UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1996
------------------------------
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: 33-9868-A
-------------
Shepherd Surveillance Solutions, Inc.
----------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 88-0212471
- -------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7 Perimeter Road, Suite 4, Manchester, NH 03103
- --------------------------------------------------------------------------------
(Address of principal executive offices)(Zip Code)
(603) 622-8668
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
At December 31, 1996, 4,293,822 shares of common stock,
$.001 par value per share, were outstanding.
Part I. Financial Information
Item 1. Financial Statements
Shepherd Surveillance Solutions, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1996
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 98,273 $ 116,770
Accounts receivable 304,384 67,786
Inventories 285,071 370,999
Prepaid expenses and other current assets 14,648 30,122
------- ------
Total current assets 702,376 580,677
------- -------
Property and equipment:
Furniture, machinery and equipment 207,997 139,283
Software and hardware 62,706 36,453
Leasehold improvements 44,245 40,807
------- -------
314,948 216,543
Accumulated depreciation 76,443 63,590
------- -------
238,505 152,953
Other assets 15,550 6,720
------- -------
Total assets $ 956,431 $ 740,350
======= =======
</TABLE>
See accompanying notes.
Note: The balance sheet at September 30, 1996 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
2
Shepherd Surveillance Solutions, Inc.
Balance Sheets (Continued)
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1996
----------------- -------------------
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable $ 323,333 $ 244,449
Accrued expenses 138,104 52,096
Interest payable to shareholder 366,347 246,047
----------- -----------
Total current liabilities 827,784 542,592
----------- -----------
Notes payable to shareholder 4,803,000 3,659,000
Shareholders' deficit:
Common Stock - $.001 par value:
50,000,000 shares authorized;
4,293,822 shares issued and outstanding 4,294 4,294
Additional paid-in capital 5,770,330 5,770,330
Accumulated deficit (10,448,977) (9,235,866)
------------ -----------
Total shareholders' deficit (4,674,353) (3,461,242)
------------ -----------
Total liabilities and shareholders' deficit $ 956,431 $ 740,350
============ ===========
</TABLE>
See accompanying notes.
3
Shepherd Surveillance Solutions, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,1996 December 31,1995
---------------------------------------
<S> <C> <C>
Sales $ 304,443 $ 20,104
Cost of sales 241,625 3,236
------- -----
62,818 16,868
------- -------
Operating expenses and other costs:
Selling and promotion 447,302 98,519
General and administrative 402,339 87,303
Research and development 293,131 12,076
Depreciation and amortization 12,853 3,447
------- -------
Total operating expenses and other costs 1,155,625 201,345
---------- ----------
Loss from operations (1,092,807) (184,477)
Other income (expenses):
Interest expense (120,300) (26,187)
Other , net 0 2
(120,300) (26,185)
--------- --------
Net loss $ (1,213,107) $ (210,662)
========= ========
Loss per share $ (.28) $ (.05)
========= ========
</TABLE>
See accompanying notes.
4
Shepherd Surveillance Solutions, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1996 1995
---- ----
<S> <C> <C>
Operating activities
Net cash used by operating activities $(1,064,092) $ (363,248)
----------- -----------
Investing activities
Capital expenditures (98,405) 34,714
-------- -------
Net cash provided by (used in) investing activities (98,405) 34,714
-------- -------
Financing activities
Loans from shareholder 1,144,000 353,500
Net cash provided by financing activities 1,144,000 353,500
---------- ----------
Net increase (decrease) in cash and cash equivalents (18,497) 26,646
Cash and cash equivalents at beginning of period 116,770 18,215
------- ------
Cash and cash equivalents at end of period $ 98,273 $ 44,861
=========== =============
</TABLE>
5
Shepherd Surveillance Solutions, Inc.
Notes to Financial Statements
December 31, 1996 and September 30, 1996
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with Item 310(b) of Regulation S-B and do not include all of the
information and footnotes required for complete financial statements. The
condensed financial statements should be read in conjunction with the Company's
audited financial statements for the fiscal year ended September 30, 1996. In
the opinion of management, the statements include all adjustments necessary for
a fair presentation of the results of the reported interim periods. All such
adjustments are of a normal recurring nature.
The results of operations for the interim periods shown are not necessarily
indicative of results for any future interim periods or for the entire fiscal
year.
2. Inventories
Inventories consist of the following:
December 31, 1996 September 30, 1996
Raw Materials $181,525 $178,999
Work in progress 15,012 13,286
Finished goods 88,534 178,714
------- -------
$285,071 $370,999
======= =======
3. Stock Options and Warrants
During the three months ended December 31, 1996 (the "First Quarter"), pursuant
to the 1996 Stock Option Plan (the "1996 Plan"), the Company granted options to
employees for the purchase of the Company's $.001 par value common stock (the
"Common Stock") at an exercise price of $.01 per share. The 1996 Plan provides
that options become exercisable based on holding periods after the grant date
and, in certain instances, on other criteria relating to the operations of the
Company. No options were exercisable at December 31, 1996.
Stock options and warrant activity for the three months ended December 31, 1996
follows:
Options Warrant
Outstanding at September 30, 1996 4,238,168 14,226,578
Granted during the First Quarter 131,781
------- --------
Outstanding at December 31, 1996 4,369,949 14,226,578
======= ========
Subsequent to December 31, 1996, the Company issued a warrant to purchase
2,200,000 shares of the Company's Common Stock, as fully discussed in Note 6.
6
4. Related party transactions
Loan from shareholder
- ---------------------
During the First Quarter, the Company borrowed $1,144,000 from its majority
shareholder. As of December 31, 1996, the Company has borrowed an aggregate
amount of $4,803,000 from its majority shareholder. Except for the advances of
the First Quarter, the indebtedness is pursuant to Credit Agreements between the
Company and its majority shareholder, as fully discussed in Note 6.
.Interest payable to shareholder
- --------------------------------
The December 31, 1996 balance of $366,347 represents interest due on notes
payable to and advances from the Company's majority shareholder. No interest was
paid during the First Quarter. Subsequent to December 31, 1996, approximately
$135,000 of this unpaid interest became a part of the principal of a new
convertible promissory note, dated January 21, 1997, as fully discussed in Note
6.
5. Per Share Data
Loss per share for the three month period ended December 31, 1996 was determined
by dividing the net loss for the period by 4,293,822, the number of shares of
common stock outstanding during the period.
6. Subsequent Events
On January 17, 1997, the Company entered into a Credit Agreement (the
"Agreement") with its majority shareholder which provides for borrowings of up
to $2,450,000. Included in this amount are advances received by the Company
aggregating $1,048,000 during the last quarter of fiscal 1996 and $1,144,000
during the First Quarter. The total of such advances outstanding at December 31,
1996 was $2,192,000. Subsequent to December 31, 1996, the Company received the
remaining $258,000 under the Agreement. In connection with the Agreement, the
Company executed and delivered to its majority shareholder a promissory note in
the amount of $2,450,000 (the "Promissory Note"), and issued to its majority
shareholder a warrant exercisable for 2,200,000 shares of the Company's Common
Stock (the "Warrant"), exercisable at a price of $.01 per share. The Warrant is
exercisable with respect to 500,000 shares immediately, is exercisable with
respect to 1,700,000 shares on August 8, 1998 in the event that the Promissory
Note is not paid in full by that date, and expires on August 8, 2003. The
Promissory Note matures on August 7, 1998 and bears interest at an annual rate
equal to the prime rate plus 4%. All principal and interest is payable at
maturity. The prime rate at December 31, 1996 was 8.25%.
On January 21,1997, the Company entered into a Credit Agreement with its
majority shareholder for the purpose of refinancing a $1,000,000 loan payable to
its majority shareholder, and the Company issued to its majority shareholder a
Convertible Promissory Note (the "Convertible Note") in the amount of
$1,141,229. The Company included $141,229 representing interest accrued from
November 1, 1995 as principal, resulting in an aggregate principal balance of
$1,141,229. The Convertible Note requires the Company to make interest payments
in cash in January and July of each year, but during the first two years such
interest can be added to principal at the election of the Company, with interest
continuing to accrue on the aggregate principal. The Convertible Note matures on
August 8, 2000, bears interest at an annual rate of the prime rate plus 4% and
is convertible on or after the maturity date into shares of the Company's Common
Stock pursuant to a formula specified in the Credit Agreement, based on fair
market value (as defined) of the Company's Common Stock.
7
Part I. Financial Information
- ------------------------------
Item 2.
- ------
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Results of operations
- ---------------------
The Company has, for the past several years, experienced substantial operating
losses, and its sales do not currently generate working capital sufficient to
meet future projected operating expenses. In addition, when comparing the two
fiscal quarters included herein, it should be noted that, starting in the middle
of its prior fiscal year, the Company received significant venture funding to
revamp its existing technology and develop new technologies, both of which have
given rise to a product line that did not exist until the end of the prior
fiscal year. As a result, the First Quarter 1997 financial statements depict a
registrant that has evolved into an entirely different business than it was one
year earlier. Accordingly, discussion and analysis of financial condition and
operating results under the described Company scenario of dramatic change over
the period of one year should be reviewed in this context.
Revenues were $304,443 during the First Quarter, an increase of approximately
$284,000 over the same period in 1995, but 1996 revenues were solely from sales
of the Company's new products, which are based on a different technology than in
the past. In the prior fiscal year, revenues arose principally from time and
materials billings for work done on large installations resulting from completed
contracts of past years. Margin of approximately 21% realized on First Quarter
sales is not comparable to the 84% margin on revenues of the same period in the
prior year because the nature of the Company's business and the products sold
have changed since 1995. Selling and promotion expenses were $447,302, an
increase of approximately $349,000 over the same period in 1995, a reflection of
marketing efforts necesary to introduce and promote the Company's new product
line. General and administrative expenses for the First Quarter were $402,339,
an increase of approximately $315,000, which is a reflection of costs associated
with the administrative staff to coordinate the dramatic changes in the
Company's business profile. Research and development expenses for the First
Quarter were $293,131, an increase of approximately $281,000 over the three
months ended December 31,1995, indicative of the Company's expanded engineering
organization and the broadened scope of its technology. Interest expense of
$120,300 in the First Quarter, when compared to $26,187 during the three months
ended December 31, 1995, reflects an increase of approximately $94,000, the
result of significantly higher borrowings from the Company's majority
shareholder, Trilon Dominion Partners, L.L.C., a Delaware limited liability
company ("Trilon"), owner of 78% of the Company's outstanding common stock.
Accounts receivable balances at December 31, 1996 were approximately $242,000
larger than at September 30, 1996, the result of significantly higher sales
during the First Quarter than in the last quarter of fiscal 1996. The $86,000
decrease in inventories at December 31, 1996 compared to those at September 30,
1996 is consistent with the greater sales activity in the First Quarter. The
increase of approximately $98,000 in property and equipment reflects the
acquisition of capital equipment used in the Company's expanding engineering and
production activities. Accounts payable increased by approximately $79,000, an
indicator of increased overall spending on purchases of manufacturing components
and fixed assets, as well as marketing commitments related to promotional
activities and materials.
Liquidity and capital resources
- -------------------------------
Management believes that the ratio of current assets to current liabilities in
the financial statements for the period ended December 31,1996, as well as the
total Shareholders' Deficit, reflects the Company's current lack of liquidity.
Trilon advanced $1,144,000 to the Company during the three months ended December
31,1996, which was the principal source of the Company's working capital. On
January 17 and 21, 1997, respectively, two Credit Agreements between the Company
and Trilon were executed (as fully discussed in Note 6 to financial statements).
8
Management forecasts indicate that the Company will need additional funding
(either debt or equity) in the second and third fiscal quarters. There is no
assurance that such funding will be obtained. In the event the Company is unable
to obtain additional funding, it would have a material adverse effect on the
Company.
The Company had cash and cash equivalents of approximately $98,000 at December
31, 1996 and further borrowings were available from Trilon. The Company
subsequently borrowed approximately $250,0000 during January of 1997. The
Company is required to repay to Trilon amounts borrowed under the June 26, 1996
Credit Agreement on or before June 28,1999, amounts borrowed under the January
17, 1997 Credit Agreement on or before August 7, 1998 and may be required to
repay to Trilon amounts borrowed under the January 21, 1997 Credit Agreement
(see Notes 4 and 6 to financial statements for further details). During the next
two fiscal quarters, the Company intends to apply any capital received ( from
Trilon or others) to the continued development of its technology and to the
further positioning of its products in the market. Any such additional capital
will be applied to engineering, promotion, marketing, and production materials.
The Company has continued its negotiations with a commercial bank for an
asset-based line of credit.
Risk Factors and Cautionary Statements
- --------------------------------------
When used in this Form 10-QSB and in other filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project", "hope to", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including but not limited to those discussed in
the notes to the financial statements and under this caption "Risk Factors and
Cautionary Statements", that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and wishes to
advise readers that the factors listed below could cause the Company's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Company will NOT undertake and specifically declines any obligation to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
* The Company's future operating results are dependent on its ability to
develop, produce and market new and innovative products and technologies,
and eventually to enter into favorable licensing and distribution
relationships. There are numerous risks inherent in this complex process,
including the risk that rapid technological change could render the
Company's products obsolete, the risk that the Company will not be able to
timely develop new products at a reasonable cost that find acceptance in
the marketplace, and the risk that the Company will not be able to develop
procedures to bring to these products to the market in a timely fashion.
* The Company's continued working capital and cash resources are dependent on
its ability to obtain additional financing in the future, as the Company's
operations currently do not generate revenues sufficient to cover its
expenses. There can be no assurance that the Company is able to obtain
additional financing. If such financing is obtained, it would have a
material adverse effect on the Company.
* The Company is highly leveraged, having borrowed $2,734,000 during fiscal
1996 from its majority shareholder without repaying any amounts of
principal or interest due on these loans. An additional $1,144,000 was
borrowed during the First Quarter. There can be no assurance that the
Company will be able to pay principal or interest due on any of these loans
from time to time. Any failure to pay interest or principal due on these
loans would have a material adverse effect on the Company.
* A single shareholder, Trilon Dominion Partners, L.L.C., which has been the
Company's principal lender, currently holds 3,367,802 shares of Common
Stock (78% of the outstanding common stock), holds warrants to purchase
16,426,578 additional shares of the Company's common stock and holds a
Convertible Promissory Note to acquire 1,000,000 additional shares.
Accordingly, Trilon is and will be able to elect all of the Company's
directors and, generally, to direct the affairs of the Company. This
stockholder could effectively block any majority corporate transactions,
such as a merger or sale of all of the Company's assets, which, under
Nevada law, requires the affirmative vote of holders of a majority of the
outstanding Common Stock of the Company.
9
The Company has experienced recurring losses from operations and has a
significant shareholders' deficit. Furthermore, the Company's operating results
have varied from fiscal period to fiscal period; accordingly, the Company's
financial results in any particular fiscal period are not necessarily indicative
of results for future periods.
Part II. Other Information
- ---------------------------
Item 5. Other Information
- --------------------------
January 17, 1997 Credit Agreement
- ---------------------------------
On January 17, 1997, the Company entered into a Credit Agreement (the
"Agreement") with Trilon which provides for borrowings up to $2,450,000. In
connection with the Agreement, the Company executed and delivered to Trilon a
promissory note in the amount of $2,450,000 (the "Promissory Note"), and issued
to Trilon a warrant exercisable for 2,200,000 shares of the Company's Common
Stock (the "Warrant"), exercisable at a price of $.01 per share. The Warrant is
exercisable with respect to 500,000 immediately, is exercisable with respect to
1,700,000 shares on August 8, 1998 in the event that the Promissory Note is not
paid is full by that date, and expires on August 8, 2003. The Promissory Note
matures on August 7, 1998 and bears interest at an annual rate equal to the
prime rate plus 4%. All principal and interest is payable at maturity. The prime
rate at December 31, 1996 was 8.25%.
January 21, 1997 Credit Agreement
- ---------------------------------
On January 21, 1997, the Company entered into a Credit Agreement with Trilon for
the purpose of refinancing a $1,000,000 loan payable to Trilon, and the Company
issued to Trilon a Convertible Promissory Note (the "Convertible Note") in the
amount of $1,141,229. The Company included $141,229 representing interest
accrued on the loan from November 1, 1995 as principal, resulting in an
aggregate principal balance of $1,141,229. The Convertible Note requires the
Company to make interest payments in cash in January and July of each year, but
during the first two years such interest can be added to principal at the
election of the Company, with interest continuing to accrue on the aggregate
principal. The Convertible Note matures on August 8, 2000, bears interest at an
annual rate of the prime rate plus 4% and is convertible on or after the
maturity date into shares of the Company's Common Stock, pursuant to a formula
specified in the Credit Agreement, based on fair market value (as defined) of
the Company's Common Stock.
Item 6. Exhibits and reports on Form 8-K
- -----------------------------------------
Exhibits
10.1 Credit Agreement, dated as of January 17, 1997, by and between the
Company and Trilon Dominion Partners, L.L.C., a Delaware limited
liability company
10.2 Promissory Note, dated as of January 17, 1997, by the Company in favor
of Trilon Dominion Partners, L.L.C.
10.3 Credit Agreement, dated as of January 21, 1997, by and between the
Company and Trilon Dominion Partners, L.L.C.
10.4 Convertible Promissory Note, dated as of January 21, 1997, by the
Company in favor of Trilon Dominion Partners, L.L.C.
27 Financial Data Schedule
No reports on Form 8-K have been filed during the quarter for which this report
is filed.
10
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Shepherd Surveillance Solutions, Inc.
(Registrant)
Date: February 14, 1997 /s/ M. Thomas Makmann
- ----------------------- ---------------------
M. Thomas Makmann
President and CEO
Date: February 14, 1997 /s/ William D. Biser
- ------------------------ --------------------
William D. Biser
Principal Financial Officer
11
CREDIT AGREEMENT
This CREDIT AGREEMENT (this "Agreement") is made as of January 17,
1997, by and between Shepherd Surveillance Solutions, Inc. (the "Borrower"), a
Nevada corporation, and Trilon Dominion Partners, L.L.C. (the "Lender"), a
Delaware limited liability company.
1. DEFINITIONS:
Certain capitalized terms are defined below:
Business Day: Any day on which the stock markets in New York are open
for business generally.
Charter Documents: In respect of any entity, the certificate or
articles of incorporation or organization and the by-laws of such entity, or
other constitutive documents of such entity.
Commission: The Securities and Exchange Commission.
Commitment: The obligation of the Lender to make Loans to the Borrower
up to an aggregate outstanding principal amount not to exceed $2,450,000, as
such amount may be reduced from time to time or terminated hereunder.
Common Stock: The common stock, $.001 par value, of the Borrower.
Consent: In respect of any person or entity, any permit, license or
exemption from, approval, consent of, registration or filing with any local,
state or federal governmental or regulatory agency or authority, required under
applicable law.
Current Assets: All assets of the Borrower that in accordance with GAAP
are properly classified as current assets, excluding bad debts and inventory not
yet saleable.
Current Liabilities: All liabilities of the Borrower payable on demand
or maturing within one (1) year from the date as of which current liabilities
are to be determined, and such other liabilities that in accordance with GAAP
are properly classified as current liabilities.
Default: An event or act which with the giving of notice and/or the
lapse of time, would become an Event of Default.
Drawdown Date: In respect of any Loan, the date on which such Loan is
made to the Borrower.
Environmental Laws: All laws pertaining to environmental matters,
including without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund
-2-
Amendments and Reauthorization Act of 1986, the Federal Clean Water Act, the
Federal Clean Air Act, the Toxic Substances Control Act, in each case as
amended, and all rules, regulations, judgments, decrees, orders and licenses
arising under all such laws.
ERISA: The Employee Retirement Income Security Act of 1974, as amended,
and all rules, regulations, judgments, decrees, and orders arising thereunder.
Event of Default: Any of the events listed in Section 6 hereof.
Fair Market Value: The value of Common Stock as determined in good
faith by the Board Directors of the Company, provided that a majority of the
independent directors of the Board shall have concurred. In the event of the
failure of such Board of Directors to make such determination or to act in good
faith with respect thereto, the fair market value shall be determined by a
single qualified appraiser (which shall be either a national accounting firm or
a national or regional major investment bank) selected by mutual agreement
between the Company and the Lender of the portion of the assets or indebtedness
so to be distributed to one share of Common Stock without discounts of any kind,
including for lack of tradeability or minority positions.
GAAP: Generally accepted accounting principles consistent with those
adopted by the Financial Accounting Standards Board and its predecessor, as in
effect on the date hereof.
Indebtedness: In respect of any entity, all obligations, contingent and
otherwise, that in accordance with GAAP should be classified as liabilities,
including without limitation (i) all debt obligations, (ii) all liabilities
secured by Liens, (iii) all guarantees, (iv) all liabilities in respect of
bankers' acceptances or letters of credit and (v) all finance leases.
Inventory: All goods, merchandise and other personal property, now
owned or hereafter acquired by the Borrower, which are held for sale or leased,
or furnished under a contract for service, or are raw materials, work in
process, or materials used in the Borrower's business.
Loan: Any loan made or to be made to the Borrower pursuant to Section 2
hereof.
Loan Documents: This Agreement, the Note, the Closing Warrant, the
Security Agreement and any and all other agreements and documents evidencing,
securing or pertaining to the Loan made hereby, in each case as from time to
time amended or supplemented.
Loan Request: See Section 2.1.
Materially Adverse Effect: Any materially adverse effect on the
financial condition, business operations or prospects of the Borrower or
material impairment of the ability of the Borrower to perform its obligations
hereunder or under any of the other Loan Documents.
-3-
Maturity Date: August 8, 1998 or such earlier date on which all Loans
may become due and payable pursuant to the terms hereof.
Note: The promissory note in the original principal amount of
$2,450,000 executed and delivered by the Borrower to the Lender, pursuant to
Section 2.1 (c) hereof.
Obligations: All indebtedness, obligations and liabilities of the
Borrower to the Lender of every kind and nature, existing on the date of this
Agreement or arising thereafter, direct or indirect, joint or several, absolute
or contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise, arising or
incurred under this Agreement or any other Loan Document or in respect of any of
the Loans or the Note or other instruments at any time evidencing any thereof.
Plan of Record: The operating plan for the Company for the fiscal year
agreed-to by the Board of Directors, from which reporting periods are measured
and to which adjustments are made with respect to performance on an ongoing
basis.
Qualified Private Placement: An offering and sale for cash of shares of
Common Stock pursuant to an exemption from registration under the Securities Act
where the gross proceeds to the Company or its Stockholders exceed $7,500,000.
Qualified Public Offering: A firm commitment underwritten public
offering of shares of securities of the Borrower pursuant to an effective
registration statement under the Securities Act where the gross proceeds to the
Company or its Stockholders exceed $7,500,000.
Requirement of Law: In respect of any person or entity, any law,
treaty, rule, regulation or determination of an arbitrator, court, or other
governmental authority, in each case applicable to or binding upon such person
or entity or affecting any of its property.
Securities Act: The Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Securities and
Exchange Commission thereunder, all as the same are in effect at the relevant
time of reference.
Security Agreement: The Amended and Restated Security Agreement, dated
as of August 8, 1994, between the Borrower and the Lender.
Total Liabilities: All liabilities of the Borrower that in accordance
with GAAP are properly classified as liabilities.
2. CREDIT FACILITY.
2.1 COMMITMENT TO LEND; ISSUANCE OF WARRANTS.
(a) Upon the terms and subject to the conditions of this
Agreement, the Lender agrees to lend to the Borrower such sums that the
Borrower may request, at
-4-
any time before but not including the Maturity Date, provided that the
sum of the outstanding principal amount of all Loans (after giving
effect to all amounts requested) hereunder shall not exceed the
Commitment. Loans shall be in the minimum aggregate amount of $50,000.
(b) The Borrower shall notify the Lender in writing or
telephonically not later than 12:00 p.m. New York time on the second
business day prior to the day of the Drawdown Date (which must be a
Business Day) of the Loan being requested, of the principal amount of
such Loan (a "Loan Request"). Subject to the foregoing, so long as the
Commitment is then in effect and the applicable conditions set forth in
Section 4 hereof have been met, the Lender shall advance the amount
requested to such account of the Borrower as the Borrower may specify
in writing or telephonically from time to time in immediately available
funds not later than the close of business on such Drawdown Date.
(c) The obligation of the Borrower to repay to the Lender the
principal of the Loans and interest accrued thereon shall be evidenced
by a promissory note (the "Note") in the principal amount of $2,450,000
executed and delivered by the Borrower and payable to the order of the
Lender, in the form attached hereto as Exhibit A.
(d) The Borrower confirms and agrees that the Obligations
including those advanced pursuant to this Agreement or evidenced by the
Note are secured by the Security Agreement.
(e) The Borrower agrees to execute and deliver to the Lender:
on the date hereof, a warrant in the form of Exhibit B attached hereto
to purchase 2,200,000 shares of Common Stock at an exercise price per
share equal to $0.01.
2.2. REPAYMENT OF CREDIT FACILITY. The Borrower shall pay to the Lender
the principal of the Loans and interest accrued thereon on the Maturity Date.
2.3. PREPAYMENTS.
(a) The Borrower may elect to prepay the outstanding principal of all
or any part of any Loan, without premium or penalty, in a minimum amount of
$50,000, upon written notice to the Lender given by 10:00 a.m. New York time on
the date of such prepayment, of the amount to be prepaid. Each repayment or
prepayment of principal of any Loan shall be accompanied by payment of the
unpaid interest accrued to such date on the principal being repaid or prepaid.
The Borrower may elect to reduce or terminate any unused portion of the
Commitment by a minimum principal amount of $50,000 or an integral multiple
thereof, upon written notice to the Bank given by 10:00 a.m. New York time at
least two (2) Business Days prior to the date of such reduction or termination.
The Borrower shall not be entitled to reinstate the Commitment following such
reduction or termination.
-5-
(b) In the event of a Qualified Public Offering or a Qualified Private
Placement by the Borrower, and subject to any prepayment rights pursuant to the
Credit Agreement dated as of June 28, 1996 ( the "June 1996 Agreement ") between
the Borrower and the lender, the entire unpaid principal of and interest on all
Loans shall be prepaid upon the closing of such offering or placement in an
amount equal to the lessor of: (i) the net proceeds received by the Borrower; or
(ii) the entire unpaid principal of and interest on all Loans.
2.4 PREVIOUS BORROWINGS. The Lender previously made certain loans to
the Borrower in the amounts and on the dates contained in Schedule 2.4 attached
hereto, in the aggregate amount of $2,442,000. Such loans are hereby deemed to
be Loans and are subsumed within and subject to the terms and conditions of this
Agreement and the Note.
2.5 USE OF PROCEEDS. Borrower will use the proceeds of the Loan only as
set forth per the Plan of Record.
2.6 DEFAULT RATE OF INTEREST. Any Obligations which are not paid when
due (subject to any applicable period of grace) shall bear interest at the
lesser of (i) the then current interest rate on the Note plus 4% or (ii) the
maximum contract rate permitted by law.
3. REPRESENTATIONS AND WARRANTIES OF BORROWER.
The Borrower represents and warrants to the Lender that:
(a) except as disclosed on Schedule 3(a), the Borrower is duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified and in good
standing in every other jurisdiction where it is doing business, and
the execution, delivery and performance by the Borrower of the Loan
Documents (i) are within its corporate authority, (ii) have been duly
authorized, (iii) do not conflict with or contravene its Charter
Documents;
(b) upon execution and delivery thereof, each Loan Document
shall constitute the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms;
(c) the Borrower maintains the insurance described on Schedule
3(c) hereto, which insurance the Borrower believes covers such risks
and is in such amounts and with such deductibles as is reasonably
appropriate for the Borrower's business as it is currently being
conducted;
(d) except as disclosed on Schedule 3(d) attached hereto, the
Borrower has made all filings on a timely basis that it has been
required to make under the Securities Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Borrower has provided
to the Lender true and accurate copies of all filings that have been
made with the Commission since June 28, 1996. All of such filings
(including all exhibits and schedules thereto and documents
incorporated by
-6-
reference therein) complied in all material respects with all
applicable requirements of the Securities Act and the Exchange Act and
the rules and regulations promulgated thereunder. None of such filings,
including without limitation, any financial statements or schedules
therein, at the time filed, contained any untrue statements of a
material fact or omitted to state a material fact required therein to
be stated or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
The financial statements included in the Borrower's SEC filings fairly
present the position of the Borrower as at such date and for such
period in accordance with GAAP consistently applied;
(e) except as described on Schedule 3(e), since January 1,
1996, there has been no materially adverse change of any kind in the
Borrower which is likely to have a Materially Adverse Effect;
(f) there are no legal or other proceedings or investigations
pending or threatened against the Borrower before any court, tribunal
or regulatory authority which would, if adversely determined, alone or
together, be likely to have a Materially Adverse Effect;
(g) the execution, delivery, performance of its obligations,
and exercise of its rights under the Loan Documents by the Borrower,
including borrowing under this Agreement, the use of the proceeds by
the Borrower and the issuance of the Closing Warrant to the Lender (i)
do not require any Consents; and (ii) are not and will not be in
conflict with, constitute a violation or breach of or be prohibited or
prevented by (A) any Requirement of Law, or (B) any Charter Document,
corporate minute or resolution, instrument, agreement or provision
thereof, in each case binding on it or affecting its property;
(h) no representation or warranty herein contains or will
contain any untrue statement of fact, or omits or will omit to state
facts required or necessary to make the statements contained herein not
false or misleading;
(i) except as described on Schedule 3(i) hereto, the Borrower
has no Subsidiaries and is not a party to any partnership or joint
venture;
(j) except as described on Schedule 3(j) hereto, Borrower has
no material liabilities or obligations of any nature, whether absolute
or contingent, accrued or otherwise, which are not shown or provided
for on the audited balance sheet of Borrower as of September 30, 1996,
except for those incurred in the ordinary course of business since such
date;
(k) Borrower has good and marketable title to all of its
material, real, personal and mixed properties (the "Assets") free and
clear of all mortgages, liens, pledges, charges, claims, leases,
restrictions or encumbrances of any nature whatsoever (other than those
granted to Lender), and subject to no restrictions with
-7-
respect to transferability. All of the Assets are in the Borrower's
possession and control. All inventory of the Borrower is of a quality
and quantity usable and saleable in the ordinary course of business of
Borrower and the values at which such inventories are carried on the
books and records of Seller reflect accurately the normal inventory
valuation policy of Borrower of inventory at the lower of cost or
market on a LIFO basis.
The accounts receivable of Borrower as shown on its books and
records have arisen in the ordinary course of business, represent valid
obligations owed to Borrower and are recorded as accounts receivable on
the books of Borrower in accordance with GAAP consistently applied, and
Borrower has no reason to believe that said accounts receivable (billed
and unbilled) will not be fully paid in the ordinary course of business
except to the extent of any bad debts reserved against on the books and
records of the Borrower;
(l) Borrower has no existing employment contracts with
directors, officers, employees or shareholders that have not been
reviewed and approved by the Compensation Committee of the Board of
Directors;
(m) to the best of Borrower's knowledge, Borrower has not
violated and is not currently in violation of or breach of, any zoning
or building laws, statutes, ordinances or regulations or any health,
safety or environmental laws, statutes, ordinances or regulations or
any other laws, statutes, ordinances or regulations relating to
Borrower or their use which violation or breach would have a Material
Adverse Effect. All material licenses, permits, franchise and other
governmental or quasi-governmental authorizations and approvals
required or necessary for Borrower to carry on its business have been
obtained and are in full force and effect;
(n) except as disclosed on Schedule 3(n), Borrower has filed
with the appropriate government agencies all tax or information returns
and tax reports required to be filed on or before the date hereof.
Except as disclosed on Schedule 3(n), all federal, state, local,
foreign, dominion and provincial income, profits, franchise, sales,
use, occupation, property, excise or other taxes whether or not yet due
have been fully paid or adequately provided for on the financial
statements of Borrower;
(o) the books and records of accounts of Borrower (i) have
been maintained in accordance with good business practices on a basis
consistent with prior years, (ii) state in reasonable detail and
accurately reflect the transactions and dispositions of the assets of
Borrower, and (iii) accurately and fairly reflect the basis for the
financial statements referred to in (d) above;
(p) Borrower has complied in all material respects with all
applicable laws, rules and regulations relating to the employment of
labor, including those relating to wages, hours, collective bargaining
and the payment and withholding of taxes, and
-8-
Borrower has withheld all amounts required by law or agreement to be
withheld from the wages or salaries of its employees and Borrower is
not liable for any arrears of wages or other taxes or penalties for
failure to comply with any of the foregoing. There are no material
controversies pending or, to the Borrower's knowledge, threatened
between Borrower and any of its employees or former employees. No union
or other collective bargaining unit has been certified or recognized by
Borrower as representing any of its respective employees;
(q) no representation or warranty of Borrower in this
Agreement or the exhibits hereto or any certificate or other document
referenced herein and furnished to the Lender by the Borrower contains
or will contain any untrue statement of a material fact or omits or
will omit a material fact necessary to make the statements contained
therein not misleading. To the knowledge of Borrower, there is no fact
which Borrower has not disclosed to Lender which materially adversely
affects, or may materially adversely affect, Borrower, its business or
operations; and
(r) Neither Borrower, any ERISA Affiliate (as defined in
ERISA) of the Borrower, nor any benefit plan of the Borrower ("Benefit
Plan") is in violation in any material respect of any of the provisions
of ERISA or any of the qualification requirements of Section 401(a) of
the Internal Revenue Code of 1986, as amended.
4. CONDITIONS PRECEDENT.
In addition to the making of the foregoing representations and
warranties and the delivery of the Loan Documents and such other documents and
the taking of such actions as the Lender may require at or prior to the time of
executing this Agreement, the obligation of the Lender to make any Loan to the
Borrower hereunder is subject to the satisfaction of the following further
conditions precedent:
(a) each of the representations and warranties of the Borrower
to the Lender herein, in any of the other Loan Documents or any
documents, certificates or other paper or notice in connection herewith
shall be true and correct in all material respects as of the time made
or claimed to have been made (the acceptance by Borrower of a Loan
shall be deemed a representation by Borrower that said representations
and warranties are true and correct as of the date of the acceptance of
the Loan);
(b) Borrower has executed and delivered all Loan Documents to
Lender;
(c) there has been no Event of Default as defined in Section
6;
(d) the Security Agreement shall continue to be in full force
and effect.
-9-
5. COVENANTS.
5.1 The Borrower agrees that so long as the Note is outstanding, the
Borrower will:
(a) maintain a system of accounting in accordance with GAAP,
maintain its current fiscal year, and permit the Lender or its
designated representatives to inspect the Borrower's premises during
normal business hours, to examine and be advised as to such other books
of account upon the request of the Lender, and to discuss the
Borrower's finances and accounts with its officers, all at such
reasonable times and as often as may be reasonably requested; provided,
that unless an Event of Default has occurred and is continuing, the
Lender shall provide at least two (2) Business Days notice of such
visit. The rights contained herein shall be exercised solely in
furtherance of the proper interests of the Lender as an investor in the
Borrower, and the Lender and its agents and representatives shall
maintain the confidentiality of all financial and other confidential
information of the Borrower acquired by the exercise of such rights
except in connection with pursuing any rights and remedies of Lender
hereunder;
(b) deliver to the Lender, as soon as available and in any
event within 90 days after the close of each fiscal year, a balance
sheet and statements of income, retained earnings, cash flows, and
comparisons to prior year earlier results, audited by an independent
accounting firm selected by the Borrower, fairly reflecting the
financial condition of the Company as of the close of such fiscal year
and the results of its operations during such fiscal year;
(c) deliver to the Lender, as soon as available and in any
event within 45 days after the end of each fiscal quarter a
consolidated unaudited balance sheet dated as of the end of such
quarter and consolidated unaudited statements of income and cash flow
for the period ending each quarter, prepared in accordance with GAAP
and certified by the chief financial officer of the Borrower as
presenting fairly the financial condition of the Borrower, and periodic
reporting against budget as approved in the Plan of Record;
(d) (i) maintain its corporate existence, business and assets,
(ii) keep its business and assets adequately insured, (iii) maintain
its chief executive office in the United States, (iv) continue to
engage in the same lines of business, (v) comply with all Requirements
of Law, including ERISA, Environmental Laws and the Securities Act, and
(vi) maintain insurance with financially responsible insurers, covering
such risks and in such amounts and with such deductibles as are
customary in the Borrower's business and are adequate;
(e) notify the Lender promptly in writing of the occurrence of
any Event of Default;
-10-
(f) use the proceeds of the Loans solely for working capital
purposes, and not for the carrying of "margin security" or "margin
stock" within the meaning of Regulations U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224;
(g) cooperate with the Lender, take such action, execute such
documents, and provide such information as the Lender may from time to
time request in order further to effect the transactions contemplated
by and the purposes of the Loan Documents;
(h) deliver to the Lender as soon as practicable upon the
filing thereof, all material filings, reports and statements, if any,
filed by the Borrower with the Commission or any other regulatory
authority;
(i) pay and discharge all taxes, assessments and government
charges incurred by, assessed against or imposed upon the Borrower
that, if unpaid, might by law become a lien or charge against its
property; provided, that the Borrower need not pay or discharge such
tax, assessment or government charges if they shall be or are being
contested in good faith and if it shall have set aside on its books
reserves deemed by its independent public accountant to be adequate
with respect thereto;
(j) Borrower will make all filings required pursuant to the
Securities Act or the Exchange Act on a timely basis;
(k) Borrower will provide Lender within ninety (90) days after
the end of Borrower's fiscal year a certificate of an officer of
Borrower certifying that during the past fiscal year no Event of
Default has occurred or if an Event of Default has occurred, detailing
the current status of such Event of Default; and
(l) Borrower will comply with each and every agreement and
covenant in each of the Loan Documents.
5.2 NEGATIVE COVENANTS. The Borrower agrees that so long as the Note is
outstanding the Borrower will not, without the Lender's consent:
(a) mortgage, pledge, or create or permit to exist any
security interest in, or lien on, any shares of Common Stock ;
(b) merge or consolidate with any other corporation or entity,
or sell, lease, transfer, distribute or otherwise dispose of all or any
substantial part of its properties or assets, in an aggregate amount in
excess of $200,000 (in any single transaction or series of related
transactions), or any intellectual property material to its operations
or business prospects in one or a series of related transactions to a
Subsidiary or any other person (including capital stock of its
Subsidiaries);
-11-
(c) transfer or permit any Subsidiary to transfer any of its
properties or assets (other than equipment) for the purpose of
subjecting the same to the payment of obligations in priority to
payment of general creditors;
(d) make any loan or advance to any person, or assume,
guarantee or become liable (contingently or otherwise) for any
Indebtedness, and will not permit any of its Subsidiaries to do the
same, except accounts payable and employee travel advances incurred in
the ordinary course of business;
(e) enter into or be a party to, or amend, modify, supplement
or waive any provisions of any contracts involving payments from the
Borrower in an amount in excess of $200,000 other than those approved
in the Plan of Record;
(f) permit any of its Subsidiaries to create, incur, assume or
suffer to exist any lien upon any of its property, assets or revenues,
whether now owned or hereafter acquired, except (i) mechanics' liens,
(ii) liens for taxes not yet due or (iii) other statutory liens arising
in the ordinary course of the Borrower's business;
(g) sell, issue or otherwise dispose of, or part with control
of, or purchase or otherwise redeem or reacquire, any shares of capital
stock or options or warrants exercisable for shares of capital stock of
the Borrower or any of its Subsidiaries, except pursuant to the
exercise of any options or warrants outstanding as of the date hereof
and as set forth on Schedule 5.2(g) attached hereto;
(h) acquire any assets of any kind or nature over $200,000
other than those in the ordinary course of business or approved in the
Plan of Record; and
(i) make any capital expenditures not approved in the Plan of
Record in excess of $200,000.
5.3 FEES AND EXPENSES OF COUNSEL. Borrower will reimburse Lender for
all costs and expenses including, without limitation, reasonable legal expenses
and attorneys' fees, incurred by Lender in connection with the documentation and
consummation of this transaction and any amendments or modifications of this
Agreement or other transactions between Borrower and Lender, in each case up to
a maximum of $10,000, including without limitation, Uniform Commercial Code and
other public record searches, lien filings, Federal Express or similar express
or messenger delivery, appraisal costs, surveys, title insurance and
environmental audit or review costs. All such costs, expenses and charges will
constitute Loans hereunder and may be advanced or paid by Lender from Loan
proceeds.
6. EVENTS OF DEFAULT; ACCELERATION.
If any of the following events ("Events of Default") shall occur:
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(a) the Borrower fails to pay the principal, interest or both
under the terms of the Note, whether at maturity or by acceleration,
within five (5) days after the Lender has given written notice of such
failure to the Borrower;
(b) any representation or warranty of the Borrower in the Loan
Documents or in any certificate or notice given in connection therewith
shall have been false or misleading in any material respect at the time
made or deemed to have been made;
(c) any of the Loan Documents shall cease to be in full force
and effect;
(d) the Borrower shall materially breach the agreements
specified in Section 5.1(e) or (f) hereof;
(e) the Borrower shall materially breach any of the agreements
specified in Section 5.2 hereof which breach is not cured within ten
(10) days after the Lender has given written notice of such breach to
the Borrower;
(f) the Borrower shall fail to perform any other term,
covenant or agreement contained in the Loan Documents within thirty
(30) days after the Lender has given written notice of such failure to
the Borrower;
(g) the Borrower (i) shall make an assignment for the benefit
of creditors, (ii) shall be adjudicated bankrupt or insolvent, (iii)
shall seek the appointment of, or be the subject of an order
appointing, a trustee, liquidator or receiver as to all or part of its
assets, (iv) shall commence, approve or consent to, any case or
proceeding under any bankruptcy, reorganization or similar law and, in
the case of an involuntary case or proceeding, such case or proceeding
is not dismissed within forty-five (45) days following the commencement
thereof, or (v) shall be the subject of an order for relief in an
involuntary case under federal bankruptcy law;
(h) upon the effective date of a sale of all or substantially
all of the assets of the Borrower;
(i) the entry of any final judgment or order in excess of
$250,000 against Borrower which is uninsured and remains unsatisfied or
undischarged and in effect for thirty (30) days after such entry
without a stay of enforcement or execution;
(j) the occurrence of an event of default under any other
agreement or instrument evidencing indebtedness for borrowed money in
excess of $500,000 executed or delivered by Borrower or pursuant to
which agreement or instrument Borrower or its properties is or may be
bound; or
(k) the occurrence of any event or condition which has had a
Material Adverse Effect.
THEN, or at any time thereafter:
-13-
(1) In the case of any Event of Default under clause (f), the
Commitment shall automatically terminate, and the entire unpaid
principal amount of the Loans, all interest accrued and unpaid thereon,
and all other amounts payable thereunder and under the Note shall
automatically become forthwith due and payable in accordance with the
terms of the Note;
(2) In the case of any Event of Default other than (f), the
Lender may, by written notice to the Borrower, terminate the Commitment
and upon any Event of Default the Lender may, without further notice,
declare the unpaid principal amount of the Loans, all interest accrued
and unpaid thereon, and all other amounts payable hereunder and under
the Note to be forthwith due and payable in accordance with the terms
of the Note, and may exercise any and all remedies available at law, in
equity or under any of the Loan Documents.
No remedy herein conferred upon the Lender is intended to be exclusive of any
other remedy and each and every remedy shall be cumulative and in addition to
every other remedy hereunder, now or hereafter existing at law or in equity or
otherwise. No course of dealing between the Borrower and the Lender or any
failure or delay on the Lender's part in exercising any rights or remedies
hereunder shall operate as a waiver of any rights or remedies.
7. REPRESENTATIONS AND WARRANTIES OF LENDER.
(a) The Lender has adequate means of providing for its current
financial needs and possible contingencies, and has no present need, and
anticipates no need in the foreseeable future, to sell the Note or any of the
warrants issued or to be issued pursuant to this Agreement. The Lender is able
to bear the economic risk of this investment and, consequently, the Lender is
able to hold any of the securities it may acquire for an indefinite period of
time, and has a sufficient net worth to sustain a loss of its entire investment
in such securities.
(b) The Lender is an "accredited investor" within the meaning of
Regulation D of the Securities Act and is acquiring the securities for its own
account, for investment purposes only, and not with a view to the distribution
of all or any part thereof. The Lender will not distribute or transfer any of
the securities in the United States except in compliance with all applicable
federal securities laws.
(c) The Lender acknowledges that it has been advised that the
securities issued pursuant to warrants granted or to be granted under this
Agreement (a) will not be registered under the Securities Act or any state
securities or blue sky laws (the "Blue Sky Laws"), (b) will be "restricted
securities" as defined in paragraph (a) (3) of Rule 144 under the Securities Act
("Rule 144"), (c) have been issued in reliance on the statutory exemptions
contained in the Securities Act, (d) have been issued in reliance on the
statutory exemptions contemplated in the Blue Sky Laws and that the Borrower
relied on the representations of the Lender set forth herein in granting certain
warrants to the Lender, (e) will not be
-14-
transferable without registration under the Securities Act and applicable Blue
Sky Laws, unless an exemption from the registration requirement thereof is
available and an opinion of counsel to that effect satisfactory to the Borrower
is delivered to the Borrower, and (f) will bear the following form of
restrictive legend evidencing such restrictions:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THE SAME ARE REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE BORROWER RECEIVES AN
OPINION FROM COUNSEL TO THE HOLDER THAT AN EXEMPTION FROM THE ACT IS AVAILABLE.
Moreover, the Lender has been advised that Rule 144 may not be available for
resales nor may all of the registration rights contained in any warrant issued
or to be issued pursuant to this Agreement be available unless the Borrower
remains a reporting company subject to and is in compliance with the
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder.
(d) The Lender is a limited liability company duly organized, validly
existing, and in good standing under the laws of Delaware. The Lender has all
requisite power and full legal right to execute and deliver this Agreement, and
to perform all of its respective obligations hereunder in accordance with all
terms. This Agreement and the transactions contemplated hereby have been duly
approved and authorized by all requisite corporate action, and constitutes when
executed and delivered a legal, valid and binding obligation of the Lender,
enforceable against it and in accordance with all terms.
8. MISCELLANEOUS.
(a) Any notice to be made hereunder shall (i) be made in writing, but
unless otherwise stated, may be made by telex, facsimile transmission or letter,
and (ii) be made or delivered to the address of the party receiving notice which
is identified with its signature below (unless such party has by three (3) days
written notice specified another address), and shall be deemed made or
delivered, when dispatched (with confirmation received in the case of facsimile
transmission), left at that address, or three (3) days after being mailed,
postage prepaid, to such address.
(b) This Agreement shall be binding upon and inure to the benefit of
each party hereto and its successors and assigns.
(c) This Agreement may not be amended or waived except by a written
instrument signed by the Borrower and the Lender, and any such amendment or
waiver shall be effective only for the specific purpose given.
-15-
(d) No failure or delay by the Lender to exercise any right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege preclude any other right, power or privilege.
(e) The provisions of this Agreement are severable and if any one
provision hereof shall be held invalid or unenforceable in whole or in part in
any jurisdiction, such invalidity or unenforceability shall affect only such
provision in such jurisdiction.
(f) This Agreement, together with all Schedules hereto, expresses the
entire understanding of the parties with respect to the transactions
contemplated hereby.
(g) This Agreement and any amendment hereby may be executed in several
counterparts, each of which shall be an original, and all of which shall
constitute one agreement. In proving this Agreement, it shall not be necessary
to produce more than one such counterpart executed by the party to be charged.
(h) THIS AGREEMENT AND THE NOTE ARE CONTRACTS UNDER THE LAWS OF THE
STATE OF NEW YORK AND SHALL BE CONSTRUED IN ACCORDANCE THEREWITH AND GOVERNED
THEREBY. THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF ANY OF THE
LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY
FEDERAL COURT SITTING THEREIN. THE BORROWER, AS AN INDUCEMENT TO THE LENDER TO
ENTER INTO THIS AGREEMENT, HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT
TO ANY ACTION ARISING IN CONNECTION WITH ANY LOAN DOCUMENTS.
(i) The Borrower shall pay on demand all costs, including court costs
and reasonable attorney's fees and expenses, paid or incurred by the Lender in
enforcing this Agreement and the Loan Documents. Lender may make a Loan for
these expenses and pay said fees and expenses to the appropriate party.
(j) The headings in this Agreement are for convenience of reference
only, and shall not limit or otherwise affect the meaning hereof.
-16-
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
as a sealed instrument as of the date first above written.
BORROWER: SHEPHERD SURVEILLANCE
SOLUTIONS, INC.
/s/ M. Thomas Makmann
By: __________________________________
Name: M. Thomas Makmann
Title: President and CEO
Address:
7 Perimeter Road, Suite 4
Manchester, New Hampshire 03103
Tel: (603) 622-8668
Fax: (603) 622-5945
LENDER: TRILON DOMINION PARTNERS, LLC
By: VC Holdings, Inc., its Managing Member
/s/ Jack R. Sauer
By: ___________________________________
Name: Jack R. Sauer
Title: Vice President
Address:
250 Park Avenue, Suite 2020
New York, New York 10017
Tel: (212) 867-3800
Fax: (212) 867-2955
PROMISSORY NOTE
January 17, 1997
FOR VALUE RECEIVED, the undersigned Shepherd Surveillance Solutions, Inc., a
Nevada Corporation (the "Borrower"), hereby promises to pay to the order of
Trilon Dominion Partners, LLC, a Delaware limited liability company (the
"Lender") at the Lender's office at 250 Park Avenue, Suite 2020, New York, NY
10017:
(a) prior to or on August 7, 1998, the principal amount of
2,450,000; and
(b) prior to or on August 7, 1998, interest on the principal
amount listed in (a) above from the date hereof through and including
the maturity date hereof at an annual rate equal to the prime rate of
the Chase Manhattan Bank, N.A., as announced from time to time (the
"Prime Rate") plus 4% (the "Interest Rate") calculated on the basis of
a 360 day year, compounded monthly, and adjusted on the first business
day of each calendar quarter.
This Promissory Note (the "Note") evidences borrowings under and has
been issued by the Borrower in accordance with and is subject to the terms of
the Credit Agreement, dated as of January 17, 1997, between the Borrower and the
Lender (the "Credit Agreement"). The Lender and any holder hereof is entitled to
the benefits of the Credit Agreement, and may enforce the agreements of the
Borrower contained therein, and any holder hereof may exercise the respective
remedies provided for thereby or otherwise available in respect thereof, all in
accordance with the respective terms thereof. This Note is secured by an Amended
and Restated Security Agreement, dated as of August 8, 1994, between the
Borrower and the Lender.
All capitalized terms used in this Note and not otherwise defined
herein shall have the same meanings herein as in the Credit Agreement.
The Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
or interest of this Note on the terms and conditions specified in the Credit
Agreement without premium or penalty.
If any one or more of the Events of Default shall occur, the entire
unpaid principal amount of this Note and all of the unpaid interest accrued
thereon may become or be declared due and payable in the manner and with the
effect provided in the Credit Agreement.
Any Obligations which are not paid when due (subject to any applicable
period of grace) shall bear interest at the lesser of (i) the then current
interest rate on this Note plus 4% or (ii) the maximum contract rate permitted
by law.
-2-
No delay or omission on the part of the Lender or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Lender or such holder, nor shall any delay, omission or
waiver on any one occasion be deemed a bar or waiver of the same or any other
right on any further occasion.
The Borrower and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
The Borrower shall pay on demand all costs, including court costs and
reasonable attorney's fees paid or incurred by the holder hereof in enforcing
this Note.
THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL
PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF
NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE
BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS NOTE MAY BE BROUGHT IN
THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND
CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF
PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS
SPECIFIED IN THE CREDIT AGREEMENT.
This Note shall be deemed to take effect as a sealed instrument under
the laws of the State of New York.
-3-
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed
in its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.
[Corporate Seal]
SHEPHERD SURVEILLANCE
SOLUTIONS, INC.
/s/ M. Thomas Makmann
By: _______________________________
Title:
CREDIT AGREEMENT
This CREDIT AGREEMENT (this "Agreement") is made as of January 21,
1997, by and between Shepherd Surveillance Solutions, Inc. (the "Borrower"), a
Nevada corporation, and Trilon Dominion Partners, L.L.C. (the "Lender"), a
Delaware limited liability company.
WHEREAS, the Lender loaned to the Borrower the aggregate amount of
$1,000,000 on November 1, 1995 (the "Loan"), in connection with a restructuring
of the operations of the Borrower; and
WHEREAS, the Lender and the Borrower desire to enter into a Credit
Agreement to which sets forth the terms and conditions of the Loan and pursuant
to which (i) the Borrower will issue to the Lender a Convertible Promissory Note
in the principal amount of $1,000,000 plus an additional amount of $141,229.50
representing interest accrued from November 1, 1995 to the date hereof, and (ii)
the Borrower will agree to certain restrictions and covenants until all amounts
due under the Convertible Promissory Note are repaid or such Convertible Note is
converted into shares of the Borrower's Common Stock, $.001 par value per share;
and
WHEREAS, the Lender and the Borrower desire to extinguish all other
obligations of the Borrower with respect to the Loan.
NOW, THEREFORE, the Lender and the Borrower hereby agree as follows:
1. DEFINITIONS:
Certain capitalized terms are defined below:
Business Day: Any day on which the stock markets in New York are open
for business generally.
Charter Documents: In respect of any entity, the certificate or
articles of incorporation or organization and the by-laws of such entity, or
other constitutive documents of such entity.
Commission: The Securities and Exchange Commission.
Common Stock: The common stock, $.001 par value, of the Borrower.
Consent: In respect of any person or entity, any permit, license or
exemption from, approval, consent of, registration or filing with any local,
state or federal governmental or regulatory agency or authority, required under
applicable law.
Current Assets: All assets of the Borrower that in accordance with GAAP
are properly classified as current assets, excluding bad debts and inventory not
yet salable.
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Current Liabilities: All liabilities of the Borrower payable on demand
or maturing within one (1) year from the date as of which current liabilities
are to be determined, and such other liabilities that in accordance with GAAP
are properly classified as current liabilities.
Default: An event or act which with the giving of notice and/or the
lapse of time, would become an Event of Default.
Environmental Laws: All laws pertaining to environmental matters,
including without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water
Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each case
as amended, and all rules, regulations, judgments, decrees, orders and licenses
arising under all such laws.
ERISA: The Employee Retirement Income Security Act of 1974, as amended,
and all rules, regulations, judgments, decrees, and orders arising thereunder.
Event of Default: Any of the events listed in Section 5 hereof.
Fair Market Value: The value of Common Stock as determined in good
faith by the Board Directors of the Company, provided that a majority of the
independent directors of the Board shall have concurred. In the event of the
failure of such Board of Directors to act in good faith with respect thereto,
the fair market value shall be determined by a single qualified appraiser (which
shall be either a national accounting firm or a national or regional major
investment bank) selected by mutual agreement between the Company and the Lender
of the portion of the assets or indebtedness so to be distributed to one share
of Common Stock.
GAAP: Generally accepted accounting principles consistent with those
adopted by the Financial Accounting Standards Board and its predecessor, (i)
generally, as in effect from time to time, and (ii) for purposes of determining
compliance by the Borrower with its financial covenants set forth herein, as in
effect for the fiscal year therein reported in certain financial information
submitted to the Lender prior to execution of this Agreement.
Indebtedness: In respect of any entity, all obligations, contingent and
otherwise, that in accordance with GAAP should be classified as liabilities,
including without limitation (i) all debt obligations, (ii) all liabilities
secured by Liens, (iii) all guarantees and (iv) all liabilities in respect of
bankers' acceptances or letters of credit.
Inventory: All goods, merchandise and other personal property, now
owned or hereafter acquired by the Borrower, which are held for sale or leased,
or furnished under a contract for service, or are raw materials, work in
process, or materials used in the Borrower's business.
-3-
Loan Documents: This Agreement, the Convertible Note, and the Security
Agreement and any and all other agreements and documents evidencing, securing or
pertaining to the Loan made hereby, in each case as from time to time amended or
supplemented.
Materially Adverse Effect: Any materially adverse effect on the
financial condition or business operations of the Borrower or material
impairment of the ability of the Borrower to perform its obligations hereunder
or under any of the other Loan Documents.
Maturity Date: August 8, 2000 or such earlier date on which all Loans
may become due and payable pursuant to the terms hereof.
Obligations: All indebtedness, obligations and liabilities of the
Borrower to the Lender of every kind and nature existing on the date of this
Agreement or arising thereafter, direct or indirect, joint or several, absolute
or contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise arising or
incurred under this Agreement or any other Loan Document or in respect of any of
the Loans or the Convertible Note or other instruments at any time evidencing
any thereof.
Plan of Record: The operating plan for the Company for the fiscal year
agreed to by the Board of Directors, from which reporting periods are measured
and to which adjustments are made with respect to performance on an ongoing
basis.
Qualified Private Placement: An offering and sale for cash of shares of
Common Stock pursuant to an exemption from registration under the Securities Act
where the gross proceeds to the Company or its Stockholders exceed $7,500,000.
Qualified Public Offering: A firm commitment underwritten public
offering of shares of Common Stock pursuant to an effective registration
statement under the Securities Act where the gross proceeds to the Company or
its Stockholders exceed $7,500,000.
Requirement of Law: In respect of any person or entity, any law,
treaty, rule, regulation or determination of an arbitrator, court, or other
governmental authority, in each case applicable to or binding upon such person
or entity or affecting any of its property.
Securities Act: The Securities Act of 1933, as amended, or any
successor federal statute, and the rules and regulations of the Securities and
Exchange Commission thereunder, all as the same are in effect at the relevant
time of reference.
Security Agreement: The Amended and Restated Security Agreement, dated
as of August 8, 1994, between the Borrower and the Lender.
2. THE NOTE.
2.1. Issuance of Convertible Note. The obligation of the Borrower to
repay to the Lender the principal of the Loan and interest accrued thereon shall
be evidenced by a Convertible Promissory Note (the "Convertible Note") in the
principal amount of $_______ executed and delivered by the Borrower and payable
to the order of the Lender, in the form attached hereto as Exhibit A.
2.2. Repayment of Loan. The Borrower shall pay to the Lender the
principal of the Loan and interest accrued thereon on the Maturity Date and as
set forth in the Convertible Note.
2.3. Prepayments.
(a) The Borrower may elect to prepay the outstanding principal of all
or any part of the Loan, without premium or penalty, in a minimum amount of
$50,000, upon written notice to the Lender given by 10:00 a.m. New York time on
the date of such prepayment, of the amount to be prepaid. Each repayment or
prepayment of principal of the Loan shall be accompanied by payment of the
unpaid interest accrued to such date on the principal being repaid or prepaid.
(b) In the event of a Qualified Public Offering or a Qualified Private
Placement by the Borrower, and subject to any prepayment rights pursuant to the
Credit Agreement, dated as of June 28, 1996 ( the "June 1996 Agreement "),
between the Borrower and the Lender, and the Credit Agreement, dated as of
January 17, 1997, between the Borrower and the Lender (referred to hereinafter
together with the June 1996 Agreement as the "Prior Agreements"), the entire
unpaid principal of and interest on the Loan shall be prepaid upon the closing
of such offering or placement in an amount equal to the lessor of: (i) the net
proceeds received by the Borrower (after compliance with the provisions of the
Prior Agreements); or (ii) the entire unpaid principal of and interest on the
Loan.
REPRESENTATIONS AND WARRANTIES OF BORROWER.
The Borrower represents and warrants to the Lender that:
(a) except as disclosed on Schedule 3(a), the Borrower is duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation and is duly qualified and in good
standing in every other jurisdiction where it is doing business, and
the execution, delivery and performance by the Borrower of the Loan
Documents (i) are within its corporate authority, (ii) have been duly
authorized, (iii) do not conflict with or contravene its Charter
Documents;
(b) upon execution and delivery thereof, each Loan Document
shall constitute the legal, valid and binding obligation of the
Borrower, enforceable in accordance with its terms;
(c) the Borrower maintains the insurance described on Schedule
3(c) hereto, which insurance the Borrower believes covers such risks
and is in such amounts and
-5-
with such deductibles as is reasonably appropriate for the Borrower's
business as it is currently being conducted;
(d) except as disclosed on Schedule 3(d) attached hereto, the
Borrower has made all filings on a timely basis that it has been
required to make under the Securities Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The Borrower has provided
to the Lender true and accurate copies of all filings that have been
made with the Commission since June 28, 1996. All of such filings
(including all exhibits and schedules thereto and documents
incorporated by reference therein) complied in all material respects
with all applicable requirements of the Securities Act and the Exchange
Act and the rules and regulations promulgated thereunder. None of such
filings, including without limitation, any financial statements or
schedules therein, at the time filed, contained any untrue statements
of a material fact or omitted to state a material fact required therein
to be stated or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
The financial statements included in the Borrower's SEC filings fairly
present the position of the Borrower as at such date and for such
period in accordance with GAAP consistently applied;
(e) except as described on Schedule 3(e), since January 1,
1996, there has been no materially adverse change of any kind in the
Borrower which is likely to have a Materially Adverse Effect;
(f) there are no legal or other proceedings or investigations
pending or threatened against the Borrower before any court, tribunal
or regulatory authority which would, if adversely determined, alone or
together, be likely to have a Materially Adverse Effect;
(g) the execution, delivery, performance of its obligations,
and exercise of its rights under the Loan Documents by the Borrower,
including borrowing under this Agreement, the use of the proceeds by
the Borrower and the issuance of the Closing Warrant to the Lender (i)
do not require any Consents; and (ii) are not and will not be in
conflict with, constitute a violation or breach of or be prohibited or
prevented by (A) any Requirement of Law, or (B) any Charter Document,
corporate minute or resolution, instrument, agreement or provision
thereof, in each case binding on it or affecting its property;
(h) no representation or warranty herein contains or will
contain any untrue statement of fact, or omits or will omit to state
facts required or necessary to make the statements contained herein not
false or misleading;
(i) except as described on Schedule 3(i) hereto, the Borrower
has no Subsidiaries and is not a party to any partnership or joint
venture;
-6-
(j) except as described on Schedule 3(j) hereto, Borrower has
no material liabilities or obligations of any nature, whether absolute
or contingent, accrued or otherwise, which are not shown or provided
for on the audited balance sheet of Borrower as of September 30, 1996,
except for those incurred in the ordinary course of business since such
date;
(k) Borrower has good and marketable title to all of its
material, real, personal and mixed properties (the "Assets") free and
clear of all mortgages, liens, pledges, charges, claims, leases,
restrictions or encumbrances of any nature whatsoever (other than those
granted to Lender), and subject to no restrictions with respect to
transferability. All of the Assets are in the Borrower's possession and
control. All inventory of the Borrower is of a quality and quantity
usable and saleable in the ordinary course of business of Borrower and
the values at which such inventories are carried on the books and
records of Seller reflect accurately the normal inventory valuation
policy of Borrower of inventory at the lower of cost or market on a
LIFO basis.
The accounts receivable of Borrower as shown on its books and
records have arisen in the ordinary course of business, represent valid
obligations owed to Borrower and are recorded as accounts receivable on
the books of Borrower in accordance with GAAP consistently applied, and
Borrower has no reason to believe that said accounts receivable (billed
and unbilled) will not be fully paid in the ordinary course of business
except to the extent of any bad debts reserved against on the books and
records of the Borrower.
(l) Borrower has no existing employment contracts with
directors, officers, employees or shareholders that have not been
reviewed and approved by the Compensation Committee of the Board of
Directors.
(m) to the best of Borrower's knowledge, Borrower has not
violated and is not currently in violation of or breach of, any zoning
or building laws, statutes, ordinances or regulations or any health,
safety or environmental laws, statutes, ordinances or regulations or
any other laws, statutes, ordinances or regulations relating to
Borrower or their use which violation or breach would have a Material
Adverse Effect. All material licenses, permits, franchise and other
governmental or quasi-governmental authorizations and approvals
required or necessary for Borrower to carry on its business have been
obtained and are in full force and effect;
(n) except as disclosed on Schedule 3(n), Borrower has filed
with the appropriate government agencies all tax or information returns
and tax reports required to be filed on or before the date hereof.
Except as disclosed on Schedule 3(n), all federal, state, local,
foreign, dominion and provincial income, profits, franchise, sales,
use, occupation, property, excise or other taxes whether or not yet due
have been fully paid or adequately provided for on the financial
statements of Borrower;
-7-
(o) the books and records of accounts of Borrower (i) have
been maintained in accordance with good business practices on a basis
consistent with prior years, (ii) state in reasonable detail and
accurately reflect the transactions and dispositions of the assets of
Borrower, and (iii) accurately and fairly reflect the basis for the
financial statements referred to in (d) above;
(p) Borrower has complied in all material respects with all
applicable laws, rules and regulations relating to the employment of
labor, including those relating to wages, hours, collective bargaining
and the payment and withholding of taxes, and Borrower has withheld all
amounts required by law or agreement to be withheld from the wages or
salaries of its employees and Borrower is not liable for any arrears of
wages or other taxes or penalties for failure to comply with any of the
foregoing. There are no material controversies pending or, to the
Borrower's knowledge, threatened between Borrower and any of its
employees or former employees. No union or other collective bargaining
unit has been certified or recognized by Borrower as representing any
of its respective employees;
(q) no representation or warranty of Borrower in this
Agreement or the exhibits hereto or any certificate or other document
referenced herein and furnished to the Lender by the Borrower contains
or will contain any untrue statement of a material fact or omits or
will omit a material fact necessary to make the statements contained
therein not misleading. To the knowledge of Borrower, there is no fact
which Borrower has not disclosed to Lender which materially adversely
affects, or may materially adversely affect, Borrower, its business or
operations;
(r) neither Borrower, any ERISA Affiliate (as defined in
ERISA) of the Borrower, nor any benefit plan of the Borrower ("Benefit
Plan") is in violation in any material respect of any of the provisions
of ERISA or any of the qualification requirements of Section 401(a) of
the Internal Revenue Code of 1986, as amended; and
(s) the authorized capital stock of the Borrower as of the
date hereof consists of 50,000,000 shares of Common Stock, of which
4,293,822 are validly issued and outstanding, fully paid and non
assessable.
4. COVENANTS.
4.1 AFFIRMATIVE COVENANTS. The Borrower agrees that so long as the
Convertible Note is outstanding, the Borrower will:
(a) maintain a system of accounting in accordance with GAAP,
maintain its current fiscal year, and permit the Lender or its
designated representatives to inspect the Borrower's premises during
normal business hours, to examine and be advised as to such other books
of account upon the request of the Lender, and to discuss the
Borrower's finances and accounts with its officers, all at such
reasonable times and as
-8-
often as may be reasonably requested; provided, that unless an Event of
Default has occurred and is continuing, the Lender shall provide at
least two (2) Business Days notice of such visit. The rights contained
herein shall be exercised solely in furtherance of the proper interests
of the Lender as an investor in the Borrower, and the Lender and its
agents and representatives shall maintain the confidentiality of all
financial and other confidential information of the Borrower acquired
by the exercise of such rights except in connection with pursuing any
rights and remedies of Lender hereunder;
(b) deliver to the Lender, as soon as available and in any
event within 90 days after the close of each fiscal year, a balance
sheet and statements of income, retained earnings, cash flows, and
comparisons to prior year earlier results, audited by an independent
accounting firm selected by the Borrower, fairly reflecting the
financial condition of the Company as of the close of such fiscal year
and the results of its operations during such fiscal year;
(c) deliver to the Lender, as soon as available and in any
event within 45 days after the end of each fiscal quarter a
consolidated unaudited balance sheet dated as of the end of such
quarter and consolidated unaudited statements of income and cash flow
for the period ending each quarter, prepared in accordance with GAAP
and certified by the chief financial officer of the Borrower as
presenting fairly the financial condition of the Borrower, and periodic
reporting against budget as approved in the Plan of Record;
(d) (i) maintain its corporate existence, business and assets,
(ii) keep its business and assets adequately insured, (iii) maintain
its chief executive office in the United States, (iv) continue to
engage in the same lines of business, (v) comply with all Requirements
of Law, including ERISA, Environmental Laws and the Securities Act, and
(vi) maintain insurance with financially responsible insurers, covering
such risks and in such amounts and with such deductibles as are
customary in the Borrower's business and are adequate;
(e) notify the Lender promptly in writing of the occurrence of
any Event of Default;
(f) use the proceeds of the Loans solely for working capital
purposes, and not for the carrying of "margin security" or "margin
stock" within the meaning of Regulations U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224;
(g) cooperate with the Lender, take such action, execute such
documents, and provide such information as the Lender may from time to
time request in order further to effect the transactions contemplated
by and the purposes of the Loan Documents;
-9-
(h) deliver to the Lender as soon as practicable upon the
filing thereof, all material filings, reports and statements, if any,
filed by the Borrower with the Commission or any other regulatory
authority;
(i) pay and discharge all taxes, assessments and government
charges incurred by, assessed against or imposed upon the Borrower
that, if unpaid, might by law become a lien or charge against its
property; provided, that the Borrower need not pay or discharge such
tax, assessment or government charges if they shall be or are being
contested in good faith and if it shall have set aside on its books
reserves deemed by its independent public accountant to be adequate
with respect thereto;
(j) Borrower will make all filings required pursuant to the
Securities Act or the Exchange Act on a timely basis;
(k) Borrower will provide Lender within ninety (90) days after
the end of Borrower's fiscal year a certificate of an officer of
Borrower certifying that during the past fiscal year no Event of
Default has occurred or if an Event of Default has occurred, detailing
the current status of such Event of Default;
(l) Borrower will comply with each and every agreement and
covenant in each of the Loan Documents; and
(m) Borrower will reserve for issuance a sufficient number of
shares of Common Stock to permit the conversion of the Convertible
Note.
4.2 NEGATIVE COVENANTS. The Borrower agrees that so long as the
Convertible Note is outstanding the Borrower will not, without the Lender's
consent:
(a) mortgage, pledge, or create or permit to exist any
security interest in, or lien on, any shares of Common Stock;
(b) merge or consolidate with any other corporation or entity,
or sell, lease, transfer, distribute or otherwise dispose of all or any
substantial part of its properties or assets, in an aggregate amount in
excess of $200,000 (in any single transaction or series of related
transactions), or any intellectual property material to its operations
or business prospects in one or a series of related transactions to a
Subsidiary or any other person (including capital stock of its
Subsidiaries);
(c) transfer or permit any Subsidiary to transfer any of its
properties or assets (other than equipment) for the purpose of
subjecting the same to the payment of obligations in priority to
payment of general creditors;
(d) make any loan or advance to, or assume, guarantee or
become liable (contingently or otherwise) for any indebtedness, and
will not permit any of its
-10-
Subsidiaries to do the same, except accounts payable and employee
travel advances incurred in the ordinary course of business;
(e) enter into or be a party to, or amend, modify, supplement
or waive any provisions of any contracts involving payments from the
Borrower in an amount in excess of $200,000 other than those approved
in the Plan of Record;
(f) permit any of its Subsidiaries to create, incur, assume or
suffer to exist any lien upon any of its property, assets or revenues,
whether now owned or hereafter acquired, except (i) mechanics' liens,
(ii) liens for taxes not yet due or (iii) other statutory liens arising
in the ordinary course of the Borrower's business;
(g) sell, issue or otherwise dispose of, or part with control
of, any shares of capital stock of the Borrower or any of its
Subsidiaries, except pursuant to the exercise of any options or
warrants outstanding as of the date hereof and as set forth on Schedule
4.2(g) attached hereto;
(h) acquire any assets of any kind or nature over $200,000
other than those in the ordinary course of business or approved in the
Plan of Record; and
(i) make any capital expenditures not approved in the Plan of
Record in excess of $200,000.
4.3 FEES AND EXPENSES OF COUNSEL. Borrower will reimburse Lender for
all costs and expenses including, without limitation, reasonable legal expenses
and attorneys' fees, incurred by Lender in connection with the documentation and
consummation of this transaction and any amendments or modifications of this
Agreement or other transactions between Borrower and Lender, in each case up to
a maximum of $10,000, including without limitation, Uniform Commercial Code and
other public record searches, lien filings, Federal Express or similar express
or messenger delivery, appraisal costs, surveys, title insurance and
environmental audit or review costs. All such costs, expenses and charges will
constitute Loans hereunder and may be advanced or paid by Lender from Loan
proceeds.
EVENTS OF DEFAULT; ACCELERATION.
If any of the following events ("Events of Default") shall occur:
(a) the Borrower fails to pay the principal, interest or both
under the terms of the Note, whether at maturity or by acceleration,
within five (5) days after the Lender has given written notice of such
failure to the Borrower;
(b) any representation or warranty of the Borrower in the Loan
Documents or in any certificate or notice given in connection therewith
shall have been false or misleading in any material respect at the time
made or deemed to have been made;
(c) any of the Loan Documents shall cease to be in full force
and effect;
-11-
(d) the Borrower shall materially breach the agreements
specified in Section 4.1(e) or (f) hereof;
(e) the Borrower shall materially breach any of the agreements
specified in Section 4.2 hereof which breach is not cured within ten
(10) days after the Lender has given written notice of such breach to
the Borrower;
(f) the Borrower shall fail to perform any other term,
covenant or agreement contained in the Loan Documents within thirty
(30) days after the Lender has given written notice of such failure to
the Borrower;
(g) the Borrower (i) shall make an assignment for the benefit
of creditors, (ii) shall be adjudicated bankrupt or insolvent, (iii)
shall seek the appointment of, or be the subject of an order
appointing, a trustee, liquidator or receiver as to all or part of its
assets, (iv) shall commence, approve or consent to, any case or
proceeding under any bankruptcy, reorganization or similar law and, in
the case of an involuntary case or proceeding, such case or proceeding
is not dismissed within forty-five (45) days following the commencement
thereof, or (v) shall be the subject of an order for relief in an
involuntary case under federal bankruptcy law;
(h) upon the effective date of a sale of all or substantially
all of the assets of the Borrower;
(i) the entry of any final judgment or order in excess of
$250,000 against Borrower which is uninsured and remains unsatisfied or
undischarged and in effect for thirty (30) days after such entry
without a stay of enforcement or execution;
(j) the occurrence of an event of default under any other
agreement or instrument evidencing indebtedness for borrowed money in
excess of $500,000 executed or delivered by Borrower or pursuant to
which agreement or instrument Borrower or its properties is or may be
bound; or
(k) the occurrence of any event or condition which has had a
Material Adverse Effect.
THEN, or at any time thereafter:
(1) In the case of any Event of Default under clause (g), the
Commitment shall automatically terminate, and the entire unpaid
principal amount of the Loan, all interest accrued and unpaid thereon,
and all other amounts payable thereunder and under the Convertible Note
shall automatically become forthwith due and payable in accordance with
the terms of the Note;
(2) In the case of any Event of Default other than (g), the
Lender may, by written notice to the Borrower, terminate the
Committment and upon any Event of
-12-
Default, the Lender may, without further notice, declare the unpaid
principal amount of the Loan, all interest accrued and unpaid thereon,
and all other amounts payable hereunder and under the Convertible Note
to be forthwith due and payable in accordance with the terms of the
Convertible Note, and may exercise any and all remedies available at
law, in equity and under any of the Loan Documents.
No remedy herein conferred upon the Lender is intended to be exclusive of any
other remedy and each and every remedy shall be cumulative and in addition to
every other remedy hereunder, now or hereafter existing at law or in equity or
otherwise. No course of dealing between the Borrower and the Lender or any
failure or delay on the Lender's part in exercising any rights or remedies
hereunder shall operate as a waiver of any rights or remedies.
6. REPRESENTATIONS AND WARRANTIES OF LENDER.
(a) The Lender has adequate means of providing for its current
financial needs and possible contingencies, and has no present need, and
anticipates no need in the foreseeable future, to sell the Convertible Note. The
Lender is able to bear the economic risk of this investment and, consequently,
the Lender is able to hold any of the securities it may acquire for an
indefinite period of time, and has a sufficient net worth to sustain a loss of
its entire investment in such securities.
(b) The Lender is an "accredited investor" within the meaning of
Regulation D of the Securities Act and is acquiring the securities for its own
account, for investment purposes only, and not with a view to the distribution
of all or any part thereof. The Lender will not distribute or transfer any of
the securities in the United States except in compliance with all applicable
federal securities laws.
(c) The Lender acknowledges that it has been advised that any
securities which may be issued upon the conversion of the Convertible Note (a)
will not be registered under the Securities Act or any state securities or blue
sky laws (the "Blue Sky Laws"), (b) will be "restricted securities" as defined
in paragraph (a) (3) of Rule 144 under the Securities Act ("Rule 144"), (c) have
been issued in reliance on the statutory exemptions contained in the Securities
Act, (d) have been issued in reliance on the statutory exemptions contemplated
in the Blue Sky Laws and that the Borrower relied on the representations of the
Lender set forth herein in granting certain warrants to the Lender, (e) will not
be transferable without registration under the Securities Act and applicable
Blue Sky Laws, unless an exemption from the registration requirement thereof is
available and an opinion of counsel to that effect satisfactory to the Borrower
is delivered to the Borrower, and (f) will bear the following form of
restrictive legend evidencing such restrictions:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
PURPOSES AND MAY NOT BE SOLD OR TRANSFERRED UNLESS THE SAME ARE REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE BORROWER RECEIVES AN
OPINION FROM
-13-
COUNSEL TO THE HOLDER THAT AN EXEMPTION FROM THE ACT IS AVAILABLE.
Moreover, the Lender has been advised that Rule 144 may not be available for
resales nor may all of the registration rights contained in any warrant issued
or to be issued pursuant to this Agreement be available unless the Borrower
remains a reporting company subject to and is in compliance with the
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder.
(d) The Lender is a limited liability company duly organized, validly
existing, and in good standing under the laws of Delaware. The Lender has all
requisite power and full legal right to execute and deliver this Agreement, and
to perform all of its respective obligations hereunder in accordance with all
terms. This Agreement and the transactions contemplated hereby have been duly
approved and authorized by all requisite corporate action, and constitutes when
executed and delivered a legal, valid and binding obligation of the Lender,
enforceable against it and in accordance with all terms.
7. ACKNOWLEDGMENT
Each of the Borrower and the Lender acknowledge and agree that all of
the Lender's outstanding rights with respect to the Loan are embodied in the
Loan Documents. The Lender hereby represents to the Borrower that, except for
the Convertible Note, there are no promissory notes or other instruments
outstanding which represent or evidence any obligations of the Borrower with
respect to the Loan.
8. MISCELLANEOUS.
(a) Any notice to be made hereunder shall (i) be made in writing, but
unless otherwise stated, may be made by telex, facsimile transmission or letter,
and (ii) be made or delivered to the address of the party receiving notice which
is identified with its signature below (unless such party has by three (3) days
written notice specified another address), and shall be deemed made or
delivered, when dispatched, left at that address, or three (3) days after being
mailed, postage prepaid, to such address.
(b) This Agreement shall be binding upon and inure to the benefit of
each party hereto and its successors and assigns.
(c) This Agreement may not be amended or waived except by a written
instrument signed by the Borrower and the Lender, and any such amendment or
waiver shall be effective only for the specific purpose given.
(d) No failure or delay by the Lender to exercise any right hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege preclude any other right, power or privilege.
-14-
(e) The provisions of this Agreement are severable and if any one
provision hereof shall be held invalid or unenforceable in whole or in part in
any jurisdiction, such invalidity or unenforceability shall affect only such
provision in such jurisdiction.
(f) This Agreement, together with all Schedules hereto, expresses the
entire understanding of the parties with respect to the transactions
contemplated hereby.
(g) This Agreement and any amendment hereby may be executed in several
counterparts, each of which shall be an original, and all of which shall
constitute one agreement. In proving this Agreement, it shall not be necessary
to produce more than one such counterpart executed by the party to be charged.
(h) THIS AGREEMENT AND THE NOTE ARE CONTRACTS UNDER THE LAWS OF THE
STATE OF NEW YORK AND SHALL BE CONSTRUED IN ACCORDANCE THEREWITH AND GOVERNED
THEREBY. THE BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF ANY OF THE
LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY
FEDERAL COURT SITTING THEREIN. THE BORROWER, AS AN INDUCEMENT TO THE LENDER TO
ENTER INTO THIS AGREEMENT, HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT
TO ANY ACTION ARISING IN CONNECTION WITH ANY LOAN DOCUMENTS.
(i) The Borrower shall pay on demand all costs, including court costs
and reasonable attorney's fees and expenses, paid or incurred by the Lender in
enforcing this Agreement and the Loan Documents. Lender may make a Loan for
these expenses and pay said fees and expenses to the appropriate party.
(j) The headings in this Agreement are for convenience of reference
only, and shall not limit or otherwise affect the meaning hereof.
-15-
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement
as a sealed instrument as of the date first above written.
BORROWER: SHEPHERD SURVEILLANCE
SOLUTIONS, INC.
/s/ M. Thomas Makmann
By: _______________________________________
Name: M. Thomas Makmann
Title: President and CEO
Address:
7 Perimeter Road, Suite 4
Manchester, New Hampshire 03103
Tel: (603) 622-8668
Fax: (603) 622-5945
LENDER: TRILON DOMINION PARTNERS, LLC
By: VC Holdings, Inc., its Managing Member
/s/ Jack R. Sauer
By: _______________________________________
Name: Jack R. Sauer
Title: Vice President
Address:
250 Park Avenue, Suite 2020
New York, New York 10017
Tel: (212) 867-3800
Fax: (212) 867-2955
CONVERTIBLE PROMISSORY NOTE
January 21, 1997
FOR VALUE RECEIVED, the undersigned Shepherd Surveillance Solutions, Inc., a
Nevada corporation (the "Borrower"), hereby promises to pay to the order of
Trilon Dominion Partners, LLC, a Delaware limited liability company (the
"Lender"), at the Lender's office at 250 Park Avenue, Suite 2020, New York, NY
10017:
(a) prior to or on August 8, 2000 (the "Maturity Date"), the
principal amount of $1,141,229.50; and
(b) prior to or on the Maturity Date and as set forth below
interest on the principal amount listed in (a) above from the date
hereof through and including the Maturity Date at an annual rate equal
to the prime rate of the Chase Manhattan Bank, N.A., as announced from
time to time plus 4% (the "Interest Rate") calculated on the basis of a
360 day year, compounded monthly, and adjusted on the first business
day of each calendar quarter.
This Convertible Promissory Note (the "Note") evidences the borrowings
referred to in and has been issued by the Borrower in accordance with the terms
of the Credit Agreement, dated as of January 21, 1997, between the Borrower and
the Lender (the "Credit Agreement"). The Lender and any holder hereof is
entitled to the benefits of the Credit Agreement, and may enforce the agreements
of the Borrower contained therein, and any holder hereof may exercise the
respective remedies provided for thereby or otherwise available in respect
thereof, all in accordance with the respective terms thereof. This Note is
secured by an Amended and Restated Security Agreement, dated as of August 8,
1994, between the Borrower and the Lender.
All capitalized terms used in this Note and not otherwise defined
herein shall have the same meanings herein as in the Credit Agreement.
Interest shall be payable semi-annually in arrears on the first day of
July and January of each year after the date hereof until the Maturity Date
(each an "Interest Payment Date"), for the immediately preceding six-month
period that there are borrowings outstanding under this Note, commencing July 1,
1997. All outstanding principal and all accrued and unpaid interest on this Note
shall be due and payable on the Maturity Date.
From the date hereof until the second anniversary of such date,
interest shall, at the option of the Borrower, be payable either (i) in cash, or
(ii) by capitalizing the
-2-
amount of such interest and adding such amount to the then outstanding principal
amount of the Note as of such Interest Payment Date, and interest shall continue
to accrue on such additional principal amount.
Should the principal of, or any installment of the principal or
interest on, this Note become due and payable on any day other than a Business
Day, the Maturity Date or Interest Payment Date thereof shall be extended to the
next succeeding Business Day, and interest shall be payable with respect to such
extension.
The Borrower has the right in certain circumstances and the obligation
under certain other circumstances to prepay the whole or part of the principal
or interest of this Note on the terms and conditions specified in the Credit
Agreement without premium or penalty.
Any Obligations which are not paid when due (subject to any applicable
period of grace) shall bear interest at the lesser of (i) the then current
interest rate on this Note plus 4% or (ii) the maximum contract rate permitted
by law.
If any one or more of the Events of Default shall occur, the entire
unpaid principal amount of this Note and all of the unpaid interest accrued
thereon may become or be declared due and payable in the manner and with the
effect provided in the Credit Agreement.
In the event that the principal amount of this Note and any accrued
interest thereon has not been repaid on or before the Maturity Date, after the
Maturity Date, this Note shall be convertible, in whole or in part, into that
number of newly-issued shares of the common stock, $.001 par value per share, of
the Borrower (the "Common Stock"), equal to the remainder of (x) the aggregate
principal amount of this Note and any accrued interest which remains unpaid on
the date of such conversion divided by (y) 80% of the Fair Market Value (as
defined below) of a share of the Common Stock on the date of such conversion.
This Note shall be convertible by the Lender upon delivery to the Borrower of
notice of its intention to effect such conversion no fewer than five (5)
business days prior to such conversion.
For the purposes hereof, the "Fair Market Value" shall mean the closing
sale price (or the average of the closing bid and ask prices if there is no
closing sale price reported) of the Common Stock on the date specified on the
principal national exchange on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not limited or admitted to trading on any
national securities exchange on such date, the average of the highest reported
bid and lowest reported ask prices as furnished by the National Association of
Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is
no longer reporting such information. If there is no reported bid and asked
price for the Common Stock, the "Fair Market Value" shall be the fair market
value of the Common Stock on the date
-3-
specified, as determined in good faith by the Company's Board of Directors and
confirmed by the independent directors.
No delay or omission on the part of the Lender or any holder hereof in
exercising any right hereunder shall operate as a waiver of such right or of any
other rights of the Lender or such holder, nor shall any delay, omission or
waiver on any one occasion be deemed a bar or waiver of the same or any other
right on any further occasion.
The Borrower and every endorser and guarantor of this Note or the
obligation represented hereby waives presentment, demand, notice, protest and
all other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note, and assents to any extension
or postponement of the time of payment or any other indulgence, to any
substitution, exchange or release of collateral and to the addition or release
of any other party or person primarily or secondarily liable.
The Borrower shall pay on demand all costs, including court costs and
reasonable attorney's fees paid or incurred by the holder hereof in enforcing
this Note.
THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL
PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF
NEW YORK (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE
BORROWER AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS NOTE MAY BE BROUGHT IN
THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL COURT SITTING THEREIN AND
CONSENTS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF
PROCESS IN ANY SUCH SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS
SPECIFIED IN THE CREDIT AGREEMENT.
This Note shall be deemed to take effect as a sealed instrument under
the laws of the State of New York.
-4-
IN WITNESS WHEREOF, the undersigned has caused this Note to be signed
in its corporate name and its corporate seal to be impressed thereon by its duly
authorized officer as of the day and year first above written.
[Corporate Seal]
SHEPHERD SURVEILLANCE
SOLUTIONS, INC.
/s/ M. Thomas Makmann
By:_________________________
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's financial statements for the period ended December 31, 1996, included
with Form 10Q-SB, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-END> Dec-31-1996
<CASH> 98,273
<SECURITIES> 0
<RECEIVABLES> 319,384
<ALLOWANCES> 15,000
<INVENTORY> 285,071
<CURRENT-ASSETS> 702,376
<PP&E> 314,948
<DEPRECIATION> (76,443)
<TOTAL-ASSETS> 956,431
<CURRENT-LIABILITIES> 827,784
<BONDS> 4,803,000
0
0
<COMMON> 4,294
<OTHER-SE> (4,678,647)
<TOTAL-LIABILITY-AND-EQUITY> 956,431
<SALES> 304,443
<TOTAL-REVENUES> 304,443
<CGS> 241,625
<TOTAL-COSTS> 241,625
<OTHER-EXPENSES> 1,145,625
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 120,300
<INCOME-PRETAX> (1,213,107)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,213,107)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,213,107)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> 0
</TABLE>
