelve months after installation. KNOGO shall use its commercially
reasonable efforts to persuade the customer to purchase a service contract with
3M. z This amount shall be included in KNOGO's PRODUCT price as shown in the
Annual Service Agreement column of Exhibit A, and KNOGO agrees to pay this
amount, even if the end customer elects to not purchase a service contract.
KNOGO is free to sell the PRODUCTS with or without a service contract, however.
After the first year after installation, all sales, billing and collection with
respect to service contracts shall be handled directly between 3M and the end
customer.
B. PRICE CHANGES. Prices may be increased and other conditions of sale may
be changed by 3M at any time upon thirty (30) days' prior written notice to
KNOGO, but the change will not affect any order properly accepted by 3M and
requesting immediate shipment before the effective date of the change. 3M may
decrease prices without notice and KNOGO will be invoiced at the price in effect
on the date of shipment. 3M may periodically offer new PRODUCT or introductory
offers, on which KNOGO discounts may not in some cases be applied; provided,
however, that such discounts shall be applied if and to the extent such PRODUCTS
are offered for sale by 3M's direct sales force to end customers at prices less
than KNOGO's purchase price.
C. SPECIAL CONTRACT PRICING. 3M recognizes that KNOGO may place bids for
the supply of PRODUCTS over a period of time. Upon the prior written approval of
3M's National Sales Manager, 3M will commit to hold its published prices firm
for a period not to exceed six (6) months from the date of approval; provided,
however, that if KNOGO's bid is accepted, KNOGO shall promptly provide to 3M
Customer Service a complete copy of KNOGO's bid and satisfactory evidence that
the bid has been accepted.
D. TAXES. Prices listed on 3M's price pages do not include sales, use,
excise, or similar taxes. The amount of any present, retroactive, or future
sales, use, excise or similar tax applicable to KNOGO's purchase of PRODUCTS
will be added to the 3M invoice and paid by KNOGO unless KNOGO provides 3M with
tax exemption certificates acceptable to the appropriate taxing authorities.
E. PURCHASE ORDERS. . KNOGO will order PRODUCTS only by purchase orders
submitted to 3M. Acceptance of any orders placed by KNOGO, either by written
acknowledgment or by shipment of PRODUCTS, does not constitute acceptance by 3M
of any of the terms and conditions contained in such orders, except the
identification and quantity of PRODUCTS ordered. All orders are governed by the
provisions of this Agreement.
F. ALLOCATION. If any PRODUCT is in short supply, 3M may allocate the
available supply among its customers in the manner that 3M considers most
equitable, but will assign to KNOGO the highest priority among 3M's customers
who buy for purposes of resale.
G. CREDIT. 3M may change or limit the amount or duration of credit to be
allowed KNOGO. 3M may cancel any orders accepted by 3M or delay the shipment of
the order, if KNOGO fails to meet payment schedule or other credit or financial
requirements reasonably established by 3M.
H. PRODUCT DISCONTINUANCE. 3M may discontinue the production or sale of any
PRODUCT at any time during the term of this Agreement. KNOGO may continue to
purchase from 3M and resell any discontinued PRODUCTS for so long as 3M
continues to have such PRODUCT available.
5. TERM; TERMINATION.
A. The Agreement term begins on the date it is signed by both KNOGO and 3M
("Effective Date").
B. The Initial Term shall be three (3) years from the Effective Date.
Thereafter, this Agreement shall continue automatically for consecutive one-year
terms ("Renewal Terms") until terminated. Either party may terminate the
Agreement only as provided below.
C. During the Initial Term, neither party may terminate this Agreement
except for a substantial breach by the other party of its material obligations
hereunder, which breach is not or cannot be cured within a reasonable time (not
to exceed 30 days) after notice from the complaining party. Any notice hereunder
shall specify in detail all causes of alleged nonperformance and the corrective
actions sought by the complaining party. If all of the causes therefor are not
cured to the reasonable satisfaction of the complaining party within the same
cure period as above, then this Agreement shall terminate effective upon the
expiration of the cure period. An example, without limitation, of a "material"
obligation is KNOGO's efforts to promote PRODUCTS as stated in paragraph 3(A)
above.
D. The continued relationship between 3M and KNOGO beyond the Initial Term
is based upon mutual expectation of growing sales volume, profits and other
advantages, as well as the fulfillment of mutual responsibilities. If after the
Initial Term either party wishes for its own reasons to discontinue this
Agreement, or if it believes the expected advantages of this Agreement s have
not been or cannot be reali7Atl, or that the responsibilities or this
relationship are not being fulfilled either party may terminate this
relationship by giving the other party advance written notice at least ninety
(90) days prior to the expiration of the then current Initial or Renewal Term of
its intent to terminate by registered mail or personal delivery. Either party
may exercise its right of termination without having to prove or possess "good
cause". Termination shall then become effective on the ninetieth day following
such notice, or the expiration of the current Initial or Renewal Term, whichever
first occurs.
E. 3M is not obligated to repurchase PRODUCTS in KNOGO's stock upon
termination of this Agreement. KNOGO may sell, in accordance with the terms of
this Agreement, those PRODUCTS in its inventory on the date of termination for
which 3M has not exercised its option to repurchase.
F. During the period between giving the notice of termination and the
effective date of termination, all PRODUCTS will be delivered to KNOGO on a cash
with order basis. Upon {, termination of this Agreement by either party, 3M and
KNOGO shall cooperate to see that all end customer needs are served and all
orders are filled.
6. WARRANTY AND LIMITATION OF REMEDIES: DISCLAIMER.
A. 3M warrants to KNOGO that PRODUCTS are free of defects in material and
manufacture at the time of shipment. Individual PRODUCTS may have additional or
different warranties as stated on PRODUCT packaging, package inserts, price
pages or literature. If any PRODUCT is proven to be defective in material or
manufacture during the applicable warranty period, 3M's entire liability and
KNOGO's exclusive remedy will be, at 3M's option, 1) repair of ~, PRODUCT, 2)
replacement of PRODUCT or 3) refund of the purchase price paid by KNOGO for each
defective PRODUCT, within a reasonable time after written notification of the
defect and return of the defective PRODUCT to 3M.
B. THE WARRANTY STATED ABOVE IS MADE IN LIEU OF ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING BUT NO LIMITED TO THE IMPLIED WARRANTY OF
MERCHANTABILITY, THE IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, ANY
IMPLIED WARRANTY ARISING OUT OF A COURSE OF DEALING OR OF PERFORMANCE, CUSTOM OR
USAGE OF TRADE, EXCEPT OF TITLE AND AGAINST PATENT INFRINGEMENT.
C. If KNOGO offers express implied warranties and limited remedies which
differ from those stated above, KNOGO agrees to assume full responsibility for
all liability, loss, cost, and expense arising out of, or in connection with,
the different warranties and/or remedies offered by KNOGO.
7. LIMITATION OF LIABILITIES; TIME LIMIT FOR FILING ACTION.
A. NEITHER PARTY WILL UNDER ANY CIRCUMSTANCES BE LIABLE TO THE OTHER PARTY
FOR DAMAGES OF ANY KIND, INCLUDING WITHOUT LIMITATION, DIRECT, INDIRECT,
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO,
LOSS OF PROFITS, REVENUE OR BUSINESS) RESULTING FROM OR IN ANY WAY RELATED TO
PRODUCTS, ANY OF KNOGO'S PURCHASE ORDERS, THIS AGREEMENT OR THE TERMINATION OF
THIS AGREEMENT. This limitation applies regardless of whether the damages or
other relief are sought based on breach of warranty, breach of contract,
negligence, strict liability in tort or any other legal or equitable theory.
This limitation does not apply to direct damages caused by breach of a material
obligation under this Agreement (except breach of warranty) or to claims for
personal injury by a third party.
B. Any action for breach of warranty or otherwise in any way arising under
or related to this Agreement must be commenced within one (1) year after KNOGO
becomes aware of the breach.
8. EXCUSED PERFORMANCE.
Except for KNOGO's obligation to make payment to 3M, neither party will be
liable for any failure to perform its obligations under this Agreement if due to
any cause beyond the i reasonable control of the non-performing party.
9. RELATIONSHIP OF THE PARTIES.
The relationship established between 3M and KNOGO by this Agreement is that
of a vendor to its vendee. KNOGO is not an agent or franchisee of 3M and has no
authority to bind 3M, transact any business in 3M's name or on its behalf in any
manner, or make any promises or representations on behalf of 3M. KNOGO agrees to
represent itself only as an independent business that is an "authorized 3M
Library Security Systems Distributor." The employees and agents of KNOGO are NOT
for any purpose the employees or agents of 3M.
10. NO ASSIGNMENT.
KNOGO will not assign its rights or delegate its duties under this
Agreement without 3M's prior written approval. Without in any way limiting its
rights as stated in Article 5, 3M expressly reserves the right to terminate this
Agreement on: (a) the sale of all or substantially all of the stock of KNOGO; or
(b) the sale or transfer of the entire business or substantially all the assets
of KNOGO. Any assignment or transfer of this Agreement or any interest in this
Agreement, without 3M's prior written consent is void and cause for termination
of this Agreement. Nothing in this Agreement will be construed to grant any
person or entity not a party to this Agreement any rights or powers whatsoever.
No person or entity will be a third party beneficiary of this Agreement.
11. NO WAIVER.
Any failure or delay by either party in exercising any right or remedy in
one or many instances will not prohibit a party from exercising it at a later
time or from exercising any other right of remedy.
12. NOTICES.
All notices must be in writing and will be deemed to have been given when
received. Any w notice to 3M will be addressed to:
Jan Hamann, Project Manager
3M Company
Library Security Systems, Bldg. 225-4N-14
Safety & Security Systems Division
St. Paul, MN 55144
With a copy to:
General Counsel
3M Company
P. O. Box 33428
St. Paul, MN 55133-3428
Any notice to KNOGO will be addressed to:
Thomas A. Nicolette, President
Knogo North America Inc.
350 Wireless Blvd.
Hauppauge, Long Island, NY 11788-3907
With a copy to: Wm. A. Perlmuth
Stroock & Stroock & Lavan
7 Hanover Square
New York, NY 10004
All notices shall be deemed to be effective within 48 hours after facsimile
transmission, or 96 hours after delivery by United States mail, whichever is
first to occur.
13. GOVERNING LAW: DISPUTE RESOLUTION
A. Any questions, claims, disputes or litigation arising from or related to
this Agreement shall be governed by the laws of Minnesota, without regard to the
principles of conflicts of law.
B. Any and all disputes arising between the parties shall be resolved in
accordance with the procedures set forth in paragraph 4.5 of the Assets Purchase
Agreement.
14. MODIFICATION.
No part of this Agreement may be waived, modified, or supplemented in any
manner whatsoever (including a course of dealing or of performance or usage of
trade) except by a written instrument signed by 3M's Project Manager and an
officer of KNOGO.
15. ENTIRE AGREEMENT.
This Agreement supersedes and terminates any and all prior agreements,
whether written or oral, between the parties with respect to the subject matter
of this Agreement. Each party agrees that it has not relied on any
representation, warranty, or provision not explicitly stated in this Agreement
and that no oral statement has been made to either party that in any way tends
to waive any of the terms or conditions of this Agreement. THIS AGREEMENT IS
INTENDED BY THE PARTIES TO BE THE FINAL, COMPLETE AND EXCLUSIVE STATEMENT OF ALL
TERMS AND CONDITIONS OF THIS AGREEMENT.
ACCEPTED AND AGREED TO:
MINNESOTA MINING AND KNOGO NORTH AMERICA INC.
MANUFACTURING COMPANY
By: /s/ JON T. HAMANN By: /s/ T.A. NICOLETTE
Jon T. Hamann Thomas A. Nicolette
Project Manager President & Chief Exec. Officer
3/22/96 3/22/96
Date Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,146
<SECURITIES> 0
<RECEIVABLES> 7,075
<ALLOWANCES> 752
<INVENTORY> 8,297
<CURRENT-ASSETS> 17,766
<PP&E> 13,649
<DEPRECIATION> 6,701
<TOTAL-ASSETS> 35,937
<CURRENT-LIABILITIES> 5,351
<BONDS> 3,095
25,254
0
<COMMON> 10
<OTHER-SE> 1,790
<TOTAL-LIABILITY-AND-EQUITY> 35,937
<SALES> 20,535
<TOTAL-REVENUES> 24,566
<CGS> 12,882
<TOTAL-COSTS> 29,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> 168
<INCOME-PRETAX> (17,743)
<INCOME-TAX> 174
<INCOME-CONTINUING> (17,917)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,917)
<EPS-PRIMARY> (2.08)
<EPS-DILUTED> (2.08)
</TABLE>
