-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OZvu+3KXQ3sMQFUrcaI5PUhZl8aLaCLafq7xjcKf68e4bIXH1PhPqBn66B+uQd+t efFQvRbmMmnc0e0uEIl2Lg== 0000950133-97-003231.txt : 19970929 0000950133-97-003231.hdr.sgml : 19970929 ACCESSION NUMBER: 0000950133-97-003231 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970911 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURACOM INC CENTRAL INDEX KEY: 0001037453 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-DETECTIVE, GUARD & ARMORED CAR SERVICES [7381] IRS NUMBER: 222817302 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-26439 FILM NUMBER: 97679118 BUSINESS ADDRESS: STREET 1: 50 TICE BLVD CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07675 BUSINESS PHONE: 2019309500 MAIL ADDRESS: STREET 1: 50 TICE BLVD STREET 2: 50 TICE BLVD CITY: WOODCLIFF LAKE STATE: NJ ZIP: 07675 S-1/A 1 AMEND #4 TO FORM S-1 FOR SECURACOM, INCORPORATED 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1997 REGISTRATION NO. 333-26439 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ AMENDMENT NO. 4 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ SECURACOM, INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 7373 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) 22-2817302 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 50 TICE BOULEVARD WOODCLIFF LAKE, NEW JERSEY 07675 (201) 930-9500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) RONALD C. THOMAS PRESIDENT AND CHIEF EXECUTIVE OFFICER SECURACOM, INCORPORATED 50 TICE BOULEVARD WOODCLIFF LAKE, NEW JERSEY 07675 (201) 930-9500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------ Copies to: MICHAEL JOSEPH, ESQ. DYER ELLIS & JOSEPH P.C. 600 NEW HAMPSHIRE AVE., N.W. SUITE 1000 WASHINGTON, D.C. 20037 (202) 944-3000 THOMAS R. DENISON, ESQ. GIBSON, DUNN & CRUTCHER LLP 1801 CALIFORNIA STREET SUITE 4100 DENVER, COLORADO 80202 (303) 298-5700 ------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. Subject to Completion, Dated September 11, 1997 PROSPECTUS 1,600,000 SHARES LOGO COMMON STOCK ------------------------ Of the 1,600,000 shares of Common Stock of the Company (the "Common Stock") offered hereby, 1,400,000 shares are being issued and sold by Securacom, Incorporated ("Securacom" or the "Company") and 200,000 are being sold by a stockholder of the Company (the "Selling Stockholder"). See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholder. Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently estimated that the initial public offering price will be between $6.50 and $8.50 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. Application has been made to list the Common Stock on the American Stock Exchange under the proposed symbol "SFT." ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING STOCKHOLDER PUBLIC COMMISSIONS (1) COMPANY (2) (3) - -------------------------------------------------------------------------------------------------- Per Share..... $ $ $ $ - -------------------------------------------------------------------------------------------------- Total (4)..... $ $ $ $ ==================================================================================================
(1) Excludes a non-accountable expense allowance payable by the Company and the Selling Stockholder to the Representatives and issuance by the Company to the Representatives for nominal consideration of three-year warrants to purchase up to 140,000 shares of Common Stock issued by the Company at a price per share equal to 120% of the Price to Public. In addition, the Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $876,000, including the Company's portion of the Representatives' non-accountable expense allowance. (3) Before deducting the Selling Stockholder's portion of the Representatives' non-accountable expense allowance. (4) The Selling Stockholder has granted the Underwriters an option, exercisable within 45 days of the date hereof, to purchase up to an additional 240,000 shares of Common Stock solely to cover over-allotments, if any, at the Price to Public less the Underwriting Discounts and Commissions. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company, and Proceeds to Selling Stockholder will be $ , $ , $ , and $ , respectively. See "Underwriting." ------------------------ The shares of Common Stock are being offered severally by the Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to other conditions. It is expected that delivery of the certificates representing the shares of Common Stock will be made against payment therefor at the offices of Cruttenden Roth Incorporated, Irvine, California, on or about , 1997. ------------------------ CRUTTENDEN ROTH SCOTT & STRINGFELLOW, INC. INCORPORATED The date of this Prospectus is , 1997 3 SECURACOM, INCORPORATED [Diagram of Services Offered by Securacom] SINGLE SOURCE SECURITY THROUGH TECHNOLOGY CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 4 Securacom, Incorporated is a fully integrated single source security company. The Company provides consulting and planning, engineering and design, systems integration, and maintenance and technical support services to commercial and government clients worldwide. Securacom's capabilities enable it to provide clients with single source turn-key solutions for medium and large scale complex security projects. Securacom has completed security projects for airports, corporations, utilities, prisons, universities, and federal, state and local governments. [Picture of New York City's [Picture of Tennessee Valley World Trade Center] Authority Facility] Federal, State and Local Utilities Government
5 [Picture of NationsBank [Picture of Processing Headquarters] Facility] Corporations Process and Manufacturing Facilities
[Picture of Washington Dulles International Airport] Airports 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Except as otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. THE COMPANY Securacom is a single-source provider of comprehensive technology-based security solutions for medium and large commercial and government facilities in the United States and abroad. The Company offers a broad range of services, consisting of: (i) consulting and planning; (ii) engineering and design; (iii) systems integration; and (iv) maintenance and technical support. The solutions provided by the Company include integrated security systems comprised of a command center managing one or more subsystems and components, primarily access control systems, intrusion detection systems, closed circuit television systems, critical condition monitoring systems and fire detection systems. The Company is not aware of any other company providing this comprehensive range of services on a national basis. The Company serves more than 40 clients including airports, hospitals, prisons, corporations, utilities, universities and government facilities. These clients include Washington Dulles International Airport, Hewlett-Packard Company, EDS, United Airlines, Gillette Corporation, MCI Communications Corporation and New York City's World Trade Center. The Company believes that the multi-billion dollar market for technology-based security solutions is growing rapidly due to the following factors: (i) many existing security systems are becoming technologically obsolete and inadequate or consist of internally incompatible subsystems, creating a need for re-engineering, upgrading and integration; (ii) technological advancements provide the opportunity to increase the scope and cost-efficiency of many routine security tasks, such as the replacement of guards with electronic surveillance; (iii) the proliferation of computers and advanced communications systems has created a new and growing security need for clients to prevent the misuse of proprietary information and other intellectual property; and (iv) a number of highly publicized acts of terrorism have led to legislation and corporate policies regarding the increased need for physical safety. The security industry is highly fragmented and consists of a broad array of equipment manufacturers and distributors, consultants and engineers and systems integrators, each of which provides only a portion of the services required to deliver an integrated security solution. As a result, clients are frequently required to coordinate the planning, design and implementation of a project through multiple service providers and vendors. This approach causes client frustration with project delays, cost inefficiencies, lack of vendor accountability and incompatible subsystems. Securacom believes that as a single-source provider of security solutions it can expedite project completion and reduce its clients' manpower requirements and aggregate project costs. In addition, the Company has the flexibility to respond to each of its client's particular needs, whether the client requires only one of the services offered by the Company, various services on an ongoing basis, or a comprehensive turnkey security solution using all of the Company's areas of expertise and its national network of offices. Securacom's objective is to become the leading provider of comprehensive, high-value-added, technology-based security solutions for medium and large commercial and government facilities in the United States and abroad. The Company's strategy focuses on developing long-term client relationships. These relationships allow the Company to integrate itself into clients' decision-making processes by identifying solutions for new security systems upgrades and other ongoing security needs. Additional key elements of the Company's strategy include: (i) capitalizing on its position as a national single-source provider of security solutions; (ii) continuing to expand its client base in targeted industries; (iii) maintaining its high level of technological sophistication; (iv) enhancing its ability to pursue bidding opportunities on larger projects; and (v) continuing to focus on providing high-value-added services. The Company began operations in 1987 in association with a large privately held engineering firm. In 1992, the Company became independent from the engineering firm in conjunction with a capital infusion from a private investment group. At the same time, the Company hired new management with extensive experience 3 7 in the security industry. Since then, the Company has devoted a substantial amount of resources and capital to enhancing its technical capability and services offerings, hiring and training key personnel and expanding its client base. As part of this effort, the Company has opened four regional offices in the United States and one international office in Moscow, Russia. Securacom believes that it now has in place the infrastructure and capabilities to substantially increase revenues and profitability. As a result of these initiatives, revenues have grown from $2.4 million in 1994 to $3.2 million in 1995 and $5.8 million in 1996. The Company achieved its first two profitable quarters of operations during the six months ended June 30, 1997, with net income of $0.4 million on revenues of $7.2 million. The Company's headquarters are located at 50 Tice Boulevard, Woodcliff Lake, New Jersey 07675, and its telephone number is (201) 930-9500. RECENT DEVELOPMENTS During the first six months of 1997, the Company contracted to provide services to several new clients. The Company signed an agreement to provide a broad range of services in connection with the upgrading of Amtrak's access control systems at eight facilities in the northeast and California. Additionally, it contracted to prepare and completed a security master plan for Xerox Corporation's manufacturing and engineering facilities in Rochester, New York. The Company also finalized an agreement to provide a comprehensive access control system upgrade at the headquarters of Rostelecom, the primary Russian long distance telephone service provider. This project expands Securacom's Moscow client base which also includes Moscow Local Telephone System and US WEST. In April, the Company signed a joint venture agreement with Ahmad N. AlBinali & Sons Co., a large Saudi Arabian engineering and construction company, to develop and conduct business in the Kingdom of Saudi Arabia. 4 8 THE OFFERING Common Stock offered by the Company.......... 1,400,000 shares Common Stock offered by the Selling Stockholder................................ 200,000 shares Common Stock outstanding after the Offering................................... 5,834,140 shares(1) Use of Proceeds to the Company............... To repay certain indebtedness, to expand and upgrade the Company's management information systems, to further develop and document the Company's command center integration software and for working capital and general corporate purposes. See "Use of Proceeds." Proposed American Stock Exchange symbol...... SFT
- --------------- (1) Based upon the number of shares outstanding as of August 31, 1997. Does not include 1,557,962 shares issuable upon the exercise of warrants outstanding as of August 31, 1997, of which warrants to purchase 1,044,626 shares were exercisable as of that date. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------- ---------------- 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------ STATEMENT OF OPERATIONS DATA: Earned revenues................................... $ 2,395 $ 3,177 $ 5,824 $ 1,931 $7,240 Gross profit................................. 809 997 1,408 685 2,030 Selling, general and administrative expenses...... 2,670 2,871 3,701 1,941 1,381 Net income (loss)................................. (1,888) (1,768) (2,513) (1,331) 429 Net income (loss) per share....................... $ (0.54) $ (0.45) $ (0.58) $ (0.31) $ 0.09 Weighted average number of common shares outstanding..................................... 3,493 3,909 4,368 4,256 4,532
JUNE 30, 1997 ----------------- AS ACTUAL ADJUSTED(1) ------- ------- BALANCE SHEET DATA: Cash and cash equivalents................................................... $ 125 $ 3,507 Working capital............................................................. 838 4,219 Total assets................................................................ 7,354 12,735 Long-term debt, less current maturities..................................... 3,410 210 Total stockholders' equity (deficiency)..................................... (1,105) 7,477
- --------------- (1) As adjusted to give effect to the sale of Common Stock in the Offering by the Company at an assumed offering price of $7.50 and the application of the net proceeds therefrom. Does not give effect to the potential issuance of 1,557,962 shares issuable upon the exercise of warrants outstanding as of August 31, 1997, of which warrants to purchase 1,044,626 shares were exercisable as of that date. 5 9 RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be carefully considered in evaluating an investment in the Common Stock offered hereby. HISTORY OF LOSSES, ACCUMULATED DEFICIT AND NEGATIVE NET WORTH The Company has incurred net losses in each year since inception. The Company reported net losses of $1.9 million, $1.8 million and $2.5 million for the years ended December 31, 1994, 1995 and 1996, respectively. The Company's accumulated deficit through June 30, 1997 was $11.8 million and as of that date it had negative net worth of $1.1 million. Although the Company reported net income of $0.4 million for the six months ended June 30, 1997, its first two quarters of profitable operations, there can be no assurance the Company will maintain profitable operations in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's financial statements and the notes thereto. RISKS ASSOCIATED WITH GROWTH STRATEGY The Company's strategy envisions a period of rapid growth that may put a strain on its administrative and operational resources. While the Company believes that it has established a significant infrastructure to support growth, its ability to effectively manage growth will require it to continue to expand the capabilities of its operational and management systems and to attract, train, manage and retain qualified project managers, engineers and technicians. There can be no assurance that it will be able to do so. If the Company is unable to successfully manage its growth, the Company's business, operating results and financial condition could be adversely affected. DEPENDENCE UPON MANAGEMENT The Company is dependent upon the continued services of key members of its management, including its President and Chief Executive Officer, Ronald C. Thomas. The loss of one or more key members of management could have a material adverse effect on the Company. The Company does not maintain key-man life insurance policies on members of management. See "Management." DEPENDENCE ON LIMITED NUMBER OF CLIENTS For the year ended December 31, 1996 the Company's three largest clients, New York City's World Trade Center, the Metropolitan Washington Airport Authority and MCI Communications Corporation, in the aggregate, accounted for 64% of its revenues, and three additional clients together accounted for an additional 18% of its revenues. The Company anticipates that its three largest clients will continue to account for the majority of its revenues during 1997. In the first six months of 1997, these three clients accounted for 57%, 22% and 6% of its revenues, respectively. The loss of any of the Company's major clients could adversely affect the Company's business, operating results and financial condition. Several of the projects for the Company's major clients, including the World Trade Center project, will be substantially completed in 1997, and the Company's future operating results will depend on its ability to develop future sales prospects and generate orders from new and existing clients. CANCELLATION OF CONTRACTS A majority of the Company's contracts are subject to cancellation by the Company's clients upon short notice. The Company's contracts with government entities are subject to modification or termination for the convenience of the government. Although these government contracts generally extend over several years, such contracts are typically funded on an annual basis and may be terminated prior to completion because of lack of funding. Contracts with corporations also frequently permit the client to terminate the Company's services for any reason, with limited notice to the Company. Although to date none of the Company's contracts has been terminated prior to completion, there can be no assurance that this will not occur in the future, resulting in a loss of a significant portion of the Company's backlog with little warning. 6 10 EXPOSURE TO PROFESSIONAL LIABILITY In the event of a breach of a security system designed, installed, maintained, or engineered by the Company, the Company may be subject to a claim that an error or omission on the part of the Company contributed to the damages resulting from such breach, which damages could be substantial. While the Company maintains insurance covering such risk, there can be no assurance that such coverage, currently limited to $1.0 million, will be adequate or that such insurance will cover all such risks associated with the Company's services. Any such claim, even if covered by insurance, could materially and adversely affect the Company. COMPETITION The security industry is highly competitive. The Company competes on a local, regional and national level with security equipment manufacturers, systems integrators, consulting firms and engineering and design firms. Many of its competitors have greater name recognition and financial resources than the Company. The Company may also face competition from potential new entrants into the security industry or increased competition from existing competitors that may attempt to develop the ability to offer the full range of services offered by the Company. The Company believes that competition is based primarily on the ability to deliver solutions that meet a client's requirements and, to a lesser extent, on price. While the Company believes its position as the only national, single-source provider of comprehensive, technology-based security solutions gives it a competitive advantage, there can be no assurance that the Company's competitors will not expand the scope of their services or that other participants in the security industry will not enter the markets served by the Company. There can be no assurance that the Company will be able to compete successfully in the future against existing or potential competitors. OFFERING PROCEEDS TO BENEFIT AFFILIATED PARTIES The Company will use approximately $3.4 million, or 39.1% of the net proceeds of the Offering to the Company, to repay outstanding debentures held by certain limited partners of the Company's largest stockholder. See "Use of Proceeds" and "Certain Transactions." CONTROL BY CURRENT STOCKHOLDERS Upon completion of the Offering, approximately 41.5% of the outstanding shares of the Common Stock will be owned by two limited partnerships, the general partner of which is KuwAm Corporation ("KuwAm"). Wirt D. Walker, III, the Company's Chairman, is the Managing Director of KuwAm. The individual limited partners of such partnerships, including Mr. Walker, will own an additional 19.8% of the outstanding Common Stock after the Offering. Accordingly, Mr. Walker, acting through these partnerships, may have the ability to control the Company's Board of Directors and, therefore, the business, policies and affairs of the Company. Such control could preclude unsolicited acquisitions of the Company and, consequently, adversely affect the market price of the Common Stock. See "Principal and Selling Stockholders" and "Description of Capital Stock." MANAGEMENT'S BROAD DISCRETION IN APPLICATION OF PROCEEDS Approximately $2.9 million, or 33.3%, of the estimated net proceeds of the Offering to the Company have been allocated to working capital and general corporate purposes. Accordingly, the Company will have broad discretion as to the application of such proceeds. See "Use of Proceeds." LENGTHY SALES CYCLE The sale of the Company's services frequently involves a substantial commitment of resources to evaluate a potential project and prepare a proposal. In addition, approval of proposals often involves a lengthy process due to clients' internal procedures and capital expenditure approval processes. Accordingly, the sales cycle associated with the Company's services is typically lengthy and subject to certain risks that are beyond the 7 11 Company's control, including risks relating to client's budgetary constraints and internal priorities or procedures. FLUCTUATIONS IN QUARTERLY RESULTS The Company's quarterly results have varied significantly in the past and will likely continue to do so in the future due to a variety of factors, including the timing and nature of projects from which revenues are recognized during any particular quarter. Such fluctuations may contribute to volatility in the market price for the Common Stock. In particular, the Company has only had two profitable quarters to date. If the Company has one or more unprofitable quarters in the future, the market price for the Common Stock could be adversely affected. ABSENCE OF TRADING MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY OF STOCK PRICE Prior to the Offering there has been no public market for the Common Stock. Accordingly, there can be no assurance that an active or sufficiently large trading market will develop or be sustained upon completion of the Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock will be determined by negotiations among the Company and the Representatives of the Underwriters and may not be indicative of the prices that will prevail in the public market. The trading prices of the Common Stock could be subject to wide fluctuations in response to quarter-to-quarter variations in the Company's operating results, material announcements by the Company, general conditions in the security industry, or other events or factors, many of which are beyond the Company's control. In addition, the stock market as a whole and individual stocks have experienced extreme price and volume fluctuations, which have often been unrelated to the performance of the related corporations. The Company's operating results in future quarters may be below the expectations of securities analysts and investors. In such event, the price of the Common Stock will likely decline, perhaps substantially. See "Underwriting." ANTI-TAKEOVER PROVISIONS; POTENTIAL FOR PREFERRED SHARE ISSUANCE Certain provisions of the Company's Certificate of Incorporation and certain provisions of the Delaware General Corporation Law may make it difficult to change control of the Company and replace incumbent management. For example, the Certificate of Incorporation permits the Board of Directors, without stockholder approval, to issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock having such number of shares, designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations as the Board of Directors may determine, which issuance of Preferred Stock may adversely affect the voting power of the holders of the Common Stock. In addition, the Company's Board of Directors has adopted a stockholder rights plan that could further discourage attempts to acquire control of the Company. See "Description of Capital Stock." The Company has also entered into employment and consulting agreements with certain officers which provide that upon the occurrence of certain events following certain changes in control of the Company, such officers may be entitled to receive two times their annual base salaries. See "Management -- Employment and Consulting Agreements." The significant ownership position of certain stockholders may also have the effect of deterring a change of control. See "Principal and Selling Stockholders." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares by existing security holders could have an adverse effect on the market price of the Company's Common Stock or otherwise impair the Company's ability to raise additional capital. Upon completion of this offering, the Company will have outstanding 5,834,140 shares of Common Stock. Of these shares, the 1,600,000 shares sold in the Offering will generally be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). The remaining approximately 4,234,140 shares of Common Stock may be sold in the public market as follows: (i) approximately 379,990 shares will be freely tradeable on the date of this Prospectus, (ii) approximately 593,670 shares will be freely tradeable 120 days from the date of this Prospectus upon the expiration of certain lock-up 8 12 agreements, and (iii) approximately 3,260,473 shares will be tradeable 270 days from the date of this Prospectus upon the expiration of certain lock-up agreements, subject in certain cases to the limitations of Rule 144 under the Securities Act. In addition, approximately 1,557,962 shares issuable upon exercise of warrants (of which 1,044,626 are currently vested) will be freely tradeable upon the earlier of one year after the date such warrants are exercised or the filing of a registration statement with respect to such shares. Approximately 794,432 of such warrants are subject to lock-up agreements which prohibit sales of such underlying shares for a period ending 270 days from the date of this Prospectus. Certain existing stockholders, holding 3,413,683 shares of Common Stock, have the right to include their shares in future registrations of Common Stock and certain preferential rights that must be satisfied in connection with future financings. See "Description of Capital Stock" and "Shares Eligible for Future Sale." DILUTION Based on an assumed public offering price of $7.50 per share, purchasers of the Common Stock offered hereby will incur an immediate and substantial dilution of $6.22 per share in net tangible book value, or 82.9%, from the initial public offering price. The Company has issued and outstanding warrants to purchase up to 1,557,962 shares of Common Stock at exercise prices ranging from $1.00 to $7.00 with a weighted average exercise price of $5.92 per share. The existence of such warrants may hinder future financings by the Company and the exercise of such warrants may further dilute the interests of all other stockholders. The possible future resale of Common Stock issuable on the exercise of such warrants could adversely affect the prevailing market price of the Common Stock. Further, the holders of warrants may exercise them at a time when the Company would otherwise be able to obtain equity capital on terms more favorable to the Company. See "Dilution." DIVIDENDS The Company has never paid cash dividends on its Common Stock and does not currently intend to pay cash dividends. It is not likely that any cash dividends will be paid in the foreseeable future. See "Dividend Policy." FORWARD-LOOKING STATEMENTS This Prospectus contains certain information and trend statements that are forward-looking statements which involve risk and uncertainty, including those risks discussed in the "Prospectus Summary," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Actual results may differ materially from the results described in such forward-looking statements. When used in this Prospectus, the words "anticipate," "believe," "estimate," "expect," "intend" and other similar expressions as they relate to the Company or its market, may be forward-looking statements. 9 13 USE OF PROCEEDS The net proceeds to the Company of the Offering, after deducting expenses payable by the Company and assuming an initial public offering price of $7.50 per share, will be approximately $8.7 million. The Company anticipates that it will use the net proceeds as follows:
APPROXIMATE APPLICATION OF NET PROCEEDS DOLLAR AMOUNT % OF PROCEEDS ----------------------------------------------------------- ------------- ------------- Repay debentures........................................... $3.4 million 39.1% Expand and upgrade management information systems.......... 1.0 million 11.5 Further develop and document command center software....... 1.0 million 11.5 Open two regional offices.................................. 0.4 million 4.6 Working capital and general corporate purposes............. 2.9 million 33.3 ------------- ------ Total................................................. $8.7 million 100.0%
The increase in working capital will enhance the Company's ability to obtain performance bonding and thus enable it to bid on larger contracts as a primary contractor. See "Business -- Marketing." The proceeds from the debentures, which bear interest at 10% per annum and mature on December 31, 2000, were used for working capital, except for $700,000 thereof which was invested in a limited partnership interest in Special Situations Investment Holdings, Ltd. ("SSIH" or the "Selling Stockholder"), the Company's largest stockholder. The Company and SSIH have agreed that, immediately following the Offering, such limited partnership interest will be redeemed at the greater of $700,000 or its market value. See "Management -- Certain Transactions" and "Principal and Selling Stockholders." The debentures to be repaid with proceeds of the Offering are held by certain limited partners of SSIH. Pending application of the net proceeds as described above, the Company intends to invest the net proceeds in short-term, interest-bearing securities. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholder. However, the Selling Stockholder will use a portion of such funds to redeem the limited partnership interest as described above. See "Certain Transactions." DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain any earnings to finance the growth and development of its business and does not anticipate paying cash dividends in the foreseeable future. Any payment of cash dividends in the future will depend upon the financial condition, capital requirements and earnings of the Company, as well as other factors the Board of Directors may deem relevant. 10 14 DILUTION The Company's net tangible book value at June 30, 1997 was $(1,579,353) or approximately $(0.36) per share. Net tangible book value per share represents total assets, less intangible assets and total liabilities, divided by the number of shares outstanding. After giving effect to the sale of the shares of Common Stock offered by the Company hereby at an assumed initial offering price of $7.50 per share and the application by the Company of the estimated net proceeds therefrom as described in "Use of Proceeds," the net tangible book value of the Company would have been $7.5 million, or $1.28 per share of Common Stock. This represents an immediate increase in net tangible book value of $1.64 per share of Common Stock to existing stockholders and an immediate dilution in net tangible book value of $6.22 per share of Common Stock to purchasers of Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.............................. $7.50 Net tangible book value per share before the Offering................... (0.36) Increase in net tangible book value attributable to new investors....... $ 1.64 ------ Net tangible book value per share after the Offering......................... $1.28 ----- Dilution per share to new investors.......................................... $6.22 =====
The following table summarizes, as of June 30, 1997, the total shares of Common Stock purchased and the total consideration and average price per share paid by existing stockholders, and paid by the new investors purchasing the shares offered hereby, assuming an initial public offering price of $7.50 per share.
SHARES PURCHASED TOTAL CONSIDERATION ------------------- --------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- ------------- Existing stockholders...................... 4,434,140 76.0% $10,741,335 50.6% $2.42 New investors.............................. 1,400,000 24.0 10,500,000 49.4 7.50 --------- ------- ----------- ------ - ----- Total................................. 5,834,140 100.0% $21,241,335 100.0% $3.64 ========= ======= =========== ======= =====
The foregoing calculations do not give effect to the exercise of (i) outstanding warrants to purchase 1,557,962 shares of Common Stock at a weighted average exercise price of $5.92 per share outstanding at August 31, 1997, and (ii) options to purchase an additional 500,000 shares of Common Stock available for issuance under the Company's stock option plan, none of which are outstanding. 11 15 CAPITALIZATION The following table sets forth the capitalization of the Company at June 30, 1997 and as adjusted to reflect the sale by the Company of the Common Stock offered hereby, assuming an initial public offering price of $7.50 per share and after deducting the applicable underwriting discount and estimated expenses payable by the Company, and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with the Company's financial statements and the notes thereto included elsewhere in this Prospectus.
JUNE 30, 1997 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Current maturities of long-term debt and capital lease obligations..... $ 44 $ 44 -------- ----------- Long-term debt and capital lease obligations, less current maturities(1)........................................................ 3,410 210 -------- ----------- Stockholders' equity(2): Preferred Stock, par value of $0.01 per share, 5,000,000 shares authorized; no shares issued and outstanding..................... -- -- Common Stock, par value $0.01 per share, 20,000,000 shares authorized; 4,434,140 shares issued and outstanding; 5,834,140 shares issued and outstanding as adjusted........................ 44 58 Additional paid-in capital........................................ 10,644 19,362 Accumulated deficit(1)............................................ (11,793) (11,943) -------- ----------- Total stockholders' equity (deficiency)...................... (1,105) 7,477 -------- ----------- Total capitalization......................................... $ 2,349 $ 7,731 ======== =========
- --------------- (1) The as adjusted amount reflects the payment of $3,350,000 face value of subordinated debt. The difference between the face value and the recorded value of $3,200,000 represents $150,000 of unamortized discount, which is reflected as an adjustment to stockholders' deficiency. (2) Does not include 1,557,962 shares issuable upon the exercise of warrants outstanding as of June 30, 1997, of which warrants to purchase 1,044,626 shares were exercisable as of that date. 12 16 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The statement of operations data set forth below for the years ended December 31, 1994, 1995 and 1996, and the balance sheet data at December 31, 1995 and 1996 are derived from, and should be read in conjunction with, the audited financial statements of the Company, and the notes thereto, included elsewhere in this Prospectus. The statements of operations data set forth below for the six months ended June 30, 1996 and 1997 and the actual balance sheet data at June 30, 1997 are derived from, and should be read in conjunction with, the unaudited financial statements of the Company, and the notes thereto, included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1992 and 1993, and the balance sheet data at December 31, 1992, 1993 and 1994 are derived from audited financial statements not included in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ----------------- 1992 1993 1994 1995 1996 1996 1997 ------- ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Earned revenues...................................... $ 6,776 $ 3,245 $ 2,395 $ 3,177 $ 5,824 $ 1,931 $ 7,240 Cost of earned revenues.............................. 6,394 2,904 1,586 2,180 4,416 1,246 5,210 ------- ------- ------- ------- ------- ------- ------- Gross profit..................................... 382 341 809 997 1,408 685 2,030 Selling, general and administrative expenses......... 1,884 2,123 2,670 2,871 3,701 1,941 1,381 ------- ------- ------- ------- ------- ------- ------- Operating income (loss).......................... (1,502) (1,782) (1,861) (1,874) (2,293) (1,256) 649 Interest and financing fees.......................... -- -- (34) (102) (242) (77) (232) Interest and other income............................ -- -- 7 208 22 2 12 ------- ------- ------- ------- ------- ------- ------- Net income (loss)................................ $(1,502) $(1,782) $(1,888) $(1,768) $(2,513) $(1,331) $ 429 ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share...................... $ (1.81) $ (0.60) $ (0.54) $ (0.45) $ (0.58) $ (0.31) $ 0.09 ======= ======= ======= ======= ======= ======= ======= Weighted average number of shares outstanding.... 832 2,986 3,493 3,909 4,368 4,256 4,532 JUNE 30, 1997 DECEMBER 31, ----------------- ----------------------------------------------- AS 1992 1993 1994 1995 1996 ACTUAL ADJUSTED(1) ------- ------- ------- ------- ------- ------- ------- BALANCE SHEET DATA: Cash and cash equivalents............................ $ 232 $ 237 $ 266 $ 555 $ 609 $ 125 3,507 Working capital (deficit)............................ 105 683 (31) 696 151 838 4,219 Total assets......................................... 1,299 1,999 2,034 3,046 4,567 7,354 12,735 Long-term debt, less current maturities.............. -- 25 6 597 2,657 3,410 210 Total stockholders' equity (deficiency).............. 43 702 316 554 (1,596) (1,105) 7,477
- --------------- (1) As adjusted to give effect to the sale of Common Stock in the Offering by the Company at an assumed offering price of $7.50 and the application of the net proceeds therefrom. Does not give effect to the potential issuance of 1,557,962 shares issuable upon the exercise of warrants outstanding as of August 31, 1997, of which warrants to purchase 1,044,626 shares were exercisable as of that date. 13 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a single-source provider of comprehensive, technology-based security solutions for medium and large commercial and government facilities in the United States and abroad. The Company offers a broad range of services, including: (i) consulting and planning; (ii) engineering and design; (iii) systems integration; and (iv) maintenance and technical support. The Company began operations in 1987 in association with a large privately held engineering firm. As a start-up, the Company expended significant capital on the development of the Company's business and infrastructure, and it accumulated losses of approximately $2.8 million from 1987 through 1991 on aggregate revenues of approximately $17.2 million. The Company's revenues from 1990 through 1994 were generated primarily by a contract to design and integrate extensive security upgrades at three nuclear facilities for the Tennessee Valley Authority (the "TVA"). In 1992, the Company became independent from the engineering firm in conjunction with a capital infusion from a private investor group. At the same time, the Company hired new management with extensive expertise in the security industry. Since 1992, the Company has devoted a substantial amount of resources and capital to enhancing its technical capability and services offerings, hiring and training key personnel and expanding its client base. As part of this effort, the Company opened four regional offices in the United States and one international office in Moscow, Russia. The Company derives its revenues primarily from long-term, fixed-price contracts. Earnings are recognized based upon the Company's estimates of the cost and percentage of completion of individual contracts. Earned revenues equal the project's total contract amount multiplied by the proportion that direct project costs incurred on a project bear to estimated total project costs. Project costs include direct labor and benefits, direct material, subcontract costs, project related travel and other direct expenses. Clients are invoiced based upon negotiated payment terms for each individual contract. Terms usually include a 25% downpayment and the balance as stages of the work are completed. Maintenance contracts are billed either in advance, monthly, or quarterly. As a result, the Company records as an asset costs and estimated earnings in excess of billings and as a liability billings in excess of costs and estimated earnings. RESULTS OF OPERATIONS The following table sets forth the percentages of earned revenues represented by certain items reflected in the Company's statements of operations.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Earned revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of earned revenues......................... 66.2 68.6 75.8 64.5 72.0 ----- ----- ----- ----- ----- Gross profit............................... 33.8 31.4 24.2 35.5 28.0 Selling, general and administrative expenses.... 111.5 90.4 63.5 100.5 19.1 ----- ----- ----- ----- ----- Operating income (loss).................... (77.7) (59.0) (39.3) (65.0) 8.9 Interest and financing fees..................... (1.4) (3.2) (4.2) (4.0) (3.2) Interest and other income....................... 0.3 6.5 0.4 0.1 0.2 ----- ----- ----- ----- ----- Net income (loss).......................... (78.8)% (55.7)% (43.1)% (68.9)% 5.9% ===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996 Revenues increased by 275% from $1.9 million in the six months ended June 30, 1996 to $7.2 million in the six months ended June 30, 1997. The increase was due to work completed for new clients and an increase 14 18 in work completed on existing projects. Revenues from the World Trade Center project, which commenced in October 1996, were $4.1 million in the first six months of 1997. In addition, revenues from the Metropolitan Washington Airport Authority increased from $0.4 million in the first six months of 1996 to $1.6 million in the first six months of 1997. In addition, $0.1 million of revenue was recognized in the first six months of 1997 on a project for which all of the costs were accrued during 1996. Cost of earned revenues increased from $1.2 million in the six months ended June 30, 1996 to $5.2 million in the six months ended June 30, 1997, primarily due to the increase in revenues. Gross margin declined from 35.5% in the first six months of 1996 to 28.0% in the first six months of 1997. The reason for the decline in gross margin is that in the first six months of 1996 there was a one-time adjustment of $0.2 million to the cost of earned revenues to reflect a reduction in a subcontractor's costs upon the final closeout of the TVA project. Net of this adjustment, gross margin was 23.1% in the first six months of 1996. Selling, general and administrative expenses decreased by 28.9% from $1.9 million in the six months ended June 30, 1996 to $1.4 million in the six months ended June 30, 1997, primarily due to a $0.4 million reduction in legal fees relating to certain litigation. Interest expense and financing fees increased 202.3% from $70,000 in the six months ended June 30, 1996 to $0.2 million in the six months ended June 30, 1997 due to an increase in outstanding indebtedness resulting from the issuance of $2.1 million of subordinated debentures during 1996 and $0.7 million of subordinated debentures during the first six months of 1997. Net income increased from a net loss of $1.3 million in the six months ended June 30, 1996 to net income of $0.4 million in the six months ended June 30, 1997. This increase in net income was primarily due to the significant increase in revenues and the decrease in selling, general and administrative expenses. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 Revenues increased by 83.4% from $3.2 million in 1995 to $5.8 million in 1996. In October 1996, the Company was awarded an $8.3 million contract as part of the security upgrade at the World Trade Center. Revenues of $1.6 million were recognized from this project in 1996. Work for the Metropolitan Washington Airport Authority increased by $1.0 million from $0.2 million in 1995 to $1.2 million in 1996. Work for MCI Communications Corporation increased by $0.2 million from $0.6 million in 1995 to $0.8 million in 1996. Cost of earned revenues increased by 102.6% from $2.2 million in 1995 to $4.4 million in 1996 primarily due to the increase in revenues. Gross margin declined from 31.4% in 1995 to 24.2% in 1996 as a result of a change in the mix of work performed. In 1996, a greater proportion of the work performed involved system integration projects, which historically have had lower margins than the other services provided by the Company. The Company believes that its gross margin will be less sensitive to changes in the mix of work performed in the future because it recently has changed its pricing strategy to yield margins on its systems integration projects consistent with its other work and has reduced its material costs through volume discounts as the Company has achieved a greater volume of sales. Selling, general and administrative expenses increased by 28.9% from $2.9 million in 1995 to $3.7 million in 1996. The increase was due to increases in legal fees of $0.4 million incurred in the successful defense of certain litigation, increased staffing expense of $0.3 million and increased office expenditures of $0.1 million. The increases in staffing and office expenditures were due to the Company's investment in infrastructure and capabilities to accommodate future growth in revenues. Interest expense and financing fees increased 137.7% from $0.1 million in 1995 to $0.2 million in 1996 as a result of the issuance of $2.1 million of 10% subordinated debentures during 1996. The net loss increased 42.2% from $1.8 million in 1995 to $2.5 million in 1996 as a result of lower project margins, higher selling, general and administrative expenses, increased financing fees, and proceeds from a litigation settlement of $0.2 million which was recognized in 1995. 15 19 YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994 Revenues increased by 32.6% from $2.4 million in 1994 to $3.2 million in 1995. Contract revenue from the TVA project in 1994 was $1.6 million as compared with $1.3 million in 1995. Revenue from work completed for MCI was $0.1 million in 1994 as compared with $0.6 million in 1995. In 1995, the Company also initiated and completed work on the Baltimore Correctional Intake Facility, resulting in revenue of $0.4 million during that year. The Company's first major preventive maintenance contract for Dulles Airport (Metropolitan Washington Airport Authority) was also initiated in 1995 and generated revenue of $0.3 million. Cost of earned revenues increased by 37.4% from $1.6 million in 1994 to $2.2 million in 1995 due primarily to the increase in revenue. Gross margin on projects declined from 33.8% in 1994 to 31.4% in 1995 as a result of a change in the mix of work performed to include a greater proportion of system integration projects in 1995. Selling, general and administrative expenses increased 7.5% from $2.7 million in 1994 to $2.9 million in 1995. The increase was due to an increase in staffing and office rents. Interest expense and financing fees increased 197.6% from $0.03 million in 1994 to $0.1 million in 1995. The net loss of $1.8 million represents a $0.1 million improvement from the net loss of $1.9 million in 1994 as the higher volume of work and the proceeds of a litigation settlement more than offset the impact of lower margins and higher spending for selling, general and administrative expenses and interest expense. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of cash have been the proceeds from private placements of Common Stock and notes from 1992 through 1995 and of subordinated debentures and warrants during 1995 and 1996. During each of those years, the Company's operations had negative cash flows as the Company increased its marketing efforts, opened new offices and hired additional staff to support anticipated growth. The net use of cash from operations in 1994, 1995 and 1996 was $1.9 million, $1.9 million and $1.6 million, respectively. From 1992 through 1995, members of the KuwAm private investor group purchased an aggregate of 3.6 million shares of Common Stock at a total purchase price of $8.3 million, generating net proceeds to the Company of $8.0 million, and $0.5 million aggregate principal amount of 10% demand notes, generating an equal amount of net proceeds to the Company. The demand notes were converted in 1995 into 103,000 shares of Common Stock. In addition, from 1995 through March 31, 1997, members of the same investor group purchased $3.4 million aggregate principal amount of 10% subordinated debentures, together with warrants to purchase 478,580 shares of Common Stock at an exercise price of $7.00 per share, generating net proceeds to the Company of $3.2 million. In 1996, an additional $0.2 million was raised through the exercise of warrants by members of the Board of Directors. The Company's anticipated capital requirements include approximately $0.4 million to open two new regional offices during 1997, $1.0 million to expand and upgrade its management information systems, $1.0 million to further develop and document its command center integration software and $3.4 million to repay outstanding subordinated debentures. The Company intends to fund these requirements with its net proceeds from the Offering and other available working capital. See "Use of Proceeds." The Company has in the past experienced cash flow shortages. The Company believes that the net proceeds of the Offering and cash generated from future operations will enable it to meet its cash requirements for the foreseeable future and enable it to pursue its current plans for expansion. 16 20 BUSINESS GENERAL Securacom is a single-source provider of comprehensive technology-based security solutions for medium and large commercial and government facilities in the United States and abroad. The Company offers a broad range of services, including: (i) consulting and planning; (ii) engineering and design; (iii) systems integration; and (iv) maintenance and technical support. This full range of capabilities enables the Company to provide its clients with any combination of these services or complete turnkey solutions for complex security projects. The solutions provided by the Company include integrated security systems comprised of a command center managing one or more subsystems or components, primarily access control systems, intrusion detection systems, closed circuit television systems, critical condition monitoring systems and fire detection systems. The Company is not aware of any other company providing this comprehensive range of services on a national basis. The Company serves more than 40 clients including airports, hospitals, prisons, corporations, utilities, universities and government facilities. These clients include Washington Dulles International Airport, Hewlett-Packard Company, EDS, United Airlines, Gillette Corporation, MCI Communications Corporation and New York City's World Trade Center. The Company began operations in 1987 in association with a large privately held engineering firm. In 1992, the Company became independent from the engineering firm in conjunction with a capital infusion from a private investment group. At that time, the Company also hired new management, including its current Chief Executive Officer, who was formerly Vice President, Integrated Systems of ADT Security Systems, Inc. and has over 20 years of experience in security system engineering and design and project planning. Since 1992, the Company has devoted a substantial amount of resources and capital to enhancing its technical capability and services offerings, hiring and training key personnel and expanding its client base. As part of this effort, the Company has opened four regional offices in the United States and one international office in Moscow, Russia. The Company currently plans to open additional regional offices in Boston and Chicago in 1997. INDUSTRY OVERVIEW The Company believes that the multi-billion dollar market for technology-based security solutions is growing rapidly due to the following factors: (i) many existing security systems are becoming technologically obsolete and inadequate or consist of internally incompatible subsystems, creating the need for their re-engineering, upgrading and integration; (ii) technological advancements provide the opportunity to increase the scope and cost-efficiency of many routine security tasks, such as the replacement of guards with electronic surveillance; (iii) the proliferation of computers and advanced communications systems has created a new and growing security need to prevent the misuse of proprietary information and other intellectual property; and (iv) a number of highly publicized acts of terrorism have led to legislation and corporate policies regarding the increased need for physical safety. The security industry is highly fragmented and consists of a broad array of equipment manufacturers and distributors, consultants and engineers and systems integrators, each of which provides only a portion of the services required to deliver an integrated security solution. Due to the lack of single-source providers, the implementation of a medium or large scale security project has traditionally been performed by a number of different parties. A company interested in establishing or enhancing a security system typically retains a consulting firm to define objectives, analyze requirements, and prepare engineering and design specifications. The security specifications are then distributed to systems integrators to obtain proposals to implement the project. The systems integrator in turn, engages software and hardware manufacturers and installation contractors to perform the components of the project. In addition, companies seeking to implement security systems at multiple locations may have to purchase separate systems for each location from different vendors. This approach causes client frustration with project delays, cost inefficiencies, lack of vendor accountability and incompatible subsystems. In addition, the Company believes that as security systems are becoming more technologically advanced, clients are recognizing that in-house personnel lack the skills and time necessary to coordinate security projects and that outsourcing such responsibilities offers significant cost and efficiency advantages. 17 21 THE SECURACOM SOLUTION The Company believes that as a single-source provider of comprehensive technology-based security solutions it can expedite project completion and reduce its client's manpower requirements and aggregate project costs. The Company has the flexibility to respond to its clients' particular needs, whether the client requires only one of the services offered by the Company, various services on an ongoing basis, or a comprehensive turnkey security solution which capitalizes on all of the Company's expertise and its national network of offices. The continually evolving security requirements of commercial and government entities, together with rapidly advancing technology, provide numerous opportunities for the Company to assist its clients with their security needs. The services required throughout this process are generally divided into the following four phases: [PHASE CHART] A client's security requirements at any particular time may involve services in only one phase of this cycle or may necessitate a complete solution. The Company is able to begin a new client relationship during any phase; however, new relationships typically begin with a consulting or maintenance contract. The following key attributes of Securacom enable it to provide comprehensive solutions: Experience and Expertise. The Company has a wide range of experience, having provided security solutions to airports, hospitals, prisons, corporations, utilities, universities and government facilities. The Company's senior managers have an average of 17 years experience in security systems and related industries, and its technical and engineering employees have an average of 11 years of security industry experience. The Company applies this specialized industry expertise to effectively manage the entire security solution process. Network of Regional Offices. The Company's network of regional offices enables it to provide a consistently high level of service to its national clients with geographically dispersed facilities. Securacom believes that clients value the access to company personnel and timely service made possible by the close proximity of its offices. Additionally, the Company believes that the regional offices allow it to capitalize on local marketing opportunities. Technological Sophistication. Securacom and its personnel have expertise in the design, development and implementation of advanced security system technology. The Company emphasizes continuing education and training and recruits skilled engineers and technicians. The Company believes that its expertise enables it to offer its clients technologically advanced security solutions, which enhance system effectiveness and reduce operating costs. For example, the Company has developed its Engineered Maintenance System ("EMS"), a database system used by the Company to effectively manage a security system's components, maintenance planning and scheduling, and costs. 18 22 Independence from Vendors. The Company has made a strategic decision not to represent any equipment manufacturer exclusively, thereby maintaining objectivity and flexibility in equipment selection. This independence allows the Company to offer solutions utilizing components that best meet its clients' needs. In addition, the Company believes that this objectivity generates trust because clients understand that equipment selection is based upon their needs and not the Company's relationship with any particular manufacturer. Quality Control. Securacom has implemented a company-wide system of quality control policies and procedures designed to ensure that all of its services are of consistently high quality. All engineering and design work is reviewed by senior members of the technical staff, and all work is subject to periodic review and inspection by senior management. STRATEGY Securacom's objective is to become the leading provider of comprehensive, high-value-added, technology-based security solutions for medium and large commercial and government facilities in the United States and abroad. The Company's strategy is focused on the following elements: Maintain and Develop Long-Term Relationships. The Company focuses on pursuing and maintaining long-term client relationships. These long-term relationships allow the Company to integrate itself into the client's decision-making process by identifying solutions for new security requirements, system upgrades and other ongoing security needs. The Company believes that the demand by large commercial or governmental clients for security services is growing. Demand is generated whenever a client identifies new security requirements, requires changes in existing systems to accommodate changes in its operations and facilities, upgrades its existing systems, or needs ongoing maintenance of such systems. The Company seeks to establish long-term relationships that provide such recurring revenue opportunities and has found that clients that initially retain the Company in a limited capacity frequently engage it to provide a broader range of services as the relationship develops. For example, the Company's relationship with MCI started with an initial consulting contract at a single location and has grown into a relationship in which the Company has provided design, project management and maintenance services to over 90 MCI facilities. Focus on High-Value-Added Services. The Company focuses on providing services that require a high degree of technical skill and expertise, such as engineering, design and project management. The Company subcontracts services requiring lower skill levels and intermittent use of personnel for short periods, such as wire installation and basic construction. By concentrating on high-value-added services, the Company believes that it will face less competition, improve its gross margin and be in a position to leverage its resources to effectively and efficiently manage a greater number of projects. Capitalize on Position as a National Single-Source Provider of Security Solutions. To become a national provider of comprehensive security solutions, Securacom has expanded its capabilities and its geographic presence from two to five domestic locations since 1992. Each regional office has the capability to offer the full range of security services, either directly or by utilizing the resources of the Company's other offices. The Company's centralized financial management and design and engineering staffs support the regional operations. The Company believes that its national presence enables it to provide effective and timely service to large clients with multiple locations. The Company intends to utilize this national infrastructure to expand its client base. Continue to Expand Client Base in Targeted Industries. The Company intends to target several key industries and facility types that it believes have substantial and increasing requirements for security services. These include facilities for which security systems are required by regulation such as airports and nuclear power plants, as well as facilities of telecommunication and technology companies. The Company believes that the expertise it has developed in providing services to such facilities and industries will enable it to effectively compete for and service additional clients with similar requirements. Enhance Ability to Pursue Bidding Opportunities. Many large projects require prime contractors to furnish performance bonds in amounts that the Company has not had sufficient financial strength to obtain. As 19 23 a result, the Company currently participates in such projects as a subcontractor or through joint ventures, which are generally less profitable than those projects in which it is the prime contractor. The proceeds of the Offering will enable the Company to obtain performance bonds necessary to pursue substantial new projects as a prime contractor. Maintain High Level of Technological Sophistication. Securacom maintains a high level of technological sophistication in an industry that is increasingly dependent upon advanced technology. The Company believes that it has been a leader in applying advanced technology to meet clients' needs in a cost-effective manner. The Company is developing proprietary command center integration software to effectively manage the various subsystems of a single site or the systems at multiple sites. The Company intends to maintain a high level of technical expertise in its employees by emphasizing continuing education and training and by recruiting additional highly skilled engineers and technicians. INTEGRATED SECURITY SYSTEMS Integrated security systems are comprised of one or more subsystems and components that perform a variety of security functions for a facility or group of facilities under the direction of a single command center. The command center consists of a central processor, a common database and software that enable various subsystems and components to communicate with each other and integrate the subsystems and components into a single system. Subsystems and components consist primarily of the following: - Access control systems, which are designed to exclude unauthorized personnel from specified areas and provide access control that is typically card-activated. Entry and exit activity can be monitored or recorded and may be controlled on the basis of time and authority level. - Intrusion detection systems, which incorporate ultrasonic, infrared, microwave and other sensors to detect unauthorized door and window openings, glass breakage, vibration, motion and noise, and alarms and other peripheral equipment. - Closed circuit television systems, which monitor and record entry and exit activity or provide surveillance of designated areas. These systems can deter theft and vandalism and support other access control systems. They can be monitored either by a video recorder or by a monitoring screen. - Critical condition monitoring systems, which provide supervision of various systems and processes such as sprinkler systems, heating and refrigeration systems, power levels, water levels and general manufacturing processes. - Fire detection systems, which incorporate heat, ionization, smoke and flame sensing devices, manual pull stations, evacuation sounders and systems, sprinkler systems and elevator controls. SERVICES The Company offers a full range of security services, consisting of: (i) consulting and planning; (ii) engineering and design; (iii) systems integration; and (iv) maintenance and technical support. At the beginning of each new client relationship, the Company designates one of its professional staff as the client service contact. This individual is the focal point for communications between the Company and the client and often acts as the client's project manager for all of its security needs. The Company's engagement may include one or more of the elements described below. 20 24 Consulting and Planning. Security consulting and planning are the initial phases of determining a security solution for a project. The Company has developed a planning process that identifies all systems, policies and procedures that are required for the successful operation of a security system that will both meet a client's current needs and accommodate its projected future requirements. The Company's consulting and planning process includes the following steps: - Identify the client's objectives and security system requirements - Review the existing security system plan - Survey the site, including inventory of physical components and software and evaluation of client's existing infrastructure and security system - Identify and prioritize the client's vulnerabilities - Develop and evaluate system alternatives - Recommend a conceptual security plan design - Estimate the cost of implementing the conceptual plan - Develop a preliminary implementation schedule As a result of this process, the Company provides the client with a master plan for security services which recommends an effective security solution that addresses routine operating needs as well as emergency situations. The Company believes that its comprehensive planning process enables its clients to budget for their security requirements on a long-term basis, identify opportunities for cost reduction and prepare for future risks. Engineering and Design. The engineering and design process involves preparation of detailed project specifications and working drawings by a team of the Company's engineers, systems designers and computer-aided design system operators. These specifications and drawings detail the instrument sensitivity requirements, layout of the control center, placement of equipment and electrical requirements. Throughout the engineering and design process, the Company utilizes its expertise in advanced technologies and its understanding of its client's operational preferences to design a system that is functional, cost-effective and accommodates the client's present and future requirements. In addition, the Company attempts to incorporate its client's existing personnel, equipment and other physical resources into the system design. When retained as a single-source provider for turnkey security solutions, the Company also selects the system components required under the specifications and drawings it has prepared. To the extent possible, the Company uses off-the-shelf equipment to minimize the cost of developing custom equipment. The Company has made a strategic decision not to represent any equipment manufacturer exclusively, thereby maintaining objectivity and flexibility in equipment selection. The Company believes that its technical proficiency with the products of a wide range of manufacturers enables it to select components that will best meet a project's requirements. Systems Integration. Systems integration involves (i) equipment procurement; (ii) custom systems modeling and fabrication; (iii) facility installation; (iv) hardware, software and network integration; and (v) system validation and testing. In addition to these basic integration services, the Company provides engineering services to enhance the compatibility of the client's subsystems. The Company prepares technical documentation of the system and operations manuals and provides on-site training to client personnel. Under the supervision of a project manager, the Company's technicians conduct hardware installation, hardware and software integration, system validation and testing. The aspects of systems integration that do not require a high level of technical expertise, such as wire installation and basic construction, are typically performed by the Company's subcontractors. Maintenance and Technical Support. The Company provides maintenance and technical support services on a scheduled, on-call, or emergency basis. These services include developing and implementing maintenance programs both for security systems designed, engineered, or integrated by the Company and for existing systems. 21 25 Maintenance services offered by the Company include its EMS, a database used by the Company to effectively manage a security system's components, maintenance planning and scheduling, and costs. The system configuration function monitors system activity and capacity, and identifies the need to reconfigure or expand the system. The system maintenance function schedules and records maintenance activity, and identifies equipment replacement and upgrading requirements. MARKETING The Company's marketing activities are conducted on both national and regional levels. The Company obtains engagements through direct negotiation with clients, competitive bid processes and referrals. At the national level, the Company conducts analyses of various industries and targets those with significant potential demand for security solutions. At a regional level, under the supervision of senior management, each office develops and implements a marketing plan for its region. The plan identifies prospective clients within the region and sets forth a strategy for developing relationships with them. Each regional office works with the headquarters office in expanding relationships with existing national clients to include facilities within the region. The Company has identified several key industries or facility types that it believes have substantial and increasing requirements for security services, including telecommunication and technology companies, corporate complexes and industries and facilities for which security systems are required by regulation. The Company has developed expertise in the security regulations applicable to airports, pharmaceutical companies, prisons and nuclear utilities. See "-- Clients" and "Management." The Company's marketing strategy emphasizes developing long-term relationships with clients so that the Company can provide additional services as the clients' security requirements evolve. The Company undertakes significant preassessment of a prospective client's needs before an initial contact is made. A long-term relationship typically begins with an engagement to provide consulting and planning or maintenance and technical support services. Consulting and planning assignments place the Company in an advantageous position, often as the client's project manager, to be engaged to implement the plan ultimately adopted by the client. Engagements for maintenance and technical support enable the Company to identify new requirements as they arise and to offer its solutions to such requirements. The Company employs a variety of pricing strategies for its services. Proposals for consulting services are priced based on an estimate of hours multiplied by standard rates. Systems integration engagements are priced based upon the estimated cost of the components of the engagement, including subcontractors and equipment, plus a profit margin. Pricing for engineering and maintenance services vary widely depending on the scope of the specific project and the length of engagement. All proposals are reviewed by the Company's senior management. Many projects require that the primary contractor obtain a performance bond in the amount of the contract. The amount of bonding that the Company is able to obtain depends upon the level of its working capital and net worth. The Company believes that its ability to compete for larger projects as a primary or independent contractor, rather than through a joint venture or subcontract arrangement, has been constrained by its inability to obtain adequate bonding. The Company believes that the proceeds of the Offering will enable it to obtain bonding of between approximately $50 million and $75 million and thus enhance its ability to bid for larger projects as a primary contractor which is generally more profitable than participation as a subcontractor or through a joint venture. The Company currently conducts limited international operations from its Moscow office from which it has provided services to several clients in Moscow. In April 1997, the Company signed a joint venture agreement with Ahmad N. AlBinali & Sons Co., a Saudi Arabian engineering and consulting company, to develop and conduct business in the Kingdom of Saudi Arabia. The Company is evaluating several additional opportunities to expand its international operations, which it anticipates it will initially undertake through joint ventures or partnerships with local and international companies. 22 26 CLIENTS During the past three years the Company has provided services to approximately 50 clients, including airports, hospitals, prisons, corporations, utilities, universities and government facilities. The Company's clients have included the following:
AIRPORTS AND AVIATION CORPORATIONS - ---------------------------------------- ----------------------------------- Fresno Airport EDS United Airlines Gillette Corporation Washington-Dulles International Airport Hewlett-Packard Company Washington National Airport Lazard Freres Yuma International Airport Mary Kay Cosmetics MCI Communications Corporation Mobil Corporation NationsBank US WEST GOVERNMENT OTHER - ---------------------------------------- ----------------------------------- Los Alamos National Laboratory City of Baltimore Central Sandia National Laboratory Booking and Intake Facility Tennessee Valley Authority Moscow Local Telephone System U.S. Department of Energy New York City's World Trade Center U.S. Navy Rostelecom Rowan County (N.C.) Prison University of Texas
Although in some cases the Company serves as a subcontractor and does not have a direct contractual relationship with its clients, it is typically selected or approved by the client and develops a close working relationship with the client. During 1996, the World Trade Center, the Metropolitan Washington Airport Authority (operator of both Washington National and Washington Dulles airports), and MCI accounted for 28%, 22% and 14% of the Company's revenues, respectively. In the first six months of 1997, these three clients accounted for 57%, 22% and 6% of its revenues, respectively. The loss of any of these clients could have a material adverse effect upon the Company's business, operating results and financial condition. Although these clients each accounted for a substantial portion of the Company's revenues, work performed for them was comprised of multiple projects and, in the case of MCI, was performed for multiple facilities. Several of the projects for the Company's major clients, including the World Trade Center project, will be substantially completed in 1997, and its future operating results will depend upon its ability to develop future sales prospects and generate orders from new and existing clients. The Company plans to diversify its client base by pursuing new clients regionally, nationally and internationally. COMPETITION The security industry is highly competitive. The Company competes on a local, regional and national basis with systems integrators, consulting firms and engineering and design firms. The Company believes that it is the only provider offering its comprehensive range of services on a national basis. As a result, the Company competes with different companies depending upon the nature of the project and the services being offered. For example, the Company has competed with Johnson Controls, Science Applications International Corporation and Sensormatic for systems integration work, and Lockwood Greene and Holmes & Narver for consulting and planning and engineering and design work. Many of its competitors have greater name recognition and financial resources than the Company. The Company's competitors also include equipment manufacturers and vendors that also provide security services. The Company may face future competition from potential new entrants into the security industry and increased competition from existing competitors that may attempt to develop the ability to offer the full range of services offered by the Company. The 23 27 Company believes that competition is based primarily on the ability to deliver solutions that effectively meet a client's requirements and, to a lesser extent and primarily in competitive bid situations, on price. There can be no assurance that the Company will be able to compete successfully in the future against existing or potential competitors. The Company's ability to compete for larger projects as a primary contractor has been constrained by its inability to obtain adequate bonding. The Company believes that the proceeds of the Offering will substantially improve its ability to obtain bonding and thus enhance its ability to compete for larger projects. See "-- Marketing." BACKLOG The Company's backlog consists of confirmed orders, including the balance of projects in process. The backlog also includes projects for which the Company has been notified it is the successful bidder even though a binding agreement has not been executed. Projects for which a binding contract has not been executed may be canceled at any time. Binding contracts may also be subject to cancellation or postponement, although cancellation generally obligates the client to pay the costs incurred by the Company. During the last two years none of the Company's contracts were canceled prior to completion. Long-term maintenance contracts may be canceled without cause. As of December 31, 1995 and 1996, the Company's backlog was approximately $1.3 million and $8.3 million, respectively. Backlog as of December 31, 1996 includes projects having a value of approximately $0.5 million for which binding contracts have not been executed and includes $1.2 million in projects that are not expected to be completed during 1997. Backlog orders as of any particular date may not be indicative of actual operating results for any fiscal period. There can be no assurance that any amount of backlog will be realized. EMPLOYEES As of August 31, 1997, the Company had 61 employees, of which 18 were based in the Company's headquarters office in New Jersey and the balance in its four regional offices and its office in Moscow. Three of the Company's employees are engaged exclusively in marketing and sales, 49 in engineering, project management and technical functions and nine in administration. Most members of senior management, project managers and technical staff devote a portion of their time to marketing activities. Approximately 57% of the Company's employees have degrees in engineering or other technical fields. None of the Company's employees are represented by a labor union, and the Company believes that its employee relations are good. INTELLECTUAL PROPERTY In addition to the Engineered Maintenance System, the Company is developing command center software that permits the integration of multi-vendor security systems into a unified, integrated system. The Company intends to utilize a portion of the proceeds of the Offering to complete development and documentation of this software. The Company relies on a combination of various methods to establish and protect its proprietary rights. In addition, it limits access to and distribution of its proprietary information. These measures afford limited protection, and there can be no assurance that the steps the Company takes to protect its proprietary rights will be adequate to prevent misappropriation of its intellectual property or the independent development by others of similar technology. INSURANCE The Company maintains in force commercial umbrella liability insurance with coverage of $10 million per occurrence and $10 million in the aggregate, with a $10,000 deductible. The Company also maintains a $1.0 million insurance policy to cover any error or omission by the Company that may result in a breach of a security system designed, installed, maintained, or engineered by the Company. There is no assurance that the amount of insurance carried by the Company would be sufficient to protect it fully in the event of a significant liability claim; however the Company believes that the amounts and coverages of its insurance are reasonable 24 28 and appropriate for its business operations. There is no assurance that such insurance will continue to be available on commercially reasonable terms, and the Company may elect not to retain liability insurance at any time. FACILITIES The Company's headquarters office is located in Woodcliff Lake, New Jersey, where the Company leases approximately 7,600 square feet of office space under a lease that expires in 2000. In addition, the Company leases between approximately 2,000 and 4,000 square feet of office space in each of the Atlanta, Dallas, San Francisco and Washington, D.C. metropolitan areas to support its regional operations. The Company believes that its facilities are adequate and suitable for its current operations, and that additional space is readily available if needed to support future growth. LEGAL PROCEEDINGS Although the Company is a defendant in certain suits arising from the normal conduct of its business, management does not believe that the resolution of this litigation will have a material adverse effect on the Company's financial position, results of operations, or cash flows. This litigation includes SecuraComm Consulting, Inc. v. Securacom, Incorporated, pending in the U.S. District Court for the District of New Jersey (Civil No. 95-5393). In this action, filed in October 1995, plaintiff, a consulting company, seeks injunctive relief and damages for alleged confusion in the marketplace and lost business resulting from the Company's alleged infringement of plaintiff's claimed service mark. Based upon discussions with its counsel, the Company believes the claim is completely without merit and has filed counterclaims alleging that the plaintiff has infringed the Company's service mark. Trial is scheduled for October 1997. 25 29 MANAGEMENT The directors and executive officers of the Company are:
NAME AGE POSITION - ------------------------------------------ --- -------------------------------------------------- Wirt D. Walker, III....................... 51 Chairman and Director Ronald C. Thomas.......................... 52 President, Chief Executive Officer and Director Larry M. Weaver........................... 47 Executive Vice President, Chief Operating Officer and Chief Financial Officer Charles C. Sander......................... 48 Senior Vice President Franklin M. Sterling...................... 64 Senior Vice President Albert A. Weinstein....................... 66 Vice President Matthew V. Wharton........................ 35 Vice President Michael V. Toto........................... 52 Vice President Jon W. Balakian........................... 39 Vice President R. Michael Lagow.......................... 39 Vice President Mishal Yousef Saud Al Sabah............... 36 Director Marvin P. Bush(1)......................... 40 Director Robert B. Smith, Jr.(1)................... 60 Director
- --------------- (1) Member of Compensation Committee and Audit Committee. WIRT D. WALKER, III has served as a director of the Company since 1987, and as Chairman since 1992. Mr. Walker is a director and the Managing Director of KuwAm, a private investment firm founded in 1982. He has also served as Chairman of Commander Aircraft Company and Advanced Laser Graphics, Inc. since 1991. RONALD C. THOMAS has served as President, Chief Executive Officer and director since 1992. Prior to joining the Company, Mr. Thomas was employed for 16 years by ADT Security Systems Inc., a subsidiary of ADT Ltd., the world's largest electronic security protection company. During his tenure at ADT, he held a variety of management positions involving systems engineering and design, project planning and marketing and business unit management, and was Vice President, Integrated Systems from 1988 to 1992. Mr. Thomas is Chairman of the Standing Committee on Physical Security of the American Society for Industrial Security ("ASIS"), a member of the Board of Directors of the Closed Circuit Television Manufacturers Association, a member of the Institute of Electrical and Electronic Engineers ("IEEE"), a member of the National Society of Professional Engineers and a member of the National Fire Protection Association ("NFPA"). He is a past member of the Nuclear Standards Subcommittee of the IEEE, the Proprietary Fire Systems Subcommittee of NFPA and the Architect/Engineer Subcommittee of ASIS. LARRY M. WEAVER has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer since June 1996. Prior to joining the Company, Mr. Weaver was employed by The Conduit and Foundation Corporation, most recently as its Chief Financial Officer from July 1995 to June 1996. Previously, Mr. Weaver was employed, from 1988 to 1995, as Group Vice President of Finance at William Bowman Associates, Inc., a residential real estate site development company, and from 1980 to 1988, as Partner and Finance Manager at Skelly and Loy, an energy and environmental consulting and engineering firm. Mr. Weaver has also served as Assistant Controller at Buell Division of Envirotech and was a Senior Accountant at Price Waterhouse. CHARLES C. SANDER has served as Senior Vice President for the Mid-Atlantic Region since 1993. From 1988 to 1992 Mr. Sander was president of his own aviation consulting firm which he sold to Ogden Services Corporation in 1992. From 1992 to 1993 Mr. Sander was employed as President of the Technical and Maintenance Services Division of Ogden. Prior to starting his own company, Mr. Sander had been employed 26 30 since 1972 by Baltimore/Washington International Airport, where he served in a variety of positions, most recently as Deputy Chief, Airport Operations. FRANKLIN M. STERLING has served as Senior Vice President for the Western Region since August 1995. Prior to joining the Company, Mr. Sterling served as President of Franklin M. Sterling and Assoc., Inc., an engineering consulting firm specialized in integrated building control systems, which he founded in 1987. Previously, Mr. Sterling was employed by the Bechtel Corporation for sixteen years, most recently as a project manager for a Bechtel subsidiary, and has held positions with ITT Data Services and the RCA Corporation. Mr. Sterling presently serves as Chairman of the Airport Consultants Council Security System Standards Committee and is a member of the Federal Aviation Administration's Advisory Committee on Security System Standards. He is a senior member of the IEEE, the IEEE Control System Society, the American Society for Industrial Security, the National Fire Protection Association, the Construction Specification Institute and the National and California Societies of Professional Engineers. ALBERT M. WEINSTEIN has served as Vice President overseeing corporate engineering and design since 1989. Prior to joining the Company, Mr. Weinstein was Vice President and General Manager of the Electronic Security Systems Division of Stoller Company, a nuclear consulting company, for 17 years. MATTHEW V. WHARTON has served as Vice President for the Southwest Region since 1994. From 1993 to 1994 he served as Manager of Consulting Engineering for the Company. Prior to joining the Company, Mr. Wharton worked from 1992 to 1993 as Director of Sales and Marketing for Integrated Security Control Systems, a California security company. MICHAEL V. TOTO has served as Vice President for the Northeast Region since 1994. Prior to joining the Company, Mr. Toto served as a communications engineer with ADT Security Systems, Inc. for two years. JON W. BALAKIAN has served as Vice President for the Southeast Region since 1996. Prior to joining the Company, Mr. Balakian was a senior manager of the national physical security program for MCI Communications since 1990. R. MICHAEL LAGOW has served as Vice President for Business Development since August 1993. Prior to joining the Company, Mr. Lagow was employed as National Sales Manager of Control Systems International, a security systems company, since 1991. MISHAL YOUSEF SAUD AL SABAH has served as a director of the Company since 1987. Since 1982, Mr. Al Sabah has been the Chairman of the Board of Directors of KuwAm. He has also served as a director of Advanced Laser Graphics, Inc. and Commander Aircraft Company since 1991. MARVIN P. BUSH has served as a director of the Company since 1993. Mr. Bush is a director of the Winston Partners Group, Inc., a private investment firm he founded in 1994, and has been a member of the Board of Directors of Kerrco Inc., an oil and gas company, since 1989. Prior to founding the Winston Group, Mr. Bush was a partner at John Stewart Darrell & Company, an investment advisory firm, and was employed by Shearson Lehman Brothers as a Vice President/Financial Consultant. ROBERT B. SMITH, JR. has served as a director of the Company since 1995. Mr. Smith has been a private investor since 1984, and has been a director of Sunshine Mining Company, a New York Stock Exchange listed silver mining company, since 1993. He has been a trustee for the Dalkon Shield Claimants Trust, a public interest trust created to compensate those damaged by the Dalkon Shield, since 1989. Mr. Smith was formerly Chief Counsel and Staff Director of the Senate Government Operations Committee. The Company's Certificate of Incorporation and By-Laws provide that members of the Company's Board of Directors are elected annually and hold office until their successors are elected. 27 31 COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established a Compensation Committee and an Audit Committee. The Compensation Committee reviews on behalf of, and makes recommendations to, the Board of Directors with respect to the compensation of executive officers and administers the Company's option plans and makes recommendations to the Board of Directors with respect to the plans and the grant of options to persons eligible under the plans. The Audit Committee's functions include recommending to the Board of Directors the engagement of the Company's independent public accountants, reviewing with such accountants the plans for and the results and scope of their auditing engagement and certain other matters relating to their services provided to the Company, including the independence of such accountants. DIRECTOR COMPENSATION All members of the Board of Directors, including the Company's officers who are also Board members, receive a fee of $10,000 per year. In addition, each director is granted options annually to purchase 15,000 shares of Common Stock at an exercise price equal to the fair market value of such stock on the date of grant, which vest in annual increments of one-third. All directors are reimbursed for out-of-pocket expenses incurred in attending meetings of the Board of Directors or committees thereof and for other expenses incurred in their capacities as directors. EMPLOYMENT AND CONSULTING AGREEMENTS The Company has entered into employment agreements with Messrs. Thomas and Weaver, to serve in their respective current positions until March 31, 2002 and 2000, respectively, at annual base salaries of $165,000 and $125,000, respectively. Both agreements provide for annual bonuses, periodic salary increases and grants of stock options in the sole discretion of the Board of Directors. In the event either executive's employment is terminated without cause, he is entitled to continue to receive the salary and certain other benefits provided for in such agreement for the remainder of its term. If such termination occurs following a "change in control" of the Company, he is entitled to receive an additional payment equal to two times his annual base salary in effect at the time of such change in control. For purposes of the employment agreements, a change in control occurs upon certain changes in the stock ownership of the Company or upon certain changes in the membership of the Board of Directors of the Company. A termination following a change in control of the Company includes certain reductions of the executive's duties and responsibilities, reductions in the salary paid to the executive, changes in the location of the executive's office or a failure by the Company to obtain the written assumption of the employment agreements by any successor of the Company. The Company has also entered into a consulting agreement with Mr. Walker, to provide strategic and corporate development services through March 31, 2002 for an annual fee of $140,000. The consulting agreement also contains provisions parallel to those of the executive employment agreements. 28 32 EXECUTIVE COMPENSATION The following table sets forth the compensation earned in the year ended December 31, 1996 by the Chief Executive Officer and each of the most highly compensated executive officers whose individual remuneration exceeded $100,000 for the fiscal year (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ----------------------------------- OTHER NAME AND PRINCIPAL ANNUAL ALL OTHER POSITION SALARY BONUSES COMPENSATION COMPENSATION - ---------------------------------------------- -------- ------- ------------ ------------ Ronald C. Thomas.............................. $136,078 $35,000 $ 10,000(1) $ 28,000(2) President and CEO Charles C. Sander............................. $131,090 $25,000 $ 10,000(1) $ -- Senior Vice President
- --------------- (1) Consists of director fees. (2) In May 1996 Mr. Thomas acquired 53,320 shares of Common Stock upon the exercise of options, for which the Company waived the exercise price of $0.53 per share. This amount equals the aggregate exercise price of such options. OPTION GRANTS IN FISCAL YEAR 1996
POTENTIAL INDIVIDUAL GRANTS REALIZABLE ------------------------------------------------------ VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL OPTIONS STOCK PRICE SHARES GRANTED TO APPRECIATION FOR UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1) OPTIONS IN FISCAL YEAR PRICE EXPIRATION ------------------ NAME GRANTED 1996 PER SHARE DATE 5% 10% - --------------------------------- --------- -------------- --------- ---------- ------- ------- Ronald C. Thomas................. 25,000 7.9 $7.00 2/5/99 $42,055 $74,563 Charles C. Sander................ 25,000 7.9 $7.00 2/5/99 $42,055 $74,563
- --------------- (1) Based upon an estimated initial public offering price of $7.50 per share and on annual appreciation of such value minus the option exercise price, through the expiration date of such options, at the stated rates. These amounts represent assumed rates of appreciation only and may not necessarily be achieved. Actual gains, if any, depend on the future performance of the Common Stock, as well as the continued employment of the Named Executive Officers for the full term of the options. AGGREGATED OPTION EXERCISES IN 1996 AND OPTION VALUES AS OF DECEMBER 31, 1996
NUMBER OF VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY SHARES WARRANTS/OPTIONS AT WARRANTS/OPTIONS AT ACQUIRED DECEMBER 31, 1996 DECEMBER 31, 1996(1) ON VALUE ---------------------------- ---------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------- --------- -------- ----------- ------------- ----------- ------------- Ronald C. Thomas.......... 53,320 $399,900 159,382 25,000 $ 1,035,983 $12,500 Charles C. Sander......... -- -- 58,333 41,667 $ 145,833 $54,167
- --------------- (1) Represents an amount equal to the difference between an estimated initial public offering price of $7.50 per share of the Company's Common Stock minus the option exercise price, multiplied by the number of unexercised options at December 31, 1996. 29 33 1997 STOCK OPTION PLAN The Company has reserved 500,000 shares of Common Stock for issuance upon the exercise of options under its 1997 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan provides for the granting to eligible participants of options to purchase Common Stock of two types: those that qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and those that do not qualify as incentive stock options, or "non-qualified options." Key employees, officers, directors and consultants of the Company are eligible to participate in the Stock Option Plan. The Stock Option Plan is administered by the Board of Directors, which determines the persons who are to receive options, the terms and number of shares subject to each option and whether the option is an incentive stock option or a non-qualified option. Incentive stock options and non-qualified options may not be granted at a purchase price less than the fair market value of the Common Stock on the date of the grant or, for an incentive stock option granted to a person holding more than 10% of the Company's voting stock, at less than 110% of fair market value. Aside from the maximum number of shares of Common Stock reserved under the Stock Option Plan, there is no minimum or maximum number of shares that may be subject to options. However, the aggregate fair market value of the stock subject to incentive stock options granted to any optionee that are exercisable for the first time by an optionee during any calendar year may not exceed $100,000. Options generally expire three months after the optionee is no longer an employee of the Company. Options may not be transferred other than by will or the laws of descent and distribution, and during the lifetime of an optionee may be exercised only by the optionee. The term of each option, which is fixed by the Board of Directors at the time of grant, may not exceed ten years from the date the option is granted (except that according to Section 422(a) of the Code an incentive stock option granted to a person holding more than 10% of the Company's voting stock may be exercisable only for five years). As of August 31, 1997, the Company had granted no options under the Stock Option Plan. 30 34 CERTAIN TRANSACTIONS The following information relates to certain transactions since January 1, 1994 in which executive officers, directors, stockholders and other related persons had an interest. All of such transactions were on terms that the Company believes were no less favorable to the Company than could have been obtained from unaffiliated third parties, and such transactions were approved by the independent members of the Board of Directors who did not have an interest in such transactions. In 1996, the Company purchased a 114B aircraft from Commander Aircraft Company ("Commander") for $335,000, the list price of the aircraft, which is the price at which Commander typically sells to retail customers. KuwAm is the general partner of two stockholders of the Company that currently own in the aggregate approximately 59% of the outstanding common stock of Commander, and Wirt Walker, III, the Chairman of the Company, is the Chairman of Commander and the Managing Director of KuwAm. During the years 1993 through 1996, the Company paid investment banking fees to KuwAm of 5% of the capital raised from the private sale of Common Stock and subordinated debentures to SSIH and affiliated entities. The Company paid approximately $79,000, $77,000, $103,000 and $35,000 of investment banking fees under the agreements during 1994, 1995, 1996 and 1997 respectively, which have been recorded as a reduction of proceeds from sales of equity securities and interest and financing fees for sales of subordinated debentures. From time to time, the Company has issued securities to certain of its officers and directors in private transactions. During 1994, the Company sold an aggregate of 316,000 shares of Common Stock to SSIH and certain of its limited partners at a purchase price of $5.00 per share. Also during 1994, the Company issued promissory notes having an aggregate principal amount of $515,000 to SSIH for an equal amount of cash proceeds. The notes, which bore interest at an annual rate of 10%, were converted into 103,000 shares of Common Stock in June 1995. In 1995, the Company issued an aggregate of 247,500 shares of Common Stock to KuwAm, SSIH, Special Situations Investment Holdings, L.P. II ("SSIH II") and certain of their limited partners at a purchase price of $5.00 per share and an aggregate of 35,294 shares to such entities and persons at a purchase price of $8.50 per share. In March 1996, KuwAm, Fifth Floor Company for General Trading and Contracting, a stockholder of the Company, and Mr. Walker acquired 53,320, 186,620 and 133,300 shares of Common Stock, respectively, upon exercise of previously outstanding warrants at an exercise price of $0.53 per share. In May 1996, Ronald C. Thomas acquired 53,320 shares of Common Stock upon the exercise of options, for which the Company waived the $0.53 per share exercise price, and Marvin P. Bush, through Andrews-Bush, Inc., of which he is president, acquired 53,897 shares of Common Stock upon exercise of previously outstanding warrants at an exercise price of $0.52 per share. The Company borrowed $75,000 from SSIH II in September 1995 and $125,000 from KuwAm in October 1995. These borrowings were evidenced by 10% demand notes which were repaid in 1996. During 1995, 1996 and 1997 the Company sold $3.4 million aggregate principal amount of 10% subordinated debentures (the "Debentures"), together with warrants to purchase 478,580 shares of Common Stock at an exercise price of $7.00 per share to certain limited partners of SSIH. The net proceeds from the sale of the Debentures, after deduction of the 5% investment banking fee payable to KuwAm and other expenses, were $3.2 million. The Debentures, all of which will be repaid with proceeds from the Offering, bear interest at 10% per annum and provide for repayment of the principal as follows: $837,500 on December 31, 1998, $837,500 on December 31, 1999 and the balance on December 31, 2000. Between January 1 and March 10, 1997, an aggregate of $700,000 of the proceeds from the Debentures was invested in limited partnership interests of SSIH. At the end of each year, the Company has the option of requiring SSIH to redeem the limited partnership interests at their then fair market value less a liquidation fee of up to 1%. The proceeds of such redemption are payable, at SSIH's option, in cash or portfolio securities of SSIH. Because the assets of SSIH include both publicly traded and privately held securities, the value of the SSIH portfolio may be materially different than the cost of the Company's investment. KuwAm, of which Mr. Walker is the Managing Director and Mr. Al Sabah is Chairman, is the general partner of SSIH. Under the terms of the limited partnership subscription agreement, KuwAm received 3% of the amount of the 31 35 Company's investment as reimbursement for accounting, legal and administrative expenses related to the organization and operation of the partnership. In addition, pursuant to SSIH's limited partnership agreement, KuwAm receives (i) an annual administration fee equal to 2% of SSIH's assets and (ii) an annual capital appreciation fee equal to 10% of the increase in the value of SSIH's assets in each year. The Company and SSIH have agreed that, immediately following the Offering, the Company's limited partnership interest in SSIH will be redeemed at the greater of $700,000 or its market value. The Company does not intend to make such investments in related parties in the future. All future material affiliated transactions and loans will be made or entered into on terms that are no less favorable to the Company than those that can be obtained from unaffiliated third parties, and all future material affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of the independent outside members of the Board of Directors who do not have an interest in the transaction. PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of the Common Stock as of the date hereof, and as adjusted to reflect the sale of the shares offered hereby, by (i) each person who is known by the Company to be the beneficial owner of 5% or more of the outstanding Common Stock, (ii) each director, (iii) each named executive officer and (iv) all directors and executive officers as a group. The Company believes that the individuals listed below each have sole voting and investment power with respect to such shares, except as otherwise indicated in the footnotes to the table. Unless otherwise indicated below, the business address of each person listed is: c/o Securacom, Incorporated, 50 Tice Boulevard, Woodcliff Lake, New Jersey 07675.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER TO OFFERING(1) SHARES TO BE OFFERING(1) NAME AND ADDRESS -------------------- SOLD IN -------------------- OF BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT - ------------------------------------------- --------- ------- ------------ --------- ------- KuwAm Corporation.......................... 2,622,127 59.1% -- 2,422,127 41.5% 2600 Virginia Avenue, N.W. Washington, DC 20037(2) Special Situation Investment Holdings, Ltd. .................................... 2,464,333 55.6% 200,000 2,264,333 38.8% c/o KuwAm Corporation 2600 Virginia Avenue, N.W. Washington, D.C. 20037(2) Special Situation Investment Holdings, L.P. II....................................... 157,794 3.6% -- 157,794 2.7% c/o KuwAm Corporation 2600 Virginia Avenue, N.W. Washington, DC. 20037(2) Fifth Floor Company for General Trading and Contracting.............................. 366,707 8.3% -- 366,707 6.3% Wirt D. Walker, III(2)(3).................. 2,941,822 66.2% -- 2,741,822 46.9% Ronald C. Thomas........................... 246,035 5.3% -- 246,035 4.1% Marvin P. Bush(4).......................... 62,230 1.4% -- 62,230 1.1% Mishal Yousef Saud Al Sabah(2)(5).......... 3,000,227 67.5% -- 2,800,227 47.9% Franklin M. Sterling....................... 63,333 1.4% -- 63,333 1.1% Charles C. Sander.......................... 75,000 1.7% -- 75,000 1.3% Larry M. Weaver............................ 8,333 * -- 8,333 * Robert B. Smith, Jr........................ 16,667 * -- 16,667 * All officers and directors as a group (8 persons)................................. 3,791,520 79.6% -- 3,591,520 58.3%
- --------------- * Represents beneficial ownership of less than one percent of the outstanding Common Stock. (1) Beneficial ownership is determined in accordance with the rules of the Commission, and includes voting power and investment power with respect to shares. Shares issuable upon the exercise of outstanding warrants that are currently exercisable or become exercisable within 60 days from the date hereof are 32 36 considered outstanding for the purpose of calculating the percentage of Common Stock owned by such person but not for the purpose of calculating the percentage of Common Stock owned by any other person. The number of warrants that are exercisable within 60 days of the date hereof is as follows: Mr. Walker, 8,333; Mr. Thomas, 167,715; Mr. Weaver, 8,333; Mr. Bush, 8,333; Mr. Smith, 16,667; Mr. Al Sabah, 8,333; Mr. Sterling, 38,333; and Mr. Sander, 75,000. (2) KuwAm is the general partner of SSIH and SSIH II. The stockholders of KuwAm include Wirt D. Walker, III and Mishal Yousef Saud Al Sabah. Mr. Walker is also the Managing Director and Mr. Al Sabah is the Chairman of KuwAm. Shares beneficially owned by KuwAm consist of 2,464,333 shares held by SSIH (2,264,333 shares after the Offering) and 157,794 shares held by SSIH II. (3) Consists of 2,464,333 shares held by SSIH (2,264,333 shares after the Offering), 157,794 shares held by SSIH II, 248,302 shares held by Mr. Walker, 13,060 shares held by Mr. Walker's son, 50,000 shares held by a trust for the benefit of Mr. Walker's son and options to purchase 8,333 shares held by Mr. Walker. (4) Consists of 53,897 shares held by Andrews-Bush, Inc., and options to purchase 8,333 shares held by Mr. Bush. (5) Consists of 2,464,333 shares held by SSIH (2,264,333 shares after the Offering), 157,794 shares held by SSIH II, 366,707 shares held by Fifth Floor Company for General Trading and Contracting, of which Mr. Al Sabah is Chairman, 3,060 shares held by Mr. Al Sabah's son and options to purchase 8,333 shares held by Mr. Al Sabah. DESCRIPTION OF CAPITAL STOCK Upon consummation of the Offering, the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock, $0.01 par value per share, of which 5,834,140 shares will be issued and outstanding, and 5,000,000 shares of Preferred Stock, $0.01 par value per share, none of which will be issued and outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by the stockholders. There is no cumulative voting with respect to the election of Directors, with the result that the holders of a majority of the shares of Common Stock voting for the election of Directors can elect all of the Directors then up for election. The holders of Common Stock are entitled to receive dividends when, as, and if declared by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution, or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining which are available for distribution to them after payment of liabilities and after provision has been made for each class of stock having preference over the Common Stock. Holders of shares of Common Stock, as such, have no conversion, preemptive, or other subscription rights, and there are no redemption provisions applicable to the Common Stock. All of the outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Board of Directors is authorized, without further approval or action by the stockholders, to issue shares of Preferred Stock in one or more series and to determine the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and number of shares constituting any series of Preferred Stock or the designation of such series. The rights of the holders of Common Stock will generally be subject to the prior rights of the holders of any outstanding shares of Preferred Stock with respect to dividends, liquidation preferences and other matters. Among other things, the Preferred Stock could be issued by the Company to raise capital or finance acquisitions. The Preferred Stock could have certain anti-takeover effects under certain circumstances. The issuance of shares of Preferred Stock could enable the Board of Directors to render more difficult or 33 37 discourage an attempt to obtain control of the Company by means of a merger, tender offer, or other business combination transaction directed at the Company by, among other things, placing shares of Preferred Stock with investors who might align themselves with the Board of Directors, issuing new shares to dilute stock ownership of a person or entity seeking control of the Company, or creating a class or series of Preferred Stock with class voting rights. The Company has no current plans to issue any shares of its Preferred Stock. The Board of Directors may, without shareholder approval, issue preferred stock with voting or conversion rights that may adversely affect the voting power of the holders of the Common Stock. Any such issuance must be approved by a majority of the independent and disinterested directors. DELAWARE ANTI-TAKEOVER LAW The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law. Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in certain business combinations with a person or affiliate or associate of such person who is an "interested stockholder" for a period of three years from the date such person became an interested stockholder unless: (i) the transaction resulting in the acquiring person's becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder; (ii) the interested stockholder acquires 85% or more of the outstanding voting stock of the corporation in the same transaction that makes it an interested stockholder (excluding shares owned by directors who are also officers, and excluding certain employee stock option plans); and (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least two-thirds of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Except as otherwise specified in Section 203, an "interested stockholder" is defined as (a) any person that is the owner of 15% or more of the outstanding voting stock of the corporation, (b) any person that is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder, or (c) the affiliates and associates of any such person. By restricting the ability of the Company to engage in business combinations with an interested person, the application of Section 203 to the Company may provide a barrier to hostile or unwanted takeovers. Under Delaware law, the Company could have opted out of Section 203 but elected to be subject to its provisions. CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS Requirements for Advance Notification of Stockholder Nomination and Proposals. The Company's By-Laws require 60 to 90 days' notice to the Company with regard to stockholder proposals and the nomination, other than by or at the direction of the Board of Directors or a committee thereof, of candidates for election as directors. Such notice must provide specified information, including information regarding the ownership of Common Stock by the person giving the notice, information regarding the proposal or the nominees and information regarding the interest of the proponent in the proposal or the nominations. Special Meetings of Stockholders; Actions by Written Consent. The Company's Certificate of Incorporation and By-Laws provide that special meetings of stockholders of the Company may only be called by the Chairman of the Board, the President, or a majority of the then authorized number of Directors. This provision precludes stockholders from calling a special meeting and taking actions opposed by the Board of Directors. The Certificate of Incorporation also provides that stockholder action cannot be taken by written consent in lieu of a meeting. Limitation of Director Liability. The Company's Certificate of Incorporation limits the liability of Directors to the Company and its stockholders to the fullest extent permitted by Delaware law. Specifically, under current Delaware law, a director will not be personally liable for monetary damages for breach of the director's fiduciary duty as a director, except liability (i) for a breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions by a director not in good faith or which involve 34 38 intentional misconduct or a knowing violation of law, (iii) for liability arising under Section 174 of the Delaware General Corporation Law (relating to the declaration of dividends and purchase or redemption of shares in violation of the Delaware General Corporation Law), or (iv) for any transaction from which the director derived an improper personal benefit. The inclusion of this provision in the Company's Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care. Supermajority Provisions. The Company's Certificate of Incorporation provides that the vote of the Board of Directors or the affirmative vote of at least two-thirds of the then outstanding shares of capital stock entitled to vote generally in the election of Directors, voting as a single class, is required to amend, repeal, or alter any of the Company's By-Laws or the foregoing provisions contained in the Company's Certificate of Incorporation. RIGHTS PLAN Prior to the consummation of the Offering, there will be a dividend distribution of one right (a "Right") for each outstanding share of Common Stock of the Company to stockholders of record at the close of business on the date that the Offering is completed (the "Record Date"). The Board of Directors will further authorize the issuance of one right for each share of Common Stock that shall become outstanding between the Record Date and the earlier of the Final Expiration Date (as defined herein) and the date the Rights are redeemed. Except as described below, each Right, when exercisable, entitles the registered holder thereof to purchase from the Company one one-thousandth of a share of Special Preferred Stock, par value $0.01 per share (the "Special Preferred Shares"), at a price of $80.00 (the "Purchase Price"), subject to adjustment. Therefore, the dividend will have no significant initial value and no significant impact on the financial statements of the Company. The description and terms of the Rights are set forth in the Rights Agreement (the "Rights Agreement") between the Company and American Securities Transfer & Trust, Inc., as Rights Agent. A copy of a form of the Rights Agreement has been filed with the Commission as an exhibit to the registration statement of which this Prospectus is a part. This summary of certain provisions of the Rights Agreement and the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement. Initially, the Rights will be evidenced by Common Stock certificates representing shares then outstanding, and no separate certificates evidencing the Rights will be distributed. Until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons, with certain limited exceptions (an "Acquiring Person"), has acquired, or obtained the right to acquire, beneficial ownership of capital stock of the Company representing 15% or more of the voting power of the Company (the "Shares Acquisition Date") or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to the time that any person becomes an Acquiring Person) following the commencement of (or a public announcement of an intention to make) a tender or exchange offer if, upon consummation thereof, such person or group would be the beneficial owner of capital stock of the Company representing 15% or more of the voting power of the Company (such date being called the "Distribution Date"), the Rights will be evidenced by the Common Stock certificates and not by separate certificates. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with, and only with, the Common Stock. Until the Distribution Date (or earlier redemption, expiration, or termination of the Rights), the transfer of any Common Stock certificates will also constitute the transfer of the Rights associated with the Common Stock represented by such certificates. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and, thereafter, such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date, and will expire upon the earliest of (i) the close of business on the tenth anniversary of the date of the Rights Agreement (the "Final Expiration Date"), 35 39 (ii) the redemption of the Rights by the Company as described below, or (iii) the exchange of all Rights for Special Preferred Shares as described below. A person will not become an Acquiring Person under the Rights Agreement if such person is the Company or an affiliate of the Company or obtained 15% or more of the voting power of the Company through (i) an issuance of Common Stock by the Company directly to such person (for example, in a private placement or an acquisition by the Company in which Common Stock is used as consideration) or (ii) a repurchase by the Company of Common Stock. In the event that any person or group becomes an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon exercise at the then current exercise price of the Right, shares of Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. In the event that, at any time following a Shares Acquisition Date, the Company is acquired by the Acquiring Person in a merger or other business combination transaction or 50% or more of the Company's assets or earning power are sold to the Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon exercise at the then current exercise price of the Right, common stock of the acquiring or surviving company having a value equal to two times the exercise price of the Right. Notwithstanding the foregoing, following the occurrence of any of the events set forth in the preceding two paragraphs (the "Triggering Events"), any Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will immediately become null and void. The Purchase Price payable, the number of Special Preferred Shares, shares of Common Stock or other securities or property issuable upon exercise of the Rights and the number of Rights outstanding, are subject to adjustment from time to time to prevent dilution, among other circumstances, in the event of a stock dividend on, or a subdivision, split, reverse split, combination, consolidation or reclassification of, the Special Preferred Shares or the Common Stock. With certain exceptions, no adjustment to the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% to the Purchase Price. Upon the exercise of a Right, the Company will not be required to issue fractional Special Preferred Shares or fractional shares of Common Stock (other than fractions in multiples of one one-hundredth of a Special Preferred Share) and, in lieu thereof, an adjustment in cash may be made based on the market price of the Special Preferred Shares or Common Stock on the last trading date prior to the date of exercise. At any time after a person or group becomes an Acquiring Person and prior to the acquisition by such person or group of capital stock of the Company representing 50% or more of the voting power of the Company, the Board of Directors may exchange the Rights (other than Rights owned by such person or group, which will become void), in whole or in part, at an exchange ratio of one share of Common Stock per Right (subject to adjustment). At any time after the date of the Rights Agreement until the earlier of the time that a person becomes an Acquiring Person or the Final Expiration Date, the Board of Directors may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the "Redemption Price"), which may (at the option of the Company) be paid in cash, shares of Common Stock, or other consideration deemed appropriate by the Board of Directors. Upon the effectiveness of any action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. 36 40 The provisions of the Rights Agreement may be amended by the Company, except that any amendment adopted after the time that a person becomes an Acquiring Person may not adversely affect the interests of holders of Rights. Upon consummation of the Offering, each outstanding share of Common Stock will receive one Right. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the Rights being redeemed or a substantial number of Rights being acquired by the Acquiring Person. Under certain circumstances the Rights beneficially owned by such a person or group may become void. The Rights should not interfere with any merger or other business combination approved by the Board of Directors because, if the Rights would become exercisable as a result of such merger or business combination, the Board of Directors may, at its option, at any time prior to the time that any person or entity becomes an Acquiring Person, redeem all (but not less than all) of the then outstanding Rights at the Redemption Price. CERTAIN AGREEMENTS WITH STOCKHOLDERS The Company and certain stockholders who will hold 3,897,251 shares of Common Stock following the offering are parties to stock purchase agreements which give them certain rights of refusal, "tagalong" rights and registration rights. The rights of refusal give the stockholders certain first rights to purchase securities of the Company that the Company proposes to issue and sell. The tagalong rights require a stockholder who proposes to sell a majority of the shares of capital stock of the Company to arrange for the purchase of all the remaining shares of the Company's capital stock held by the remaining shareholders at a price and on terms as favorable as those applicable to the sale of the offeror's shares. For a description of the registration rights, see "Shares Eligible for Future Sale." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Securities Transfer & Trust, Inc. SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering, there has been no public market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this Offering because of certain contractual and legal restrictions on resale described below, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this Offering, the Company will have outstanding 5,834,140 shares of Common Stock. Of these shares, the 1,600,000 shares sold in the Offering will generally be freely tradeable without restriction or further registration under the Securities Act. The remaining approximately 4,234,140 shares of Common Stock may be sold in the public market as follows: (i) approximately 379,990 shares will be freely tradeable on the date of this Prospectus, (ii) approximately 593,670 shares will be freely tradeable 120 days from the date of this Prospectus upon the expiration of certain lock-up agreements, and (iii) approximately 3,260,473 shares will be tradeable 270 days from the date of this Prospectus upon the expiration of certain lock-up agreements, subject in certain cases to the limitations of Rule 144. In addition, approximately 1,557,962 shares issuable upon exercise of warrants (of which 1,044,626 are currently vested) will be freely tradeable upon the earlier of one year after the date such warrants are exercised or the filing of a registration statement with respect to such shares. Approximately 794,432 of such warrants are subject to lock-up agreements which prohibit sales of such underlying shares for a period ending 270 days from the date of this Prospectus. 37 41 The Company's officers, directors and certain stockholders have agreed that they will not, without the prior written consent of Cruttenden Roth Incorporated, directly or indirectly offer, sell, contract to sell or otherwise dispose of approximately 3,260,473 shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock during the 270-day period commencing on the Effective Date. The Company has agreed that it will not, without the prior written consent of Cruttenden Roth Incorporated, directly or indirectly offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock during such 270-day period except for the sale of the shares of Common Stock in this offering, the issuance of options and shares of Common Stock pursuant to employee benefit plans set forth in this Prospectus, and the issuance of shares of Common Stock upon exercise of warrants presently outstanding. Any shares subject to the lock-up agreements may be released at any time without notice by Cruttenden Roth Incorporated. In general, under Rule 144 as currently in effect, beginning 90 days after the Effective Date, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year will be entitled to sell in any three-month period a number of shares that does not exceed greater of (i) one percent of the then outstanding shares of the Company's Common Stock or (ii) the average weekly trading volume of the Company's Common Stock in the American Stock Exchange during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice, and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. An employee, officer or director of or consultant to the Company who purchased or was awarded shares or options to purchase shares pursuant to a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701 under the Securities Act, which permits affiliates and non-affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions, in each case commencing 90 days after the date of this Prospectus. In addition, non-affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. Upon completion of the Offering, certain holders will have "piggyback" registration rights with respect to 3,513,683 shares of Common Stock held by them or issuable to them, which rights allow them to require the Company, subject to certain conditions, to include their shares in certain future registration statements filed by the Company. In addition, the Company intends to file a registration statement covering 500,000 shares of Common Stock reserved for issuance under the Company's stock option plans. 38 42 UNDERWRITING The Underwriters named below, for whom Cruttenden Roth Incorporated and Scott & Stringfellow, Inc. are acting as Representatives, have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company and the Selling Stockholder the number of shares of Common Stock set forth opposite their respective names below at the price to public less underwriting discounts and commissions set forth on the cover page of this Prospectus. The nature of the Underwriters' obligations is such that if any such shares are purchased, all must be purchased.
UNDERWRITERS PARTICIPATION ---------------------------------------------------------------- ------------- Cruttenden Roth Incorporated.................................... Scott & Stringfellow, Inc. .....................................
The several Underwriters propose to offer the shares of Common Stock in part directly to the public at the price to public set forth on the cover page of this Prospectus, and in part to certain dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD"), at the price to public less a concession not exceeding $ per share. The Underwriters may allow, and such dealers may reallow, a concession not exceeding $ per share. After the shares of Common Stock are released for sale to the public, the Representatives may change the initial price to public and other selling terms. No change in such terms shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Selling Stockholder has granted the Underwriters an option, exercisable for 45 days after the date of this Prospectus, to purchase up to 240,000 additional shares of Common Stock at the price to public less the underwriting discount set forth on the cover page of this Prospectus. The Underwriters may exercise the option solely to cover over-allotments, if any. To the extent the Underwriters exercise the over-allotment option, each Underwriter will be committed, subject to certain conditions, to purchase that number of additional shares which is proportionate to such Underwriter's initial commitment. The Company and the Selling Stockholder have also agreed to pay the Representatives a non-accountable expense allowance equal to 2.5% of the gross proceeds of the Offering (including any over-allotment shares), and to sell to the Representatives or their designees, for nominal consideration, certain warrants (the "Representatives' Warrants") to purchase up to 140,000 shares of Common Stock (subject to certain antidilution adjustments). The Representatives' Warrants will be exercisable for a period of three years commencing one year after the effective date of the Registration Statement of which this Prospectus forms a part, and cannot be transferred for a period of one year from the date of issuance except to the Underwriters, selling group members and their officers or partners. The exercise price per share for the Representatives' Warrants is equal to 120% of the initial price to public and may be paid in cash or on a cashless net issuance basis by foregoing receipt of a number of shares otherwise issuable upon exercise having a fair market value equal to the aggregate exercise price. During the exercise period, holders of the Representatives' Warrants are entitled to certain demand and incidental registration rights with respect to the securities issuable upon exercise. The Company has agreed for a period of two years after the Offering to grant Cruttenden Roth Incorporated a right of first refusal to manage any public or private offerings of debt or equity securities by the Company or its principal stockholders. Except in connection with acquisitions or pursuant to the exercise of options granted under outstanding warrants to purchase Common Stock, the Company has agreed, for a period of nine months from the consummation of this Offering, not to issue, sell or purchase any equity securities without the prior written consent of Cruttenden Roth Incorporated. In addition, the Company's officers, directors and certain 39 43 stockholders have agreed not to transfer any equity securities of the Company for a period of nine months after the consummation of this Offering without the prior written consent of Cruttenden Roth Incorporated. Prior to this Offering, there has not been a public market for the Common Stock. The public offering price of the Common Stock has been determined by arms-length negotiation between the Company and the Representatives. There is no direct relation between the offering price of the Common Stock and the assets, book value or net worth of the Company. Among the factors considered by the Company and the Representatives in pricing the Common Stock were the Company's results of operations, the current financial condition and future prospects of the Company, the experience of management, the amount of ownership to be retained by pre-offering stockholders, the general condition of the economy and the securities markets, the rights, preferences, privileges and restrictions of the Common Stock, and the demand for similar securities of companies considered comparable to the Company. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. In connection with the Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with the Securities Exchange Act of 1934 pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the offering than they are committed to purchase from the Company, and in such case may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such shares of Common Stock or may exercise the Underwriters' over-allotment option referred to above. In addition, the Representatives, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby they may reclaim from an Underwriters (or dealers participating in the Offering), for the account of the other Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in stabilization or syndicate covering transactions or otherwise. Any of these activities may stabilize or maintain the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and if they are undertaken they may be discontinued at any time. The Representatives have advised the Company that the Underwriters do not expect to confirm any sales to accounts over which they exercise discretionary authority. LEGAL MATTERS Certain legal matters will be passed upon for the Company by Dyer Ellis & Joseph PC, Washington, D.C. Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, Denver, Colorado. EXPERTS The financial statements and schedule of the Company as of December 31, 1996, included in this Prospectus and elsewhere in the Registration Statement have been audited by Grant Thornton LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. The financial statements and schedule of the Company as of December 31, 1994 and 1995 included in this Prospectus have been audited by Amper, Politziner & Mattia, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. On January 30, 1997, the Company engaged Grant Thornton LLP as its principal accountants, and dismissed its former accountants, Amper Politziner & Mattia. The Company decided to change accountants in 40 44 anticipation of the Offering. The decision to change accountants was ratified by the Company's Board of Directors. In connection with the audits for the years ended December 31, 1994 and 1995 and through January 30, 1997, there were no disagreements with Amper, Politziner & Mattia on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements if not resolved to the satisfaction of Amper, Politziner & Mattia would have caused them to make reference thereto in their report on the financial statements for such years. During the years ended December 31, 1994 and 1995 and through January 30, 1997 there were no reportable events (as defined in Item 304 (A)(1)(v) of Regulation S-K) with Amper, Politziner & Mattia. Amper, Politziner & Mattia rendered unqualified opinions with respect to the Company's financial statements for the years ended December 31, 1994 and 1995. ADDITIONAL INFORMATION A Registration Statement on Form S-1 including amendments thereto relating to the Common Stock offered hereby has been filed by the Company with the Securities and Exchange Commission, Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, exhibits, and schedules. A copy of the Registration Statement may be inspected without charge at the Securities and Exchange Commission's principal office located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, the New York Regional Office located at 7 World Trade Center, Suite 1300, New York, New York 10048, and the Chicago Regional Office located at Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661-2511 and copies of all or any part thereof may be obtained from the Public Reference Section of the Securities and Exchange Commission upon the payment of certain fees prescribed by the Securities and Exchange Commission. The Registration Statement may also be obtained from the Web site that the Commission maintains at http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing audited financial statements certified by an independent public accounting firm and quarterly reports for each of the first three quarters of each fiscal year containing unaudited financial information. 41 45 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of independent certified public accountants -- Grant Thornton LLP.............. F-2 Report of independent certified public accountants -- Amper, Politziner & Mattia...... F-3 Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997..................... F-4 Statements of Operations for the years ended December 31, 1994, 1995, and 1996 and the six months ended June 30, 1996 and 1997............................................. F-5 Statement of Stockholders' Equity (Deficiency) for the years ended December 31, 1994, 1995, and 1996 and the six months ended June 30, 1997............................... F-6 Statements of Cash Flows for the years ended December 31, 1994, 1995, and 1996 and the six months ended June 30, 1996 and 1997............................................. F-7 Notes to Financial Statements......................................................... F-8
F-1 46 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders SECURACOM, INCORPORATED We have audited the accompanying balance sheet of Securacom, Incorporated as of December 31, 1996, and the related statements of operations, stockholders' equity (deficiency), and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Securacom, Incorporated as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. We have also audited Schedule II of Securacom, Incorporated for the year ended December 31, 1996. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. GRANT THORNTON LLP Parsippany, New Jersey March 12, 1997 F-2 47 REPORT OF INDEPENDENT AUDITORS Board of Directors SECURACOM, INCORPORATED We have audited the accompanying balance sheet of Securacom, Incorporated at December 31, 1995, and the related statements of operations, stockholders' equity and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from 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 accounting estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Securacom, Incorporated at December 31, 1995 and the results of its operations and its cash flows for each of the two years then ended in conformity with generally accepted accounting principles. We have also audited Schedule II of Securacom, Incorporated for the years ended December 31, 1995 and 1994. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. AMPER, POLITZINER & MATTIA June 3, 1996 Edison, New Jersey F-3 48 SECURACOM, INCORPORATED BALANCE SHEETS
DECEMBER 31, --------------------------- JUNE 30, 1995 1996 1997 ----------- ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents (including $22,500 of restricted cash at June 30, 1997)............ $ 555,345 $ 609,342 $ 125,200 Accounts receivable, net of allowance for doubtful accounts of $120,000 in 1995 and $42,000 in 1996 and 1997..................... 1,155,173 1,777,456 2,489,559 Costs and estimated earnings in excess of billings on uncompleted contracts............ 780,391 1,148,560 2,471,415 Prepaid expenses and other..................... 100,006 120,937 100,296 Investment in SSIH, Ltd. ...................... 700,000 ----------- ------------ ------------ Total current assets...................... 2,590,915 3,656,295 5,886,470 Plant and equipment, net............................ 261,139 714,989 783,518 Deferred registration costs......................... -- -- 474,566 Other assets........................................ 193,888 195,803 209,201 ----------- ------------ ------------ $ 3,045,942 $ 4,567,087 $ 7,353,755 ========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Notes payable-stockholder...................... $ 200,000 $ -- $ -- Current maturities of capital lease obligations.................................. 6,290 21,454 44,293 Accounts payable............................... 817,980 2,739,271 4,140,576 Billings in excess of costs and estimated earnings on uncompleted contracts............ 442,059 103,184 101,050 Accrued expenses and other..................... 428,507 641,506 762,553 ----------- ------------ ------------ Total current liabilities................. 1,894,836 3,505,415 5,048,472 Long-term liabilities: Notes payable.................................. 597,000 2,541,000 3,200,000 Capital lease obligations, less current maturities................................... -- 116,399 210,070 Stockholders' equity (deficiency): Common stock, $0.01 par value per share; authorized; 10,000,000 shares; issued and outstanding, 3,953,683 shares in 1995 and 4,434,140 shares in 1996 and 1997............ 39,536 44,341 44,341 Additional paid-in capital..................... 10,224,002 10,582,197 10,644,197 Accumulated deficit............................ (9,709,432) (12,222,265) (11,793,325) ----------- ------------ ------------ 554,106 (1,595,727) (1,104,787) ----------- ------------ ------------ $ 3,045,942 $ 4,567,087 $ 7,353,755 ========== =========== ===========
The accompanying notes are an integral part of these statements. F-4 49 SECURACOM, INCORPORATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ---------- (UNAUDITED) Earned revenues................. $ 2,395,254 $ 3,176,523 $ 5,824,448 $ 1,930,470 $7,240,240 Cost of earned revenues......... 1,586,315 2,179,964 4,416,386 1,245,583 5,210,176 ----------- ----------- ----------- ----------- ---------- Gross profit............... 808,939 996,559 1,408,062 684,887 2,030,064 Selling, general and administrative expenses....... 2,670,092 2,870,570 3,700,698 1,940,679 1,380,514 ----------- ----------- ----------- ----------- ---------- Operating income (loss)......... (1,861,153) (1,874,011) (2,292,636) (1,255,792) 649,550 Interest and financing fees..... (34,181) (101,707) (241,716) (76,683) (231,778) Interest and other income....... 7,617 208,026 21,519 1,682 11,168 ----------- ----------- ----------- ----------- ---------- Net income (loss).......... $(1,887,717) $(1,767,692) $(2,512,833) $(1,330,793) $ 428,940 ========== ========== ========== ========== ========= Net income (loss) per share..... $ (0.54) $ (0.45) $ (0.58) $ (0.31) $ 0.09 ========== ========== ========== ========== ========= Weighted average shares outstanding................... 3,493,000 3,909,000 4,368,000 4,256,000 4,532,000 ========== ========== ========== ========== =========
The accompanying notes are an integral part of these statements. F-5 50 SECURACOM, INCORPORATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
TOTAL COMMON STOCK ADDITIONAL STOCKHOLDERS' ------------------- PAID-IN ACCUMULATED EQUITY SHARES AMOUNT CAPITAL DEFICIT (DEFICIENCY) --------- ------- ----------- ------------ ----------- Balance at January 1, 1994......... 3,226,889 $32,269 $ 6,724,201 $ (6,054,023) $ 702,447 Net loss........................... (1,887,717) (1,887,717) Proceeds from issuance of common stock............................ 316,000 3,160 1,576,780 1,579,940 Common stock issuance costs........ (78,997) (78,997) --------- ------- ----------- ------------ ----------- Balance at December 31, 1994....... 3,542,889 35,429 8,221,984 (7,941,740) 315,673 Net loss........................... (1,767,692) (1,767,692) Proceeds from issuance of common stock............................ 410,794 4,107 2,075,818 2,079,925 Common stock issuance costs........ (76,800) (76,800) Issuance of warrants............... 3,000 3,000 --------- ------- ----------- ------------ ----------- Balance at December 31, 1995....... 3,953,683 39,536 10,224,002 (9,709,432) 554,106 Net loss........................... (2,512,833) (2,512,833) Exercise of warrants............... 480,457 4,805 247,195 252,000 Issuance of warrants............... 111,000 111,000 --------- ------- ----------- ------------ ----------- Balance at December 31, 1996....... 4,434,140 44,341 10,582,197 (12,222,265) (1,595,727) Net income (unaudited)............. 428,940 428,940 Issuance of warrants (unaudited)... 62,000 62,000 --------- ------- ----------- ------------ ----------- Balance at June 30, 1997 (unaudited)...................... 4,434,140 $44,341 $10,644,197 $(11,793,325) $(1,104,787) ======== ======= ========== =========== ==========
The accompanying notes are an integral part of this statement. F-6 51 SECURACOM, INCORPORATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................ $(1,887,717) $(1,767,692) $(2,512,833) $(1,330,793) $ 428,940 ----------- ----------- ----------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization........... 47,503 62,457 91,859 31,737 63,205 Noncash compensation.................... 27,500 28,000 28,000 Amortization of debt discount........... 5,000 3,000 21,000 Changes in operating assets and liabilities: Accounts receivable..................... 183,225 (767,135) (622,283) 174,213 (712,103) Costs and estimated earnings in excess of billings on uncompleted contracts............................. (700,481) 177,124 (368,169) 147,951 (1,322,855) Prepaid expenses and other.............. 209,311 (30,043) (20,931) (23,988) 20,641 Other assets............................ 13,361 (146,978) (1,915) (1,172) (13,398) Accounts payable........................ 153,897 115,265 1,921,291 345,131 1,401,305 Billings in excess of costs and estimated earnings on uncompleted contracts............................. 192,213 249,846 (338,875) (288,064) (2,134) Accrued expenses and other.............. (119,646) 145,620 212,999 174,710 121,047 ----------- ----------- ----------- ----------- ----------- Total adjustments....................... (20,617) (166,344) 906,976 591,518 (423,292) ----------- ----------- ----------- ----------- ----------- Net cash from operating activities ..... (1,908,334) (1,934,036) (1,605,857) (739,275) 5,648 ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in SSIH, Ltd...................... (700,000) Acquisition of plant and equipment........... (63,661) (17,868) (396,460) (7,331) ----------- ----------- ----------- ----------- ----------- Net cash used by investing activities........ (63,661) (17,868) (396,460) (7,331) (700,000) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable.................. 515,000 800,000 2,050,000 600,000 700,000 Principal payments on notes payable -- stockholder..................... (200,000) (200,000) Principal payments of capital lease obligations................................ (15,235) (19,068) (17,686) (10,349) (15,224) Deferred registration costs.................. (474,566) Proceeds from issuance of common stock and exercise of warrants....................... 1,579,940 1,537,425 224,000 224,000 Common stock issuance costs.................. (78,997) (76,800) ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities ........................................... 2,000,708 2,241,557 2,056,314 613,651 210,210 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.................................... 28,713 289,653 53,997 (132,955) (484,142) Cash and cash equivalents at beginning of period......................................... 236,979 265,692 555,345 555,345 609,342 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period....... $ 265,692 $ 555,345 $ 609,342 $ 422,390 $ 125,200 ============ ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period Interest and financing fees............. $ 23,000 $ 97,000 $ 165,000 $ 56,000 $ 161,000 Income taxes............................ 2,000 2,000 7,000 5,000 6,000
During the first six months of 1997, the Company acquired equipment totaling approximately $132,000 through capital lease transactions. During 1996, the Company acquired equipment totaling approximately $149,000 through capital lease transactions. During 1995, the Company issued 103,000 shares of common stock in payment of notes payable totaling $515,000. The accompanying notes are an integral part of these statements. F-7 52 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES Securacom, Incorporated (the "Company") is a single-source provider of comprehensive technology-based security solutions primarily for medium and large commercial and government facilities in the United States and abroad. At December 31, 1996, the Company was approximately 90% owned by KuwAm Corporation, two private investment partnerships of which KuwAm serves as general partner, Special Situations Investment Holdings, Ltd. and Special Situations Investment Holdings L.P. II, and certain individual limited partners of the investment partnerships (the "KuwAm Group"). A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows: 1. REVENUE RECOGNITION The Company derives its revenues principally from long-term contracts which are generally on a fixed price basis. Earnings are recognized on the basis of the Company's estimates of the percentage of completion of individual contracts, whereby total estimated income is earned based upon the proportion that costs incurred bear to the Company's estimate of total contract costs. The percentage of completion of individual contracts includes management's best estimates of the amounts expected to be realized on these contracts. It is at least reasonably possible that the amounts the Company will ultimately realize could differ materially in the near term from the amounts estimated in arriving at the earned revenue and costs and earnings in excess of billings on uncompleted contracts. Contract costs include all direct material, direct labor and subcontract costs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract revisions and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed to clients. The liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized. 2. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. 3. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. F-8 53 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) 4. PLANT AND EQUIPMENT Plant and equipment are stated at cost. Depreciation is provided using the straight-line method based on the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the economic life of the improvements or the lease term. 5. USE OF ESTIMATES In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In addition to the estimates of revenues earned on contracts as described in Note A-1, the Company estimates an allowance for doubtful accounts based on the creditworthiness of its clients, as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate. 6. CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash, money market funds and trade accounts receivable. The Company places its cash and money market funds with high credit quality institutions. In general, such investments exceed the FDIC insurance limit. The Company provides credit to its clients in the normal course of business. The Company routinely assesses the financial strength of its clients and, as a consequence, believes that its trade accounts receivable exposure is limited. The carrying value of financial instruments potentially subject to valuation risk (principally consisting of cash, accounts receivable, long-term debt and accounts payable) approximates fair market value due to their short-term nature or market interest rates. 7. INCOME (LOSS) PER SHARE Net income (loss) per common share is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding. Except as noted in the following paragraph, stock warrants have not been included in the calculation as their inclusion would be antidilutive. Warrants issued for the purchase of shares of Common Stock at an exercise price below the estimated initial public offering price of $7.50 per share during the 12 months preceding the date of the Company's initial filing of a registration statement with the Securities and Exchange Commission have been included in the number of weighted average shares outstanding for all periods presented calculated based on the treasury stock method. The Company believes that the implementation of Statement of Financial Accounting Standards 128, Earnings Per Share, will not have a material impact on the calculation of earnings per share. 8. INTERIM FINANCIAL STATEMENTS (UNAUDITED) The unaudited balance sheet as of June 30, 1997 and the unaudited statements of operations, stockholders' equity and statements of cash flows for the six months ended June 30, 1996 and 1997 are condensed financial statements in accordance with the rules and regulations of the Securities and Exchange F-9 54 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE A -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES -- (CONTINUED) 8. INTERIM FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) Commission. Accordingly, they omit certain information included in complete financial statements and should be read in connection with the information for the years ended December 31, 1994, 1995 and 1996. In the opinion of the Company, the unaudited financial statements at June 30, 1997 and for the six months ended June 30, 1996 and 1997, include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position and results of operations for such periods. Results of operations for the six months ended June 30, 1997 are not necessarily indicative of results to be expected for the full year. In April 1997, the Board of Directors approved an increase in the number of shares of Common Stock authorized to 20,000,000 shares. In June 1997, the Company placed $22,500 in an interest bearing money market fund as collateral for a stand-by letter of credit issued in the same amount to guarantee shipment of equipment for a project in Russia. During the six months ended June 30, 1997, one client accounted for 56.8% of the earned revenue and 49.8% of the gross profit. The Company entered into an agreement with an underwriter pursuant to which the Company intends to prepare and file with the Securities and Exchange Commission a registration statement for the initial public offering of 1,400,000 shares to be issued by the Company and 200,000 shares by an existing stockholder. At June 30, 1997, the Company had $474,566 of deferred registration costs which will be netted against the Offering proceeds, if successful. Otherwise, they will be expensed. Of the total $3,350,000 proceeds received from the issuance of notes payable, the Company invested $700,000 in a limited partnership interest of Special Situations Investment Holdings, Ltd. ("SSIH") recorded at cost which is deemed to be equivalent to fair market value. At the end of each year, the Company has the option of requiring SSIH to redeem the limited partnership interest at their then fair market value less a liquidation fee of up to 1%. The proceeds of such redemption are payable, at SSIH's option, in cash or portfolio securities of SSIH. Because the assets of SSIH include both publicly traded and privately held securities, the value of the SSIH portfolio may be materially different than the cost of the Company's investment. Under the terms of the governing agreements KuwAm receives 3% of the amount of the Company's investment as reimbursement for accounting, legal and administrative expenses, an annual fee equal to 2% of the assets and an annual capital appreciation fee equal to 10% of the increases in the value of SSIH's assets each year. The Company and SSIH have agreed that, immediately following the Offering, such limited partnership interest will be redeemed at the greater of $700,000 or its market value. NOTE B -- LIQUIDITY As shown in the accompanying financial statements, Securacom, Incorporated has incurred recurring operating losses and has an accumulated deficit of $12,222,265 at December 31, 1996. In addition, the Company has been dependent on its principal stockholders for the financing of ongoing operations. In these circumstances, the Company's continued existence is dependent upon its ability to generate profitable operations and secure financing to fund future operations. Management is addressing these matters by implementing a comprehensive business strategy. The Company anticipates that it will generate sufficient cash flow from 1997 operations to meet its working capital needs. The Company has, in the past, been able to F-10 55 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE B -- LIQUIDITY -- (CONTINUED) secure additional financing to meet its operating requirements, although there can be no assurance that it will be able to continue to do so. NOTE C -- COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings on uncompleted contracts at December 31, 1995 and 1996 and June 30, 1997 which are expected to be collected within one year are as follows:
JUNE 30, 1997 1995 1996 (UNAUDITED) ----------- ----------- ------------- Costs incurred on contracts................... $28,205,341 $32,222,489 $ 9,621,226 Estimated earnings............................ 2,701,352 3,889,963 3,188,287 ----------- ----------- ------------- 30,906,693 36,112,452 12,809,513 Less billings to date......................... 30,568,361 35,067,076 10,439,148 ----------- ----------- ------------- $ 338,332 $ 1,045,376 $ 2,370,365 ========== ========== ==========
In addition, included in accounts receivable and accounts payable at December 31, 1996 were retainages of $76,983 and $111,278, respectively. At June 30, 1997 retainages included in accounts receivable were $409,225 and in accounts payable $240,795 (unaudited). The Company anticipates that retainages will be collected and paid within one year. There were no such amounts at December 31, 1995. In February 1996, the Company negotiated a final settlement on a major contract with the Tennessee Valley Authority. As a result, the Company wrote off approximately $238,000 of amounts owed to a subcontractor and reduced cost of earned revenues. NOTE D -- PLANT AND EQUIPMENT Plant and equipment are summarized as follows:
USEFUL 1995 1996 LIFE -------- -------- -------- Computer equipment..................................... $232,599 $275,110 5 years Equipment and fixtures................................. 214,158 328,885 10 years Aircraft (a)........................................... 335,000 10 years Leasehold improvements................................. 53,471 5 years -------- -------- 446,757 992,466 Accumulated depreciation and amortization.............. 185,618 277,477 -------- -------- $261,139 $714,989 ======== ========
- --------------- (a) The aircraft was purchased from a firm whose principal stockholders are the same as those of the Company. NOTE E -- NOTES PAYABLE During the years ended December 31, 1995 and 1996, the Company issued subordinated debentures to the KuwAm Group totaling $600,000 and $2,050,000, respectively, and 85,716 and 292,862, respectively, of warrants to purchase common stock of the Company at $7.00 per share. The debentures bear interest at 10% and the principal is payable as follows: $663,000 on December 31, 1998, $663,000 on December 31, 1999 and F-11 56 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE E -- NOTES PAYABLE -- (CONTINUED) the balance on December 31, 2000. The value of the warrants, $3,000 and $111,000 at December 31, 1995 and 1996, respectively, was determined based upon an appraisal of the securities by an independent firm and was recorded as additional paid-in capital and reduction of notes payable. All 378,578 warrants are outstanding at December 31, 1996. Interest expense on these notes amounted to approximately $37,000 and $125,000 (including $5,000 of amortization of debt discount) for the years ended December 31, 1995 and 1996, respectively. At December 31, 1995, the Company had $200,000 of notes payable to stockholders which were repaid in 1996. NOTE F -- ACCRUED EXPENSES Accrued expenses and other are summarized as follows:
DECEMBER 31, -------------------- 1995 1996 -------- -------- Payroll......................................................... $225,979 $237,515 Employee expense reimbursements................................. 16,735 107,236 Professional fees............................................... 73,656 87,875 Deferred rent obligation........................................ 81,915 74,295 Other........................................................... 30,222 134,585 -------- -------- $428,507 $641,506 ======== ========
NOTE G -- OBLIGATIONS UNDER CAPITAL LEASE AGREEMENTS The Company has entered into various capital lease agreements for equipment with a cost of $48,646 and $197,895 at December 31, 1995 and 1996, respectively. The leases expire at various times through 2001. Accumulated amortization amounted to $10,372 and $29,447 at December 31, 1995 and 1996, respectively. The related future minimum lease payments, as of December 31, 1996, are as follows:
CAPITAL FISCAL YEAR LEASES -------------------------------------------------------------------------- -------- 1997...................................................................... $ 48,713 1998...................................................................... 48,713 1999...................................................................... 45,144 2000...................................................................... 46,544 2001...................................................................... 28,531 -------- Net minimum lease payments................................................ 217,645 Amount representing interest.............................................. (79,792) -------- $137,853 ========
NOTE H -- RELATED PARTY TRANSACTIONS The Company had agreements (the "Agreements") with KuwAm Corporation whereby the Company paid a fee of five percent of the capital raised from the private sale of common stock and subordinated debentures under the Agreements. The Company incurred approximately $79,000, $77,000 and $103,000, of investment banking fees under the Agreements during 1994, 1995 and 1996, respectively, which have been F-12 57 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE H -- RELATED PARTY TRANSACTIONS -- (CONTINUED) recorded as a reduction of proceeds from sales of equity securities and interest and financing fees for sales of subordinated debentures. NOTE I -- EMPLOYEE STOCK WARRANTS From time to time the Company has granted warrants for the purchase of its common stock to employees and directors. The Company has elected to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in measuring compensation expense for its stock warrants. Under APB No. 25, because the exercise price of the Company's employee stock warrants is not less than the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. However, SFAS No. 123, "Accounting for Stock-Based Compensation," requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock warrants granted subsequent to December 31, 1994, under the fair value method of that statement. For purposes of pro forma disclosure, the estimated fair value of the warrants is amortized to expense over the vesting period. Under the fair value method, the Company's net loss and loss per share would not have had a material change. Because SFAS No. 123 is applicable only to options and warrants granted subsequent to December 31, 1994, and the warrants have a three-year vesting period, its pro forma effect will not be fully reflected until 1998. The weighted average fair value of the individual warrants granted during both 1995 and 1996 is estimated as $0.04 on the date of grant. The fair values were determined using a Black-Scholes option-pricing model with the following assumptions:
1995 1996 ------- ------- Dividend yield..................................................... -- -- Volatility......................................................... 50% 50% Risk-free interest rate............................................ 6.70 6.06 Forfeiture rate.................................................... -- -- Expected life...................................................... 3 years 3 years
Stock warrant activity during 1994-1996 is summarized below:
SHARES OF WEIGHTED COMMON STOCK AVERAGE ATTRIBUTABLE EXERCISE PRICE TO WARRANTS OF WARRANTS ------------ -------------- Unexercised at December 31, 1993............................ 785,634 $ 1.91 Granted..................................................... 33,260 0.53 Expired..................................................... 16,667 5.00 ------------ Unexercised at December 31, 1994............................ 802,227 1.78 Granted..................................................... 245,148 4.63 Exercised................................................... -- -- Expired..................................................... 35,000 5.00 ------------
F-13 58 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE I -- EMPLOYEE STOCK WARRANTS -- (CONTINUED)
SHARES OF WEIGHTED COMMON STOCK AVERAGE ATTRIBUTABLE EXERCISE PRICE TO WARRANTS OF WARRANTS ------------ -------------- Unexercised at December 31, 1995............................ 1,012,375 2.36 Granted..................................................... 400,797 6.58 Exercised................................................... 480,457 0.53 Expired..................................................... 48,333 5.41 ------------ Unexercised at December 31, 1996............................ 884,382 5.10 ==========
The following table summarizes information concerning outstanding and exercisable warrants at December 31, 1996:
WARRANTS OUTSTANDING --------------------------------- WEIGHTED-AVERAGE EXERCISE NUMBER REMAINING WARRANTS PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE - -------- ----------- ----------------- ----------- $1 159,382 0.7 159,382 5 360,000 1.1 209,998 7 365,000 2.2 --
Warrants exercisable at December 31, 1994, 1995 and 1996, were 562,639, 689,248 and 369,382, respectively. Reference is made to Note E relating to outstanding warrants issued relating to notes payable. During the year ended December 31, 1996, the President of the Company exercised warrants for the purchase of 53,320 shares of common stock at an exercise price of $0.53 per share. Since no amount was paid upon exercise of the warrants, the Company recorded compensation expense of $28,000. NOTE J -- INCOME TAXES Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities at December 31, 1995 and 1996 follow:
1995 1996 ----------- ----------- Current assets and liabilities Allowance for doubtful accounts............................... $ 29,000 $ 17,000 Accrued vacation pay.......................................... 15,000 38,000 Deferred rent obligation...................................... 19,000 -- ----------- ----------- 63,000 55,000 Valuation allowance................................................ (63,000) (55,000) ----------- ----------- Net current deferred tax asset (liability)......................... $ -- $ -- ========== ========== Noncurrent assets and liabilities: Depreciation.................................................. $ (26,000) $ (58,000) Net operating loss carryforward............................... 2,250,000 4,744,000 ----------- ----------- 2,224,000 4,686,000 Valuation allowance................................................ (2,224,000) (4,686,000) ----------- ----------- Noncurrent deferred tax asset (liability).......................... $ -- $ -- ========== ==========
F-14 59 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE J -- INCOME TAXES -- (CONTINUED) The valuation allowance has been established for those loss carryforwards and deductible temporary differences which are not presently considered more likely than not to be realized. The provision for income taxes differs from the effective tax rate used in the financial statements as a result of current year net operating losses, the benefit of which has not been recognized in the current year. As of December 31, 1996, the Company had net operating loss carryforwards of approximately $12,200,000, which expire in 2002 through 2011. In 1992, a major stockholder of the Company significantly increased its ownership of the Company. As a result of a complex set of rules limiting the utilization of net operating loss carryforwards in tax years following a corporate ownership change (enacted in the Tax Reform Act of 1986), the ability of the Company to utilize net operating losses of approximately $3.5 million may be limited. Also, the shares issued in connection with the Offering are expected to create an ownership change. However, based on the expected value of the Company immediately before such ownership change and the resulting limitation as defined, the Company expects to be able to utilize its net operating losses of approximately $8.7 million incurred after August 1992. NOTE K -- EMPLOYEE BENEFIT ARRANGEMENTS The Company established a contributory employee savings plan under Section 401(k) of the Internal Revenue Code. The Company contributes amounts to individual participant accounts based on specific provisions of the plan. The cost to the Company for the employer match under the plan was $8,111, $8,238 and $12,728, for the years ended December 31, 1994, 1995 and 1996, respectively. The Company had an employee profit-sharing plan providing for the provision of an amount equal to 10% of the Company's income before income taxes. The Company did not make a contribution to the plan for the years ended December 31, 1994, 1995 or 1996. NOTE L -- COMMITMENTS AND CONTINGENCIES Leases The Company conducts all of its operations from leased facilities consisting of its corporate headquarters and branch office locations. All facility leases are classified as operating leases with terms ranging from one to five years. The following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1996:
YEAR ENDING DECEMBER 31, AMOUNT ------------------------------------------------------------------ -------- 1997.............................................................. $269,000 1998.............................................................. 260,000 1999.............................................................. 253,000 2000.............................................................. 152,000 2001.............................................................. 32,000 -------- $966,000 ========
F-15 60 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE L -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Rent expense for the years ended December 31, 1994, 1995 and 1996 was $279,000, $236,000 and $286,000, respectively. Contingencies The Company is a party in certain legal actions arising from the normal conduct of its business. While the outcome of such actions is not presently determinable, in the opinion of management, based on discussions with legal counsel, the resolution of these actions will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. NOTE M -- INTEREST AND OTHER INCOME Included in interest and other income for the year ended December 31, 1995 is a gain on settlement of litigation, net of expenses and fees of $205,179. NOTE N -- ACQUISITION Effective August 1, 1995, Securacom, Incorporated acquired the assets and certain liabilities of Franklin M. Sterling & Associates, Inc. in exchange for issuing 25,000 shares of common stock to, and employment of, Franklin M. Sterling, P.E. as Senior Vice President in charge of Securacom's West Coast offices. The Company recorded compensation expense of $27,500 in 1995 relating to the issuance of these shares of common stock. NOTE O -- SIGNIFICANT CLIENTS During the year ended December 31, 1994, one client accounted for approximately 67% of earned revenue. During the year ended December 31, 1995 contracts with three clients accounted for approximately 41%, 18% and 13% of earned revenue. During the year ended December 31, 1996, contracts with four clients accounted for approximately 28%, 22%, 14% and 11% of earned revenue. NOTE P -- SUBSEQUENT EVENTS Issuance of Notes Payable Through March 10, 1997, the Company issued $700,000 of subordinated debentures to the KuwAm Group with warrants to purchase 100,002 shares of the Company's common stock at an exercise price of $7.00 per share. The debentures bear interest at 10% and the principal is payable as follows: $175,000 on December 31, 1998, $175,000 on December 31, 1999 and the balance on December 31, 2000. The warrants were valued at $62,000 based upon an appraisal of the securities by an independent firm and were recorded as additional paid-in capital and a reduction of notes payable. Common Stock and Warrants In January and February 1997, the Company issued to employees and directors 195,000 warrants to purchase shares of the Company's common stock at $7.00 per share. Employment and Consulting Agreements In 1997, the Company entered into employment agreements with its President and Chief Financial Officer that provide for annual base salaries of $165,000 and $125,000, respectively, through March 31, 2002 F-16 61 SECURACOM, INCORPORATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1995 AND 1996 NOTE P -- SUBSEQUENT EVENTS -- (CONTINUED) and 2000, respectively. The agreements provide for an additional payment equal to two times the annual base salary if the executive is terminated without cause following a change in control as defined in the agreement. The Company also entered into a consulting agreement with the Chairman of the Company (and managing partner of KuwAm Corporation) that provides for an annual consulting fee of $140,000 through March 31, 2002. Stock Option Plan In 1997, the Board of Directors approved the adoption of the 1997 Stock Option Plan. The 1997 Stock Option Plan provides for the grant of options to purchase up to 500,000 shares of the Company's Common Stock. Options may be granted to employees, officers, directors and consultants of the Company for the purchase of Common Stock of the Company at a price not less than the fair market value of the Common Stock on the date of the grant. F-17 62 SECURACOM, INCORPORATED [Diagram of Services Offered by Securacom] SINGLE SOURCE SECURITY THROUGH TECHNOLOGY 63 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 Risk Factors........................... 6 Use of Proceeds........................ 10 Dividend Policy........................ 10 Dilution............................... 11 Capitalization......................... 12 Selected Financial Data................ 13 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 14 Business............................... 17 Management............................. 26 Certain Transactions................... 31 Principal and Selling Stockholders..... 32 Description of Capital Stock........... 33 Shares Eligible for Future Sale........ 37 Underwriting........................... 39 Legal Matters.......................... 40 Experts................................ 40 Additional Information................. 41 Index to Financial Statements.......... F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 1,600,000 SHARES [SECURACOM LOGO] COMMON STOCK ------------------------ PROSPECTUS ------------------------ CRUTTENDEN ROTH INCORPORATED SCOTT & STRINGFELLOW, INC. , 1997 - ------------------------------------------------------ - ------------------------------------------------------ 64 PART II. INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth certain expenses payable in connection with the registration of the Common Stock that is the subject of this Registration Statement, all of which shall be borne by the Company. In addition, $37,500 of the Representative's non-accountable expense allowance will be paid by the Selling Stockholder. All the amounts shown are estimates except for the registration fee, the Nasdaq SmallCap Market listing fee, and the NASD filing fee.
TO BE PAID BY REGISTRANT ------------- Securities and Exchange Commission registration fee............ $ 6,970 Nasdaq listing fee............................................. 10,000 National Association of Securities Dealers filing fee.......... 2,800 Printing and engraving expenses................................ 100,000 Legal fees and expenses........................................ 210,000 Accounting fees and expenses................................... 170,000 Blue sky filing fees........................................... 13,730 Representatives' non-accountable expense allowance............. 262,500 Miscellaneous.................................................. 100,000 ----------- Total..................................................... $ 876,000 ===========
- --------------- * To be supplied by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation and By-Laws provide for indemnification of directors, officers, agents, and employees of the Company to the fullest extent permitted by law. Under Delaware law, a corporation may indemnify any person who was or is a party or is threatened to be made a party to an action (other than an action by or in the right of the corporation) by reason of his service as a director or officer of the corporation, or his service, at the corporation's request, as a director, officer, employee or agent of another corporation or other enterprise, against expenses (including attorneys' fees) that are actually and reasonably incurred by him ("Expenses"), and judgments, fines and amounts paid in settlement that are actually and reasonably incurred by him, in connection with the defense or settlement of such action, provided that he acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Although Delaware law permits a corporation to indemnify any person referred to above against Expenses in connection with the defense or settlement of an action by or in the right of the corporation, provided that he acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests, if such person has been judged liable to the corporation, indemnification is only permitted to the extent that the Court of Chancery (or the court in which the action was brought) determines that, despite the adjudication of liability, such person is entitled to indemnity for such Expenses as the court deems proper. The determination as to whether a person seeking indemnification has met the required standard of conduct is to be made (1) by a majority vote of a quorum of disinterested members of the board of directors, or (2) by independent legal counsel in a written opinion, if such a quorum does not exist or if the disinterested directors so direct, or (3) by the stockholders. The General Corporation Law of the State of Delaware also provides for mandatory indemnification of any director, officer, employee or agent against Expenses to the extent such person has been successful in any proceeding covered by the statute. In addition, the General Corporation Law of the State of Delaware provides the general authorization of advancement of a director's or officer's litigation expenses in lieu of requiring the authorization of such advancement by the board of directors in specific cases, and that indemnification and advancement of II-1 65 expenses provided by the statute shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement or otherwise. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since January 1, 1994, the Registrant has sold or issued the following unregistered securities: During 1994, the Company issued an aggregate of 316,000 shares of Common Stock to eight individuals and five entities at a purchase price of $5.00 per share. Also during 1994, the Company issued $515,000 aggregate principal amount of promissory notes to one entity at a purchase price equal to the principal amount of the promissory notes. From January 1995 through June 1995, the Company issued an aggregate of 247,500 shares of Common Stock to three individuals and three entities at a purchase price of $5.00 per share. In June 1995, $515,000 aggregate principal amount of promissory notes held by one entity was converted into 103,000 shares of Common Stock at a conversion price of $5.00 per share. During July and August 1995, the Company issued an aggregate of 35,294 shares of Common Stock to one entity at a purchase price of $8.50 per share. In August 1995, the Company issued 25,000 shares of Common Stock to one individual in connection with the acquisition of the assets and certain liabilities of a security consulting business. In March and May 1996, two entities and three directors and/or officers exercised warrants to purchase an aggregate of 480,457 shares of Common Stock at an exercise price of $0.53 per share. From October 1995 through March 1997 the Company issued $3,350,000 aggregate principal amount of 10% subordinated debentures and warrants to purchase 478,580 shares of Common Stock at an exercise price of $7.00 per share to nine entities and 19 individuals at a purchase price equal to the principal amount of the debentures. The issuances of securities in the above transactions were deemed to be exempt from registration under the Act in reliance on Section 4(2) thereof as transactions not involving a public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following is a list of exhibits furnished: 1.1 Form of Underwriting Agreement 1.2 Form of Underwriter's Warrant 3.1+ Form of Restated Certificate of Incorporation of Securacom, Incorporated 3.2+ Form of Bylaws of Securacom, Incorporated 4+ Form of Rights Agreement 5+ Opinion of Counsel 10.1+ Stock Option Plan 10.2+ Employment Agreement with Ronald C. Thomas 10.3+ Employment Agreement with Larry M. Weaver 10.4+ Consulting Agreement with Wirt D. Walker, III 10.5+ Agreement and Certificate of Limited Partnership for Special Situation Investment Holdings, Ltd. 10.6+ Form of Stock Purchase Agreement 10.7 Agreement to Redeem Limited Partnership Interest 11+ Computation of Net Income (Loss) Per Share 16+ Letter from Amper, Politziner & Mattia 23.1 Consent of Grant Thornton LLP 23.2 Consent of Amper, Politziner & Mattia 23.3+ Consent of Counsel (included as part of Exhibit 5) 24+ Power of Attorney 27 Financial Data Schedule
- --------------- + Previously filed II-2 66 (b) The following is a list of the financial statement schedule furnished: Schedule II -- Valuation and Qualifying Accounts. Schedules not listed above have been omitted because they are not applicable or because required information is included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (2) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (3) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (4) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 67 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, this registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Woodcliff Lake and State of New Jersey on the 11th day of September, 1997. SECURACOM, INCORPORATED By: * ------------------------------------ Ronald C. Thomas President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ---------------------------------------- -------------------------------- ------------------- * President, Chief Executive September 11, 1997 - ---------------------------------------- Officer, and Director Ronald C. Thomas (Principal Executive Officer) * Executive Vice President, September 11, 1997 - ---------------------------------------- Chief Operating Officer and Larry M. Weaver Chief Financial Officer (Principal Financial and Accounting Officer) * Chairman and Director September 11, 1997 - ---------------------------------------- Wirt D. Walker, III * Director September 11, 1997 - ---------------------------------------- Mishal Yousef Saud Al Sabah * Director September 11, 1997 - ---------------------------------------- Marvin Bush * Director September 11, 1997 - ---------------------------------------- Robert B. Smith, Jr. By: /s/ MICHAEL JOSEPH - ---------------------------------------- Michael Joseph Attorney-in-Fact
II-4 68 SECURACOM, INCORPORATED SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------ ---------- ------------------------- ------------- ----------- ADDITIONS ------------------------- (1) (2) CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ------------------------------------ ---------- ---------- ----------- ------------- ----------- Year ended December 31, 1994 Allowance for doubtful accounts... $ 97,000 $ 97,000 ======== ======== Year ended December 31, 1995 Allowance for doubtful accounts... $ 97,000 $ 23,000 $ 120,000 ======== ======== ======== Year ended December 31, 1996 Allowance for doubtful accounts... $ 120,000 $78,000(a) $ 42,000 ======== =========== ========
- --------------- (a) Uncollectible accounts written off S-1 EX-1.1 2 SECURACOM INC. COMMON STOCK UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 1,600,000 SHARES(1) SECURACOM, INCORPORATED COMMON STOCK UNDERWRITING AGREEMENT September __, 1997 CRUTTENDEN ROTH INCORPORATED SCOTT & STRINGFELLOW, INC. As Representatives of the several Underwriters 18301 Von Karman, Suite 100 Irvine, California 92715 Dear Sirs: Securacom, Incorporated., a Delaware corporation (the "COMPANY"), and the Stockholder named on Schedule B address you as the Representatives of each of the parties listed in Schedule A hereto (herein collectively called the "UNDERWRITERS") and hereby confirm their agreements with the several Underwriters as follows: 1. Description of Shares. The Company proposes to issue and sell 1,400,000 shares of its authorized and unissued Common Stock, par value $0.01 per share (the "COMPANY FIRM SHARES"), to the several Underwriters. Moreover, a certain stockholder of the Company named in Schedule B hereto (the "SELLING STOCKHOLDER") proposes to sell to the several Underwriters 200,000 shares of the Company's Common Stock, par value $0.01 per share (the "STOCKHOLDER FIRM SHARES"). The Company Firm Shares and the Stockholder Firm Shares are hereinafter collectively referred to as the "Firm Shares." The Selling Stockholder also proposes to grant to the several Underwriters an option to purchase up to 240,000 additional shares of the Company's Common Stock, par value $0.01 per share (the "OPTION SHARES"), as provided in Section 7. The Company also proposes to sell to the Representatives, at a purchase price of $0.001 per warrant, warrants exercisable for a period of three years commencing one year after the effective date of the Registration Statement (as defined below) to purchase up to an aggregate of 140,000 shares of Common Stock at a price of $[price x 120%] per share (the "REPRESENTATIVES' WARRANTS"), - ---------------------------------- (1) Plus an option to purchase up to 240,000 additional shares from the Selling Shareholder to cover over-allotments. 2 which exercise and purchase shall be effected in accordance with the Representatives' Warrant Agreement in the form attached hereto as Exhibit A and entered into between the Company and you concurrently herewith (the "REPRESENTATIVES' WARRANT AGREEMENT"). As used in this Agreement, the term "SHARES" shall include the Firm Shares and the Option Shares. All shares of Common Stock, par value $0.01 per share, of the Company, including the Shares, are hereinafter referred to as "COMMON STOCK." 2. Representations, Warranties and Agreements. The Selling Stockholder represents and warrants to and agrees with each Underwriter that: (a) the Selling Stockholder now has valid marketable title to such number of shares of the Common Stock as are to be sold by the Selling Stockholder pursuant to this Agreement (the "Stockholder Shares"), and on each Closing Date on which the Selling Stockholder will sell Common Stock will have valid and marketable title to the Stockholder Shares free and clear of any security interests, claims, liens, equities and other encumbrances, (b) the Stockholder Shares, when delivered, will have been duly authorized and will be validly issued, fully paid and nonassessable, (c) the Selling Stockholder now has, and on each Closing Date on which the Selling Stockholder will sell Common Stock, will have, the legal right and power, and all consents, approvals and authorizations required by law, to enter into this Agreement and to sell, transfer and deliver the Stockholder Shares in the manner provided in this Agreement and that no such action will contravene any provision of applicable law or, if the Selling Stockholder is a partnership, the partnership agreement or any other agreement or other instrument binding upon the Selling Stockholder, (d) all information furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement and Prospectus is, and on each Closing Date will be, true, correct and complete, and does not, and on each Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading, (e) this Agreement has been duly and validly authorized, executed and delivered by the Selling Stockholder and constitutes a legal, valid and binding agreement of the Selling Stockholder, enforceable against it in accordance with its terms, and (f) all transactions between the Company and the Selling Stockholder have been (i) on terms which were fair to and in the best interest of the Company, (ii) approved by a majority of the Company's directors who did not have an interest in such transaction and (iii) disclosed in the Prospectus to the extent required under the Act or the Rules and Regulations. The Company represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-1 (File No. 333-26439) with respect to the Shares, including a prospectus, has been prepared by the Company in material conformity with the requirements of the Securities Act of 1933, as amended (the "ACT"), and the applicable rules and regulations (the "RULES AND REGULATIONS") of the Securities and Exchange Commission (the "COMMISSION") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses and such abbreviated registration statements as may hereafter be required. Copies of such registration 2 3 statement and amendments together with each exhibit filed therewith, of each related prospectus (the "PRELIMINARY PROSPECTUSES") and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission, pursuant to Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus), the information omitted from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations or, if Cruttenden Roth Incorporated, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if Cruttenden Roth Incorporated, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "REGISTRATION STATEMENT" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits (including exhibits incorporated by reference), in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated registration statement. The term "PROSPECTUS" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); provided, however, that if in reliance on Rule 434 of the Rules and Regulations and with the consent of Cruttenden Roth Incorporated, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by 3 4 the Company and circulated by the Underwriters to all prospective purchasers of the Shares and the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations, and such Prospectus will not be materially different from such prospectus subject to completion. Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. (c) The Company is duly incorporated and validly existing as a corporation in good standing under the laws of the State of Delaware. The Company has full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus; the Company is duly qualified to do business as foreign corporations and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company; no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; the Company is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities that are material to the conduct of its business, all of which are valid and in full force and effect; the Company is not in violation of or in breach of or in default under (nor has any event occurred that with notice, lapse of time or both would constitute a breach of or default under) its charter or bylaws or any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any 4 5 material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which it is a party or by which its properties may be bound; and the Company is not in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over it or its properties. The Company does not directly or indirectly own beneficially or of record any equity interest in or securities of, or control, any corporation, partnership association or other entity. (d) The Company has full legal right, power and authority to enter into this Agreement and the Representatives' Warrant Agreement and perform the transactions contemplated hereby and thereby. This Agreement and the Representatives' Warrant Agreement have been duly authorized, executed and delivered by the Company and are valid and binding agreements on the part of the Company, enforceable in accordance with their respective terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof or thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the making and performance of this Agreement and the Representatives' Warrant Agreement by the Company and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company is a party or by which its properties may be bound, (ii) the charter or bylaws of the Company or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, administrative agency, regulatory body, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or its properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or its properties is required for the execution and delivery of this Agreement and the consummation by the Company of the transactions herein contemplated, except such as may be required under the Act, by the NASD Regulation, Inc. (the "NASDR"), the rules of the American Stock Exchange ("AMEX"), or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) There is not pending, threatened, or to the Company's knowledge, contemplated, any action, suit, claim or proceeding against the Company, any of its officers, directors, employees, or agents or any of its properties or assets or rights, at law or in equity, before any court, administrative agency, regulatory body, government or governmental agency or body, domestic or foreign, which (i) might, individually or in the aggregate, result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company or might materially and adversely affect the properties, assets or rights of the Company, (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus 5 6 or filed as exhibits to the Registration Statement. The Company is not a party or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency, government or governmental agency or body domestic or foreign, that could result in a material adverse change in the condition (financial or other), earnings, operations, business or business prospects of the Company. (f) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "CAPITALIZATION" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Registration Statement and the Prospectus; the Shares and the Representatives' Warrants and the shares of Common Stock issuable upon exercise of the Representatives' Warrants have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement, and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement or the Representatives' Warrant Agreement, as the case may be, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Shares or the issuance and sale thereof or the Representatives' Warrants or the Common Stock issuable upon exercise thereof; and the certificates for the Shares are in due and proper form and the holders of the Shares and the Representatives' Warrants and the Common Stock issuable upon exercise thereof, after making payment therefor will not be subject to personal liability by reason of being such holders. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares or the Representatives' Warrants or the Common Stock issuable upon exercise thereof except as may be required under the Act or under state or other securities or Blue Sky laws. Except as disclosed in the Registration Statement, Prospectus and the financial statements of the Company, and the related notes thereto included in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus fairly and accurately presents the information required to be shown with respect to such plans, arrangements, options and rights. (g) Grant Thorton LLP and Amper, Politziner & Mattia, whose reports on the financial statements of the Company are included in the Registration Statement and the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited financial statements of the Company, together with the related schedules and notes, and the unaudited financial information, forming part of the Registration Statement and 6 7 Prospectus, fairly present the financial position and the results of operations and cash flows of the Company at the respective dates and for the respective periods to which they apply and have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any (i) material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (ii) transaction that is material to the Company, except transactions entered into in the ordinary course of business consistent with past practices, (iii) obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations incurred in the ordinary course of business consistent with past practices, (iv) change in the capital stock of the Company, (v) change in the outstanding indebtedness of the Company that is either material to the Company or is out of the ordinary course of business of the Company, (vi) dividend or distribution of any kind declared, paid or made on the capital stock of the Company, (vii) default in the payment of principal of or interest on any outstanding debt obligations, or (viii) loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (i) The Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, and valid and subsisting interests in all of the real property described in the Registration Statement and Prospectus as leased by it, in each case free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than as set forth in the Registration Statement and Prospectus. The agreements to which the Company is a party described in, or filed as exhibits to, the Registration Statement and Prospectus are valid agreements, enforceable by the Company, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and the Company has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted (subject to additional properties and assets as may be required in connection with expansion of the Company's operations), and all such properties are free of contractual or legal restrictions that would impair the use by the Company of such properties in its business for the purposes described in the Registration Statement and the Prospectus. 7 8 (j) The Company has correctly and timely filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown thereon as due and all assessments received by it to the extent that the same have become due. Neither the Company nor any of its officers has any knowledge of any tax deficiency of the Company or any tax proceeding or action pending or threatened against the Company. There are no liens for taxes on the assets of the Company, except for taxes not yet due. There are no audits pending of the Company's tax returns (federal, state, local or foreign), and there are no claims which have been or, to the best of the Company's knowledge, may be asserted relating to any such tax returns which, if determined adversely, would result in the assertion by any governmental agency of any deficiency material to the Company. There have been no waivers of any statute of limitations by the Company relating to tax returns (federal, state, local and foreign). The Internal Revenue Service has not asserted or threatened to assert any assessment, claim or liability for taxes due or to become due in connection with any review or examination of the tax returns of the Company for any year. (k) The Company maintains insurance with insurers of recognized financial responsibility of the types and in the amounts prudent for its business, including, but not limited to, insurance covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism, errors and omissions, and all other risks customarily insured against, all of which insurance is in full force and effect; the Company has not been refused any insurance coverage sought or applied for other than refusal of certain insurance coverages that were discontinued by the carriers thereof; and the Company does not have any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (l) The Company is in compliance in all material respects with all federal, state and local laws and regulations respecting the employment of its employees and employment practices, terms and conditions of employment and wages and hours relating thereto. There are no pending investigations involving the Company by the United States Department of Labor or any other governmental agency responsible for the enforcement of such federal, state or local laws and regulations. There is no labor strike, dispute or work stoppage or lockout pending, or, to the knowledge of the Company, threatened, against or affecting the Company, and no such labor strike, dispute, work stoppage or lockout has occurred with respect to any employees of the Company, during the two years prior to the date of this Agreement. No union organization activity is in progress with respect to the employees of the Company, and no question concerning representation exists with respect to such employees. No unfair labor practice charge or complaint against the Company is pending or, to the knowledge of the Company, threatened, before the National Labor Relations Board or similar foreign authorities, and no such charge or complaint against the Company has been filed during the past two years. There is no pending, or, to the knowledge of the Company, threatened, grievance that, if adversely decided, would have a material adverse effect on the business, results of operations, prospects or financial condition of the Company. No charges with respect to or relating to the Company are pending before the Equal Employment Opportunity Commission or any similar state, local or foreign agency 8 9 responsible for the prevention of unlawful employment practices, and no such charges have been filed with respect to the Company. (m) The Company owns or possesses rights to use all know-how necessary to conduct its business as now conducted and as described in the Registration Statement and Prospectus; no patent rights, or copyrights are utilized in the business of the Company; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others by the Company with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (n) The Common Stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and is approved for quotation on the AMEX, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the AMEX, nor has the Company received any notification that the Commission or the NASD is contemplating terminating such registration or listing. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 ACT"), and the rules and regulations thereunder, and the Company has in the past conducted, and the Company intends in the future to conduct, its affairs in such a manner as to ensure that it is not and will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) None of the Company, or its officers, directors, employees or agents has at any time during the last five (5) years made (i) any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof, or (iii) any other payment of funds of the Company prohibited by law, and no funds of the Company have been set aside for any payment prohibited by law. (r) Other than the over-allotment option granted to the Underwriters, the Company has not taken and will not take, directly or indirectly, any action designed to or that 9 10 might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares (except for any action taken by the Underwriters). (s) Except as otherwise set forth in the Registration Statement and the Prospectus, each of the Company's officer, director and stockholder's who own 1% or more of the outstanding Common Stock has agreed in writing that such person will not, except as described below, for a period of nine months from the date of the final Prospectus (the "LOCK-UP PERIOD"), sell, offer to sell, solicit an offer to buy, contract to sell, loan, pledge, grant any option to purchase, or otherwise transfer or dispose of (collectively, a "DISPOSITION"), any shares of Common Stock, or any securities convertible into or exercisable or exchangeable for Common Stock (collectively, "SECURITIES"), now owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of disposition otherwise than on exercise (on a cash or cashless basis not resulting in any public sale of Common Stock) of Common Stock options outstanding, it being understood, however, that the shares of Common Stock received (net of shares delivered to the Company in a traditional cashless exercise thereof) by such person shall be subject to the terms of the Lock-Up Agreement (as defined below). The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging, pledge or other transaction which is designed to or may reasonably be expected to lead to or result in a Disposition by any stockholder or any other person of any Securities, whether or not owned by a stockholder, during the Lock-up Period, even if such Securities would be disposed of by someone other than such stockholder. Such prohibited hedging, pledge or other transactions would include, without limitation, any short sale (whether or not against the box), any pledge of shares covering an obligation that matures, or could reasonably mature during the Lock-Up Period, or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, each such person has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company as of the Closing Date and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and stockholders have agreed to such or similar restrictions (the "LOCK-UP AGREEMENTS") presently in effect. The Company hereby represents and warrants that it will not purport to release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Cruttenden Roth Incorporated. (t) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in 10 11 accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (u) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers, directors, employees, or consultants of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (v) Other than Cruttenden Roth Incorporated, on behalf of the several Underwriters, no person is or will be owed any finders fee or commission or similar payment in connection with the transactions contemplated by this Agreement. (w) There are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the Act, except (i) as described in the Registration Statement and the Prospectus and (ii) that the Underwriters have registration rights with respect to the Representatives' Warrants and the underlying Common Stock as described in the Representatives' Warrant Agreement. (x) The Company has conducted and is conducting its business and operations in compliance with all applicable federal, state, local and foreign statutes, laws, rules, regulations, ordinances, codes, decisions, decrees, directives and orders. (y) The Company has complied with all provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida statutes, and all regulations promulgated thereunder relating to issuers doing business with Cuba. (z) Except as described in the Prospectus, to the Company's knowledge, there are no rulemaking or similar proceedings before any federal, state, local or foreign government or regulatory bodies which involve or affect the Company which, if the subject of an action unfavorable to the Company would have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (aa) To the knowledge of the Company, no officer, director, employee, or consultant of the Company is in violation of any non-competition, non-disclosure, confidentiality or other similar agreement with any party other than the Company, and no such person is expected to be in violation thereof as a result of the business conducted or expected to be conducted by the Company as described in the Prospectus or such person's performance of his obligations to the Company. (bb) The Company has not violated any foreign, federal, state or local law or regulation relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), and the Company does not anticipate incurring any material costs or liabilities (including without 11 12 limitation any capital or operating expenditures) in connection with any clean-up or remediation of hazardous or toxic substances or wastes, pollutants or contaminants, related closure of properties or compliance with Environmental Laws, or any federal or state law relating to discrimination in the hiring, promotion or pay of employees or any applicable federal or state wages and hours laws, or any provisions of the Employee Retirement Income Security Act or the rules and regulations promulgated thereunder, which in each case might result in any material adverse effect on the properties, assets, operations, business, business prospects or condition (financial or other) of the Company. (cc) The Company has such permits, licenses, franchises and authorizations of governmental or regulatory authorities ("permits"), including without limitation under any applicable Environmental Laws, as are necessary to own, lease and operate its properties and to conduct its business; the Company has fulfilled and performed all of its material obligations with respect to such permits and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any such permit; and such permits contain no restrictions that are materially burdensome to the Company. (dd) All transactions during the Company's current fiscal year and last three (3) full fiscal years between the Company and any person who is or was during such period an officer, director or 5% or greater stockholder of the Company have been (i) on terms which were fair to and in the best interest of the Company, (ii) approved by a majority of the Company's directors who did not have an interest in such transactions and (iii) disclosed in the Prospectus to the extent required under the Act or the Rules and Regulations. (ee) The Company is not required to register as a "broker" or "dealer" in accordance with the provisions of the Exchange Act or the rules or regulations promulgated thereunder. (ff) The Company is in compliance with the Foreign Corrupt Trade Practices Act. 3. Purchase, Sale and Delivery of Shares. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company the Company Firm Shares and the Selling Stockholder agrees to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Selling Stockholder the Stockholder Firm Shares, at a purchase price of $[PRICE LESS DISCOUNT] per share, the respective number of Firm Shares set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Firm Shares to be purchased by the several Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by wire transfer, certified or official bank check or checks drawn in same day funds, payable to the order of the Company, at the offices of Gibson, Dunn & 12 13 Crutcher LLP, 1801 California Street, Suite 4100, Denver, Colorado 80202 (or at such other place as may be agreed upon between the Representatives and the Company), at 8:00 a.m. Colorado time, (a) on the third (3rd) full business day following the first day that Shares are traded or (b) if this Agreement is executed and delivered after 2:30 p.m. Colorado time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (c) at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10), such time and date of payment and delivery being herein called the "CLOSING DATE"; provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d), the Representatives may, in its sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you shall specify at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. The Underwriters intend to make a public offering (as described in Section 11) of the Firm Shares at the public offering price of $[PRICE TO PUBLIC] per share. After the public offering the Underwriters may from time to time, in their discretion, vary the public offering price. The information set forth on the inside front cover page of the Prospectus (insofar as such information relates to the Underwriters) concerning stabilization, syndicate short covering transactions and penalty bids, and under the first (including the table listing the Underwriters), second, third, eighth and ninth paragraphs under the caption "Underwriting" in the Prospectus constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. Further Agreements of the Company and the Selling Stockholder. The Company and the Selling Stockholder agree with the several Underwriters that: 13 14 (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations have been filed, within the time period prescribed, with the Commission pursuant to Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("UNDERWRITERS' COUNSEL"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, and provide you with copies of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. 14 15 (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement, or suspension of the qualification of the Shares for sale in any jurisdiction, or of the initiation or threat of any proceeding for any such purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts (including by providing full cooperation with your counsel, whose services in this matter are required and which you and the Company will seek to expedite) to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction for such purpose. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first full business day following the first day that Shares are traded, copies of the Registration Statement (two of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. Notwithstanding the foregoing, if Cruttenden Roth Incorporated, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of five (5) years after the date hereof, the Company will furnish to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and, upon request by a stockholder, unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's stockholders, (ii) concurrently with furnishing to its stockholders, a balance sheet of 15 16 the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the NASD, (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared by the Company, and (vi) any additional information of a public nature concerning the Company, or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and such subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) The terms of Section 10 of that certain Letter Agreement dated August 21, 1997 between you and the Company (the "LETTER AGREEMENT") are hereby incorporated by reference and made obligations of the Company and Cruttenden Roth Incorporated as part of this Agreement notwithstanding that the Letter Agreement shall have ceased to be of full force or effect for any other purpose. If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a), or if the Underwriters shall terminate this Agreement pursuant to Section 11(a) or 11(b), then the provisions of Section 10 of the Letter Agreement shall govern payment and reimbursement obligations of the parties notwithstanding that the Letter Agreement shall have ceased to be in full force or effect for any other purpose. (j) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (k) During the Lock-up Period, the Company will not, without the prior written consent of Cruttenden Roth Incorporated, effect the Disposition of, directly or indirectly, 16 17 any Securities other than the sale of the Firm Shares and the Option Shares hereunder and the Company's issuance of options or Common Stock under the Company's presently authorized stock option and stock purchase plans described in the Registration Statement and the Prospectus. (l) The Company and the Selling Stockholder shall pay to Cruttenden Roth Incorporated a nonaccountable expense allowance equal to two and one-half percent (2.5%) of the total Price to Public with respect to Shares sold by each of them as shown on the front cover of the Prospectus, including, if exercised, with respect to the over-allotment option. Cruttenden Roth Incorporated acknowledges that $30,000 of the amount payable by the Company pursuant to this paragraph has already been paid. (m) The Company will use its best efforts to cause the Shares to be listed on the AMEX. (n) The Company will refrain from investing the proceeds of the sale of the Shares in such a manner as to cause the Company to become an "investment company" within the meaning of the 1940 Act. (o) The Company will furnish to you as early as practicable before the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, but not later than two business days prior thereto, a copy of the latest available unaudited interim consolidated financial statements, if any, of the Company that have been read by the Company's independent certified public accountants as stated in their letters to be furnished pursuant to Section 6(f). (p) On the Closing Date, the Company will sell the Representatives' Warrants to the Representatives. (q) The Company agrees to take, or refrain from taking, any and all actions necessary so that any shares of Common Stock issuable upon the exercise of warrants or options to purchase Common Stock shall not become freely trade during the Lock-Up Period. Without limiting the foregoing, the Company shall not change the terms of any outstanding warrants to provide for a cashless exercise, register any such shares under the Act, or set the vesting schedule of any newly issued options or warrants so that such options or warrants (or any portion thereof) vest before the expiration of the Lock-Up Period. (r) For a period of two years after the Closing Date or until an offering occurs which Cruttenden Roth Incorporated ("Cruttenden") has declined to exercise its rights under this Section, the Company shall notify Cruttenden in writing at least ten (10) days before (i) the proposed private or public offering of any debt or equity securities (other than bank debt or similar financing) by the Company or by any of its majority owned or controlled subsidiaries (collectively referred to herein as the Company) or (ii) the proposed public offering of any equity securities by any of its stockholders owning at least five percent of the Company's Common Stock ("PRINCIPAL SHAREHOLDERS") so that Cruttenden or, at its option, a group of associated investment bankers shall have the right of first refusal to manage or co-manage the offering. Cruttenden agrees to notify the Company of Cruttenden's intention to exercise the right of first refusal within 17 18 ten (10) days of receipt by Cruttenden of such notice from the Company. If Cruttenden fails to exercise the right of first refusal within the ten-day period and the terms of the proposed subsequent financings thereafter are altered in any material respect, the Company shall again offer to Cruttenden the right of first refusal to manage or co-manage subsequent financings upon such altered terms and Cruttenden shall have ten (10) days from the date of receipt to notify the Company of its acceptance. 5. Expenses. (a) The Company agrees with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Representatives' Warrant Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any; the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASDR filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including fees and disbursements of Underwriters' Counsel and filing fees in connection with such NASDR filings and Blue Sky qualifications); the cost of any listing of the Shares on any securities exchange or qualification of the Shares for inclusion in the AMEX; registration and other fees payable to the Commission; the cost of preparing bound volumes of the public offering documents for the Representatives and Underwriters' Counsel; the Company's road show expenses; and all other expenses directly incurred by the Company in connection with the performance of its obligations hereunder. The provisions of this Section 5(a)(i) are intended to relieve the Underwriters from the payment of the expenses and costs which the Company hereby agrees to pay. (ii) In addition to its other obligations under Section 8(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a), it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the 18 19 highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "PRIME RATE"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(b), the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b), they will reimburse the Company on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) In addition to its other obligations under Section 8(c), the Selling Stockholder agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(c), it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Selling Stockholder's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Selling Stockholder together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (d) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(b) and 5(c), including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASDR. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii), 5(b) and 5(c) and will not resolve the 19 20 ultimate propriety or enforceability of the obligation to indemnify for expenses that is created by the provisions of Sections 8(a), 8(b) and 8(c) or the obligation to contribute to expenses that is created by the provisions of Section 8(e). 6. Conditions of Underwriters' Obligations. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., New York time, on the date following the date of execution and delivery of this Agreement, or such later date and time as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued, no suspension of the qualification of the Shares for sale in any jurisdiction shall have occurred, and no proceedings for any such purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission or any other regulatory authority of appropriate jurisdiction, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to the Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any (i) change in the condition (financial or otherwise), earnings, operations, properties, assets, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse to the Company and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus; (ii) any transaction that is material to the Company entered into or committed to by the Company other than as described in the Registration Statement and the Prospectus; or (iii) any material obligation, contingent or otherwise, directly or indirectly, incurred by the Company other than as described in the Registration Statement and the Prospectus. (d) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of Dyer, Ellis & Joseph, P.C., counsel for the Company, dated the Closing Date or such later date on which Option Shares are to be purchased addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: 20 21 (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus, and is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the character of the business conducted by it or the location of the properties owned or leased by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse change in the condition (financial or otherwise), earnings, operations, properties, assets, business or business prospects of the Company; (ii) The Company has all requisite corporate power and authority and, to such counsel's knowledge, all necessary authorizations, approvals, consents, orders, licenses, certificates and permits required to own, lease and license its assets and properties and to conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. The Company has all requisite corporate power and authority and all necessary authorizations, approvals, consents, orders, licenses, certificates and permits to enter into, deliver and perform this Agreement, and, to issue and sell the Shares and the Representatives' Warrants, other than those authorizations, approvals, consents, orders licenses, certificates and permits required under state and foreign securities laws. To such counsel's knowledge, the Company does not control, directly or indirectly, any corporation, partnership, joint venture, association or other business organization. (iii) The Company had authorized, issued and outstanding capital stock as of June 30, 1997 as described under the caption "Capitalization" in the Prospectus and the Common Stock, the Representatives' Warrants, and the rights issued under the shareholder rights plan conform to the descriptions thereof contained under the caption "Description of Capital Stock" in the Prospectus. The outstanding shares of the Company's capital stock have been, and the Shares, the Representatives' Warrants, the Common Stock underlying the Representatives' Warrants (the "Warrant Shares") and the shares of Common Stock to be issued upon the exercise of the warrants and options described in the Prospectus, upon issuance, delivery and payment therefor in the manner herein described, will be, duly authorized, validly issued, fully paid and non-assessable. The certificates for the Shares, the Representatives' Warrants and the Warrant Shares, are in due and proper form under the corporations law of the State of the Company's organization. There are no preemptive or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of the Company's capital stock pursuant to the Company's certificate of incorporation, bylaws, other governing documents or any agreements or other instruments to which the Company is a party or by which any of them is bound, other than certain rights pursuant to stock purchase agreements entered into between the Company and certain of its current stockholders that have been waived or satisfied in connection with the offering or sale of the Shares contemplated by this Agreement; and to such counsel's knowledge, after conducting a reasonable investigation, neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, which have 21 22 not been waived or satisfied, for or relating to the registration of any shares of the Company's capital stock. All corporate action required to be taken on the part of the Company for the authorization, issuance and sale of the Shares, the Representatives' Warrants and the Warrant Shares by the Company has been duly and validly taken; (iv) The Registration Statement and all post-effective amendments thereto have become effective under the Act and, to such counsel's knowledge, after conducting a reasonable investigation, such counsel has reasonable grounds to believe and does believe that no stop order proceedings with respect thereto have been instituted or are pending before or threatened by the Commission and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations have been made; (v) The Registration Statement and the Prospectus and any amendment or supplement thereto, as of their respective effective dates comply as to form in all material respects with the requirements of the Act and the Rules and Regulations (except that counsel need express no opinion on the financial statements or other financial data); (vi) The Company is not, or with the giving of notice or lapse of time or both will not be, in violation of or in default under, nor will the execution or delivery hereof or consummation of the transactions contemplated hereby result in a violation of, or constitute a default under, the certificate of incorporation, bylaws or other governing documents of the Company, or any agreement, indenture or other instrument to which the Company is a party or by which it is bound, or to which any of their properties are subject and of which such counsel is aware or which has been filed as an Exhibit to the Registration Statement, nor will the performance by the Company of its obligations hereunder violate any law, rule or regulation of any governmental agency or body having jurisdiction over the Company, or its properties, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or assets of the Company. Except for permits and similar authorizations required under the Act, the NASDR, and the securities or Blue Sky laws of certain jurisdictions and for such permits and authorizations which have been obtained, no consent, approval, authorization or order of any court, governmental agency or body or financial institution is required in connection with execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement; (vii) The descriptions of matters in the Registration Statement and Prospectus under the headings "Description of Capital Stock" and "Shares Eligible for Future Sale" are accurate and fairly present the information required to be shown; and such counsel, after conducting a reasonable investigation, do not know of or believe that any contracts or documents of a character required to be summarized or described therein or to be filed as exhibits thereto which are not so summarized, described or filed, nor after conducting a reasonable investigation do such counsel know of or believe that there is any pending or threatened litigation or any governmental proceeding, statute or regulation, disclosed by the Act, the Exchange Act and the respective rules and regulations thereunder. All descriptions in the Prospectus of statutes, regulations, legal or governmental proceedings, contracts and other documents, insofar as such statements 22 23 constitute a summary of the legal matters, documents or proceeding referred to therein are accurate and fairly present the information required to be shown; and such counsel, after conducting a reasonable investigation, do not know of or believe that any contracts or documents of a character required to be summarized or described therein or to be filed as exhibits thereto which are not so summarized, described or filed, nor after conducting a reasonable investigation do such counsel know of or believe that there is any pending or threatened litigation or any governmental proceeding, statute or regulation required to be described in the Prospectus which is not so described; (viii) The Underwriting Agreement and the Representatives' Warrant Agreement have been duly authorized, executed and delivered by the Company, and each constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by Federal or State securities laws and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles (regardless of whether such enforceability is considered in a proceeding at law or in equity) including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. (ix) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended; (x) To such counsel's knowledge, the Company is in compliance with the Foreign Corrupt Trade Practices Act; and (xi) To such counsel's knowledge after conducting a reasonable investigation, there are no persons with registration or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the Securities Act, except as waived or disclosed in the Registration Statement and the Prospectus. In addition, such counsel shall state that such counsel has acted as outside corporate legal counsel to the Company and participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads such counsel to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial information derived therefrom, as to which such counsel need express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date 23 24 on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. To the extent deemed advisable by such counsel, they may rely as to matters of fact on certificates of officers of the Company and public officials and on the opinions of other counsel satisfactory to the Underwriters as to matters which are governed by laws other than the Federal laws of the United States and the Delaware General Corporation Law; provided that such counsel shall state that they believe that they and the Underwriters are justified in relying on such certificates and other opinions. Copies of such certificates and other opinions shall be furnished upon request to the Underwriters and counsel for the Underwriters. (e) You shall have received on the Closing Date an opinion of Dyer, Ellis & Joseph, P.C., counsel for the Selling Stockholder, dated the Closing Date, to the effect that: (i) This Agreement has been duly authorized, executed and delivered by or on behalf of the Selling Stockholder and constitutes a legal, valid and binding agreement of Selling Stockholder and is enforceable against the Selling Stockholder in accordance with its terms, except as the right to indemnity under this Agreement may be limited by Federal or state securities laws and except as (i) may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and (ii) is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); (ii) The execution, delivery and performance of this Agreement by the Selling Stockholder will not contravene, any provision of applicable law, (ii) the certificates of incorporation, bylaws or other governing documents of the Selling Stockholder that is a corporation, or the articles of partnership of the Selling Stockholder that is a limited partnership, or the trust agreement of the Selling Stockholder that is a trust or (iii) any agreement or other instrument known to such counsel to be binding upon the Selling Stockholder, no consent, approval or authorization of any governmental body is required for the performance of this Agreement by the Selling Stockholder, except such as are specified and have been obtained and except such as may be required by federal securities laws and state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters; (iii) The Selling Stockholder has valid marketable title to the Shares to be sold by the Selling Stockholder and has the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by the Selling Stockholder; (iv) The Custody Agreement signed by the Selling Stockholder and the Custodian relating to the deposit of the Shares to be sold by the Selling Stockholder, and the Power-of-Attorney appointing certain individuals as the Selling Stockholder's attorneys-in-fact to the extent set forth therein, relating to the transactions contemplated 24 25 hereby and by the Registration Statement, have been duly authorized, executed and delivered by the Selling Stockholder and are valid and binding agreements of the Selling Stockholder enforceable against the Selling Stockholder in accordance with their terms, except as (i) may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and (ii) is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law); and (v) Delivery of the certificates for the Shares to be sold by the Selling Stockholder pursuant to this Agreement to each of the several Underwriters (who such counsel may assume have purchased the Shares in good faith and without notice of any adverse claim) will pass to each such Underwriter marketable title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. With respect to all of paragraph (e) above, counsel may rely, to the extent such counsel deems appropriate, as to matters of fact upon the representations of the Selling Stockholder contained herein and in the aforementioned Custody Agreements and Powers of Attorney and in other documents and instruments and opinions of local counsel; provided however, that copies of such Custody Agreements and Powers of Attorney and of such other documents and instruments shall be delivered to the Underwriters and shall be reasonably satisfactory to your counsel and, in the case of local counsel, such local counsel shall be reasonably satisfactory to your counsel, (a) a copy of each opinion from local counsel so relied upon shall be delivered to you and shall be reasonably satisfactory to your counsel and (b) counsel for each Selling Stockholder shall state that they have no reason to believe that they are not justified in relying thereon. With respect to all of paragraph (e) above, counsel may assume the legal capacity and the absence of any legal disability to contract as to each Selling Stockholder that is a natural person. The opinions as to all of paragraph (e) above shall state that such opinions may be relied upon by the Custodian and the attorneys-in-fact appointed under the Powers of Attorney executed by the Selling Stockholder. (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Gibson, Dunn & Crutcher LLP, in form and substance reasonably satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, letters from Grant Thornton LLP, ("Grant") and Amper Politziner & Mattia ("Amper"), Independent Auditors ("ACCOUNTANTS"), addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be (in each case, the "BRING DOWN LETTERS"), confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in a letter delivered to you concurrently with the execution of this 25 26 Agreement (herein called the "ORIGINAL LETTERS"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letters are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letters that are necessary to reflect any changes in the facts described in the Original Letters since its date, or to reflect the availability of more recent financial statements, data or information. The Bring Down Letters shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Grant shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the balance sheet of the Company as of December 31, 1996 and related combined statements of operations, equity and cash flows for the twelve (12) months ended December 31, 1996, (iii) state that Grant has performed the procedures set out in Statement of Accounting Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Grant as described in SAS 71 on the financial statements for the six-month period ended June 30, 1997 (the "QUARTERLY FINANCIAL STATEMENTS"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, (v) state that nothing came to their attention that caused them to believe that the financial statements included in the Registration Statement and Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Rules and Regulations and that any adjustments thereto have not been properly applied to the historical amounts in the compilation of such statements, and (vi) address other matters agreed upon by Grant and you. The Original Letter from Amper shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the balance sheet of the Company as of December 31, 1995 and related combined statements of operations, equity and cash flows for each of the two years ended December 31, 1995, (iii) state that nothing came to their attention that caused them to believe that the financial statements included in the Registration Statement and Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Rules and Regulations and that any adjustments thereto have not been properly applied to the historical amounts in the compilation of such statements, and (iv) address other matters agreed upon by Amper and you. (h) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated 26 27 the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement and the Representatives' Warrant Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and Regulations, and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any (A) material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (B) transaction that is material to the Company, except transactions entered into in the ordinary course of business consistent with past practices, (C) obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations incurred in the ordinary course of business consistent with past practices, (D) change in the capital stock of the Company, (E) change in the outstanding indebtedness of the Company that is material to the Company or is out of the ordinary course of business of the Company, (F) dividend or distribution of any kind declared, paid or made on the capital stock of the Company, (G) default in the payment of principal of or interest on any outstanding debt obligations, or (H) loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. 27 28 (i) The Company shall have obtained and delivered to you an agreement from each officer, director and 1% stockholder of the Company in writing prior to the date hereof that such person will not, except as described below, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than on exercise (on a cash or cashless basis not resulting in any public sale of Common Stock) of Common Stock Options outstanding, it being understood, however, that the shares of Common Stock received (net of shares delivered to the Company in a traditional cashless exercise thereof) by such person upon exercise thereof shall be subject to the terms of the Lock-Up Agreement. The foregoing restriction shall have been expressly agreed to preclude the holder of the Securities from engaging in any hedging, pledge or other transaction which is designed to or may reasonably be expected to lead to or result in a Disposition by any stockholder or any other person of any Securities, whether or not owned by a stockholder, during the Lock-Up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging, pledge or other transactions would include, without limitation, any short sale (whether or not against the box), any pledge of shares covering an obligation that matures or could reasonably mature during the Lock-Up Period, or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. (j) The Shares have been approved for listing on the AMEX. (k) The Company shall have executed and delivered the Representatives' Warrant Agreement and shall have tendered to the Representatives the Representatives' Warrants. (l) The Company shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers of the Company) as to the accuracy of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 7. Option Shares. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Stockholder hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 240,000 Option Shares at the purchase price per share for the Firm Shares set forth 28 29 in Section 3. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of forty-five (45) days after the date on which the Firm Shares are initially offered to the public by giving written notice (the "OPTION NOTICE") to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in same-day funds, payable to the order of the Company. In the event of any breach of such definitive certificate delivery obligations, the Company shall reimburse the Underwriters for the interest lost and any other expenses borne by them by reason of such breach. Such delivery and payment shall take place at the offices of Gibson, Dunn & Crutcher LLP, 1801 California Street, Suite 4100, Denver, Colorado or at such other place as may be agreed upon between the Representatives and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company after the date two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you shall specify at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a), the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions 29 30 hereof, to the performance by the Company of its obligations hereunder, to the conditions set forth in Section 6, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the satisfaction of any of the conditions herein contained. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Section 2720 of the Conduct Rules of the NASDR), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages, judgments, liabilities and expenses (including the fees and expenses of counsel and other expenses in connection with investigating, defending or settling any such action or claim) (or actions in respect thereof), as they are incurred and regardless of whether the Indemnitee is a party to the litigation, if any, arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d). 30 31 The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act and each of the agents, employees, officers and directors of each Underwriter and person who so controls any Underwriter. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, to which the Company may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages, judgments liabilities and expenses (including the fees and expenses of counsel and other expenses in connection with investigating, defending or settling any such action or claim) (or actions in respect thereof), as they are incurred and regardless of whether the Indemnitee is a party to the litigation, if any, arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (c) The Selling Stockholder agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Section 2720 of the Conduct Rules of the NASDR), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages, judgments, liabilities and expenses (including the fees and expenses of counsel and other expenses in connection with investigating, defending or settling any such action or claim) (or actions in respect thereof), as they are incurred and regardless of whether the Indemnitee is a party to the litigation, if any, arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Selling Stockholder herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in 31 32 the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Selling Stockholder shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(c) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d). The indemnity agreement in this Section 8(c) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act and each of the agents, employees, officers and directors of each Underwriter and person who so controls any Underwriter. This indemnity agreement shall be in addition to any liabilities which the Selling Stockholder may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8 except to the extent that it has been prejudiced by such omission. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified 32 33 party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party hereunder for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the public offering price, and the Company is responsible for the remaining portion, provided, however, that (i) no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has otherwise been required to pay and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(e) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter or the Company within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (f) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this 33 34 Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 9. Representations, Warranties, Covenants and Agreements to Survive Delivery. All representations, warranties, covenants and agreements of the Company, the Selling Stockholder and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange Act, or by or on behalf of the Company, or any of its officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. Substitution of Underwriters. If any Underwriter or Underwriters shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted 34 35 underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, then, other than as set forth in the Letter Agreement, the Company shall not be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. Effective Date of this Agreement and Termination. (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., California time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(i) and 8. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by The Nasdaq Stock Market, Inc., or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by The Nasdaq Stock Market, Inc., or if a banking 35 36 moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 4(i) and 8. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 12. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715, telecopier number (714) 852-9603, Attention: General Counsel; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to 13470 Washington Blvd., Suite 300, Marina del Rey, California 90292, telecopier number (310) 301-1569, Attention: Chief Executive Officer. 13. Parties. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company shall be entitled to act and rely upon any statement, 36 37 request, notice or agreement made or given by you jointly or by Cruttenden Roth Incorporated on behalf of you. 14. Applicable Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. 15. Counterparts. This Agreement may be signed in several counterparts, each of which will constitute an original. If the foregoing correctly sets forth the understanding among the Company and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between the Company and the several Underwriters. Very truly yours, SECURACOM, INCORPORATED By: ------------------------ Name: ----------------------- Title: ---------------------- Accepted as of the date first above written: CRUTTENDEN ROTH INCORPORATED SCOTT & STRINGFELLOW, INC. On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By CRUTTENDEN ROTH INCORPORATED By: ---------------------------------------------- Name: ---------------------------------------------- Title: ---------------------------------------------- 37 38 SCHEDULE A
Number of Firm Shares Underwriters to be Purchased Cruttenden Roth Incorporated Scott & Stringfellow, Inc. ========================================= Total
EA972380.066/1+ 38 EX-1.2 3 WARRANT AGREEMENT 1 EXHIBIT 1.2 WARRANT AGREEMENT This WARRANT AGREEMENT (this "AGREEMENT") is entered into as of __________, 1997 by and among Securacom, Incorporated, a Delaware corporation (the "COMPANY"), and Cruttenden Roth Incorporated ("CRUTTENDEN") and Scott & Stringfellow, Inc. ("SCOTT" and together with Cruttenden, the "REPRESENTATIVES"). A. The Representatives have agreed to act as the Representatives of the several underwriters in connection with the proposed public offering by the Company pursuant to that certain Underwriting Agreement with the Company dated _______________, 1997 (the "UNDERWRITING AGREEMENT") of up to 1,600,000 shares in the aggregate of its Common Stock, par value $0.01 per share (the "COMMON STOCK"), including 240,000 of such shares covered by an over-allotment option (the "PUBLIC OFFERING"); and B. Pursuant to Section 4(p) of the Underwriting Agreement and as part of the Representatives' compensation in connection with the Public Offering, the Company has agreed to sell to the Representatives, at a price of $0.01 per warrant, warrants (the "WARRANTS") to purchase, at a price of $______ per share, up to an aggregate of 140,000 shares of Common Stock (hereinafter, and as the number thereof may be adjusted as set forth herein, the "WARRANT SHARES"). In consideration of the foregoing premises and the mutual agreements herein and in the Underwriting Agreement and for other good and valuable consideration, the parties hereto agree as follows: 1. Issuance of Warrants: Form of Warrant Certificate. The Company shall issue to each of the Representatives, on the Closing Date referred to in the Underwriting Agreement, that number of Warrants set forth opposite such Representative's name on Schedule 1. Certificates representing the Warrants in substantially the form of Exhibit A (the "WARRANT CERTIFICATES") shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman of the Board, Chief Executive Officer or Vice President of the Company, attested by the manual or facsimile signature of the Secretary or an Assistant Secretary of the Company, and delivered to the Representatives on the Closing Date referred to in the Underwriting Agreement, and thereafter to successive registered Holders (as defined below). Warrant Certificates bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any one of them shall have ceased to hold such offices prior to the delivery of such Warrant Certificates or did not hold such offices on the date of this Agreement. Warrant Certificates shall be dated as of the date of execution thereof by the Company either upon initial issuance or upon division, exchange, substitution or transfer. 2. Term and Exercise of Warrants. 2.1 Each Warrant entitles the registered owner thereof to purchase one share of Common Stock (subject to adjustment as set forth herein) at any time from 10:00 a.m., 2 California time, on ______________, 1998 (the "INITIATION DATE") until 6:00 p.m., California time, on _______________, 2001 (the "EXPIRATION DATE") at a purchase price of $_______ (subject to adjustment as set forth herein) (the "WARRANT PRICE"). Subject to the provisions of this Agreement, each registered Holder (as defined below) of Warrants shall have the right to exercise the Warrants and purchase the underlying Warrant shares, either in their entirety or from time to time, effective as of any date specified by the Holder from and after the Initiation Date and on or before the Expiration Date in the manner set forth in the Warrant Certificate. Payment of the aggregate Warrant Price for all Warrant Shares for which Warrants are exercised shall be made, in the discretion of the Holder, in cash or by certified or official bank check or by net issuance, or a combination thereof. Exercise by net issuance shall be effected without payment by the Holder of any cash or other consideration by the Company's withholding from the Warrant Shares that would otherwise be issued upon exercise if the exercise price were paid in cash, that number of Warrant Shares which, when multiplied by the Closing Price for the day immediately preceding the date of exercise, equals the aggregate Warrant Price for the Warrants so exercised. 2.2 Notwithstanding the foregoing, if at 6:00 p.m., California time on the Expiration Date, any Holder of Warrants has not exercised its Warrants and has not notified the Company that it waives automatic issuance pursuant to this Section 2.2, then all such unexercised Warrants shall be automatically converted into a number of shares of Common Stock of the Company equal to: (A) the number of shares of Common Stock then issuable upon exercise of all such unexercised Warrants minus (B) a number of shares of Common Stock equal to the quotient obtained by dividing the aggregate Warrant Price for all such unexercised Warrants by the Closing Price (as defined in Section 11.1(c) below) for the Common Stock on the Expiration Date. 2.3 Upon exercise of Warrants and payment of the applicable Warrant Price, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the registered Holder of such Warrants and in such name or names as such registered Holder may designate, a certificate or certificates for the number of full Warrant Shares so purchased upon the exercise of such Warrants (net of any Warrant Shares withheld in payment of the Warrant Price, if paid by net issuance), together with cash, as provided in Section 12, in respect of any fraction of a share otherwise issuable upon such exercise and, if the number of Warrants represented by a Warrant Certificate shall not be exercised in full, a new Warrant Certificate for the number of Warrants represented by the Warrant Certificate surrendered but not exercised. Any person(s) designated by the exercising Holder as the holder of the Warrant Shares issuable upon exercise shall be deemed to have become a holder of record of such shares as of the date of the surrender of such Warrants and payment of the Warrant Price, or such later date as the exercising Holder may specify, notwithstanding that the stock transfer books of the Company may then be closed or that certificates representing the Warrant Shares have not been delivered. 3. Registration. The Warrant Certificates shall be numbered and shall be registered on the books of the Company (the "WARRANT REGISTER") as they are issued. The Company shall be entitled to treat the registered holder of any Warrant Certificate (notwithstanding any notation of ownership or other writing made on the Warrant Certificate made by anyone) on the Warrant Register (the "HOLDER") as the owner in fact thereof and of the Warrants represented thereby for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant Certificate or the Warrants represented thereby on the part of any other person, and shall 2 3 not be liable for any registration or transfer of Warrants registered in the name of a fiduciary or the nominee of a fiduciary. The Warrant Certificates shall be registered initially in the names of each of the Representatives and in the denominations set forth for each Representative on Schedule 1, or in such other denominations as any Representative may request in writing to the Company with respect to the Warrants to be issued to such Representative. 4. Transfers. 4.1 Until ________________, 1998, the Warrants will not be sold, transferred, assigned or hypothecated except to (a) bona fide officers or partners of the Representatives; (b) a successor to the Holder in a merger or consolidation; (c) a purchaser of all or substantially all of the Holder's assets; (d) any person receiving the Warrants from a permitted transferee at death pursuant to will, trust or the laws of intestate succession; (e) any other underwriter or selling group member that participated in the Public Offering and is a member of the NASD, or bona fide officers or partners thereof; or (f) any person by operation of law, provided that any such transfer shall be contingent upon the transferee's agreement in writing to be bound by the terms hereof. 4.2 The Warrants shall be transferable only on the Warrant Register upon delivery thereof duly endorsed by the Holder or by the Holder's duly authorized attorney or representatives, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, the original power of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited with the Company. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced and may be required to be deposited with the Company in its discretion. Upon any registration of transfer, the Company shall deliver a new Warrant Certificate or Warrant Certificates to the person entitled thereto. 4.3 The Company shall not be required to recognize any transfer of the Warrants or the Warrant Shares unless (a) such transfer is made pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "ACT"), including a post-effective amendment to the Registration Statement, or (b) counsel reasonably satisfactory to the Company provides an opinion that the transfer may be made without registration pursuant to Rule 144 under the Act or otherwise. 4.4 The Company may stop transfer of the Warrants and the Warrant Shares to enforce the transfer restrictions set forth herein. The Warrant Certificates shall bear the following legend: TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS RESTRICTED AS DESCRIBED IN THE WARRANT AGREEMENT DESCRIBED HEREIN. THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION 3 4 STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO WHICH SUCH SECURITIES WERE ORIGINALLY REGISTERED IN CONNECTION WITH ORIGINAL ISSUANCE OF THE WARRANTS REPRESENTED HEREBY, OR (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. The Warrant Shares or other securities issued upon exercise of the Warrants shall bear the following legend, if applicable: THE SHARES OR OTHER SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. 5. Compliance with Government Regulations. If any shares of Common Stock required to be reserved for purposes of exercise or conversion of Warrants require, under any federal or state law or applicable governing rule or regulation of any national securities exchange or market system, registration with or approval of any governmental authority, or listing on any such national securities exchange or market system before such shares may be issued upon exercise, the Company will in good faith and as expeditiously as possible endeavor to cause such shares to be duly registered, approved or listed. The Company shall keep current in filing all reports, statements and other materials required to be filed with the Securities and Exchange Commission to permit Holders to sell the Warrants and the Warrant Shares under Rule 144. 6. Payment of Taxes. The Company shall pay any taxes due in connection with the issuance or exercise of the Warrants other than transfer taxes payable in connection with secondary transfers of any Warrants or issuance of Warrant Shares to any person other than the registered Holder of such Warrants. 7. Exchange of Warrant Certificates. Holders of Warrant Certificates may exchange them for another certificate or certificates representing the right of the Holder thereof to purchase a like aggregate number of Warrant Shares as the Warrant Certificate or Certificates surrendered by delivering the Warrant Certificates to be exchanged to the Company, properly endorsed or accompanied by a properly executed instrument of transfer, together with a written request for transfer, whereupon the Company shall execute and deliver to the person entitled thereto a new Warrant Certificate or Certificates, as the case may be, as so requested. 8. Mutilated or Missing Warrant Certificates. In case any of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate, or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, subject to the provision to the Company by the Holder thereof of evidence reasonably satisfactory to the Company of such loss, theft or 4 5 destruction of such Warrant Certificate and, if requested, indemnity or bond also reasonably satisfactory to the Company, provided that no such bond shall be required from any of the initial Holders of the Warrants. 9. Reservation of Warrant Shares; Authorization and Valid Issuance. The Company shall at all times reserve and keep available out of its authorized and unissued shares of Common Stock a number of shares sufficient to provide for the exercise of the rights of purchase represented by the Warrants, and the transfer agent for the Common Stock or any other securities issuable upon the exercise of any of the rights of purchase aforesaid ("TRANSFER AGENT") is hereby irrevocably authorized and directed at all times until the Expiration Date to reserve such number of authorized and unissued shares or other securities as shall be required for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent and will supply such Transfer Agent with duly executed stock certificates for such purposes and will itself provide or otherwise make available any cash which may be issuable as provided in Section 12. The Company will furnish to such Transfer Agent a copy of all notices of adjustments, and certificates related thereto, transmitted to each Holder pursuant to Section 11.2. All Warrant Certificates surrendered in the exercise of the rights thereby evidenced shall be cancelled. The Company represents that the Warrant Shares are duly authorized and covenants that, upon receipt by the Company of the full payment therefor, the Warrant Shares will be validly issued, fully paid, nonassessable, and not issued in violation of any preemptive rights. 10. Obtaining Stock Exchange Listings. The Company will from time to time take all action which may be necessary so that the Warrant Shares, immediately upon their issuance upon the exercise of Warrants, will be listed and/or included for trading on the principal securities exchanges and markets within the United States of America, if any, on which other shares of Common Stock are then listed or included for trading. 11. Adjustment of Warrant Price and Number of Warrant Shares. For purposes of this Section 11, "Common Stock" means shares now or hereafter authorized of any class of Common Stock of the Company and any other stock of the Company, however designated, that has the right (subject to any prior rights of any class or series of preferred stock) to participate in any distribution of the assets or earnings of the Company without limit as to per share amount. 11.1 Mechanical Adjustments. The number and kind of securities purchasable upon the exercise of each Warrant and the Warrant Price shall be subject to adjustment from time to time as follows: (a) In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock or (iv) issue by reclassification of its shares of Common Stock other securities of the Company (including any such reclassification in connection with a consolidation or merger in which the Company is the surviving corporation), the number of Warrant Shares purchasable upon exercise of each Warrant without giving effect thereto shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which such Holder would have owned or would have been entitled to receive after the happening of any of the events described 5 6 above, had such Warrants been exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Such adjustment shall be made successively whenever any event listed above shall occur. (b) In case the Company shall distribute to all holders of its shares of Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the surviving corporation) evidences of its indebtedness or assets (excluding cash dividends or distributions payable out of consolidated earnings or earned surplus and in compliance with applicable law and dividends or distributions referred to in paragraph (a) above or in the paragraph immediately following this paragraph), or rights, options or warrants, or convertible or exchangeable securities containing the right to subscribe for or purchase shares of Common Stock, then in each case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares purchasable upon the exercise of each Warrant without giving effect thereto by a fraction, the numerator of which shall be the current market price per share of Common Stock (as defined in paragraph (c) below) as of the record date for such distribution or, if there is no record date with respect thereto then as of the date of such distribution, and the denominator of which shall be the current market price per share of Common Stock as of such date, less the fair value (as reasonably determined by the Board of Directors of the Company) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options or warrants, or of such convertible or exchangeable securities applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. Notwithstanding the foregoing, however, no adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant need be made under this paragraph if the Company issues or distributes to each Holder of Warrants the rights, options, warrants or convertible or exchangeable securities, or evidences of indebtedness or assets referred to in those paragraphs which each Holder of Warrants would have been entitled to receive had the Warrants been exercised prior to the happening of such event or the record date with respect thereto. No adjustment need be made for a change in the par value of the Warrant Shares. In the event of a distribution by the Company to all holders of its shares of Common Stock or of the stock of a subsidiary of securities convertible into or exercisable for such stock (other than as described in subparagraph (a)(iv) above), then in lieu of an adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant, the Holder of each Warrant, upon the exercise thereof at any time after such distribution, shall be entitled to receive from the Company, such subsidiary or both, as the Company shall determine, the stock or other securities to which such Holder would have been entitled if such Holder had exercised such Warrant immediately prior thereto, all subject to further adjustment as provided in this Section 11.1; provided, however, that no adjustment in respect of dividends or interest on such stock or other securities shall be made during the term of a Warrant or upon the exercise of a Warrant. 6 7 (c) For the purpose of any computation under paragraph (b) of this Section, the current market price per share of Common Stock as of any date shall be the average of the daily Closing Prices for 20 consecutive trading days on which such Common Stock actually was traded commencing 30 trading days before the date of such computation. The "CLOSING PRICE" for any day shall be the last such reported sales price regular way for a share of Common Stock on that day on the principal national securities exchange or national market system on which the shares of Common Stock are listed or admitted to trading or, if not so listed or admitted to trading, the average of the closing bid and asked prices of the Common Stock in the over-the counter market or if not approved for such trading, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers, Inc. selected from time to time by the Company for that purpose. (d) No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; provided, however, that any adjustments which by reason of this paragraph (d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a share. (e) Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted, as herein provided, the Warrant Price per share payable upon exercise of each Warrant shall be appropriately and proportionately adjusted. (f) If at any time, as a result of an adjustment made pursuant to paragraph (a) above, the Holders shall become entitled to purchase any securities of the Company other than shares of Common Stock, thereafter the number of such other shares so purchasable upon exercise of each Warrant and the Warrant Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this Section 11, and the other provisions of this Agreement, with respect to the Warrant and Warrant Shares, shall apply as nearly equivalent as practicable on like terms to such other securities. (g) Upon the expiration of any rights, options, warrants or conversion or exchange privileges for which an adjustment was made hereunder, if any thereof shall not have been exercised, the Warrant Price per share and the number of shares of Common Stock purchasable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion or exchange rights and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants or conversion or exchange rights whether or not exercised; provided, however, that no such readjustment shall have the effect of increasing the Warrant Price per share or decreasing the number of shares of Common Stock purchasable upon the exercise of each Warrant by an amount in excess of the amount of the 7 8 adjustment initially made in respect to the issuance, sale or grant of such rights, options, warrants or conversion or exchange rights. 11.2 Notice of Adjustment. Whenever the Company proposes any action that would result in an adjustment of the number of Warrant Shares purchasable upon the exercise of Warrants or the Warrant Price per share as herein provided, the Company shall, at least 10 days prior to the date of such action or, if earlier, the record date therefor, mail by first class, postage prepaid, to each Holder notice of such adjustment or adjustments, the proposed date and, if applicable, record date therefor, and a certificate of a firm of independent public accountants selected by the board of directors of the Company (who may be the regular accountants employed by the Company) setting forth the number of Warrant Shares to be purchasable upon the exercise of each Warrant and the Warrant Price per share after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 11.3 No Adjustment for Dividends. Except as provided in Section 11.1, no adjustments in respect of any dividends shall be made during the term of a Warrant or upon the exercise of a Warrant. 11.4 Preservation of Purchase Rights Upon Merger, Consolidation etc. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale, transfer or lease to another corporation of all or substantially all the property of the Company, the Company or such successor or purchasing corporation, as the case may be, shall execute with each Holder an agreement (and shall not effect any such transaction in the absence of such an agreement) that each Holder shall have the right thereafter upon payment of the Warrant Price in effect immediately prior to such action to purchase upon exercise of each Warrant the kind and amount of shares and other securities, cash and property which such Holder would have owned or would have been entitled to receive in connection with the happening of such consolidation, merger, sale, transfer or lease and as a result of subsequent transactions had such Warrant been exercised immediately prior to such action and such consideration been held until such exercise; provided, however, that no adjustment in respect of dividends, interest or other income on or from such shares or other securities, cash and property shall be made during the term of a Warrant or upon the exercise of a Warrant. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 11. The provisions of this Section 11.4 shall similarly apply to successive consolidations, mergers, sales transfer or leases. 11.5 Statements on Warrants. Irrespective of any adjustments in the Warrant Price per share or the number or kind of shares purchasable upon the exercise of the Warrants, Warrant Certificates theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Warrants initially issuable pursuant to this Agreement. 12. Fractional Interests. The Company shall not be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be exercised at the same time by the same holder, the number of full Warrant Shares which shall be issuable upon the 8 9 exercise thereof shall be computed on the basis of the aggregate number of Warrant Shares purchasable on exercise of the Warrants so exercised. If any fraction of a Warrant Share would, except for the provisions of this Section 12, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay the exercising Holder in lieu thereof an amount in cash equal to the Closing Price for one share of the Common Stock, on the day immediately preceding the exercise date of the Warrant, multiplied by such faction. 13. Registration Rights. 13.1 Demand Registration Rights. Within 60 days after receipt of a written request from Holders of at least 50% in interest of the aggregate of Warrants and/or Warrant Shares that the Representatives or such Holders of the Warrants and/or Warrant Shares desire and intend to transfer more than 25% in interest of the aggregate number of the Warrants and/or Warrant Shares under such circumstances that a public offering, within the meaning of the Act, will be involved, the Company shall (subject to the last sentence of this paragraph) notify all Holders of such request and file a registration statement (and use its reasonable best efforts to cause such registration statement to become effective under the Act) with respect to the offering and sale or other disposition of the Warrants and/or Warrant Shares requested to be included by the requesting Holders and any other Holders who request inclusion of Warrants or Warrant Shares within 20 days after the Company has given them notice of the registration (the "OFFERED SECURITIES"); provided, however, that the Company shall not be obligated to comply with the foregoing provisions of this Section 13.1 if in the opinion of counsel to the Company reasonably acceptable to the Holder or Holders from whom such written requests have been received, registration under the Act is not required for the transfer of the Offered Securities in the manner proposed by such person or persons, or a post-effective amendment to an existing registration statement would be legally sufficient for such transfer (in which latter event the Company shall promptly file such post-effective amendment (and use its best efforts to cause such amendment to become effective under the Act)). Notwithstanding the foregoing, however, the Company shall not be obligated to provide more than one effective registration statement meeting the requirements hereof pursuant to this Section 13.1. The Company may defer the preparation and filing of a registration statement for up to 90 days after the request for registration is made if the Company's board of directors determines in good faith that (i) such registration or post-effective amendment would materially adversely affect or otherwise materially interfere with a proposed or pending material transaction by the Company, including without limitation a financing or a corporate reorganization, or (ii) the Company is in possession of material inside information concerning the Company or its securities, disclosure of which would be illegal or have a material adverse effect upon the Company. The Company shall not be obligated to honor any request to register Warrant Shares pursuant to this Section 13.1 received later than four (4) years from the effective date of the Company's Registration Statement on Form S-1 (File No. 333-26439) (the "EFFECTIVE DATE"). The Company shall not be required (i) to maintain the effectiveness of the registration statement beyond the earlier to occur of 120 days after the effective date of the registration statement or the date on which all of the Offered Securities have been sold (the "TERMINATION DATE"); provided, however, that if at the Termination Date the Offered Securities are covered by a registration 9 10 statement which also covers other securities and which is required to remain in effect beyond the Termination Date, the Company shall maintain in effect such registration statement as it relates to Offered Securities for so long as such registration statement (or any substitute registration statement) remains or is required to remain in effect for any such other securities, or (ii) to cause any registration statement with respect to the Warrant Shares to become effective prior to the Initiation Date. All expenses of registration pursuant to this Section 13.1 shall be borne by the Company (excluding underwriting discounts and commissions on securities not sold by the Company). The Company shall be obligated pursuant to this Section 13.1 to include in the registration statement Warrant Shares that have not yet been purchased by a Holder of Warrants so long as such Holder of Warrants submits an undertaking to the Company that such Holder intends to exercise Warrants representing the number of Warrant Shares to be included in such registration statement prior to the consummation of the public offering with respect to such Warrant Shares. In addition, such Holder of Warrants is permitted to pay the Company the Warrant Price for such Warrant Shares upon the consummation of the public offering with respect to such Warrant Shares. 13.2 Piggy-back Registration Rights. In the event the Company proposes to file (for its own offer and sale or offer and sale by selling security holders) a registration statement under the Act at any time on or before ______________, 2000 (the third anniversary of the Effective Date) with respect to any class of security (other than in connection with an exchange offer, a non-cash offer or a registration statement on Form S-4 or Form S-8 or any successor registration statement form) which becomes or which should be expected to become effective at any time after the Initiation Date then the Company shall in each case give written notice of such proposed filing to the Holders of Warrants and Warrant Shares at least 30 days before the proposed filing date and such notice shall offer to such Holders the opportunity to include in such registration statement such number of Warrant Shares as they may request, unless, in the opinion of counsel to the Company reasonably acceptable to any such holder of Warrants or Warrant Shares who wishes to have Warrant Shares included in such registration statement, registration under the Act is not required for the transfer of such Warrants and/or Warrant Shares in the manner proposed by such Holders. The Company shall not be obligated to honor any request to register any such Warrant Shares if the Company is not notified in writing of any such request pursuant to this Section 13.2 within 20 days after the Company has given notice to the Holders of the filing. The Company shall permit, or shall cause the managing underwriter of a proposed offering to permit, the Holders of Warrant Shares requested to be included in the registration (the "PIGGY-BACK SHARES") to include such Piggy-back Shares in the proposed offering on the same terms and conditions as applicable to securities of the Company included therein or as applicable to securities of any person other than the Company and the Holders of Piggy-back Shares if the securities of any such person are included therein. Notwithstanding the foregoing, if any such managing underwriter shall advise the Company in writing that it believes that the distribution of all or a portion of the Piggy-back Shares requested to be included in the registration statement concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then the Holders of such Piggy-back Shares shall delay their offering and sale of Piggyback Shares (or the portion thereof so designated by such managing underwriter) for such period, not to exceed 120 days, as 10 11 the managing underwriter shall request provided that no such delay shall be required as to Piggy-back Shares if any securities of the Company are included in such registration statement for the account of any person other than the Company and the Holders of Piggy-back Shares. In the event of such delay, the Company shall file such supplements, post-effective amendments or separate registration statement, and take any such other steps as may be necessary to permit such Holders to make their proposed offering and sale for a period of 90 days immediately following the end of such period of delay ("PIGGY-BACK TERMINATION DATE"); provided, however, that if at the Piggy-back Termination Date the Piggyback Shares are covered by a registration statement which is, or is required to remain, in effect beyond the Piggy-back Termination Date, the Company shall maintain in effect the registration statement as it relates to the Piggy-back Shares for so long as such registration statement remains or is required to remain in effect for any of such other securities. The Company shall be obligated pursuant to this Section 13.2 to include in the registration Warrant Shares that have not yet been purchased by a holder of Warrants so long as such Holder of Warrants submits an undertaking to the Company that such Holder intends to exercise Warrants representing the number of Warrant Shares to be included in such registration prior to the consummation of the offering made pursuant thereto. In addition, such Holder of Warrants is permitted to pay the Company the Warrant Price for such Warrant Shares upon the consummation of the public offering with respect to such Warrant Shares. If the Company decides not to proceed with a registration and offering in which Piggy-back Shares are included, the Company has no obligation to proceed with the offering of the Piggy-back Shares, unless the Holders of the Warrants and/or Warrant Shares otherwise comply with the provisions of Section 13.1 hereof (without regard to the 60 days' written request required thereby). 13.3 In connection with the registration of securities in accordance with Sections 13.1 and 13.2 above, the Company shall: (a) Use its reasonable best efforts to register or qualify the securities for offer or sale under the state securities or Blue Sky laws of such states which the Holders of such Warrant Shares shall designate; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not then so subject or to register or get a license as a broker or dealer in securities in any jurisdiction where it is not so registered or licensed. (b) Pay all costs, other than fees and disbursements of counsel for the Holders and underwriting discounts and commissions, if any, in respect of securities held by the Holders. (c) Furnish to each Holder such number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), such reasonable number of copies of each prospectus contained in such registration statement and each supplement or amendment thereto (including each preliminary prospectus), all of which shall conform to the requirements of the Act and the rules and regulations thereunder, and such other 11 12 documents, as any Holder may reasonably request to facilitate the disposition of the securities included in such registration. (d) If an opinion of counsel for the Company is delivered to any underwriter in connection with the registration, such opinion to each Holder participating in the registration. (e) Enter into a cross-indemnity agreement and a contribution agreement, each in customary form, with each underwriter, if any, and, if requested, enter into an underwriting agreement containing conventional representations, warranties, allocation of expenses and customary closing conditions, including, without limitation, opinions of counsel and accountants' cold comfort letters, with any underwriter who acquires any securities included by a Holder in the registration. 13.4 (a) The Company shall indemnify and hold harmless each Holder participating in any registration hereunder against any losses, claims, damages or liabilities, joint or several, to which such Holder may become subject under the Act, the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") or otherwise, specifically including, but not limited to, losses, claims, damages, judgments, liabilities and expenses (including the fees and expenses of counsel and other expenses in connection with investigating, defending or settling any such action or claim) (or actions in respect thereof), as they are incurred and regardless of whether the indemnitee is a party to the litigation, if any, arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in any registration statement filed by the Company or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any preliminary prospectus or final prospectus included in any registration statement filed by the Company or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each such Holder for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any such registration statement, preliminary prospectus or final prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Holder furnished to the Company by such Holder specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this Section 13.4(a) with respect to any preliminary prospectus shall not inure to the benefit of any Holder from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased securities, if adequate copies of the applicable final prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected were provided by the Company to the Holder or its 12 13 representatives and the Holder or its representatives did not deliver such final prospectus to such person. The indemnity agreement in this Section 13.4(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Holder within the meaning of the Act or the Exchange Act and each of the agents, employees, officers and directors of each Holder and person who so controls any Holder. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Holder, severally and not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, to which the Company may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages, judgments liabilities and expenses (including the fees and expenses of counsel and other expenses in connection with investigating, defending or settling any such action or claim) (or actions in respect thereof), as they are incurred and regardless of whether the indemnitee is a party to the litigation, if any, arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Holder herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in any registration statement filed by the Company or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any preliminary prospectus or final prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 13.4(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Holder specifically for use in the preparation thereof, and agrees to reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. The indemnity agreement in this Section 13.4(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed such registration statement and each director of the Company, and each person, if any, who controls the Company within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 13.4 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 13.4, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 13.4 except to the extent that it has been prejudiced by such omission. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to 13 14 participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party hereunder for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 13.4(a) or 13.4(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (d) To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 13.4(a) or 13.4(b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act or otherwise, then the Company (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed any such registration statement, any controlling person of the Company, and its or their respective counsel), as one entity, and the affected Holders of the securities included in such registration in the aggregate (including for this purpose any contribution by or on behalf of an indemnified party), as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and such Holders in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission, 14 15 shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by the Company or by such Holders, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Holders agree that it would be unjust and inequitable if the respective obligations of the Company and the Holders for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses (even if the Holder and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 13.4(c). In no case shall any Holder be responsible for a portion of the contribution obligation imposed on all Holders in excess of its pro rata share based on the number of shares of Common Stock (or other successor securities) owned (or which would be owned upon exercise of all Warrants) by it and included in such registration as compared to the number of shares of Common Stock (or other successor securities) owned (or which would be owned upon exercise of all Warrants) by all Holders and included in such registration. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 13.4(c), each person, if any, who controls any Holder within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent and counsel of each such Holder or control person shall have the same rights to contribution as such Holder or control person and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such registration statement, each director of the Company and its or their respective counsel shall have the same rights to contribution as the Company, subject in each case to the provisions of this Section 13.4(c). Anything in this Section 13.4(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 13.4(c) is intended to supersede any right to contribution under the Act, the Exchange Act or otherwise. 14. No Rights as Stockholder; Notices to Holders. Nothing contained in this Agreement or in any of the Warrant Certificates shall be construed as conferring upon the Holders or their transferee(s) the right to vote or to consent to or receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Company or any other matter or any rights whatsoever as stockholders of the Company. If, however, at any time prior to the expiration of the Warrants and prior to their exercise, any of the following events shall occur: (a) the Company shall declare any dividend payable in any securities upon its shares of Common Stock or make any distribution (other than a cash dividend) to the holders of its shares of Common Stock; or (b) the Company shall offer to the holders of its shares of Common Stock any additional shares of Common Stock or securities convertible into or exchangeable for shares of Common Stock or any right to subscribe to or purchase any thereof; or 15 16 (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation, merger, sale, transfer or lease of all or substantially all of its property, assets and business as an entirety) shall be proposed, then in any one or more of said events the Company shall (i) give notice in writing of such event to the Holders, as provided in Section 16 hereof and (ii) if there are more than 100 Holders, cause notice of such event to be published once in The Wall Street Journal (national edition), such giving of notice and publication to be completed at least 10 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution or subscription rights, or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to publish, mail or receive such notice or any defect therein or in the publication or mailing thereof shall not affect the validity of any action taken in connection with such dividend, distribution or subscription rights, or such proposed dissolution, liquidation or winding up. 15. Attorney's Fees. In the event of any action, suit, counterclaim, appeal, arbitration, mediation, or other proceeding (an "ACTION") between any Holder and the Company arising out of or in connection with this Agreement or the Warrants, in addition to any damages and costs to which the prevailing party would otherwise be entitled, the losing party in any such Action shall pay to the prevailing party the attorneys' fees and costs incurred by the prevailing party in connection with such Action and/or enforcing any judgment, order, ruling, or award (collectively, a "DECISION") granted therein, all of which shall be paid whether or not such Action is prosecuted to a Decision. Any Decision entered in an Action shall contain a specific provision providing for the recovery of attorneys' fees and costs incurred in enforcing such Decision. Attorneys' fees shall include, but not be limited to, fees incurred in the following: (1) post judgment motions and collection actions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery, and (5) bankruptcy. "Prevailing party" within the meaning of this section includes, without limitation, a party who agrees to dismiss an Action on the other party's payment of the sum allegedly due or performance of the covenants allegedly breached, or who obtains substantially the relief sought. If there are multiple claims, the prevailing party shall be determined with respect to each claim separately. The prevailing party shall be the party who has obtained the greater relief in connection with any particular claim, although with respect to any claim, it may be determined by the court or arbitrator before which the Action is brought that there is no prevailing party. 16. Notices. Any notice pursuant to this Agreement to be given or made by the registered Holder of any Warrant to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed as follows: Securacom, Incorporated 50 Tice Boulevard Woodcliff Lake, New Jersey 07675 Attn: Chief Executive Officer 16 17 Notices or demands authorized by this Agreement to be given or made by the Company to the registered Holder of any Warrant shall be sufficiently given or made (except as otherwise provided in this Agreement) if sent by first-class mail, postage prepaid, addressed to such Holder at the address of such Holder as shown on the Warrant Register. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to principles of conflicts of laws. 18. Supplements and Amendments. The Company and the Representatives owning at least a majority of the outstanding Warrants may from time to time supplement or amend this Agreement in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Representatives may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrant Certificates and which shall not adversely affect the interests of the Holders. This Agreement may also be supplemented or amended from time to time by a writing executed by or on behalf of the Company and all of the Holders. 19. Successor. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Holders shall bind and inure to the benefit of their respective successors and assigns hereunder. Assignments by the Holders of their rights hereunder shall be made in accordance with Section 4. 20. Merger or Consolidation of the Company. So long as Warrants remain outstanding, the Company will not merge or consolidate with or into, or sell, transfer or lease all or substantially all of its property to, any other corporation unless the successor or purchasing corporation, as the case may be (if not the Company), shall expressly assume, by supplemental agreement executed and delivered to the Holders, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company. 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Holders, any legal or equitable right, remedy or claim under this Agreement, but this Agreement shall be for the sole and exclusive benefit of the Company and the Holders of the Warrants and Warrant Shares. 22. Captions; References. The captions of the sections and subsections of this Agreement have been inserted for convenience only and shall have no substantive effect. References herein to Sections, Schedules and Exhibits are, unless otherwise specified, references to the referenced section, schedule or exhibit hereof or hereto. 17 18 23. Counterparts. This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original; but such counterparts together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day, month and year first above written. SECURACOM, INCORPORATED CRUTTENDEN ROTH INCORPORATED By: By: --------------------------------- --------------------------------- Name: Name: ------------------------------- ------------------------------- Title: Title: ------------------------------ ------------------------------ SCOTT & STRINGFELLOW By: --------------------------------- Name: ------------------------------- Title: ------------------------------ 18 19 Schedule 1 to Warrant Agreement Representative Number of Warrants Cruttenden Roth Incorporated Scott & Stringfellow, Inc. 19 20 EXHIBIT A Exhibit A to Warrant Agreement [Form of Warrant Certificate] TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS RESTRICTED AS DESCRIBED IN THE WARRANT AGREEMENT DESCRIBED HEREIN. THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE CLASS A COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO WHICH SUCH SECURITIES WERE ORIGINALLY REGISTERED IN CONNECTION WITH ORIGINAL ISSUANCE OF THE WARRANTS REPRESENTED HEREBY, OR (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT. EXERCISABLE ON OR BEFORE ___________, 2001 No. _______ Warrants Warrant Certificate SECURACOM INCORPORATED This Warrant Certificate certifies that [Cruttenden Roth Incorporated], or registered assigns (the "HOLDER"), is the registered holder of __________ Warrants (the "WARRANTS") to purchase Common Stock, $0.01 par value per share (the "COMMON STOCK"), of Securacom, Incorporated, a Delaware corporation (the "COMPANY"). Each Warrant entitles the registered Holder thereof to purchase one share of Common Stock (subject to adjustment as set forth in the Warrant Agreement (as defined below), at any time from 10:00 a.m., California time, on ____________, 1998 (the "INITIATION DATE") until 6:00 p.m., California time, on ____________, 2001 (the "EXPIRATION DATE") at a purchase price of $________ (the "WARRANT PRICE"). Subject to the provisions of the Warrant Agreement, the Holder shall have the right to exercise the Warrants and purchase the underlying Warrant Shares, either in their entirety or from time to time, effective as of any date specified by the Holder from and after the Initiation Date and on or before the Expiration Date. Exercise shall be effected by surrendering this Warrant Certificate, with the form of election to purchase set forth hereon properly completed and executed, together with payment of the Warrant Price or designation of net issuance at the office of the Company designated for such purpose. If upon any exercise of Warrants evidenced hereby the number of Warrants exercised shall be less than the total number of Warrants evidenced hereby, there shall be issued to the Holder or such Holder's assignee a new Warrant Certificate 20 21 evidencing the number of Warrants not exercised. No adjustment shall be made for any dividends on any Common Stock issuable upon exercise of this Warrant. Payment of the aggregate Warrant Price for all Warrant Shares for which Warrants are exercised shall be made, in the discretion of the Holder, by certified or official bank check or by net issuance, or a combination thereof. Exercise by net issuance shall be effected without payment by the Holder of any cash or other consideration by the Company's withholding from the Warrant Shares that would otherwise be issued upon exercise if the exercise price were paid in cash, that number of Warrant Shares which, when multiplied by the Closing Price for the day immediately preceding the date of exercise, equals the aggregate Warrant Price for the Warrants so exercised. Notwithstanding the foregoing, if at 6:00 p.m., California time on the Expiration Date, the Holder has not exercised its Warrants and has not notified the Company that it waives automatic issuance, then all such unexercised Warrants shall be automatically converted into a number of shares of Common Stock of the Company equal to: (A) the number of shares of Common Stock then issuable upon exercise of all such unexercised Warrants minus (B) a number of shares of Common Stock equal to the quotient obtained by dividing the aggregate Warrant Price for all such unexercised Warrants by the Closing Price (as defined in Section 11.1(c) of the Warrant Agreement) for the Common Stock on the Expiration Date. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to a Warrant Agreement, dated as of _________, 1997 (the "WARRANT AGREEMENT"), duly executed and delivered by the Company, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders of the Warrants. A copy of the Warrant Agreement may be obtained by the Holder hereof upon written request to the Company. The Warrant Price and number of Warrant Shares issuable upon exercise of the Warrants are subject to adjustment upon the occurrence of certain events set forth in the Warrant Agreement. No fractions of a share of Common Stock will be issued upon the exercise of any Warrants but the Company will pay the cash value thereof determined as provided in the Warrant Agreement. The Holder is entitled to certain registration rights with respect to the Common Stock purchasable upon exercise thereof as set forth in the Warrant Agreement. Warrant Certificates may be exchanged, in the manner and subject to the limitations provided in the Warrant Agreement, but without payment of any service charge, for another Warrant Certificate or Warrant Certificates of like tenor evidencing in the aggregate a like number of Warrants. The Company may deem and treat the registered Holder of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) as the 21 22 owner in fact hereof and of the Warrants represented hereby for all purposes, and the Company shall not be affected by any notice to the contrary. Neither the Warrants nor this Warrant Certificate entitles the Holder to any rights of a stockholder of the Company. This Warrant Certificate shall not be valid unless countersigned by the Company. IN WITNESS WHEREOF, Securacom, Incorporated has caused this Warrant Certificate to be signed by its Chief Executive Officer and by its Secretary. Dated: , 1997 SECURACOM, INCORPORATED ------------- By: ------------------------- Chief Executive Officer Attest: ------------------------------------- Secretary 22 23 [Form of Election to Purchase] (To be Executed upon Exercise of Warrant) The undersigned hereby irrevocably elects, effective as of ____________, to exercise the right, represented by this Warrant Certificate, to receive ___________ shares of Common Stock, par value $0.01 per share, of Securacom, Incorporated and elects to pay the Exercise Price as indicated below: [ ] Payment in cash in the amount of $_______ per share, for a total aggregate Exercise Price payment of $________; check payable to Securacom, Incorporated in the amount of such aggregate Exercise Price. [ ] Payment on a cashless, net issuance basis by foregoing receipt of that number of shares of Common Stock otherwise issuable upon this exercise as has an aggregate value, at the Closing Price, equal to the aggregate Exercise Price. The undersigned requests that a certificate for such shares be registered in the name of _____________________________, whose address is ___________________________________________________ and that such shares be delivered to ____________________________ whose address is ________________________________. If said number of shares is less than all of the shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant certificate representing the remaining balance of such shares be registered in the name of ________________________________, whose address is _________________________, and that such Warrant certificate be delivered to _______________________, whose address is _________________________________. Signature: Date: Signature Guaranteed: 23 EX-10.7 4 AGREEMENT TO REDEEM LIMITED PARTNERSHIP INTEREST 1 EXHIBIT 10.7 [KUWAM CORPORATION LETTERHEAD] September 10, 1997 Securacom, Incorporated 50 Tice Boulevard Woodcliff Lake, NJ 07675 Gentlemen: This is to confirm that Special Situation Investment Holdings, Ltd. ("SSIH") has agreed to redeem the limited partnership interest of Securacom, Incorporated ("Securacom") in SSIH immediately following completion of the initial public offering of common stock of Securacom for cash in an amount equal to the greater of $700,000 or the market value of such interest SPECIAL SITUATION INVESTMENT HOLDINGS, LTD. By: KuwAm Corporation General Partner By: /s/ WIRT D. WALKER, III -------------------------- Wirt D. Walker, III Managing Director EX-23.1 5 CONSENT OF GRANT THORNTON LLP 1 Exhibit 23.1 We have issued our report dated March 12, 1997 accompanying the financial statements and schedule of Securacom, Incorporated contained in the Registration Statement on Form S-1 (File No. 333-26439) and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." GRANT THORNTON LLP Parisppany, New Jersey September 11, 1997 EX-23.2 6 CONSENT OF AMPER, POLITZINER & MATTIA 1 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation of our report dated June 3, 1996 on the financial statements of Securacom, Incorporated as of December 31, 1995 and for each of the two years then ended which is included in this Registration Statement No. 333-26439 on Form S-1 Amendment Number 4 of Securacom, Incorporated, and to the reference of our Firm under the caption "Experts" in the Form S-1 Amendment Number 4 which is expected to be filed on or about September 11, 1997. AMPER, POLITZINER & MATTIA September 11, 1997 Edison, New Jersey EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1997 JUN-30-1997 125 0 2,490 0 0 5,886 0 0 7,354 5,049 3,410 0 0 44 (1,149) 7,354 7,240 7,240 5,210 5,210 1,381 0 232 0 0 429 0 0 0 429 .09 0
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