<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
For the Fiscal Year ended December 31, 1996
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
Commission file number 0-24510
HOLMES PROTECTION GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1070719
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
440 Ninth Avenue
New York, New York 10001-1695
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (212) 760-0630
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports,
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained to the best
of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Based on the closing sale price per share of the registrant's Common Stock of
$14.25 on March 27, 1997 as quoted on the NASDAQ National Market, the aggregate
market value of the voting shares held by non-affiliates of the registrant
(including 1,106,819 shares held by the "Institutions" (as defined herein)) was
$60.9 million.
At March 27, 1997, the number of shares outstanding of the registrant's Common
Stock, par value $.01 per share, was 5,828,062 shares.
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\
Certain statements in this Annual Report on Form 10-K constitute "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. All such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions;
cancellation rates of subscribers; competitive factors in the industry,
including additional competition from existing competitors or future entrants
to the industry; social and economic conditions; local, state and federal
regulations; changes in business strategy or development plans; the Company's
indebtedness; availability, terms and deployment of capital; availability of
qualified personnel; and other factors referenced in this Annual Report on Form
10-K.
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Table of Contents
Page
PART I
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Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................15
Item 3. Legal Proceedings..............................................................................15
Item 4. Submission of Matters to a Vote of Security Holders............................................15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..........................17
Item 6. Selected Consolidated Financial Data...........................................................18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................20
Item 8. Financial Statements and Supplementary Data....................................................24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................24
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................24
Item 11. Executive Compensation.........................................................................24
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................25
Item 13. Certain Relationships and Related Transactions.................................................25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...............................25
Signatures..................................................................................28
Index to Financial Statements............................................................................F-1
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DOCUMENTS INCORPORATED BY REFERENCE:
The information required by Part III, Items 10, 11, 12 and 13 is incorporated
by reference to the registrant's definitive proxy statement if filed with the
Securities and Exchange Commission (the "Commission") on or before April 30,
1997 or, if such proxy statement is not filed, will be filed with the
Commission as an amendment to this Form 10-K under cover of Form 10-K/A, not
later than April 30, 1997.
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PART I
Item 1. Business
The Company
Holmes Protection Group, Inc. (the "Company" or "Holmes") provides
security alarm monitoring services and designs, sells, installs and services
electronic security systems for commercial and mid- to high-end residential
subscribers. These systems include event detection devices, surveillance
equipment and access control devices which restrict access to specified areas.
The Company currently provides its services in New York, New Jersey,
Pennsylvania, Texas, Tennessee, California, Massachusetts and Florida, and
conducts its operations primarily through 15 branch offices, five central
monitoring station and 69 independent alarm service dealers and franchisees.
According to the latest available survey, published in May 1996, the Company was
the twelfth largest provider of electronic security services in the United
States in terms of total 1995 revenues.
Following an internal management transition and reorganization in 1995,
the Company, in 1996, engaged the services of several former senior executives
of The National Guardian Corporation, a large national electronic security
alarm services company which was acquired by Ameritech Monitoring Services,
Inc., in October 1995. Among the executives hired by the Company was George V.
Flagg, the Company's President and Chief Executive Officer, who served as the
President and Chief Executive Officer of National Guardian from 1986 to 1995.
Under the direction of the Company's new management team, the Company is
implementing a business strategy involving a combination of strategic
acquisitions and internal growth. In regard to strategic acquisitions, the
Company intends to pursue both (i) fold-in acquisitions, which consist of
businesses or portfolios of alarm monitoring accounts that can be readily
combined with the Company's existing branch offices and management structure
and (ii) new market acquisitions, which consist of companies in the electronic
security services industry located outside the Company's current geographic
market. In regard to its internal growth strategy, the Company intends to
capitalize on public recognition of the historic Holmes brand name (which has
been utilized in the security services industry since 1858) in connection with
(i) expanding its security services product offerings, including the HolmesNet
system for wireless data communications; (ii) strengthening its national
accounts program; (iii) increasing its sales and marketing efforts; and (iv)
expanding its dealer operations.
The Company's revenues consist primarily of recurring payments under
written contracts for security alarm monitoring activities and associated
services, which represented approximately 70% of total revenues in 1996. The
Company monitors digital alarm signals arising from various activities,
including burglaries, fires and other events, through security systems
installed at subscribers' premises. These signals are received and processed
at the Company's relevant central monitoring station. In order to reduce
overall manpower requirements, achieve economies of scale and other cost
efficiencies, and enhance the quality of service being provided, the Company
consolidated its central monitoring stations in the Northeast into one facility
located in Edison, New Jersey, with monitoring capacity of approximately 60,000
accounts. In addition, the Company has acquired several businesses with central
monitoring stations with the capacity to process 56,000 additional accounts. An
additional 21% of the Company's total revenues in 1996 was comprised of direct
sales and installation of security equipment. The balance of the Company's
revenues in 1996 was derived from (i) jewelry vault rentals, (ii) insured
parcel delivery services for the jewelry trade and (iii) royalty fees and
product sales relating to its franchise and dealer operations.
Approximately 80% of the Company's business is derived from commercial
customers, including financial institutions, jewelry and fine art dealers,
corporate headquarters, manufacturers, distribution facilities and health care
and education facilities. The Company's residential business focuses
principally on mid- to high-end customers.
Electronic security services is a consolidating but still a highly
fragmented industry, consisting of a large number of local and regional
companies and several integrated national companies. The fragmented nature of
the industry can be attributed to the low capital requirements associated with
performing basic installation and maintenance of electronic security systems.
However, the business of a full service, integrated electronic security
services company providing central station monitoring services is capital
intensive, and the Company believes that the high fixed costs of establishing
both central monitoring stations and full service operations contribute to the
small number of national competitors. The low marginal cost of monitoring
additional customers has been one of the principal factors leading full
service, integrated
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electronic security services companies to seek acquisitions of other electronic
security businesses to consolidate into their existing operations. The principal
focus of the Company's business strategy is to pursue acquisitions in this
environment.
Market Overview And Trends
The Company is a leading competitor in the electronic security
services industry, offering services in both the commercial and mid- to high-
end residential segments of the market. The products and services marketed in
the electronic security services industry range from alarm systems that provide
basic intrusion and fire detection to sophisticated systems incorporating such
features as closed circuit television and access control. The industry consists
of companies that design, sell, install, monitor and maintain intrusion, fire
alarm and other electronic security systems. It includes companies using both
hardwire and wireless technology for systems installed on subscribers' premises
and digital, multiplex and wireless (radio) technologies for the transmission
of alarm signals to a central monitoring center, such as the Company's central
station monitoring facilities. The Company believes that the electronic
security services industry is characterized by the following attributes:
o High Degree of Fragmentation. The electronic security services
industry is comprised of a large number of local and regional
companies and several integrated national companies. The Company
believes that, based on industry studies, there are approximately
11,000 separate companies in the industry generating approximately
$12 to $13 billion in revenues annually. A survey published by
SDM magazine (formerly Security Distributing and Marketing) in May
1996 reported that in 1995, based upon information provided by the
respondents, the 100 largest companies in the industry accounted
for approximately 23% of total industry revenues. According to
the same survey, which contains the latest available information,
the Company ranks twelfth among the 100 largest companies in the
industry in terms of total 1995 revenues.
o Trend Toward Consolidation. The Company believes that because the
central station monitoring sector of the electronic industry has
relatively high fixed costs but relatively low marginal costs
associated with servicing additional subscribers, the industry
offers significant opportunities for consolidation. In addition,
the Company believes that the fragmented nature of the industry
can be attributed to the low capital requirements associated with
performing basic installation and maintenance of electronic
security systems. However, the business of a full service,
integrated electronic security services Company which provides
central station monitoring services is capital intensive, and the
Company believes that the high fixed costs of establishing both
central monitoring stations and full service operations contribute
to the small number of national competitors.
o Continued Product Diversification and Integration of Services.
A recent trend in the commercial electronic security services
industry has been increased integration of different types of
products into single systems provided by single vendors. The
Company believes that this trend has resulted from commercial
needs for enhanced security services on a more cost-effective
basis. Whereas basic alarm systems were once adequate for many
businesses, it appears that many companies now require access
control and closed circuit television systems integrated into a
single system to provide for their overall security needs. A
security system which provides burglar and fire alarm monitoring
along with closed circuit television and access control, all
integrated into one central system, not only provides enhanced
security services, but also is more cost-effective than four
separate systems installed by four separate vendors. The Company
is positioning itself to take advantage of this trend by expanding
the breadth of its electronic security service offerings.
o Advances in Digital Communications Technology. Prior to the
development of digital communications technology, alarm monitoring
required a dedicated telephone line, which made long-distance
monitoring uneconomic. Consequently, in order to achieve a national
or regional presence, alarm monitoring companies were required to
maintain a large number of geographically dispersed monitoring
stations. The development of digital communications technology
eliminated the need for dedicated telephone lines, reducing the
cost of monitoring services to the subscriber and permitting the
monitoring of subscriber accounts over a wide geographic area from
a central monitoring station. The elimination of local monitoring
stations has decreased
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the cost of providing alarm monitoring services and has
substantially increased the economies of scale for larger alarm
service companies. In addition, the concurrent development of
microprocessor-based control panels has substantially reduced the
cost of the equipment available to subscribers in the residential
and commercial markets and has substantially reduced service costs
because many diagnostic and maintenance functions can be performed
from a company's office without having to send a technician to the
customer's premises.
The Company believes that several factors contribute to a favorable
market for electronic security services generally in the United States.
o High Level of Concern About Crime. As violent crime and the
reporting of crime by the news media has increased, the perception
by Americans that crime is a significant problem has also grown.
Concurrently, demand for security systems has grown with greater
awareness of risk management within the business community. In
addition to the protection that electronic detection and
surveillance systems provide, the Company believes that such
systems also have a deterrent effect against crime.
o Insurance Requirements and Premium Discounts. The increase in
demand for security systems may also be attributable, in part, to
the requirement of insurance companies that businesses install an
electronic security system as a condition of insurance coverage.
The purchase of an electronic alarm system often entitles the
subscriber to obtain premium discounts as well. In addition, in
order to comply with many municipal fire codes, the installation of
an electronic fire system is required in many localities.
Business Strategy
Management believes that Holmes is uniquely positioned to pursue a
business strategy involving a combination of strategic acquisitions and
internal growth. Because the historic Holmes brand name is well established in
the Northeast and has been utilized since 1858, the Company believes that it
can capitalize on public recognition of this name and its historic reputation
in connection with expanding into new geographic markets throughout the United
States, strengthening its national accounts program, increasing its sales and
marketing strategy and expanding its dealer operations and achieving continued
market penetration by increasing its sales force. The Company further believes
that its new management team's previous experience will be helpful in
successfully implementing its business strategy.
Growth through Acquisitions
The Company continues to pursue two fundamental types of acquisitions:
fold-in acquisitions and new market acquisitions. Various factors will be
considered when evaluating any potential acquisition, including the purchase
price and other financial terms of the transaction, the business prospects and
competitive position of and services provided by the acquisition candidate and
the extent to which any such acquisition would enhance the Company's future
prospects. In addition to determining the economic viability of the proposed
acquisition, an acquisition candidate will be evaluated for stability of
subscriber base, market share, quality of operations, compatibility of
equipment and contract terms and growth opportunities.
Fold-in Acquisitions. Fold-in acquisitions will mainly target
businesses or portfolios of alarm monitoring accounts that can be
readily consolidated with existing Holmes branch offices and
monitoring centers. Such acquisitions are attractive because the
Company believes that, through consolidation, cost savings will be
achieved due to the low variable cost associated with monitoring and
supporting additional subscriber accounts. The Company believes that
certain fold-in acquisitions may also add specialized expertise to the
Company. For example, acquiring a business that specializes in
fire system installation would bring many of the expected financial
benefits of a typical fold-in acquisition, and in addition, would
enhance the Company's ability to broaden its product and service
offerings with the added industry-specific knowledge and management
obtained through the acquisition.
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New Market Acquisitions. The Company also continues to expand its
operations through strategic acquisitions of electronic security
services companies in new geographic markets throughout the United
States, thereby diversifying its business base beyond the Northeast.
In the Company's view, expansion into new geographic markets will also
create additional opportunities for fold-in acquisitions. The Company
believes that acquiring existing companies that have established a
local market presence in areas outside of the Northeast is a less
costly alternative to the internal development of new markets. In
addition, through the retention of certain of the existing employees
of acquired companies who are familiar with local markets, the Company
believes it will be able to capitalize on local affiliations and
relationships. New market acquisitions will be sought in geographic
markets which the Company believes can serve as a framework for
establishing national accounts business from subscribers who require
electronic security services at multiple locations nationwide.
In September 1996, the Company acquired an alarm monitoring company
based in Stanton, California (the "California Corporation") which provides
alarm monitoring services for customers of other alarm companies through its
state-of-the-art central monitoring facility. The Company is maintaining this
Southern California facility in order to monitor the accounts of customers of
other alarm companies as well as those of authorized Holmes dealers and does
not anticipate consolidating this newly acquired facility with its central
monitoring facility located in Edison, New Jersey.
In addition, as of March 15, 1997, the Company purchased alarm
operations in Dallas and Arlington, Texas; San Francisco, California; the
Boston, Massachusetts metropolitan area; Nashville, Tennessee; Harrisburg,
Pennsylvania; and Lakeland, Florida.
The Company is actively exploring other acquisition opportunities and
has had discussions with a number of prospects. Except as disclosed above, the
Company has not completed any other acquisitions as of the date hereof.
Internal Growth
The Company also plans to continue growing internally by expanding its
product and service offerings, strengthening its national accounts program
which focuses on commercial subscribers conducting business in multiple
locations nationwide, enhancing its sales and marketing activities and
expanding its dealer operations. The Company believes that this type of
expansion will increase usage and cost efficiencies of its newly consolidated
state-of-the-art central monitoring station in Edison, New Jersey. The
Company's target market remains oriented toward the commercial and mid- to
high-end residential subscriber.
Expanding Security Services Product Offerings. The Company believes
that it has established a reputation as a provider of quality systems
and services and that this reputation is the result, in part, of the
Company's attention to advances in technology and their application to
the Company's products and services. In this regard, the Company
maintains an Equipment Evaluation Committee that evaluates new
products and the development of improvements to existing products and
services. The Company is committed to offering a broad range of
services, products and features that incorporate the latest technology
generally available to the industry. As a result, the Company has
entered into a relationship with ARDIS, a Company owned by Motorola,
Inc., under which the Company plans to utilize a national wireless
data communications network for highly reliable and immediate
transmissions of alarm signals as part of its Holmes Net system.
Wireless data transmission methods are less susceptible to accidental
or intentional signal transmission interruptions because they are less
reliant on land-based telephone wiring networks. Due to its high level
of security and reliability, the Company believes that the Holmes Net
system will be attractive to customers such as jewelry stores, banks
and others who require more than a conventional digital (telephone
based) alarm system. The Company also offers other specialized
services using products from various manufacturers to allow itself
maximum flexibility in the types of systems and services that it
provides. These include, but are not limited to LifeNet, a
sophisticated vehicle tracking system which uses global positioning
satellite ("GPS") technology and is designed to provide a high level
of security to executives while they travel in automobiles; CargoNet,
also a GPS-based system, designed to protect trucks and trailers from
theft; ViewNet(TM), an interactive video and verification system
designed for commercial sites in which central station staff can
monitor in "real time" as events occur and central station operators
can talk to customers or suspected criminals at the monitored site;
and ProWatch, an integrated security system for high-rise office
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buildings designed to automate fire and burglar alarms and access
control systems located on tenants' premises as well as in the
buildings' common areas, thereby reducing the need for physical guards
on-site.
Strengthening National Accounts Program. The Company believes that
large companies conducting business on a national scale with multiple
locations throughout the United States can achieve cost benefits by
centralizing all of their security needs with a single vendor. The
Company intends to enhance its national accounts program to enable it
to more effectively compete for business from large commercial
subscribers with multi-location security needs. This program is
designed to offer national account subscribers, through an account
manager, a single source for centralized and standardized system
design, installation, service, billing, comprehensive activity and
data reporting, nationwide monitoring and system operation for all of
the subscriber's locations. The Company believes that a stronger
national accounts program will enhance its competitive position and
increase the marketability of its services and products. The national
accounts management team and sales force will operate the national
accounts business. The Company's branch offices, dealers from its
dealer program and selected subcontractors, under the direction of the
national accounts management team, provide service and installation
support for all national account subscribers.
Increasing Sales and Marketing Activities. The Company will continue
to focus its marketing efforts on increasing its visibility throughout
the United States. The Company aggressively markets and sells its
products and services through its growing sales force. Sales
compensation and incentive plans have been revised to increase the
motivation of the sales force by reducing base salaries and increasing
incentive compensation. The Company provides its sales force and
operational personnel with advanced training and market resources,
including professionally prepared literature and presentation manuals,
background research and technical information. The Company believes
that such training and resources will expand the expertise and
knowledge of its employees and enable each branch office to offer a
full range of security products and services. In addition, the Company
has returned to one of the original Holmes logos used in the early part
of this century, which it believes will further increase public
recognition and awareness of Holmes and its historical presence and
long-standing reputation in the industry.
Expanding Dealer Operations. The Company plans to expand its dealer
operations by adding a number of new independent dealers to its
authorized Dictograph dealer program and by implementing a separate
Holmes authorized dealer program. The Dictograph program had
previously been operated as a franchise network prior to 1996. As of
March 15, 1997, the Company had 15 Dictograph dealers and 25 Holmes
dealers. New Dictograph dealers will acquire exclusive territories
from the Company and will be required to purchase a minimum quota of
specialized proprietary security equipment from the Company. On the
other hand, while authorized Holmes dealers will not be provided with
exclusive territories, they will be allowed to purchase specialized
proprietary security equipment from the Company without meeting
minimum purchase requirements. In addition, Holmes dealers will be
authorized to use the Holmes brand name to gain market advantage. Both
Dictograph and Holmes dealers will be offered the opportunity to
provide service and installation support for certain of the Company's
national accounts subscribers. It is also anticipated that the Company
will provide central monitoring services to some of its dealers'
customers.
The Company believes that its dealer programs will provide it with a
presence in local markets in which the Company may not have an office
and thereby broaden recognition of its brand names. In addition, the
dealers, who will be located throughout the United States, will give
the Company greater geographic coverage for its developing national
accounts business by providing subcontractor installation services.
The Company believes that the development of these dealer programs
will be an important aspect of establishing and supporting its
national accounts program. In addition, the Company anticipates that,
as a result of its dealer programs, revenues may be increased through
the provision of monitoring services to its dealers' customers and by
sales of its products to its dealers.
Description Of The Business
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Alarm Monitoring Services
Central Monitoring Activity. The Company monitors signals arising from
various activities, including burglaries, fires and other events, through
certain of the systems described below which are installed at the subscriber's
premises. The Company's monitored security systems consist of sensors,
transmitters and other event detection devices designed to detect a variety of
conditions including, but not limited to, entry, movement, fire, temperature,
water flow and electric power interruption. The sensors and other event
detection devices are connected to a control panel/transmitter which sends
signals to a central monitoring station maintained by the Company. Signals may
be transmitted over leased telephone lines, multiplex circuits, public
telephone lines and cellular and radio networks. The control panel/transmitters
are generally microprocessor-based and can identify the nature of the emergency
and the area within a building where the sensor or other device was activated.
Company personnel at its central monitoring stations respond to incoming alarm
signals by contacting the subscriber, alerting the police, the fire department
or other emergency response services or, where contracted, dispatching a Holmes
response agent.
Central Monitoring Stations. In order to reduce overall manpower
requirements, achieve economies of scale and other cost efficiencies and
enhance the quality of service being provided, the Company consolidated its
central monitoring facilities in the Northeast into one facility located in
Edison, New Jersey.
The Company monitors the accounts of customers of other alarm
companies primarily at its central monitoring station located in Southern
California. The Company intends to monitor the accounts of customers of its
authorized Holmes dealers at this location as well. In addition, the Company
acquired small central stations in Arlington, Texas; Nashville, Tennessee and
San Francisco, California, in connection with its acquisitions in these cities.
Future plans for these central stations have not been finalized. See "Business
- -- Business Strategy/Growth through Acquisitions."
The Company's central monitoring stations incorporate the use of
communications and computer systems that route incoming alarm signals and
telephone calls to operators at each station. Each operator sits before a
computer monitor that provides immediate information concerning the nature of
the alarm signal, the subscriber whose alarm has been activated and the premises
on which such alarm is located. All telephone conversations are automatically
recorded. Due to the security-sensitive nature of their employment, the
Company's central monitoring employees are subject to extensive pre-employment
screening.
The Company's central computer system in Edison, New Jersey,
consisting of two computers with built-in redundancy, has the capacity to
monitor up to 60,000 subscriber accounts. The Company's central computer system
in Stanton, California also consists of two computers with built-in redundancy
and has the capacity to monitor up to 40,000 customer accounts. The equipment
at the Edison facility includes: phone switching equipment; digital receivers
that process the incoming signals; a multi-channel, voice-activated recording
system; an uninterruptable power supply; dual backup generators supplied by
different fuel sources; and other equipment in support of specialized services
such as LifeNet, CargoNet and ProWatch. The Company's smaller central stations
in California, Texas and Tennessee have the combined capacity to monitor up to
16,000 additional customer accounts.
The Company's central monitoring stations are listed by Underwriters
Laboratories Inc. ("UL").The Company also offers Factory Mutual Research
Corporation ("FM") approved services through its Edison, New Jersey central
monitoring station. UL and FM specifications for central monitoring stations
include building integrity, back-up systems, staffing and standard operating
procedures. UL and FM confirm compliance with their respective specifications
through periodic on-site inspections. In many jurisdictions, applicable law
requires that security alarms for certain buildings be monitored by UL-listed
and/or FM-approved facilities. In addition, such listing and/or approval is
required by certain commercial subscribers' insurance companies as a condition
to insurance coverage.
Operation of Central Monitoring Stations. Depending upon the type of
service for which the subscriber has contracted, central monitoring station
personnel respond to alarms by relaying information to the local fire or police
departments, notifying the subscriber, or taking other appropriate action, such
as dispatching alarm response personnel to the subscriber's premises where this
service is available. Other non-emergency administrative signals are generated
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by low battery status, deactivation and reactivation of the alarm monitoring
system, and test signals, and are processed automatically by computer. Each of
the Company's central monitoring stations operates 24 hours per day, seven days
a week, including all holidays. Each operator receives training that includes
familiarization with substantially every type of alarm system in the Company's
subscriber base. The Company's training program encompasses classroom study as
well as personalized instruction by experienced operators on all aspects of
alarm monitoring procedure.
Subscriber Contracts. The Company's alarm monitoring subscriber
contracts generally have initial terms of five years in duration and provide
for automatic renewal terms for fixed periods (typically one or two years)
unless the Company or the subscriber elects to cancel the contract at the end
of its term.
In the normal course of its business, the Company experiences customer
cancellations of monitoring and related services as a result of subscribers
relocating, the cancellation of purchased accounts in the process of
assimilation into the Company's operations, unfavorable economic conditions,
dissatisfaction with field maintenance services and other reasons. This
attrition is offset to a certain extent by revenues from the sale of additional
services to existing subscribers, price increases, the reconnection of premises
previously occupied by subscribers and conversions of accounts previously
monitored by other alarm companies. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Alarm Response Services. The Company supplements its security alarm
monitoring services by providing to certain subscribers "alarm response
service" in connection with alarm system activations. Upon receipt of an alarm
activation signal from an alarm response service subscriber, a response guard
is dispatched by the Company to the subscriber's premises. If the Company's
response guard observes potential criminal activity upon arrival at the
subscriber's premises, the response guard will report the activity to the
dispatch office, which will in turn notify local law enforcement. The response
guard will then maintain surveillance until law enforcement officers arrive.
Depending upon a subscriber's preference, the dispatch of the Company's
response guards may be used as an alternative to the dispatch of local police.
The Company's patrol and response officers are subject to extensive
pre-employment screening. Patrol and response officers are required to have
firearm permits and applicable state and city guard licenses. The Company's
training program for patrol and response officers includes arrest procedure,
criminal law, firearms usage and patrol and search tactics. This training
program complies with state-mandated requirements. The provision of patrol and
alarm response services subjects the Company to greater risks, including those
relating to accidents or inappropriate employee behavior, than other types of
services.
The Company believes that demand for alarm response service may
increase as a result of a trend on the part of local police departments to
limit their response to alarm activations and other factors that may lead to a
decrease of police presence. In addition, the Company believes that alarm
response service is an effective means to assist subscribers in reducing their
exposure to false alarm fines.
Electronic Security Alarm Systems and Associated Services
Electronic Security Systems. The Company uses what it believes to be
the highest quality, most cost- effective components and products in the design
and installation of electronic security systems for its customers. An effort is
being made to incorporate the most suitable combination of products such that
each system provides the highest level of security required at competitive
prices. The Company designs, sells, installs and services the following types
of security alarm systems.
Intrusion Detection Systems incorporate control panels and sensors to
detect glass breakage, unauthorized door and window openings,
vibration, motion and noise, together with personal emergency alarms
and other peripheral equipment such as sirens and bells. Activity
indicating the presence of intruders is automatically communicated to
the Company's central monitoring stations, a monitoring facility at
the subscriber's own premises or the local police or fire department.
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Commercial and industrial businesses are the traditional users of
these types of systems and generally regard them as a necessary
business expense. In addition, residential purchases of these systems
have grown in recent years. In an effort to minimize false alarms and
improve customer service, the Company provides a video alarm
verification system (Computect VS) for use in conjunction with
intrusion detection systems. The Company is in the process of adding
two-way voice capabilities to its central monitoring facility in
Edison, New Jersey.
Fire Detection Systems incorporate heat, ionization, smoke and flame
sensing devices, manual pull stations, evacuation sounders, sprinkler
systems, elevator controls and evacuation systems. Fire detection
systems are designed to comply with applicable fire codes. Activities
indicating fire related conditions or events are automatically
communicated to the Company's central monitoring stations, a local
police or fire department or a monitoring center at the subscriber's
own premises.
Access Control Systems are primarily designed to exclude unauthorized
personnel from specified areas. These systems provide access control
that is generally card-activated and can be integrated with fire and
burglary detection systems. Entry and exit activity can be monitored
or recorded, and may be controlled on the basis of time and authority
level. In addition to standard access control systems, the Company has
introduced ProWatch, an integrated building security system specially
designed for multi-tenant office buildings. ProWatch integrates access
control and intrusion and fire detection systems, which systems may be
controlled and monitored by a Holmes central monitoring station.
Closed Circuit Television Systems can monitor and record entry and
exit activity or provide surveillance of designated areas. These
systems can deter theft and vandalism or support other access control
systems. These systems can be monitored either by a video recorder or
in real time via a monitoring screen.
Critical Condition Monitoring provides supervision of various
commercial systems and processes. A common form of this service is
monitoring of sprinkler system functions, such as water flow, air and
water pressure, fire pump conditions, shut-off valves and water tank
levels. Additionally, these systems can consist of ambient temperature
sensors that signal failure of heating or refrigeration systems,
devices that monitor manufacturing processes, and other equipment that
monitors power levels, water levels and energy waste.
Interactive Video and Verification designed for commercial sites allow
central station staff, using ViewNet(TM), to monitor a location in
"real time" as events occur, and enables central station operators to
talk to people they are monitoring as needed, offering instruction to
customers, or engaging a suspected criminal before police arrive.
Vehicle Tracking Systems provide covert tracking of vehicles and can
pinpoint the location of a vehicle anywhere in the continental United
States using global positioning satellite technology. In addition to
providing tracking capabilities, the Company's LifeNet system and
CargoNet system control a vehicle's engine functions thereby allowing
LifeNet or CargoNet, as the case may be, to direct a vehicle to a
complete halt. CargoNet also protects commercial trucks and trailers
from theft.
Wireless Security Transmission Systems are designed to be monitored by
a central monitoring facility via wireless security transmissions. In
1996 the Company introduced HolmesNet, an in-building wireless
security transmission system which is constantly monitored by a Holmes
central monitoring station. HolmesNet is also a two-way communication
network that allows a subscriber to send a message directly to a
Holmes central monitoring station and receive a confirmation that such
message was received.
Field Repair Services. The Company believes one of the most effective
ways of improving customer retention is the provision of quality,
responsive field repair service by Company employees. Repair services
generate revenues primarily through billable field service calls and
contractual payments under the Company's extended service program. The
increasing density of the Company's subscriber base, as a result of
the Company's continuing effort to infill areas surrounding its
branch operations with new subscribers, permits more efficient
scheduling and routing of field service technicians, and results in
economies of scale at the branch level. The increased efficiency
- 8 -
<PAGE>
in scheduling and routing also allows the Company to provide faster
field services response and support, which leads to a higher level of
subscriber satisfaction.
Franchise And Dealer Operations
The Company acquired the business of Dictograph Franchise Corporation
in 1988. Headquartered in Edison, New Jersey, this business operates a
widespread franchise network and authorized Dictograph dealer program
throughout the United States and the Caribbean. As of March 15, 1997, the
Company had 29 independent franchisees and 15 independent Dictograph dealers,
all authorized to do business under the name of Dictograph Security Systems.
The Company is in the process, however, of phasing out its franchise operations
and, since 1993, has not established additional franchise relationships.
Accordingly, the existing Dictograph franchisees are being given an option
either to convert their franchises into dealerships by June 30, 1997, or to
maintain their franchises under existing franchise agreements. The Company's
franchise agreements require franchisees to purchase products based on
individual minimum quotas and pay royalties based on a percentage of their
revenues.
In accordance with its current business strategy, the Company plans to
increase the number of Dictograph dealers in the Dictograph dealer program and
has established an authorized Holmes dealer program. As of March 15, 1997, the
Company had 25 independent Holmes dealers. Under both programs, dealers are
independent electronic security services businesses which sell, install and
service security equipment. These businesses are typically small and often
cannot properly provide monitoring services because they lack a sufficient
number of subscribers to support the fixed operating expenses associated with
such services. Hence, Dictograph and Holmes dealers are able to have their
customers' security systems monitored by the Company. Other Company services
are also available to dealers under both programs, including technical support,
sales training and marketing assistance. In addition, it is intended that both
Dictograph and Holmes dealers will be offered the opportunity to provide
service and installation support for certain of the Company's national accounts
subscribers. Pursuant to dealership arrangements under the Dictograph dealer
program, dealers acquire exclusive operating territories and are required to
purchase a minimum quota of specialized proprietary security equipment from the
Company on an annual basis. On the other hand, under the Holmes program,
authorized Holmes dealers will not be provided with exclusive operating
territories, but will be allowed to purchase specialized proprietary security
equipment from the Company without meeting minimum purchase requirements. In
addition, Holmes dealers will be authorized to use the Holmes brand name to
gain market advantage.
To date, the Company's revenues from its franchise and dealer
operations are derived primarily from (i) the gross margin on the sale of
security equipment to franchisees and Dictograph dealers, (ii) royalties
received from franchisees based upon their revenues and (iii) subcontract
monitoring charges from security alarm services performed for monitoring
franchisee and Dictograph dealer accounts. See "Business -- Business Strategy."
Other Services
Jewelry Vault Rentals. The Company operates a maximum security safe
deposit vault facility in the jewelry district of New York City. Vault rentals
are provided on a short-term or long-term basis to jewelers, many of whom also
utilize the Company's security alarm services for their businesses located in
the jewelry district.
Insured Parcel Delivery. In 1995, the Company began providing insured
parcel delivery services to the jewelry markets of New York City, Los Angeles
and other locations after acquiring the assets of its One Service business.
This business involves the arranging of overnight shipping of insured jewelry
parcels from jewelry centers in New York, Los Angeles and other locations to
various points throughout the United States. The Company's insured parcel
delivery service provides a number of special handling features to ensure the
security of the parcel, including computerized tracking and proof of delivery.
In addition, insurance coverage is provided for each parcel in an amount up to
$50,000 of the declared value of such parcel with no deductible.
Marketing and Sales
- 9 -
<PAGE>
The Company is currently focusing its marketing efforts on increasing
its visibility throughout the United States. This is accomplished through
national and local advertising in various forms of print media, direct mail
campaigns, telemarketing efforts, referrals from existing customers and
attendance at national trade shows. Additionally, the Company's marketing
strategy includes the return to one of the original Holmes logos used in the
early part of this century. The Company believes that use of this original logo
will increase public recognition and awareness of Holmes and its historical
presence and long-standing reputation in the industry. The Company provides its
sales force with extensive training and market resources, including
professionally prepared literature and presentation materials, background
research and technical information.
The Company installs security equipment either on the basis of an
outright sale of the equipment to the subscriber, or as a "company-owned
system" where Holmes charges the subscriber for the installation, but retains
title to the equipment. Sales of alarm systems are generally made at the
customer's premises, typically through visits by a sales representative. The
Company's sales representatives analyze a customer's security needs and, acting
in coordination with necessary technical support staff, design or specify an
appropriate security system to meet those needs and coordinate the installation
of the system in the customer's premises. The Company maintains installation
and field service personnel, as well as inventories of parts, in each of its
branch offices. See "Business -- Business Strategy."
Competition
The electronic security services industry in the United States is
highly competitive and highly fragmented, with new competitors continually
entering the field. Competition is based primarily on price in relation to
quality of service. The Company believes that it derives competitive strength
from its emphasis on high quality systems and services and its attention to
technological advances. Sources of competition in the electronic security
services industry are other providers of central monitoring services, systems
directly connected to local police and fire departments, local alarm systems
and other methods of protection, such as locks and gates and manned guarding.
The Company believes that it competes with numerous local, regional and
national companies. The Company's primary nationwide competitors include ADT
Security Systems, Inc., Ameritech Monitoring Services, Inc., Wells Fargo Alarm
Services and Honeywell, Inc. Some of the Company's national competitors have
greater financial, marketing and other resources than the Company. It is
possible that, subject to regulatory compliance, companies such as those
engaged in the telephone and cable business, if not already competing, may in
the future endeavor to enter the electronic security services industry.
Suppliers
The Company currently has multiple sources of supply for the
components used in the electronic security and fire detection systems that it
designs and installs. The Company does not manufacture any of the equipment or
components that it designs and installs. The Company believes that a variety of
alternative sources of supply is available on reasonable terms. However, the
Company has no guaranteed supply arrangements with its suppliers and purchases
components pursuant to purchase orders placed from time to time in the ordinary
course of business. There can be no assurance that shortages of components will
not occur in the future. Failure of sources of supply and the inability of the
Company to develop alternative sources of supply if required in the future
could have a material adverse effect on the Company's operations.
Regulation
The Company's operations are subject to a variety of federal, state,
county and municipal laws, regulations and licensing requirements. Many of the
states in which Holmes operates, as well as certain local authorities, require
Holmes to obtain licenses or permits to conduct a security alarm services
business. Certain governmental entities also require persons engaged in the
security alarm services business to be licensed and to meet certain standards
in the selection and training of employees and in the conduct of business. The
Company believes that it holds the required licenses and is in substantial
compliance with all licensing and regulatory requirements in each jurisdiction
in which it operates.
- 10 -
<PAGE>
In addition, there has been a trend recently on the part of
municipalities and other localities to attempt to reduce the level of false
alarms through various measures such as the licensing of individual alarm
systems and the imposition of fines upon customers, revocation of customer
licenses or non-response to alarms after a certain number of false alarms.
While such statutes and ordinances have not had a material adverse effect on
Holmes' business operations to date, Holmes is unable to predict whether such
statutes or ordinances, or any similar statues or ordinances enacted by other
jurisdictions, will adversely affect its business and operations in the future.
The security alarm industry is also subject to the oversight and requirements
of various insurance, approval, listing and standards organizations. Adherence
to the standards and requirements of such organizations may be mandatory or
voluntary depending upon the type of customer served, the nature of security
service provided and the requirements of the local governmental jurisdiction.
The Company has not had any material difficulties in complying with such
standards and requirements in the past.
Holmes' electronic security business relies on the use of telephone
lines and radio frequencies to transmit signals and to communicate with field
personnel. The cost of such lines and the type of equipment which may be
utilized in telephone line transmissions are regulated by both the federal and
state governments. The operation and utilization of radio frequencies are
regulated by the Federal Communications Commission and state public utilities
commissions.
Risk Management
The nature of the services provided by Holmes potentially exposes it
to greater risks of liability for employee acts or omissions, or system
failures, than may be inherent in many other service businesses. To reduce
those risks, substantially all of Holmes' customers have subscriber agreements
which contain provisions for limited liability and predetermined liquidated
damages to customers and indemnification by customers against third party
claims; however, some jurisdictions prohibit or restrict limitations on
liability and liquidated damages in cases of gross negligence or intentional
misconduct and in certain other situations. Holmes carries insurance of various
types, including general and umbrella liability and errors and omissions
insurance to insure it from liability arising from acts or omissions of its
employees.
Intellectual Property
Holmes Protection and Dictograph are the Company's principal
trademarks and service marks. The Company also uses the Computect service mark
in connection with its alarm services and related products, the LifeNet and
CargoNet service marks for its vehicle tracking systems, the HolmesNet service
mark in connection with its wireless transmission system and the One service
mark for its insured parcel delivery service. The Company believes that its
rights in these trademarks and service marks are of unlimited duration and
adequately protected by registration or applications to register. In addition,
the ProWatch trademark is authorized for use by the Company from a third party.
The Company believes that certain of its trademarks and service marks are
important to the marketing of its security alarm services, particularly as the
Company strives to establish a strong identity for Holmes with its customers.
In addition, the Company relies on trade secret and other laws to protect its
proprietary rights in its security systems and programs. No assurance can be
given that the Company will be able to successfully enforce or protect its
rights to its trademarks, service marks or proprietary information in the event
that any of them is subject to third party infringement or misappropriation.
The Company's central monitoring operations utilize proprietary software which
the Company has licensed from a third party.
Employees
As of March 15, 1997, the Company had approximately 565 full-time
employees. The Company believes that relations with its employees and their
unions are satisfactory. Approximately 85% of the Company's installation and
service personnel and a small portion of its response personnel are represented
by unions under the following collective bargaining agreements with the
Company's subsidiaries:
- 11 -
<PAGE>
<TABLE>
<CAPTION>
Agreement Employees
Subsidiary* Union Expiration Date Covered
- ---------------------- --------------------------------------------- ----------------------- -------------
<S> <C> <C> <C>
Holmes Protection United Service Workers of America, Local December 31, 2001 18
of Long Island, Inc. 355
Holmes Protection Local No. 98, International Brotherhood of November 9, 2000 18
of Philadelphia, Inc. Electrical Workers
Holmes Protection United Service Workers of America, Local September 30, 2001 38
of New Jersey, Inc. 355
Holmes Protection Local 3, International Brotherhood of January 31, 2001 69
of New York, Inc. Electrical Workers
Holmes Protection United Service Workers of America, Local March 24, 2002 10
of New York, Inc. 355
- -----------------------------
</TABLE>
* These subsidiaries have all been merged into the Company's
wholly-owned subsidiary, Holmes Protection, Inc., as of December 31,
1996.
Historical Developments
The 1992 Restructuring
On August 13, 1992, the Company effected a financial restructuring
(the "1992 Restructuring") pursuant an exchange agreement, dated as of December
18, 1991, which agreement was amended as of January 31, 1992, May 24, 1992 and
June 30, 1992 (the "Exchange Agreement"), between the Company and seven U.S.
insurance companies and other institutions (together, the "Institutions").
Stockholder approval of the Exchange Agreement was received on August 10, 1992.
The Exchange Agreement provided for the satisfaction of certain notes
representing approximately $72.6 million of loans (including accrued interest
and penalties thereon, as at June 30, 1992) to the Company by the Institutions
by a combination of cash payment, an exchange of Common Stock for debt, and
forgiveness of approximately $34.5 million of debt. The Company implemented a
twenty-five-for-one reverse stock split and then sold for 8.75 British pounds
(approximately $16.91) per share additional shares of Common Stock to the
Institutions as well as a total of 1,151,947 shares to its existing
stockholders and directors and to certain institutional investors. Upon the
completion of the 1992 Restructuring, the Institutions received a total of
1,603,224 new shares of Common Stock (representing 54.3% of the resulting
outstanding shares of Common Stock), warrants (the "Institution Warrants") to
purchase an aggregate of 147,572 shares of Common Stock at 8.75 British pounds
per share (representing 5% of the resulting outstanding shares), and a cash
payment of $12.6 million. As of August 13, 1992, after giving effect to the
reverse stock split, the average trading price of the Common Stock on the
London Stock Exchange was 7.28 British pounds per share and, based upon such
price, the aggregate value of the shares issued to the Institutions was
approximately $22.5 million. (United States dollar equivalents stated in this
paragraph assume an exchange rate of $1.9323 per British pound.) John Hancock
Mutual Life Insurance Company and The Mutual Life Insurance Company of New York,
and their respective affiliates, are currently the two largest stockholders
among the Institution group.
In connection with the 1992 Restructuring and the Exchange Agreement,
the Institutions received the right to nominate three directors of the Company
("Institution Nominees"), subject to adjustment based on their percentage
ownership of total Common Stock. As of the date hereof, the Institutions have
the right to nominate only two directors.
- 12 -
<PAGE>
The 1994 Investment Agreement
On August 1, 1994, pursuant to an investment agreement, dated as of
June 29, 1994 (the "Investment Agreement"), between the Company and HP Partners
L.P., a Delaware limited partnership (the "Investor"), the Investor purchased
1,515,886 shares of Common Stock (the "Investor Shares") (representing
approximately 34% of the then outstanding shares of Common Stock) and warrants
(the "Investor Warrants") to purchase an aggregate of 685,714 shares of Common
Stock at an exercise price of $4.58 per share, for an aggregate consideration
of $10 million. The Investment Agreement and the transactions contemplated
thereby, including amendments to the Company's By-Laws and the adoption of the
Restated Certificate of Incorporation of the Company which effected a one-for-
fourteen reverse stock split of the Common Stock, were approved by the
Company's stockholders on July 29, 1994. As a result of the Investment
Agreement, the Common Stock was delisted from the London Stock Exchange and
listed on the Nasdaq SmallCap Market effective March 27, 1995. In addition, on
March 27, 1995, the Company implemented a one-for-fourteen reverse stock split.
Unless otherwise noted, all share amounts referred to herein have been adjusted
to reflect this reverse stock split.
In connection with the Investment Agreement, the Investor received the
right to nominate four directors of the Company ("Investor-Nominees"), subject
to adjustment based on the number of Institution Nominees and the Investors'
percentage ownership of total Common Stock. As of the date hereof, the
Investors have the right to nominate only three directors.
Other Developments
1996 Credit Facility
In August 1996, the Company entered into a credit agreement dated as
of August 30, 1996, as amended and restated as of December 31, 1996 (the
"Credit Facility") with Merita Bank Ltd. and Bank of Boston Connecticut
(together, the "New Banks") providing for a two-year, $25 million revolving
credit facility which converts into a five-year term loan on September 30, 1998.
Certain funds under the Credit Facility were used by the Company to replace its
previous loan facility and to repay the outstanding balance thereunder. In
connection with the Credit Facility, the New Banks received warrants to
purchase an aggregate of 166,666 shares of Common Stock at an exercise
price of $9.75 per share (the "New Bank Warrants") and were granted certain
registration rights with respect thereto.
Registration Rights
In connection with the Investment Agreement, the Company entered into
substantially similar registration rights agreements, each dated August 1, 1994,
with the Investor and each of the Institutions, respectively (the "Registration
Rights Agreements"). Pursuant to the Registration Rights Agreements, the
Company agreed to use its best efforts to prepare and file with the Securities
and Exchange Commission and thereafter keep effective for a period of up to 15
years a registration statement under the Securities Act of 1933 (the
"Securities Act") permitting the public resale of the Investor Shares, the
1,588,105 shares held by the Institutions on August 1, 1994, and the shares of
Common Stock issuable upon exercise of the Investor Warrants and the
Institution Warrants. The Registration Rights Agreements provide that the
Company may not grant any "piggyback" registration rights with respect to
underwritten offerings to any person without the written consent of the
Investor and the holders of more than 50% of Registrable Securities (as
defined therein) held by the Institutions.
In connection with the Credit Facility, the Company entered into a
registration rights agreement, dated as of August 30, 1996, with the New Banks
(the "New Banks Registration Rights Agreement"). Pursuant to the New Banks
Registration Rights Agreement, the Company has agreed to, at the request of the
New Banks, use its best efforts to prepare and file with the SEC and thereafter
keep effective for a period of 120 days a registration statement under the
Securities Act permitting the resale of the Shares underlying the New Bank
Warrants.
- 13 -
<PAGE>
In connection with an acquisition (the "Acquisition") that the Company
made in 1996, the Company issued restricted shares of Common Stock and entered
into substantially similar registration rights agreements with each of the
various parties that acquired such restricted shares of Common Stock (the
"Acquisition Registration Rights Agreements"). Pursuant to the Acquisition
Registration Rights Agreements, the Company has agreed to, at the request of
the various parties thereto, use its best efforts to prepare and file with the
SEC and thereafter keep effective for a period of 90 days, a registration
statement under the Securities Act permitting the resale of 103,805 shares of
restricted Common Stock that were issued in connection with the Acquisition.
The 1995 Outsourcing Agreement
In 1995, the Company entered into a ten-year, $51 million information
technology services agreement, as amended (the "Outsourcing Agreement"), with
PremiTech Corporation ("PremiTech"), a subsidiary of Electronic Data Systems,
Inc. PremiTech is a limited partner in the Investor, holding a partnership
interest equivalent to approximately 6% of the Company's Common Stock. Pursuant
to the Outsourcing Agreement, PremiTech assisted the Company in consolidating
the Company's four central monitoring stations located in the Northeast to a
single location in Edison, New Jersey. The consolidation was completed in
February 1997. The Outsourcing Agreement also provided for PremiTech to manage
all of the Company's technological infrastructure and to perform certain other
administrative functions.
In March 1997, the Company and PremiTech reached an agreement in
principle to terminate the Outsourcing Agreement, under which the Company will
record a one-time, non-recurring charge of approximately $1.5 million in the
first quarter of 1997. See Notes 3 and 15 to Notes to Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
The 1996 Public Offering
In October 1996, the Company completed a secondary public offering,
underwritten by Brean Murray & Co., Inc., of 1.1 million shares of its Common
Stock resulting in net proceeds to the Company of $12.1 million dollars, which
were used to fund acquisitions, meet working capital requirements and reduce
long-term debt obligations.
- 14 -
<PAGE>
Item 2. Properties
As of March 15, 1997, the Company leased the following principal
properties:
<TABLE>
<CAPTION>
Square Annual
Address Principal Use Feet Rental Lesse Expires
- --------------------------- --------------------------------- -------- ---------- --------------------
<S> <C> <C> <C> <C>
440 9th Avenue Corporate and sales offices 20,000 $392,800 February 28, 2002
New York, NY
21 Northfield Avenue Sales, service center and central 15,620 $210,768 June 30, 2006
Edison, NJ station
10579 Dale Avenue #200 Sales office and central station 3,168 $ 46,416 March 31, 1999
Stanton, CA
</TABLE>
Item 3. Legal Proceedings
The Company experiences routine litigation in the normal course of its
business, which claims are generally covered under the Company's insurance
policies. The Company believes that none of such pending litigation will have a
material adverse effect on its consolidated financial condition, future results
of operations or liquidity.
As previously reported, the Company was a defendant in a lawsuit
captioned Pan American Diamond Corporation and Wasko Gold v. Holmes Protection
of New York, Inc., commenced in New York State Supreme Court, New York County,
in January, 1994. The complaint sought compensatory, consequential and punitive
damages in excess of $1,000,000 arising out of a burglary at a New York City
jewelry manufacturing Company in which an employee of the Company participated.
The Company, under the claim, was subject to an uninsured exposure for any
damages that could be awarded in excess of $100,000. In March 1997, the parties
to this action settled all claims with an aggregate payment made by the Company
and its insurance carrier of $250,000.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on December
5, 1996. The holders of 5,828,062 shares of Common Stock of the Company were
entitled to vote at the meeting. The holders of 4,819,830 shares of Common
Stock, or 82.70% of shares entitled to vote at the meeting, were represented by
proxy. The holders of 142 shares of Common Stock, or approximately .0021364% of
shares entitled to vote at the meeting, were present in person. The following
actions took place:
1. The stockholders voted for the reelection of each of the following
persons nominated to serve as a director of the Company for a three-year term
which will expire at the Company's annual meeting in 1999: George V. Flagg,
Lawrence R. Glenn, and Edward L. Palmer. The remaining directors whose terms
of office did not expire at the meeting were Pierre Besuchet, Daniel T. Carroll,
Mark S. Hauser, William P. Lyons, and David Jan Mitchell. The holders of
4,816,672 shares voted for each nominated director, the holders of 3,300 shares
voted against each nominated director, the holders of 0 shares abstained from
voting and 0 shares were broker non-votes.
2. The stockholders approved a proposal to amend and restate the
Company's Restated Certificate of Incorporation to delete Article Seventh which
relates to certain creditors' and stockholders' rights to effect compromises or
reorganizations. The holders of 3,538,075 shares voted for the proposal, the
holders of 2,202 shares voted against the proposal, the holders of 1,300 shares
abstained from voting and 1,278,395 shares were broker non-votes.
- 15 -
<PAGE>
3. The stockholders voted to adopt the Company's 1996 Stock Incentive
Plan. The holders of 4,405,109 shares voted for the adoption, the holders of
364,352 shares voted against the adoption, the holders of 6,560 shares
abstained from voting and 43,951 shares were broker non-votes.
4. The stockholders voted to ratify the appointment of Arthur Andersen
LLP as the Company's independent public accountants for the year ended December
31, 1996. The holders of 4,817,170 shares voted for the appointment, the
holders of 502 shares voted against the appointment, the holders of 2,300
shares abstained from voting and 0 shares were broker non-votes.
- 16 -
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Authorized Capital Stock
The Company's authorized capital stock consists of 12,000,000 shares
of Common Stock, par value $.01 per share, of which 5,828,062 shares are
outstanding as of March 27, 1997, and 1,000,000 shares of undesignated
Preferred Stock, par value $1.00 per share, of which no shares are outstanding
as of March 27, 1997.
On March 27, 1995 the Company effected a reverse stock split pursuant
to which one new share of Common Stock, $.01 par value, was exchanged for every
fourteen (14) whole shares of Common Stock, $.25 par value, then issued or
outstanding and shareholders received a cash payment in lieu of any fractional
shares (the "Reclassification"). References to "Common Stock" herein refer to
the Common Stock of the Company both prior to and following the
Reclassification as the context requires. All share amounts and related share
price information in this report have been adjusted to give effect to the
Reclassification.
Price Range of Common Stock
The Company's Common Stock traded on the London Stock Exchange from
1984 through March 24, 1995. From March 27, 1995 through September 20, 1996,
the Common Stock traded on the Nasdaq SmallCap Market ("NASDAQ/SmallCap").
Since September 23, 1996, the Common Stock has traded on the Nasdaq National
Market ("NASDAQ/NM") under the trading symbol "HLMS." The following table sets
forth, as applicable for the periods indicated, the range of the high and low
mid-market closing prices for the Common Stock as reported by the London Stock
Exchange and the range of high and low sale prices as reported by
NASDAQ/SmallCap and NASDAQ/NM. The prices set forth below have been adjusted to
give effect to the Reclassification.
<TABLE>
<CAPTION>
U.S. Dollars* British Pounds
--------------------------- ----------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1995
1st Quarter (on London
Stock Exchange through
March 24, 1995)................ $6.25 $5.81 (pound)3.92 (pound)3.64
1st Quarter (on
NASDAQ/SmallCap
effective March 27, 1995)...... 6.25 6.25 -- --
2nd Quarter.................... 7.25 5.50 -- --
3rd Quarter.................... 9.25 4.25 -- --
4th Quarter.................... 6.50 3.75 -- --
1996
1st Quarter.................... $9.00 $4.38 -- --
2nd Quarter.................... 9.25 7.75 -- --
3rd Quarter................... 11.50 9.00 -- --
4th Quarter.................... 15.13 11.25 -- --
</TABLE>
- -------------------------
* For purposes of this table, historical pound/dollar exchange rates have been
used based on the average of the rates at the end of each month during each
quarterly period.
- 17 -
<PAGE>
At March 27, 1997, the Company had approximately 1,451 shareholders of record.
Dividend Policy
The Company has not paid cash dividends on the Common Stock since 1989
and does not anticipate paying such dividends in the foreseeable future. The
Company currently intends to retain any future earnings for use in the
Company's business. The payment of any future dividends will be determined by
the Board in light of the conditions then existing, including the Company's
financial condition and requirements, future prospects, restrictions in
financing agreements, business conditions and other factors deemed relevant by
the Board. In addition, the Company is subject to certain restrictions
regarding the payment of cash dividends and the making of other distributions
in respect of the Common Stock pursuant to the Credit Facility (as hereinafter
defined in "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Liquidity and Capital Resources") and any other new
financing arrangements.
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below as of
December 31, 1996 and 1995 are derived from the Company's financial statements
included elsewhere in this Form 10-K, which have been audited by Arthur
Andersen LLP, independent public accountants. The selected consolidated
financial data set forth below as of December 31, 1994, 1993 and 1992 are
derived from financial statements not included in this Form 10-K. This data
should be read in conjunction with the Company's consolidated financial
statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations," included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share amounts)
Statement of Operations Data:(1)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 50,975 $ 50,075 $51,402 $ 53,500 $ 56,173
Cost of sales (exclusive of depreciation (28,124) (26,262) (24,885) (29,916) (29,560)
expense)......................................
Gross profit.................................. 22,851 23,813 26,517 26,584 26,613
Selling, general and administrative expenses.. (14,989) (16,668) (15,051) (17,837) (17,287)
Depreciation and amortization................. (10,574) (10,390) (9,736) (8,919) (8,139)
Income (loss) before income taxes and
cumulative effect of change in accounting
principle..................................... (3,667) (5,793) 982 145 3,803
Income (loss) before cumulative effect of
change in accounting principle and
extraordinary item............................ (2,452) (3,674) 404 (55) (3,795)
Cumulative effect of change in accounting
principle..................................... -- 2,477 -- -- --
Extraordinary item .......................... -- -- -- -- 23,187
Net income (loss)............................. (2,452) (1,197) 404 (55) 19,392
Earnings (loss) per common share before
cumulative effect of change in accounting
principle and extraordinary item.............. (0.51) (0.82) 0.11 (0.02) (3.04)
Earnings (loss) per common share(2)........... (0.51) (0.27) 0.11 (0.02) 15.54
Weighted average shares outstanding........... 4,827 4,459 3,580 2,944 1,250
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Other Data:
<S> <C> <C> <C> <C> <C> <C>
EBITDA(3) ................................... $8,144 $ 7,392 $11,659 $ 9,649 $ 12,312
Interest Expense............................. 537 721 941 585 370
Capital expenditures......................... 9,428 7,494 7,361 7,883 7,074
Net cash provided by operating activities.... 3,337 6,144 6,164 2,335 1,797
At December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working Capital.............................. $(2,171) $ (5,246) $(1,818) $ (9,107) $ (8,307)
Total Assets ................................ 89,817 80,208 87,148 84,078 83,450
Long-term debt, net of current maturities.... 4,370 4,862 6,709 5,995 435
Shareholders' equity ........................ 60,395 47,672 48,420 39,319 38,006
- -------------------
</TABLE>
(1) Results of operations vary significantly among the years due to
reorganization and a recapitalization of the Company. Net loss for
1996 reflects the effect of a non-recurring charge of $700,000. Net
loss for 1995 reflects the effect of a non-recurring charge of
$2,074,000 and the cumulative effect of a change in the method of
accounting for non-refundable payments received from customers for
Company-owned systems resulting in a net credit after tax of
$2,477,000. See Notes 4 and 5 to Notes to Consolidated Financial
Statements for further explanations. Net income for 1992 reflects the
effect of an extraordinary gain, net of tax of $23,187,000, resulting
from the restructuring of debt that occurred in August 1992.
(2) The net income (loss) per common share data has been adjusted to give
effect to the Reclassification on March 27, 1995.
(3) EBITDA means earnings before interest, taxes, depreciation and
amortization and is presented because it is an accepted and useful
financial indicator of a Company's ability to service and incur debt.
EBITDA should not be considered (i) as an alternative to net income or
any other GAAP measure of performance, (ii) as an indicator of
operating performance or cash flows generated by operating, investing
or financing activities or (iii) as a measure of liquidity. EBITDA for
1996 does not reflect a non-recurring charge of $700,000. EBITDA for
1995 does not reflect the cumulative effect of a change in accounting
principle of $2,477,000 or a non-recurring charge of $2,074,000.
EBITDA for 1992 does not reflect an extraordinary gain of $23,187,000.
- 19 -
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands)
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Monitoring and service............................. $35,656 $ 37,912 $ 39,747 $ 41,004
Installation ...................................... 10,537 8,155 8,425 9,141
Franchise royalties, product sales
and other........................................ 4,782 4,008 3,230 3,355
------- --------- --------- --------
Total revenues..................................... 50,975 50,075 51,402 53,500
Cost of sales (exclusive of
depreciation expense shown below)................ (28,124) (26,262) (24,885) (26,916)
------- -------- -------- --------
Gross profit....................................... 22,851 23,813 26,517 26,584
Selling, general and administrative
expenses......................................... (14,989) (16,668) (15,051) (17,837)
Depreciation and amortization...................... (10,574) (10,390) (9,736) (8,919)
Non-recurring charge............................... (700) (2,074) -- --
Other income ...................................... 282 247 193 902
Interest expense, net.............................. (537) (721) (941) (585)
-------- -- ------- --------- ---------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle............................. (3,667) (5,793) 982 145
Provision (benefit) for income taxes............... (1,215) (2,119) 578 200
------- --------- -------- ---------
Income (loss) before cumulative effect
of change in accounting principle................ (2,452) (3,674) 404 (55)
Cumulative effect of change in
accounting principle, net of
tax of $1,942.................................... -- 2,477 -- --
--------- --------- -------- ----------
Net income (loss).................................. $ (2,452) $ (1,197) $ 404 $ (55)
========= ========= ======== ==========
</TABLE>
Overview
The majority of the Company's revenues is derived from a combination
of (i) recurring payments received from subscribers for providing monitoring,
service and equipment relating to electronic security systems, primarily under
renewable contracts which generally have an initial five-year term, (ii)
non-refundable charges received in connection with the installation of
Company-owned systems in subscribers' premises, (iii) direct sales of
electronic security systems and (iv) billable service charges, primarily from
subscribers who own their systems outright. The remainder of the Company's
revenues is derived from its insured parcel delivery service for the jewelry
trade, jewelry vault rentals and royalties and product sales relating to its
franchise and dealer operations.
Recurring revenues are payable monthly, quarterly or annually in
advance and are recognized as service is provided. Effective January 1, 1995,
the Company changed its method of accounting for installation revenues with
respect to the recording of non-refundable payments received from customers
upon the completion of the installation of Company-owned systems. The
cumulative net effect of this change was to increase net income by $2.5 million
in 1995. The Company believes that recognizing revenues upon completion of the
installation results in a better matching of revenues and expenses, better
reflects the actual level of new business activity and conforms with the
dominant practice being followed by the electronic security services industry
See Note 4 to Notes to Consolidated Financial Statements.
- 20 -
<PAGE>
Direct installation costs of Company-owned systems, which include
materials, labor and installation overhead, are capitalized and depreciated
over the average useful life of subscriber contracts (including renewals),
estimated by the Company to be twelve years. Other than direct installation
costs of Company-owned systems, all costs are recognized in the period in which
they are incurred.
Fiscal Year Ended 1996 Compared with Fiscal Year Ended 1995
Revenues increased $0.9 million (1.8%) to $51.0 million in 1996 from
$50.1 million in 1995. The increase was attributable to an increase in
installation revenues of $2.4 million (29.2%) primarily from new installations
of customer-owned systems and an increase of approximately $0.8 million in
other revenues which represents an increase in revenues associated with the One
Service business acquired in March, 1995 offset by a decline in revenues from
the Company's Dictograph operations. The increase in installation and other
revenues was partially offset by a decrease in monitoring and service revenue
of $2.2 million (6.0%) relating to the cancellation of annual recurring
revenues in excess of new sales. The annualized cancellation rate was 10.8% in
996 compared to 10.9% in 1995. The annual recurring revenue base declined from
$35.5 million at December 31, 1995 to $35.0 million at December 31, 1996. In
1996, the Company acquired approximately $1.9 million of annual recurring
revenue most of which was acquired in December.
Cost of sales increased $1.8 (7.1%) to $28.1 million in 1996 from
$26.3 million in 1995. This increase was a result of the costs associated with
the increase of new installations of customer-owned systems and the costs
associated with the increased One Service business. New installation margins
on customer-owned systems remained constant for 1996 as compared to 1995.
Selling, general and administration expenses decreased $1.7 million
(10.1%) to $15.0 million in 1996 from $16.7 in 1995. The decrease reflects
reduced costs associated with staff reductions completed in the fourth quarter
of 1995 and additional reductions completed in 1996 offset slightly by
increased selling expenses associated with increased sales in 1996.
Depreciation and amortization expense increased $0.2 million (1.8%) to
$10.6 million in 1996 from $10.4 million in 1995. The increase relates to
additional depreciation of installation costs relating to new and upgraded
company-owned systems partially offset by a reduction in depreciation on other
assets as a result of the writedown of leasehold improvements and other fixed
assets in the fourth quarter of 1995.
Interest expense, net of interest income, declined by $0.2 million
(25.5%) from $0.7 million in 1995 to $0.5 million in 1996 primarily due to a
declining debt balance.
Non-recurring charges of $0.7 million in 1996 included $0.5 million
relating to severance pay and related benefits in connection with additional
reserves required for the staff reductions announced in the fourth quarter of
1995 and further reductions in 1996 as well as a settlement of an outstanding
legal matter. In 1995, non-recurring charges of $2.1 million included $1.1
million relating to severance pay and related benefits for staff reductions and
approximately $1.0 million relating to the write-off of unamortized leasehold
improvements and other assets in connection with the Company's central station
consolidation and the relocation of the Company's corporate headquarters.
The Company recorded a net loss in 1996 of $2.5 million compared to a
net loss of $1.2 million in 1995. In 1995, the Company changed its method of
accounting for non-refundable installation fees on company-owned systems. The
cumulative net effect of this change was to increase net income by $2.5 million
in 1995.
Fiscal Year Ended 1995 Compared with Fiscal Year Ended 1994
Revenues declined $1.3 million (2.6%) to $50.1 million in 1995 from
$51.4 million in 1994. A portion of the decline was attributable to a reduction
in revenues of $1.8 million from the Company's monitoring and service
operations relating to the cancellation of annual recurring revenues in excess
of new sales. Such annual recurring revenue base declined from $37.4 million at
December 31, 1994 to $35.5 million at December 31, 1995. In addition, reduced
revenues resulted from a decline in revenues of $.7 million from franchise and
dealer operations and $.7 million from the change in the method of accounting
for non-refundable installation fees on Company-owned systems. The decline in
revenues
- 21 -
<PAGE>
was partially offset by revenues from the insured parcel delivery service of
$1.4 million, which business was acquired in March 1995. In 1995, the franchise
and dealer operations experienced the loss of several franchisees and a
reduction in related royalties and product sales. The change in accounting
policy regarding non-refundable installation fees, while having a favorable
cumulative effect on net income, resulted in lower installation income
recognition in 1995. The Company's cancellation rate continued to improve from
a high in 1991 of 15.2%, to 10.9% in 1995, which was slightly better than the
11.1% cancellation rate in 1994. This improvement reflects continued efforts to
upgrade older accounts with new systems and to provide high quality service to
subscribers.
Cost of sales increased by $1.4 million (5.5%) to $26.3 million in
1995 from $24.9 million in 1994 primarily due to costs incurred in the
operation of the insured parcel delivery business.
Selling, general and administrative expenses increased by $1.6 million
(10.7%) to $16.7 million in 1995 from $15.1 million in 1994. The increase
relates in part to legal and professional fees incurred in connection with the
Outsourcing Agreement and a significant prospective acquisition which did not
materialize. Increased selling expenses were incurred in connection with new
marketing efforts relating to the ProWatch and LifeNet systems.
Depreciation and amortization expense increased $.7 million (6.7%) to
$10.4 million in 1995 from $9.7 million in 1994. The increase relates to
additional depreciation of installation costs relating to new Company-owned
systems as well as those systems which have been upgraded.
Interest expense, net of interest income, declined by $0.2 million
(23.4%) from $0.9 million in 1994 to $.7 million in 1995 primarily due to an
increase in interest income on investments and a declining debt balance under
the Loan Agreement.
Non-recurring charges of $2.1 million in 1995 included $1.1 million
relating to (i) severance pay and related benefit costs in connection with the
selective reduction of approximately 70 employees in the Company's work force,
all of whom were terminated, notified or identified at December 31, 1995 and
(ii) approximately $1.0 million relating to the write-off of unamortized
leasehold improvements and other assets in connection with the Company's
central station consolidation and the relocation of the Company's corporate
headquarters which took place in late 1996. See Note 4 to Notes to Consolidated
Financial Statements.
In 1995, the Company changed its method of accounting for
non-refundable installation fees on Company-owned systems. The cumulative net
effect of this change was to increase net income by $2.5 million in 1995.
However, excluding the cumulative effect, this change resulted in an increase
in net loss of $0.4 million in 1995. The Company believes that, on an ongoing
basis, the effect on net income of this change will not be significant. See
Note [3] to Notes to Consolidated Financial Statements.
The Company recorded a net loss in 1995 of $1.2 million compared to
net income of $0.4 million in 1994. The net reduction in income of $1.6 million
in 1995 is due to all the various changes described above.
Liquidity and Capital Resources
Fiscal Year Ended 1996
Cash and cash equivalents increased by $0.6 million from $0.4 million
in 1995 to $1.0 million in 1996. In 1996, net cash provided by operating
activities of $3.3 million and net cash provided by financing activities of
$7.8 million was offset by $10.5 million of cash used by investing activities.
Net cash provided by operating activities of $3.3 million in this
period principally consisted of cash provided by sales of electronic security
services, adjusted for non-cash charges for depreciation and amortization, an
increase in inventory of $0.8 million, a decrease in accounts payable and
accrued expenses of $1.8 million and an increase in customer deposits of $1.0
million. The excess of current liabilities over current assets decreased from
$5.2 million in 1995 to $2.2 million in 1996 primarily as a result of a
reduction in long-term debt, accounts payable and accrued expenses.
- 22 -
<PAGE>
Net cash of $10.5 million used by investing activities in 1996
consisted of $9.4 million of capital expenditures (primarily for installation of
alarm equipment on subscribers' premises) and investments in acquired companies
of $3.2 million, offset by a net reduction of $2.0 million from net maturities
of short-term investments.
Net cash of $7.8 million provided by financing activities during this
period consisted principally of net proceeds from the issuance of Common Stock
of $12.1 million and proceeds from the Credit Facility of $12.0 million, offset
by repayments of amounts due under the Loan Agreement of $6.2 million, the
Credit Facility of $8.5 million, and short-term borrowings of $1.0 million. In
addition, $0.6 million was used for issuance costs associated with the Credit
Facility. See Notes 7 and 8 to Notes to Consolidated Financial Statements.
Fiscal Year Ended 1995
Cash and cash equivalents declined by $1.0 million from $1.4 million
in 1994 to $.4 million in 1995. In 1995, net cash provided by operating
activities of $6.1 million was offset by $1.5 million of cash used by financing
activities and $5.6 million of cash used by investing activities.
Net cash provided by operating activities of $6.1 million in this
period principally consisted of cash provided by sales of electronic security
services, adjusted for non-cash charges for depreciation and amortization, an
increase in accounts receivable of $1.6 million, an increase in accounts
payable and accrued expenses of $1.8 million and a decrease in customer
deposits and other liabilities of $1.6 million. The excess of current
liabilities over current assets increased from $1.8 million in 1994 to $5.2
million in 1995 primarily as a result of a reduction in long-term debt,
additions to property, plant and equipment and establishment of the reserve for
severance and related benefit costs.
Net cash of $5.6 million used by investing activities in 1995
consisted of $7.5 million of capital expenditures (primarily for installation
of alarm equipment on subscribers' premises), offset by a net reduction of $1.9
million from net maturities of short-term investments.
Net cash of $1.5 million used by financing activities during this
period consisted principally of repayments of amounts due under the Loan
Agreement and short-term borrowings under a Company margin account. See Note 6
to Notes to Consolidated Financial Statements.
Future Commitments and Cash Requirements
Liquid assets available to the Company as of December 31, 1996
included cash and cash equivalents of $1.0 million. At December 31, 1996 the
Company had undrawn funds of $21.5 million under its new revolving credit
facility.
In August 1996, the Company entered into the Credit Facility with
Merita Bank Ltd. and Bank of Boston Connecticut (see "Business -- Other
Developments/1996 Credit Facility"), to provide a two-year, $25 million
revolving credit facility to the Company which converts into a five-year term
loan on September 30, 1998. At December 31, 1996, the outstanding balance under
the Credit Facility was $3.5 million. At such date outstanding balances under
the Company's previous loan agreement, aggregating $6.2 million, were paid in
full and such agreement was subsequently canceled.
The Credit Facility matures on September 30, 2003, with principal
payments payable in increasing quarterly installments commencing December 31,
1998. Borrowings under the Credit Facility bear interest, at the Company's
option, at an annual rate equal to either a base rate, defined as the higher of
the prime rate or a specified federal funds rate, or a specified Eurodollar
rate plus, in each case, an applicable margin which varies with the Company's
leverage (the ratio of total debt to EBITDA less capital expenditures). The
Company is obligated to pay a commitment fee of 1/2% per annum of any undrawn
amounts. The New Banks also received warrants to purchase an aggregate of
166,666 shares of Common Stock at an initial exercise price of $9.75 per share
and were granted certain registration rights in connection therewith.
Mandatory prepayment of the Credit Facility will be required under
certain circumstances. Additionally, the Credit Facility contains a number of
negative covenants customary in credit agreements for this type of loan,
including, without limitation, restrictions on additional indebtedness,
- 23 -
<PAGE>
certain acquisitions, dividends, investments, mergers and sales of assets,
creation of liens, guarantees, issuance of capital stock by the Company's
subsidiaries and transactions with affiliates. The Company is also required to
comply with various financial covenants, tests and ratios, including those
relating to (i) ratios of total debt to recurring monthly revenue, (ii) minimum
debt service coverage, (iii) minimum net worth, (iv) maximum capital
expenditures and (v) maximum subscriber attrition rate (as defined in the
Credit Facility).
The Credit Facility is secured by all current and future assets and
the pledge of the capital stock of the Company's subsidiaries.
In 1995, the Company entered into the Outsourcing Agreement with
PremiTech which provides for PremiTech to manage the Company's technological
infrastructure, perform certain of the Company's administrative functions, and
assist in the consolidation of the Company's central monitoring facilities. For
on-going services during the ten-year term of the agreement, the Company was
obligated to pay PremiTech a total of $47.7 million in equal monthly
installments aggregating $4.8 million per year, subject to certain adjustments.
In addition, the Company agreed to pay PremiTech a total of $3.3 million for its
consolidation activities. In March 1997, the Company and PremiTech reached an
agreement in principle to terminate the Outsourcing Agreement, under which the
Company will record a one-time, non-recurring charge of approximately $1.5
million in the first quarter of 1997. See Notes 3 and 15 to Notes to
Consolidated Financial Statements.
The Company has in the past experienced cash flow shortages. The
Company believes that net cash provided by operations, together with funds
available under the Credit Facility, will enable it to meet its future cash
operating needs.
In the course of its business, the Company plans on-going annual
capital expenditures for Company-owned alarm equipment installed at subscriber
premises. Additionally, the Company continues to invest in the replacement and
modernization of the equipment utilized in its central monitoring activities and
associated security services. All such capital expenditures will require
substantial financial resources which are expected to be provided by internally
generated funds and, as necessary, supplemental funding from other sources,
including its Credit Facility.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and a related schedule
are included on pages F-1 to F-20 and S-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated herein by
reference to "Directors and Executive Officers of the Registrant" in the
registrant's definitive proxy statement for 1997, if filed by April 30, 1997.
Item 11. Executive Compensation
The information required by this item is incorporated herein by
reference to "Executive Compensation" in the registrant's definitive proxy
statement for 1997, if filed by April 30, 1997.
- 24 -
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by
reference to "Security Ownership of Certain Beneficial Owners and Management"
in the registrant's definitive proxy statement for 1997, if filed by April 30,
1997.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by
reference to "Certain Relationships and Related Transactions" in the
registrant's definitive proxy statement for 1997, if filed by April 30, 1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(b) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts
(c) Exhibits
Exhibit
No.
3.1 Restated Certificate of Incorporation of the Company, as amended(*)
3.2 Amended and Restated By-Laws of the Company(5)
4.1 Specimen of Common Stock Certificate(5)
4.3 Investor Warrant(2)
4.4 Form of Institution Warrant(2)
4.5 New Bank Warrants(11)
10.1 Investment Agreement between HP Partners L.P. ("Investor") and the
Company, dated as of June 29, 1994(1)
10.2 Registration Rights Agreement between Investor and the Company,
dated August 1, 1994(2)
10.3 Exchange Agreement, dated as of December 18, 1991, among the Company
and a number of insurance companies and other institutions listed
therein ("Institutions")(1)
10.4 First Amendment to the Exchange Agreement, dated January 31, 1992(1)
10.5 Second Amendment to the Exchange Agreement, dated May 24, 1992(1)
- 25 -
<PAGE>
10.6 Third Amendment to the Exchange Agreement, dated June 30, 1992(1)
10.7 Amended and Restated Senior Executives Option Plan(2)
10.8 Master Lease Agreement No. 12223, dated December 18, 1992, between
Data General Corporation and the Company(1)
10.9 Letter Agreement, dated July 12, 1995, and Lease Schedule No. 006,
dated July 26, 1995, to Master Lease Agreement No. 12223 between
Data General Corporation and the Company(7)
10.10 Letter Agreement, dated September 3, 1996, and Revised Lease
Schedule No. 006 to Master Lease Agreement 12223 between Data
General Corporation and the Company(11)
10.11 Software License and Sublicense Agreement, dated April 4, 1995,
among Monitoring Automation Systems, PremiTech Corporation and the
Company(6)
10.12 Employment Agreement between the Company and George V. Flagg, dated
January 8, 1996(9)
10.13 Employment Agreement between the Company and James L. Boehme, dated
January 8, 1996(9)
10.13(a) Amendment to Employment Agreement between the Company and James L.
Boehme, dated June 5, 1996(10)
10.14 Employment Agreement between the Company and Lawrence R. Irving,
dated May 13, 1996(10)
10.15 Lease Agreement, dated as of July 1, 1995, between Holmes Protection
of New York Inc. ("HPNY") and Forty-Seventh-Fifth Company; Lease
Guaranty by the Company, dated as of July 1, 1995(7)
10.16(a) Lease Agreement, dated March 2, 1987, between HPNY and Ninth Avenue
Associates (including First Amendment, dated August 9, 1988
thereto)(1)
10.16(b) Second Amendment to Lease Agreement, dated October 7, 1987(2)
10.16(c) Third Amendment to Lease Agreement, dated October 27, 1994(3)
10.16(d) Fourth Amendment to Lease Agreement, dated November 13, 1995(9)
10.17 Lease Agreement, dated June 1992, among Holmes Protection of Long
Island, Inc., Holmes Protection Group, Inc. and J&B Properties
Ltd.(1)
10.18 Lease Agreement, dated January 31, 1974, between Holmes Protection
of Philadelphia, Inc. and George Shapiro (including amendments
thereto)(1)
10.19 Form of Registration Rights Agreement with Institutions(2)
10.20 Agreement For Information Technology Services, dated as of April 4,
1995, between PremiTech Corporation (formerly Premisys Corporation)
and the Company ("Outsourcing Agreement")(7)
10.21 First Amendment to Outsourcing Agreement, dated as of August 1,
1995(8)
10.22 Second Amendment to Outsourcing Agreement, dated as of December 14,
1995(9)
10.23 Third Amendment to Outsourcing Agreement, dated as of January 19,
1996(9)
10.24 Parent Corporation Guarantee, dated April 4, 1995, among Electronic
Data Systems Corporation, PremiTech Corporation and the Company(6)
10.25 Credit Agreement, dated as of August 30, 1996, among Merita Bank
Ltd., Bank of Boston Connecticut (together, the "New Banks"), the
Company and Holmes Holding Company, Inc. (the "New Credit
Agreement")(11)
10.25(a) The New Credit Agreement, as amended and restated(*)
10.26 Registration Rights Agreement, dated as of August 30, 1996, between
the Company and the New Banks(11)
18.1 Letter from Arthur Andersen LLP, dated March 20, 1996, regarding
change in accounting principle(9)
21.1 Subsidiaries of the Company(*)
27.1 Financial Data Schedule(*)
99.1 Definitive Proxy Statement(12)
(*) Filed herewith.
(**) To be filed by amendment.
- 26 -
<PAGE>
(1) Incorporated by reference to the Company's Registration Statement on
Form 10, dated July 11, 1994.
(2) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A, dated October 13, 1994.
(3) Incorporated by reference to Amendment No. 2 to the Company's
Registration Statement on Form 10/A, dated December 13, 1994.
(4) Incorporated by reference to Amendment No. 3 to the Company's
Registration Statement on Form 10/A, dated January 25, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(10) Incorporated by reference to the Company's Registration Statement on
Form S-1, dated July 26, 1996.
(11) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1, dated September 25, 1996.
(12) To be incorporated by reference.
- 27 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
HOLMES PROTECTION GROUP, INC.
By: /s/ George V. Flagg
----------------------
George V. Flagg
President and Chief Executive Officer
Date: April 7, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates indicated.
Date:
April 7, 1997 /s/ George V. Flagg
-------------------
George V. Flagg
President and Chief Executive Officer
(Principal Executive Officer)
April 7, 1997 /s/ Lawrence R. Irving
----------------------
Lawrence R. Irving
Vice President/Finance
(Principal Financial Officer)
April 7, 1997 /s/ Lawrence R. Glenn
---------------------
Lawrence R. Glenn
Director
April 7, 1997 /s/ Mark S. Hauser
------------------
Mark S. Hauser
Director
April 7, 1997 /s/ William P. Lyons
----------------------
William P. Lyons
Director
April 7, 1997 /s/ David Jan Mitchell
----------------------
David Jan Mitchell
Director
- 28 -
<PAGE>
April 7, 1997 /s/ Edward L. Palmer
--------------------
Edward L. Palmer
Director
April 7, 1997 /s/ Daniel T. Carroll
---------------------
Daniel T. Carroll
Director
- 29 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 - F-20
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS S-1
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Holmes Protection Group, Inc.:
We have audited the accompanying consolidated balance sheets of Holmes
Protection Group, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Holmes Protection
Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 4 to the consolidated financial statements, effective
January 1, 1995, the Company changed its revenue recognition policy of
accounting for non-refundable payments received from customers upon completion
of installation of Company owned systems.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed on the Index to
Financial Statements is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
February 28, 1997 (except with respect to the matter discussed in Note 15, as
to which the date is March 12, 1997)
F-2
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(000's omitted)
<TABLE>
<CAPTION>
ASSETS 1996 1995
CURRENT ASSETS: ------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 990 $ 435
Short-term investments - 2,043
Accounts receivable, less allowance for doubtful accounts of $973 in 1996 and
$1,340 in 1995 5,333 4,997
Inventories 2,795 1,923
Prepaid expenses and other 1,871 1,899
---------- ----------
Total current assets 10,989 11,297
---------- ----------
FIXED ASSETS, net 47,198 45,231
SUBSCRIBER CONTRACTS, at cost, less accumulated amortization of $25,137 in 1996 and
$22,522 in 1995 19,650 18,894
TRADENAMES, less accumulated amortization of $2,045 in 1996
and $1,875 in 1995 4,063 4,234
OTHER ASSETS 7,917 552
---------- ----------
$ 89,817 $ 80,208
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ - $ 943
Current maturities of long-term debt 364 2,497
Accounts payable and accrued expenses 7,290 8,689
Deferred revenue 2,693 2,664
Customer deposits 2,813 1,750
---------- ----------
Total current liabilities 13,160 16,543
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt 4,370 4,862
Other long-term liabilities 555 834
Deferred income taxes 11,337 10,297
---------- ----------
Total long-term liabilities 16,262 15,993
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000 authorized shares; none outstanding - -
Common stock, $0.01 par value; 12,000 authorized shares; 5,835 issued
in 1996 and 4,466 issued in 1995 58 45
Additional paid-in capital 133,251 120,763
Accumulated deficit (72,829) (70,188)
Minimum pension liability adjustment - (2,863)
---------- ----------
60,480 47,757
Less- Treasury stock - 7 shares in 1996 and 1995 at cost (85) (85)
---------- ----------
Total shareholders' equity 60,395 47,672
---------- ----------
$ 89,817 $ 80,208
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-3
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(000's omitted, except earnings per share data)
<TABLE>
<CAPTION>
1996 1995 1994
REVENUES: ---- ---- ----
<S> <C> <C> <C>
Monitoring and service $ 35,656 $ 37,912 $ 39,747
Installation 10,537 8,155 8,425
Franchise royalties, product sales and other 4,782 4,008 3,230
---------- ---------- ----------
Total revenues 50,975 50,075 51,402
---------- ---------- ----------
COST OF SALES (exclusive of depreciation expense shown below):
Monitoring and service 18,054 18,554 18,632
Installation 5,831 3,971 3,595
Franchise royalties, product sales and other 4,239 3,737 2,658
---------- ---------- ----------
Total cost of sales 28,124 26,262 24,885
SELLING, GENERAL AND ADMINISTRATIVE 14,989 16,668 15,051
DEPRECIATION AND AMORTIZATION 10,574 10,390 9,736
NON-RECURRING CHARGE 700 2,074 -
---------- ---------- ---------
54,387 55,394 49,672
---------- ---------- ----------
Income (Loss) from operations (3,412) (5,319) 1,730
OTHER INCOME 282 247 193
INTEREST EXPENSE (net of interest income of $62 in 1996,
$276 in 1995 and $70 in 1994) (537) (721) (941)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (3,667) (5,793) 982
PROVISION (BENEFIT) FOR INCOME TAXES (1,215) (2,119) 578
---------- ---------- ----------
Income (Loss) before cumulative effect of change in
accounting principle (2,452) (3,674) 404
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAXES
OF $1,942 - 2,477 -
---------- ---------- ---------
Net Income (Loss) $ (2,452) $ (1,197) $ 404
========== ========== ==========
EARNINGS (LOSS) PER COMMON SHARE:
Earnings (Loss) before cumulative effect of change in accounting
principle $ (0.51) $ (0.82) $ 0.11
Cumulative effect of change in accounting principle - 0.55 -
---------- ----------- ---------
Net Earnings (Loss) per common share $ (0.51) $ (0.27) $ 0.11
---------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 4,827 4,459 3,580
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-4
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(000's omitted)
<TABLE>
<CAPTION>
Minimum
Additional Pension
Common Treasury Paid- In Liability Accumulated
Stock Stock Capital Adjustment Deficit Total
----- ----- ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 $ 10,330 $ (85) $ 101,978 $ (3,509) $ (69,395) $ 39,319
Net income for year - - - - 404 404
Proceeds from issuance of shares
of common stock 5,305 - 4,695 - - 10,000
Common stock issuance and other
related costs - - (1,500) - - (1,500)
Change in minimum pension
obligation (net of taxes of
$155) - - - 197 - 197
Effect of reverse stock split (14,518) - 14,518 - - -
Effect of change in par value (1,072) - 1,072 - - -
---------- ------- ---------- ---------- ---------- ---------
BALANCE, December 31, 1994 45 (85) 120,763 (3,312) (68,991) 48,420
Net loss for year - - - - (1,197) (1,197)
Change in minimum pension
obligation (net of taxes of
$307) - - - 449 - 449
---------- ------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 45 (85) 120,763 (2,863) (70,188) 47,672
Net loss for year - - - - (2,452) (2,452)
Change in minimum pension
obligation (net of taxes of
$2,295) - - - 2,863 - 2,863
Proceeds from issuance of shares
of common stock (net of
expenses of $1,815) 12 - 12,089 - - 12,101
Issuance of shares to former
stockholders of acquired company 1 - (1) - (189) (189)
Fair value of warrants issued in
connection with new Credit
Facility - - 400 - - 400
---------- ------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1996 $ 58 $ (85) $ 133,251 $ - $ (72,829) $ 60,395
========== ======= ========== ======== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-5
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(000's omitted)
<TABLE>
<CAPTION>
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES: ---- ---- ----
<S> <C> <C> <C>
Net Income (Loss) $ (2,452) $ (1,197) $ 404
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 10,574 10,390 9,736
Provision for doubtful accounts (146) 486 506
Cumulative effect of change in accounting principle - (2,477) -
Non-recurring charge 700 2,074 -
Deferred income taxes (1,465) (2,319) 484
Changes in operating assets and liabilities-
Increase in accounts receivable (30) (1,628) (423)
(Increase) decrease in inventories (837) 57 337
Decrease in prepaid expenses and other current assets 97 559 957
(Increase) decrease in other assets (1,165) - 58
(Decrease) increase in accounts payable and accrued
expenses (1,844) 1,840 (2,812)
Increase (decrease) in customer deposits 1,063 (696) 376
Decrease in deferred revenue (139) (123) (801)
Decrease in pension and other liabilities (1,019) (822) (2,658)
---------- ----------- -----------
Net cash provided by operating activities 3,337 6,144 6,164
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (9,428) (7,494) (7,361)
Purchase of subscriber contracts - - (1,840)
Acquisition of businesses, net of cash acquired (3,185) - -
Purchase of short-term investments - (6,601) (5,486)
Maturities of short-term investments 2,043 8,544 1,500
Other - (50) -
---------- ---------- ---------
Net cash used by investing activities (10,570) (5,601) (13,187)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Credit Facility 11,996 - -
Payments on Credit Facility (8,496) - -
Payments for issuance costs related to debt obligation (568) - -
Proceeds from secured note - - 3,405
Payments on secured note (6,188) (2,250) (3,681)
Payments on other long-term debt (114) (210) (449)
Proceeds from issuance of common stock 13,916 - 10,000
Transaction and other related costs (1,815) - (1,500)
(Repayments) proceeds from short-term borrowings (943) 943 -
---------- ---------- ---------
Net cash provided (used) by financing activities 7,788 (1,517) 7,775
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 555 (974) 752
CASH AND CASH EQUIVALENTS, beginning of year 435 1,409 657
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $ 990 $ 435 $ 1,409
========== ========== ==========
CASH PAYMENTS FOR:
Interest $ 636 $ 1,016 $ 992
Income taxes $ 301 $ 167 $ 155
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations $ - $ 234 $ 302
Issuance of warrants in connection with new Credit Facility $ 400 $ - $ -
Issuance of notes payable in connection with acquired businesses $ 179 $ - $ -
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
F-6
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Holmes Protection Group, Inc. (the "Company"), a Delaware corporation,
is the holding company for its subsidiaries which operate in the security alarm
business primarily in the Northeastern United States. The consolidated financial
statements incorporate all the accounts of the Company and its subsidiaries.
All intercompany transactions and balances have been eliminated. Certain
amounts for prior periods have been reclassified to conform to the 1996
presentation.
Revenue Recognition
The Company's subsidiaries design, install, service and monitor
security alarm systems, which are either sold outright ("customer owned") or
the Company retains title to the equipment ("Company owned"). Installation
revenue, and related cost under customer owned contracts, is recognized upon
completion of installation. In 1995, the Company changed its method of
accounting for installation revenue for contracts relating to Company owned
equipment, (see Note 4). In both cases, revenue from monitoring and servicing
activities is recognized on a straight-line basis over the life of the contract.
Allowance for Doubtful Accounts
Management reviews the collectibility of accounts receivables on a
regular basis. Amounts, if any, which are determined to be uncollectible are
provided for in the financial statements in the period such determination is
made.
Fixed Assets
Fixed assets are recorded at cost. The Company's equipment installed
on the subscribers' premises for Company owned systems is capitalized on the
basis of the cost of materials, labor and overhead relating to the specific
installation. The Company provides for depreciation of equipment on subscribers'
premises, central stations and vaults using the straight-line method over an
average life of 12 years. Periodically, management will review these lives to
assess their adequacy given changes in its business. If circumstances warrant a
significant change in lives, management will adjust such lives to those which
are more representative of its business environment. The Company depreciates
other equipment, including computers, utilizing the straight-line method over a
period ranging between 5 to 12 years, and automotive equipment over the
equipment's useful lives ranging from 3 to 5 years. Leasehold improvements are
depreciated utilizing the straight-line method over the asset's useful life or
the remaining lease term, whichever is shorter. Assets held under capital lease
obligations are depreciated utilizing the straight line method over the life of
the lease or asset, whichever is applicable.
Repair and maintenance costs are expensed as incurred.
F-7
<PAGE>
Subscriber Contracts
The cost of acquired subscriber contracts is amortized, based upon
average experience, on a straight-line basis over their estimated useful lives
which has been determined to be 12 years. Such life is periodically reviewed by
management in order to assess its reasonableness. When, in the opinion of the
Company's management, a permanent diminution in the value of subscriber
contracts has occurred, the amount of the diminution would be included in the
consolidated statements of operations. In order to determine whether a
permanent diminution in value has occurred, management monitors the Company's
cancellation rates. If an increasing trend in cancellation rates exists and is
recurring, and such cancellation rates indicate nonrecoverability of the assets,
a write down of assets is reflected in the consolidated statement of operations
based upon the discounted future net cash flows of the remaining subscriber
contracts or other method to determine fair market value of such assets.
Amortization expense was $2,615,000, $2,580,000 and $2,483,000 in 1996,
1995 and 1994, respectively.
Tradenames
Tradenames are amortized on a straight-line basis over a period of
forty years. Such life is periodically reviewed by management in order to
assess its adequacy. When, in the opinion of the Company's management, a
permanent diminution in the value of tradenames has occurred, the amount of the
diminution would be included in the consolidated statements of operations.
Amortization expense was $170,000 for each year presented.
Inventories
Inventories consist primarily of parts used in the installation and
repair of equipment on subscribers' premises and equipment sold to franchise
dealers. Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. Inventories as of December 31, 1996
and 1995 consist of the following (000's omitted):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Materials $ 1,749 $ 1,390
Work-in-process 1,046 533
--------- ---------
$ 2,795 $ 1,923
========= =======
</TABLE>
Cash and Cash Equivalents
Cash equivalents consist principally of short-term investments having
original maturities of 90 days or less, and are carried at cost, which
approximates market.
F-8
<PAGE>
Short-Term Investments
Short-term investments consisted primarily of short-term U.S.
Government obligations ($1,853,000 at December 31, 1995), which had an original
maturity of greater than 90 days, as well as certificates of deposit ($190,000
at December 31, 1995). All such investments matured during 1996.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". This Statement requires the classification of
debt and equity securities based on whether the securities will be held to
maturity, are considered trading securities or are available for sale.
Classification within these categories may require the securities to be
reported at their fair market value with unrealized gains and losses included
either in current earnings or reported as a separate component of shareholders'
equity, depending on the ultimate classification. The Company adopted the
provisions of this statement effective January 1, 1994, the adoption of which
had no impact on the Company's consolidated financial statements. As of
December 31, 1995, all short-term investments used as part of the Company's
investment management had been classified as held to maturity. These
investments are stated at cost which approximates market. Interest is accrued
as earned.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees." Under APB No. 25, the Company applies the intrinsic value method
of accounting and therefore does not recognize compensation expense for options
granted, because options are only granted at a price equal to market value on
the day of grant.
During 1996, Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock Based Compensation," became effective
for the Company. SFAS No. 123 prescribes the recognition of compensation
expense based on the fair value of options determined on the grant date.
However, SFAS No. 123 allows companies currently applying APB No. 25 to
continue using that method. The Company has therefore elected to continue
applying the intrinsic value method under APB No. 25. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. See Note 9
for additional discussion.
Income Taxes
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income
taxes are recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial reporting
amounts at each year-end based on the enacted tax law rates. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized.
Long-Lived Assets
Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The new standard, which was adopted in 1996,
did not have a material effect on the Company's results of operations, cash
flows or financial position.
Earnings Per Share
Earnings per common share calculations are based on the weighted
average number of shares of common stock outstanding and dilutive common stock
equivalents outstanding. All earnings per share amounts have been adjusted to
give effect of the reverse stock split (Note 8).
F-9
<PAGE>
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
2. ACQUISITIONS
In September 1996, the Company acquired an alarm monitoring company
using the pooling of interest method. In connection with this acquisition
103,805 shares were exchanged for all the outstanding stock of the acquired
company. The consolidated financial statements of the Company have not been
restated to reflect the impact of the pooling of interests as such amounts are
immaterial.
In addition, during the fourth quarter of 1996, the Company acquired
five alarm companies for an aggregate purchase price of $3,364,000. These
acquisitions are accounted for using the purchase method. Accordingly, the
purchase price was allocated based on their estimated values and the results of
operations of the acquired entities have been included in the accompanying
consolidated statements of operations from the respective dates of the
acquisition. The results of operations for these acquisitions were not
significant to the consolidated financial statements of the Company.
3. INFORMATION TECHNOLOGY SERVICES AGREEMENT
On April 4, 1995, the Company entered into an information technology
services agreement with PremiTech Corporation ("PremiTech"), a subsidiary of
Electronic Data Systems Corporation. The ten year $51 million outsourcing
agreement provided for PremiTech to consolidate and manage the Company's data
processing, communications and certain administrative functions. In connection
with the consolidation of its operations, the Company paid PremiTech $3.3
million. This amount was to compensate PremiTech for the cost of constructing
the new central station facility and certain leasehold improvements.
PremiTech is a limited partner of the Investor (see Note 8), holding a
partnership interest equivalent to approximately 5% of the Company's common
stock. Payments made to PremiTech for managing the Company's data processing,
communications and certain administrative functions amounted to $4,772,000
during 1996 and $3,073,000 during 1995. (See "Subsequent Event" Note 15).
4. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1995 the Company changed its method of accounting
for installation revenue with respect to the recording of non-refundable
payments received from customers upon the completion of the installation of
Company owned systems. Previous to this change, the Company deferred the
difference between these payments and estimated selling costs and amortized
such difference over the life of the non-cancelable customer monitoring and
service contract (generally five years). The Company believes that recognizing
revenue upon completion of the installation results in a better matching of
revenue and expenses, better reflects recorded installation revenues with the
actual level of new business activity, and conforms with the dominant practice
being followed by the security alarm industry. Excluding the cumulative effect,
this change resulted in an increase in net loss of $443,000 or $0.10 net loss
per share in 1995. The Company estimates that the effect of adopting this
accounting principle would have resulted in a decrease in the results from
operations of $470,000 or $0.13 per share in 1994.
F-10
<PAGE>
5. NON-RECURRING CHARGE
In connection with the Company entering into the information
technology services agreement (see Note 3), the Company determined that certain
existing asset and resource requirements were to be redeployed or no longer
required. After analyzing numerous alternatives regarding its consolidation,
management determined that certain existing assets and personnel resources
would no longer be necessary. Accordingly, the Company recorded a non-recurring
charge of $2,074,000 in 1995 which consisted of severance and related benefit
costs of $1,133,000 covering selected reductions in work force throughout the
Company of approximately 70 employees, all of whom were terminated, notified or
identified at December 31, 1995 and writedowns of leasehold improvements and
other fixed assets amounting to $941,000 which will no longer be utilized.
In 1996, the Company recorded a non-recurring charge of $700,000. This
charge consists of (i) $387,000 for additional severance and related benefits
resulting from delays in the Company's consolidation, (ii) $163,000 for
severance and related benefit costs associated with additional staff reductions
in connection with the restructuring of the operations and (iii) $150,000 for
the settlement of an outstanding legal matter. These employees have been
terminated or notified at December 31, 1996. At December 31, 1996, the reserve
for severance and related benefit costs was $863,000. The Company anticipates
completing its consolidation in February 1997.
6. FIXED ASSETS
Fixed assets as of December 31, 1996 and 1995 consist of the following
(000's omitted):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Subscriber installation costs $ 103,903 $ 97,558
Central station and other equipment 10,051 9,588
Leasehold improvements 5,955 4,087
Furniture and fixtures 1,038 917
Construction in progress 1,009 615
------------ ------------
121,956 112,765
Less- Accumulated depreciation (74,758) (67,534)
------------ ------------
$ 47,198 $ 45,231
============ ============
</TABLE>
Depreciation expense relating to cost of sales is $6,428,000,
$6,378,000 and $6,507,000 for 1996, 1995 and 1994, respectively.
7. DEBT
Short-Term Borrowings
Short-term borrowings of $943,000 at December 31, 1995 consisted of
borrowings from a margin account, which were secured against the value of the
securities in the Company's short term investment account. The weighted average
interest rate on the outstanding balances during 1995 was 8%.
F-11
<PAGE>
Long-Term Debt
At December 31, 1996 and 1995, the Company had the following long-term
indebtedness outstanding (000's omitted):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Credit Facility $ 3,500 $ -
Term Note - 6,188
Capital lease obligations, interest rates
ranging from 9.0% to 12.6%, maturing
through August 2000 896 981
Other 338 190
--------- ---------
4,734 7,359
Less- Current portion 364 2,497
--------- ---------
$ 4,370 $ 4,862
========= =========
</TABLE>
The maturities of long-term debt due within the next five years are as
follows (000's omitted):
1996
----
1997 $ 364
1998 460
1999 922
2000 888
2001 700
Thereafter 1,400
---------
$ 4,734
=========
In 1993 the Company negotiated a credit facility of $12 million (the
"loan agreement") with its bank. The loan agreement provided for a $9 million
five-year term note ("Term Note") and a $3 million revolving loan facility
("Credit Note"). These amounts were used in 1993 and 1994 to replace the
Company's existing short-term borrowings, to finance acquisitions and to provide
for working capital. The Term Note bore interest on the outstanding balance at
the bank's prime rate (8.5 percent at December 31, 1995) plus 2 percent.
However, the Company had a separate agreement with a bank which provided for a
minimum and a maximum interest rate on its term note of 8% and 10.25%,
respectively. The Credit Note bore interest on outstanding balances at the
bank's prime rate (8.5 percent at December 31, 1995) plus 1 percent and was
subject to renewal at the option of the bank on May 31, 1996. The outstanding
balance on the Term Note was $6,188,000 on December 31, 1995.
On August 30, 1996, the Company entered into a new credit agreement
(the "Credit Agreement") and amended and restated this agreement on December 31,
1996 with Merita Bank Ltd. and Bank of Boston Connecticut (together, the "New
Banks") pursuant to which the New Banks have agreed, subject to the terms and
conditions set forth therein, to provide a two-year $25 million revolving credit
facility to the Company, the borrowings of which automatically converts into a
five-year term loan on September 30, 1998 (the "Credit Facility").
The Credit Facility matures on September 30, 2003 with principal
payments payable in increasing quarterly installments commencing December 31,
1998. Borrowings under the Credit Facility bear interest, at the Company's
option, at an annual rate equal to either a base rate, defined as the higher of
F-12
<PAGE>
the prime rate or a specified federal funds rate, or a specified Eurodollar rate
plus, in each case, an applicable margin which varies with the Company's
leverage (as defined in the Credit Agreement). The Company is obligated to pay
a commitment fee of 1/2% per annum of any undrawn amounts. The New Banks also
received warrants to purchase an aggregate of 166,666 shares of Common Stock at
an initial exercise price of $9.75 per share (the "New Bank Warrants") and were
granted certain registration rights in connection therewith. Such warrants were
valued at approximately $400,000 and are being amortized over the life of the
Credit Facility. At December 31, 1996, the outstanding balance under the Credit
Facility was $3.5 million at an interest rate of 9.75%.
The Company is subject to certain covenants under the Credit Facility
which include, but are not limited to, ratios of total debt to recurring
monthly revenue, minimum debt service coverage, minimum net worth, maximum
capital expenditures, maximum subscriber attrition rate (as defined in the
Credit Agreement), restrictions on additional indebtedness, certain
acquisitions, dividends, investments, mergers and sales of assets, creation of
liens, guarantees and issuance of capital stock by the Company's subsidiaries.
The Credit Facility is secured by all current and future assets, and
the pledge of the Company's common stock of the Company's subsidiaries.
The carrying amounts of the Company's short-term borrowings and
long-term debt approximate their fair value. The fair value of the Company's
long-term debt is estimated based on current rates offered to the Company for
debt with similar remaining maturities.
8. COMMON STOCK
On August 13, 1992, the Company issued warrants to purchase 193,150
shares of common stock, subject to adjustment upon certain dilutive events, in
connection with a restructuring of debt. These warrants expire on August 13,
2002 and are exercisable at any time prior to expiration at an exercise price
of $10.68, subject to adjustment upon certain dilutive events.
On August 1, 1994, the Company sold to HP Partners L.P. (the
"Investor") for $10,000,000 (i) 1,515,886 shares of common stock and (ii)
warrants to purchase 685,714 shares of common stock at an exercise price of
$4.58 per share. The warrants are exercisable at any time prior to their
expiration date on August 1, 2004 and are subject to adjustment upon certain
dilutive events.
On March 27, 1995, the Company effected a reverse stock split pursuant
to which one share of common stock, $.01 par value, was exchanged for every 14
shares of common stock, $.25 par value, then issued or outstanding. In addition,
the Company reduced its authorized shares of preferred and common stock from
10,000,000 and 100,000,000 shares to 1,000,000 and 12,000,000 shares,
respectively. The share information included in the accompanying financial
statements reflect the effect of the reverse stock split effected March 27,
1995.
On September 25, 1996, the Company issued 1,265,000 shares of Common
Stock at $11.00 per share, par value $0.01 per share, in a public offering for
net proceeds of approximately $12.1 million.
At December 31, 1996, the Company has 2,196,861 shares of common stock
reserved for share option plans and 1,045,530 for warrants.
F-13
<PAGE>
Changes in common stock outstanding are as follows (000's omitted):
<TABLE>
<CAPTION>
Common Treasury
Stock Stock
------ -------
<S> <C> <C>
January 1, 1994 2,951 7
Additions - Sales of common stock 1,515 -
----------- --------
December 31, 1994 4,466 7
Additions - -
----------- --------
December 31, 1995 4,466 7
Additions - Sales of common stock 1,265 -
Additions - Common stock issued for an
acquisition 104 -
----------- --------
December 31,1996 5,835 7
=========== =========
</TABLE>
9. STOCK OPTIONS
The Company, with the approval of its stockholders, adopted the 1992
Senior Executives' Option Plan (the "Executives Plan") and the 1992 Directors'
Option Plan (the "Directors Plan"). The Executives Plan and the Directors Plan
(collectively, the "Option Plans") took effect on August 13, 1992. On such date,
one-time grants of options were made to certain current and former directors
under the Directors Plan. At December 31, 1996, options to purchase 165,429
shares of common stock were outstanding under the Directors Plan, of which no
options were exercisable. Under the Directors Plan, all options vested on
January 1, 1993.
On July 29, 1994 (the "Effective Date"), the Company's stockholders
approved the amendment and restatement of the Executives Plan, which amendment
and restatement (i) replaced all options outstanding under the Plan with a like
number of options at a reduced exercise price of $7.28 per share, (ii)
commenced a new vesting period for such options, (iii) reduced the "hurdle rate"
relating to the price at which the shares must trade prior to becoming
exercisable and (iv) modified the provisions of the Plan to satisfy the
requirements of Rule 16b-3 of the Securities Exchange Act of 1934. Under the
Executives Plan, initial option grants to certain designated senior executives
made on the Effective Date will become exercisable as to thirty percent (30%)
of the option shares on the first anniversary of the Effective Date; twenty
percent (20%) of the option shares on the second and third anniversaries of the
Effective Date, and fifteen percent (15%) of the option shares on each of the
fourth and fifth anniversaries of the Effective Date. At December 31, 1996,
options to purchase 31,432 shares of common stock were outstanding under the
Executives Plan, of which no options were exercisable.
No options granted under the Executives Plan or the Directors Plan will
become exercisable until the price of the shares subject thereto reaches or has
reached a trading price of $13.30 and $24.45, respectively, and remains at or
above such price for 30 consecutive trading days. The options will expire ten
years after the date of grant. No further stock options or other awards shall
be granted under the Executives Plan and the Directors Plan. All stock options
outstanding under the Executives Plan and the Directors Plan shall continue to
be governed by the terms of the respective plans, and the relevant stock option
agreement pertaining to each such stock option.
During 1995, the Company adopted the 1996 Stock Incentive Plan (the
"Plan"), which permits the issuance of incentive stock options, non qualified
stock options and restricted stock. The Plan provides for the granting of up to
2,000,000 shares of the Company's common stock. Pursuant to the terms and
conditions of the Plan, 300,000 and 702,500 options to purchase common stock
were granted during 1995 and 1996, respectively, at exercise prices ranging
F-14
<PAGE>
from $5.50 to $12.00 per share. At December 31, 1996, options to purchase
465,500 shares of common stock were exercisable. Each option issued under the
Plan vests at a rate and expires on a date designated by the Compensation
Committee of the Board of Directors.
The Company accounts for awards granted to employees and directors
under APB No. 25, under which no compensation cost has been recognized for
stock options granted. Had compensation cost for these stock options been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C>
Net loss: As reported $ (2,452,000) $ (1,197,000)
Pro forma (2,711,000) (1,596,000)
Loss per share: As reported (0.51) (0.27)
Pro forma (0.56) (0.36)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts as additional awards in future years are
anticipated.
Option activity for the three years ended December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise
Number of Shares Price
---------------- -----
<S> <C> <C>
Options outstanding, January 1, 1994 247,928 $ 12.54
Granted 73,930 $ 7.28
Canceled (29,515) $ 13.97
Exercised - -
-------------- -----------
Options outstanding, December 31, 1994 292,343 $ 11.07
Granted 308,854 $ 5.57
Canceled (56,672) $ 7.28
Exercised - -
-------------- -----------
Options outstanding, December 31, 1995 544,525 $ 8.34
Granted 702,500 $ 9.00
Canceled (47,664) $ 7.28
Exercised - -
-------------- -----------
Options outstanding, December 31, 1996 1,199,361 $ 8.77
============== ===========
</TABLE>
There were 977,500 options available for future grant at December 31,
1996.
The weighted average fair value of options granted is $3.58 and $2.18
for the years ended December 31, 1996 and 1995, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
F-15
<PAGE>
grants in 1996 and 1995: risk-free interest rate of 5.72%; expected life of 4
years; expected volatility of 50% and expected dividend yield of 0%.
The following table summarized information with respect to stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted
Number of Average Weighted
Options Remaining Weighted Number of Options Average
Range of Outstanding at Contractual Average Exercisable at Exercise
Exercise Prices December 31, 1996 Life Exercise Price December 31, 1996 Price
--------------- ----------------- ---- -------------- ----------------- -----
<S> <C> <C> <C> <C> <C>
$5.50 - $8.25 629,432 6.0 $ 6.33 401,000 $ 5.76
$8.26 -$12.39 404,500 9.0 $ 10.44 64,500 10.40
$12.40 -$13.97 165,429 5.0 $ 13.97 - -
$5.50 -$13.97 1,199,361 6.9 $ 8.77 465,500 6.40
</TABLE>
10. INCOME TAXES
Income tax provision (benefit) include current and deferred taxes as
follows (000's omitted):
<TABLE>
<CAPTION>
For the Years Ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ -
State 250 200 94
-------- ------- --------
250 200 94
-------- ------- --------
Deferred:
Federal (1,125) (1,764) 301
State (340) (555) 183
-------- ------- --------
(1,465) (2,319) 484
-------- ------- --------
$ (1,215) $ (2,119) $ 578
======== ========= =========
</TABLE>
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to a
significant portion of the deferred tax liability and deferred tax asset and
their approximate tax effects are as follows at December 31 (000's omitted):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current deferred tax asset:
Accrued expenses $ 119 $ 414
Allowance for doubtful accounts 395 589
Other (48) 145
---------- ----------
Net current deferred tax asset 466 1,148
Noncurrent deferred tax liability:
Fixed assets (12,017) (11,867)
Subscriber contracts (5,645) (4,990)
Net operating loss carryforward 9,569 7,418
Prepaid pension (2,176) -
Accrued expenses and other (1,068) (858)
---------- ----------
Net noncurrent deferred tax liability (11,337) (10,297)
---------- ----------
Net deferred tax liability $ (10,871) $ (9,149)
========== ==========
</TABLE>
F-16
<PAGE>
The tax expense allocated to shareholders' equity related to the change
in the minimum pension obligation was $2,295,000, $307,000 and $155,000 in 1996,
1995 and 1994, respectively. Reconciliation of tax at the U.S. statutory income
tax rate of 34% to the provision (benefit) for income taxes was as follows
(000's omitted):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate $(1,247) $ (1,970) $ 334
Nondeductible amortization 58 58 58
State income taxes (59) (234) 163
Other 33 27 23
------- --------- ---------
Tax provision (benefit) $(1,215) $ (2,119) $ 578
======= ========= =========
</TABLE>
The Company has net operating loss carryforwards for tax purposes at
December 31, 1996 of approximately $22,000,000 which expire through 2011, and is
limited as to its utilization in any one year due to a previous change in
ownership of the Company. Future changes in ownership, as defined by Section 382
of the Internal Revenue Code, could limit the amount of net operating loss
carryforwards in any one year.
11. PENSION PLANS
The Company covers approximately 15 percent of its employees under two
defined benefit pension plans which were frozen at June 30, 1987. The benefits
under these plans are based upon compensation levels and length of service. The
pension plans are being funded in accordance with the Employee Retirement Income
Security Act of 1974.
The components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Components:
Service cost - benefits earned during period $ 150 $ 150
Interest cost on projected benefit obligation 1,552 1,623
Actual return on assets (2,551) (3,174)
Net amortization and deferral 973 1,795
---------- ----------
Net periodic pension cost $ 124 $ 394
========== ==========
Assumptions:
Discount rate for benefit obligations 7.5% 7.5%
Expected long-term rate of return on assets 8.5% 8.5%
</TABLE>
F-17
<PAGE>
The following table sets forth the funded status of the plans at September 30,
1996 and 1995 and amounts recognized in the Company's consolidated balance
sheets at December 31, 1996 and 1995, respectively (000's omitted):
<TABLE>
<CAPTION>
1996 1995
-------------- ----------------------------
Over Over Under
Funded Funded Funded
Plans Plan Plan
----------- ----------- -----------
<S> <C> <C> <C>
Vested benefits $ (20,917) $ (1,601) $ (19,838)
=========== =========== ===========
Accumulated benefit obligation $ (20,970) $ (1,603) $ (19,892)
----------- ----------- -----------
Projected benefit obligation (20,970) (1,603) (19,892)
Plan assets at fair value 21,964 1,645 18,871
----------- ----------- -----------
Plan assets in excess of (less than)
projected benefit obligation 994 42 (1,021)
---------- ----------- -----------
Unrecognized net (gain) loss 4,472 602 5,164
Unrecognized prior service cost - - -
Unrecognized net transition obligation (asset) (2) (10) (5)
Fourth quarter contribution 146 18 203
Adjustment required to recognize minimum liability - - (5,159)
----------- ----------- -----------
Prepaid (accrued) pension cost recognized
in the balance sheet $ 5,610 $ 652 $ (818)
=========== =========== ===========
</TABLE>
Pension plan assets are primarily invested in corporate common stocks
and bonds and U.S. government securities.
12. SUPPLEMENTARY FINANCIAL STATEMENT DATA
<TABLE>
<CAPTION>
1996 1995
---- ----
(000's omitted)
<S> <C> <C>
Prepaid expenses and other:
Deferred tax assets $ 466 $ 1,148
Prepaid pension cost 250 652
Other 1,155 99
--------- ---------
$ 1,871 $ 1,899
========= =========
Other Assets:
Prepaid pension cost $ 5,360 $ -
Other 2,557 552
--------- ---------
$ 7,917 $ 552
========= =========
Accounts payable and accrued expenses:
Accounts payable $ 4,090 $ 3,975
Accrued pension 162 740
Accrued severance 792 1,020
Accrued expenses 2,246 2,954
--------- ---------
$ 7,290 $ 8,689
========= =========
</TABLE>
F-18
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
The Company conducts its operations principally from leased facilities
and has entered into capital lease arrangements for certain fixed assets.
Future minimum lease payments with respect to leases in effect at December 31,
1996 are as follows (000's omitted):
Capital Operating
------- ---------
1997 $ 308 $ 1,497
1998 296 1,380
1999 294 1,147
2000 146 767
2001 - 644
Thereafter - 1,016
----- --------
1,044 $ 6,451
Less-Amount representing interest 148 =========
-----
$ 896
======
Rental expense for the years ended December 31, 1996, 1995 and 1994
was approximately $1,467,000, $1,084,000 and $1,166,000 respectively.
Certain subsidiaries of the Company are defendants or co-defendants in
various lawsuits, some of which claim damages in substantial amounts. Management
of the Company is of the opinion that the ultimate resolution of all these
claims is not likely to have a material adverse effect on the consolidated
financial condition of the Company, future results of operations or liquidity.
The Company has entered into employment agreements with certain of its
employees. Termination of employment for reasons other than (i) "Cause" (ii)
such employee's "Disability" (each defined in the employment agreements), (iii)
the employee's death, incompetence or bankruptcy or (iv) the expiration of the
term of the employment agreement will obligate the Company to pay the employee's
salary for a period of twelve months and maintain certain benefits. The amount
of this obligation would be approximately $595,000. In addition, the employment
agreements grant these employees the right to receive their respective salaries
and certain other benefits for a period of twelve months if the Company
terminates any of such employees within twelve months of a change in control of
the Company (as defined). Upon a change in control, the salary obligation would
result in an aggregate payment of approximately $595,000 based upon such
employee's 1996 salary.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for
the years ended December 31, 1996 and 1995:
Three Months Ended
-----------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(000's omitted, except per share data)
1996:
Revenue $ 12,292 $ 12,191 $ 13,037 $ 13,455
Gross profit 5,863 5,811 5,797 5,380
Net income (loss) (253) (483) (712) (1,004)
------- ------- ------ -------
Earnings (loss) per share $ (0.06) $ (0.11) $(0.15) $ (0.17)
======= ======= ====== =======
F-19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
March 31* June 30* September 30* December 31
--------- -------- ------------- -----------
(000's omitted, except per share data)
1995:
<S> <C> <C> <C> <C>
Revenue $ 12,584 $ 12,539 $ 12,569 $ 12,383
Gross profit 6,405 6,155 5,787 5,466
Income (loss) before cumulative
effect of accounting change 5 (645) (1,040) (1,994)
Net income (loss) 2,482 (645) (1,040) (1,994)
----------- ------------ -------------- --------------
Earnings (loss) per share before
cumulative effect of accounting
change $ - $ (0.14) $ (0.23) $ (0.45)
Earnings (loss) per share $ 0.55 $ (0.14) $ (0.23) $ (0.45)
========== =========== =========== ==========
</TABLE>
(*) First, second and third quarter 1995 results have been restated for the
change in accounting principle (see Note 4).
15. SUBSEQUENT EVENT
On March 12, 1997, the Company announced that it had reached an
agreement in principle (the "Agreement") with PremiTech to terminate its
outsourcing agreement effective April 1, 1997. The recent changes in the
Company's growth strategy and the sale by PremiTech of its alarm monitoring
business in late 1995 led both parties to re-evaluate the outsourcing agreement.
Pursuant to the Agreement, the Company will be obligated to pay $650,000 in
cash and execute a noninterest bearing promissory note ("Note") in the amount
of $1,000,000 payable to EDS in twenty quarterly installments of $50,000,
beginning January 1, 1998. The Note will be secured by an irrevocable letter of
credit for $1,000,000. In addition, the Company has agreed to lease certain
computer equipment for a three year term with an option to purchase the
equipment at the end of the lease for the fair market value. The Company expects
to record a pretax charge of approximately $1,500,000.
F-20
<PAGE>
HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(000's omitted)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Charged to Balance at
Description Period Expenses Other Accounts (A) Deductions End of Period
----------- ------ -------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
December 31-
1996 $ 1,340 $ (146) $ - $ (221) $ 973
1995 1,315 486 - (461) 1,340
1994 1,240 506 - (431) 1,315
</TABLE>
(A) Deductions represent the net effect of write-offs and recoveries.
S-1
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibits Page No.
- ---------- ----------------------- --------
3.1 Restated Certificate of Incorporation of the Company, as
amended(*)
3.2 Amended and Restated By-Laws of the Company(5)
4.1 Specimen of Common Stock Certificate(5)
4.3 Investor Warrant(2)
4.4 Form of Institution Warrant(2)
4.5 New Bank Warrants(11)
10.1 Investment Agreement between HP Partners L.P. ("Investor") and
the Company, dated as of June 29, 1994(1)
10.2 Registration Rights Agreement between Investor and the Company,
dated August 1, 1994(2)
10.3 Exchange Agreement, dated as of December 18, 1991, among the
Company and a number of insurance companies and other
institutions listed therein ("Institutions")(1)
10.4 First Amendment to the Exchange Agreement, dated January 31,
1992(1)
10.5 Second Amendment to the Exchange Agreement, dated May 24,
1992(1)
10.6 Third Amendment to the Exchange Agreement, dated June 30,
1992(1)
10.7 Amended and Restated Senior Executives Option Plan(2)
10.8 Master Lease Agreement No. 12223, dated December 18, 1992,
between Data General Corporation and the Company(1)
10.9 Letter Agreement, dated July 12, 1995, and Lease Schedule No.
006, dated July 26, 1995, to Master Lease Agreement No. 12223
between Data General Corporation and the Company(7)
10.10 Letter Agreement, dated September 3, 1996, and Revised Lease
Schedule No. 006 to Master Lease Agreement 12223 between Data
General Corporation and the Company(11)
10.11 Software License and Sublicense Agreement, dated April 4, 1995,
among Monitoring Automation Systems, PremiTech Corporation and
the Company(6)
10.12 Employment Agreement between the Company and George V. Flagg,
dated January 8, 1996(9)
10.13 Employment Agreement between the Company and James L. Boehme,
dated January 8, 1996(9)
10.13(a) Amendment to Employment Agreement between the Company and James
L. Boehme, dated June 5, 1996(10)
10.14 Employment Agreement between the Company and Lawrence R. Irving,
dated May 13, 1996(10)
10.15 Lease Agreement, dated as of July 1, 1995, between Holmes
Protection of New York Inc. ("HPNY") and Forty-Seventh-Fifth
Company; Lease Guaranty by the Company, dated as of July 1,
1995(7)
10.16(a) Lease Agreement, dated March 2, 1987, between HPNY and Ninth
Avenue Associates (including First Amendment, dated August 9,
1988 thereto)(1)
10.16(b) Second Amendment to Lease Agreement, dated October 7, 1987(2)
10.16(c) Third Amendment to Lease Agreement, dated October 27, 1994(3)
10.16(d) Fourth Amendment to Lease Agreement, dated November 13, 1995(9)
10.17 Lease Agreement, dated June 1992, among Holmes Protection of
Long Island, Inc., Holmes Protection Group, Inc. and J&B
Properties Ltd.(1)
10.18 Lease Agreement, dated January 31, 1974, between Holmes
Protection of Philadelphia, Inc. and George Shapiro (including
amendments thereto)(1)
10.19 Form of Registration Rights Agreement with Institutions(2)
<PAGE>
10.20 Agreement For Information Technology Services, dated as of April
4, 1995, between PremiTech Corporation (formerly Premisys
Corporation) and the Company ("Outsourcing Agreement")(7)
10.21 First Amendment to Outsourcing Agreement, dated as of August 1,
1995(8)
10.22 Second Amendment to Outsourcing Agreement, dated as of December
14, 1995(9
10.23 Third Amendment to Outsourcing Agreement, dated as of January
19, 1996(9)
10.24 Parent Corporation Guarantee, dated April 4, 1995, among
Electronic Data Systems Corporation, PremiTech Corporation and
the Company(6)
10.25 Credit Agreement, dated as of August 30, 1996, among Merita Bank
Ltd., Bank of Boston Connecticut (together, the "New Banks"),
the Company and Holmes Holding Company, Inc. (the "New Credit
Agreement")(11)
10.25(a) The New Credit Agreement, as amended and restated(*)
10.26 Registration Rights Agreement, dated as of August 30, 1996,
between the Company and the New Banks(11)
18.1 Letter from Arthur Andersen LLP, dated March 20, 1996, regarding
change in accounting principle(9)
21.1 Subsidiaries of the Company(*)
27.1 Financial Data Schedule(*)
99.1 Definitive Proxy Statement(12)
--------
(*) Filed herewith.
(**) To be filed by amendment.
(1) Incorporated by reference to the Company's Registration Statement on
Form 10, dated July 11, 1994.
(2) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form 10/A, dated October 13, 1994.
(3) Incorporated by reference to Amendment No. 2 to the Company's
Registration Statement on Form 10/A, dated December 13, 1994.
(4) Incorporated by reference to Amendment No. 3 to the Company's
Registration Statement on Form 10/A, dated January 25, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995.
(8) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(10) Incorporated by reference to the Company's Registration Statement on
Form S-1, dated July 26, 1996.
(11) Incorporated by reference to Amendment No. 1 to the Company's
Registration Statement on Form S-1, dated September 25, 1996.
(12) To be incorporated by reference.
<PAGE>
EXHIBIT 3.1
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 02:00 PM 12/24/1996
960383107 - 0947195
RESTATED CERTIFICATE OF INCORPORATION
OF
HOLMES PROTECTION GROUP, INC.
Pursuant to Sections 242 and 245 of the
General Corporation Law of the State of Delaware
------------------------------------------------
The following Restated Certificate of Incorporation of Holmes Protection
Group, Inc., originally incorporated under the name Security Centres USA Inc. by
original Certificate of Incorporation filed October 29, 1982, was duly proposed
by its directors and adopted by its stockholders in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of the State
of Delaware, and hereby amends and restates the Restated Certificate of
Incorporation of the Corporation.
FIRST: Name. The name of this corporation (the "Corporation") is Holmes
Protection Group, Inc.
SECOND: Delaware Office and Registered Agent. The address of the
registered office of the Corporation in the State of Delaware is 9 East
Loockerman Street, in the City of Dover, County of Kent. The name of its
registered agent for service of process at such address is National Corporate
Research, Ltd.
THIRD: Purpose. The purpose of the Corporation is to engage in any
lawful act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware. The Corporation shall possess and
exercise all the powers and privileges granted by the General Corporation Law of
the State of Delaware, by any other law, or by this Restated Certificate of
Incorporation, together with any powers incidental thereto as far as such
<PAGE>
powers and privileges are necessary or convenient to the conduct, promotion or
attainment of the purpose of the Corporation.
FOURTH: Authorized Shares.
1. General. The total number of shares of capital stock which the
Corporation shall have the authority to issue is 13,000,000 shares, consisting
of 12,000,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), and 1,000,000 shares of preferred stock, par value $1.00 per share (the
"Preferred Stock").
2. Preferred Stock.
The Preferred Stock may be issued from time to time in one or more
series of any number of shares, provided that the aggregate number of shares
issued and not canceled of any and all such series shall not exceed the total
number of shares of Preferred Stock authorized herein.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock as Preferred Stock of any series and,
in connection with the creation of each such series, to fix by resolution or
resolutions providing for the issue of shares thereof, the designations, powers,
preferences and rights, and the qualifications, limitations or restrictions of
such series to the full extent now or hereafter permitted by this Restated
Certificate of Incorporation and the laws of the State of Delaware, with respect
to the matters set forth in the following paragraphs (a) to (e) inclusive, but
subject to such exceptions and limitations as are set forth therein:
(a) the liquidation value to which each share shall be entitled
and the preference, if any, in relation to any other series or class of
securities of the Corporation;
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(b) whether such shares shall be convertible into Common Stock,
and, if so, the ratio of conversion expressed in whole and/or fractional shares
of Common Stock together with terms and conditions relating to conversion;
(c) voting rights may be conferred upon such shares only with the
prior consent of three-quarters of the entire Board of Directors and the holders
of a majority of the shares of Common Stock then outstanding;
(d) whether such shares may be called in and retired or be
otherwise subject to redemption (including redemption through the operation of
a sinking fund, purchase fund or retirement fund) and, if so, the terms and
conditions thereof; and
(e) the rights of stockholders to receive dividends or other
distributions (i) payable out of earnings attributable to an acquired company on
shares issued as all or part of the consideration for the assets or shares of
such acquired company; and/or (ii) payable out of increases in earnings above
certain specified target levels (not less than the level existing at the time
the target level is fixed) on shares issued to officers and/or employees as
bonus or incentive compensation; and/or (iii) upon complete dissolution of the
Corporation pursuant to subparagraph (a) above; and/or (iv) upon conversion of
the shares pursuant to subparagraph (b) above; and/or (v) upon redemption of the
shares pursuant to subparagraph (d) above. Except as set forth in the previous
sentence of this subparagraph (e), no rights to receive dividends, whether in
cash, stock or other property, or to receive a distribution of any nature
whatsoever of any assets or shares of the Corporation shall be conferred upon
such shares without the prior consent of the holders of a majority of the shares
of Common Stock then outstanding.
In addition to and subject to the foregoing, the Board of Directors may,
in its discretion, assign to such Preferred Stock in connection with each issue
thereof such other terms, conditions, restrictions, limitations, rights and
privileges as it may deem appropriate.
3. Common Stock.
(a) Each share of Common Stock shall entitle the holder thereof to
one vote.
(b) Dividends. After all accrued dividends on the Preferred Stock
then outstanding shall have been paid, or funds therefor set aside, and subject
to all other rights of the
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Preferred Stock, dividends may be paid on the Common Stock, as and when
declared by the Board of Directors, out of any funds legally available for the
payment of such dividends.
(c) Liquidation Dissolution or Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, all assets and funds remaining after the payment to the holders of
the Preferred Stock of the full amount to which they are entitled shall be
divided and distributed among the holders of the Common Stock according to their
respective shares.
FIFTH: Board of Directors.
1. Number. The business and affairs of the Corporation shall be managed
by or under the direction of a Board of Directors. The number of directors shall
be fixed from time to time by, or in the manner provided in, the By-Laws.
2. Classified Board. The Board of Directors shall be divided into three
classes which are hereby designated Class A, Class B and Class C. The number of
directors in each class shall be fixed from time to time by, or in the manner
provided in, the By-Laws. The term of office of the initial Class A directors
shall expire at the next annual meeting of stockholders after the date of the
1994 Annual Meeting of Stockholders (the "1994 Annual Meeting Date"); that of
the initial Class B directors at the second annual meeting of stockholders after
the 1994 Annual Meeting Date; and that of the Initial Class C directors at the
third annual meeting of stockholders after the 1994 Annual Meeting Date. At each
annual meeting of stockholders after the 1994 Annual Meeting Date, the
stockholders shall elect directors of the class of directors whose term shall
than expire, which directors shall be elected to hold office for a term expiring
at the third succeeding annual meeting and each director so elected shall hold
office until his successor is elected and qualified, or until his earlier
resignation or removal.
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SIXTH: Amendment of By-Laws. The Board of Directors is authorized to
adopt, amend or repeal the By-Laws of the Corporation, except as and to the
extent provided in the By-Laws or in this Restated Certificate of Incorporation.
Any By-Laws made by the Board of Directors under the powers conferred hereby may
be amended or repealed by the Board of Directors or by the stockholders.
Notwithstanding the foregoing and anything contained in this Restated
Certificate of Incorporation to the contrary, Section 1 (regarding the number
and election of directors) and Section 12 (regarding the removal of directors)
of Article III of the By-Laws shall not be amended or repealed, and no provision
inconsistent therewith shall be adopted, without either (i) the affirmative vote
of the holders of record of outstanding shares representing three-quarters of
the voting power of the then outstanding Common Stock, voting at a duly called
annual or special meeting of stockholders, with such prior notice as is required
by the By-Laws, or (ii) the affirmative vote of three-quarters of the total
number of directors then in office.
SEVENTH: Reservation of Right to Amend. The Corporation reserves the
right to amend or repeal any provision contained in this Restated Certificate of
Incorporation, from time to time at any time, in the manner now or hereafter
prescribed by the law of the State of Delaware, and all rights conferred upon
stockholders, directors and officers herein are granted subject to this
reservation. Notwithstanding any other provision of this Restated Certificate of
Incorporation or the By-Laws (and in addition to any other vote that may be
required by applicable law, by this Restated Certificate of Incorporation or by
the By-Laws), this Article Seventh or any of the Articles Fifth, Eighth, Ninth
or Tenth of this Restated Certificate of Incorporation shall not be amended or
repealed, and no provision inconsistent therewith shall be adopted, without
either (i) the affirmative vote of the holders of record of outstanding shares
representing at least three-quarters of the voting power of the then outstanding
Common Stock,
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voting at a duly called annual or special meeting of the stockholders, with
such prior notice as is required by the By-Laws, or (ii) the affirmative vote
of three-quarters of the total number of directors then in office.
EIGHTH: Stockholder Action. Any action required or permitted to be taken
by stockholders may be effected only at a duly called annual or special meeting
of stockholders with prior notice and with a vote, and may not be effected by
consent in writing.
NINTH: Director Liability. Anything to the contrary in this Restated
Certificate of Incorporation notwithstanding, no director shall be liable
personally to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, provided however, that nothing in this
paragraph shall eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, (iv) for any transaction from which
such director derived an improper personal benefit or (v) for any act or
omission occurring prior to the date on which this provision was first set forth
as part of the certificate of incorporation of the Corporation.
TENTH: Indemnification.
1. Power to Indemnify in Actions, Suits or Proceedings Other Than Those
by or in the Right of the Corporation. Subject to Section 3 of this Article
Tenth, the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than action by or in the right of the Corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation, or
is or was
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serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
2. Power to Indemnify in Action, Suits or Proceedings by or in the Right
of the Corporation. Subject to Section 3 of this Article Tenth, the Corporation
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer, employee or agent of the Corporation, or is or
was a director, officer, employee or agent of the Corporation serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, join venture, trust, employee benefit plan or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation; except that no
indemnification shall be made in
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respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses which the Court of Chancery or such
other court shall deem proper.
3. Authorization of Indemnification. Any indemnification under this
Article Tenth (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in Section 1 or Section
2 of this Article Tenth, as the case may be. Such determination shall be made
(i) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (ii) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (iii) by the stockholders. To the extent, however, that a director,
officer, employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding described in Section 1
or Section 2 of this Article Tenth, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith, without the
necessity of authorization in the specific case.
4. Good Faith Defined. For purposes of any determination under Section 3
of this Article Tenth, a person shall be deemed to have acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Corporation, or, with
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respect to any criminal action or proceeding, to have had no reasonable cause to
believe his conduct was unlawful, if his action is based on the records or books
of account of the Corporation or another enterprise, or on information supplied
to him by the officers of the Corporation or another enterprise in the course of
their duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section 4
shall mean any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise of which such person is or was serving
at the request of the Corporation as a director, officer, employee or agent. The
provisions of this Section 4 shall not be deemed to be exclusive or to limit in
any way the circumstances in which a person may be deemed to have met the
applicable standard of conduct set forth in Sections 1 or 2 of this Article
Tenth, as the case may be.
5. Indemnification by a Court. Notwithstanding any contrary
determination in the specific case under Section 3 of this Article Tenth, and
notwithstanding the absence of any determination thereunder, any director,
officer, employee or agent may apply to any court of competent jurisdiction in
the State of Delaware for indemnification to the extent otherwise permissible
under Sections 1 and 2 of this Article Tenth. The basis of such indemnification
by a court shall be a determination by such court that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standards of conduct set forth in Section 1 or 2 of this
Article Tenth, as the case may be. Neither a contrary determination in the
specific case under Section 3 of this Article Tenth nor the absence of any
determination thereunder shall be a defense to such application or create a
presumption that the
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director, officer, employee or agent seeking indemnification has not met any
applicable standard of conduct. Notice of any application for indemnification
pursuant to this Section 5 shall be given to the Corporation promptly upon the
filing of such application. If successful, in whole or in part, the director,
officer, employee or agent seeking indemnification shall also be entitled to be
paid the expenses of prosecuting such application.
6. Expenses Payable in Advance. Expenses incurred by a director,
officer, employee or agent in defending a threatened or pending action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director, officer, employee or agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article Tenth.
7. Nonexclusivity of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by or granted pursuant to
this Article Tenth shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any statute, certificate of incorporation, by-law, agreement, contract, vote of
stockholders or disinterested directors or pursuant to the direction (howsoever
embodied) of any court of competent jurisdiction or otherwise, both as to action
in his official capacity and as to action in another capacity while holding such
office.
8. Insurance. The Corporation shall maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or any person serving as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, or other enterprise at
the request of the Corporation against any expense, liability, or loss incurred
by the Corporation or by such persons in their capacity as directors, officers,
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employees or agents of the Corporation or such other enterprise or arising out
of their status as such, whether or not the Corporation would have the power to
indemnify such person against such expense, liability, or loss under the
Delaware General Corporation Law.
9. Certain Definitions. For purposes of this Article Tenth, references
to the "Corporation" shall include any direct or indirect subsidiary of the
Corporation and, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees and
agents, so that any person who is or was a director, officer, employee or agent
of such constituent corporation, or is or was a director, officer, employee or
agent of such constituent corporation serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
shall stand in the same position under the provisions of this Article Tenth with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existences had continued. For
purposes of this Article Tenth, references to "agents" shall refer exclusively
to agents who are natural persons; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
services as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves service by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed
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to have acted in a manner "not opposed to the best interests of the
Corporation" as referred to in this Article Tenth.
10. Survival of Indemnification and Advancement of Expenses. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article Tenth shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such person.
11. Limitation on Indemnification. Notwithstanding anything contained in
this Article Tenth to the contrary, except for proceedings to enforce rights to
indemnification (which shall be governed by Section 5 hereof), the Corporation
shall not be obligated to indemnify or advance expenses for any director,
officer, employee or agent in connection with a proceeding (or part thereof)
initiated by such person unless such proceeding (or part thereof) was authorized
or consented to by the Board of Directors of the Corporation.
12. Set-Off. The Corporation's obligation, if any, to indemnify any
person who was or is serving as a director, officer, employee or agent of any
direct or indirect subsidiary of the Corporation or, at the request of the
Corporation, of any other corporation or of a partnership, joint venture, trust
or other enterprise shall be reduced by any amount such person may collect as
indemnification from such other corporation, partnership, joint venture, trust
or other enterprise.
13. Effect of Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article Tenth shall not adversely affect any right
or protection hereunder of any person in respect of any act or omission
occurring prior to the time of such repeal or modification.
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IN WITNESS WHEREOF, Holmes Protection Group, Inc. has caused its
corporate seal to be hereunto affixed and this Restated Certificate of
Incorporation to be signed by its President and attested by its Assistant
Secretary this 7th day of November, 1996.
HOLMES PROTECTION GROUP, INC.
Attest:
By: /s/ Glenn C. Riker By: /s/ George V. Flagg
---------------------- -----------------------
Assistant Secretary President
Glenn C. Riker George V. Flagg
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AMENDED AND RESTATED CREDIT AGREEMENT
by and among
MERITA BANK LTD,
a Finnish banking corporation,
acting through its New York branch
and
BANK OF BOSTON CONNECTICUT,
a Connecticut savings bank
Lenders
- and -
HOLMES PROTECTION, INC.,
a New York corporation
Borrower
- and -
HOLMES PROTECTION GROUP, INC.,
a Delaware corporation
Parent
- and -
MERITA BANK LTD,
a Finnish banking corporation,
acting through its New York branch
Agent Bank
December 31, 1996
<PAGE>
H&H Draft
1/10/97
TABLE OF CONTENTS
Page
SECTION 1. CONSTRUCTION AND DEFINITION OF TERMS...............................1
SECTION 2. LOANS..............................................................15
2.1 Loans...............................................................15
2.3 Fees................................................................17
2.6 Voluntary and Mandatory Prepayments; Commitment Reductions..........24
2.9 Payments Among the Agent Bank and the Lenders.......................26
SECTION 3. LETTERS OF CREDIT..................................................28
3.2 Letter of Credit Request............................................28
3.5 Fulfillment of Reimbursement Obligations............................30
SECTION 4. CONDITIONS PRECEDENT...............................................33
SECTION 5. REPRESENTATIONS AND WARRANTIES.....................................37
5.1 Corporate Status....................................................38
5.2 Subsidiaries........................................................38
5.7 Capitalization......................................................41
5.9 Conduct of Business; Absence of Material Adverse Change.............42
5.11 Accounts Receivable................................................43
5.12 Debt Instruments...................................................43
5.13 Bank Accounts......................................................43
5.14 Books and Records..................................................43
5.33 Solvency...........................................................48
SECTION 6. AFFIRMATIVE COVENANTS..............................................49
6.4 Payment of Obligations..............................................50
6.9 ERISA...............................................................51
6.10 Books and Records..................................................51
6.11 Examination Rights.................................................51
6.12 Financial Data.....................................................52
6.13 Environmental Matters..............................................57
6.14 Insurance..........................................................59
SECTION 7 . NEGATIVE COVENANTS................................................64
7.1 Indebtedness........................................................64
7.13 Restricted Leases: Sharing of Facilities...........................69
7.19 Financial Covenants................................................72
SECTION 8. EVENTS OF DEFAULT..................................................74
8.1 Event of Default....................................................74
8.2 Acceleration; Remedies..............................................77
SECTION 9. AGENCY.............................................................79
SECTION 10. MISCELLANEOUS.....................................................82
10.1 Notices............................................................82
H&H Draft
1/10/97
<PAGE>
H&H Draft
1/10/97
10.3 Stamp or Other Tax.................................................85
10.12 Counterparts......................................................90
10.13 Maximum Lawful Interest Rate......................................90
<PAGE>
H&H Draft
1/10/97
SCHEDULES
Schedule 1.2A Existing Indebtedness
Schedule 1.2B Description of Restructuring
Schedule 3.1 Indebtedness Permitted to be Repaid by
Letter of Credit Proceeds
Schedule 4.5(f) Form of Officer's Certificate
Schedule 5.1(a) Foreign Qualifications of Borrower
Schedule 5.1(b) Foreign Qualifications of Parent
Schedule 5.2 Subsidiaries Information
Schedule 5.7(a) Borrower Outstanding Options/Warrants or Other Rights
Schedule 5.7(b) Parent Outstanding Options, Warrants or Other Rights
Schedule 5.10 Taxes
Schedule 5.12 Debt Instruments; Defaults
Schedule 5.13 Bank Accounts
Schedule 5.15(a) Pending Litigation
Schedule 5.15(b) Threatened Litigation
Schedule 5.16 Restrictive Agreements
Schedule 5.17 Licenses
Schedule 5.19 Location of Assets
Schedule 5.21 Fictitious, Trade and Assumed Names
Schedule 5.24 Pension and Benefit Plans
Schedule 5.25 Compliance with Laws
Schedule 5.26 Affiliate Transactions
Schedule 5.30 Material Agreements
Schedule 6.15 Leased Real Property
Schedule 7.1(j) Indebtedness Remaining on the Closing Date
Schedule 7.2 Liens of Record on the Closing Date
Schedule 7.3 Investments and Loans
Schedule 7.19 Attrition
<PAGE>
H&H Draft
1/8/97
EXHIBITS
Exhibit A-1 Form of Amended and Restated Merita Note
Exhibit A-2 Form of Amended and Restated BKBCT Note
Exhibit B Form of Loan Request
1Exhibit C Form of Amended and Restated Blocked Account Agreement
Exhibit D Form of Amended and Restated Guaranty and Suretyship
Agreement
Exhibit E Form of Amended and Restated Pledge Agreement
Exhibit F Form of Amended and Restated Security Agreement
Exhibit G Forms of Legal Opinion
Exhibit H Form of Landlord's Waiver and Consent
Exhibit I Form of Assignment and Assumption Agreement
H&H Draft
4/1/97
<PAGE>
H&H Draft
1/8/97
AMENDED AND RESTATED CREDIT AGREEMENT
This Amended and Restated Credit Agreement (this "Agreement") is entered
into as of December 31, 1996, by and among (i) Merita Bank Ltd, a Finnish
banking corporation, acting through its New York branch ("Merita"); (ii) Bank of
Boston Connecticut, a Connecticut savings bank ("BKBCT"; and together with
Merita, the "Lenders"); (iii) Holmes Protection, Inc., a New York corporation
("Holmes Protection"), successor by merger to Holmes Holding Company, Inc., a
Delaware corporation ("Holmes Holding") (Holmes Protection, in such capacity,
the "Borrower"); (iv) Holmes Protection Group, Inc., a Delaware corporation (the
"Parent"); and (v) Merita, as the agent bank (the "Agent Bank").
RECITALS
WHEREAS, the Lenders, the Parent, the Agent Bank and Holmes Holding entered
into a Credit Agreement dated as of August 30, 1996 (the "Original Credit
Agreement") pursuant to which the Lenders agreed, subject to the terms and
conditions set forth therein, to extend loans to Holmes Holding up to an
aggregate principal amount of $25,000,000;
WHEREAS, pursuant to the Merger Documents (as hereinafter defined), Holmes
Holding and the Other Merged Subsidiaries (as hereinafter defined) have merged
with and into Holmes Protection, effective as of the date hereof, and Holmes
Protection has become the surviving corporation and the successor by merger to
Holmes Holding and the Other Merged Subsidiaries;
WHEREAS, the Lenders have made loans to Holmes Holding under the Original
Credit Agreement which are outstanding;
WHEREAS, the parties hereto wish to amend and restate in its entirety the
Original Credit Agreement;
NOW, THEREFORE, the parties, intending to be legally bound, acknowledge the
receipt of sufficient consideration and agree as follows:
SECTION 1. CONSTRUCTION AND DEFINITION OF TERMS
1.1 General Interpretive Principles. If the context requires, the use of
any gender shall also refer to any other gender, and the use of the singular or
plural shall also refer to the other. All terms which are defined by the New
York Uniform Commercial Code (the "U.C.C.") have the same meanings assigned to
them by the U.C.C., as amended from time to
<PAGE>
time. All accounting terms not specifically defined have the meanings determined
by reference to United States generally accepted accounting principles
consistently applied ("GAAP"). The word "including" is not exclusive; if
exclusion is intended, the word "comprising" is used instead. The word "or"
shall be construed to mean "and/or" unless the context clearly prohibits that
construction. Defined terms shall also mean in the singular number the plural
and in the plural the singular.
1.2 Definitions. As used herein, the following terms shall have the
meanings herein specified
unless the context otherwise requires.
Additional Indebtedness: the categories of Indebtedness identified in
Section 7.1(b), (c), (d) and (g).
Additional Requirements: defined in Section 2.4(b)(ii)(6).
Affiliate: a spouse or relative (by blood, adoption or marriage) of any
Person within the second degree, any director or employee of any Person, any
other Person with which any Person is a partner, member, director, officer or
employee, and any other Person directly or indirectly controlling or controlled
by or under direct or indirect common control with any Person. "Control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with"), means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract, or otherwise.
Agent Bank: Merita Bank Ltd, and any other Person which becomes the Agent
Bank, in such Person's capacity as the Agent Bank.
Agreement: this Amended and Restated Credit Agreement and the Exhibits and
Schedules attached hereto (all of which Exhibits and Schedules are hereby
incorporated by reference and made a part hereof), as amended, supplemented or
modified.
Annualized Interest Expense: as of the date of determination, Interest
Expense for the most recent Quarter multiplied by four.
Annualized Quarterly Consolidated EBITDA: as of the date of determination,
Consolidated EBITDA for the most recent Quarter multiplied by four.
Applicable Margin: defined in Section 2.4.
Approved Debt: defined in Section 7.1(e).
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Assignments of Tenant's Interest Under Leases: the collateral assignments
of the leases of the offices of the Borrower and the Subsidiaries required under
Section 6.15, which assignments shall be in proper recordable form as required
by the laws of the states in which such offices are located and otherwise in
form and substance acceptable to the Agent Bank.
Assignment and Acceptance: defined in Section 10.7(b).
Assignment and Assumption Agreement: the assignment and assumption
agreement by and between Holmes Holding and Holmes Protection, substantially in
the form attached as Exhibit I hereto.
Attrition: defined in Section 7.19(d).
Availability Period: the twenty-five month period commencing on the Closing
Date and ending on the Conversion Date.
Base Rate: for any day, a rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to the higher of (a) the Prime Rate in effect on such
day and (b) the Federal Funds Effective Rate in effect on such day plus 0.5 of
1%. If for any reason the Agent Bank shall have determined (which determination
shall be conclusive absent manifest error) that it is unable to ascertain the
Federal Funds Effective Rate for any reason, including the inability or failure
of the Agent Bank to obtain sufficient quotations in accordance with the terms
thereof, the Base Rate shall be determined without regard to clause (b) of the
preceding sentence until such time as the circumstances giving rise to such
inability no longer exist. Any change in the Base Rate due to a change in the
Prime Rate or the Federal Funds Effective Rate shall be effective as of the
opening of business on the effective date of such change in the Prime Rate or
the Federal Funds Effective Rate, respectively.
BKBCT: Bank of Boston Connecticut, a Connecticut savings bank, and its
successors and assigns.
BKBCT Commitment: defined in Section 2.1(a).
BKBCT Note: defined in Section 2.1(d).
Blocked Account Agreements: Amended and Restated Blocked Account Agreements
substantially in the form attached as Exhibit C.
Borrower: Holmes Protection, Inc., a New York corporation, as successor by
merger to Holmes Holding, and its successors and permitted assigns.
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Borrowing Date: the date of any advance of funds to the Borrower pursuant
to this Agreement.
Business Day: a day other than a Saturday, Sunday or other day on which
commercial banks are authorized or permitted to close in New York, New York.
Capital Expenditures: an expenditure by a Person for property classified as
a "fixed asset" under GAAP.
Capital Lease: any lease of any property (whether real, personal or mixed)
by such Person as lessee which would, in accordance with GAAP, be classified as
a capital lease on a balance sheet. For purposes of this Agreement, any Person
shall be deemed to be the owner of any property which it has acquired or holds
subject to a Capital Lease or conditional sale agreement or other arrangement
pursuant to which title to the property has been retained by or vested in some
other person for security purposes.
Capital Lease Obligation: with respect to any Capital Lease, the amount of
the obligation of the lessee which would, in accordance with GAAP, appear on the
lessee's balance sheet.
CERCLA: defined in Section 6.13(c).
Change of Control: any Person or two or more Persons acting in concert
which shall have acquired beneficial ownership (within the meaning of Rule 13d-3
of the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended), directly or indirectly, of securities of the Parent (or other
securities convertible into such securities) representing forty percent (40%) or
more of the combined voting power of all securities of the Parent entitled to
vote in the election of directors.
Closing Date: August 30, 1996.
Code: the Internal Revenue Code of 1986, as amended, or any successor(s)
and any Treasury regulations, revenue rulings or technical information releases
issued thereunder.
Collateral: the property of the Borrower, the Parent and the Subsidiaries
in which the Agent Bank, on behalf of the Lenders, is taking a security
interest, as more fully defined in the Security Agreements, the Pledge
Agreements, the Assignments of Tenant's Interest Under Leases and the Blocked
Account Agreements.
Commitment: the Merita Commitment or the BKBCT Commitment, as the context
indicates.
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Commitment Fee: defined in Section 2.3(a).
Commonly Controlled Entity: an entity, whether or not incorporated, which
is under common control with the Borrower within the meaning of Section 414(c)
of the Code.
Consolidated Debt: consolidated Debt of the Parent, the Borrower and the
Subsidiaries, computed in accordance with GAAP.
Consolidated EBITDA: without duplication, net income for the period
(excluding extraordinary items) before deductions for Interest Expense and
taxes, minority interest, depreciation expense and amortization expense, all as
determined in accordance with GAAP, on a consolidated basis.
Consolidated Net Worth: consolidated net worth of the Parent, the Borrower
and the Subsidiaries,
computed in accordance with GAAP.
Conversion Date: September 30, 1998.
Customer Lists: defined in Section 6.23.
Debt: as applied to any Person and without duplication, all Indebtedness of
a Person which is (a) an obligation for borrowed money or a direct or contingent
reimbursement obligation arising on account of the issuance of a letter of
credit (irrespective of whether a draw has been made thereunder), purchase money
Indebtedness, and the Loans, whether evidenced by bonds, notes, debentures or
other written obligations or evidenced by a loan agreement, reimbursement
agreement, indenture or other agreement, (b) unfunded pension and retiree health
care liabilities, (c) a Capital Lease Obligation, (d) Indebtedness secured by a
Lien on any property or asset owned or held by such Person subject thereto,
whether or not the Indebtedness secured thereby shall have been assumed by such
Person, and (e) a Guaranty (regardless of the maturity of the underlying
obligation, but not including any Guaranty that has terminated or expired).
Environmental Laws: defined in Section 6.13(c).
ERISA: the Employee Retirement Income Security Act of 1974, as the same
from time to time may be amended, supplemented or modified.
Eurocurrency Liabilities: defined in Section 2.4(b)(ii)(4).
Eurodollar Business Day: any Business Day on which the relevant London
international financial markets are open for the transaction of business
contemplated in this Agreement.
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Eurodollar Loan: any Loan as to which the applicable rate of interest is
based on the Eurodollar Rate.
Eurodollar Rate: defined in Section 2.4(b)(ii)(3).
Event of Default: any of the events specified in Section 8.1 hereof.
Excess Cash Flow: for any fiscal year, Consolidated EBITDA minus the sum of
(i) Capital Expenditures made during the period, (ii) scheduled amortization of
Indebtedness paid during such period, (iii) income taxes paid in cash during the
period, and (iv) interest paid in cash during the period.
Existing Indebtedness: the Indebtedness described on Schedule 1.2A.
Federal Funds Effective Rate: for any day, the weighted average of the
rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Agent Bank from
three federal funds brokers of recognized standing selected by it.
Fees: the Commitment Fee and the Letter of Credit Fees.
Financial Information: defined in Section 6.12(d).
GAAP: defined in Section 1.1.
Governmental Authority: any nation or government, any federal, state or
other political subdivision thereof, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to any government or any federal, state or other political subdivision thereof,
and any corporation or other entity owned or controlled (through stock or
capital ownership or otherwise) by any of the foregoing.
Guarantors: the Parent, the Subsidiaries, and their respective successors
and assigns.
Guaranty: as applied to any Person, any direct or indirect liability,
contingent or otherwise, of such Person with respect to any indebtedness, lease,
dividend or other obligation of another, including any such obligation directly
or indirectly guaranteed, endorsed (otherwise than
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for collection or deposit in the ordinary course of business) or discounted or
sold with recourse by such Person, or in respect of which such Person is
otherwise directly or indirectly liable, including any such obligation in effect
guaranteed by such Person through any agreement (contingent or otherwise) to
purchase, repurchase or otherwise acquire such obligation or any security
therefor, or to provide funds for the payment or discharge of such obligation
(whether in the form of loans, advances, stock purchases, capital contributions
or otherwise), or to maintain the solvency or any balance sheet or other
financial condition of the obligor of such obligation, or to make payment for
any products, materials or supplies or for any transportation or services
regardless of the non-delivery or non-furnishing thereof, in any such case if
the purpose or intent of such agreement is to provide assurance that such
obligation will be paid or discharged, or that any agreements relating thereto
will be complied with, or that the holders of such obligation will be protected
against loss in respect thereof.
Guaranty Agreement: that certain Amended and Restated Guaranty and
Suretyship Agreement, substantially in the form attached as Exhibit D hereto, as
further amended, replaced or supplemented from time to time in accordance with
the terms thereof.
Indebtedness: as applied to any Person and without duplication, (a) all
items (except items of (i) capital stock, capital or surplus, or (ii) reserves
for deferred income taxes or (iii) reserves for losses incurred in connection
with any occurrence which the Borrower is permitted to self-insure pursuant to
Section 6.14(c)), which in accordance with GAAP would be included in determining
total liabilities as shown on the liability side of a balance sheet of a Person
as of the date on which Indebtedness is to be determined, (b) all Capital Lease
Obligations, obligations to the holders of minority interests, if any, in the
Borrower, the Parent or a Subsidiary for the purchase by such Person of such
interests, unfunded pension liabilities and direct or contingent reimbursement
obligations arising upon the issuance of a letter of credit, (c) all
indebtedness secured by any consensual Lien on any property or asset owned or
held by such Person subject thereto, whether or not the indebtedness secured
thereby shall have been assumed by such Person, (d) all indebtedness of others
with respect to which such Person has become liable by way of a Guaranty, (e)
any obligation under any interest rate protection agreement, and (f) fifty
percent (50%) of the amount in holdback or similar accounts established in
connection with Permitted Acquisitions by such Person; provided, that
"Indebtedness" shall not include the amounts of such Person's insurance premiums
which are financed by a third party.
Indemnified Liabilities: defined in Section 10.15.
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Indemnitees: defined in Section 10.15.
Interest Expense: as of the date of determination, the aggregate amount of
interest due on the Loans, Additional Indebtedness and Approved Debt, if any, as
determined in accordance with GAAP.
Interest Period: the elected period for any Loan as to which the Eurodollar
Rate applies.
Interest Rate Protection Agreement: any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement or other similar
agreement or arrangement executed in connection with this Agreement, designed to
protect the Borrower against fluctuations in interest rates.
Investment: as applied to any Person, any direct or indirect purchase or
other acquisition by such Person of stock or other securities of any other
Person, or any direct or indirect loan, advance (other than advances to
employees for moving and travel expenses, drawing accounts and expenditures in
the ordinary course of business) or capital contribution by such Person to any
other Person, including all Indebtedness and accounts receivable from such other
Person which are not current assets or did not arise from sales or the provision
of services to such other Person in the ordinary course of business.
Landlord's Waiver and Consent: a waiver and consent document
respecting statutory liens on personalty, ingress and egress and related or
incidental matters, substantially in the form attached as Exhibit H hereto,
executed by the lessor of real estate to the Borrower or any Subsidiary.
Leased Real Property: the locations identified on Schedule 6.15 hereto and
all other real property in which the Borrower or a Subsidiary has a leasehold
interest after Closing.
Lenders: Merita, BKBCT and any other Person which becomes an assignee of
any of the foregoing or a participant in the Loans; Lender means any one of the
Lenders.
Letter of Credit: defined in Section 3.1.
Letter of Credit Fees: defined in Section 3.7.
Letter of Credit Liability: defined in Section 3.11.
Letter of Credit Request: defined in Section 3.2.
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Leverage Ratio: defined in Section 2.4(a).
Lien: as to any Person, any mortgage, deed of trust, pledge, hypothecation,
assignment, assigned deposit arrangement, encumbrance, lien (statutory or
other), claim, option, reservation, right of way, easement, covenant, lease,
condition, restriction, charge or defect of any kind, or preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any financing lease having substantially the same economic
effect as any of the foregoing, and the filing of any financing statement under
the U.C.C. or comparable law of any jurisdiction).
Loan Documents: this Agreement, the Notes, the Guaranty Agreements, the
Security Agreements, the Pledge Agreements, the Blocked Account Agreements, the
Interest Rate Protection Agreement, the Assignment of Tenant's Interest Under
Leases and all certificates, documents and instruments required by, referred to
in or delivered pursuant to any of the foregoing documents.
Loan Request: defined in Section 2.1(e).
Loans: defined in Section 2.1(b).
Majority Lenders: Lenders whose percentages of the Total Commitment exceed
sixty seven percent (67%).
Material Adverse Effect: (a) a material adverse effect on the business,
operations, affairs, condition (financial or otherwise), assets, properties or
financial prospects of the Borrower, the Parent or any of the Subsidiaries, (b)
a material adverse effect on the ability of the Borrower, the Parent or any of
the Subsidiaries to perform its obligations under the Loan Documents, or (c) an
adverse effect, material or otherwise, on the validity or enforceability of any
Loan Document.
Maturity Date: the earlier of (i) September 30, 2003 or (ii) such date on
which the Loans become due and payable, whether by declaration, optional or
mandatory prepayments or otherwise.
Merger Agreement: the Agreement and Plan of Merger by and among the Parent,
Holmes Holding, the Borrower, and the Other Merged Subsidiaries, dated December
10, 1996, effective December 31, 1996.
Merger Documents: collectively, (i) the Merger Agreement; (ii) the
Certificate of Merger of Holmes Holding into the Borrower, dated December 10,
1996, effective in New York December 31, 1996; (iii) the
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Certificate of Merger of Holmes NY into the Borrower, dated December 10, 1996,
effective in New York December 31, 1996; (iv) the Certificate of Merger of
Holmes LI into the Borrower, dated December 10, 1996, effective in New York
December 31, 1996; (v) the Certificate of Merger of Holmes NJ into the Borrower,
dated December 10, 1996, effective in New York December 31, 1996; (vi) the
Certificate of Merger of Holmes PA into the Borrower, dated December 10, 1996,
effective in New York December 31, 1996; (vii) the Certificate of Merger of
Holmes DE into the Borrower, dated December 1, 1996, effective in New York
December 31, 1996; (viii) the Certificate of Merger of Holmes Central into the
Borrower, dated December 10, 1996, effective in New York December 31, 1996; (ix)
the Certificate of Merger of Holmes Holding into the Borrower, dated December
10, 1996, effective in Delaware December 31, 1996; (x) the Certificate of Merger
of Holmes DE into the Borrower, dated December 10, 1996, effective in Delaware
December 31, 1996; (xi) the Certificate of Merger of Holmes NJ into the
Borrower, dated December 10, 1996, effective in New Jersey December 31, 1996;
(xii) the Certificate of Merger of Holmes Central into the Borrower, dated
December 10, 1996, effective in New Jersey December 31, 1996; and (xiii) the
Articles of Merger of Holmes PA into the Borrower, dated December 10, 1996,
effective in Pennsylvania December 31, 1996.
Merita Commitment: defined in Section 2.1(a).
Merita Note: defined in Section 2.1(d).
Mortgagee's Waiver: an executed waiver document respecting certain rights
as a mortgagee in real estate owned by the Borrower or a Subsidiary, in form and
content satisfactory to the Agent Bank.
Multiemployer Plan: a Plan which is a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
Non-U.S. Subsidiaries: Holmes Protection S.A., an entity organized under
the laws of Switzerland, and Holmes Protection (UK) Limited, an entity organized
under the laws of the United Kingdom.
Notes: the Merita Note and the BKBCT Note, and all other notes, if any,
executed in substitution for, or in connection with a Note; "Note" means one of
the Notes.
Officer: any executive officer of the Borrower or the Parent.
Officer's Certificate: a certificate executed on behalf of the Borrower or
the Parent, as the case may be, by an Officer thereof.
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Operating Licenses: all licenses, permits, authorizations or approvals
issued by a Governmental Authority having jurisdiction over the Borrower, the
Parent or a Subsidiary required for the operation of any business of such
Person.
Other Merged Subsidiaries: Holmes Protection of New York, Inc. (a New York
corporation) ("Holmes NY"), Holmes Protection of Long Island, Inc. (a New York
corporation) ("Holmes LI"), Holmes Protection of New Jersey, Inc. (a New Jersey
corporation) ("Holmes NJ"), Holmes Protection of Philadelphia, Inc. (a
Pennsylvania corporation) ("Holmes PA") Holmes Protection, Inc. (a Delaware
corporation) and Holmes Central Services, Inc. (a New Jersey corporation)
("Holmes Central").
Owned Real Property: any real estate owned or to be acquired in fee by the
Borrower or a Subsidiary at any time during the term of the Loans.
PBGC: the Pension Benefit Guaranty Corporation established pursuant to
Subtitle A of Title IV of ERISA, or any governmental agency or instrumentality
succeeding to the functions thereof.
Permitted Acquisitions: defined in Section 7.16.
Permitted Indebtedness: defined in Section 7.1.
Permitted Liens: defined in Section 7.2.
Permitted Uses: defined in Section 2.1(c).
Person: an individual, partnership, corporation, business trust, joint
stock company, trust, unincorporated association, joint venture, Governmental
Authority or other entity of whatever nature.
PESA: defined in Section 6.13(a)(i).
Plan: any plan of a type described in Section 3(3) of ERISA in respect of
which the Borrower or a Commonly Controlled Entity is an "employer" as defined
in Section 3(5) of ERISA.
Pledge Agreement: that certain Amended and Restated Pledge Agreement
substantially in the form attached as Exhibit E hereto, as further amended,
replaced or supplemented from time to time in accordance with the terms thereof.
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Pledgors: the Borrower, the Parent, and each other Person executing and
delivering a Pledge Agreement pursuant to the provisions of this Agreement or a
Pledge Agreement.
Potential Event of Default: any condition or event which, with notice or
lapse of time or both, would constitute an Event of Default.
Premises: defined in Section 6.13(a).
Prime Rate: the rate of interest from time to time established and publicly
announced by the Agent Bank, in its sole discretion, as its Prime Rate of
interest to be used as an index in determining actual interest rates to be
charged to certain of its borrowers. The Prime Rate may not be the lowest rate
charged by the Agent Bank to its borrowers. The Agent Bank shall certify the
Prime Rate and such certification shall be conclusive in the absence of manifest
error.
Quarter: a calendar quarter of the Borrower, commencing with the first full
calendar quarter following the Closing Date.
Quarterly Payment Date: defined in Section 2.2.
Records: defined in Section 6.12(b).
Recurring Monthly Revenue: the total recurring monthly amount of alarm
service revenue billed by or on behalf of the Borrower or a Subsidiary to
customers for alarm services in connection with Recurring Security Services
Contracts owned by the Borrower or such Subsidiary and which are in full force
and effect. Monthly amounts shall include charges for monitoring services,
maintenance, inspection services and leased equipment. Quarterly, semi-annual
and annual billings shall be divided by three, six and twelve, respectively, to
determine the monthly amount. Recurring Monthly Revenue shall not include any
amounts derived from (i) reimbursement or prepayment of telephone lines, radio
transmission facilities, and other utility company charges associated directly
with the installation, monitoring, maintenance or furnishing of alarm services;
(ii) reimbursement for or prepayment of any false alarm assessments; (iii)
reimbursement for or prepayment of any amounts equal to taxes (other than income
taxes), fees or other charges which may be payable to any governmental authority
or public utility relative to the furnishing of alarm services; (iv)
non-recurring non-regular services incurred by a customer; (v) monitoring
services provided under any contract for which the Borrower's or Subsidiary's
customer is in arrears in payment for a period in excess of ninety (90) days
after the last date for which services were provided and billed; and (vi)
contracts which have not yet been "cut in". For purposes of this Agreement, the
term "cut in"
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shall mean the first date on which an alarm system at a customer's premises is
on line to the central station or operational.
Recurring Security Services Contracts: all contracts and agreements,
whether now owned or held or hereinafter acquired or generated by the Borrower
or any Subsidiary, under which the Borrower or such Subsidiary will provide any
form of recurring Security Services for a fee, and all such other recurring
revenue contracts or agreements entered into by the Borrower or a Subsidiary
during the term of the Loans.
Reimbursement Obligation: as of any date of determination, the obligations
of the Borrower then outstanding, or which may thereafter arise, in respect of
Letters of Credit then outstanding, to reimburse the Agent Bank for the amount
paid by the Agent Bank in respect of any drawing under Letters of Credit.
Reportable Event: any of the events set forth in Section 4043(b) of ERISA,
or the regulations thereunder.
Reserve Percentage: defined in Section 2.4(b)(ii)(4).
Restricted Payment: (a) any dividend or other distribution, direct or
indirect, on account of any shares of any class of stock or ownership interest
of the Parent, the Borrower or any Subsidiary, now or hereafter outstanding,
except (i) a dividend payable solely in shares of stock of the Parent, the
Borrower or any Subsidiary and (ii) any other dividend payable by the Borrower
or a Subsidiary to its parent corporation which owns all the issued and
outstanding shares of capital stock of the Borrower or such Subsidiary; (b) any
redemption, retirement, purchase or other acquisition, direct or indirect, of
any shares of any class of stock or ownership interest of the Parent, the
Borrower or any Subsidiary now or hereafter outstanding, or of any warrants,
rights or options to acquire any such shares or interests, except to the extent
that the consideration therefor consists of shares of stock or ownership
interests, or any warrants, rights or options to acquire any such shares or
interests, of the Parent, the Borrower or a Subsidiary; and (c) any sinking
fund, other required prepayment or mandatory installment payment on account of
any shares of stock of the Parent, the Borrower or a Subsidiary.
Security Agreement: that certain Amended and Restated Security Agreement
substantially in the form attached as Exhibit F hereto, as further amended,
replaced or supplemented from time to time in accordance with the terms thereof.
Security Services: burglar alarm services, fire alarm services, closed
circuit television and electronic access control services, all central
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station monitoring services, maintenance services, leases, fire testing and all
other similar security services provided to commercial, residential and other
customers.
Special Purpose Subsidiary: any Person acquired by the Parent, the Borrower
or any Subsidiary after the Closing Date as permitted under Section 7.16.
Stamped: the process by which the originals of all Recurring Security
Services Contracts will be manually stamped by an authorized representative of
the Borrower, which stamp shall state that a security interest in each such
Recurring Security Services Contract has been granted to the Agent Bank.
Subsidiary: (a) a corporation of which at least a majority of the
outstanding Voting Stock is owned, directly or indirectly, now or in the future,
by the Parent or the Borrower and (b) a general or limited partnership of which
at least a majority of the partnership interests are owned, directly or
indirectly, now or in the future, by the Parent or the Borrower. A general
partnership includes a joint venture for the purposes of this definition.
Total Commitment: defined in Section 2.1(a).
Total Consolidated Debt: as of the date of determination, the sum of (a)
the outstanding principal amount of the Loans, (b) to the extent not included in
(a), the face amount of all Letters of Credit, if any, then outstanding, (c) the
outstanding principal amount of Additional Indebtedness, and (d) the outstanding
principal amount of Approved Debt, if any.
Total Projected Debt Service: for any period, all scheduled principal
amortization and interest payments on Total Consolidated Debt.
U.C.C.: defined in Section 1.1.
U.C.P.: defined in Section 3.10.
Variable Rate: the Base Rate, plus the Applicable Margin, as determined
pursuant to Section 2.4(a).
Voting Control: with respect to any Person which is a business entity
acting alone, the power to elect a majority of the directors of such business
entity or to effectuate and cause the direction of the management and policies
of such business entity.
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Voting Stock: stock of any class or classes (or equivalent interests) of a
Person which is a business entity, if the holders of the stock of such class or
classes (or equivalent interests) are ordinarily, in the absence of
contingencies, entitled to vote for the election of a majority of the directors
(or persons performing similar functions) of such business entity, even though
the right to so vote has been suspended by the happening of such a contingency.
1.3 Use of "Subsidiary". With respect to any representation or warranty set
forth in this Agreement, the term "Subsidiary" shall refer to each Subsidiary in
existence at the time the representation or warranty is made or deemed to be
made. Covenants and other provisions shall apply to Subsidiaries actually in
existence from time to time.
SECTION 2. LOANS
2.1 Loans.
(a) Establishment. Subject to the terms and conditions of this Agreement,
in reliance upon the representations, warranties and covenants of the Borrower
contained herein and upon satisfaction of the conditions precedent set forth in
Section 4, the Lenders severally agree to establish on a pro rata basis a credit
in favor of the Borrower in the aggregate principal amount of $25,000,000 (the
"Total Commitment"), consisting of an aggregate principal amount of $15,000,000
to be extended by Merita (the "Merita Commitment") and an aggregate principal
amount of $10,000,000 to be extended by BKBCT (the "BKBCT Commitment").
Notwithstanding anything to the contrary contained herein, in no event shall any
Lender be obligated to lend any amount in excess of its Commitment.
(b) Availability. Subject to the satisfaction of the conditions set forth
in Section 4, the Borrower may borrow during the Availability Period from time
to time from each Lender, severally and not jointly, an aggregate principal
amount at any time not in excess of such Lender's Commitment (each such
borrowing, a "Loan", and collectively, the "Loans").
(c) Purpose. The proceeds of the Loans shall be used by the Borrower (i) to
repay Existing Indebtedness, (ii) to finance Capital Expenditures, (iii) to
finance Permitted Acquisitions, and (iv) for general corporate purposes
("Permitted Uses").
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(d) Notes. The Loan made by each Lender shall be evidenced by an amended
and restated promissory note of the Borrower in a principal amount equal to such
Lender's Commitment and in the form attached hereto as Exhibit A-1 with respect
to the Merita Commitment (the "Merita Note") and in the form attached hereto as
Exhibit A-2 with respect to the BKBCT Commitment (the "BKBCT Note"). Each Note
shall bear interest on the unpaid principal amount thereof at the applicable
rate or rates set forth in Section 2.4.
(e) Loan Requests. Each request by the Borrower for a Loan (a "Loan
Request") shall be made in writing to the Agent Bank and to each Lender, in
substantially the form attached hereto as Exhibit B. Each Loan Request shall be
submitted at least three (3) Business Days before the requested Borrowing Date
if the request is for a Eurodollar Rate Loan and two (2) Business Days before
the requested Borrowing Date if the request is for a Base Rate Loan, unless and
to the extent such Loan Request is in the form of a Letter of Credit Request, in
which event the notice requirements set forth in Section 3.2 shall be
applicable. Each Loan Request shall cover a requested Loan in the minimum
principal amount of $1,000,000 (or less if the unused portion of the Total
Commitment is less) and shall be made pro rata between Merita and BKBCT. Each
Loan Request shall contain the information and other evidence reasonably
required by the Agent Bank and the Lenders to establish that all conditions
precedent to the requested Loan have been satisfied. Each Loan Request shall
include an express representation and warranty (and shall be deemed to include
the representation and warranty if it is not expressly included) by the Borrower
that (i) all of the representations and warranties made in Section 5 continue to
be true and correct in all material respects as of the date of such Loan
Request, (ii) all conditions precedent have been satisfied, as of the time the
Loan Request is submitted, (iii) the business and financial ratios and covenants
set out in Section 7.19 have been met as of the last test date, and (iv) no
Event of Default or Potential Event of Default exists.
2.2 Repayment of Loans. The outstanding principal amount of the Notes shall
be repaid in consecutive quarterly installments of principal due on the last
Business Day of each Quarter (the "Quarterly Payment Dates"), commencing on
December 31, 1998. The principal amount to be repaid on each Quarterly Payment
Date shall be the following percentages of the principal amount of the Loans
outstanding on the Conversion Date:
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Percentage of
Quarterly Payment Dates Principal Repaid
----------------------- ----------------
December 31, 1998 3.75%
March 31, 1999 3.75%
June 30, 1999 3.75%
September 30, 1999 3.75%
December 31, 1999 5.0%
March 31, 2000 5.0%
June 30, 2000 5.0%
September 30, 2000 5.0%
December 31, 2000 5.0%
March 31, 2001 5.0%
June 30, 2001 5.0%
September 30, 2001 5.0%
December 31, 2001 5.0%
March 31, 2002 5.0%
June 30, 2002 5.0%
September 30, 2002 5.0%
December 31, 2002 6.25%
March 31, 2003 6.25%
June 30, 2003 6.25%
September 30, 2003 6.25%
Notwithstanding anything herein to the contrary, the outstanding principal
amount under the Notes and all accrued interest thereon and all other amounts
due and owing by the Borrower hereunder shall become immediately due and payable
on the Maturity Date.
2.3 Fees.
(a) Commitment Fee. The Borrower shall pay the Lenders, on a pro rata
basis, commitment fees (the "Commitment Fee") of one-half of one percent (1/2%)
per annum (computed on the basis of the actual number of days elapsed over a 365
or 366 (as the case may be) day year) of the average daily unused portion of the
Total Commitment that was available to the Borrower on the Closing Date
[$12,500,000], payable quarterly in arrears on each Quarterly Payment Date after
the Closing Date, commencing September 30, 1996.
(b) Letter of Credit Fees. The Borrower shall pay the Agent Bank and the
Lenders the Letter of Credit Fees in accordance with the provisions of Section
3.7.
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2.4 Interest. The outstanding principal amount of the Notes shall bear
interest on the unpaid principal amount thereof until paid in full at a rate or
rates per annum as provided in this Section 2.4. The applicable interest rate
shall, at the option of the Borrower, be the Base Rate or the Eurodollar Rate,
plus the applicable margin specified herein -- the "Applicable Margin", and
shall be determined in the following manner.
(a) Base Rate Option. If the Borrower selects the Base Rate option,
interest on the outstanding principal amount of the Notes shall be payable
monthly in arrears on the last Business Day of each month, commencing on the
last Business Day of the first full month following the Closing Date. Interest
shall be computed on the basis of the actual number of days elapsed over a 365
or 366 (as the case may be) day year and shall be equal to the Base
Rate, plus the Applicable Margin (the "Variable Rate"), determined quarterly
based on the ratio (the "Leverage Ratio") of Total Consolidated Debt to
Consolidated EBITDA for the preceding four Quarters minus Capital Expenditures
as follows:
Total Consolidated Debt/
Consolidated EBITDA (for the preceding four Applicable Margin
Quarters) minus Capital Expenditures (per annum)
------------------------------------ -----------
Greater than or equal to 2.00 1.50%
Less than 2.00 but greater than or equal to 1.00 1.00%
Less than 1.00 0.75%
Quarterly changes, if any, in the Applicable Margin under this Section 2.4(a)
shall become effective as follows:
The Borrower shall provide the Agent Bank with Quarterly Financial
Statements (duly certified by an Officer of the Borrower) and an Officer's
Certificate within forty-five (45) days after the close of each Quarter other
than the fourth Quarter of each year, and within ninety (90) days after the
close of the fourth Quarter of each year, setting forth the computations and
information as of the end of the preceding Quarter necessary to adjust the
Applicable Margin. Any change to the Applicable Margin with respect to the Base
Rate shall be effective as of the next succeeding Business Day following the day
on which the Quarterly Financial Statements and applicable Officer's Certificate
are delivered. Notwithstanding the foregoing, in the event that the Quarterly
Financial Statements and applicable Officer's Certificate are not delivered
within forty-five (45) days (or within ninety (90) days with respect to the
fourth Quarter), the Variable Rate shall be the Base
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Rate plus one and one half percent (1.5%) per annum, effective on the expiration
of such forty-five (45) day or ninety (90) day period, as the case may be, and
continuing until such Quarterly Financial Statements and applicable Officer's
Certificate are delivered to the Agent Bank as aforesaid.
(b) Eurodollar Rate Option. (i) Notwithstanding the foregoing, upon receipt
by the Agent Bank of at least three (3) Eurodollar Business Days' written notice
from the Borrower, the Borrower may elect with respect to a principal amount of
the Loans designated in such notice and equal to at least $2,000,000 or an
integral multiple thereof, for the Interest Period next ensuing, which period
shall equal one (1), two (2), three (3) or six (6) months as designated by the
Borrower, an interest rate based on the Eurodollar Rate (computed on the basis
of a 360 day year). Interest on Eurodollar Loans shall be equal to the
Eurodollar Rate, plus the Applicable Margin computed with reference to the
Leverage Ratio as follows:
Total Consolidated Debt/Consolidated
EBITDA (for the preceding four Applicable Margin
Quarters) minus Capital Expenditures (per annum)
------------------------------ -----------
Greater than or equal to 2.00 2.50%
Less than 2.00 but greater than or equal to 1.00 2.00%
Less than 1.00 1.75%
Quarterly changes, if any, in the Applicable Margin under this Section
2.4(b) shall become effective as follows:
The Borrower shall provide the Agent Bank with Quarterly Financial
Statements (duly certified by an Officer of the Borrower) and an Officer's
Certificate within forty-five (45) days after the close of each Quarter other
than the fourth Quarter of each year, and within ninety (90) days after the
close of the fourth Quarter of each year, setting forth the computations and
information as of the end of the preceding Quarter necessary to adjust the
Applicable Margin. Any change to the Applicable Margin with respect to the
Eurodollar Rate shall be effective as of the next succeeding Business Day
following the day on which the Quarterly Financial Statements and the applicable
Officer's Certificate are delivered. Notwithstanding the foregoing, in the event
that the Quarterly Financial Statements and applicable Officer's Certificate are
not delivered within forty-five (45) days (or within ninety (90) days with
respect to the fourth Quarter), interest on Eurodollar Loans shall be the
Eurodollar Rate plus two and one-half percent (2.50%) per annum, effective on
the expiration of such forty-five (45) or ninety (90) day period, as the case
may be, and continuing until such Quarterly Financial Statements
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and applicable Officer's Certificate are delivered to the Agent Bank as
aforesaid.
(ii) Provisions Applicable to Eurodollar Loans.
(1) The Borrower may not convert any outstanding Loan to a
borrowing based on the Eurodollar Rate or extend a Eurodollar Rate
pricing option if either prior to or after giving effect to such
conversion or extension there shall exist an Event of Default. The
interest rate so designated shall remain in effect for the Interest
Period. If an Interest Period would otherwise commence on a day which
is not a Eurodollar Business Day, such Interest Period shall commence
on the next Eurodollar Business Day. (The principal accruing interest
pursuant to such election shall be deemed re-borrowed on the last day
of the Interest Period, and shall bear interest in the manner
designated in this Section 2.4(b)). Notwithstanding any provisions of
this Agreement to the contrary, no more than four (4) Eurodollar Rate
options may be elected by the Borrower and be outstanding at any time.
(2) In the event that the Borrower elects a Eurodollar Rate
pricing option, interest shall be payable on the last day of each
relevant Interest Period, except that if the Borrower has selected an
Interest Period equal to six (6) months, interest shall be payable on
the 90th day and on the 180th day of such Interest Period. It is
further agreed that (A) if an Interest Period with respect to a
Eurodollar Loan would otherwise end on a day which is not a Eurodollar
Business Day, such Interest Period shall be extended to the next
Eurodollar Business Day, unless such next Eurodollar Business Day
shall fall in the next calendar month in which event such Interest
Period shall end on the immediately preceding Eurodollar Business Day,
(B) the principal amount designated in the notice requesting a
Eurodollar Rate pricing option, when added to the principal amount of
all then outstanding Loans bearing interest at a Eurodollar Rate shall
not exceed the outstanding principal amount of the Notes reduced by
any installment of principal falling due within any Interest Period or
Periods and (C) no Interest Period beginning prior to the Conversion
Date or the Maturity Date shall end later than the Conversion Date or
the Maturity Date, as the case may be.
(3) As used herein, the term "Eurodollar Rate" shall mean the
rate per annum (rounded upwards if necessary to the nearest 1/100 of
1%) determined by the Agent Bank to be equal to the quotient of (A)
the offered rate for deposits in U.S. Dollars (having a term
comparable to the Interest Period designated by the Borrower and in an
amount comparable to the principal amount of the Loan to be borrowed
at such alternate rate
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during such Interest Period) in the London interbank market which
appears on the Telerate Screen two (2) Eurodollar Business Days prior
to the first day of the relevant Interest Period, divided by (B) 1.00
minus the Reserve Percentage for Loans to be borrowed at such
alternate rate for the relevant Interest Period. "Telerate Screen"
means the display designated as page 3750 on the Telerate Service (or
such other page as may replace such page for the purpose of displaying
Eurodollar Rates of major banks).
(4) "Reserve Percentage" shall mean the maximum applicable
percentage rate stated in Regulation D of the Board of Governors of
the Federal Reserve System at which reserves are required to be
maintained during such Interest Period against "Eurocurrency
Liabilities" (or if more than one such percentage rate is applicable
during such period, the maximum percentage rate for such period) or,
if such regulations or the definition of "Eurocurrency Liabilities" is
modified, and as long as a Lender may be required to maintain reserves
against a category of liabilities which includes Eurodollar deposits
or a category of assets which includes Eurodollar loans, the maximum
percentage rate at which reserves are required or elected generally in
respect of such liabilities or assets to be maintained on such
category. As of the date of this Agreement, the Reserve Percentage is
zero. The Borrower agrees to pay each Lender on demand such additional
sums as will compensate such Lender for the effect of any change in
such reserve requirements. The affected Lender shall certify the
amount of such cost to the Borrower and such certification shall be
conclusive in the absence of manifest error.
(5) It is hereby acknowledged that the Borrower may call the
Agent Bank on or before the date on which notice of an elective
interest rate is to be delivered by the Borrower in order to receive
an indication of the Eurodollar Rates then in effect but that such
projection shall not be binding upon the Borrower, the Agent Bank or
any Lender or affect the Eurodollar Rates actually in effect two (2)
Eurodollar Business Days prior to the first day of said Interest
Period. Unless subsequent notice is received by the Agent Bank, the
interest rate shall return to the interest rate based on the Variable
Rate applicable to such Loan after the end of any relevant Interest
Period for which the Eurodollar Rate pricing option was elected by the
Borrower.
(6) The Borrower hereby agrees to pay each Lender or the Agent
Bank on demand such additional sums as are necessary to reimburse each
such Lender or the Agent Bank for such Lender's or Agent Bank's costs
directly relating to the Loans or the Letters of Credit in complying
during the term of this Agreement with all present and future laws,
executive orders and regulations of the governments of the United
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States and the United Kingdom and of any regulatory or administrative
agency thereof (including the Bank of England and the Board of
Governors of the Federal Reserve System) which after the date of this
Agreement impose, modify or deem applicable any reserve, asset,
special deposit, deposit insurance or assessment, capital or similar
requirements relating to (A) any category of liabilities which
includes deposits by reference to which a Eurodollar Rate is to be
determined as provided in the definition of such term or (B) any
category of extensions of credit or other assets which include any
portion of the Loans as to which an alternate rate has been elected
(hereinafter "Additional Requirements"), or which in the future
subject a Lender or the Agent Bank to any tax with respect to the
execution and delivery of this Agreement or change the basis of
taxation of payments to a Lender or the Agent Bank of principal or
interest or fees payable under this Agreement (except for changes in
the rate of tax on the net income of such Lender or the Agent Bank
imposed by the United States or any other government having
jurisdiction or any political subdivision or taxing authority thereof)
(hereinafter included in Additional Requirements). A Lender or the
Agent Bank shall certify the amount of such cost to the Borrower and
such certification shall be conclusive in the absence of manifest
error.
(7) In the event that the Borrower shall have requested Loans
based on a Eurodollar Rate and the Agent Bank, or any Lender after
consultation with the Agent Bank, shall have reasonably determined
that quotations of interest rates for the relevant deposits referred
to in the definition of Eurodollar Rate are not being provided in the
relevant amounts or for the relevant Interest Periods for purposes of
determining Eurodollar Rates, or that, by reason of circumstances
affecting the London Inter-Bank Eurocurrency Market, adequate and
reasonable means do not exist for ascertaining Eurodollar Rates
applicable to such deposits for the specified Interest Period, the
Agent Bank shall promptly give notice of such determination to the
Borrower and no Loans based on Eurodollar Rates shall be available for
the specified Interest Period. Such determination by the Agent Bank
hereunder shall be conclusive and binding upon the Lenders and the
Borrower in the absence of manifest error.
(8) Further, in the event that by reason of any change in any
law, regulation or official directive, or in the interpretation
thereof by any governmental body charged with the administration
thereof, a Lender becomes subject to restrictions on the amount of any
category of deposits or other liabilities of such Lender which
includes deposits by reference to which Eurodollar Rates are
determined as provided herein or a category of extensions of credit or
other assets of such Lender which includes any portion of the Loans as
to which Eurodollar Rates have been elected,
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<PAGE>
then, if such Lender so elects by notice to the Borrower setting out
the basis of such election, the obligation of the Lenders to make
additional Loans based on Eurodollar Rates shall be suspended until
such change ceases to be in effect, and during such suspension a
Lender's portion of all Loans requested to be made based on Eurodollar
Rates shall instead bear interest at the applicable Variable Rate.
(9) Notwithstanding anything herein contained to the contrary,
if, prior to or during any Interest Period with respect to which a
Eurodollar Rate is in effect, any change in any law, regulation or
official directive, or in the interpretation thereof, by any
governmental body charged with the administration thereof, shall make
it unlawful for a Lender to fund or maintain its funding in
Eurodollars of any portion of the principal amount of a Note or
otherwise to give effect to such Lender's obligations as contemplated
hereby, (A) the Agent Bank may by written notice to the Borrower
declare the Lenders' obligations in respect of the Eurodollar Rate
pricing option to be terminated forthwith, (B) the Eurodollar Rate
option with respect to the Lenders shall forthwith cease to be in
effect, and interest shall from and after such date be calculated at
the interest rate based on the Base Rate otherwise applicable and (C)
the Borrower hereby agrees to indemnify each Lender against any loss
or expense suffered by it in liquidating prior to maturity Eurodollar
deposits which correspond, directly or indirectly, to its pro rata
share of the principal amount of the Note to which a Eurodollar Rate
was applicable. Each Lender shall certify the amount of such loss or
expense to the Borrower and such certification shall be conclusive in
the absence of manifest error.
(10) The Lenders have indicated that if the Borrower elects a
Eurodollar Rate, the Lenders may wish to purchase in the London
Inter-Bank Eurocurrency Market one or more Eurodollar deposits in
order to fund or maintain their funding of their pro rata shares of
the principal amount of the Note to which a Eurodollar Rate pricing
option is applicable during the Interest Period in question; it being
understood that the provisions of this Agreement relating to such
funding are included only for the purpose of determining the rate of
interest to be paid under a Eurodollar Rate pricing option and any
other amounts owing under this Section 2 with respect to Eurodollar
Loans.
(c) Default Rate. After (i) maturity of the Loans, whether scheduled, by
acceleration or otherwise, and whether prior to or after a judgment against the
Borrower or (ii) the occurrence of, and during the continuance of, an Event of
Default under Section 8.1, the Borrower shall pay to the Lenders, on demand, an
additional amount as a premium on all unpaid amounts from the due date until
paid in full at a rate or rates per
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annum equal to two (2) percentage points above the rate or rates otherwise
applicable in accordance with the terms of this Agreement.
2.5 Reserve Requirements; Change in Circumstances. If, during the term of
this Agreement, a Lender shall reasonably have determined that the adoption
after the date hereof of any applicable law, rule or regulation regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by a Lender with any request or directive regarding capital adequacy (whether or
not having the force of law) of any such authority, central bank or comparable
agency has or would have the effect of reducing the rate of return on such
Lender's capital as a consequence of its obligations hereunder to a level below
that which such Lender could have achieved but for such adoption, change or
compliance (taking into consideration such Lender's policies with respect to
capital adequacy) by an amount deemed by such Lender to be material, then from
time to time, after submission by such Lender to the Borrower (with a copy to
the Agent Bank) of a written request therefor (which shall be conclusive in the
absence of manifest error), the Borrower shall promptly pay to such Lender such
additional amount or amounts as will compensate such Lender for such reduction.
2.6 Voluntary and Mandatory Prepayments; Commitment Reductions
(a) Voluntary Prepayments; Commitment Reductions. The Borrower shall be
permitted to prepay the Loans from and after the Conversion Date in whole or in
part, without penalty or premium, or reduce or terminate the Total Commitment at
any time, without penalty or premium except as otherwise stated herein, upon the
following terms:
(i) The Borrower shall provide the Agent Bank with at least one (1)
Business Day's prior written notice of its intention to prepay.
(ii) Each prepayment shall be made on a pro rata basis to the Lenders.
(iii) The Total Commitment may be reduced (pro rata between the
Lenders) or terminated upon at least one (1) Business Day's notice;
provided, however, that such Commitment may not be reduced below the
outstanding principal amounts of the Loans on such date.
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<PAGE>
(b) Mandatory Prepayments. In addition to the Borrower's right of voluntary
prepayment:
(i) From and after the Conversion Date, the Borrower shall make
mandatory prepayments of the Loans to the Lenders, on a pro rata basis, in
an amount equal to fifty percent (50%) of Excess Cash Flow for the
immediately preceding fiscal year. Such payments shall be made annually, no
later than May 1 of each year in respect of the prior fiscal year,
commencing on May 1, 2,000 in respect of fiscal year 1999.
(ii) If at any time the outstanding principal amount of the Loans
exceeds the Total Commitment, the Borrower shall make mandatory prepayments
of the Loans to the Lenders, on a pro rata basis, within two (2) Business
Days thereof, in such amounts as may be necessary to eliminate such excess.
(iii) The Borrower shall make mandatory prepayments of the Loans to
the Lenders, on a pro rata basis, in an amount equal to 100% of the net
cash proceeds (after payment of related taxes and expenses) from the sale
of its assets outside the ordinary course of business.
(iv) From and after the Conversion Date, the Borrower shall make
mandatory prepayments of the Loans to the Lenders, on a pro rata basis, in
an amount equal to 100% of the net cash proceeds obtained by the Borrower
through the issuance of Approved Debt.
(c) Application of Prepayments. Voluntary and mandatory prepayments made to
the Lenders pursuant to this Section 2.6 shall be made on a pro rata basis. All
prepayments shall be applied by each Lender first to late charges and other
costs, then to accrued but unpaid fees, then to accrued but unpaid interest and
thereafter in reduction of outstanding principal amounts in the inverse order of
maturity.
(d) Prepayment of Eurodollar Loans. In the event that the Borrower makes a
prepayment (whether voluntary or mandatory) of any portion of a Eurodollar Loan
on a day other than the last day of an Interest Period with respect thereto, the
Borrower will pay to the Lenders, upon demand, an amount or amounts equal to the
amount, if any, by which the interest which would have been payable on the last
day of the relevant Interest Period exceeds the amount of interest (as
reasonably determined by each such Lender) that each such Lender would have
obtained by placing its pro rata share of the amount so prepaid on deposit in
the London Inter-Bank Eurocurrency market for a period commencing on the date
following such prepayment and ending on the last day of such Interest Period.
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The respective Lender's calculation of such amounts shall be conclusive in the
absence of manifest error.
(e) Permanent Reduction of Commitment. Any mandatory prepayment shall
permanently reduce the Total Commitment on a pro rata basis, by the amount of
such prepayment.
2.7 Reimbursement of Certain Expenses. In addition to amounts hereinabove
set forth, the Borrower agrees to pay to the Lenders with respect to the Loans,
on a pro rata basis, an amount certified by the Agent Bank to be sufficient to
compensate the Lenders for all actual losses, reasonable out-of-pocket expenses,
funding expenses or costs incurred in connection with the Borrower's (a) failure
to borrow or prepay a Eurodollar Loan pursuant to a written notice given
hereunder with respect thereto or (b) repayment upon acceleration or prepayment
of principal bearing interest at a Eurodollar Rate. The certification by the
Agent Bank hereunder shall be conclusive in the absence of manifest error.
2.8 Security. The Notes and other obligations of the Borrower shall be
secured by and entitled to the benefits of (i) the Security Agreements, (ii) the
Guaranty Agreements, (iii) the Pledge Agreements, (iv) the Blocked Account
Agreements and (v) the Assignments of Tenant's Interest Under Leases.
2.9 Payments Among the Agent Bank and the Lenders.
(a) Except as otherwise provided herein, the Borrower agrees that: (A) each
Loan hereof will be made by the Lenders to the Agent Bank for the account of the
Borrower and each payment of the Commitment Fee shall be made to the Agent Bank
for the account of the Lenders pro rata in accordance with their respective
percentages of the Total Commitment, (B) payments and prepayments of principal
or interest will be made by the Borrower to the Agent Bank for the account of
the Lenders pro rata in accordance with the unpaid principal amount of the
Loans, as applicable, and (C) any reduction in the Total Commitment shall reduce
each Lender's Commitment pro rata in accordance with its percentage of the Total
Commitment.
In the event any payments to the Lenders by the Agent Bank described in Section
2.9(a)(B) are not received by any Lender from the Agent Bank on the Business Day
immediately following the date the Agent Bank receives such payment from the
Borrower, the Agent Bank shall owe such Lender the amount of such payment,
together with interest thereon, for each day from the date such amount is in
possession of the Agent Bank on behalf of the
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Lenders until the date such amount is paid by the Agent Bank to the Lenders, at
the rate computed by taking the Base Rate in effect from time to time and
increasing it by 1.5%. The Agent Bank shall be deemed to be delinquent with
respect to such payment until all payments to the Lenders have been paid in
full.
(b) The Agent Bank shall have no obligation to fund any amounts to the
Borrower pursuant to a Loan Request unless such amounts are actually received
from the Lenders. In the event funds are not received from a Lender on the
Business Day immediately prior to a Borrowing Date, the Agent Bank may assume
that such Lender will make such funds available to the Agent Bank on the
Borrowing Date (if such Lender has not notified the Agent Bank that it will not
make funds available to the Agent Bank) and the Agent Bank, in its sole
discretion, may, but shall not be obligated to, in reliance upon such
assumption, make available to the Borrower on the Borrowing Date a corresponding
amount. If and to the extent such Lender shall not have so made such funds
available to the Agent Bank and the Agent Bank has made a corresponding amount
available to the Borrower, such Lender (a "Delinquent Lender") agrees to repay
to the Agent Bank such corresponding amount within one (1) Business Day of such
advance to the Borrower. Such amount shall be paid by the Delinquent Lender,
together with interest thereon, for each day from the date such amount is
advanced to the Borrower by the Agent Bank on behalf of such Delinquent Lender
until the date such amount is repaid to the Agent Bank, at the rate computed by
taking the Base Rate in effect from time to time and increasing it by 1.5%. If
such Delinquent Lender shall repay to the Agent Bank such corresponding amount,
such amount so repaid shall constitute a Loan under such Delinquent Lender's
Commitment. If such Delinquent Lender does not pay such corresponding amount
within one (1) Business Day, the Agent Bank shall be entitled to all interest
earned thereon through the date of the payment of any such amount by such
Delinquent Lender. A Delinquent Lender shall be deemed to have assigned any and
all payments due to it from the Borrower, whether on account of outstanding
principal, interest, fees or otherwise to the nondelinquent Lenders for
application to, and reduction of, their respective pro rata share of all
outstanding Loans to the extent of the delinquency. The Delinquent Lender hereby
authorizes the Agent Bank to distribute such payments to the nondelinquent
Lenders in proportion to their respective pro rata shares of all outstanding
Loans. A Delinquent Lender shall be deemed to have satisfied in full a
delinquency when and if, as a result of application of the assigned payment to
all outstanding Loans of the nondelinquent Lenders, the Lenders' respective pro
rata shares of all outstanding Loans have returned to those in effect
immediately prior to such delinquency and without giving effect to the
nonpayment causing such delinquency.
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(c) Nothing contained in this Section 2.9 shall be construed
to relieve any Lender of its obligation to make funds available to the Agent
Bank under this Agreement except as otherwise expressly provided herein, nor to
relieve the Borrower of its obligation to make any payment when due.
SECTION 3. LETTERS OF CREDIT
3.1 Availability of Letters of Credit. In addition to cash advances under
the Loans, the Borrower may draw on the Total Commitment by requesting the
issuance by the Agent Bank, for the account of the Borrower, of one or more
letters of credit (individually, a "Letter of Credit" and collectively the
"Letters of Credit") upon terms and in form reasonably satisfactory to the Agent
Bank; provided that the Agent Bank shall have no obligation to issue a Letter of
Credit if, after giving effect to such issuance the aggregate principal amount
of all Reimbursement Obligations would, when added to the then outstanding
principal amount of the Loans, exceed the Total Commitment. The Letters of
Credit shall have terms which do not extend beyond the Maturity Date and shall
not be issued or renewed for the purpose of supporting or permitting repayment
of any Indebtedness for borrowed money or similar obligations of the Borrower
(except for those set forth in Schedule 3.1 or those reasonably acceptable to
the Agent Bank). At no time shall the aggregate principal amount of all
Reimbursement Obligations in respect of all outstanding Letters of Credit exceed
$4,000,000.
3.2 Letter of Credit Request. Each request by the Borrower for the issuance
of a Letter of Credit (a "Letter of Credit Request") shall be made in writing,
in a form prescribed by the Agent Bank from time to time. Each Letter of Credit
Request shall be submitted at least five (5) Business Days before the day on
which the Letter of Credit is to be issued. Each Letter of Credit Request shall
contain the information and other evidence reasonably required by the Agent Bank
to establish that all conditions precedent to the requested Letter of Credit
have been satisfied. Each Letter of Credit Request shall include an express
representation and warranty (and shall be deemed to include the representation
and warranty if it is not expressly included) by the Borrower that (i) all of
the representations and warranties set forth in Section 5 hereof continue to be
true and correct in all material respects on the date of the Letter of Credit
Request, (ii) all conditions precedent to the requested Letter of Credit have
been satisfied as of the time the Letter of Credit Request is submitted to the
Agent Bank and (iii) the business and financial ratios and covenants set forth
in Section 7.19 have been met and (iv) no Event of Default or Potential Event of
Default exists. The Borrower shall attach to each Letter of Credit Request a
form of
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the Letter of Credit, issuance of which is requested by the Borrower, which form
shall have been substantially agreed upon by the intended beneficiary of such
Letter of Credit.
3.3 Utilization of Commitment. Upon the issuance of any Letters of Credit,
on each day during the period commencing with the issuance by the Agent Bank of
any such Letters of Credit and until the time on which such Letters of Credit
shall have expired or have been terminated or until all Reimbursement
Obligations of the Borrower have been paid, whichever is earlier, the Total
Commitment shall be reduced by the amount of the face amount of the Letters of
Credit for all purposes hereof.
3.4 Reimbursement Obligations. Amounts paid by the Agent Bank upon any
drawing under a Letter of Credit shall be reimbursed by the Borrower on or
before 1:00 p.m. New York City time on the date of honoring such drawing (the
"Reimbursement Time") as provided in Section 3.5. The Borrower's obligation to
reimburse the Agent Bank under this Section 3.4 for payments and disbursements
made by the Agent Bank in respect of each drawing shall be absolute and
unconditional under any and all circumstances and irrespective of any set-off,
counterclaim or defense to payment which the Borrower may have or have had
against the Agent Bank or the Lenders (other than any set-off, counterclaim or
defense arising out of an act or acts of gross negligence or willful misconduct
by the Agent Bank or the Lenders), including any defense based on (a) the
failure of any presentation or demand for payment under any Letter of Credit to
conform to the terms of any Letter of Credit if the Borrower has requested in
writing that the Agent Bank honor such Letter of Credit despite the
non-conformance; (b) any nonapplication or misapplication by any beneficiary of
the proceeds of any Letter of Credit; (c) the legality, validity, regularity or
enforceability of any Letter of Credit; (d) any amendment or waiver of or any
consent to or departure from this Agreement; (e) any exchange, release or
non-perfection of any Collateral, or any release, amendment or waiver of or
consent to or departure from any guaranty; (f) the existence of any claim,
set-off, defense or other right which the Borrower may have at any time against
the beneficiary or any transferee of any Letter of Credit (or any entities for
whom such beneficiary or any such transferee may be acting), or any other
Person, whether in connection with this Agreement, the transaction in respect of
which such Letter of Credit was issued, or any unrelated transaction; (g) any
presentation or demand under or transfer of any Letter of Credit or any
statement or other document presented under any Letter of Credit proving to be
unauthorized, forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect whatsoever; and (h)
any law, order, regulation or custom in effect in the places of negotiation or
payment of any Letter of Credit.
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3.5 Fulfillment of Reimbursement Obligations. The Borrower's obligation to
reimburse the Lenders under Section 3.4 for any amounts paid in respect of a
drawing shall be fulfilled as follows:
(a) Subject to fulfillment of each and every condition provided in
Section 4 hereof by the Reimbursement Time, the amounts paid by the Agent
Bank under such drawing shall be treated as a Loan under this Agreement and
in such event the Lenders agree to fund such Loan pro rata.
(b) If clause (a) above cannot apply because the conditions of Section
4 are not met, the Borrower shall make a payment in cash to the Agent Bank,
to be applied pro rata among the Lenders in accordance with Section 3.11,
on or before the Reimbursement Time, in an amount equal to the drawing
under the Letters of Credit.
3.6 Interest on Amounts Advanced under Letter of Credit Drawings. On each
day during the period commencing with the issuance by the Agent Bank of any
Letter of Credit and until such Letter of Credit shall have expired or been
terminated and until all Reimbursement Obligations have been paid, the Total
Commitment shall be deemed to be utilized for all purposes hereof, in an amount
equal to each Lender's percentage of the Total Commitment of the then undrawn
face amount of each Letter of Credit and any unpaid Reimbursement Obligation.
The interest rate applicable to such amounts shall be determined by reference to
Section 2.4 hereof.
3.7 Letter of Credit Fees. Upon the issuance of each Letter of Credit, the
Borrower shall pay to the Agent Bank a letter of credit issuance fee (the
"Issuance Fee") of $500. The Borrower shall pay to the Agent Bank, for the
benefit of the Lenders, on a pro rata basis, an additional Letter of Credit fee
(the "Maintenance Fee", together with the Issuance Fee, the "Letter of Credit
Fees") quarterly in advance, beginning with the last day of the first Quarter in
which the Agent Bank has issued a Letter of Credit. The Letter of Credit Fee
shall be paid to the Agent Bank on the daily undrawn face amount of each Letter
of Credit outstanding for the period from and including the date of issuance of
such Letter of Credit to and including the date of expiration or termination
thereof, at a rate per annum based upon the Leverage Ratio as follows:
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Total Consolidated Debt/ Fee as a % of
Consolidated EBITDA Face Amount of
(for the preceding four Quarters) minus Letter of Credit
Capital Expenditures (per annum)
-------------------- -----------
Greater than or equal to 2.00 2.25%
Less than 2.00 but
greater than or equal to 1.00 1.75%
Less than 1.00 1.50%
3.8 Additional Conditions to Issuance of Letters of Credit. The issuance by
the Agent Bank of each Letter of Credit shall further be subject to the
conditions precedent that (a) such Letter of Credit be in such form and contain
such terms as reasonably required by the Agent Bank and be used only for
Permitted Uses and (b) the Borrower shall have paid to the Agent Bank for its
own account the Issuance Fee in connection with issuing each such Letter of
Credit.
3.9 Additional Costs in Respect of Letters of Credit. If as a result of any
new law, rule or regulation or any change in an existing law, rule or regulation
there shall be imposed, modified or deemed applicable any tax (except for taxes
imposed on a Lender's or Agent Bank's net income by the United States or any
other government having jurisdiction or any political subdivision or taxing
authority thereof), reserve, special deposit or similar requirement against or
with respect to or measured by reference to any Letter of Credit issued or to be
issued by the Agent Bank hereunder and the result shall be to increase the cost
to the Agent Bank of issuing or maintaining such Letter of Credit or such
participation, or reduce any amount receivable by the Agent Bank hereunder in
respect of such Letter of Credit or such participation, then, upon demand by the
Agent Bank, the Borrower agrees to pay immediately to the Agent Bank such
additional amounts as the Agent Bank shall from time to time specify as
necessary to compensate the Agent Bank for such increased costs or reductions in
amounts. A statement as to such increased costs or reductions in amounts
incurred by the Agent Bank, submitted to the Borrower, shall be conclusive,
absent manifest error, provided that such costs or reductions are determined on
a reasonable basis.
3.10 Commercial Practices in Respect of Letters of Credit. Notwithstanding
anything to the contrary in this Agreement, the Agent Bank shall have no
obligation to issue any Letter of Credit if, in its sole determination, such
issuance would conflict with or violate any applicable law. All Letters of
Credit shall be construed in accordance with
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and shall be governed by the Uniform Customs and Practice for Documentary
Credits, International Chamber of Commerce, Publication 500 (1993 revision) (the
"UCP") and, to the extent not inconsistent with the UCP, the U.C.C. Without
affecting any rights the Agent Bank or the Lenders may have under applicable law
(including the UCP), the Borrower agrees that neither any Lender or the Agent
Bank nor any of their respective officers or directors shall be liable or
responsible for, and the obligations of the Borrower to the Agent Bank or the
Lenders hereunder shall not in any manner be affected by: (a) the use which may
be made of any Letter of Credit or the proceeds thereof by the beneficiary
thereof or any other Person; (b) the validity, sufficiency or genuineness of
documents other than the Letters of Credit, or of any endorsement(s) thereon,
even if such documents should, in fact, prove to be in any or all respects,
invalid, insufficient, fraudulent or forged; or (c) any other circumstances
whatsoever in making or failing to make payment under any Letter of Credit
except that the Borrower shall have a claim against the Agent Bank, and the
Agent Bank shall be liable to the Borrower, to the extent, but only to the
extent, of any direct, as opposed to consequential, damages suffered by the
Borrower which the Borrower proves are caused by the Agent Bank's willful
misconduct or gross negligence in determining whether documents presented under
any Letter of Credit complied with the terms of such Letter of Credit or the
Agent Bank's willful failure to pay under such Letter of Credit after the
presentation to it of documents strictly complying with the terms and conditions
of such Letter of Credit. In furtherance and not in limitation of the foregoing,
the Agent Bank may accept documents that appear on their face to be in order
without responsibility for further investigation, regardless of any notice or
information to the contrary.
3.11 Lender's Participation in Liability. Each Lender hereby agrees that
upon the issuance by the Agent Bank of any Letter of Credit, such Lender will
automatically acquire a participation under such Letter of Credit in an amount
equal to the product of the face amount of the Letter of Credit, multiplied by
such Lender's percentage of the Total Commitment (the amount of liability of
each Lender to the Agent Bank as calculated pursuant to this Section 3.11 being
referred to herein as the "Letter of Credit Liability"). Each Lender hereby
unconditionally agrees to pay to the Agent Bank at the address of the Agent Bank
set forth in this Agreement in immediately available funds (not later than 4:00
p.m. New York City time on the Business Day on which the Agent Bank will send a
notice to such Lender that the Agent Bank has paid amounts in respect of a
drawing under any Letter of Credit) the amount of such Lender's Letter of Credit
Liability specified in such notice, provided that such notice is received by
such Lender by not later than 1:00 p.m. New York City time, on such Business
Day. Simultaneously with the making of each payment by a Lender
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to the Agent Bank pursuant to the preceding sentence, the Agent Bank will,
automatically and without any further action on the part of the Agent Bank or
such Lender, acquire a participation in an amount equal to such payment in the
Reimbursement Obligation owing by the Borrower in respect of such drawing and a
participation in a percentage equal to such Lender's percentage of the Total
Commitment in any interest payable by the Borrower in respect of such
Reimbursement Obligation. Each payment received by the Agent Bank in respect of
any Reimbursement Obligation (including by way of set-off or application of
proceeds or any collateral security for such Reimbursement Obligation) will be
promptly paid by the Agent Bank to the Lenders entitled thereto, pro rata, in
accordance with the amounts of the Lenders' respective participation in such
Reimbursement Obligation.
SECTION 4. CONDITIONS PRECEDENT
No Lender shall be required to make any Loan or to make any other advance
in connection therewith and the Agent Bank shall not be required to issue any
Letter of Credit to the Borrower unless the following conditions have been
satisfied prior thereto:
4.1 Representations and Warranties; Compliance. All representations and
warranties made by the Borrower and the Parent in this Agreement or in the other
Loan Documents or otherwise made in writing in connection herewith or therewith
shall be true and correct on and as of the Borrowing Date with the same force
and effect as though such representations and warranties had been made on and as
of the Borrowing Date. All of the agreements, terms, covenants and conditions
required by this Agreement and the other Loan Documents to be complied with and
performed by the Parent, the Borrower and the Subsidiaries shall have been
complied with and performed.
4.2 No Default. No Event of Default shall have occurred and be continuing
on and as of the Borrowing Date.
4.3 No Adverse Change; No Litigation. No adverse change in the business,
operations, properties or condition (financial or otherwise) of the Borrower,
the Parent and the Subsidiaries, taken as a whole, and no other event shall have
occurred which creates a Material Adverse Effect. No actions, suits, claims,
arbitrations, litigation, proceedings or investigations before or by any
arbitrator or Governmental Authority shall have been instituted or threatened to
restrain, prohibit, invalidate or otherwise affect the transactions contemplated
by this Agreement, the other Loan Documents or the Merger Documents.
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4.4 Authorizations Obtained. All approvals, licenses, authorizations,
consents, filings and registrations of or with all Governmental Authorities and
other Persons which shall be necessary or which in the reasonable judgment of
the Agent Bank or counsel to the Agent Bank shall be desirable in connection
with the execution, delivery and performance of this Agreement, the other Loan
Documents, the Merger Documents and the transactions contemplated hereby and
thereby, shall have been obtained, shall be in form and substance reasonably
satisfactory to the Agent Bank and counsel to the Agent Bank, shall have been
delivered to the Agent Bank and shall be in full force and effect at and as of
such Borrowing Date.
4.5 Documentation and Proceedings. All corporate and legal proceedings and
all instruments delivered in connection with the transactions contemplated by
this Agreement, the other Loan Documents and the Merger Documents shall be in
form and substance reasonably satisfactory to the Agent Bank and counsel to the
Agent Bank, and the Agent Bank and such counsel shall have received all
information and copies of all documents (including records of corporate
proceedings) which the Agent Bank and such counsel may have reasonably requested
in connection herewith or therewith, such documents where appropriate to be
certified by proper corporate or Governmental Authorities, including, without
limitation, the following:
(a) Resolutions of Borrower. Certified copies of resolutions of the
Board of Directors of the Borrower authorizing the borrowing contemplated
hereby, the creation of a security interest in favor of the Agent Bank in
the Collateral owned by the Borrower, and the execution and delivery by the
Borrower of this Agreement, the Notes, its Security Agreement, the
Assignment and Assumption Agreement, the Merger Documents to which it is a
party and of all other instruments and documents called for hereunder and
thereunder to be executed and delivered by the Borrower.
(b) Resolutions of Parent. Certified copies of resolutions of the
Board of Directors of the Parent authorizing the creation of a security
interest in favor of the Agent Bank in the Collateral owned by the Parent,
and authorizing the execution and delivery by the Parent of this Agreement,
its Guaranty Agreement, its Pledge Agreement the Merger Documents to which
it is a party, and of all other instruments and documents called for
hereunder and thereunder to be executed and delivered by the Parent.
(c) Resolutions of Subsidiaries. Certified copies of resolutions of
the Board of Directors of each Subsidiary authorizing the
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creation of a security interest in favor of the Agent Bank in the
Collateral owned by each such Subsidiary, and authorizing the execution and
delivery by each Subsidiary of its Guaranty Agreement, its Security
Agreement, the Merger Documents to which it is a party and of all other
instruments and documents called for hereunder and thereunder to be
executed and delivered by each such Subsidiary.
(d) Articles of Incorporation and Bylaws. Copies of the articles of
incorporation and bylaws of each of the Borrower, the Parent and the
Subsidiaries, certified by each such corporation's respective corporate
secretary to be true and complete.
(e) Certificates of Good Standing. Certificates of good standing of
each of the Borrower, the Parent and the Subsidiaries in the state in which
it is incorporated and in each of the states listed on Schedules 5.1(a),
5.1(b) and 5.2, respectively, dated as of a date within fifteen (15) days
of the Closing Date.
(f) Officer's Certificates of Borrower and Parent. An Officer's
Certificate of each of the Borrower and the Parent, dated the Borrowing
Date and substantially in the form attached hereto as Schedule 4.5(f),
certifying in form and substance satisfactory to the Agent Bank that the
conditions precedent specified in Sections 4.1 through 4.5 hereof have been
satisfied, and that the representations and warranties specified in
Sections 5.1 through 5.35 hereof are true and correct at and as of such
Borrowing Date.
(g) Incumbency Certificates. Certificates of incumbency showing the
signatures and corporate authority of the persons executing Loan Documents
on behalf of each of the Borrower, the Parent and any Subsidiary.
(h) Opinions of Counsel. (i) The opinions of counsel to the Borrower,
the Parent, and the Subsidiaries, dated the Closing Date and addressed to
the Lenders, substantially in the form of Exhibit G hereto and (ii) the
opinion of counsel to the Borrower, the Parent and the Subsidiaries, dated
the date hereof, substantially in the form of Exhibit G-1 hereto. On
subsequent Borrowing Dates, the Borrower shall deliver updates of the
opinion in the form of Exhibit G-1 hereto in the event the funding on such
Borrowing Date (1) is in an amount equal to or greater than $5,000,000, (2)
is in an amount greater than $2,000,000 and is for the purpose of making a
Permitted Acquisition or (3) is being made within one hundred and eighty
(180) days after the occurrence of an Event of Default which has been cured
in accordance with this Agreement.
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(i) Notes. The fully executed Notes.
(j) Guaranty Agreements. The fully executed Guaranty Agreements from
the Parent and each of the Subsidiaries.
(k) Pledge Agreements. The fully executed Pledge Agreements (together
with the original stock certificates and assignment powers required
thereunder and any appropriate Federal Reserve Forms U-1) from the Parent
and the Borrower.
(l) Security Agreements. The fully executed Security Agreements from
the Parent, the Borrower and each of the Subsidiaries.
(m) Blocked Account Agreements. The fully executed Blocked Account
Agreements from the Parent, the Borrower and each of the Subsidiaries.
(n) U.C.C Financing Statements. U.C.C.-1 financing statements required
under the Security Agreements, all of which financing statements shall be
filed in the appropriate jurisdictions.
(o) U.C.C., Tax Lien and Judgment Searches. Such title reports and
lien and judgment searches as are necessary to demonstrate that the title
of each of the Borrower, the Parent and the Subsidiaries to the Collateral
is free and clear of all Liens except Permitted Liens, that all U.C.C.-1
financing statements required to perfect the security interests of the
Agent Bank have been duly filed in the appropriate offices, and that all
pledges of uncertificated securities, if any, included in the Collateral
have been duly registered, so that, when the Loans are advanced, the
security interests of the Agent Bank in the Collateral will be valid,
perfected and of first priority.
(p) Insurance Policies or Certificates. Insurance binders evidencing
that the insurance required by Sections 6.14 and 6.22 has been obtained.
(q) Mortgage and Collateral Assignments of Leases. Assignments of
Tenant's Interest under Leases with respect to the offices of the Borrower
and the Subsidiaries. If the Agent Bank requests, any Assignment of
Tenant's Interest Under Leases shall be recorded in the appropriate land
record offices unless to do so would cause a breach of a lease subject to
such Assignment of Tenant's Interest Under Leases. The Borrower shall have
executed and delivered a mortgage in favor of the Agent Bank as the first
mortgagee, covering each parcel of Owned Real Property, which such
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mortgage shall be recorded among the land records of the jurisdiction(s) in
which the Owned Real Property is located.
(r) Landlords'/Mortgagees' Waivers. A Landlord's Waiver and Consent,
executed by each landlord of the offices of the Borrower and the
Subsidiaries, subject to the provisions of Section 6.15. The waiver shall
include a consent to the Assignment of the Tenant's Interest Under Leases
and shall assure the Agent Bank of its ability to gain access to such
premises and remove the Collateral without interference by the landlord,
even if the Borrower is in default under any leases or mortgages (or deeds
of trust) affecting such premises.
(s) Collateral Audit Report. An audit report prepared by an
independent certified public accounting firm selected by the Agent Bank as
to the existence and value of the Collateral, which audit report shall be
reasonably satisfactory to the Agent Bank.
(t) Repayment of Existing Indebtedness. Written evidence satisfactory
to the Agent Bank that (i) all of the Existing Indebtedness, including,
without limitation, all principal, interest, costs and expenses thereon,
has been fully and finally paid, (ii) no obligations are due and owing by
the Borrower to any holder of Existing Indebtedness and (iii) all liens in
connection with the Existing Indebtedness have been fully released by
appropriate UCC-3 termination statements.
(u) Assignment and Assumption Agreement. The fully executed Assignment
and Assumption Agreement.
4.6 Recurring Security Services Contracts. The Agent Bank shall be
satisfied that all of the Recurring Security Services Contracts in existence as
of the Closing Date were Stamped within sixty (60) days after the Closing Date
and that all Recurring Security Services Contracts entered into since the
Closing Date have been stamped.
4.7 Non-U.S. Subsidiaries. The Agent Bank shall be satisfied that the
Non-U.S. Subsidiaries have been fully dissolved on or before December 31, 1996.
SECTION 5. REPRESENTATIONS AND WARRANTIES.
In order to induce the Lenders and the Agent Bank to enter into this
Agreement and to make the Loans and issue the Letters of Credit as herein
provided, the Borrower and the Parent, jointly and severally, hereby make the
following representations and warranties, which representations and warranties
shall survive the execution and delivery of this Agreement
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and of the Notes and shall not be affected or waived by any inspection or
examination made by or on behalf of the Agent Bank or the Lenders:
5.1 Corporate Status.
(a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York, and has the full power
and authority, corporate and otherwise, to own, operate and lease its
properties, to carry on its business as currently conducted, to execute and
deliver this Agreement, the Notes, its Security Agreement, the Assignment and
Assumption Agreement, the Merger Documents and the other Loan Documents to which
it is a party, and to perform all of its obligations under all such agreements
and documents. The Borrower is duly qualified to conduct business as a foreign
corporation and is in good standing in the states listed on Schedule 5.1(a)
hereto. The Borrower is not qualified to conduct business in any other
jurisdiction and there is no state, country or territory wherein the absence of
licensing or qualification as a foreign corporation has had or would result in a
Material Adverse Effect.
(b) The Parent is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has the full power
and authority, corporate and otherwise, to own, operate and lease its
properties, to carry on its business as currently conducted, to execute and
deliver this Agreement, its Guaranty Agreement, its Pledge Agreement, the Merger
Documents to which it is a party and the other Loan Documents to which it is a
party, and to perform all of its obligations under all such agreements and
documents. The Parent is duly qualified to conduct business as a foreign
corporation and is in good standing in the states listed on Schedule 5.1(b)
hereto. The Parent is not qualified to conduct business in any other
jurisdiction, and there is no state, country or territory wherein the absence of
licensing or qualification as a foreign corporation has had or would result in a
Material Adverse Effect.
5.2 Subsidiaries. Neither the Parent nor the Borrower has any subsidiaries,
any equity investment or other interest in, or has made advances to any
corporation, association, partnership, joint venture or other entity, except as
described on Schedule 5.2 hereto, which Schedule 5.2 sets forth (a) the
authorized capital stock of each Subsidiary and the percentage of the
outstanding capital stock of each Subsidiary owned by the Parent or the
Borrower, as the case may be, (b) the nature and amount of any such equity
investment, other interest or advance, and (c) the state of incorporation of
each Subsidiary. All of such shares owned by the Parent or the Borrower, as the
case may be, have been duly authorized and validly issued and are fully paid and
nonassessable. Other than the Non-U.S. Subsidiaries, each
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Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of its state of incorporation, and has the full power
and authority, corporate and otherwise, to own, operate and lease its
properties, to carry on its business as currently conducted, to execute and
deliver its Security Agreement, its Guaranty Agreement, the Merger Documents to
which it is a party and the other Loan Documents to which it is a party, and to
perform all of its obligations under all such agreements and documents. Each
Subsidiary is duly qualified to conduct business as a foreign corporation and is
in good standing in the states listed on Schedule 5.2 hereto. The Subsidiaries
are not qualified to conduct business in any other jurisdictions and there is no
state, country or territory wherein the absence of licensing or qualification as
a foreign corporation has had or would result in a Material Adverse Effect. The
Parent or the Borrower, as the case may be, owns all of the outstanding capital
stock of each Subsidiary, free and clear of any Liens, except for Permitted
Liens.
5.3 Articles of Incorporation and Bylaws. The Borrower has furnished to the
Agent Bank a complete and correct copy of the Articles of Incorporation of each
of the Borrower, the Parent and each Subsidiary (other than the Non-U.S.
Subsidiaries), as presently in effect, certified as of a recent date by the
Secretary of State of their respective states of incorporation, and a complete
and correct copy of the bylaws of each of the Borrower, the Parent and each
Subsidiary (other than the Non-U.S. Subsidiaries), as currently in effect,
certified by their respective corporate secretaries.
5.4 Authorization; No Violations. The execution, delivery and performance
of this Agreement, the Notes, the Merger Documents and the other Loan Documents
by the Borrower, the Parent and any Subsidiary party thereto, the fulfillment of
and the compliance with the respective terms and provisions hereof and thereof,
and the due consummation of the transactions contemplated hereby and thereby,
have been duly and validly authorized by all necessary corporate action on the
part of the Borrower, the Parent and such Subsidiary (none of which actions have
been modified or rescinded, and all of which actions are in full force and
effect), and do not and will not:
(a) Require any consent or approval of any Person, other than the
stockholders of the Borrower, the Parent or such Subsidiary and with
respect only to the Merger Documents, the Secretary of State of the State
of Delaware; the Secretary of State of the State of New Jersey; the
Pennsylvania Department of State, Corporation Bureau; the New York State
Department of State, Division of
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Corporations and State Records; the Secretary of the Commonwealth, the
Commonwealth of Massachusetts; the State of Texas, Secretary of State; the
State of California, Franchise Tax Board; the Secretary of State, State of
California; and the Division of Taxation, State of New Jersey, all of which
consents and approvals have been duly obtained.
(b) Conflict with, or violate any provision of, any statute, law,
ordinance, rule, regulation, order, writ, judgment, injunction, decree,
determination or award of any arbitrator or Governmental Authority having
applicability to the Borrower, the Parent or any Subsidiary or any of their
respective properties, or any provision of the Articles of Incorporation or
bylaws of the Borrower, the Parent or any Subsidiary;
(c) Conflict with, or result in any breach of, or constitute a default
under, any indenture loan credit agreement, deed of trust, mortgage, note
or other instrument or any material agreement, commitment, lease or
contract to which the Borrower, the Parent or any Subsidiary is a party or
by which it or any of its properties may be bound or affected; provided,
however, that the parties understand that certain agreements and leases to
which the Borrower, the Parent or any Subsidiary may be a party, none of
which agreements and leases is material to the respective businesses of the
Parent, the Borrower or such Subsidiary, prohibit assignment of such
agreements and leases by the Borrower, the Parent or such Subsidiary; or
(d) Result in or require the creation or imposition of or result in
the acceleration of any Indebtedness or any Lien of any nature upon, or
with respect to, the Borrower, the Parent or any Subsidiary or any of the
properties now owned or hereafter acquired by the Borrower, the Parent or
any Subsidiary.
5.5 Governmental Approvals. No consent, approval or authorization of, or
declaration or filing with, any Governmental Authority or any state, county, or
municipal agency, authority, commission or council, and, if applicable, public
utility commissions and other entities exercising jurisdiction over the sale,
lease (or rental), installation, servicing or monitoring of Security Services,
on the part of the Borrower, the Parent or any Subsidiary is required for the
valid execution, delivery or performance of any of the Loan Documents.
5.6 Validity and Binding Nature. This Agreement constitutes, and each of
the Notes, the other Loan Documents and the Merger Documents when executed and
delivered hereunder will constitute, a legal, valid and binding obligation of
the Borrower, the Parent and each Subsidiary party thereto, enforceable against
the Borrower, the Parent and such Subsidiary, as the case may be, in accordance
with its respective terms, except as enforceability may be limited by
bankruptcy, insolvency,
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reorganization, moratorium, or similar laws relating to or affecting generally
the enforcement of creditors' rights.
5.7 Capitalization.
(a) The authorized capital stock of the Borrower consists solely of
2,000 shares of common stock, no par value, of which 2,000 shares have been
duly authorized and validly issued and are outstanding, fully paid and
nonassessable. No shares of capital stock have been reserved for any
purpose. There are no outstanding securities convertible into or
exchangeable for, and no outstanding options, warrants or other rights to
purchase or to subscribe for, any shares of stock or other securities of
the Borrower or of any of the Subsidiaries, other than as set forth on
Schedule 5.7(a). There are no outstanding agreements, arrangements,
commitments or understandings of any kind affecting or relating to the
voting, issuance, purchase, redemption, repurchase or transfer of the
Borrower's common stock, any other securities of the Borrower, or any
securities of any Subsidiary, other than as set forth on Schedule 5.7(a).
(b) The authorized capital stock of the Parent consists solely of
12,000,000 shares of common stock, par value $0.1 per share, of which, as
of the date hereof, 5,828,062 shares were duly authorized and validly
issued and are outstanding, fully paid and nonassessable. No shares of
capital stock have been reserved for any purpose. There are no outstanding
securities convertible into or exchangeable for, and no outstanding
options, warrants or other rights to purchase or to subscribe for, any
shares of stock or other securities of the Parent, other than as set forth
on Schedule 5.7(b). There are no outstanding agreements, arrangements,
commitments or understandings of any kind affecting or relating to the
voting, issuance, purchase, redemption, repurchase or transfer of the
Parent's common stock or any other securities of the Parent, other than as
set forth on Schedule 5.7(b).
5.8 Financial Statements. All financial statements delivered to the Agent
Bank, including, without limitation, audited financial statements for the year
ending December 31, 1995 and unaudited financial statements for the Quarter
ending June 30, 1996 of the Borrower delivered to the Agent Bank including the
notes thereto, (i) are true, correct and complete, (ii) are in accordance with
the books and records of the Borrower, the Parent and the Subsidiaries, (iii)
present fairly the financial condition, assets, liabilities and stockholders'
equity as of the respective dates indicated, and the results of operations and
changes in financial position for the respective periods indicated, of the
Borrower, the Parent and the Subsidiaries, and (iv) are prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved. Except as
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reflected in such balance sheets, there exist no liabilities of the Borrower,
the Parent or any Subsidiary of a type customarily reflected in a balance sheet
in accordance with generally accepted accounting principles, contingent or
absolute, matured or unmatured, known or unknown. Officer's Certificates
delivered to the Agent Bank after the date hereof which certify the truth and
accuracy of the representations shall be deemed to apply to financial statements
which the Borrower has most recently delivered to the Agent Bank as of the time
of such certification.
5.9 Conduct of Business; Absence of Material Adverse Change. Since the date
of the most recent balance sheet delivered hereto, there has been no material
adverse change in the business, operations, affairs, condition (financial or
otherwise), assets, properties or assets of the Borrower, the Parent and the
Subsidiaries, taken as a whole, as shown on the balance sheet as of such date,
other than changes which are disclosed in the other Schedules attached hereto,
and no fact or condition exists or is contemplated or threatened which might
cause such material adverse change in the future.
5.10 Taxes. The amounts reserved as a liability for income and other taxes
payable in each balance sheet delivered pursuant to this Agreement will be
sufficient for the payment of all unpaid federal, state, county and local income
and other taxes, whether or not disputed, of the Borrower, the Parent and of
each Subsidiary accrued for or applicable to the period ended on the dates of
such balance sheet(s) and all years and periods prior thereto and for which the
Borrower, the Parent or any Subsidiary may be liable in its own right or as
transferee of the assets of, or as successor to, any other Person. Except as set
forth on Schedule 5.10, the Borrower, the Parent and each Subsidiary has filed
all federal, state, county and local income, excise, property and other tax
returns which are required to be filed by it and such returns are true and
correct. Each of the Borrower, the Parent and each Subsidiary has paid all
taxes, estimated taxes, interest, penalties, assessments and deficiencies which
have become due pursuant to such returns or without returns or pursuant to any
assessments received by it, and none of the Borrower, the Parent or any
Subsidiary is required to pay any additional taxes or other governmental
charges. Neither the Borrower nor the Parent nor any Subsidiary is a party to
any pending action or proceeding, and there is no action or proceeding
threatened by any Governmental Authority against the Borrower, the Parent or any
Subsidiary for assessment or collection of taxes, and no unresolved claim for
assessment or collection of taxes has been asserted against the Borrower, the
Parent or any Subsidiary. There are no outstanding agreements or waivers with
any Governmental Authority extending the statutory period of limitation
applicable to any tax
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return for any period, other than those relating to the extension of time to
file tax returns.
5.11 Accounts Receivable. The accounts receivable of the Borrower, the
Parent and the Subsidiaries shown on the most recent balance sheet delivered
hereto, or thereafter acquired by any of them, have been collected or are good
and collectible in amounts not less than the amounts thereof carried on the
books of the respective owners except to the extent of the allowance for
doubtful accounts shown on such balance sheet.
5.12 Debt Instruments. Attached hereto as Schedule 5.12 is a list and brief
description of the material terms, provisions and conditions of all mortgages,
indentures, notes, guarantees and other obligations for or relating to any
Indebtedness to which the Borrower, the Parent or any Subsidiary is a party or
which have been assumed by the Borrower, the Parent or any Subsidiary or to
which any properties or assets of the Borrower, the Parent or any Subsidiary are
subject which equal or exceed $100,000 for any single item of Indebtedness or in
the aggregate equal or exceed $100,000, including the principal amount, interest
rate, original and maturity dates and any sinking fund installments, prepayment
premiums, restrictive covenants and any other material provisions. Except as
described on Schedule 5.12, each of the Borrower, the Parent and each Subsidiary
has performed all the obligations required to be performed by it to the date
hereof and is not in default in any respect under any of the foregoing, and
there has not occurred any event which (whether with or without notice, lapse of
time or the happening or occurrence of any other event) would constitute such a
default.
5.13 Bank Accounts. Attached hereto as Schedule 5.13 is a complete list
showing the name of each bank in which the Borrower has accounts (including a
description of the account), certificates of deposit or safe deposit boxes, and
the names of all Persons authorized to draw thereon or to have access thereto.
Such list also shows the name of any Person holding a power of attorney from the
Borrower and a brief description thereof.
5.14 Books and Records. The books of account, stock records, minute books
and other records of the Borrower, the Parent and of each Subsidiary are in all
material respects complete and correct and have been maintained in accordance
with good business practices, and the matters contained in the books of account
are appropriately and accurately reflected in the financial statements described
in Section 5.8.
5.15 Litigation. Except as set forth on Schedule 5.15(a), there are no
actions, suits, protests, reconsiderations or proceedings pending, against or
affecting the Borrower, the Parent or a Subsidiary before or by any
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arbitrator or Governmental Authority. Except as set forth on Schedule 5.15(b),
there are no actions, suits, protests, reconsiderations or proceedings
threatened against the Borrower, the Parent or a Subsidiary which would, if
actually pursued and liability is determined against the Borrower, the Parent or
such Subsidiary, result in a Material Adverse Effect. Neither the Borrower nor
the Parent nor any Subsidiary (i) is operating under, subject to or in default
with respect to any order, writ, injunction, decree or judgment of any
arbitrator or Governmental Authority or (ii) is in default with respect to the
requirements of any Operating License held by any such Person.
5.16 No Restrictive Agreements. Except as set forth on Schedule 5.16,
neither the Borrower nor the Parent nor any Subsidiary is a party to any
agreement or subject to any corporate, governmental, or other legal restrictions
which could have a Material Adverse Effect.
5.17 Licenses. The Borrower, the Parent and each Subsidiary have duly
secured all necessary Operating Licenses, and have filed all required
registrations, applications, reports and other documents with the entities
exercising jurisdiction over the sale, lease (or rental), installation,
servicing and monitoring of Security Services, the absence of which Operating
Licenses and filings would result in a Material Adverse Effect. All such
Operating Licenses are listed on Schedule 5.17. Each Operating License is in
full force and effect and the Borrower, the Parent and each Subsidiary have
performed all of their respective obligations with respect thereto which are
required to have been performed prior to the applicable date. No event has
occurred which permits, or after notice or lapse of time (if not renewed within
required time limits) or both would permit, revocation or termination of any
such Operating License or which materially adversely affects or will materially
adversely affect the rights of such holder or which has or will have a Material
Adverse Effect.
5.18 Fees. Each of the Borrower, the Parent and each Subsidiary has paid
all franchise, license or other material fees and charges which it is obligated
to pay and which have become due pursuant to any Operating License.
5.19 Title to Property. Each of the Borrower, the Parent and the
Subsidiaries has good and marketable title to all of its properties and assets,
and none of such properties or assets is subject to any Liens, other than
Permitted Liens. As of the date hereof, only the Borrower, the Parent or a
Subsidiary, as the case may be, has legal and beneficial title to, and is the
only Person who operates, all of such properties and assets. Schedule 5.19 is a
correct and complete listing of the locations of all the assets and properties
of each of the Borrower, the Parent and the Subsidiaries. Each of the Borrower,
the Parent and the Subsidiaries enjoys peaceful and undisturbed
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possession under all leases necessary for the operation of such properties and
assets, and all such leases are valid and subsisting and are in full force and
effect; none of such leases contains any provision restricting the incurrence of
indebtedness by the lessee or any unusual or burdensome provision materially
adversely affecting the current or proposed operations of such lessee. The
Borrower has provided to each landlord of the Leased Real Property listed on
Schedule 6.15, the form of Landlord's Waiver and Consent.
5.20 Patents, Trademarks, Licenses. Each of the Borrower, the Parent and
the Subsidiaries has rights to or has agreed to purchase all material patents,
trademarks, service marks, trade names, copyrights, and franchises, and all
rights with respect to the foregoing, necessary for the conduct of its business
as now conducted, without any known conflict with the rights of others and
subject only to Permitted Liens.
5.21 Names. Other than as set forth on Schedule 5.21, none of the Borrower,
the Parent or any Subsidiary nor any of their respective predecessors operates
or does business or within the past five years, has operated or done business,
under a fictitious, trade or assumed name or has had a corporate or partnership
name other than its current name.
5.22 Federal Reserve Regulations. No part of the proceeds of the Loans will
be used to purchase or carry any "margin stock" (as defined in Regulation U of
the Board of Governors of the Federal Reserve System) or any "margin securities"
(as defined in Regulation G of the Board of Governors of the Federal Reserve
System), or to extend credit to others for the purpose of purchasing or carrying
any such "margin stock" or "margin securities", or for the purpose of reducing
or retiring any indebtedness which was originally incurred for the purpose of
purchasing or carrying any such "margin securities" or "margin stock", or for
any purpose which would cause this Agreement to violate Regulation G, Regulation
U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve
System.
5.23 Investment Company Act. Neither the Borrower nor the Parent nor any
Subsidiary is an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
5.24 Pension and Benefit Plans. There are no Plans maintained by the
Borrower, the Parent or any Subsidiary, or under which the Borrower, the Parent
or any Subsidiary has any liability, other than those described on Schedule 5.24
attached hereto. No Plan or trust forming a part thereof has been terminated.
All Plans and the trusts forming a part thereof have been administered and
enforced in accordance with their terms, and no disputes are pending or
threatened with respect thereto. All Plans
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and any trusts forming parts thereof which are subject to ERISA are and have
been administered in compliance with ERISA and all applicable rules and
regulations issued thereunder, and no Reportable Event has heretofore occurred
with respect thereto. No person has participated in any "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code) that could
subject the Borrower, the Parent or any Subsidiary to any tax, penalty or
liability. No accumulated funding deficiency (as defined in Section 302 of
ERISA) and no liability to the PBGC has been or is expected to be incurred with
respect to any Plan. All Plans which are "employee pension benefit plans" as
defined in Section 312 of ERISA since their adoption have qualified and do
qualify under Section 401 of the Code. All trusts established under any Plans
are exempt from taxation pursuant to Section 501(a) of the Code.
5.25 Compliance with Applicable Laws. Except as set forth on Schedule 5.25,
the Borrower, the Parent and each Subsidiary has complied and is in full
compliance with all statutes, laws, ordinances, regulations, rules,
determinations, orders, judgments and decrees applicable to them and to the
assets, properties and business of the Borrower, the Parent, and each
Subsidiary, including, without limitation, all applicable federal and state
securities laws and regulations, and all federal, state and local statutes,
laws, ordinances, regulations, rules, orders, judgments and decrees pertaining
to the sale, leasing, ownership or management of real property, pertaining to
employment and employment practices, terms and conditions of employment, and
wages and hours, and pertaining to safety, health, fire prevention,
environmental protection, building standards, zoning and other matters. The
Borrower, the Parent, the Subsidiaries and all employees, agents, distributors,
representatives or other persons acting on the express, implied or apparent
authority of the Borrower, the Parent or of any Subsidiary have not paid or
received any bribe or other unlawful, questionable or unusual payment of money
or other thing of value, granted or accepted any extraordinary discount, or
furnished or been given any other unlawful and unusual inducement to or from any
Person in the United States or elsewhere in connection with or in furtherance of
the business of the Borrower, the Parent or of any Subsidiary.
5.26 Transactions with Related Parties. Except as set forth on Schedule
5.26 or any other Schedule attached hereto, no present or former officer or
director of the Borrower, the Parent or any Subsidiary, and no Affiliate of such
an officer or director is currently a party to any transaction with the
Borrower, the Parent or with any Subsidiary, including, without limitation, any
contract, agreement or other arrangement providing for the employment of,
furnishing of services by, rental of real or personal property from or otherwise
requiring payments to any such officer, director or
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Affiliate where the amount involved is in excess of $25,000 for each such
transaction or in excess of $100,000 in the aggregate for any series of related
transactions.
5.27 Public Utility Holding Company Act. Neither the Borrower nor the
Parent nor any Subsidiary is a "holding company," or a "subsidiary company" of a
"holding company," or an "affiliate" of a "holding company," or a "subsidiary
company" of a "holding company," as such terms are defined in the Public Utility
Holding Company Act of 1935, as amended.
5.28 Capital Stock. Neither the Borrower nor the Parent nor any Subsidiary
(i) is subject to any obligation (contingent or otherwise) to repurchase, redeem
or otherwise acquire or retire any shares of its capital stock or (ii) is
required to file a registration statement relating to its common stock.
5.29 No Limitations on Dividends. Except pursuant to this Agreement,
neither the Borrower nor the Parent nor any Subsidiary is subject or party to
any agreement, lien or encumbrance, charter or by-law, regulatory or other
provision (except for applicable statutory corporate law) restricting, directly
or indirectly, the payment of dividends or the making of advances or other cash
payments.
5.30 Material Agreements. Except as set forth on Schedule 5.30, neither the
Borrower nor the Parent nor any Subsidiary is a party to any material lease,
contract, agreement, understanding or commitment of any kind (including
employment agreements, collective bargaining agreements, powers of attorney,
distribution agreements, patent license agreements, contracts for future
purchase or delivery of goods or rendering of services, bonus, pension and
retirement plans or accrued vacation pay, insurance and welfare agreements). To
the best knowledge of each of the Borrower and the Parent, all parties to such
agreements have complied with all material provisions thereof, and, to the best
knowledge of the Borrower and the Parent, no such party is in default
thereunder.
5.31 Compliance with Environmental Laws. Each of the Borrower, the Parent
and each Subsidiary is in material compliance with all applicable statutes,
laws, rules, regulations and orders of all governmental authorities relating to
environmental protection and pollution control with respect to the conduct of
their respective businesses and the ownership of their respective properties.
5.32 Disclosure. All facts of material importance to the condition
(financial or otherwise), assets, properties, liabilities, business, operations
and financial prospects of the Borrower, the Parent and of each
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Subsidiary have been fully and truthfully disclosed to the Agent Bank and the
Lenders in this Agreement and the other Loan Documents. No representation or
warranty by the Borrower, the Parent or any Subsidiary in this Agreement or in
the other Loan Documents, and no document, statement, certificate, opinion
letter or exhibit to be furnished or delivered to the Agent Bank or a Lender
pursuant to the Loan Documents, or in connection herewith or therewith or with
the transactions contemplated hereby or thereby, contains or will contain any
untrue or misleading statement of material fact or omits or will omit any
material fact necessary to make the statements contained therein not misleading.
5.33 Solvency.
(a) The fair saleable value of the assets of the Borrower, the Parent
and the Subsidiaries, taken as a whole, will exceed the probable amount
that will be required to be paid on or in respect of the existing debts and
other liabilities (including liabilities under the Loan Documents) of the
Borrower, the Parent and the Subsidiaries as they mature.
(b) The capital of each of the Borrower, the Parent and each of the
Subsidiaries does not constitute unreasonably small capital for such entity
to carry out its business as now conducted and as proposed to be conducted
including the capital needs of such entity, taking into account the
particular capital requirements of the businesses conducted by such entity,
and projected capital requirements and capital availability thereof.
(c) Neither the Borrower nor the Parent intends to, or intends to
permit any Subsidiary to, incur debts beyond such Person's ability to pay
its probable liability in respect of its debts as they mature (taking into
account the timing and amounts of cash to be received by such Person and
the amounts to be payable on or in respect of debt of such Person). The
cash flow of the Borrower, the Parent and the Subsidiaries, after taking
into account all anticipated uses of the cash of the Borrower, the Parent
and the Subsidiaries, shall at all times be sufficient to pay all such
probable amounts on or in respect of Indebtedness of the Borrower, the
Parent or such Subsidiaries when such amounts are required to be paid.
5.34 Effect of Merger. The Merger Documents have been properly filed with
all requisite federal and state regulatory bodies, administrative agencies and
other governmental authorities. As of the date hereof, Holmes Protection, as the
successor to Holmes Holding and the Other Merged Subsidiaries, possesses all the
rights privileges, powers, immunities and purposes of Holmes Holding and the
Other Merged Subsidiaries, and Holmes Protection has become the owner of all of
the real and personal property of Holmes Holding and the Other Merged
Subsidiaries, including
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subscription to shares, causes of action and every other asset, and Holmes
Protection has assumed and is liable for all of the obligations, liabilities and
penalties of Holmes Holding and the Other Merged Subsidiaries.
5.35 Non-U.S. Subsidiary. The Borrower has filed all documents with the
appropriate governmental authorities, and has taken all such other necessary or
appropriate action, to fully dissolve each of the Non-U.S. Subsidiaries.
SECTION 6. AFFIRMATIVE COVENANTS
The Borrower and the Parent covenant that from the Closing Date and
thereafter until all of the Loans, and the Letters of Credit and all other
amounts due and owing under the Loan Documents have been fully, finally and
indefeasibly paid, discharged and retired (and the Commitments of the Lenders
have expired or been terminated in full):
6.1 Payment of Notes. The Borrower shall punctually pay the principal of
and interest on the Notes at the times and places and in the manner specified
therein.
6.2 Corporate Existence. The Borrower and the Parent shall each preserve,
maintain, and keep, and, except as otherwise contemplated by the Merger
Documents, cause each Subsidiary, to preserve, maintain, and keep, in full force
and effect its corporate existence in the jurisdiction of its incorporation, and
all rights, franchises, and privileges necessary or desirable in the normal
conduct of its business, and shall qualify and remain qualified, and shall cause
each Subsidiary to qualify and remain qualified, as a foreign corporation in
each jurisdiction in which such qualification is necessary or desirable in view
of its business and operations and the ownership of its properties; provided,
however, that the obligations set forth in this Section 6.2 shall not apply to
any Special Purpose Subsidiary which is dissolved within one hundred and eighty
(180) days after the date of its acquisition or to any Non-U.S. Subsidiary.
6.3 Payment of Taxes and Claims. The Borrower and the Parent shall each pay
and discharge, and shall cause each Subsidiary to pay and to discharge, all
taxes, assessments and governmental charges or levies imposed upon it or any
Subsidiary or upon its income or profits or the income or profits of any
Subsidiary, or upon any of its properties or any properties of any Subsidiary or
any part thereof, prior to the date on which penalties attach thereto, and all
lawful claims, including, without limitation, claims for labor, materials or
supplies, which, if unpaid, might become a Lien upon any properties of the
Borrower, the Parent or of any Subsidiary, provided that neither the Borrower
nor the Parent nor any Subsidiary shall be required to
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pay any such tax, assessment, charge, levy or claim which is being contested in
good faith and by proper proceedings if the Borrower, the Parent or such
Subsidiary, as the case may be, sets aside on its books reserves which are in
conformity with GAAP.
6.4 Payment of Obligations. The Borrower and the Parent shall each pay,
discharge or otherwise satisfy and shall cause each Subsidiary to pay, discharge
or otherwise satisfy at or before maturity or before they become delinquent, as
the case may be, all of the Indebtedness and other obligations of whatever
nature of the Borrower, the Parent and the Subsidiaries, provided that neither
the Borrower nor the Parent nor any Subsidiary shall be required to pay,
discharge or otherwise satisfy any Indebtedness or other obligation when the
amount or validity thereof is being contested in good faith and by proper
proceedings if such Person sets aside on its books reserves which are in
conformity with GAAP.
6.5 Conduct of Business. The Borrower and the Parent shall each continue to
engage, and shall cause each Subsidiary to continue to engage, in business of
the same general type as now conducted by it, and shall conduct, and shall cause
each Subsidiary to conduct, such business in an orderly, efficient and regular
manner consistent with the conduct of its business prior to the date of this
Agreement.
6.6 Maintenance of Property. The Borrower and the Parent shall each keep
all property used or useful in its business, and shall cause each Subsidiary to
keep all property used or useful in its business, in good repair, working order
and condition, and from time to time make all necessary or desirable repairs
thereto and renewals and replacements thereof, taking into account normal
obsolescence.
6.7 Performance of Contractual Obligations. The Borrower and the Parent
shall each perform in accordance with its terms and conditions, and comply with
all provisions of, and shall cause each Subsidiary to perform in accordance with
its terms and conditions, and to comply with all provisions of, each and every
security issued by the Borrower, the Parent or any Subsidiary, and each and
every mortgage, deed of trust, indenture, note, lease, commitment, contract or
other agreement, instrument or undertaking to which the Borrower, the Parent or
any Subsidiary is or is purported to be a party or by which it or any of its
property is or is purported to be bound, except to the extent that the Borrower,
the Parent or any Subsidiary, as the case may be, is contesting the provisions
thereof in good faith and by proper proceedings if required (and such Person has
set aside on its books reserves which are in conformity with GAAP) and the
failure to comply therewith does not, and will not, in the aggregate, have a
material adverse effect on the business, operations, prospects, assets, property
or
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condition (financial or otherwise) of the Borrower, the Parent and the
Subsidiaries, taken as a whole.
6.8 Compliance with Laws. The Borrower and the Parent shall each comply,
and shall cause each Subsidiary to comply, with the requirements of all
applicable statutes, laws, ordinances, rules, regulations, determinations,
judgments, decrees and orders of any Governmental Authority, non-compliance with
which could have a Material Adverse Effect.
6.9 ERISA. The Borrower and the Parent shall each maintain, and shall cause
each Subsidiary to maintain, each of its and each Subsidiary's Plans in
compliance with all applicable requirements of ERISA and of the Code and with
all applicable rulings and regulations issued under the provisions of ERISA and
of the Code.
6.10 Books and Records. The Parent shall keep and maintain adequate and
proper records and books of account for itself, the Borrower and the
Subsidiaries on a consolidated basis, in which complete entries are made in
accordance with GAAP consistently applied and in accordance with all applicable
statutes, laws, rules, regulations, determinations, judgments, decrees and
orders of any Governmental Authority, reflecting all financial and other
transactions of the Borrower, the Parent and of each Subsidiary, as the case may
be, normally or customarily included in records and books of account of
companies engaged in the same or similar businesses and activities as the
Borrower, the Parent or such Subsidiary, as the case may be.
6.11 Examination Rights. The Borrower and the Parent shall each, upon
reasonable advance notice, permit the Agent Bank, the Lenders and any agents or
representatives thereof to visit with reasonable frequency and to inspect the
properties of the Borrower, the Parent and the Subsidiaries, including the
Collateral wherever located, and to examine and make abstracts from any of their
respective books and records at any reasonable time and as often as the Agent
Bank or such Lenders or such agents or representatives may desire, and to
discuss the business, operations, properties, Collateral and condition
(financial or otherwise) of the Borrower, the Parent and the Subsidiaries with
any of their respective officers, directors, and, upon supervision or direction
of senior management, their respective employees, agents or representatives
(including, without limitation, the independent certified public accountants).
6.12 Financial Data.
(a) Notice to the Agent Bank. The Borrower shall promptly advise the
Agent Bank and each of the Lenders in writing of any
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condition, event or act which comes to its attention that (i) would, with
notice or lapse of time, or both, become an Event of Default, (ii)
constitutes an Event of Default or (iii) constitutes a material adverse
change to the assets, business, properties, or financial prospects of the
Borrower, the Parent or the Subsidiaries.
(b) Books and Records. The Parent shall maintain true and complete
books, records, and accounts in which true and correct entries shall be
made of all transactions of the Parent, the Borrower and the Subsidiaries
on a consolidated basis in accordance with GAAP (the "Records"), and permit
access to and reproduction of such Records by the Agent Bank, the Lenders
and their respective agents, as the Agent Bank or such Lenders shall
request. The Borrower and the Parent shall maintain their Records in such
detail, form and scope as the Agent Bank shall reasonably require and shall
ensure that the Subsidiaries maintain their Records accordingly. Upon the
occurrence and during continuance of an Event of Default, the Borrower
shall mark all Records relating to accounts receivable with notations
satisfactory to the Agent Bank disclosing that such accounts receivable
have been pledged, assigned and transferred to the Agent Bank and that the
Borrower has granted a security interest in such accounts receivable to the
Agent Bank.
(c) Financial Statements and Other Information. The Borrower shall
furnish to the Lenders:
(i) Annual Financial Statements. As soon as practicable and in
any event within ninety (90) days after the close of each fiscal year:
(1) consolidated balance sheets and consolidated statements
of income and cash flows of the Parent, the Borrower and the
Subsidiaries, as at the end of and for the fiscal year just
closed, setting forth the corresponding figures for the previous
fiscal year in comparative form, all in accordance with GAAP and
certified (without any qualification deemed material by the Agent
Bank) by independent certified public accountants selected by the
Borrower and satisfactory to the Majority Lenders:
(2) balance sheets and statements of income of each of the
Parent and the Borrower and the Subsidiaries as at the end of and
for the fiscal year just closed, setting forth the corresponding
figures for the previous fiscal year in comparative form;
(3) concurrently with such financial statements,
supplementary consolidating balance sheets and consolidating
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statements of income of the Parent and the Borrower and the
Subsidiaries as at the end of and for the fiscal year just
closed, setting forth the corresponding figures for the previous
fiscal year in comparative form; and
(4) concurrently with the financial statements described in
sub-clause (1) above, a written statement signed by such
accountants to the effect that, in performing the audit necessary
for their certification of such financial statements, they have
not obtained any knowledge of any Event of Default or the
violation of any of the financial ratios and covenants set out in
Section 7.19 or, if such accountants have obtained any such
knowledge, they shall disclose in such written statement their
observations with respect to such matters (in furnishing such
written statement such accountants shall not be required to
exceed the scope of the audit in accordance with generally
accepted auditing standards).
(ii) Quarterly Financial Statements. As soon as practicable and in any
event within forty-five (45) days after the close of each of the first,
second and third Quarters, quarterly financial statements including
unaudited consolidated balance sheets and statements of income and cash
flows of the Parent as of the end of and for the period commencing at the
end of the previous fiscal year and ending with such Quarter, setting forth
(A) the comparative figures for the appropriate periods of the preceding
fiscal year and (B) the comparative figures for the appropriate periods as
against the budget estimates for the current fiscal year, all in reasonable
detail and certified by the chief financial officer of the Parent to be
true and complete, subject to normal recurring year-end audit adjustments,
it being understood that such statements may omit footnotes.
(iii) Quarterly Certification. As soon as practicable and in any event
within forty-five (45) days after the close of each Quarter an Officer's
Certificate of the Borrower:
(1) stating that there existed during such Quarter or fiscal
year no Event of Default and no Potential Event of Default or if
any such Event of Default or Potential Event of Default existed,
specifying the nature thereof, the period of existence thereof
and what action the Borrower proposes to take, or has taken, with
respect thereto;
(2) setting forth in reasonable detail the required
information with respect to compliance by the Borrower with the
provisions of Section 7.19 hereof and specifying the financial
computations with respect thereto;
(3) stating that the representations and warranties continue
to be true and correct in all material respects;
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(4) setting forth a general statement projecting the amounts
and general categories of Capital Expenditures to be made during
the remainder of the fiscal year; and
(5) stating that all information required to have been
delivered during such period has been so delivered.
(iv) Monthly Financial Statements. As soon as practicable and in any
event within thirty (30) days after each calendar month, the following:
(1) except for those months at the end of each Quarter, a
consolidated statement of income of the Parent, the Borrower and
the Subsidiaries for the period commencing at the end of the
previous fiscal year and ending with such month, setting forth
with respect to the Parent, the Borrower and the Subsidiaries the
comparative figures for the appropriate period of the preceding
fiscal year and the variance as against the corresponding month
of the prior year of each line item stated as a percentage, all
in reasonable detail; and
(2) a report showing the Attrition for such month.
(v) Data Supplied by Auditors. To the extent not delivered pursuant to
clause (ii) of this Section 6.12(c), promptly upon their becoming available
(but in any event within fifteen (15) days of receipt), copies of all
balance sheets, statements of income and cash flow, management letters and
other material financial reports or material written recommendations, if
any, submitted to the Parent or the Borrower by its auditors in connection
with each annual or interim audit or examination by such auditors.
(vi) Notice of Default. As soon as possible and in any event within
five (5) days after the occurrence of any Potential Event of Default or
Event of Default, a statement of the chief financial officer of the
Borrower setting forth the details of such Potential Event of Default or
Event of Default and the action which the Borrower proposes to take with
respect thereto.
(vii) Notice of Other Defaults. As soon as possible and in any event
within five (5) days after the occurrence of any default or event of
default under any security issued by the Parent or the Borrower or any
Subsidiary or under any mortgage, indenture, lease, contract or other
agreement, instrument or undertaking to which the Parent or the Borrower or
any Subsidiary is or is purported to be a party or by which it or any of
its
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property is or is purported to be bound, which default or event of default
could have a material adverse effect on the business, operations,
prospects, assets, properties or condition (financial or otherwise) of the
Parent or the Borrower or any Subsidiary, a statement of the chief
financial officer of the Borrower setting forth the details thereof and the
action which the Borrower proposes to take with respect thereto.
(viii) Notice of Litigation. Promptly after the commencement thereof,
notice of all actions, suits and proceedings before any arbitrator or
Governmental Authority affecting the Parent or the Borrower or any
Subsidiary and involving the lesser of (A) $500,000 and (B) that amount
which such Person is required to report to the U.S. Securities and Exchange
Commission.
(ix) Notice of ERISA Problems. As soon as possible and in any event
within thirty (30) days after the Borrower knows (provided, however, that
with respect to any Multiemployer Plan in which neither the Borrower nor
any Commonly Controlled Entity is a "substantial employer," the Borrower
shall be deemed to have knowledge only of facts concerning which it has
actual knowledge) of (i) the occurrence or expected occurrence of any
Reportable Event with respect to any Plan, or (ii) the institution of
proceedings or the taking or expected taking of any other action by PBGC or
the Borrower or any Commonly Controlled Entity to terminate or withdraw
from any Plan, whichever of the following may be applicable: (A) a notice
of the Reportable Event and a certificate of the chief financial officer of
the Borrower setting forth the details of such Reportable Event and the
action which the Borrower or Commonly Controlled Entity proposes to take
with respect thereto, together with a copy of any notice of such Reportable
Event that may be required to be filed with PBGC, or (B) a notice with
respect to any termination or withdrawal from any Plan and a copy of any
notice delivered by PBGC evidencing its intent to institute such
proceedings or any notice to PBGC that such Plan is to be terminated or
withdrawn from, as the case may be.
(x) Notice of Adverse Developments. Immediately upon obtaining
knowledge thereof notice of:
(1) Any citation, petition to deny, order to show cause or other
legal process or order, or protest, or reconsideration directly
affecting an Operating License.
(2) Any (A) refusal or failure by any issuer to renew or extend
any Operating License, (B) proposed abandonment or proposed or actual
revocation, termination or materially adverse modification of any
Operating License, (C) dispute or other action with
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respect to any Operating License, (D) denial or threatened denial or
revocation or modification by applicable state regulatory authority of
any operating permit or any other applicable state license and permit,
(E) notice from the applicable state regulatory authority of the
imposition of any fines or penalties or forfeitures or (F) written
notices or written requests by private parties with respect to any of
the foregoing.
(3) Any dispute concerning, or any threatened non-renewal or
modification of, any material lease for real or personal property to
which the Parent, the Borrower or a Subsidiary is a party.
(4) Any actions, proceedings or claims which are commenced or
asserted against the Borrower, the Parent or a Subsidiary in which the
amounts involved are in the aggregate $500,000 or more and which are
not fully covered by insurance.
Each notice pursuant to this Section 6.12(c)(x) may be given orally and shall
immediately thereafter be confirmed by a written statement of an Officer of the
Borrower setting forth details of the matter referred to therein and stating
what action the affected Person has taken, is taking or proposes to take with
respect thereto.
(xi) Evidence of Insurance. Upon request, evidence of the insurance
coverage described in Sections 6.14 and 6.22 hereof.
(xii) Notice of Uninsured or Partially Insured Loss. Promptly upon the
occurrence thereof, notice of any uninsured or partially insured loss
affecting the Parent, the Borrower or any of the Subsidiaries through fire,
theft, liability, property damage, or other cause, in excess of $250,000.
(xiii) Reports. Promptly after the sending or filing thereof, copies
of all financial statements and reports which the Parent and the Borrower
send to their respective stockholders, and copies of all regular, periodic
and special reports and all registration statements which the Borrower or
the Parent files with the U.S. Securities and Exchange Commission or any
Governmental Authority which may be substituted therefor, or with any
national securities exchange.
(xiv) Budget. No later than December 31 of each of the Borrower's
fiscal years, a budget showing in reasonable detail the Borrower's good
faith estimate of the projected income and expenses, Capital Expenditures,
Capital Lease Obligations and general and administrative expenses for the
next succeeding fiscal year, allocated by Quarter.
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(xv) Other Information. Such other information respecting the
business, operations, prospects, assets, properties or condition (financial
or otherwise) of the Parent, the Borrower or any Subsidiary as the Agent
Bank from time to time reasonably may request.
(d) Authority to Provide Information. The Agent Bank and the Lenders are
hereby authorized to provide a copy of any financial statement or any other
information relating to the business, operations or financial condition of the
Parent, the Borrower or any Subsidiary which may be furnished to the Agent Bank
or a Lender or come to its attention pursuant to this Agreement or otherwise
(the "Financial Information") (i) to any regulatory body or agency having
supervisory jurisdiction over the Agent Bank or a Lender, (ii) to any person or
entity which shall or shall have any right or obligation to succeed to all or
any part of the Agent Bank's or a Lender's interest in any of the Loan
Documents, (iii) upon the order of any court or administrative agency, (iv) in
connection with any litigation to which the Agent Bank, a Lender, the Parent,
the Borrower or a Subsidiary may be a party, (v) to the extent reasonably
required in connection with the exercise of any remedy hereunder, (vi) to legal
counsel for the Agent Bank or a Lender and independent auditors or to
accountants retained by the Agent Bank or a Lender in connection with the
transactions contemplated by the Loan Documents, (vii) to the extent it has
already been publicly disclosed or (viii) to any person not identified herein
with the prior written consent of the Borrower. Such information in the event
that it is not public information shall be disclosed on a confidential basis, to
the extent permitted by law.
6.13 Environmental Matters.
(a) Prior to owning or leasing any material real property interest (the
"Premises"), the Parent and the Borrower shall, and shall cause the Subsidiaries
to, perform due diligence regarding environmental matters for the Premises as
follows:
(i) When the Borrower, the Parent or a Subsidiary plans to (x) own the
Premises or (y) lease the Premises other than as provided in Section
6.13(a)(ii), the term "due diligence" shall mean that such Person shall
hire an environmental consultant, subject to the approval of the Agent
Bank, which shall not be unreasonably withheld or delayed, to perform a
preliminary environmental site assessment ("PESA"). The scope of the PESA
shall be determined by the Borrower, in consultation with the Agent Bank,
taking into consideration, inter alia, the physical characteristics and
historical uses of the Premises and the nature of the ownership or
leasehold interest therein, as applicable. The final specifications of the
scope of the PESA shall be subject to the approval of the Agent Bank, which
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approval shall not be unreasonably withheld or delayed. The term "due
diligence" shall also mean that the Borrower shall provide to the Agent
Bank any information regarding any violation of Environmental Laws, as
hereinafter defined, with respect to the Premises of which the Borrower,
the Parent or a Subsidiary has actual knowledge or has actual information
which would cause such Person to know, outside of the information contained
in the PESA.
(ii) When the Borrower, the Parent or a Subsidiary plans to lease
space for administrative offices, central monitoring services or storage of
inventory, the term "due diligence" shall mean that the Borrower shall
provide to the Agent Bank any information regarding any violation of
Environmental Laws with respect to the Premises of which the Borrower, the
Parent or such Subsidiary has actual knowledge or has actual information
which would cause such Person to know. "Due diligence" shall not require a
PESA under this provision.
(b) When a PESA is finalized, both the Borrower and the Agent Bank shall
concurrently receive and review a copy of the PESA. The Borrower and the Agent
Bank shall discuss the contents of the PESA. The decision to purchase or lease
the Premises shall be subject to the Agent Bank's approval based on the results
of the due diligence. If the Agent Bank fails to advance Loan funds based on the
due diligence results, the Agent Bank reserves the right as a condition to any
funding to require the Borrower to provide representations and warranties, in
form and substance satisfactory to the Agent Bank, as to such environmental
matters with respect to the Premises.
(c) The Borrower and the Parent will not, and will cause the Subsidiaries
and any Tenants of Owned Real Property not to, use any of the real property
occupied by any of them for the purpose of treating, producing, handling,
transferring, processing, transporting, disposing, storing or otherwise
releasing "hazardous substances" (as the term "hazardous substances" is defined
in the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. ss. 9601 et seq., as amended ("CERCLA")), and by applicable state
statutes and any regulations promulgated thereunder), in violation of any
federal, state or local law or regulation relating to environmental or health
and safety matters (the "Environmental Laws"). The Borrower and the Parent
further covenant that they will not cause or permit to exist as the result of an
intentional or unintentional action or omission on their part, or on the part of
any of the Subsidiaries the releasing, spilling, leaking, pumping, pouring,
emitting or dumping from, on or about any real property occupied by the
Borrower, the Parent or a Subsidiary or on or about any Owned Real Property of
any hazardous substance in violation of any federal, state or local law or
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regulation. Should there be any discharge, spill, injection, escape, emission,
disposal, leak or other release of hazardous substances on any real property
occupied by the Borrower, the Parent, a Subsidiary or on or about any Owned Real
Property, if required by applicable law, the Borrower shall promptly notify the
Environmental Protection Agency National Response Center and any applicable
local governmental authority, and shall take all steps necessary to promptly
clean such discharge, spill, injection, escape, emission, disposal, leak or
other release in accordance with the provisions of CERCLA, the Federal Clean
Water Act, the Federal National Contingency Plan and any applicable local
requirements, if required by applicable law, and shall apply for a certification
from the Federal Environmental Protection Agency or from any applicable local
governmental authority that said premises have been cleaned up to the
satisfaction of those agencies.
6.14 Insurance.
(a) The Borrower and the Parent shall maintain, and shall cause each
Subsidiary to maintain with respect to their respective properties and
businesses, insurance policies as required by the Agent Bank from time to time
in accordance with the following general rules:
(i) Loss or Casualty to Collateral. All tangible Collateral shall be
fully insured against loss or damage by theft or casualty and such other
risks as the Agent Bank may require. The amount of the insurance shall be
at least equal to the replacement value of such Collateral, and in any case
in amounts sufficient to prevent the Borrower, the Parent or a Subsidiary
from becoming a co-insurer. The deductibles applicable to the insurance
shall not exceed amounts reasonably acceptable to the Agent Bank.
(ii) Loss or Casualty to Real Property. The Borrower, the Parent and
the Subsidiaries shall maintain all risk property insurance covering any
Owned Real Property in an amount not less than 100% of the full replacement
cost of the improvements on the Owned Real Property. The full replacement
cost of such improvements shall be determined from time to time as required
by the Agent Bank, by appraisal or another method acceptable to the Agent
Bank. The Borrower, the Parent and the Subsidiaries shall maintain all risk
property insurance covering the Leased Real Property to the extent that
such Person has any obligation to restore the improvements on such Leased
Real Property if a casualty occurs. The amount of such insurance shall be
at least equal to the amount for which such Person may be obligated, and in
any case in amounts sufficient to prevent such Person from becoming a
co-insurer. The deductibles applicable to all insurance required by this
paragraph (ii) shall not exceed amounts acceptable to the Agent Bank.
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(iii) Business Interruption Insurance. Subject to its availability at
reasonable costs, the Borrower and the Parent shall, and shall cause the
Subsidiaries to, maintain business income interruption insurance against
loss of income by reason of any casualty which causes the temporary or
permanent cessation of the business of each such Person.
(iv) Other Insurance. The Borrower and the Parent shall, and shall
cause the Subsidiaries to, maintain such other insurance as the Agent Bank
may require from time to time so that such Persons are at all times
adequately insured to the extent customary for companies in similar
businesses and of similar size as such Person.
(v) Form of Policies. Any insurance policies carried in accordance
with this Section 6.14 shall be written by companies acceptable to the
Agent Bank, and authorized to do business in each jurisdiction in which the
Borrower, the Parent or a Subsidiary is located.
(vi) Delivery of Policies, Certificates and Paid Receipts. The
Borrower shall deliver to the Agent Bank original certificates of insurance
for all insurance policies required to be maintained under this Section
6.14 (and, if the Agent Bank requests, original policies of insurance). If
the Agent Bank so requests, such certificates (and policies, if applicable)
shall list the Agent Bank as an additional insured. The Borrower shall
deliver a current policy to the Agent Bank whenever any such policies are
renewed, changed or replaced. If the Agent Bank requests, the Borrower
shall deliver to the Agent Bank paid receipts (or other evidence of payment
satisfactory to the Agent Bank) evidencing full and timely payment of all
premiums on all insurance policies required to be maintained under this
Section 6.14.
(vii) Payment of Proceeds. Casualty insurance proceeds shall be
payable directly to the insured party, who shall use such proceeds to
repair the damage caused by the casualty; provided, however, upon the
occurrence and during the continuance of, an Event of Default or Potential
Event of Default, all proceeds payable shall be paid to the Agent Bank.
(viii) Application of Insurance Proceeds. All insurance proceeds
received by the Agent Bank under the provisions of this Section 6.14 shall
be applied as follows: (i) if, at the time in question, there exists any
Event of Default, or a Potential Event of Default, toward payment of the
Loans, whether or not the Agent Bank accelerates or takes any other
remedial action pursuant to Section 8 or (ii) otherwise, in accordance with
reasonable withdrawal procedures prescribed by the Agent Bank, to repair or
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replace the Collateral, Leased Real Property or Owned Real Property which
has suffered a casualty.
(b) The Borrower shall maintain or cause to be maintained all insurance
available through the PBGC or insurers acceptable to the Agent Bank against all
obligations to the PBGC.
(c) Notwithstanding the foregoing, in the event that the Borrower delivers
to the Agent Bank written evidence reasonably satisfactory to the Agent Bank
that it has adequate reserves to cover insurable losses, the Borrower may
self-insure with respect to its insurable properties, workers' compensation,
medical claims, errors and omissions and general liability in an amount up to
the amount of such reserves but in no event in an amount exceeding $1,000,000
per occurrence or $5,000,000 in the aggregate during any policy year. Insurance
coverage for amounts over $1,000,000 per occurrence or $5,000,000 in the
aggregate shall be provided by the companies referred to in Section 6.14 if the
Borrower is obligated to maintain such higher coverage limits pursuant to any
other provision of this Section 6.14.
6.15 Landlord's/ Mortgagee's Waivers. Within sixty (60) days of the Closing
Date, for each lease of Leased Real Property identified on Schedule 6.15, the
Borrower has provided to the Agent Bank either (a) a Landlord's Waiver and
Consent, executed by the landlord of such Leased Real Property or (b) a
certificate duly executed by the chief executive officer and the chief financial
officer of the Borrower stating that the Borrower and its officers and employees
have taken and diligently pursued all appropriate actions in order to obtain a
Landlord's Waiver and Consent. The Borrower shall provide to the Agent Bank, a
Landlord's Waiver and Consent executed by each landlord of Leased Real Property
leased after the Closing Date, and, if the Agent Bank requests, a waiver of all
mortgagees of any premises (including the Owned Real Property) at which any
Collateral is located. These waivers shall include a consent to each Assignment
of Tenant's Interest Under Leases, in the case of Leased Real Property, and
shall assure the Agent Bank of its ability to gain access to such premises and
remove the Collateral without interference by the landlord, even if the Borrower
or the Subsidiary party thereto is in default under any leases or mortgages (or
deeds of trust) affecting such premises.
6.16 Exchange of Note. Upon receipt of a written notice of loss, theft,
destruction or mutilation of a Note and of a bond or letter of indemnity from
the Agent Bank, upon surrendering for cancellation a Note if mutilated (in which
event no indemnity shall be required), the Borrower shall execute and deliver a
new Note of like tenor in lieu of any such lost, stolen, destroyed or mutilated
Note, as the case may be. A Note issued
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pursuant to this Section 6.16 shall be dated so that neither gain nor loss of
interest shall result therefrom.
6.17 Other Agreements. Each of the Borrower and the Parent will cause each
Subsidiary, immediately upon its formation, to enter into and execute a Guaranty
Agreement and a Security Agreement. Each of the Borrower and the Parent will,
immediately upon formation of such new Subsidiary, execute a Pledge Agreement
wherein it grants a security interest to the Agent Bank in all the outstanding
capital stock of such Subsidiary or the Borrower's ownership interest in such
Subsidiary, as appropriate. The Borrower and the Parent will, and will cause
each such Subsidiary to, comply with all provisions of any other agreement
between the Borrower or the Parent and the Agent Bank and the Lenders.
Notwithstanding the foregoing, the obligations of this Section 6.17 shall not
apply to any Non-U.S. Subsidiary nor any Special Purpose Subsidiary; provided,
however, that the Borrower and the Parent shall cause any Non-U.S. Subsidiary
which is not dissolved on or before December 31, 1996, and any Special Purpose
Subsidiary which is not dissolved within one hundred and eighty (180) days after
the date of its acquisition or formation, as applicable, to comply with the
provisions of this Section 6.17 upon the earlier of (x) the date on which a
determination has been made that such Non-U.S. Subsidiary or Special Purpose
Subsidiary will not be dissolved or (y) ten (10) Business Days after the
expiration of such time periods.
6.18 Further Assurances. At the Borrower's sole cost and expense, upon
request of the Agent Bank, the Borrower and the Parent will duly execute and
deliver, or cause to be duly executed and delivered, to the Agent Bank such
further instruments and do or cause to be done such further acts as may be
reasonably necessary or desirable in the opinion of the Lenders to carry out
more effectively the provisions and purposes of this Agreement.
6.19 Consistent Action. The Borrower and the Parent shall, and shall cause
the Subsidiaries to, exercise any and all voting or similar rights which they
hold in any Person in a manner consistent with the provisions of this Agreement.
6.20 Control. The Borrower shall conduct, and shall cause the Subsidiaries
to conduct, their respective businesses and acquire and operate monitoring
assets and Recurring Security Services Contracts and related businesses directly
and not through any other structure or entity. Neither the Borrower nor the
Parent nor any Subsidiary shall enter into any agreement with any Person which
shall confer upon such Person the right or authority to control or direct the
Borrower, the Parent or such Subsidiary.
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6.21 Change in Documents. The Borrower and the Parent will give, and will
cause each Subsidiary to give, the Agent Bank at least ten (10) Business Days'
prior written notice of any proposed change of name or address or material
amendment or supplement to its or their bylaws, articles of incorporation or
partnership agreements, as appropriate. Except as consented to by the Majority
Lenders, the Borrower and the Parent will not, and will not permit any
Subsidiary to, amend or consent to any amendment or supplement to its
partnership agreement, articles of incorporation or by-laws, as appropriate.
6.22 Key Man Life Insurance. Within thirty (30) days of the Closing Date,
the Borrower obtained, and the Borrower shall thereafter maintain, key man life
insurance for George Flagg in an amount no less than $2,000,000. The Borrower
shall deliver to the Agent Bank, for the account of the Lenders, an original
certificate of such insurance. The proceeds payable under such insurance shall
be used by the Borrower to hire a replacement for George Flagg as chief
executive officer of the Borrower; provided, however, that upon the occurrence
and during the continuance of an Event of Default, all proceeds payable under
such insurance shall be paid to the Agent Bank, for the account of the Lenders.
6.23 Updating of Customer Lists. The Borrower shall, and shall cause all
Subsidiaries to, maintain complete and accurate lists of the parties to the
Recurring Security Services Contracts ("Customer Lists"). No Customer List shall
be sold or rented by the entity generating a Customer List except in accordance
with the provisions of this Agreement.
6.24 Reserve for Accounts Receivable. The Borrower shall adopt a consistent
policy for the treatment of reserves for its accounts receivable, and shall
ensure that the Subsidiaries adopt and implement such policy. Neither the
Borrower nor any Subsidiary shall vary from such treatment without prior written
notice to the Agent Bank.
6.25 Interest Rate Protection Agreement. The Borrower shall maintain in
effect an interest rate protection agreement which will cover at least fifty
percent (50%) of the entire outstanding amount of the Loans. Each such agreement
(a) shall be in a form reasonably satisfactory to the Majority Lenders, (b)
shall be for a term not less than three (3) years, (c) shall provide for
all-in-costs, including hedging costs, of not greater than such maximum rate as
may be agreeable to the Majority Lenders, and (d) shall provide that the
individual hedging transactions shall be completed within sixty (60) days of the
respective Borrowing Date.
6.26 Stamping of Recurring Security Services Contracts. The Borrower has
Stamped all existing Recurring Security
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Services Contracts, and has delivered to the Agent Bank a certificate of an
officer of the Borrower stating that all of the Recurring Security Services
Contracts have been so Stamped. The Borrower shall maintain as Stamped all
originals and copies of the Recurring Security Services Contracts at the
principal offices of the Borrower and the Subsidiaries located in New York, New
York, Edison, New Jersey, Philadelphia, Pennsylvania and Central Islip, New
York. The Borrower shall, and shall cause the Subsidiaries to, Stamp all future
Recurring Security Services Contracts (i) generated by or on behalf of the
Borrower or a Subsidiary within three (3) Business Days thereof and (ii)
purchased or acquired by or on behalf of the Borrower or a Subsidiary within
thirty (30) calendar days of such purchase or acquisition.
SECTION 7. NEGATIVE COVENANTS.
The Borrower and the Parent covenant that from the Closing Date and
thereafter and until all of the Loans and the Letters of Credit and any other
amounts due and owing under the Loan Documents have been fully, finally and
indefeasibly paid, discharged and retired (and the Commitments of the Lenders
have expired or been terminated in full):
7.1 Indebtedness. The Borrower and the Parent will not, and will not permit
any Subsidiary to, directly or indirectly, create, incur, assume, enter into a
Guaranty or otherwise become or remain directly or indirectly liable with
respect to any Indebtedness, except that the Borrower, the Parent and the
Subsidiaries may become or remain liable with respect to the following
("Permitted Indebtedness"):
(a) In the case of the Borrower only, the Loans.
(b) In the case of the Borrower and the Subsidiaries, Capital Lease
Obligations and purchase money Indebtedness in the aggregate amount of
$2,500,000 incurred with respect to the lease, hire or use by the Borrower
of operating office equipment in the ordinary course of business.
(c) In the case of the Borrower and the Subsidiaries, purchase money
obligations in the aggregate amount of $1,000,000 incurred with respect to
the purchase of real property on which is situated all or any part of the
equipment or facilities of the Parent, the Borrower or a Subsidiary and for
which a first mortgage in favor of the Agent Bank is executed and
delivered.
(d) In the case of the Parent, the Borrower and the Subsidiaries only,
subordinated unsecured promissory notes in the aggregate
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amount of $10,000,000 which are issued in connection with Permitted
Acquisitions; provided, however, that the terms of such notes shall include
subordination provisions satisfactory to the Agent Bank and shall otherwise
be on terms and conditions reasonably acceptable to the Agent Bank.
(e) Such other Indebtedness as the Lenders, in their sole and absolute
discretion, shall approve ("Approved Debt").
(f) In the case of the Parent and the Subsidiaries, the Guaranty
Agreements.
(g) In the case of Special Purpose Subsidiaries only, Indebtedness
existing on the date of such Subsidiary's acquisition, which Indebtedness
is (i) unsecured or secured only by real estate, fixed assets or equipment
and (ii) in an aggregate amount which does not exceed $2,000,000; provided,
however, that such Indebtedness must be repaid on the earlier of (A) the
date on which such Special Purpose Subsidiary is dissolved or (B) sixty
(60) days after such Special Purpose Subsidiary is acquired, unless the
Majority Lenders otherwise consent in writing or such Indebtedness would
otherwise be Permitted Indebtedness under a subsection of this Section 7.1
other than this Section 7.1(g).
(h) Guaranties given by the Borrower, the Parent or any Subsidiary in
favor of any of the Borrower, the Parent or any Subsidiary with respect to
Indebtedness otherwise permitted by this Section 7.1.
(i) In the case of the Borrower only, self-insurance subject to the
provisions of Section 6.14(c).
(j) Indebtedness existing on the Closing Date, as set forth on
Schedule 7.1(j).
7.2 Liens. The Borrower and the Parent will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, assume or permit to exist
any Lien on or with respect to any property, asset or revenues (including any
document or instrument in respect of goods or accounts receivable) of the
Borrower, the Parent or any Subsidiary, whether now owned or hereafter acquired,
except the following ("Permitted Liens"):
(a) Liens in favor of the Agent Bank or the Lenders.
(b) In the case of the Borrower and the Subsidiaries, liens of
carriers, warehousemen, mechanics and materialmen or other similar Liens
incurred in the ordinary course of business which are not overdue for a
period of more than thirty (30) days or which are being contested in good
faith and by proper proceedings.
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(c) In the case of the Borrower and the Subsidiaries, leases or
subleases granted to others, easements, rights-of-way, restrictions and
other similar charges or encumbrances, in each case incidental to, and not
interfering in a material respect with, the ordinary conduct of the
business of the Borrower, the Parent or any Subsidiary.
(d) In the case of the Borrower and the Subsidiaries, Liens incurred
in connection with the Indebtedness relating to purchase money obligations
permitted under Sections 7.1(b) and (c), provided that (i) such Liens shall
be limited to any equipment financed thereby and (ii) no such lien may be
spread to cover other or additional Indebtedness or property of the
Borrower, the Parent or any Subsidiary.
(e) Pledges or deposits in connection with workmen's compensation,
unemployment insurance or other social security legislation.
(f) Restrictions, easements and minor irregularities in title which do
not and will not interfere in a material respect with the occupation, use
and enjoyment by the Parent, the Borrower and the Subsidiaries of their
properties and assets in the normal course of their businesses as presently
conducted or materially impair the value of their properties and assets for
the purpose of their businesses.
(g) Liens arising pursuant to Section 412(n) of the Code or ERISA
Section 4068(a) if (i) the delinquent payments to which the Lien relates
are made within ten (10) days after a responsible officer of the Parent,
the Borrower or any of the Subsidiaries learns of the failure to make
payment or (ii) the obligation to make such payments is being contested in
good faith and by appropriate proceedings, diligently conducted, if
adequate reserves with respect thereto are maintained on the books of the
Borrower or such Subsidiary, as the case may be, in accordance with GAAP.
(h) Liens currently of record listed on Schedule 7.2.
(i) Liens on real estate, fixed assets or equipment in connection with
Indebtedness permitted under Section 7.1(g).
(j) Liens for taxes or assessments and similar charges either (i) not
delinquent or (ii) being contested in good faith by appropriate
proceedings, and as to which the Borrower, the Parent or such Subsidiary,
as the case may be, shall have set aside on its books adequate reserves;
provided, however, that any obligations giving rise to such Lien shall be
paid immediately upon the commencement of proceedings to foreclose such
Lien unless such proceedings shall have been stayed or adequate
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evidence of a surety bond satisfactory to the Lenders shall have been
delivered to the Lenders.
7.3 Investments and Loans. The Borrower and the Parent will not, and will
not permit any Subsidiary to, directly or indirectly, make or own any Investment
in any Person, other than a Subsidiary (including without limitation the
contribution or transfer of ownership or possession of any of its cash, property
rights or other assets to any Subsidiary) without the prior written consent of
the Agent Bank, except that the Borrower may make and own Investments (a) set
forth on Schedule 7.3, (b) in marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency thereof
maturing within one year from the date of acquisition thereof, (c) in open
market commercial paper maturing within one year currently having the highest
rating obtainable from either Standard & Poor's Corporation or Moody's Investors
Service, Inc., (d) in certificates of deposit maturing within one year from the
date of issuance thereof issued by commercial banks incorporated under the laws
of the United States of America, each having combined capital, surplus and
undivided profits of not less than $500,000,000, (e) in repurchase agreements
with commercial banks incorporated under the laws of the United States of
America, each having combined capital, surplus and undivided profits of not less
than $500,000,000 and fully secured by securities of the types listed in (b) and
(c), (f) in deposits, federal funds or commercial paper sold by the Agent Bank
or its Affiliates, (g) in reputable money market funds with assets in excess of
$500,000,000, (h) in deposits in accounts in the Borrower's local banks for
payroll and accounts payable in the ordinary course of business; and (i) in
Special Purpose Subsidiaries.
7.4 Fundamental Changes. The Borrower and the Parent will not, and will not
permit any Subsidiary to, enter into any transaction of merger or consolidation
or amalgamation, or liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, lease, transfer or otherwise
dispose of, in one transaction or a series of transactions, all or a substantial
part of its business or assets, or other than as permitted by Section 7.16,
acquire by purchase or otherwise all or substantially all of the business or
assets of, or stock or other evidence of beneficial ownership of, any Person, or
make any material change in its present business or in its present method of
conducting business, except that:
(a) any Subsidiary may sell, lease, transfer or otherwise dispose of
any or all of its assets (upon voluntary liquidation or otherwise) to the
Borrower; and
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(b) any Subsidiary of the Borrower may be merged or consolidated with
or into the Borrower (provided that the Borrower shall be the continuing or
surviving corporation).
7.5 Sale of Assets. The Borrower and the Parent will not, and will not
permit any Subsidiary to, sell, lease, assign, pledge, transfer or otherwise
dispose of any of their assets (including, without limitation, accounts
receivable and leasehold interests), whether now owned or hereafter acquired,
except that the Borrower may sell tangible assets if the total amount of the
sale would be less than five (5%) of the Borrower's tangible assets in any one
year and such sale would not impair the going concern value of the Borrower.
7.6 Compliance with ERISA. The Borrower and the Parent will not (a)
terminate or withdraw from any Plan so as to result in any material liability to
PBGC, (b) engage in or permit any Person to engage in any "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code)
involving any Plan which would subject the Parent, the Borrower or any of its
Subsidiaries to any material tax, penalty or other liability, (c) incur or
suffer to exist any material "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived, involving any Plan, or (d) allow
or suffer to exist any event or condition which presents a material risk of
incurring a material liability to PBGC.
7.7 Lease Obligations. The Borrower and the Parent will not, and will not
permit any Subsidiary to, create, incur, assume or suffer to exist any lease,
excluding any real property lease, or other obligation to pay rent with a term
of one year or more if by reason thereof the aggregate of all rental payments
payable by such parties during any fiscal year would exceed $2,000,000.
7.8 Transactions With Affiliates. Except as otherwise permitted by this
Agreement and as set forth on Schedule 5.26, the Borrower and the Parent will
not, and will not permit any Subsidiary to, directly or indirectly, (a) make any
loan, advance, extension of credit or capital contribution to or other
investment in any Affiliate, (b) transfer, sell, assign or otherwise dispose of
any assets to any Affiliate (excluding payment to an Affiliate of dividends
payable in capital stock and otherwise permitted by this Agreement), (c) merge
or consolidate with or purchase or acquire assets from any Affiliate, or (d)
enter into any other transaction with or for the benefit of any Affiliate.
7.9 Retirement of Debt. The Borrower and the Parent will not purchase,
acquire, redeem or retire, or make any payment on account of
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principal of, any Indebtedness of the Borrower, the Parent or of any Subsidiary
except as expressly permitted by Section 7.1.
7.10 Use of Proceeds. The Borrower and the Parent will not use or permit
any proceeds of the Loans to be used, either directly or indirectly, for any
purpose, whether immediate, incidental or ultimate, which would be inconsistent
with this Agreement.
7.11 Other Agreements. The Borrower and the Parent will not, and will not
permit any Subsidiary to, enter into any agreement, contract or undertaking
containing any provision which would be violated or breached by the performance
by the Borrower, the Parent or such Subsidiary, as the case may be, of its
obligations hereunder or under any other Loan Document.
7.12 Restricted Payments. Except for (a) Restricted Payments in the
ordinary course of business to Subsidiaries that are 100% owned by the Parent,
(b) Restricted Payments from the Borrower to the Parent for the ordinary
operating needs of the Parent, and then only in the ordinary course of business,
and (c) annual dividend payments by the Parent after the Conversion Date in an
amount not to exceed the remaining Excess Cash Flow after mandatory prepayment
of Excess Cash Flow has been made to the Lenders in accordance with Section
2.6(b), the Borrower and the Parent will not, and will cause the Subsidiaries
not to, declare, order, pay, make or set apart any sum or property for any
Restricted Payment.
7.13 Restricted Leases: Sharing of Facilities.
(a) The Borrower and the Parent will not, and will not permit any
Subsidiary to, directly or indirectly, become or remain liable as lessee or as
guarantor or other surety with respect to any agreement for the lease, hire or
use of any real estate or personal property other than as expressly permitted by
Section 7.1 or for inter-company guarantees of lease obligations otherwise
permitted by this Agreement; provided, however, that sublets of leased property
in the ordinary course of business and on terms and conditions no less favorable
than that imposed on the lessee/sublessor shall be permitted.
(b) Anything herein to the contrary notwithstanding, the Borrower and the
Parent will not, and will not permit any Subsidiary to, directly or indirectly,
become or remain liable as lessee or as guarantor or other surety with respect
to any material lease of any property (whether real, personal or mixed) (i)
whether now owned or hereafter acquired which has been or is to be sold or
transferred (otherwise than by lease) by such Person to any other Person or (ii)
which the Borrower, the Parent, or any Subsidiary
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intends to use for substantially the same purpose as any other property now
owned or hereafter acquired by the Borrower, the Parent, or any Subsidiary which
has been or is to be sold or transferred (otherwise than by lease) by such
person to any other Person in connection with such lease.
7.14 Operating Licenses. The Borrower and the Parent will not and will not,
permit any Subsidiary to, violate any material laws, ordinances or governmental
rules and regulations to which any of them is subject or the provisions or
conditions of any Operating Licenses which they hold, and will not fail to
obtain any licenses (including Operating Licenses), permits, franchises or other
governmental authorizations or approvals necessary to the ownership,
construction, operation, acquisition or disposition of their respective
properties or to the conduct of their respective businesses, the failure of
which to obtain would result in a Material Adverse Effect.
7.15 Type of Business. The Borrower and the Parent will not, and will not
permit any Subsidiary to, enter into any business which is substantially
different from the sale and monitoring of alarm systems and the provision of
security services or make any substantial change in the nature of its businesses
or operations other than expansion to the extent not prohibited hereunder;
provided, that the business of each such Person shall at all times primarily be
the sale, lease (or rental), installation, maintenance and monitoring of alarm
systems for residential, industrial, commercial or governmental customers, or in
the case of Dictograph Franchise Corporation, the sale of franchises and/or
dealerships of its Security Services business to independent dealers, for whom
Dictograph Franchise Corporation agrees to provide for a fee all or a portion of
the Security Services for such Person's customers.
7.16 Permitted Acquisitions. The Borrower and the Parent will not, and will
not permit any Subsidiary to, directly or indirectly, through joint ventures or
any other means, enter into or consummate the acquisition of assets or stock or
other ownership interests of another Person after the date of this Agreement,
except that the Borrower may enter into and consummate acquisitions in
accordance with the following restrictions and limitations ("Permitted
Acquisitions"):
(a) Prior to making any such acquisition, the Borrower shall have
delivered to the Lenders, and the Majority Lenders shall have approved, an
Officer's Certificate representing that both before and after giving effect
to such acquisition, the Borrower and the Parent remain in full compliance
with the covenants set forth in Sections 6 and 7 hereof and there exists no
Event of Default or Potential Event of Default.
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(b) With respect to any acquisition of assets or of another Person
whose purchase price exceeds (i) $4 million or (ii) 35 times the Recurring
Monthly Revenue to be acquired, the Lenders shall have provided their prior
written consent (which consent shall not be unreasonably withheld).
(c) The Borrower shall have submitted to the Lenders a copy of the
proposed purchase contract and the due diligence reports prepared by the
Borrower for acquisitions falling under the requirements of clause (b)
above and those acquisitions whose aggregate purchase price equals or
exceeds $4 million, and the approval of the Majority Lenders shall have
been received with respect thereto.
For purposes of determining the "purchase price" hereunder, (i) payment solely
in shares of capital stock of the Parent shall not be included in any such
determination and (ii) the amount of cash paid and the amount of liabilities, if
any, assumed in such acquisition shall be aggregated.
7.17 Ownership Interests and Indebtedness.
(a) The Borrower and the Parent will not, and will not permit any
Subsidiary to, directly or indirectly sell, assign, pledge or otherwise dispose
of any Indebtedness or any shares of stock of (or warrants, rights or options to
acquire stock of) or ownership interests in any Person other than the Parent.
(b) The Borrower will not, and will not permit any Subsidiary to, directly
or indirectly, create, authorize or issue any additional capital stock or other
equity security (or options to acquire such shares, stock or other equity
security).
7.18 Fiscal Year. Neither the Borrower nor the Parent shall change its
fiscal year without the prior written consent of the Agent Bank or change its
method of accounting (other than immaterial changes in methods or changes
permitted by GAAP in which such Person's auditors concur, or changes required by
a change in GAAP).
7.19 Financial Covenants.
(a) Ratio of Total Consolidated Debt/Annualized Quarterly Consolidated
EBITDA. On the Closing Date and thereafter at the end of each Quarter set forth
below, the ratio of Total Consolidated Debt to Annualized Quarterly Consolidated
EBITDA shall not exceed:
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Period Ratio
------ -----
Closing Date 1.95
All Quarters of 1996 1.95
Quarter ending March 31, 1997 1.95
Quarter ending June 30, 1997
through Quarter ending March 30, 1998 1.50
Quarter ending June 30, 1998
through Quarter ending March 30, 1999 1.30
Quarter ending June 30, 1999
and thereafter 1.00
(b) Ratio of Total Consolidated Debt/Annualized Quarterly Consolidated
EBITDA Minus Capital Expenditures. At the end of each Quarter ending in the
fiscal year set forth below, the ratio of (i) Total Consolidated Debt to (ii)
Annualized Quarterly Consolidated EBITDA minus the cumulative Capital
Expenditures for all completed Quarters of such fiscal year shall not exceed:
Period Ratio
------ -----
1996 --
Quarter ending March 31, 1997 --
All other Quarters of 1997 3.00
1998 2.50
1999 2.00
2000 1.50
2001 1.25
2002 1.25
2003 1.25
(c) Ratio of Total Consolidated Debt/Recurring Monthly Revenue. On the
Closing Date and thereafter at the end of each Quarter, the ratio of Total
Consolidated Debt to Recurring Monthly Revenue shall not exceed 20.0.
For purposes of calculating the financial covenants set forth in Sections
7.19(a), (b) and (c) only, "Total Consolidated Debt" shall not include unfunded
pension liabilities which existed as of December 31, 1995.
(d) Maximum Attrition. On a monthly basis, Attrition shall not exceed
twelve percent (12%) per annum, tested at the end of two consecutive Quarters,
commencing with the Quarters ending December 31,
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1997. For purposes of this Section 7.19(d), "Attrition" shall be calculated in
accordance with Schedule 7.19.
(e) Minimum Interest Coverage. On the Closing Date and thereafter at the
end of each Quarter, the ratio of Annualized Quarterly Consolidated EBITDA to
Interest Expense shall not be less than 4.0.
(f) Minimum Consolidated Net Worth. On the Closing Date and thereafter at
the end of each Quarter, the Consolidated Net Worth of the Parent, the Borrower
and the Subsidiaries shall be at least $45,000,000, plus the amount of net
proceeds received through issuance of common stock of the Parent as of October
31, 1996.
(g) Minimum Debt Service. On the Conversion Date and thereafter at the end
of each Quarter, the ratio of Annualized Quarterly Consolidated EBITDA to Total
Projected Debt Service during the twelve month period following such date shall
not fall below 1.15.
(h) Maximum Capital Expenditures. On the Closing Date and thereafter at the
end of each Quarter ending in the fiscal year set forth below, the aggregate
maximum amount of Capital Expenditures for the Parent, the Borrower and the
Subsidiaries shall not exceed:
Fiscal Year Amount
----------- ------
1996 $12,000,000
1997 $ 8,500,000
1998 $ 8,500,000
1999 $ 8,500,000
2000 $ 9,000,000
2001 $ 9,500,000
2002 $ 9,500,000
2003 $10,000,000
For purposes of determining compliance with the financial covenants set forth in
this Section 7.19, (i) Consolidated EBITDA contributed to the Borrower through
Permitted Acquisitions will be accounted for on a pro forma basis for the
Quarter during which the Permitted Acquisitions were consummated and (ii) the
terms "Debt" and "Indebtedness" shall not include any Guaranty of the Borrower,
the Parent or any Subsidiary in favor of the Borrower, the Parent or any
Subsidiary.
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SECTION 8. EVENTS OF DEFAULT
8.1 Event of Default.
"Event of Default" means any of the following events:
(a) If the Borrower (i) fails to pay interest on the Notes when the
same becomes due and payable or (ii) fails to pay the principal of or
premium, if any, on the Notes when the same becomes due and payable,
whether at the maturity thereof, on a date fixed for payment or for a
prepayment, or otherwise.
(b) If the Borrower, the Parent or a Subsidiary shall default (as
payor or guarantor or other surety) in any payment of any principal or
premium or interest on any Indebtedness in respect of borrowed money with
an unpaid principal amount in excess of $1,000,000, or if any event shall
occur or condition shall exist in respect of any such Indebtedness or under
any evidence of any such Indebtedness or of any mortgage, indenture or
other agreement relating thereto, and any such default shall continue for
more than the period of grace, if any, specified therein and shall not have
been waived pursuant thereto.
(c) If the Borrower, the Parent or any Subsidiary shall default in
payment or performance of any material obligation (except Indebtedness,
which is covered in subsection (b) above), whether now or hereafter
incurred, and such default shall continue for more than the period of
grace, if any, specified in the agreement or other documents setting forth
the terms of such obligation, or shall not have been waived pursuant
thereto, and in the Agent Bank's sole and absolute discretion, either
individually or together with any other defaults hereunder, materially
jeopardizes or could reasonably be expected to materially jeopardize
repayment of any of the Notes, consummation of the transactions
contemplated by the Loan Documents, or could reasonably be expected to have
a material adverse effect on the business, properties, operation or
condition, financial or otherwise, of the Borrower or the Parent.
(d) If any representation and warranty made by any of the Borrower,
the Parent or a Subsidiary in any Loan Document to which it is a party or
in any document, certificate or statement furnished to the Agent Bank or a
Lender pursuant to this Agreement is false in any material respect when
made or deemed to be made.
(e) If there has been a breach of any term, covenant, or agreement
contained in Section 6 or Section 7 hereof.
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(f) If any defaults occur under any other Loan Documents and continue
beyond any cure period provided therein.
(g) If custody or control of any substantial part of the property of
the Borrower, the Parent or a Subsidiary shall be assumed by any
governmental agency or any court of competent jurisdiction at the instance
of any governmental agency or if any governmental regulatory authority
shall take any final action the effect of which would be to affect
materially and adversely the operations of the Borrower, the Parent or such
Subsidiary as now or then conducted.
(h) If the Borrower, the Parent or any Subsidiary shall suspend or
discontinue its business, shall make an assignment for the benefit of
creditors or a composition with creditors, shall generally not pay its
debts as they mature, shall institute a case or proceeding in bankruptcy,
shall become insolvent (however such insolvency may be evidenced), shall be
adjudicated insolvent or bankrupt, shall petition or apply to any tribunal
for the appointment of any receiver, liquidator or trustee of or for it or
any substantial part of its property or assets, shall commence any
proceeding relating to it under any bankruptcy, reorganization,
arrangement, readjustment of debt, receivership, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or
if there shall be commenced against the Borrower, the Parent or any
Subsidiary any such case or proceeding and the same shall not be dismissed
within ninety (90) days or if the Borrower, the Parent or any Subsidiary
shall by any act or failure to act indicate its consent to, approval of or
acquiescence in, any such case or proceeding or any appointment of any
receiver, liquidator or trustee of or for it or for any substantial part of
its property or assets, or shall suffer the appointment of any receiver,
liquidator or trustee, or shall take any corporate action for the purpose
of effecting any of the foregoing; or if any court of competent
jurisdiction shall assume jurisdiction with respect to any such case or
proceeding and the same shall not be dismissed within ninety (90) days or
if a receiver or a trustee or other officer or representative of a court or
of creditors, or if any court, governmental office or agency shall, under
color of legal authority, take and hold possession of any substantial part
of the property or assets of the Borrower, the Parent or any Subsidiary or
if the Borrower, the Parent or any Subsidiary shall have concealed, removed
or permitted to be concealed or removed any part of its property with
intent to hinder, delay or defraud its creditors, or any of them, or shall
have knowingly made or knowingly suffered a transfer of any of its property
which is fraudulent under any bankruptcy, fraudulent conveyance or similar
law or if the Borrower, the Parent or any Subsidiary, while insolvent,
shall have made any transfer of its property to or for the benefit of a
creditor at a time when other creditors similarly situated have not been
paid, or if the Borrower, the
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Parent or any Subsidiary shall have suffered or permitted, any creditor to
obtain a lien upon any of its property through legal proceedings.
(i) If there has been a denial, forfeiture, revocation, or nonrenewal
by the pertinent Governmental Authority of any Operating License or other
authorization required by law of the Borrower, the Parent or any Subsidiary
(or the expiration without renewal of any such authorization) and such
denial, forfeiture, revocation, non-renewal or expiration has a material
adverse effect on the financial condition, operations or business of the
Parent, the Borrower and the Subsidiaries, taken as a whole.
(j) The Borrower, the Parent or any Subsidiary shall be dissolved
(except (A) Persons dissolved as contemplated by the Merger Documents, (B)
Special Purpose Subsidiaries dissolved within one hundred and eighty (180)
days of their acquisition and (C) Non-U.S. Subsidiaries dissolved by
December 31, 1996) or shall lose its corporate or legal status by
forfeiture or by any judicial or administrative proceeding or otherwise.
(k) A Reportable Event shall occur with respect to, or proceedings
shall commence to have a trustee appointed to administer or to terminate,
any Plan under which there are unfunded vested benefits that are material
in relation to the business, operations, prospects, assets, properties or
condition (financial or otherwise) of the Borrower, the Parent or any
Subsidiary, which Reportable Event or institution of proceedings is, in the
opinion of the Agent Bank, likely to result in the termination of such Plan
for purposes of Title IV of ERISA, and, in the case of a Reportable Event,
the continuance of such Reportable Event unremedied for a period of ten
(10) days after notice of such Reportable Event pursuant to Section
4043(a), (c) or (d) of ERISA is given or the continuance of such
proceedings for a period of ten (10) days after commencement thereof, as
the case may be; a trustee shall be appointed by PBGC or any Federal Court
to administer any such Plan; or any such Plan shall terminate for purposes
of Title IV of ERISA.
(l) If judgments for the payment of money in an aggregate amount not
to exceed $100,000 shall be rendered against the Borrower, the Parent or a
Subsidiary and such judgments remain either unstayed or unsatisfied for a
period of thirty (30) days.
(m) If any property of the Borrower, the Parent or a Subsidiary is
attached, levied upon, seized under authority of a court, or otherwise
taken in satisfaction of judgments in an aggregate amount not to exceed
$50,000 against the Borrower, the Parent or such Subsidiary.
(n) If a Change of Control shall have occurred.
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(o) If, at any time before the Conversion Date, the employment of
George Flagg shall have been involuntarily terminated without cause, unless
such termination had been previously disclosed to the Agent Bank and the
Agent Bank had not objected thereto.
(p) Other than as specified in Sections 8.1(a) through 8.1(o), the
occurrence of any other default in the due performance or observance of any
term, covenant or agreement to be performed or observed pursuant to the
provisions of this Agreement and such default continues for thirty (30)
days after notice of such default by the Borrower. The grace period
described in this Section 8.1(p) is not applicable to any default referred
to in Sections 8.1(a) through 8.1(o).
8.2 Acceleration; Remedies.
(a) Acceleration. Upon the occurrence and during the continuation of any
Event of Default, the entire unpaid principal balance of the Notes and interest
accrued thereon, all Reimbursement Obligations and any unpaid expenses payable
under this Agreement shall be immediately due and payable by the Borrower and
the Commitment of the Lenders to fund and to issue Letters of Credit shall
immediately terminate. Such principal and interest and all Reimbursement
Obligations shall become and be immediately due and payable, without
presentation, demand, protest, notice of protest or other notice of dishonor of
any kind, all of which are hereby expressly waived by the Borrower.
(b) Remedies. Upon the occurrence of an Event of Default, the Lenders and
the Agent Bank may protect and enforce their rights hereunder or realize on any
or all security granted pursuant hereto or pursuant to the other Loan Documents
in any manner or order they deem expedient without regard to any equitable
principles of marshalling or otherwise. In addition to all other rights
hereunder or under law, the Lenders and the Agent Bank shall have the right to
institute proceedings in equity or other appropriate proceedings for the
specific performance of any covenant or agreement made herein or in any document
executed in connection herewith or for an injunction against the violation of
any of the terms hereof or thereof or in aid of the exercise of any power
granted hereby or thereby or by law or otherwise. Further, upon the occurrence
of any Event of Default, the Lenders and the Agent Bank shall be entitled, to
the extent not prohibited by applicable law, to the appointment of a trustee or
receiver for all or any part of the business of the Borrower or the Parent,
which trustee or receiver shall have such powers as may be conferred by the
appointing authority, and the Borrower and the Parent, on behalf of themselves
and the Subsidiaries, hereby consent to such appointment. All
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rights and remedies given by this Agreement and the other Loan Documents are
cumulative and not exclusive of any other rights or remedies available to the
Lenders and the Agent Bank, and no course of dealing between the Borrower, the
Parent, the Agent Bank or a Lender or any delay or omission in exercising any
right or remedy shall operate as a waiver of any right or remedy, and every
right and remedy may be exercised from time to time and as often as shall be
deemed appropriate by the Lenders and the Agent Bank.
(c) Waiver. The Lenders may, by notice to the Borrower, at any time and
from time to time waive, in whole or in part, any Event of Default. Any such
waiver shall be for such period and subject to such conditions or limitations as
may be specified in any such notice. In the case of any such waiver, the rights
of the Agent Bank and the Lenders shall be otherwise unaffected and any Event of
Default so waived shall be deemed to be cured and not continuing only to the
extent and on the conditions or limitations, if any, set forth in such waiver
(unless such waiver shall state to the contrary), but no such waiver shall
extend to any subsequent or other Event of Default.
(d) Governmental Consent. If counsel to the Agent Bank reasonably
determines that the consent of any Governmental Authority is required in
connection with any of the actions which may be taken by the Agent Bank in the
exercise of its rights under the Loan Documents, each of the Borrower and the
Parent, at its sole cost and expense, agrees to use its best efforts to secure
such consent and to cooperate with the Agent Bank in any action commenced by the
Agent Bank to secure such consent. Upon the occurrence and during the
continuation of an Event of Default, the Borrower and the Parent, subject to the
provisions of applicable law, shall promptly execute or cause the execution of
all applications, certificates, instruments and other documents and papers that
the Agent Bank may be required to file in order to obtain any necessary
governmental consent, approval or authorization, and if the Borrower or the
Parent refuses to execute such documents, the clerk of the court with
jurisdiction may execute such documents on behalf of the Borrower or the Parent,
as the case may be. The Borrower agrees to assist the Agent Bank to obtain any
required Operating Licenses. The Borrower and the Parent further recognize that
a violation of this covenant would result in irreparable harm to the Agent Bank
for which monetary damages are not readily ascertainable. Therefore, in addition
to any other remedy which may be available to the Agent Bank, at law or in
equity, the Agent Bank shall have the remedy of specific performance of the
provisions of this subsection.
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SECTION 9. AGENCY
9.1 Authority. In order to expedite the transactions contemplated by this
Agreement, Merita is hereby appointed to act as Agent Bank on behalf of the
Lenders. Each of the Lenders and any subsequent holder of any Note by its
acceptance thereof, irrevocably authorizes the Agent Bank to execute and take
such action on its behalf under the provisions of the Loan Documents and to
exercise such powers hereunder and thereunder as are specifically delegated to
the Agent Bank by the terms hereof and thereof and such powers as are reasonably
incidental thereto. The Agent Bank is hereby expressly authorized on behalf of
the Lenders, without limiting any implied authority, (i) to receive on behalf of
each of the Lenders any payment of principal or interest on the Notes
outstanding hereunder and all other amounts, including fees, payable hereunder,
and to promptly distribute to each Lender its proper share of all payments so
received, (ii) to distribute to each Lender copies of all notices, agreements
and other material as provided for in this Agreement or in the Security
Agreements and (iii) to take all actions with respect to the Loan Documents as
are specifically delegated to the Agent Bank.
9.2 Expenses. Each Lender agrees (a) to reimburse the Agent Bank in the
amount of such Lender's pro rata share (based on its percentage of the Total
Commitment hereunder) for any expenses incurred by the Agent Bank for the
benefit of the Lenders, including counsel fees and compensation of agents and
employees, and all other amounts paid by the Agent Bank respectively, for
services rendered on behalf of the Lenders, to the extent not reimbursed by the
Borrower and (b) to indemnify and hold harmless the Agent Bank and any of its
directors, officers, employees or agents, on demand, in the amount of its pro
rata share, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against it in its capacity as the Agent Bank or any of its directors,
officers, employees or agents in any way relating to or arising out of the Loan
Documents or any action taken or omitted by the Agent Bank or any of its
directors, officers, employees or agents under the Loan Documents, to the extent
not reimbursed by the Borrower; provided, however, that no Lender shall be
liable to the Agent Bank for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgment, suits, costs, expenses or
disbursements resulting from the gross negligence or willful misconduct of the
Agent Bank, or any of its directors, officers, employees or agents.
9.3 Exculpatory Provisions. Neither the Agent Bank nor any of its officers,
directors, employees or agents will be liable to the Lenders
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for any action taken or omitted hereunder or in connection herewith or in
connection with any document or instrument now or hereafter executed in
connection herewith unless caused by its gross negligence or willful misconduct.
The Agent Bank will not be responsible for any recitals, warranties or
representations herein or in any such other document or instrument. The Lenders
acknowledge that they have reviewed this Agreement, the Notes, the Security
Agreements, the Pledge Agreements, the Guaranty Agreements and all of the other
Loan Documents and are fully aware of the terms hereof and thereof. The Agent
Bank may execute any of its duties by or through agents or employees and will be
entitled to advice of counsel, accountants or other professionals of its
selection concerning all matters pertaining to the Loan Documents or such other
documents and instruments and its duties hereunder and thereunder. The Agent
Bank will be entitled to rely upon any writing or other document, telegram or
telephone conversation believed by it to have been signed, sent or made by the
proper person or persons and, in respect of legal matters, upon the advice of
counsel selected by the Agent Bank. The Agent Bank shall be fully justified in
failing or refusing to take any action under this Agreement and the other Loan
Documents unless it shall first receive such advice or concurrence of the
Majority Lenders (or, when expressly required hereby or by the relevant other
Loan Document, all the Lenders) as it deems appropriate or it shall first be
indemnified to its satisfaction by the Lenders against any and all liability and
expense which may be incurred by it by reason of taking or continuing to take
any such action except for its own gross negligence or willful misconduct. The
Agent Bank shall in all cases be fully protected in acting, or in refraining
from acting, under this Agreement and the other Loan Documents in accordance
with a request of the Majority Lenders (or, when expressly required hereby, all
the Lenders), and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Lenders and all future holders of the
Notes.
9.4 Investigation by Lender. Each Lender acknowledges that the Agent Bank
has not made any representation or warranty to it and that no act taken by the
Agent Bank will be deemed to constitute a representation or warranty by the
Agent Bank to any Lender. Each Lender further acknowledges that it has taken and
will continue to take such action and to make such investigation as it deems
necessary to inform itself of the affairs of the Parent or the Borrower and that
it has made and will continue to make its own independent investigation of the
creditworthiness and the business and operations of the Borrower and the Parent.
In making an advance hereunder, each Lender represents that it has not relied
and will not rely upon any information or representations furnished or given by
the Agent Bank. The Agent Bank will be under no duty or responsibility to the
Lenders to ascertain or to inquire into the performance or observance by the
Borrower
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or the Parent of any of the provisions of this Agreement or any document or
instrument now or hereafter executed in connection herewith. The Agent Bank will
not have any duty or responsibility to provide any Lender with any credit or
other information concerning the affairs, financial condition or business of the
Borrower, the Parent or any Subsidiary which may come into the possession of the
Agent Bank. The Lenders understand and agree that the Agent Bank will not be
deemed to have knowledge of the existence, occurrence or continuance of an Event
of Default, unless the officers of the Agent Bank immediately responsible for
matters concerning this Agreement will have actual knowledge of such occurrence
or will have been notified in writing by any Lender or Borrower that the Lender
or the Borrower, as applicable, considers that an Event of Default has occurred
and is continuing and specifying the nature thereof.
9.5 Action Upon Default.
(a) Anything in Section 8 of this Agreement to the contrary notwithstanding
upon the occurrence and during the continuation of an Event of Default
hereunder, the Agent Bank upon (i) the request of the Majority Lenders, and (ii)
the providing by the Majority Lenders of an indemnity in form and substance
satisfactory to the Agent Bank (in proportion to their respective portions of
the Loans) of all expenses to the extent not reimbursed by the Borrower
(including attorneys' fees of the Agent Bank's counsel) and disbursements, will
declare the Notes to be due and payable and will proceed to enforce the rights
of the holders of the Notes by such proceedings as the Agent Bank may deem
appropriate, whether at law or in equity. Upon any request aforesaid, the Agent
Bank will declare the Notes to be due and payable, but the Agent Bank will be
justified in failing or refusing to take any further action unless it will be
indemnified to its satisfaction as aforesaid. It is agreed that if the Agent
Bank, having been so indemnified, or not having been indemnified to its
satisfaction, will fail to so proceed, any Lender will be entitled to take such
action as it will deem appropriate to enforce its rights.
(b) The Agent Bank, on behalf of all the Lenders, will hold in accordance
with the Security Agreements and the Pledge Agreements all items of collateral
or interest therein received or held by the Agent Bank. Subject to the Agent
Bank's and the Lenders' rights to reimbursement for their costs and expenses
hereunder and subject to the application of payments in accordance with the
terms of this Agreement, each Lender will have an interest in any collateral or
interests therein in the same proportions that the aggregate outstanding
principal obligations owed such Lender bear to the aggregate outstanding
principal obligations owed to all the Lenders, without priority or preference
among the Lenders.
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9.6 Instructions. The Agent Bank will in all cases be fully protected in
acting, or in refraining from acting, hereunder or in connection with any other
documents or instruments now or hereafter executed in connection herewith in
accordance with written instructions of the Lenders.
9.7 Resignation as Agent. Subject to the appointment and acceptance of a
successor Agent Bank as provided below, the Agent Bank may resign at any time by
notifying the Lenders and the Borrower. Upon any such resignation, the Lenders
will have the right to appoint a successor Agent Bank. If no successor Agent
Bank will have been so appointed by the Lenders and will have accepted such
appointment within thirty (30) days after the retiring Agent Bank gives notice
of its resignation, then the retiring Agent Bank may, on behalf of the Lenders,
appoint a successor Agent Bank which will be a bank with an office (or an
affiliate with an office) in New York, New York, having a combined capital and
surplus of at least $500,000,000. Upon the acceptance of any appointment as
Agent Bank hereunder by a successor bank, such successor will thereupon succeed
to and become vested with all the rights, powers, privileges and duties of the
retiring Agent Bank and the retiring Agent Bank will be discharged from its
duties and obligations hereunder and under the Security Agreements and the
Pledge Agreements. After any Agent Bank's resignation hereunder, the provisions
of this Section 9 will continue in effect for its benefit in respect of any
actions taken or omitted to be taken by it while it was acting as Agent Bank.
SECTION 10. MISCELLANEOUS
10.1 Notices.
All notices and other communications hereunder shall be given in writing
and shall be deemed to have been delivered when delivered personally (including
by means of telex, telecopier or telefax systems), or the day following delivery
to a reputable overnight courier service which guarantees delivery within 24
hours, charges prepaid (or upon the date mailed, if sent certified mail, postage
prepaid, return receipt requested, and delivery is refused or returned as
undeliverable), to the respective parties to this Agreement as follows:
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(a) If to the Borrower:
Holmes Protection, Inc.
440 9th Avenue
New York, New York 10001-1695
Attention: Lawrence R. Irving
Telephone: (212) 760-0630
Telecopy: (212) 563-0129
with a copy (which shall not constitute notice) to:
Buchanan Ingersoll
One Oxford Center
301 Grant Street
20th Floor
Pittsburgh, Pennsylvania 15219-1410
Attention: Hugh Van Der Veer, Esq.
Telephone: (412) 562-8877
Telecopy: (412) 562-1041
(b) If to the Guarantor:
Holmes Protection Group, Inc.
440 9th Avenue
New York, New York 10001-1695
Attention: Lawrence R. Irving
Telephone: (212) 760-0630
Telecopy: (212) 563-0129
with a copy (which shall not constitute notice) to:
Buchanan Ingersoll
One Oxford Center
301 Grant Street
20th Floor
Pittsburgh, Pennsylvania 15219-1410
Attention: Hugh Van Der Veer, Esq.
Telephone: (412) 562-8877
Telecopy: (412) 562-1041
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<PAGE>
(c) If to Merita or the Agent Bank:
Merita Bank Ltd
437 Madison Avenue
21st Floor
New York, New York 10022
Attention: Charles J. Lansdown
Telephone: (212) 318-9562
Telecopy: (212) 421-4420
with copies (which shall not constitute notice) to:
Merita Bank Ltd
437 Madison Avenue
21st Floor
New York, New York 10022
Attention: Rossella Perna
Telephone: (212) 318-9345
Telecopy: (212) 421-4420
and
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, D.C. 20004-1109
Attention: Claudette M. Christian, Esq.
Telephone: (202) 637-5650
Telecopy: (202) 637-5910
(d) If to BKBCT:
Bank of Boston Connecticut
100 Pearl Street
Hartford, Connecticut 06103
Attention: Roger J. Roche, Jr., Director
Telephone: (860) 727-6568
Telecopy: (860) 727-6975
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<PAGE>
with a copy (which shall not constitute notice) to:
Updike, Kelly & Spellacy, P.C.
One State Street
P.O. Box 231277
Hartford, Connecticut 06123-1277
Attention: John F. Wolter, Esq.
Telephone: (860) 548-2628
Telecopy: (860) 548-2680
The designation of the person to be so notified or the address of such
person for the purposes of such notice may be changed from time to time by
similar notice in writing.
10.2 Payment of Expenses. The Borrower shall pay and save the Agent Bank
and the Lenders harmless against liability for the payment of all expenses
arising in connection with the administration of the Loan Documents (including
any insurance premiums relating to insurance required to be maintained hereunder
paid by the Agent Bank and the Lenders on behalf of the Borrower in case the
Borrower fails to maintain such insurance, any modification of, or any consent
or waiver under, the Loan Documents, all expenses, if any, in connection with
the Borrower's failure to make any repayment when due, and any enforcement of,
or the preservation of any rights under, the Loan Documents, including, without
limitation, the fees of counsel to the Agent Bank and the Lenders) and against
liability for the payment of all expenses arising in connection, with the
preparation, execution and delivery of the Loan Documents, the transactions
contemplated under the Loan Documents, and expenses of the Agent Bank and the
Lenders (including reasonable fees of counsel to the Agent Bank and the
Lenders). The obligations of the Borrower under this Section 10.2 shall survive
the termination of the Loan Documents and the payment of the Notes.
10.3 Stamp or Other Tax. Should any stamp or excise tax be payable in
respect of any of the Loan Documents or any modification hereof or thereof, the
Borrower agrees to pay the same (including interest and penalties, if any) and
to hold the Agent Bank and the Lenders harmless with respect thereto.
10.4 Fees and Commissions. The Borrower agrees to indemnify and hold
harmless the Agent Bank and the Lenders in respect of any commissions, fees,
judgments or expenses of any nature and kind which they may become liable to pay
by reason of any claims by or on behalf of brokers, finders or agents in
connection with the transactions contemplated by this Agreement or any
litigation or similar proceeding arising from such
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<PAGE>
claims. The Borrower represents and warrants that there are no valid bases for
any such claims against the Agent Bank and the Lenders.
10.5 No Waiver. No failure or delay on the part of the Agent Bank or a
Lender or the holder of the Notes in exercising any right, power or privilege
hereunder, and no course of dealing between the Borrower and the Agent Bank or a
Lender or the holder of any of the Notes, will operate as a waiver thereof; nor
will any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any right,
power or privilege. The rights and remedies herein expressly provided are
cumulative and not exclusive of any rights or remedies which the Agent Bank or a
Lender or any subsequent holder of any of the Notes would otherwise have. No
notice to or demand on the Borrower or the Parent in any case will entitle the
Borrower or the Parent to any other or further notice or demand in similar or
other circumstances or will constitute a waiver of the right of the Agent Bank
or a Lender to take any other or further action in any circumstances without
notice or demand.
10.6 Entire Agreement and Amendments. The Loan Documents represent the
entire agreement between the parties hereto with respect to the Loans, the
Letters of Credit and the transactions contemplated hereunder and, except as
expressly provided herein, will not be affected by reference to any other
documents. Neither this Agreement nor any provision hereof may be changed,
waived, discharged or terminated orally, but such may be accomplished only by an
instrument in writing signed by the Borrower, the Majority Lenders and the Agent
Bank; provided, however, that any amendment which would have the effect of (a)
changing the nature of or releasing any or all of the Collateral, as defined in
the Security Agreements or the Pledge Agreements, (b) extending the time of any
payment of any amounts which are payable by the Borrower hereunder, (c)
increasing the amount of the Merita Commitment or the BKBCT Commitment, or
increasing the permitted aggregate amount of Reimbursement Obligations in
respect of outstanding Letters of Credit above $4,000,000, (d) changing the
amount of interest, fees, or other payments payable to any of the Lenders or the
Agent Bank or (e) amending the term "Majority Lenders" or this Section 10.6,
must be signed by the Borrower, the Parent, the Agent Bank and each of the
Lenders.
10.7 Benefit of Agreement; Assignments and Participations.
(a) This Agreement will be binding upon and inure to the benefit of
the Borrower, the Parent, the Agent Bank and the Lenders and their
respective successors and assigns and all subsequent holders of any of the
Notes or any portion thereof.
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<PAGE>
(b) Each Lender may assign its rights and interests and delegate its
obligations hereunder in whole, but not in part, to any financial
institution or institution with capital and surplus in excess of
$500,000,000 reasonably acceptable to the Agent Bank and the Borrower. Any
such assignment will be pursuant to an assignment and acceptance which
conforms in substance with this Section 10.7 (the "Assignment and
Acceptance"). The parties to each such assignment will execute and deliver
the Assignment and Acceptance together with any Note or Notes subject to
such assignment. Upon such execution and delivery, from and after the
effective date specified in each Assignment and Acceptance, which effective
date will be at least five (5) Business Days after the execution thereof,
(i) the assignee thereunder will be a party hereto and, to the extent
provided in such Assignment and Acceptance, have the rights and obligations
of the assigning Lender hereunder and (ii) the assigning Lender will, to
the extent provided in such Assignment and Acceptance, be released from its
obligations under this Agreement.
(c) By executing and delivering the Assignment and Acceptance, each
Lender and the assignee thereunder confirm to and agree as follows: (i)
other than the representation and warranty that it is the legal and
beneficial owner of the interest being assigned thereby free and clear of
any adverse claim, the assigning Lender makes no representation or warranty
and assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with any Loan Document or the
execution, legality, validity, enforceability, genuineness, sufficiency or
value of any Loan Document; (ii) the assigning Lender makes no
representation or warranty and assumes no responsibility with respect to
the financial condition of the Borrower or the performance or observance by
the Borrower of any of its obligations under any of the Loan Documents;
(iii) such assignee confirms that it has received a copy of this Agreement
together with such other documents and information as it has deemed
appropriate to make its own credit analysis and decision to enter into the
Assignment and Acceptance; (iv) such assignee will, independently and
without reliance upon the assigning Lender, and based on such documents and
information as it will deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement;
and (v) such assignee agrees that it will perform all of the obligations
which by the terms of this Agreement are required to be performed by the
assigning Lender, to the extent provided in such Assignment and Acceptance.
(d) Upon execution of the Assignment and Acceptance by the assigning
Lender and the assignee, together with any Note or Notes subject to such
assignment, the Agent Bank will give prompt notice thereof to
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<PAGE>
the Borrower. Within five (5) Business Days after receipt of such notice,
the Borrower will execute and deliver to the assigning Lender (at the cost
and expense of the assigning Lender) in exchange for the surrendered Note
or Notes a new Note or Notes to the order of such assignee in an amount
equal to that portion of the principal amount outstanding under the Note
being surrendered and being assumed by it pursuant to such Assignment and
Acceptance and, a new Note or Notes to the order of the assigning Lender in
an amount, if any, equal to that portion of the principal amount of the
Note being surrendered which is being retained by such assigning Lender
hereunder. Such new Note or Notes will be in an aggregate principal amount
equal to the aggregate principal amount of such surrendered Note or Notes,
will be dated the effective date of such Assignment and Acceptance and will
otherwise be in substantially the form of Exhibit A-1 or A-2, as the case
may be. Canceled Notes will be promptly returned to the Borrower
simultaneously with the execution of such new Notes.
(e) Notwithstanding the foregoing, each Lender may sell participations
to one or more commercial banks, each of which have capital and surplus in
excess of $500,000,000, in all or a portion of its rights and obligations
under this Agreement. Each such Lender shall provide written notice to the
other Lenders, the Agent Bank and the Borrower of any such participation.
(f) Without the prior written consent of the Majority Lenders, neither
the Borrower nor the Parent may assign any of its rights or delegate any of
its duties or obligations hereunder.
(g) Any party hereto which assigns its rights and obligations
hereunder shall pay to the Agent Bank an administrative fee of $5,000.
10.8 Descriptive Headings. The descriptive headings of this Agreement are
inserted for convenience only and shall not affect the meaning or construction
of any of the provisions hereof.
10.9 Governing Law. This Agreement and the rights and obligations of the
parties hereunder and under the Notes shall be construed in accordance with and
shall be governed by the laws of the State of New York (without regard to the
laws as to conflict of law).
10.10 Consent to Jurisdiction, Service and Venue; Waiver of Jury Trial. For
the purpose of enforcing this Agreement, payment of the Notes and performance of
the obligations hereunder and thereunder or otherwise in connection herewith,
the Borrower and the Parent hereby
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<PAGE>
consent to the jurisdiction and venue of the courts of the State of New York or
of any federal court located in such state. In the event either the Borrower or
the Parent changes its principal office to an address which is not located in
the State of New York, within five (5) days of such change, such Person shall
appoint and maintain an agent for service of process. If an agent is so
appointed, such Person agrees to accept such agent for all service of process in
connection with any such matter (provided that at the same time a copy of such
service is also sent to the Borrower and the Parent at the address and in the
manner set forth in Section 10.1 hereof). The Borrower and the Parent hereby
waive the right to contest the jurisdiction and venue of the courts located in
the State of New York on the ground of inconvenience or otherwise. The
provisions of this Section 10.10 shall not limit or otherwise affect the right
of the Borrower or the Parent to institute and conduct action in any other
appropriate manner, jurisdiction or court. Neither the Borrower nor the Parent
nor any other Person liable for the Indebtedness to the Agent Bank or the
Lenders referred to herein, nor any assignee, successor, heir or personal
representative of the Borrower or the Parent or any such other Person shall seek
a jury trial in any proceeding based upon or arising out of this Agreement, any
Note, any other document executed in connection herewith, any collateral for the
payment hereof or the dealings or the relationship between or among such
Persons, or any of them. Neither the Borrower nor the Parent nor any such Person
will seek to consolidate any such action with any action in which a jury trial
cannot be or has not been waived. Except as prohibited by law, each party hereto
waives any rights it may have to claim or recover in any litigation referred to
in this Section 10.10 any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, direct damages. Each party hereto
(a) certifies that no representative, agent or attorney of the Agent Bank or a
Lender has represented, expressly or otherwise, that the Agent Bank or a Lender
would not, in the event of litigation, seek to enforce the foregoing waivers and
(b) acknowledges that it has been induced to enter into this Agreement or any
other document executed in connection herewith, as applicable, by, among other
things, the mutual waivers and certifications herein. The provisions of this
Section 10.10 have been fully disclosed by the parties hereto and the provisions
hereof shall be subject to no exceptions. No party has in any way agreed with or
represented to any other party that the provisions of this Section 10.10 will
not be fully enforced in all instances.
10.11 Holidays. Whenever any payment of interest or principal to be made
hereunder or pursuant to the Notes shall become due and payable on a day which
is not a Business Day (or, in the case of a Eurodollar Loan, Eurodollar Business
Day), such payment may be made on the next succeeding Business Day (or, in the
case of a Eurodollar Loan, the next succeeding Eurodollar Business Day unless
the result of the extension would be to extend such payment into another
calendar month, in which event such payment shall be made on the immediately
preceding Eurodollar Business Day) and such extension
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of time for a principal payment shall in such case be included in computing
interest on such payment.
10.12 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument.
10.13 Maximum Lawful Interest Rate. Notwithstanding any provision contained
herein, liability of the Borrower for payment of interest pursuant hereto,
including late charges, shall not exceed the maximum amount of such interest
permitted by law to be charged, collected or received from the Borrower, and if
any payments by the Borrower include interest in excess of such a maximum
amount, the Lenders shall apply such excess to the reduction of the unpaid
principal amount due pursuant hereto, or if none is due, such excess shall be
refunded to the Borrower.
10.14 Severability. Every provision of this Agreement and the Notes is
intended to be severable and, if any term or provision hereof or thereof shall
be invalid, illegal or unenforceable for any reason, the validity, legality and
enforceability of the remaining provisions hereof or thereof shall not be
affected or impaired thereby, and any invalidity, illegality or unenforceability
in any jurisdiction shall not affect the validity, legality or enforceability of
any such term or provision in any other jurisdiction. In the event that any
provisions affecting the Agent Bank's or a Lender's remedies or their security
interests shall be held illegal, invalid or unenforceable in a final judgment of
a court having competent jurisdiction, the Agent Bank and the Lenders shall be
entitled, among other things, to reduce the Total Commitment to the lesser of
(a) the outstanding aggregate principal amount of the Loans, as of the date of
the rendering of such decision as to illegality, invalidity or unenforceability
or (b) the amount of such outstanding principal as of the date on which such
reduction is made. Such Lender or the Agent Bank, as the case may be, shall
provide notice to the other Lenders and to the Borrower of any such event.
10.15 Indemnity. In addition to the payments contemplated by Section 10.2
and 10.4, whether or not the transactions contemplated hereby shall be
consummated, the Borrower agrees to defend, indemnify, pay and hold the Agent
Bank and each of the Lenders and any holder of the Notes, and the shareholders,
officers, directors, employees and agents of the Agent Bank and each of the
Lenders and such holders (collectively called the "Indemnitees") harmless from
and against, any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever
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(including the reasonable fees and disbursements of counsel for such Indemnitees
in connection with any investigative, administrative, judicial proceeding or
other proceedings, whether commenced or threatened and whether or not such
Indemnitee shall be designated a party thereto) (collectively, "Claims"), which
may be imposed on, incurred by, or asserted against that Indemnitee, in any
manner relating to or arising out of (a) the use or intended use of the proceeds
of the Loans, or (b) any funding or proposed funding, or arrangements to obtain
funding, made available, or proposed to have been made available, under and as
contemplated by this Agreement to the Borrower (collectively, the "Indemnified
Liabilities"); provided that the Borrower shall have no obligation to an
Indemnitee hereunder with respect to Indemnified Liabilities arising from the
gross negligence or willful misconduct of that Indemnitee in connection with its
responsibilities hereunder. The Agent Bank and the Lenders agree to provide the
Borrower with notice of any such Claims. To the extent that the undertaking to
defend, indemnify, pay and hold harmless set forth in the preceding sentence may
be unenforceable because it is violative of any law or public policy, the
Borrower shall contribute the maximum portion which it is permitted to pay and
satisfy under applicable law to the payment and satisfaction of all Indemnified
Liabilities incurred by the Indemnitees.
10.16 Application of and Modifications to GAAP. Whenever this Agreement
requires disclosure of Financial Information in accordance with GAAP, the
Borrower and each other Person in making such disclosure shall include any notes
required by GAAP to be made on statements included in such Financial
Information, except that notes shall not be provided in connection with
quarterly or monthly financial statements. In the event that any change in GAAP
has the effect of changing the result of any financial calculations required to
be made under this Agreement other than as expressly permitted in this
Agreement, the Agent Bank and the Borrower shall negotiate in good faith
concerning an appropriate amendment to the provisions of this Agreement
requiring such calculation; if the Agent Bank and the Borrower are unable to
agree on such amendment, the affected Person shall continue to make such
financial calculation based upon GAAP as applicable prior to such change. If
there is more than one permissible treatment of any financial calculation under
GAAP, the affected Person shall seek the advice of its auditors and use the
treatment so recommended.
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[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
-92-
<PAGE>
IN WITNESS WHEREOF, the Borrower, the Parent, the Lenders and the Agent
Bank have caused this Agreement to be duly executed by their respective, duly
authorized officers as of the date first above written.
BORROWER
Holmes Protection, Inc.
By: __________________________
Its: ________________________
PARENT
Holmes Protection Group, Inc.
By: __________________________
Its: ________________________
LENDERS
Merita Bank Ltd, a Finnish banking
corporation acting through its
New York branch
By: __________________________
Its: ________________________
By: __________________________
Its: ________________________
Bank of Boston Connecticut
By: __________________________
Its: ________________________
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<PAGE>
AGENT BANK
Merita Bank Ltd, a Finnish banking
corporation acting through its
New York branch
By: __________________________
Its: ________________________
By: __________________________
Its: ________________________
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
Holmes Protection, Inc., a New York corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 990
<SECURITIES> 0
<RECEIVABLES> 5,333
<ALLOWANCES> 973
<INVENTORY> 2,795
<CURRENT-ASSETS> 10,989
<PP&E> 121,956
<DEPRECIATION> 74,758
<TOTAL-ASSETS> 89,817
<CURRENT-LIABILITIES> 13,160
<BONDS> 4,734
0
0
<COMMON> 58
<OTHER-SE> 60,337
<TOTAL-LIABILITY-AND-EQUITY> 89,817
<SALES> 8,879
<TOTAL-REVENUES> 50,975
<CGS> 7,438
<TOTAL-COSTS> 28,124
<OTHER-EXPENSES> 25,563
<LOSS-PROVISION> (146)
<INTEREST-EXPENSE> (537)
<INCOME-PRETAX> (3,667)
<INCOME-TAX> (1,215)
<INCOME-CONTINUING> (2,452)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,452)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
