-----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, BzPGa7ieME9HA/kWYm+vQpFF7fVzFSUyDlVdZIYGWRMCFSY11jbia7uP/5KCWP0l vMQgl2qHlXNwLACHjNirHw== 0001042645-98-000038.txt : 19980401 0001042645-98-000038.hdr.sgml : 19980401 ACCESSION NUMBER: 0001042645-98-000038 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALARMGUARD HOLDINGS INC CENTRAL INDEX KEY: 0000319250 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS RETAIL [5900] IRS NUMBER: 330318116 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08138 FILM NUMBER: 98582455 BUSINESS ADDRESS: STREET 1: 125 FRONTAGE ROAD STREET 2: STE 1880 CITY: ORANGE STATE: CT ZIP: 06477 BUSINESS PHONE: 6192311818 MAIL ADDRESS: STREET 1: 125 FRONTAGE ROAD STREET 2: STE 1880 CITY: ORANGE STATE: CT ZIP: 06477 FORMER COMPANY: FORMER CONFORMED NAME: TRITON GROUP LTD DATE OF NAME CHANGE: 19950328 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _______________ FORM 10-K _X_ Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number 1-8138 OR __ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ALARMGUARD HOLDINGS, INC. Incorporated in Delaware IRS Employer Identification No: 33-0318116 Principal Executive Offices: Telephone :(203) 795-9000 125 Frontage Road Orange, Connecticut 06477 Securities registered pursuant to Section 12(b) of the Act: _____Title of Class______ Exchange on Which Registered Common Stock, $0.0001 Par Value American Stock Exchange Warrants American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x_ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ The aggregate market value of voting stock held by non-affiliates of the Registrant as of March 20, 1998 (based on the closing price of such stock as reported by the American Stock Exchange on such date) was $25.9 million. The number of shares of the Registrant's $0.0001 par value common stock outstanding as of March 20, 1998 was 5,593,396. PART 1 ITEM 1. BUSINESS Alarmguard Holdings, Inc. ("Alarmguard" or the "Company") sells and installs burglar and fire systems and provides security monitoring, repair and maintenance services for residential and business subscribers located primarily in the Northeast and Mid- Atlantic regions of the United States. Alarmguard provides such security alarm systems and services primarily under its trademark "Alarmguard". Alarmguard also sells, installs and services Sonitrol audio-based security systems in New Haven County, Connecticut as a Sonitrol franchisee. Alarmguard had approximately 64,000 monitored subscriber accounts for its alarm monitoring services as of December 31, 1997 (approximately 68% of which were residential) with Monthly Recurring Revenue ("MRR"FN1) of approximately $2.1 million. Upon completion of the acquisitions announced in the first quarter of 1998 (see "Recent Developments"), Alarmguard had MRR of approximately $2.9 million serving approximately 100,000 subscribers. Alarmguard management believes that it is currently the ninth largest residential and commercial security alarm monitoring company in the United States based on MRR. Alarmguard's revenues consist primarily of recurring payments under written contracts for the monitoring, leasing and servicing of security systems and the provision of additional enhanced security services. For the year ended December 31, 1997, monitoring and service revenues represented 69% of total revenues. Alarmguard monitors digital signals arising from burglaries, fires and other monitored activities such as temperature and water levels through monitoring systems installed at subscribers' premises. These signals are received and processed primarily at Alarmguard's central monitoring station located in Orange, Connecticut, which, as currently configured, has the capacity to monitor up to approximately 250,000 subscribers following a March 1998 expansion of this facility at a cost of approximately $800,000. Alarmguard also provides enhanced security services including, among others, two-way voice communication, supervised monitoring services, pager service, wireless backup service and extended warranty plans, as well as local field repair services through its ten branch offices. Since its 1991 inception, Alarmguard has grown rapidly, primarily through the acquisition of 32 portfolios of subscriber accounts (approximately $1.8 million of MRR) and internal growth through direct marketing (primarily by means of outbound telemarketing) to obtain new subscribers (the "Direct Marketing Program"). Alarmguard's management believes that numerous acquisition opportunities are still available as there are approximately 3,000 alarm monitoring companies in its markets. Alarmguard intends to make acquisitions and open branches in contiguous geographic markets in the Northeast and Mid-Atlantic states in which the Company operates and does not presently have subscribers. Alarmguard intends to then implement plans to increase the number of subscriber accounts in such markets through the Direct Marketing Program, its recently launched Dealer Program and subsequent acquisitions, all of which have the effect of increasing subscriber density in the area, and thereby improving operating efficiency. Alarmguard continuously pursues acquisition opportunities from a number of sources. - ---------------------- FN1 MRR means monthly recurring revenue that Alarmguard (or, if the context requires, another company in the security alarm industry) is entitled to receive under contracts in effects at the end of such period. MRR is a term commonly used in the security alarm industry as a measure of the size of a company. It does not measure profitability or performance, and does not include any allowance for future subscriber attrition or for uncollectible accounts receivable. - ---------------------- In 1997, Alarmguard maintained the Direct Marketing Program at a relatively constant level of monthly sales and installation of residential and small commercial security alarm monitoring systems. Alarmguard believes it can access a broader demographic market with the Direct Marketing Program than is presently being accessed by it and other companies providing traditional high-end residential and commercial alarm service. The cost of creating a customer through the Direct Marketing Program remains substantially lower than the amount required to acquire a customer through an acquisition. In late 1997, Alarmguard launched its Dealer Program which is an externally driven growth program which augments the Direct Marketing Program. The characteristics of the subscribers purchased through the Dealer Program are similar to those of Direct Marketing Program subscribers. Under this program, Alarmguard purchases credit-approved monitoring contracts from Alarmguard authorized dealers. In most cases, Alarmguard installs the systems and deducts the cost of the installation from the amount paid to the dealer. As of December 31, 1997, the Dealer Program had 4 authorized dealers and 12 dealers as of March 20, 1998. In mid 1996, Alarmguard began its National Accounts program which provides security services to multi-location commercial accounts. This program was further expanded in 1997 with the acquisition of Protective Alarms, Inc. ("Protective Alarms"), which had a well-established national accounts program serving numerous retailers. As of December 31, 1997, the National Accounts Program had 24 accounts with approximately $100,000 of MRR, which represented approximately 5% of Alarmguard's total MRR. Forward Looking Disclosures Certain statements in this Form 10-K that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of Alarmguard to be materially different from historical results or from any results expressed or implied by such forward- looking statements, These factors are discussed under the caption "Risk Factors" in a Registration Statement on Form S-4 (File No 333-23307) filed with the Securities and Exchange Commission on March 14, 1997 and in other filings with the Securities and Exchange Commission. Major Developments During 1997 Merger with Triton Group Ltd. On April 15, 1997, Triton Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary of Triton Group Ltd. ("Triton"), consummated a merger (the "Merger") with Security Systems Holdings, Inc. ("SSH") pursuant to an Agreement and Plan of Merger dated December 23, 1996, as amended March 6, 1997 (the "Merger Agreement"), by and among Triton, Merger Sub and SSH. As a result of the Merger, Merger Sub ceased to exist and SSH has continued as the surviving corporation and a wholly-owned subsidiary of the Company. In connection with the Merger, the Company effected a one-for-ten reverse stock split (the "Reverse Stock Split"). Pursuant to the Merger Agreement and in consideration of the Merger, SSH's preferred and common stockholders received an aggregate of 2,877,321 new shares of common stock of the Company, representing approximately 57% of the common stock outstanding upon consummation of the Reverse Stock Split and the Merger. Concurrent with the merger, the Company was renamed Alarmguard Holdings, Inc., and the common shares were listed for trading on the American Stock Exchange ("AMEX") under the symbol "AGD". The Company also has warrants to purchase shares of common stock of the Company which are listed for trading on the AMEX under the symbol "AGDW". As a result of the Merger, the Company's fiscal year end was changed to December 31 and the Board of Directors was reconstituted to include five representatives from SSH's Board of Directors and two representatives from Triton's Board of Directors. The Merger was accounted for as a "reverse acquisition" such that Triton was designated the accounting acquiree and SSH the accounting acquiror. As such, the net assets of Triton (principally cash of approximately $15.0 million plus other investments) were recorded at fair value and the pre-Merger financial statements of SSH became the historical financial statements of Alarmguard. Prior to September 2, 1997, Alarmguard owned approximately 44% of Mission West Properties ("Mission West"), a real estate company whose shares were listed for trading on the AMEX under the trading symbol "MSW". On September 2, 1997, Mission West completed the sale of six million shares of newly issued common stock to a group of private investors and Alarmguard's ownership percentage was reduced to approximately 9%. On October 21, 1997, Mission West paid a $3.30 per share cash distribution to its shareholders. Alarmguard's share of this cash distribution amounted to approximately $2.2 million. Acquisition of Protective Alarms, Inc. On May 1,1997, Alarmguard purchased all of the issued and outstanding shares of capital stock of Protective Alarms, a company with approximately 9,000 subscribers and aggregate MRR of approximately $0.5 million, including its National Accounts MRR, for a total purchase price of approximately $19.7 million. As of December 31, 1997, Alarmguard owed $2.6 million of the purchase price to the sellers of Protective Alarms, of which approximately $1.9 million was secured by a cash collateralized letter of credit and is classified as restricted cash in the consolidated balance sheet at December 31, 1997. The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Protective Alarms was a security alarm system company doing business primarily in Connecticut and Westchester County, New York, that provided security equipment and monitoring services to homeowners and businesses. In addition, Protective Alarms engaged in national account sales under the name "Pro National", primarily in the Northeastern United States. Other Acquisitions During the year ended December 31, 1997, Alarmguard acquired certain operating assets of five additional companies in the security alarm installation and monitoring business for an aggregate of $2.0 million in cash and up to 568,000 shares of Alarmguard common stock valued for the purposes of the acquisitions at $3.8 million. The acquisitions added approximately $.2 million of MRR and 3,400 customers. These acquisitions were accounted for under the purchase method of accounting and, accordingly, the purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair value at the respective dates of acquisition. Recent Developments The Company completed an offering of 40,000 shares of Cumulative Convertible Preferred Stock (35,000 shares of Series A and 5,000 shares of Series B) at $1,000 per share in February 1998 yielding gross proceeds totaling $40 million. Concurrently, the Company issued 700 additional shares of the Series A Preferred in exchange for $.7 million of the Company's subordinated debt. The Series A Preferred Stock pays quarterly dividends at 5% per annum. Under the terms of the security, each holder of the Series A and Series B Preferred Stock has the right to convert its shares, at the option of the holder, at any time, into shares of the Company's common stock at the conversion price of $8.25 per share and $7.75 per share, respectively, subject to certain anti-dilution provisions. The holders of the newly issued preferred stock will elect two members to the Company's expanded Board of Directors. Concurrent with the offering, the Company increased its credit facility from $60 million to $90 million. The proceeds from the offering and borrowings from the expanded credit facility are intended to finance acquisitions and expand the Company's Direct Marketing and Dealer Programs. In February 1998, the Company purchased all of the outstanding shares of Detect, Inc., (dba "Pelletier"), headquartered in Danbury, Connecticut, for cash consideration of approximately $10.9 million, including a one-year holdback subject to certain working capital adjustments. The acquisition added over 7,200 accounts and MRR of approximately $210,000 to the Company's subscriber base. In March 1998, Alarmguard completed the acquisition of certain assets of Security Systems, Inc. (dba "Sentry"), headquartered in Malden, Massachusetts, with an office in Portland, Maine. The acquisition added approximately 26,000 subscribers and MRR of approximately $.6 million. The purchase price for the Company was approximately $26.5 million and is subject to certain agreed upon post-closing adjustments based on a subsequent performance review of the acquired subscriber base. Both of the 1998 acquisitions will be accounted for under the purchase method of accounting. Market Overview and Trends The security industry is highly competitive and highly fragmented. Alarmguard competes with major firms which have substantial financial resources. Other alarm service companies have adopted a strategy similar to Alarmguard's that entails the aggressive purchase of alarm monitoring accounts both through acquisitions of account portfolios and through dealer programs and through internal growth programs similar to Alarmguard's. Alarmguard's target market consists of owners of single family residences and businesses. The security alarm industry is characterized by the following attributes: High Degree of Fragmentation. The security alarm industry is primarily comprised of a large number of small providers of alarm systems and services. According to the publicly-available Lehman Brothers 1996 Year-End Security Industry Review, there are approximately 11,000 security alarm companies nationally. These companies generate approximately $13.2 billion of gross revenues from alarm system sales, installation, service and monitoring according to a survey published in May 1997 by SDM, a security alarm industry publication. Alarmguard estimates that approximately 3,000 such companies operate in the territories Alarmguard currently serves. Alarmguard believes that most of such companies are small regional firms and that no one firm dominates the market. The SDM survey reported that in 1996, based upon information provided by the respondents, the 100 largest companies in the industry accounted for approximately 25% of alarm industry revenues. Based upon its acquisition experience, Alarmguard believes that many smaller alarm companies, due to their size, have higher overhead expenses as a percentage of revenues than Alarmguard and lack access to capital on terms as attractive as those available to Alarmguard. Rapid Growth and Low Penetration. The residential security alarm market is growing but is still characterized by a low level of market penetration. An industry trend toward subsidizing installation costs to increase affordability, combined with other factors such as heightened concern about crime and favorable demographic trends, have resulted in increased demand for residential security alarm services. The 1997 SDM survey reported that in 1996 the 25 largest firms in the industry experienced a 21.5% growth rate, as opposed to only a 2.2% growth rate for the industry as a whole. The percentage of the estimated 100 million households in the United States with monitored alarm systems is approximately 11% and it is estimated that 20% of households will have monitored systems by the year 2000. Advances in Digital Communications Technology. Prior to the development of digital communications technology, alarm monitoring required a dedicated telephone line, which made long- distance monitoring uneconomic. Consequently, in order to achieve a national or regional presence, alarm monitoring companies were required to maintain a large number of geographically dispersed monitoring stations. The development of digital communications technology eliminated the need for dedicated telephone lines, reducing the cost of monitoring services to the subscriber and permitting the monitoring of subscriber accounts over a wide geographic area from a central monitoring station. The elimination of local monitoring stations has decreased the cost of providing alarm monitoring services and has substantially increased the economies of scale for larger alarm service companies. In addition, the concurrent development of microprocessor-based control panels has substantially reduced the cost of the equipment available to subscribers in the residential and small business markets. Alarmguard believes that several factors contribute to a favorable market for security alarm services both generally in the United States and specifically in the Northeastern and Mid- Atlantic portions of the country: Concern about Crime. According to Uniform Crime Report (the "UCR") published by the Federal Bureau of Investigation in October 1996, between 1986 and 1995 the number of violent crimes reported in the United States increased by more than 21% and the total number of criminal offenses increased by over 5% for the same period. The UCR also found that a property crime was committed in the United States in 1995 once every three seconds, one burglary was committed every twelve seconds, and one larceny theft committed every four seconds. The 1995 property crime rate was 4,593 offenses per 100,000 population. The UCR also found that larceny theft increased by more than 2% from 1994 to 1995 representing over 66% of property crimes reported and 58% of the UCR's Crime Index total. The value of property stolen in connection with property was estimated at $15.1 billion for 1995. In the Northeastern and Mid-Atlantic states in which Alarmguard operates, the overall Crime Index Rate is 10% higher than the national average in the Metropolitan Statistical Areas (MSA's) that constitute over 90% of Alarmguard's subscriber base. While the UCR found that the number of criminal offenses reported have declined over the last four years, a recent survey with respect to America's perception of crime showed that 78% of those surveyed believed that crime is worse compared to 11% who reported that crime in America has decreased. Demographic Trends. According to the U.S. Bureau of Census 1995 Statistical Abstract of the United States, resident population in the territories in which Alarmguard operates accounts for approximately one-quarter of the total U.S. population. Population growth is projected to increase by more than 6% from 1994 to 2010. According to that same 1995 report, median household income in the territories in which Alarmguard operates is approximately 15% higher than the national average. The report also found that disposable personal income in these states is as high as 30% over the national average, with the states of Connecticut, New Jersey, New York, and Massachusetts ranking as the top four states, respectively, in the nation in this category. According to a privately-commissioned study presented at a national dealer convention sponsored by ITI Technologies Inc., the following trends and factors will drive increased alarm business penetration: (i) alarm installation will more than double to 48% for all new home construction by the year 2005; (ii) the increase in the number of households headed by a single parent in the workforce and the estimated 40 million households with two parents working outside the home resulting in more children at home alone; (iii) the aging of the population in general, as older people tend to be more concerned about security; and (iv) the increase in people working at home resulting in increasing demand for security services to protect home office equipment. Insurance Discounts. The increase in demand for security systems may also be attributable in part to the practice of certain insurance companies to grant discounts to homeowners who install alarm systems. Such discounts are typically greater when systems are monitored by a central station. In addition, insurance companies may require that businesses install an alarm system as a condition of insurance coverage. Security Alarm Effectiveness. The National Burglar and Fire Alarm Association ("NBFAA") reports that homes without security systems are about three times more likely to be broken into than homes with security systems. Businesses without alarm systems are 4.5 times more likely to be burglarized than commercial locations with alarm systems. Business Strategy Alarmguard's primary objective is to provide residential and commercial security services to an increasing number of new subscribers by making such services affordable and by focusing on markets with attractive demographics. Alarmguard's strategy is to enhance its position in the security alarm monitoring industry in the Northeastern and Mid-Atlantic regions of the United States by increasing the number and density of subscribers for whom it provides services. Alarmguard is pursuing this strategy through a growth plan incorporating acquisitions of portfolios of subscriber accounts in existing and contiguous markets and internal growth of Alarmguard's core business utilizing direct marketing and authorized dealer programs and through referrals and traditional local marketing. Alarmguard believes that increasing the number and density of subscribers will help it to achieve economies of scale resulting in improved results of operations. Alarmguard's revenue has increased from $10.7 million in 1993 to $34.3 million in 1997, or 34% per year. Alarmguard's historical growth has enabled it to realize economies of scale in its central monitoring station, branch operations and its corporate office. As the number of subscribers monitored by Alarmguard has increased from approximately 49,000 monitored subscribers at December 31, 1996 to approximately 64,000 at December 31, 1997, the costs of the central monitoring station have been spread over a larger base. As of March 20, 1998, the number of subscribers has increased to approximately 100,000 following the two acquisitions completed in the first quarter of 1998 (see "Recent Developments"). Additionally, subscribers have been added in areas surrounding Alarmguard's branch offices, allowing Alarmguard to spread the branch office costs over a larger base and increasing the productivity of field service technicians through more efficient scheduling and dispatching. Finally, Alarmguard's revenue growth has exceeded the growth of its selling, general and administrative expenses, allowing Alarmguard to realize further operating efficiencies. The Acquisition Program Alarmguard seeks to grow by acquiring portfolios of subscriber accounts from other alarm companies. Alarmguard focuses on acquisitions that allow it to "fill-in" areas surrounding branch operations, which in turn lead to greater central station efficiencies and field maintenance efficiencies. Alarmguard estimates there are approximately 3,000 alarm companies in its markets, most of which are independently owned and may, from time to time, become acquisition opportunities. Alarmguard believes that it is an effective competitor in the acquisition market because of the substantial experience of its management in acquiring alarm companies and subscriber accounts as a result of the 32 acquisitions made by Alarmguard from inception through December 31, 1997. Alarmguard also believes that, through its acquisition activities, it has developed a reputation in the alarm service industry as an active purchaser of subscriber accounts. Historically, Alarmguard has offered sellers cash and promissory notes, subject to holdbacks with respect to purchase price adjustments. In 1997, Alarmguard paid for such acquisitions with a combination of cash, promissory notes and common stock. Because Alarmguard's primary consideration in acquiring a portfolio of subscriber accounts is the amount of cash flow that can be derived from the associated MRR, the price paid by Alarmguard is directly tied to such MRR. To protect Alarmguard against the loss of acquired accounts and to encourage the seller of such accounts to facilitate the transfer of subscribers, management typically requires the seller to provide guarantees against account cancellations for a period following the acquisition. Alarmguard usually holds back a portion of the acquisition price, and has the contractual right to utilize such holdback to recapture a portion of the purchase price based on the lost MRR arising from the cancellation of acquired accounts in excess of the seller's guarantee. In evaluating the quality of the accounts acquired, Alarmguard relies primarily on management's knowledge of the industry, its due diligence procedures, its experience integrating accounts into the company's operations, the history of attrition rates for the acquired accounts and the representations and warranties provided by the sellers. If the actual financial condition or operations of a seller were inaccurately represented to Alarmguard in connection with an acquisition or the actual attrition rate for the accounts acquired is greater than the rate assumed by Alarmguard at the time of the acquisition, and if Alarmguard is unable to recoup its damages from the portion of the purchase price held back from the seller, such acquisition could have an adverse effect on Alarmguard's financial condition or results of operations. Alarmguard actively seeks to identify prospective companies in the areas in which it operates through senior management's contacts in the industry. The extensive experience of Alarmguard's management in identifying and negotiating acquisitions, and Alarmguard's use of standard form agreements for smaller acquisitions, help to facilitate the successful negotiation and execution of acquisitions in a timely manner. Alarmguard conducts an extensive pre-closing review and analysis of all facets of the seller's operations. The process includes, but is not limited to, a combination of selective field equipment inspections, review of substantially all subscriber contracts, an analysis of the rights and obligations under such contracts, telephone surveys of a representative sample of subscribers, review of customer billing records and accounts receivable aging reports, review of the seller's telephone traffic and signal activity and other types of verification of the seller's operations. Alarmguard develops a specific integration plan for each acquisition in conjunction with the seller. Integration efforts typically include an Alarmguard approved letter from the seller to its subscribers explaining the sale, and a personal visit by an Alarmguard representative or mailing from Alarmguard to provide the subscriber with service brochures, field service and monitoring phone number stickers, yard signs and window decals. Each new subscriber is contacted individually by telephone by a member of Alarmguard's customer care group to solicit certain information and address the subscriber's questions or concerns. The plan's goal is to enhance new subscriber identification with Alarmguard as the service provider and to promote subscriber satisfaction to maximize the potential value of the MRR generated by purchased subscriber accounts. The Direct Marketing, Dealer and National Accounts Programs Alarmguard employs a sales force of approximately 22 employees in its Direct Marketing Program which generates new subscriber accounts through direct telemarketing. The Direct Marketing Program offers potential subscribers security alarm systems and services primarily under the "Alarmguard" trademark. Alarmguard uses a 24-seat predictive dialer which is expandable to 120 seats. In 1997, Alarmguard maintained the Direct Marketing Program at a relatively constant level of monthly sales and installation of residential and small commercial security alarm monitoring systems. Alarmguard believes it can access a broader demographic market with the Direct Marketing Program than is presently being accessed by it and other companies providing traditional high-end residential and commercial alarm service. The cost of creating a customer through the Direct Marketing Program remains substantially lower than the amount required to acquire a customer through an acquisition transaction. In late 1997, Alarmguard launched its Dealer Program which represents an externally driven growth program which augments the Direct Marketing Program. The characteristics of the subscriber purchased through the Dealer Program are similar to those of Direct Marketing Program subscribers. Under this program, Alarmguard purchases credit-approved monitoring contracts from Alarmguard authorized dealers. In most cases, Alarmguard installs the systems and deducts the cost of the installation from the amount paid to the dealer. As of December 31, 1997, the Dealer Program had 4 authorized dealers and 12 dealers as of March 20, 1998. Alarmguard plans to continue to emphasize the Direct Marketing and Dealer Programs because of the predictability and cost efficiency in adding new subscribers. Accounts generated under these programs often have a service advantage as compared to acquired accounts which may have older equipment that is less easily serviced. In addition, these programs generate a comparatively steady flow of new subscribers spread more evenly over Alarmguard's ten branch offices, making it easier for Alarmguard's branch operations to successfully assimilate these accounts. In mid 1996, Alarmguard began its National Accounts program which provides security services to multi-location commercial accounts. This program was further expanded in 1997 with the acquisition of Protective Alarms, which had a well-established national accounts program serving numerous retailers. As of December 31, 1997, the National Accounts Program had 24 accounts with approximately $100,000 of MRR, representing approximately 5% of Alarmguard's total MRR. Traditional Sales and Marketing Alarmguard believes that increasing density of its subscriber base (i.e., increasing concentration of subscribers) increases the overall presence and visibility of Alarmguard. New subscribers, whether internally developed or acquired, are provided with highly visible reflective "Alarmguard" yard signs placed prominently in front of their homes or businesses. The presence of these signs develops greater awareness in a neighborhood and leads to more inbound telephone inquiries and referral business. Alarmguard encourages referrals from existing subscribers through an incentive program promoted through billing inserts and employee contacts. Each of Alarmguard's ten branch offices employs sales representatives who sell new systems, equipment additions and upgrades and enhanced services to residential and commercial subscribers. In addition to the Direct Marketing and Dealer Programs, Alarmguard receives in-bound telephone requests for security alarm systems, primarily the result of subscriber referrals, local crime activity and responses to yellow pages advertising. Such inquiries are pursued by Alarmguard's sales representatives. Alarm sales are made at the subscriber's home or place of business. Alarmguard seeks to increase revenues from current and newly added subscribers by actively marketing enhanced services to such subscribers. These services include extended service protection, two-way voice communication, supervised monitoring services, pager service, remote audio verification and wireless back-up. Alarmguard also generates new subscriber accounts by signing monitoring contracts with new owners of residences previously occupied by Alarmguard subscribers. Alarmguard supports its traditional sales and marketing programs with direct sales collateral materials. In 1997, the Company also created an Internet website, www.alarmguard.com, where interested parties can obtain information on the Company. Sonitrol Franchise Alarmguard also sells, installs and services Sonitrol audio- based security systems in New Haven County, Connecticut as a Sonitrol franchisee. The Sonitrol system is an audio-based monitoring system designed primarily for commercial customers. As of December 31, 1997, Sonitrol represented approximately 2.5% of Alarmguard's MRR. Description of Operations Alarmguard's operations consist principally of alarm monitoring services, enhanced security services, and the installation of new subscriber equipment and field service and repair. Alarm Monitoring Services Subscriber Security Alarm Systems. Security alarm systems include devices installed at the subscriber's premises designed to detect or react to various occurrences or conditions, such as intrusion or the presence of fire or smoke. These devices are connected to a control panel that communicates primarily through telephone lines to the central monitoring station. Other transmission methodologies include cellular, long range RF and derived channel. Subscribers may also initiate an emergency signal from a device such as a "panic button." In most systems, control panels can identify the nature of the alarm and the areas within a building where the sensor was activated, and can transmit that information to the central monitoring station. The Central Monitoring Station. Alarmguard monitors substantially all of its subscriber accounts, including acquired accounts, at its central monitoring station in Orange, Connecticut. The central monitoring station incorporates the use of advanced telecommunications and computer systems that route incoming alarm signals and telephone calls to operators. Each operator is situated at a computer station that provides immediate information concerning the nature of the alarm signal, the subscriber whose alarm has been activated and the premises on which such alarm is located. All telephone conversations are automatically recorded. In March 1998, Alarmguard completed an expansion of its central monitoring station at a cost of approximately $800,000, increasing monitoring capacity to approximately 250,000 subscribers. The equipment at the central monitoring station includes: sophisticated and redundant phone switching equipment; digital receivers that process the incoming signals; a fault- tolerant mainframe computer system; a network of computer terminals; a multi-channel, voice-activated recording system; uninterruptable power supply; and two backup generators. Alarmguard's central monitoring station is listed by Underwriters Laboratory ("UL") as a protective signaling services station. The UL burglar and fire certificates were developed in response to the needs of the insurance industry as a means to verify proper installation and maintenance of burglar and fire alarm systems. To issue a UL certificate, which describes varying levels of response and protection, a central monitoring station must earn the UL listing through a series of ongoing inspections and operational tests. UL specifications for central monitoring stations include building integrity, back-up systems, staffing and standard operating procedures. In many jurisdictions, applicable law requires that security alarms for certain buildings be monitored by UL-listed facilities. In addition, such listing is required for certain commercial subscribers by insurance companies as a condition of insurance coverage. Of the estimated 11,000 companies in the security alarm industry, approximately 400 carry the UL approval. Additional listings carried by Alarmguard's central monitoring station include FM (Factory Mutual), which has more stringent procedural and equipment requirements than UL, and the Central Station Signaling Unit of the Fire Department of New York City. Alarmguard is one of only 19 central monitoring stations approved to monitor commercial fire systems in New York City. Operation of the Central Monitoring Station. Depending on the type of service provided to the subscriber, central monitoring station personnel respond to alarms by relaying information to the local fire or police departments, notifying the subscriber or taking other appropriate action, such as dispatching alarm response personnel to the subscriber's premises where this service is available. Alarmguard also provides certain subscribers with a remote audio verification capability that enables the central monitoring station to listen and speak directly into the subscriber's premises in the event of an alarm activation. This feature allows Alarmguard's personnel to verify that an emergency exists, to reassure the subscriber and to expedite emergency response, even if the subscriber is unable to reach a telephone. Remote audio verification capability also assists Alarmguard in quickly determining if the alarm was activated inadvertently, and thus whether a response is required. Alarmguard's central monitoring station operates 24 hours a day, seven days a week, including all holidays. Each operator receives training that includes familiarization with the various types of alarm systems in Alarmguard's subscriber base. This enables the operator to tell subscribers how to turn off their systems in the event of a false alarm, thus reducing the instances in which a field service person must be dispatched. Other non-emergency administrative signals are generated by low battery status, deactivation and reactivation of the alarm monitoring system and test signals, and are processed automatically by computer. All of Alarmguard's central monitoring station operators have received operator certificates from the Security Industry Association ("SIA"). Founded in 1969, SIA is a security alarm industry trade organization that promotes growth and professionalism in the alarm industry. SIA developed the first industry-wide training program for central station operators, which has been offered since 1995. This training program provides a standard orientation, introduction and procedural foundation for operators which is based on UL policies as well as input from numerous security alarm monitoring companies that operate central stations. The program consists of classroom instruction followed by a comprehensive written examination. The SIA operator certificate is issued to those operators who pass such examination. The NBFAA has endorsed and approved the SIA program, adding it to the NBFAA National Training School. Alarmguard was the first security alarm company in the United States to have all its central monitoring station operators trained and tested in the SIA program. As of March 20, 1998, there have been approximately 1,200 SIA certified central monitoring station operators granted certificates. Of these, 77, or approximately 7% have been Alarmguard employees, representing one of the highest number of certificates granted to any one SIA approved company. Subscriber Contracts. Alarmguard's monitoring/equipment lease contracts generally have initial terms of 60 months in duration, and provide for automatic renewal for a fixed period (typically one year) unless Alarmguard or the subscriber elects to cancel the contract 90 days in advance of the end of its term. Alarmguard maintains individual files with a signed copy of the contract for each of its subscribers and a computerized customer data base. Substantially all of Alarmguard's monitoring/equipment lease contracts for Alarmguard's residential subscribers provide for subscriber payments of between $25 and $40 per month. Alarmguard's commercial subscribers typically pay from $25 to $150 per month. At December 31, 1997, Alarmguard's average MRR per subscriber was approximately $32.00. Enhanced Security Services Additional MRR is generated by providing enhanced security services that Alarmguard offers to both its existing subscribers and in conjunction with the sales of new systems. These enhanced security services include: Extended Warranty Plans, which cover the normal costs of repair of the system during normal business hours, after the expiration of the initial warranty period. Two-Way Voice Communication (Remote Audio Verification), which consists of the ability, in the event of an alarm activation, to listen and talk to persons at the monitored premises from the central monitoring station through the monitoring panel located within the premises. Among other things, such remote audio verification helps Alarmguard determine if an alarm activation is a false alarm. Supervised Monitoring Service, which allows the alarm system to send various types of signals containing information on the use of the system, such as the identity of users arming or disarming the system and at what time of day. This information is supplied to subscribers for use in connection with the management of their households or businesses. Supervised monitoring service can also include a daily automatic test feature and opening and closing reports on the number of persons entering or leaving a location. Pager Service, which provides the subscriber, at discounted rates, with standard pager services that also enable Alarmguard to reach the subscriber in the event of an alarm activation. Wireless Back-Up, which permits the alarm system to send signals over a dedicated radio system in the event that regular telephone service is interrupted. Installation and Field Repair Services Alarmguard hires and maintains installation and field service personnel in each of its branch offices. Alarmguard trains its employees to install and maintain the various types of security systems marketed and serviced by Alarmguard, and those typically marketed by other dealers and found in the households of acquired subscriber accounts. The primary alarm systems that Alarmguard currently installs are manufactured by ITI (wireless) and Ademco (hard-wired). Alarmguard has purchased alarm systems from other manufacturers and believes that it can readily do so in the future if necessary. Alarmguard believes that the majority of installed alarm systems monitored in the United States was manufactured by a limited number of manufacturers. Accordingly, Alarmguard believes that it can readily train service personnel to service these systems. Installation of new alarm systems are performed on a timely basis after the completion of the sale. After completing an installation, the technician instructs the subscriber on the use of the system and furnishes a written manual and, in many instances, an instruction video. Additional follow-up instruction is provided by sales consultants in the branch office on an as-needed basis. Alarmguard believes one of the most effective ways of improving customer retention is to provide high-quality, responsive field repair service. Field service personnel are trained by Alarmguard to service the various types of security systems owned by Alarmguard's subscribers. Field service personnel also inspect installations performed by Alarmguard's installation subcontractors. Repair services generate revenues primarily through billable field service calls or contractual payments under Alarmguard's extended warranty plans. The increased density of Alarmguard's subscriber base, the result of Alarmguard's continuing effort to fill in areas surrounding its branch operations with new subscribers, permits more efficient scheduling and routing of field service technicians, and results in economies of scale at the branch level. The increased efficiency in scheduling and routing allows Alarmguard to provide faster field service response and support, which leads to a higher level of subscriber satisfaction. Customer Retention Alarmguard believes that customer satisfaction is an important factor in the retention of subscriber accounts. Alarmguard has implemented a number of measures intended to maximize customer satisfaction, including a phone survey of every subscriber receiving a field service visit. The survey consists of questions about the service visit and overall subscriber satisfaction with Alarmguard as a service provider. Periodic awards are given to the branches and individuals that maintain superior customer satisfaction. To further enhance customer satisfaction, each branch is on-line with Alarmguard's central computer in Orange, Connecticut so that employees of any branch can immediately access subscriber account information and respond promptly to questions or complaints. A history of each customer's alarm, repair and payment activities is maintained in the central computer, which enables customer representatives to promptly and effectively respond to customer inquiries. Alarmguard experiences customer cancellations of monitoring and related services as a result of subscriber relocation, the cancellation of acquired accounts during the process of integrating such accounts into Alarmguard's operations, unfavorable economic conditions and other reasons. This attrition is offset to a certain extent by revenues from the sale of additional services to existing subscribers, the reconnection of premises previously occupied by subscribers, the conversion of accounts previously monitored by other alarm companies, and guarantees provided by the sellers of such accounts. Alarmguard experienced gross MRR attrition of 12.3%, 11.9% and 11.8% in 1995, 1996 and 1997, respectively. Gross MRR attrition is defined by Alarmguard for a particular period as a quotient, the numerator of which is equal to gross MRR lost as the result of canceled subscriber accounts, including the MRR of subscribers who have moved from homes or businesses in which an existing alarm system was installed ("Transfers"), and the denominator of which is the average month-end MRR during such period. Competition The security alarm industry is highly competitive and highly fragmented. Alarmguard competes with major national firms with substantial financial resources, including Tyco International (ADT), Ameritech Corporation, Wells Fargo, Honeywell, Inc., Westec, The Pittston Brinks Group, Protection One, as well as strong regional providers. Other alarm service companies have adopted a strategy similar to Alarmguard's that entails the aggressive purchase of alarm monitoring accounts both through acquisitions of account portfolios and through dealer programs and internal growth programs. Some competitors have greater financial resources than Alarmguard, or may be willing to offer higher prices than Alarmguard is prepared to offer to purchase subscriber accounts. Utility companies and cable television companies also have recently entered the alarm monitoring business and will likely compete with Alarmguard for new accounts and for acquisitions. Competition in the security alarm industry is based primarily on reliability of equipment, market visibility, services offered and reputation for quality of service. Alarmguard believes it competes effectively with national, other regional and local security alarm companies in the Northeastern and Mid-Atlantic United States because of Alarmguard's reputation for reliable equipment and services, its concentrated presence in the areas surrounding its branch offices, its ability to bundle monitoring, maintenance and repair and enhanced services and its low cost structure. Regulatory Matters Recently, certain local government authorities have considered or adopted various measures aimed at reducing the number of false alarms. Such measures include: (i) subjecting alarm monitoring companies to fines or penalties for transmitting false alarms, (ii) licensing individual alarm systems and the revocation of such licenses following a specified number of false alarms, (iii) imposing fines on alarm subscribers for false alarms (iv) imposing limitations on the number of times the police will respond to alarms at a particular location and (v) requiring further verification of an alarm signal before the police will respond. Alarmguard's operations are subject to a variety of other laws, regulations and licensing requirements of federal, state and local authorities. In certain jurisdictions, Alarmguard is required to obtain licenses or permits, to comply with standards governing employee selection and training and to meet certain standards in the conduct of its business. Many jurisdictions also require certain of Alarmguard's employees to obtain licenses or permits. Alarmguard and its individual installers are required to hold licenses which, depending on the state, may include an electrical contractor's license and a journeyman's license. Such states may also require, as part of the licensing process, a security clearance or background check issued by the state's department of public safety or similar governmental authority. In the states where Alarmguard is required to have a single license holder, under whose license the individual installers may operate, Alarmguard generally has two or three license holders in order to ensure continuity in the event a licensed employee is transferred or leaves Alarmguard's employment. Local authorities generally require permits for large or complex fire system installations. Such permits are generally specific to the installation site and are obtained in advance of the commencement of work. The alarm industry is also subject to requirements imposed by various insurance, approval, listings and standards organizations depending upon the type of subscriber served, the type of security service provided, and the requirements of the applicable local governmental jurisdiction. Alarmguard's advertising and sales practices are regulated by both the FTC and state consumer protection laws. Such laws and regulations include restrictions on the manner in which Alarmguard promotes the sale of its security alarm systems and the obligation of Alarmguard to provide purchasers of its alarm systems with certain rescission rights. Alarmguard markets some of its products and services through telemarketing, which is regulated on the state and federal level. Alarmguard believes that these activities will increasingly be subject to such regulation. Such regulation may limit Alarmguard's ability to solicit new subscribers or to offer one or more products and services to existing subscribers and may materially affect Alarmguard's business and revenues. Alarmguard's alarm monitoring business utilizes telephone lines and radio frequencies to transmit alarm signals. The cost of telephone lines and the type of equipment which may be used in telephone line transmission are currently regulated by both federal and state governments. The operations and utilization of radio frequencies are regulated by the Federal Communications Commission and state public utilities commissions. Risk Management The nature of the services provided by Alarmguard potentially exposes it to greater risks of liability for employee acts or omissions or system failure than may be inherent in other businesses. Most of Alarmguard's alarm monitoring agreements and other agreements pursuant to which it sells its products and services include certain provisions limiting Alarmguard's liability to subscribers in an attempt to reduce this risk. Alarmguard carries insurance of various types, including general liability and errors and omissions insurance. The loss experience of Alarmguard and other security service companies may affect the availability and cost of such insurance. Certain of Alarmguard's insurance policies, and the laws of some states, may limit or prohibit insurance coverage for punitive or certain other types of damages, or liability of Alarmguard arising from gross negligence or wanton behavior. Alarmguard experiences insurance claims in the ordinary course of its business. Alarmguard does not believe that any of such pending claims will have a material adverse effect on the financial condition or results of operations of Alarmguard or Alarmguard's ability to obtain insurance coverage in the future. Trademarks Alarmguard operates under the trademark "Alarmguard" and certain other trademarks. Employees At December 31, 1997, Alarmguard employed approximately 450 individuals on a full-time basis. Currently, none of Alarmguard's employees is represented by a labor union or covered by a collective bargaining agreement. Alarmguard believes that its relations with its employees are good. ITEM 2. PROPERTIES Alarmguard's executive offices, central monitoring station and administrative offices constitute 20,000 square feet and are located at 125 Frontage Road, Orange, Connecticut (the "Headquarters"). Alarmguard has entered into a lease with respect to the Headquarters with 125 Frontage Road LLC, a company controlled by Russell R. MacDonnell, Chairman, President and Chief Executive Officer of Alarmguard. This lease expires on June 30, 2005. Alarmguard also leases office space in Piscataway, New Jersey; Cos Cob, Meriden and Darien, Connecticut; Plainview, New York; Woodlyn, Pennsylvania; Seaford, Delaware; Salisbury, Maryland.; Malden, Massachusetts; and Portland, Maine. The leases of these properties expire on various dates through 2005, and in some cases are renewable at the option of Alarmguard. ITEM 3. LEGAL PROCEEDINGS Alarmguard experiences routine litigation in the normal course of its business. Alarmguard does not believe that any pending or threatened litigation will have a material adverse effect on the financial condition, results of operations or cash flows of Alarmguard. In May 1995, a stockholder of Ridgewood Hotels, Inc. commenced a derivative and class action lawsuit in Delaware Chancery Court against Ridgewood, its directors and Triton (Alarmguard's predecessor) entitled Strassburger v. Early, et al. (C.A. No. 14267). The lawsuit concerns a transaction entered into in August 1994 in which Ridgewood purchased from Triton all of the Ridgewood common stock owned by Triton (which consisted of approximately 75% of Ridgewood's then outstanding common stock) for $8 million in cash and newly-issued Ridgewood preferred stock with a face value of $3.6 million. The complaint alleges that such transaction constituted a corporate waste and a breach by Triton of its alleged duties of loyalty and good faith as a majority stockholder to Ridgewood's other stockholders. The complaint seeks a rescission of the transaction and other unspecified monetary relief. The class action lawsuit was dismissed in March 1998. Alarmguard intends to defend vigorously against the remaining lawsuit. It is the opinion of Alarmguard's management that the ultimate resolution of such litigation will not have a material adverse effect on Alarmguard's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Registrant's security holders during the quarter ended December 31, 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (A) Market Information Alarmguard's Common Stock, par value $.0001 per share, and its warrants have been traded on the AMEX since April 16, 1997 under the symbols "AGD" and "AGDW", respectively. Prior to April 16, 1997, the date of the Merger with Triton, the common stock and warrants of Alarmguard's predecessor, Triton, were traded on the AMEX under the trading symbols "TGL" and "TGLW", respectively. The stock prices prior to April 16, 1997 listed below have been adjusted to reflect the one-for-ten reverse stock split completed on such date. Market Price of Common Stock 1997 1996 Quarters Ended High Low High Low 1st Quarter 10 7 1/2 5 9/16 3 3/4 2nd Quarter 9 1/4 5 13/16 5 9/16 3 3/4 3rd Quarter 9 5/8 8 5/16 7 1/2 6 1/4 4th Quarter 10 7/8 8 10 5/8 6 7/8 Market Price of Warrants 1997 1996 Quarters Ended High Low High Low 1stt Quarter 1/8 1/8 1/4 1/8 2nd Quarter 9/16 3/16 1/4 1/8 3rd Quarter 1/2 1/8 3/16 1/16 4th Quarter 3/8 3/16 1/4 1/8 (B) Holders At March 26, 1998, there were 328 and 403 holders of record of the Company's common stock and warrants, respectively. (C) Dividends The Company did not pay cash dividends on its common stock in 1996 and 1997 and is not expected to pay cash dividends in the foreseeable future. (D) Recent Sales of Unregistered Securities During 1997, the Company issued unregistered shares of its common stock in connection with certain acquisitions (see "Major Developments During 1997 - Other Acquisitions"). In February 1998, the Company sold unregistered shares of Convertible Preferred Stock (see "Recent Developments"). Lehman Brothers represented the Company in connection with the issuance of the Preferred Stock and was paid a cash fee of $1.8 million, plus a commitment from Alarmguard to issue warrants to purchase 80,000 shares of common stock of the Company at $8.66 per share. The Common and Preferred securities discussed herein were sold pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected consolidated financial and operating data of Alarmguard. The selected consolidated balance sheet data as of December 31, 1993, 1994, 1995, 1996, and 1997 and the selected consolidated statement of operations data for the five years then ended have been derived from the audited consolidated financial statements of SSH (referred to herein as "Alarmguard"). The selected consolidated financial data should be read in conjunction with Alarmguard's consolidated financial statements and related notes and with the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. As of and for the Years Ended December 31, 1993 1994 1995 1996 1997 (in thousands, except per share data) Statement of Operations Data: Total revenue $10,718 $17,075 $20,200 $24,152 $34,260 Gross profit 6,539 9,710 11,926 14,372 19,849 Selling, general and administrative expense 4,502 7,200 9,487 12,167 16,258 Amortization and depreciation expense 3,255 4,617 6,786 8,142 11,386 expense Operating loss (1,218) (2,107) (4,347) (5,937) (7,795) Interest and other expense, net (1,068) (1,510) (2,300) (3,051) (4,541) Loss before extraordinary item (2,286) (3,617) (6,647) (8,988) (12,336) Extraordinary loss - (218) - - (813) Net loss $(2,286)$(3,835)$(6,647)$(8,988)$(13,149) Basic and diluted per share data: (1) Loss before extraordinary item $(3.12) $(2.61) Extraordinary loss - (.17) Net loss $(3.12) $(2.78) Basic and diluted weighted average shares 2,877 4,726 Cash Flow Data: Net cash used in operating activities $(77)$(1,997)$(5,001)$(6,984) $ (5,715) Net cash used in investing activities (5,665) (3,147) (2,879) (1,623) (6,606) Net cash provided by financing activities 8,282 2,538 8,640 7,276 12,789 Other Data: Certain subscriber data: MRR at end of period (2) $822 $956 $1,129 $1,392 $2,087 Number of subscribers at end of period 25 29 36 49 64 Adjusted EBITDA: EBITDA (3) $2,037 $2,510 $2,439 $2,205 $3,591 Less Direct Marketing Program revenue (4) - (279) (1,249)(2,166) (1,265) Plus Direct Marketing Program expenses (4) 656 2,084 4,351 3,946 Plus acquisition integration expenses (4) - - - - 34 Adjusted EBITDA (5) $2,037 $2,887 $3,274 $4,390 $6,621 Balance Sheet Data: Intangible assets, net(6) $22,499 $23,517 $23,223$21,430 $43,027 Total assets 32,369 33,484 38,113 39,131 69,850 Total obligations (7) 16,162 20,735 30,776 39,775 54,789 Total stockholders' deficiency (3,473) (7,992)(15,264)(24,898)(3,197) (1) Basic and diluted per share information gives effect to the conversion of all SSH preferred and common stock into Common Stock of the Company as if it occurred at the beginning of 1996, resulting in a consistent pro forma number of common shares of 2,877,368. Actual shares outstanding are used for the weighted average share calculation for the period subsequent to the Merger with Triton. (2) "MRR" means monthly recurring revenue that Alarmguard is entitled to receive under contracts in effect at the end of such period. MRR is a term commonly used in the security alarm industry as a measure of the size of a company. It does not measure profitability or performance, and does not include any allowance for future subscriber attrition or for uncollectible accounts receivable. (3) "EBITDA" means earnings before interest, taxes, depreciation and amortization. EBITDA is derived by adding to the loss before income taxes and extraordinary items, the sum of (i) amortization of debt issuance costs, acquired customer accounts, covenants not to compete and goodwill; (ii) interest and other expense, net; and (iii) depreciation expense. EBITDA does not represent cash flows available to fund Alarmguard's cash needs. Items excluded from EBITDA are significant components in understanding and assessing Alarmguard's financial performance. Alarmguard's management believes presentation of EBITDA enhances an understanding of Alarmguard's financial condition, results of operations and cash flows because EBITDA is used by Alarmguard to measure its ability to meet its debt service obligations and its capital expenditures and other operational needs as well as to provide funds for growth. In addition, EBITDA has been used by Alarmguard's lenders and the investment community to determine current borrowing capacity and to estimate the value of companies with recurring revenues. (4) Direct Marketing Program amounts are not reportable for 1993 as the program did not commence until 1994. Acquisition integration expenses incurred prior to 1997 were not material. (5) "Adjusted" EBITDA is derived by adding to EBITDA, Direct Marketing Program and acquisition integration expenses incurred, net of Direct Marketing Program revenues earned, during the period. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, should not be construed as an alternative to net income, and is not indicative of Alarmguard's operating performance or of cash flows available to fund Alarmguard's cash needs. Alarmguard's management believes presentation of Adjusted EBITDA enhances an understanding of Alarmguard's operating results, particularly in comparison to other security alarm companies that grow substantially through acquisitions of subscriber accounts. Additionally, an amount similar to Adjusted EBITDA is used by lenders in extending credit to Alarmguard. (6) Includes acquired customer contracts, covenants not to compete and goodwill. (7) Total obligations includes the current and non-current portion of: the credit facility, subordinated debt, capital leases (included in other liabilities) and notes payable. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the historical financial condition and results of operations of Alarmguard for each of the three years in the period ended December 31, 1997. The financial information, discussion and analysis which follow are based upon and should be read in conjunction with Alarmguard's consolidated financial statements and the notes thereto, included elsewhere herein. General Alarmguard sells, installs, services and monitors security alarm systems for residential and commercial subscribers, principally in the Northeastern and Mid-Atlantic regions of the United States. At December 31, 1997, Alarmguard had MRR of $2.1 million serving approximately 64,000 subscribers accounts for its alarm monitoring services, approximately 68% of which were residential. Since January 1, 1995, Alarmguard has added approximately $748,000 of MRR through 17 separate acquisitions, $586,000 of which was acquired during 1997. Acquisitions consummated by Alarmguard typically contain contractual provisions providing for (i) a guarantee by the seller with respect to the rate of attrition measured in terms of MRR, generally for a period of 6- 12 months following the closing of such transaction, and (ii) a holdback from the seller of a portion of the purchase price which, if the actual attrition rate exceeds the guaranteed rate at the end of such 6-12 month holdback period, is applied to adjust the effective purchase price downward. No acquisition consummated by Alarmguard during such period included an acquired account which was of such a size that the loss of such account would have had a material adverse effect on the benefits to Alarmguard of such acquisition. From January 1, 1995 to December 31, 1997, Alarmguard added approximately $567,000 of MRR through the Direct Marketing Program, including $193,000 of MRR during the year ended December 31, 1997. The total MRR added during the same periods (before cancellations) was $1.6 million and $913,000, respectively. Alarmguard continually pursues numerous acquisition opportunities. Generally, acquisitions involve cash, promissory notes and common stock. To the extent that a transaction requires payment of the entire purchase price in cash, the capital available to support other direct marketing growth initiatives will be reduced, which may in turn adversely impact Alarmguard's overall liquidity. Alarmguard increased its MRR from approximately $1.0 million at January 1, 1995 to approximately $2.1 million at December 31, 1997. Alarmguard internally generates two different types of new subscriber accounts, accounts generated through the Direct Marketing Program and accounts generated through traditional sales efforts at its ten branch offices. In the Direct Marketing Program, Alarmguard utilizes outbound telemarketing and other high volume sales approaches, to offer a basic alarm system for a low downpayment. New subscribers are generally required to enter into noncancellable monitoring/equipment lease contracts which have a term of 60 months. Alarmguard retains ownership of the alarm system hardware installed for the new subscriber. Alarmguard's costs associated with generating a new account substantially exceed the installation fee received from the customer. However, these costs are significantly less than the monitoring revenues to be realized over the life of the monitoring/equipment lease contract. Each new subscriber is subject to credit approval prior to entering into a monitoring contract under the Direct Marketing Program. In late 1997, Alarmguard launched its Dealer Program. Under this program, Alarmguard purchases credit-approved monitoring contracts from Alarmguard authorized dealers. In most cases, Alarmguard installs the systems and charges back the dealer for the cost of the installation. The subscriber profile is similar to accounts generated through the Direct Marketing Program. Alarmguard also markets traditional alarm systems through its branch offices, which are characterized by the sale of the alarm system by Alarmguard to the subscriber at a non-subsidized price. A majority of Alarmguard's revenues are derived from recurring payments for the monitoring, maintenance and leasing of subscribers' security systems. The remainder of Alarmguard's revenues include revenues for installing Direct Marketing Program alarm systems, revenues derived from the sale and installation of traditional alarm systems, revenues from installing and/or selling add-ons and upgrades to alarm systems, and revenues derived from payments for service calls performed based on time incurred and materials used. Monitoring and service revenues are recognized as the monitoring or service is provided. Selling and marketing costs, excluding commissions on the generation of Direct Marketing Program accounts, are generally expensed in the period incurred. With respect to the Direct Marketing Program, Alarmguard defers all direct costs (principally equipment, labor and direct sales commissions) incurred in connection with installing and activating new subscriber accounts. Such direct costs are amortized over a period of 48 months, which reflects the life of the contract adjusted for estimated subscriber attrition. It is Alarmguard's policy to review actual account attrition on a quarterly basis and, when an installation is identified for disconnection, to fully write off and charge to amortization expense the remaining net book value of the installation costs. Substantially all other costs associated with the Direct Marketing Program (principally telemarketing and overhead) are expensed as incurred. Alarmguard grew rapidly in the year ended December 31, 1997, realizing a 30.6% increase in the number of monitored subscriber accounts, from approximately 49,000 at December 31, 1996 to approximately 64,000 at December 31, 1997, and a 49.9% increase in MRR, from $1.4 million at December 31, 1996 to $2.1 million at December 31, 1997. Total revenues increased by 41.9% from $24.2 million in 1996 to $34.3 million in 1997. Adjusted EBITDA as a percentage of total revenue less Direct Marketing Program installation revenues was 20.0% in 1997 and 20.0% in 1996. Alarmguard's operating loss increased from $5.9 million in 1996 to $7.8 million in 1997. Alarmguard's net loss increased from $9.0 million in 1996 to $13.1 million in 1997. The increased operating loss in 1997 reflects primarily the increase in amortization expense associated with the acquisition of subscriber accounts during the year. The increased net loss in 1997 reflects the increased amortization expense discussed above combined with an increase in net interest expense as a result of a higher level of borrowings in 1997. Accounting Policies for Direct Marketing Program Installations and Subscriber Account Purchases. The difference between Alarmguard's accounting policy for the generation of subscriber accounts through the Direct Marketing Program and its accounting policy for the acquisition of subscriber account portfolios has a significant impact on Alarmguard's results of operations. Substantially all telemarketing and overhead costs related to the generation of subscriber accounts under the Direct Marketing Program are expensed in the period in which such costs are incurred. During 1997, the costs of the Direct Marketing Program which were expensed relating to an average Direct Marketing Program installation exceeded the amount of installation revenues recognized. Accordingly, new Direct Marketing Program accounts adversely affect operating results for the period in which the associated marketing expenses are incurred. In contrast to the accounting policy for the Direct Marketing Program expenses, costs associated with acquisitions of subscriber accounts are capitalized and amortized over six to ten years, the estimated average life of an acquired account, on a straight-line basis. Alarmguard personnel and related support costs incurred solely in connection with subscriber account acquisitions and transitions are generally expensed as incurred. As a result of these accounting policies, Alarmguard's results of operations may vary in any period depending on the relative contribution to growth in subscriber accounts from internal generation of Direct Marketing Program accounts and from acquisitions of subscriber account portfolios. Gross MRR Attrition: Gross MRR attrition has an adverse effect on the Company's financial position and results of operations, since if affects the Company's recurring revenues. Gross MRR attrition, generally expressed on an annualized basis, can be measured in terms of decreased MRR resulting from canceled subscriber accounts. Gross MRR attrition is defined by the Company for a particular period as a quotient, the numerator of which is equal to gross MRR lost as the result of canceled subscriber accounts during a period and the denominator of which is the average month-end MRR during the period. The following table sets forth the Company's MRR additions, cancellations, and gross MRR attrition for the periods indicated: Years Ended December 31, 1995 1996 1997 MRR: Beginning of period $956 $1,129 $1,392 Direct Marketing Program additions 110 264 193 Additions through acquisitions 82 80 586 Other additions (1) 109 73 134 Canceled MRR (2) (128) (154) (218) End of period $1,12 $1,39 $2,08 9 2 7 Annual attrition 12.3% 11.9% 11.8% (1) MRR primarily generated through traditional sales programs and the National Accounts Program. (2) Includes canceled MRR of subscribers who have moved from homes or businesses in which an existing alarm system has already been installed ("Transfers"). Average MRR per Subscriber. Alarmguard's average MRR per existing subscriber was approximately $32.00 at December 31, 1997. Future Net Losses. Alarmguard expects to incur net losses for the foreseeable future. Factors contributing to Alarmguard's net losses included the initial excess of expenses over revenues generated by the Direct Marketing Program and the charges incurred by Alarmguard for amortization of purchased subscriber accounts and capitalized costs (materials, labor and direct sales commissions) associated with the Direct Marketing Program, interest expense incurred on its indebtedness. Although the Direct Marketing Program adversely impacts current period results, Alarmguard believes the Direct Marketing Program will benefit operating results in the future years because of the ongoing monitoring revenues associated with such accounts. Certain Potential Environmental Liabilities. In the past, Triton, through certain divisions and wholly-owned subsidiaries, owned and operated businesses that conducted operations that included the use, generation and disposal of hazardous waste and hazardous substances. Certain potential environmental liabilities exist associated with these former operations, including potential contamination at, or migrating from, certain properties historically owned or operated by these former divisions and subsidiaries. Triton also has limited contractual indemnification obligations relating to certain of these matters. With respect to these potential environmental liabilities, management believes that most of these liabilities were discharged in Triton's 1993 bankruptcy proceedings or, if a matter were to circumvent the bankruptcy discharge, would be covered by insurance. Historically, these environmental matters have not had a material adverse effect on the Company's financial condition and, although there can be no assurance, management does not expect such matters to have a material adverse effect on the Company's financial condition, results of operations or cash flows in the future. Year 2000 issues. The year 2000 issue relates to computer system programs which may not properly recognize the change in date years from 1999 to 2000. As a result of this sensitivity of existing software, any business entity is at risk for possible system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on a risk assessment, the Company has utilized both internal and external resources to reprogram or replace and test software for year 2000 modifications. The total cost of the year 2000 project has not been and is not expected to be material to the results of operations or cash flows of the Company. The Company presently believes that with these modifications to its software the year 2000 issue does not pose a significant operational problem. Subscriber systems are generally not date dependent, except in the case of certain access control systems installed at subscribers' premises. These systems have been identified and are currently being upgraded. The cost of these upgrades will not be material to the Company. The Company intends to initiate formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to suppliers' failure to remediate their own Year 2000 issues. Results of Operations The following table sets forth certain operating data as a percentage of total revenues, other than Adjusted EBITDA which is a percentage of total revenue less Direct Marketing Program installation revenue for the periods indicated: Year ended December 31, 1995 1996 1997 Recurring revenue 59.8% 62.2% 62.9% Installation revenue 34.1% 31.5% 30.6% Service revenue 6.1% 6.3% 6.5% Total Revenue 100.0% 100.0% 100.0% Monitoring expense 8.4% 9.3% 7.9% Installation expense 20.8% 19.4% 22.0% Service expense 11.8% 11.8% 12.2% Total cost of revenue 41.0% 40.5% 42.1% Gross profit 59.0% 59.5% 57.9% Sales and marketing expense 15.0% 15.5% 13.6% General and administrative expense 32.0% 34.9% 32.8% Acquisition integration expense - - 1.0% Amortization and depreciation expense 33.5% 33.8% 33.2% Total operating expense 80.5% 84.2% 80.6% Operating loss (21.5%) (24.7%) (22.7%) Other operating data: EBITDA 12.1% 9.1% 10.5% Direct Marketing Program installation revenue (6.2%) (9.0%) (3.7%) Direct Marketing Program and acquisition integration expenses 10.3% 18.0% 12.5% Adjusted EBITDA 17.3% 20.0% 20.1% 1997 Compared to 1996 Revenue. Revenues for 1997 increased by $10.1 million, or 41.9%, to $34.3 million from $24.2 million for 1996. Recurring revenue increased by $6.5 million, or 43.5%, from $15 million in 1996 to $21.5 million in 1997, which was primarily the result of an increase in the number of monitored accounts generated primarily due to the acquisition of portfolios of subscriber accounts in 1997 as well as accounts generated through the Direct Marketing Program. Installation revenue, which includes revenues from the installation of Direct Marketing Program systems and from sales of traditional systems, increased by 37.5% to $10.5 million in 1997 from $7.6 million in 1996, due to the growth in system sales as a result of a larger account base in a larger territory. Service revenue increased by 47.3% to $2.3 million in 1997 from $1.5 million in 1996, due primarily to the growth in the account base. Gross Profit. Gross profit in 1997 increased by $5.5 million, or 38.1%, to $19.9 million from $14.4 million in 1996. This increase was due to the growth in MRR as a result of the addition of acquired account portfolios and growth related to the Direct Marketing Program. As a percentage of total revenues, gross profit declined from 59.5% in 1996 to 57.9% in 1997. The decrease of gross profit as a percentage of total revenue was primarily the result of several larger commercial installations which had lower gross profit margins than the Company's traditional business as well as lower per-unit revenue for installations through the Direct Marketing Program. Sales and Marketing. Sales and marketing expenses for 1997 increased by $1.0 million, or 25.1%, to $4.7 million from $3.7 million in 1996. This increase was primarily the result of greater marketing efforts directed at adding new subscriber accounts through traditional sales and the Direct Marketing Program. Acquisition Integration Expense. In 1997 the Company incurred $349,000 of costs associated with the integration of acquired subscriber accounts into the Company's system. These costs were not material in 1996 and 1995. Management expects to incur such costs in the future, principally relating to the acquisition and integration of larger subscriber account portfolios. General and Administrative Expenses. General and administrative expenses for 1997 increased $2.8 million, or 33.3%, to $11.2 million from $8.4 million in 1996. The increase was primarily the result of staffing requirements at both the operating and corporate level required to facilitate the Company's growth plan and additional expenses of operating as a public company, costs which were not incurred in 1996. As a percent of total revenue, general and administrative expense decreased to 32.8% in 1997 from 34.9% in the comparable 1996 period, reflecting economies of scale resulting from incremental revenue growth. Amortization and Depreciation. Amortization and depreciation expenses increased in 1997 by $3.2 million, or 39.8%, to $11.4 million from $8.1 million in 1996. This increase was primarily the result of Alarmguard's acquisition of approximately 12,400 subscriber accounts in 1997 as well as the addition of approximately 7,000 monitored subscriber accounts through the Direct Marketing Program. Net Interest Expense. Net interest expense for 1997 increased by $1.7 million, or 55.4%, to $4.7 million from $3.0 million in 1996. This increase was primarily the result of higher weighted average debt outstanding under the Credit Facility, as well as a higher interest rate on its subordinated debt. Alarmguard increased its borrowing during this period to fund the acquisition of subscriber portfolios and Direct Marketing Program account growth. 1996 Compared to 1995 Revenue. Revenue for 1996 increased by $4.0 million, or 19.6%, to $24.2 million from $20.2 million for 1995. Recurring revenue increased by $3.0 million, or 24.3%, which was primarily the result of an increase in the number of monitored accounts generated by the Direct Marketing Program and the acquisition of portfolios of subscriber accounts. Installation revenue increased by 10.6% to $7.6 million in 1996 from $6.9 million in 1995. Service revenue increased by 22.9% to $1.5 million in 1996 from $1.2 million in 1995. Gross Profit. Gross profit in 1996 increased by $2.5 million, or 20.5%, to $14.4 million from $11.9 million in 1995. This increase was due to the growth in MRR as a result of the addition of acquired account portfolios and growth related to the Direct Marketing Program. As a percentage of total revenues, gross profit rose from 59.0% in 1995 to 59.5% in 1996. Sales and Marketing. Sales and marketing expenses for 1996 increased by $0.7 million, or 23.6%, to $3.7 million from $3.0 million in 1995. This increase was primarily the result of greater marketing efforts directed at adding new subscriber accounts through traditional sales and the Direct Marketing Program. The Direct Marketing Program added 10,000 and 5,000 monitored subscriber accounts in 1996 and 1995, respectively. General and Administrative Expenses. General and administrative expenses for 1996 increased $1.9 million, or 30.4%, to $8.4 million from $6.5 million in 1995. This increase was due to the significant growth associated with the Direct Marketing Program during 1996. Amortization and Depreciation. Amortization and depreciation expenses increased in 1996 by $1.3 million, or 20.0%, to $8.1 million from $6.8 million in 1995. This increase was primarily the result of Alarmguard's acquisition of approximately 3,800 subscriber accounts and the addition of approximately 10,000 monitored subscriber accounts from the Direct Marketing Program during 1996. Net Interest Expense. Net interest expense for 1996 increased by $0.7 million, or 30.8%, to $3.0 million from $2.3 million in 1995. This increase was the result of higher weighted average debt outstanding under the Credit Facility. Alarmguard increased its borrowing during this period to fund Direct Marketing Program account growth and the acquisition of subscriber account portfolios. Liquidity and Capital Resources General. Since May 1992, Alarmguard has financed its operations and growth from a combination of borrowings under credit facilities, sales of its capital stock, the 1997 Merger with Triton Group Ltd and the cash realization of certain non- strategic assets. Alarmguard's principal uses of cash have historically been and are expected to continue to be for acquisitions of subscriber account portfolios, interest payments on borrowings under the credit facility and the costs associated with marketing and installing Direct Marketing and Dealer Program systems. A substantial portion of Alarmguard's future operating cash flow will be used to fund these initiatives and requirements. As of December 31, 1997, a lending group provided term loans to Alarmguard, Inc., a wholly owned subsidiary of the Company (the "Borrower") under a $60 million Restated Term Loan and Acquisition Credit Agreement (the "Credit Facility") in an aggregate principal amount of approximately $46.7 million. The Credit Facility is a senior secured term credit facility. Loans outstanding under the Credit Facility bear interest based, at the option of the Borrower, at a floating rate equal to either (i) the greater of (x) a base rate and (y) the Federal Funds effective rate plus 0.5% per annum, plus, in either case, the applicable margin of 1.5%, or (ii) the Eurodollar rate, plus the applicable margin of 3%. At December 31, 1997, availability under the Credit Facility was approximately $2.3 million. The Credit Facility is a two-year non-amortizing loan which converts to an amortizing five-year term loan on April 30, 1999. On October 29, 1997, the Borrower entered into a three-year interest rate swap agreement at 6.09% (LIBOR) plus the applicable margin of 3.0%, or a fixed rate of 9.09%. The fixed rate based on the current Credit Facility is 8.84%. As a result of the swap agreement, the Borrower has fixed the interest rate on $40 million out of $46.7 million outstanding at December 31, 1997. The loans and other obligations under the Credit Facility are secured by a first lien on all the tangible and intangible personal property of the Borrower and its subsidiaries, a pledge of the capital stock of all of the Company's existing or future subsidiaries and is guaranteed by Alarmguard and a subsidiary. The Credit Facility contains covenants which, among other matters, (i) limit indebtedness, (ii) limit capital expenditures, (iii) require the satisfaction of certain financial ratios and (iv) limit the declaration of dividends. As of December 31, 1996 the restricted net assets of the Borrower were approximately $1.1 million. As of December 31, 1997, the Borrower's liabilities exceeded its assets by $10.2 million. The Credit Facility provides for the following material events of default: (i) nonpayment of principal or interest; (ii) breach by the Borrower of any affirmative or negative covenants; (iii) any misrepresentation by the Borrower; (iv) cross default with respect to other agreements or obligations of the Borrower; (v) incurrence of additional indebtedness by Alarmguard, except for certain permitted indebtedness; (vi) creation of any liens on Alarmguard's property, assets or revenues other than certain permitted liens; and (vii) certain defaults relating to bankruptcy, insolvency, ERISA and judgments, with customary limitations and time periods. On February 3, 1998, the Company completed an offering of 40,000 shares of Cumulative Convertible Preferred Stock at $1,000 per share yielding gross proceeds totaling $40 million. The offering was comprised of 35,000 shares of Series A Convertible Preferred Stock and 5,000 shares of Series B Convertible Preferred Stock. The Series A Preferred Stock pays quarterly dividends at 5% per annum. Concurrently, the Company issued 700 additional shares of the Series A Preferred Stock in exchange for $.7 million of the Company's subordinated debt. Net proceeds of the total offering, after the payment of investment banking fees and legal expenses, amounted to approximately $38.0 million. Under the terms of the securities, each holder of the Series A and Series B Preferred has the right to convert its shares, at the option of the holder, at any time, into shares of the Company's common stock at the conversion price of $8.25 per share and $7.75 per share, respectively, subject to certain anti- dilution provisions. Concurrent with the offering, the Borrower increased its Credit Facility discussed above from $60 million to $90 million with an expanded lending group. The net proceeds from the offering and the additional Credit Facility are intended to finance acquisitions and expand the Company's Direct Marketing and Dealer Programs. On February 5, 1998, the Company completed the acquisition of all of the common stock of Pelletier, headquartered in Danbury, Connecticut, for cash consideration of approximately $10.9 million, including a one-year holdback subject to certain revenue guarantees. The acquisition added over 7,200 accounts and MRR of approximately $210,000 to the Company's subscriber base. On March 17, 1998, Alarmguard completed the acquisition of certain assets of Sentry headquartered in Malden, Massachusetts with an office in Portland, Maine. This acquisition added approximately 26,000 subscribers and MRR of approximately $.6 million. The purchase price for Sentry company was approximately $26.5 million. The Company believes its current sources of funds will be sufficient to satisfy its requirements for at least the next twelve months. The Company, depending on future needs and the cost and availability of various financing alternatives, may from time to time seek additional debt or equity financing in the public or private markets in order to support the growth of subscriber accounts through acquisitions and the Direct Marketing and Dealer Programs. During 1997, 1996 and 1995, Alarmguard's net cash used in its operating activities was $5.7 million, $7.0 million and $5.0 million, respectively. These uses of cash were primarily the result of capitalized Direct Marketing Program installation costs. During 1997, 1996 and 1995, Alarmguard's net cash used in its investing activities was $6.6 million, $1.6 million and $2.9 million, respectively. These uses primarily represent the acquisition of subscriber account portfolios in all three years, net of cash acquired in 1997 from the Merger with Triton. During 1997, 1996 and 1995, Alarmguard's net cash provided by financing activities was $12.8 million, $7.3 million and $8.6 million, respectively. Financing activities were principally the result of the restructuring and extension of the Credit Facility in all three years to fund acquisitions and the Direct Marketing and Dealer Programs. Capital Expenditures. Alarmguard requires capital expenditures for its core operations, including central monitoring station equipment, phone systems and the refurbishment of offices, which have historically totaled less than $1.0 million annually. This amount will vary based on the growth of subscriber accounts and significant acquisitions of subscriber accounts. In March 1998, Alarmguard completed an expansion of its central monitoring facility, increasing its capacity to approximately 250,000 subscribers at a cost of approximately $800,000. Adoption of Recent Accounting Standards In 1997, the Financial Accounting Standards Board (FASB) issued SFAS NO. 128. "Earnings per Share," which was adopted in the fourth quarter of 1997. This new rule changes the way earnings per share is calculated and requires restatement of all reported prior period amounts. Under the new requirements, basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. The diluted earnings per share computation includes the effect of shares, if dilutive, which would be issuable upon the exercise of outstanding stock options, reduced by the number of shares which are assumed to be purchased by the Company from the resulting proceeds at the average market price during the period. During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 130 is effective for the first quarter of 1998, while SFAS 131 is effective for year end financial reporting in 1998 and on an interim basis thereafter. Both of these pronouncements require additional disclosure and the company expects no material impact upon adoption. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements and supplementary data, together with the report of Ernst & Young LLP, independent auditors, are included elsewhere herein. See "Index to Consolidated Financial Statements" on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III The information to be set forth herein, Item 10, "Directors and Executive Officers of the Registrant," Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management," and Item 13, "Certain Relationships and Related Transactions," will be included in a definitive Proxy Statement pursuant to Regulation 14A, which is incorporated herein by reference. It is anticipated that copies of such Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31,1997. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as a part of this Form 10-K a. Consolidated Financial Statements and Schedules. The following consolidated financial statements and schedules are included in this Annual Report on Form 10-K on the pages listed below. Page Consolidated Financial Statements F-1 Report of Independent Auditors F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 F-4 Consolidated Statements of Operations for the years ended December 31, 1995, 1996, and 1997. F-5 Consolidated Statements of Stockholders' Deficiency for the years ended December 31, 1995, 1996 and 1997. F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997. F-7 Notes to Consolidated Financial Statements Page Schedule S-1 Schedule I - Condensed Financial Information of Alarmguard Holdings, Inc. (Parent Company) All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. b. Exhibits. Exhibit Number Exhibit Description 2.01 Agreement and Plan of Merger, dated December 23, 1996, among Triton Group Ltd., Triton Acquisition Corp. and Security Systems Holdings, Inc. (restated to reflect Amendment No. 1 to Agreement and Plan of Merger dated as of March 6, 1997), incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 3.01 Second Amended and Restated Certificate of Incorporation, incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 3.02 Second Amended and Restated By-Laws, incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 3.03 Form of Second Amended and Restated Certificate of Incorporation of Security Systems Holdings, Inc., incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 3.04 Form of Second Amended and Restated By-Laws of Security Systems Holdings, Inc., incorporated herein by reference to File No. 333-23307. Registration Statement on Form S- 4, filed March 14, 1997. 3.05 Certificate of Designations, Preferences and Rights of Series A Preferred Stock and Series B Preferred Stock dated February 2, 1998. 4.01 Warrant Agreement and Form of Warrant, incorporated herein by reference to file No. 1-8592, Exhibit 4 to Interim Report on Form 8-K dated July 12, 1993. 4.02 Warrant Agreement in favor of Patricof & Co. Capital Corp., dated January 1, 1996, incorporated herein by reference to file No. 0-8138, Annual Report on Form 10-K for the year ended March 31, 1996. 4.03 Form of Alarmguard Common Stock Certificate, incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 4.04 Form of Alarmguard Warrant Certificate, incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 4.05 Registration Rights Agreement, incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 4.06 Registration Rights Agreement dated February 2, 1998, with Series A and B Preferred Stock holder. 10.01Note Payable Agreement, incorporated herein by reference to File No.1-8138, Interim Report on Form 10-Q, filed August 14, 1997. 10.02Protective Alarms, Inc. Stock Purchase and Sale Agreement, as amended, incorporated herein by reference to File No. 1-8138, Interim Report on Form 8-K, filed May 1, 1997. 10.031997 Long Term Stock Incentive Plan, incorporated herein by reference to File No. 333-23307, Registration Statement on Form S-4, filed March 14, 1997. 10.04 Stock Purchase Agreement between Ridgewood Properties, Inc. and Triton Group Ltd., dated August 15, 1994, incorporated herein by reference to File No. 1- 8138, Interim Report on Form 8-K/A, filed September 2, 1994. 10.05 Severance Agreement of Russell R. MacDonnell, incorporated herein by reference to File No. 333-23307, Registration Statement of Form S-4, filed March 14, 1997. 10.06 Severance Agreement of David Heidecorn, incorporated herein by reference to File No. 333-23307, Registration Statement of Form S-4, filed March 14, 1997. 10.07 Severance Agreement of Gregory J. Westhoff, incorporated herein by reference to File No. 333-23307, Registration Statement of Form S-4, filed March 14, 1997. 10.08 Management Agreement with Triton Group Management, Inc., incorporated herein by reference to File No. 333- 23307, Registration Statement of Form S-4, filed March 14, 1997. 10.09 Stock Option and Conversion Agreement, incorporated herein by reference to File No. 333-23307, Registration Statement of Form S-4, filed March 14, 1997. 10.10 Preferred Stock Purchase Agreement, dated February 2, 1998. 10.11 Third Amended and Restated Term Loan and Acquisition Credit Agreement, dated as of February 2, 1998. 10.12 Asset Purchase and Sale Agreement, dated as of March 5, 1998, with Security Systems, Inc., James W. Lees and Edward A. Silvey. 21.1 Listing of Subsidiaries of Alarmguard Holdings, Inc. 23.1 Consent of Ernst & Young LLP. 27.1 Financial Data Schedules. (a) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, each of the registrants has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALARMGUARD HOLDINGS, INC. By: /s/ David Heidecorn Director, Executive Vice President and Chief Financial Officer Date: March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of each of the registrants and in the capacities and on the dates indicated. Signature Title Date /s/ Russell R. MacDonnell President, Chief Executive March 30, 1998 Russell R. MacDonnell Officer and Chairman of the Board /s/ David Heidecorn Executive Vice President, March 30, 1998 David Heidecorn Chief Financial Officer and Director /s/ Stuart L. Bell Director March 30,1998 Stuart L. Bell /s/ Michael E. Cahr Director March 30, 1998 Michael E. Cahr /s/ Michael M. Earley Director March 30, 1998 Michael M. Earley /s/ Stephen L. Green Director March 30, 1998 Stephen L. Green /s/Thomas W. Janes Director March 30, 1998 Thomas W. Janes Report of Independent Auditors The Board of Directors and Stockholders Alarmguard Holdings, Inc. We have audited the accompanying consolidated balance sheets of Alarmguard Holdings, Inc. (formerly Security Systems Holdings Inc.) as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' deficiency and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alarmguard Holdings, Inc. at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/Ernst & Young LLP Stamford, Connecticut March 18, 1998 Alarmguard Holdings, Inc. Consolidated Balance Sheets December 31, 1996 1997 (In thousands) Assets Current assets: Cash and cash equivalents $ 230 $ 698 Restricted cash - 1,931 Accounts receivable, less allowance for doubtful accounts of $298 and $1,003, respectively 3,791 5,558 Inventories 1,698 3,065 Prepaid expenses 332 343 Other current assets 250 - Total current assets 6,301 11,595 Property and equipment, net 2,478 2,133 Customer installation costs, net of accumulated amortization of $2,383 7,531 8,868 and $5,354, respectively Customer contracts and intangibles, net of accumulated amortization 21,430 43,027 of $15,854 and $22,217, respectively Other investments - 2,245 Other assets 1,391 1,982 Total assets $39,131 $69,850 Alarmguard Holdings, Inc. Consolidated Balance Sheets (continued) December 31, 1996 1997 (In thousands) Liabilities and stockholders' deficiency Current liabilities: Accounts payable $1,469 $ 2,659 Accrued expenses 1,390 5,675 Current portion of notes payable 696 2,462 Current portion of credit facility 4,169 - Deferred revenue 4,621 6,231 Other current liabilities 1,008 4,061 Total current liabilities 13,353 21,088 Notes payable, less current portion 2,563 549 Credit facility 26,467 46,700 Subordinated debt 4,951 4,389 Other liabilities 422 321 Commitments and Contingencies - Note 15 Redeemable preferred stock, $100 par value; Series A, 5% cumulative dividends, 50,000 shares authorized, issued and outstanding at December 31, 1996 5,994 - Redeemable preferred stock, $120 par value; Series B, 5% cumulative dividends, 72,500 shares authorized, issued and outstanding at December 10,279 - 31, 1996 Stockholders' deficiency: Common stock, $1.00 par value; 256,500 shares authorized 237,671 shares (including 33,748 shares of Class B non- voting shares) issued and outstanding at December 31, 1996 237 - Common stock, $0.0001 par value, 25,000,000 shares authorized, 5,593,396 shares issued and outstanding at December 31, 1997, including 361,238 shares held in escrow pursuant to holdback provisions in acquisition agreements - 1 Additional paid in capital 35 35,286 Accumulated deficit (25,135) (38,484) Notes receivable from officers (35) - Total stockholders' deficiency (24,898) (3,197) Total liabilities and stockholders' deficiency $ 39,131 $ 69,850 See accompanying notes to consolidated financial statements. Alarmguard Holdings, Inc. Consolidated Statements of Operations (In thousands, except per-share data) Years ended December 31, 1995 1996 1997 Recurring revenue $12,072 $15,011 $21,540 Installation revenue 6,885 7,613 10,470 Service revenue 1,243 1,528 2,250 Total revenue 20,200 24,152 34,260 Monitoring expense 1,691 2,258 2,692 Installation expense 4,196 4,685 7,543 Service expense 2,387 2,837 4,176 Total cost of revenue 8,274 9,780 14,411 Gross profit 11,926 14,372 19,849 Sales and marketing expense 3,020 3,732 4,669 General and administrative expense 6,467 8,435 11,240 Acquisition integration expense - - 349 Amortization and depreciation expense 6,786 8,142 11,386 Total operating expenses 16,273 20,309 27,644 Operating loss (4,347) (5,937) (7,795) Other income (expense): Interest expense, net (2,278) (3,014) (4,683) Other, net (22) (37) 142 Loss before extraordinary items (6,647) (8,988) (12,336) Loss on refinancing of debt - - (813) Net loss (6,647) (8,988) (13,149) Dividend requirement on preferred (685) (685) (200) stock Loss applicable to common shares $(7,332) $(9,673) $(13,349) Basic and diluted loss per share: Loss before extraordinary item $(3.12) $(2.61) Loss on refinancing of debt - (.17) Net loss $(3.12) $(2.78) Weighted average number of basic and diluted shares 2,877 4,726 See accompanying notes to consolidated financial statements. Alarmguard Holdings, Inc. Consolidated Statements of Stockholders' Deficiency For the years ended December 31, 1995, 1996 and 1997 Notes Receiva Total Common Paid Accumula ble Stockhol Stock in ted from ders' Capital Deficit Officers Deficiency (In thousands) Balance at January 1, 1995 $154 $18 $ (8,130) $(34) $(7,992) Issuance of 49,753 shares of common stock (including 20,249 shares of Class B non-voting shares), $1.00 par value 49 11 - - 60 Exercise of stock options 1 - - (1) - Preferred stock dividends - - (685) - (685) Net loss - - (6,647) - (6,647) Balance at December 31, 1995 204 29 (15,462) (35) (15,264) Issuance of 33,168 shares of common stock (including 13,499 shares of Class B non-voting shares), $1.00 par value 33 6 - - 39 Preferred stock dividends - - (685) - (685) Net loss - - (8,988) - (8,988) Balance at December 31, 1996 237 35 (25,135) (35) (24,898) Conversion of redeemable preferred stock - 16,273 - - 16,273 Merger with Triton Group Ltd (236) 15,166 - 35 14,965 Issuance of 567,890 shares of common stock, $0.0001 par value, issued in connection with acquisitions, including 361,238 shares held in escrow - 3,812 - - 3,812 Preferred stock dividends - - (200) - (200) Net loss - - (13,149) - (13,149) Balance at December 31, 1997 $1 $35,286 $(38,484) $ - $(3,197) See accompanying notes to consolidated financial statements. Alarmguard Holdings, Inc. Consolidated Statements of Cash Flows Years ended December 31, 1995 1996 1997 (In thousands) Operating activities: Net loss $(6,647) $(8,988) $(13,149) Adjustments to reconcile net loss to net cash used in operating activities: Loss on refinancing of debt - - 813 Amortization and depreciation 6,786 8,142 11,386 Customer installation costs incurred (3,445) (5,812) (4,098) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable (284) 7 (243) Inventories (377) (444) (998) Prepaid expenses 48 94 233 Other current assets (8) (131) 371 Other assets (610) (155) (285) Accounts payable 149 (18) 319 Accrued expenses (736) 286 (995) Deferred revenue 235 307 294 Other current liabilities (36) (326) 637 Other liabilities (76) 54 - Net cash used in operating activities (5,001) (6,984) (5,715) Investing activities: Acquisitions of businesses, net of cash acquired (2,229) (1,221) (6,477) Increase in restricted cash - - (1,931) Purchases of property and equipment (650) (402) (429) Cash distribution from Mission West - - 2,231 Net cash used in investing activities (2,879) (1,623) (6,606) Financing activities: Proceeds from issuances of common stock 60 39 - Proceeds from term loan 7,400 8,100 48,100 Proceeds from issuance of subordinated debt 2,970 1,981 4,600 Payments of notes payable (36) (170) (1,243) Payments of term loan (1,357) (1,907) (32,036) Payments of subordinated debt - - (4,950) Financing fees paid - (277) (1,047) Payments of capital leases (397) (490) (635) Net cash provided by financing activities 8,640 7,276 12,789 Increase (decrease) in cash and cash equivalents 760 (1,331) 468 Cash and cash equivalents at beginning of year 801 1,561 230 Cash and cash equivalents at end of year $ 1,561 $ 230 $ 698 See accompanying notes to consolidated financial statements. Alarmguard Holdings, Inc. Notes to Consolidated Financial Statements December 31, 1997 1. Basis of Presentation and Merger Alarmguard Holdings, Inc. ("Alarmguard" or the "Company") is the successor-in-interest to Security Systems Holdings, Inc. ("SSH") and Triton Group Ltd. ("Triton"), following the merger ("Merger") of SSH and Triton on April 15, 1997. The Merger was pursuant to an Agreement and Plan of Merger dated December 23, 1996, as amended March 6, 1997 (the "Merger Agreement") by and among SSH and Triton. Alarmguard, through its wholly-owned subsidiaries, sells and installs burglar and fire alarm systems and provides monitoring and security system repair and maintenance services to homeowners and businesses, principally in the Northeast and Mid-Atlantic regions of the United States. Management believes it operates in one industry segment. SSH was formed on December 4, 1991 to acquire and manage companies in the security alarm installation and monitoring business. Triton was a diversified holding company whose shares were traded on the American Stock Exchange ("AMEX") prior to the Merger. At the time of the Merger, Triton held approximately $15 million in cash and certain other investments. Pursuant to the Merger Agreement and in consideration of the Merger, SSH's preferred and common stockholders received an aggregate of 2,877,321 new shares of common stock of Triton, representing approximately 57% of the common stock outstanding upon consummation of the Merger and a one-for-ten reverse stock split ("Reverse Stock Split") effected in connection with the Merger. Additionally, post-Merger, the combined Company was renamed Alarmguard Holdings, Inc., the common shares of which are listed for trading on the AMEX under the symbol "AGD". As a result of the Merger, Alarmguard's fiscal year end was changed to December 31 and the Board of Directors of the Company was reconstituted to include five representatives from SSH's Board of Directors and two representatives from Triton's Board of Directors. The Merger was accounted for as a "reverse acquisition" such that Triton was designated the accounting acquiree and SSH the accounting acquiror. As such, the net assets of Triton (principally cash of approximately $15 million plus certain other investments) were recorded at fair value and the pre-Merger financial statements of SSH became the historical financial statements of Alarmguard. The fair value of the net assets of Triton was recorded as a direct credit to additional paid-in capital. The differences between the par values of Triton's common stock and SSH's common stock was also recorded as an adjustment to additional paid-in capital. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries (SSH, Alarmguard Inc. and Protective Alarms of Canada, Inc.) which are all wholly-owned. All intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents The Company considers financial instruments with original maturities of three months or less from the date of purchase to be cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Accounts Receivable Accounts receivable consist primarily of amounts due from customers in the Mid-Atlantic and Northeastern United States. Credit is extended based on an evaluation of the customer's financial condition; collateral is not required. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential losses. During the years ended December 31, 1995, 1996 and 1997, the Company recorded a provision for uncollectible accounts of $0.3, $0.7 and $1.3 million, respectively. The Company wrote off $0.3, $0.5 and $0.9 million of accounts receivable as uncollectible during the years ended December 31, 1995, 1996 and 1997, respectively. Additionally, in 1997, the Company increased its provision by $0.3 million through purchase accounting as a result of certain acquisitions consummated during the year. Inventories Inventories consist principally of alarm components and supplies. Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment Property and equipment is stated at cost. Costs of maintenance and repairs are charged to expense when incurred and costs of improvements are capitalized. Depreciation is computed using the straight-line method based on estimated useful lives of the respective assets. Customer Installation Costs Customer installation costs consist of materials, labor and direct sales commissions incurred in connection with installing and activating new subscriber accounts under the Company's direct marketing and other leasing programs. Amortization is provided on a straight-line basis over the term of the initial monitoring/ equipment lease contract (5 years), adjusted to reflect estimated subscriber attrition. When an installation is identified for disconnection, the remaining net book value of the installation costs are fully written-off and charged to amortization expense. Intangible Assets Intangible assets, recorded at cost, represent the value assigned to acquired customer contracts and covenants not-to- compete. Acquired customer contracts are being amortized over their estimated useful lives (6 to 10 years) using the straight- line method. Covenants not-to-compete are being amortized over the lives (5 years) of the respective agreements using the straight-line method. The cost in excess of fair value of the net assets of companies acquired in purchase business combinations (goodwill) is being amortized using the straight- line method over its estimated useful life (20 years). The Company periodically reviews its intangible assets to assess recoverability. Assets in excess of associated expected cash flows are considered impaired and accordingly, a charge to operating results would be recognized. Deferred Financing Costs Deferred financing costs, included in other assets, consisting primarily of bank and legal fees and are being amortized on a straight-line basis over the term of the underlying debt instrument. In conjunction with the refinancing during 1997 (see Note 10), $813,000 of unamortized deferred financing costs were written off as a loss on refinancing as an extraordinary item. Derivative Financial Instruments The Company enters into interest-rate swap agreements to manage its exposure to the fluctuations of interest rates. Each interest-rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. These agreements involve the exchange of amounts based on a fixed interest rate for amounts based on variable interest rates over the life of the agreement without an exchange of the notional amount upon which the payments are based. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment of interest expense related to the debt (the accrual accounting method). The related amount payable to or receivable from counterparties is included as an adjustment to accrued interest expense. The fair value of the swap agreements and changes in the fair value as a result of changes in market interest rates are not recognized in the financial statements. Gains and losses on termination of interest-rate swap agreements are deferred as an adjustment to the carrying amount of the outstanding debt and amortized as an adjustment to interest expense related to the debt over the remaining term of the original contract life of the terminated swap agreement. In the event of the early extinguishment of a designated debt obligation, any realized or unrealized gain or loss from the swap would be recognized in income coincident with the extinguishment gain or loss. Revenue Recognition Revenue from installations relating to new subscriber accounts generated under the Company's direct marketing program is recognized at the time the installation is completed to the extent that related direct selling costs are charged to expense. Any excess installation revenue is deferred and amortized to income over the initial term of the related noncancelable monitoring/equipment lease contract (5 years), adjusted to reflect estimated subscriber attrition. The Company recognizes revenue, together with related costs, from traditional installation contracts and the sale of additional equipment to existing customers when the installation is completed. Recurring fees are generally billed to customers in advance of the period for which the services are to be provided. Deferred revenue is recorded when billed and is recognized ratably over the period the service is performed. Monthly recurring revenue ("MRR") is recurring revenue that the Company is entitled to receive under contracts in effect at the end of such period. MRR is a term commonly used in the security alarm industry as a measure of the size of the company. It does not measure profitability or performance, and does not include any allowance for future subscriber attrition or for uncollectible accounts receivable. Advertising Costs Advertising costs are generally expensed as incurred. Amounts charged to expense for advertising were approximately $414,000, $623,000 and $776,000 in 1995, 1996 and 1997, respectively. Income Taxes Income taxes are determined under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. Loss Per Share In 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share," which was adopted in the fourth quarter of 1997. This new rule changes the way earnings per share is calculated and requires restatement of all reported prior period amounts. Under the new requirements, basic earnings per share is calculated by dividing net earnings by the weighted average number of common shares outstanding during the period. The basic and diluted loss before extraordinary item per share and the basic and diluted net loss per share for the years ended December 31, 1996 and 1997 give effect to the conversion of all common and preferred stock of SSH (the predecessor company) to common stock of the Company, as if the conversion occurred on January 1, 1996. In the diluted calculations, the net shares issuable pursuant to outstanding stock options and warrants have been excluded from the denominator due to their antidilutive effect. Fair Value of Financial Instruments Cash, accounts receivable, accounts payable, and accrued expenses are carried at cost, which approximates fair value, due to the short-term nature of these accounts. At December 31, 1997, the fair value of the Company's long-term debt approximates its carrying value as the interest rate, taking into account the interest rate swap, approximates the rate the Company would have to pay for similar debt at such date. The fair value of interest rate instruments are the estimated amounts that the Company would receive or pay to terminate the agreements at the reporting date, taking into account current interest rates and the current credit worthiness of the counterparties. At December 31, 1997, the Company estimates it would have paid approximately $220,000 to terminate the swap agreement. Stock Based Compensation The Company generally grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value on the date of grant. The Company has elected to continue to account for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense for stock option grants. New Accounting Pronouncements During 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 130 is effective for the first quarter of 1998, while SFAS No. 131 is effective for year end financial reporting in 1998 and on an interim basis thereafter. Both of these pronouncements require additional disclosure and the Company expects no material impact upon adoption. Reclassifications Certain amounts from the prior years have been reclassified to conform with the current year's financial statement presentation. 3. Acquisitions During 1995, the Company acquired certain operating assets of seven companies in the security alarm installation and monitoring business for $2.2 million in cash and $534,000 in notes. In the aggregate, the acquisitions added approximately $95,000 of MRR and 3,800 customers. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the respective dates of acquisition. In connection with the acquisitions, the Company received current assets of $67,000, property and equipment of $90,000, customer contracts of $2.5 million, intangibles and other assets of $1.8 million and assumed current liabilities of $1.6 million. During 1996, the Company acquired certain operating assets of four companies in the security alarm installation and monitoring business for $1.2 million in cash and $1.2 million in notes. In the aggregate, the acquisitions added approximately $80,000 of MRR and 3,800 customers. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the respective dates of acquisition. In connection with the acquisitions, the Company received current assets of $112,000, customer contracts of $1.9 million, intangibles and other assets of $1.1 million and assumed current liabilities of $651,000. On May 1, 1997, Alarmguard purchased all of the issued and outstanding shares of capital stock of Protective Alarms, Inc., ("Protective Alarms"), a company with approximately 9,000 subscribers and MRR of approximately $0.5 million, for a total purchase price of approximately $19.7 million, including $17.1 million paid at closing. As of December 31, 1997, Alarmguard owed $2.6 million of the purchase price to the sellers of Protective Alarms, of which approximately $1.9 million was secured by a cash collateralized letter of credit which was included in the purchase price and is classified as restricted cash in the consolidated balance sheet at December 31, 1997. The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Protective Alarms was a security alarm system company doing business primarily in Connecticut and Westchester County, New York, that provided security equipment and monitoring services to homeowners and businesses. In addition, Protective Alarms engaged in national account sales under the name "Pro National". In connection with this acquisition, the Company received current assets of $1.7 million, property and equipment of $208,000, customer contracts of $16.0 million, other intangibles of $5.0 million and assumed current liabilities of $3.2 million. During 1997, Alarmguard also acquired certain operating assets of five companies in the security alarm installation and monitoring business for an aggregate of $2.0 million in cash and up to 568,000 shares of Alarmguard common stock (361,000 of which are currently held in escrow pursuant to holdback provisions in the contracts) valued for the purposes of the acquisitions at $3.8 million. The acquisitions added approximately $200,000 of MRR and 3,400 customers. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the respective dates of acquisition. In connection with the acquisitions, Alarmguard received customer contracts of $6.6 million, other assets of $1.0 million and assumed current liabilities of $1.8 million. Accrued expenses at December 31, 1997 include $1.3 million of estimated costs expected to be incurred relating to the integration of all of the 1997 acquisitions. The results of operations of the acquired companies have been included in the consolidated statements of operations from the respective dates of acquisition. The following unaudited proforma information shows the results of the Company's operations as though the 1995 acquisitions had been made as of January 1, 1995, the 1996 acquisitions had been made as of January 1, 1995 and 1996 and the 1997 acquisitions had been made as of January 1, 1996 and 1997: Years ended December 31, 1995 1996 1997 (In thousands, except per share data) Pro forma revenue $23,105 $35,232 $38,065 Pro forma loss before extraordinary item $(6,612) $(14,497) $(15,145) Pro forma net loss $(6,612) $(14,497) $(15,958) Pro forma basic and diluted per share: Loss before extraordinary item $(2.59) $(2.71) Net loss (2.59) (2.85) Shares used in computations 5,593 5,593 The 5,593,000 shares of Common Stock reflect the 1 for 10 reverse stock split at the time of the Merger and 568,000 shares issued in connection with two acquisitions in 1997. The pro forma results are not necessarily indicative of the actual results of operations that would have been obtained had the acquisitions taken place at the beginning of the respective periods or the results that may occur in the future and do not give effect to cost savings which are expected to occur as a result of the consolidation of the acquired companies. 4. Property and Equipment Property and equipment consists of the following: Estimated December 31, Useful 1996 1997 Life (In thousands) Leasehold improvements 5 to 10 $ 876 $ 1,044 (lease terms) Furniture, fixtures and equipment 3 to7 years 6,027 6,683 Less accumulated depreciation (4,425) (5,594) $ 2,478 $2,133 Equipment additions of $264,000 and $395,000 were financed through capital leases or notes payable during 1996 and 1997, respectively. The related accumulated depreciation on total financed assets is $1,476,000 and $1,910,000 as of December 31, 1996 and 1997, respectively. 5. Customer Installation Costs During the years ended December 31, 1995, 1996 and 1997, Alarmguard incurred approximately $3.4 million, $5.8 million and $4.1 million, respectively, in customer installation costs primarily attributable to the operations of its direct marketing program. Alarmguard added approximately 5,000, 10,000 and 7,000 customers, respectively, through this program during these periods. 6. Customer Contracts and Intangibles Customer contracts and intangibles (at cost) consist of the following: December 31, 1996 1997 (in thousands) Acquired customer contracts $27,520 $49,807 Covenants not to compete 7,271 12,944 Goodwill 2,493 2,493 37,284 65,244 Less accumulated amortization (15,854) (22,217) $21,430 $43,027 7. Other Investments Other investments at December 31, 1997 are comprised of certain assets held by Triton at the time of the Merger, which are in the process of being liquidated (in thousands): Ridgewood Hotels, Inc., Series A $2,009 Preferred Stock Other 236 $2,245 Alarmguard owns 450,000 shares of Series A Preferred Stock of Ridgewood Hotels, Inc. ("Ridgewood") with a face value of $3.6 million. Alarmguard currently receives a 10% quarterly dividend of $90,000 on this investment and the preferred stock is redeemable at any time by Ridgewood at its face value plus accrued dividends. The preferred stock is convertible by Alarmguard at any time into 1,350,000 Ridgewood common shares, which would represent approximately 47% of the Ridgewood common shares then outstanding, or 40% fully diluted. Alarmguard accounts for the Ridgewood investment using the cost method of accounting. Alarmguard management estimates the fair value of this investment to be approximately $2.5 million at December 31, 1997, determined using a discounted cash flow analysis. Prior to September 1997, Alarmguard owned approximately 44% of Mission West Properties ("Mission West") , a real estate company listed on the AMEX under the symbol "MSW". On August 5, 1997, the Mission West shareholders approved the sale of 6 million shares of newly issued common stock at $0.15 per share, to a group of private investors, which transaction closed on September 2, 1997, resulting in a decrease in the Company's ownership level to approximately 9%. Additionally, Mission West made a $3.30 per share cash distribution on October 21, 1997. Alarmguard's share of the distribution amounted to approximately $2.2 million. The $0.9 million difference between the carrying amount at that time (approximately $1.3 million) and the distribution amount was recorded as a direct credit to additional paid-in capital as an adjustment of the purchase accounting value established for this investment at the time of the Merger. Prior to the sale of the new shares by Mission West, Alarmguard accounted for this investment using the equity method of accounting. Subsequent to such time, the cost method was adopted. 8. Notes Payable December 31, 1996 1997 (in thousands) Various notes, each collateralized by a vehicle (aggregate net book value of approximately $178,000 and $153,000 at December 31, 1996 $ 330 $ 293 and 1997, respectively), with interest rates varying from 5.9% to 12% and final payment dates ranging from January 1998 to December 2000 Various notes issued primarily in connection with acquisitions made in 1995, 1996 and 1997. The notes bear interest at rates varying from 5.86% to 10% per annum with maturities ranging from January 1997 to February 2004 2,929 2,718 Total notes payable 3,259 3,011 Less current portion 696 2,462 Long term portion $2,563 $ 549 On March 5, 1997, certain notes with an aggregate principal amount of approximately $1.6 million due in 1997 were extended to March 31, 1998 and were subsequently paid in the first quarter of 1998. Maturities of notes payable subsequent to December 31, 1997 are as follows: $2.5 million in 1998, $421,000 in 1999, $124,000 in 2000 and $4,000 in 2001. During the years ended December 31, 1995, 1996 and 1997 the company paid interest aggregating $71,000, $166,000 and $186,000, respectively, in connection with these notes. 9. Subordinated Debt On November 17, 1995, the Company entered into an agreement with various existing stockholders at that time and a third party. The agreement called for the sale of 41,254 shares of common stock of SSH at $1.20 a share, and the issuance of $4.9 million of subordinated debt, bearing interest at 8%. The stock and debt were offered in tandem with each share of stock purchased requiring a loan of $120 to the Company. At the closing of the transaction, the purchasers had acquired stock and debt of 24,753 shares and $3 million, respectively, representing 60% of the total amount offered by the Company. On April 16, 1996 and May 1, 1996, the purchasers acquired, in the aggregate, stock and debt of 16,501 shares and $2 million, respectively, representing the remaining 40% of the agreement. The debt is subordinated to certain senior obligations of the Company and was originally payable in four equal installments commencing on September 30, 1996, with final payment to be on June 30, 1997. On March 1, 1996, the principal repayment schedule was renegotiated such that, 75% of the principal balance was due on March 31, 1997, the remaining 25% was due on June 30, 1997 and the interest rate was to increase to 10% on October 1, 1996. On March 5, 1997, the Agreement was further amended such that all principal was to be due on March 31, 1998. In connection with the Merger, Alarmguard refinanced the subordinated debt with $4.6 million of newly issued subordinated debt, of which $200,000 is held by certain Executive Officers of the Company, bearing interest at 15%. In addition, Alarmguard issued warrants to purchase 215,939 shares of Alarmguard Common Stock at an exercise price of $11.11 per share. The estimated fair value of these warrants has been accounted for as a discount to the new subordinated debt and is being amortized over the two year life of the underlying debt instrument. During the years ended December 31, 1996 and 1997, the Company made interest payments of $310,000 and $716,000, respectively, in connection with this debt. No interest payments were made during 1995. 10. Credit Facility On April 15, 1997, concurrent with the Merger, Alarmguard, Inc., (the "Borrower"), a wholly owned subsidiary of the Company, entered into the Second Amended and Restated Term Loan and Acquisition Credit Agreement (the "Credit Facility") which refinanced all the existing senior secured indebtedness of the Borrower. The Credit Facility provides for a two year, $60 million non-amortizing revolving loan which converts to a five year amortizing term loan on April 30, 1999. Borrowings under the Credit Facility are secured by substantially all of the properties and assets of the Borrower including accounts receivable, inventory, leasehold interests, customer contracts and the capital stock of all of the subsidiaries of the Company. Interest on the Credit Facility accrues and is payable monthly in arrears at the option of the Borrower at either prime plus 1 1/2% or LIBOR plus 3% (approximately 8.6875% at December 31, 1997). On December 31, 1997, outstanding borrowings under the Credit Facility were $46.7 million. During 1997, the Company recognized an extraordinary loss of $813,000 resulting from the write-off of unamortized financing costs from the former credit agreement and subordinated debt. The Credit Facility replaced a combined credit facility of approximately $31.4 million, which included a term loan component, an acquisition loan component and a component to fund the Borrower's direct marketing program. Total borrowings under this prior credit facility amounted to $30.6 million at December 31, 1996. The Credit Facility contains covenants which, among other matters; i) limit indebtedness, ii) limit capital expenditures, iii) require the Borrower to satisfy certain financial ratios and, iv) limit the declaration of dividends by the Borrower. As of December 31, 1996, the restricted net assets of the Borrower were $1.1 million. As of December 31, 1997, the Borrower's liabilities exceeded its assets by $10.2 million. On January 15, 1997, subject to the execution of a bridge loan with Triton, the Borrower amended its prior credit facility to provide for $1.5 million of additional borrowings. In addition, the principal repayment schedules were adjusted whereby the January and February 1997 principal payments were deferred and were paid in conjunction with the execution of the Credit Facility on April 15, 1997. On August 22, 1997, the Borrower entered into an amendment to the Credit Facility which allowed the Borrower to increase its borrowing availability by $2.1 million in anticipation of the Mission West cash distribution of $2.2 million. The amendment terminated upon receipt of the cash distribution from Mission West on October 21, 1997. On October 29, 1997, the Borrower entered into a three- year interest rate swap agreement with the Agent of its Credit Facility. The agreement fixed the interest rate on $40.0 million of the Borrower's floating rate debt at a rate of 6.09% plus the applicable interest rate margin of 300 basis points as of December 31, 1997, effectively 9.09%. In February 1998, the margin was reduced to 275 basis points and the cost on such debt was reduced to 8.84%. The amounts to be repaid under the Credit Facility for the five years ended December 31 are as follows (in thousands): 1998 $ - 1999 5,254 2000 8,756 2001 9,340 2002 9,340 Thereafter 14,010 $46,700 During the years ended December 31, 1995, 1996 and 1997, the Company paid interest aggregating $2.0 million, $2.4 million and $3.0 million, respectively, in connection with the Credit Facility and various other credit facilities. 11. Redeemable Preferred Stock Prior to April 15, 1997, dividends on the redeemable preferred stock were cumulative, accrued 5% annually (noncompounded) and were payable upon liquidation, redemption or a public offering. Liquidation preferences included the cost of the preferred stock plus accrued but unpaid dividends at the redemption date. As of December 31, 1996, accrued but unpaid dividends aggregated $2.7 million. Such amounts are included in their respective redeemable preferred stock accounts in the consolidated balance sheet at December 31, 1996. In connection with the Merger, the redeemable preferred stock was exchanged for 2,002,685 shares of Common Stock, $0.0001 par value, of the Company. 12. Stockholders' Deficiency Stock Options: In connection with the Merger, the Company adopted the 1997 Long Term Stock Incentive Plan (the "Option Plan"). The Option Plan provides for the issuance of stock options to directors, officers and other key employees of the Company to purchase the greater of 770,000 shares of common stock or 10% of the total number of shares of common stock of the Company (on a fully diluted basis assuming the conversion of all warrants and other convertible securities). In April 1997, 369,000 options were issued pursuant to the Option Plan. A summary of stock option activity for the three years ended December 31, 1997 is as follows: Number of Option Price Shares Per Share Outstanding at January 1, 1995 26,498 $.27 Granted in 1995 23,185 .33 Exercised in 1995 (3,680) .27 Outstanding at December 31, 1995 and 1996 46,003 .27 - .33 Granted in 1997 369,000 7.50 Exercised in 1997 (920) .27-.33 Outstanding at December 31, 1997 414,083 $.27-$7.50 Exercisable at December 31, 1997 28,337 $.27- $.33 Available for grant at December 31, 1997 401,000 During 1996, no stock options were either granted or exercised. The table below summarizes information about the stock options outstanding as of December 31, 1997: Options Exercisable Weighted- Weighted Weighted Range Average Average Number Average of Number Remaining Exercise Exercis Exercise Description Exercise Outstanding Contractual Price able Price Price Life 1995 and prior options $.27 - 45,083 7.0 years $.30 28,337 $.30 $.33 1997 Options $7.50 369,000 9.5 years $7.50 - - The Company has elected to continue to use the intrinsic value based method in accordance with APB No. 25. Accordingly, no compensation cost has been recorded. Had the fair value based method been adopted consistent with the provisions of SFAS 123, the Company's pro forma net loss and pro forma basic and diluted net loss per common share for the year ended December 31, 1997 would have increased by $202,000 and $.04, respectively. For the purposes of this pro forma calculation, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.0%; expected life of options of 4 years; an expected stock price volatility of 45.0% and dividend yield of zero. Warrants to Purchase Common Stock: The Company has various warrants outstanding which enable the warrant holders to purchase common stock of the Company. In December, 1995, the Company issued a warrant to a financial advisor to purchase 50,000 shares of common stock of the Company at $5.00 per share, the quoted market value at the date of the issuance. The warrant expires in December 2000. The Company determined that the value of these warrants at the date of issuance was not material. The Company also has 77,303 warrants outstanding which were issued in June 1993. Each warrant enables the holder to purchase 1.84 shares of common stock of the Company at a price of $20.40 (effectively $11.09 per share of common stock). The warrants expire in June 1998. In April 1997, the Company issued 215,939 warrants to purchase the same number of shares of common stock of the Company at $11.11 per share. The warrants were issued to certain holders of subordinated debt in connection with the refinancing of the terms of such debt (see Note 9). Other Equity Items: In connection with the issuance of the subordinated debt (see Note 9) during 1995, the Company issued 24,753 shares of SSH common stock, $1.00 par value, for total proceeds of $30,000. During 1996, in connection with the issuance of the remaining portion of the subordinated debt, the Company issued 16,501 shares of SSH common stock, $1.00 par value, for total proceeds of $20,000. In addition, the purchasers received 25,000 and 16,667 shares of SSH common stock in 1995 and 1996, respectively, (valued at $1.20 a share) as a fee for their participation in the transaction, which amount has been treated as a deferred financing fee. In connection with the Refinancing and Merger, this asset was written off and included in the extraordinary loss (See Note 1). 13. Employee Savings Plan The Company established a voluntary 401(k) Savings Plan ("the Plan") effective January 1, 1994. Employees working a minimum of 20 hours per week who are 21 years of age with one year of service are eligible to participate in the Plan. The Company matches 25% of the first 6% of each employee's contributions. Contributions to the Plan are invested in a wide range of traditional 401(k) investment funds, as well as the common stock of the Company, as directed solely by the participants. The Company's contributions to the Plan were approximately $41,000, $55,000 and $90,000 for the years ended December 31, 1995, 1996 and 1997, respectively. 14. Income Taxes Net deferred tax assets of approximately $8.6 million and $27.9 million at December 31, 1996 and 1997, respectively, have been offset in full by valuation allowances as the Company has continually generated net losses from its inception and is expected to continue to do so in the near future. Differences between the tax basis of assets and liabilities and their financial reporting amounts that give rise to significant portions of deferred income taxes are as follows: December 31, 1996 1997 Deferred tax assets (liabilities): Net operating losses $ 7,133 $30,683 Intangible assets 880 (4,241) Property and equipment 267 853 Other 311 626 8,591 27,921 Valuation allowances (8,591) (27,921) Net deferred tax assets $ - $ - The Company has net operating loss carryforwards, subject to certain limitations, for federal income tax purposes of approximately $17 million and $73 million at December 31, 1996 and 1997, respectively, which expire from 2006 to 2012. In connection with the Triton Merger, the Company acquired approximately $48 million of net operating losses. Utilization of the net operating losses are subject to a substantial annual limitation due to the ownership change provisions of Internal Revenue Code Section 382. The valuation allowances have been established until it is more likely than not that the deferred tax assets will be realized. 15. Commitments and Contingencies In connection with various acquisitions, the Company assumed noncancelable operating leases for the operating facilities of the acquired companies, as well as various operating and capital leases for office and central station equipment and agreements for wholesale monitoring services. At December 31, 1997, the minimum annual rental payments under all of these lease agreements (including approximately $300,000 per annum payable to a corporation whose principal stockholder is the Chief Executive Officer of the Company on terms no less favorable than are available from an unaffiliated third party) are as follows: Capital Operatin Leases g Leases (in thousands) 1998 $418 $850 1999 241 783 2000 103 719 2001 - 6616 2002 - 463 Thereafter - 835 $762 $4,266 Less interest portion 73 Present value of net minimum rentals $689 Rent expense was $608,000, $710,000 and $820,000 for the years ended December 31, 1995, 1996 and 1997, respectively. In conjunction with an acquisition, the Company entered into an employment agreement with the former owner. Under the agreement, the employee is entitled to a minimum annual salary of $150,000 for a term of six years expiring September 10, 1998. Additionally, the redeemable common stock issued to the former owner was converted to a promissory note with a face value of $1.25 million due September 29, 1997. In March 1997, the due date of this note was extended to March 1998. The note was repaid in full in February 1998. The Company has entered into severance agreements with three key executives which provide for termination benefits under certain circumstances, including a termination without cause or the termination or resignation in connection with a change in control of the Company. The termination benefits include one- year's annual salary, an amount representing the average annual bonus amount paid over the last three years and the continuation of certain health and welfare plan benefits for up to one year. In 1997, the annual salaries of the three executives amounted to $625,000. In addition, on March 10, 1998, the Board of Directors approved a one year severance agreement for four other executives based on certain other conditions. In 1997, the annual salaries of the four executives amounted to $354,000. In May 1995, a stockholder of Ridgewood Hotels, Inc. commenced a derivative and class action lawsuit in Delaware Chancery Court against Ridgewood, its directors and Triton (Alarmguard's predecessor) entitled Strassburger v. Early, et al. (C.A. No. 14267). The lawsuit concerns a transaction entered into in August 1994 in which Ridgewood purchased from Triton all of the Ridgewood common stock owned by Triton (which consisted of approximately 75% of Ridgewood's then outstanding common stock) for $8 million in cash and newly issued Ridgewood preferred stock with a face value of $3.6 million. The complaint alleges that such transaction constituted a corporate waste and a breach by Triton of its alleged duties of loyalty and good faith as a majority stockholder to Ridgewood's other stockholders. The complaint seeks a rescission of the transaction and other unspecified monetary relief. The class action lawsuit was dismissed in March 1998. Alarmguard intends to defend vigorously against the remaining lawsuit. It is the opinion of Alarmguard's management that the ultimate resolution of such litigation will not have a material adverse effect on Alarmguard's financial position, results of operations or cash flows. The Company experiences routine litigation in the normal course of its business. Management does not believe that any pending or threatened litigation will have a material adverse effect on the financial condition, results of operations or cash flows of the Company. In the past, Triton, through certain divisions and wholly- owned subsidiaries, owned and operated businesses that conducted operations that included the use, generation and disposal of hazardous waste and hazardous substances. Certain potential environmental liabilities exist associated with these former operations, including potential contamination at, or migrating from, certain properties historically owned or operated by these former divisions and subsidiaries. The Company also has limited contractual indemnification obligations relating to certain of these matters. With respect to these potential environmental liabilities, management believes that most of these liabilities were discharged in Triton's 1993 bankruptcy proceedings or, if a matter were to circumvent the bankruptcy discharge, would be covered by insurance. Historically, these environmental matters have not had a material adverse effect on the Company's financial condition and, although there can be no assurance, management does not expect such matters to have a material adverse effect on the Company's financial condition, results of operations or cash flows in the future. 16. Licensing Agreements On August 7, 1995, the Company entered into regional and national licensing agreements ("the SNET Agreements") with Southern New England Telephone ("SNET") for the exclusive right to market security systems and monitoring services utilizing the SNET, Bell Equipment Security Systems and Southern New England Bell ("Bell") tradenames and trademarks. The Company was required to pay a monthly royalty based on a percentage of the total net MRR generated under the SNET and Bell tradenames and trademarks. In addition, annual minimum royalty payments were paid to SNET on a per region basis, as defined, to maintain the exclusivity of the SNET Agreements. In 1995, royalties incurred were insignificant. During 1996, royalties incurred pursuant to these Agreements were approximately $180,000. The Company terminated the SNET regional licensing agreement as of January 31, 1997 and settled all outstanding matters with SNET for $90,000. 17. Subsequent Events On February 3, 1998, the Company completed an offering of 40,000 shares of Cumulative Convertible Preferred Stock (Series A Preferred of 35,000 shares and Series B Preferred of 5,000 shares) at $1,000 per share yielding gross proceeds totaling $40 million. The Company issued 700 additional shares of the Series A Preferred in exchange for $.7 million of the Company's subordinated debt. Net proceeds of the offering, after the payment of investment banking fees and legal expenses, amounted to approximately $38.2 million. The Series A Preferred Stock pays quarterly dividends at 5% per annum. Under the terms of the securities, each holder of the Series A and Series B Preferred Stock has the right to convert its shares, at the option of the holder, at any time, into shares of the Company's common stock at the conversion price of $8.25 per share and $7.75 per share, respectively, subject to certain anti-dilution provisions. The holders of the newly issued preferred stock will elect two members to the Company's Board of Directors. Concurrent with the offering, the Company increased its Credit Facility from $60 million to $90 million with an expanded lending group. The net proceeds from the offering and the additional credit facility are intended to finance acquisitions and expand the Company's dealer and direct marketing programs. On February 5, 1998, the Company completed the acquisition of Detect, Inc., headquartered in Danbury, Connecticut, for cash consideration of approximately $10.4 million, including a one- year holdback subject to certain revenue guarantees. The acquisition added over 7,200 accounts and MRR of approximately $210,000 to the Company's subscriber base. On March 17, 1998, Alarmguard completed the acquisition of Sentry Protective Systems, headquartered in Malden, Massachusetts, with an office in Portland, Maine. Sentry has approximately 26,000 subscribers and MRR of approximately $.6 million. The purchase price for the company was approximately $26.5 million and is subject to certain agreed upon post-closing adjustments based on a subsequent performance review of the acquired subscriber base. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF ALARMGUARD HOLDINGS, INC. (PARENT COMPANY) AND SECURITY SYSTEMS HOLDINGS, INC. (PREDECESSOR COMPANY) Condensed Balance Sheets (In Thousands) Predecessor Alarmguard Company Holdings, Inc. December 31, December 31, 1996 1997 Assets Current assets: Cash and cash equivalents $ 147 $ --- Accounts receivable 1,348 --- Other current assets 907 100 Total current assets 2,402 100 Property and equipment, net 818 110 Customer installation costs, net 6,728 --- Other investments --- 2,245 Other assets (principally investment in and amounts due from wholly-owned 1,707 67,395 subsidiaries) Total assets $ 11,655 $ 69,850 Liabilities and stockholder's deficiency Current liabilities: Due to affiliate $ 11,945 $70,259 Other current liabilities 2,009 2,256 Total current liabilities 13,954 72,515 Subordinated debt 4,951 --- Other liabilities 1,375 532 Redeemable preferred stock, series A 5,994 --- Redeemable preferred stock, series B 10,279 --- Stockholders' deficiency: Other stockholders' equity 237 35,287 Accumulated deficit (25,135) (38,484) Total stockholders' deficiency (24,898) (3,197) Total liabilities and stockholders' deficiency $ 11,655 $69,850 See accompanying notes to condensed financial information. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF ALARMGUARD HOLDINGS, INC. (PARENT COMPANY) AND SECURITY SYSTEMS HOLDINGS, INC. (PREDECESSOR COMPANY) Condensed Statements of Operations For the years ended December 31, 1995, 1996 and 1997 Alarmguard Holdings, Predecessor Inc. and Company Predecessor Company Combined Years ended Years ended December 31, December 31, 1997 1995 1996 Revenues $ 1,249 $ 3,376 $ - Cost of sales (190) (1,584) - Selling, general and (3,390) (5,664) (618) administrative expense Amortization and depreciation expense (672) (2,007) (76) Interest expense (85) (536) (220) Other income (expense) 724 (573) (11) Share of subsidiaries loss (4,283) (2,000) (12,224) Net loss (6,647) (8,998) (13,149) Dividend requirement on preferred stock (685) (685) (200) Loss applicable to common shares $(7,332) $(9,673) $(13,349) See accompanying notes to condensed financial information. SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF ALARMGUARD HOLDINGS, INC. (PARENT COMPANY) AND SECURITY SYSTEMS HOLDINGS, INC. (PREDECESSOR COMPANY) Condensed Statements of Cash Flows For the years ended December 31, 1995, 1996 and 1997 (In Thousands) Alarmguard Holdings, Predecessor Inc. and Company Predecessor Company Combined Years ended December 31, Year ended December 31, 1997 1995 1996 Cash used in operating $(1,259) $(2,569) $(415) activities Investing activities: Capital contributed to subsidiaries --- (1,577) (1,574) Acquisition of business, net of cash acquired (205) --- --- Purchases of property and equipment (333) (153) (132) Net cash used in investing activities (538) (1,730) (1,706) Financing activities: Proceeds from sales of other investments --- --- 2,099 Proceeds from issuance of common stock 60 39 --- Proceeds from issuance of subordinated debt 2,970 1,981 --- Proceeds from issuance of notes payable --- 1,235 --- Financing fees paid (230) (25) --- Other financing activities (177) (239) (125) Net cash provided by financing activities 2,623 2,991 1,974 Increase (decrease) in cash anc cash equivalents 826 (1,308) (147) Cash and cash equivalents at beginning of period 629 1,455 147 Cash and cash equivalents at end of period $ 1,455 $ 147 $--- See accompanying notes to condensed financial information. SCHEDULE I-CONDENSED FINANCIAL INFORMATION OF ALARMGUARD HOLDINGS, INC. (PARENT COMPANY) AND SECURITY SYSTEMS HOLDINGS, INC. (PREDECESSOR COMPANY) Notes to Condensed Financial Statements December 31, 1997 NOTE A--BASIS OF PRESENTATION Alarmguard Holdings, Inc. (the "Company") is the successor-in- interest to Security Systems Holdings, Inc. (the "Predecessor Company") and Triton Group Ltd ("Triton"), following the merger of SSH and Triton on April 15, 1997. The condensed balance sheet as of December 31, 1996 and the condensed statements of operations and cash flows for the years ended December 31, 1995 and 1996 are the historical information of the Predecessor Company. The condensed balance sheet as of December 31, 1997 is the historical information of the Company. The condensed statement of operations and cash flows for the year ended December 31,1997 are the combined historical information of the Predecessor Company for the period from January 1, 1997 to April 15, 1997 (the date of the Merger), and the Company for the period from April 16, 1997 to December 31, 1997. In the parent company only financial statements, the Company's investment in subsidiaries is stated at cost plus its share of the undistributed earnings/losses of subsidiaries since the respective dates of acquisition. The parent-company only financial statements should be read in conjunction with the Company's consolidated financial statements. NOTE B--GUARANTEE OF DEBT Alarmguard, Inc. has $30,636,000 and $46,700,000 of debt outstanding at December 31, 1996 and 1997, respectively. Under the terms of the debt agreement, the Company has guaranteed the payment of all principal and interest. EX-3 2 EXHIBIT 3.05 I:\ADVANCE\ALARM\MAIN\PREFERED.007 - 13 - ALARMGUARD HOLDINGS, INC. (THE "CORPORATION") PREFERRED STOCK TERMS Section 1. Dividends. 1A. General Obligation. When and as declared by the Corporation's Board of Directors and to the extent permitted under the General Corporation Law of Delaware, the Corporation shall pay preferential dividends in cash to the holders of the Series A Preferred Stock (the "Series A Preferred") as provided in this Section 1. No preferential dividends shall be paid to the holders of the Series B Preferred Stock (the "Series B Preferred"). Except as otherwise provided herein, dividends on each share of the Series A Preferred (a "Series A Share", and, collectively with each share of the Series B Preferred, a "Share") shall accrue, whether or not declared or paid, on a daily basis at the rate of 5% per annum of the sum of the Liquidation Value thereof plus all accumulated and unpaid dividends thereon from and including the date of issuance of such Share to and including the first to occur of (i) the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid to the holder thereof in connection with the liquidation of the Corporation or the redemption of such Share by the Corporation, (ii) the date on which such Share is converted into shares of Conversion Stock hereunder or (iii) the date on which such Share is otherwise acquired by the Corporation. Such dividends shall accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends, and such dividends shall be cumulative such that all accrued and unpaid dividends shall be fully paid before any dividends, distributions, redemptions or other payments may be made with respect to any Junior Securities. The date on which the Corporation initially issues any Share shall be deemed to be its "date of issuance" regardless of the number of times transfer of such Share is made on the stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such Share. 1B. Dividend Payment Dates. All dividends which have accrued on the Series A Preferred shall be payable on January 1, April 1, July 1 and October 1 of each year, beginning April 1, 1998 (the "Dividend Payment Dates"); provided, however, that incremental dividends over and above the rate of 5% per annum payable pursuant to clause (i) of Paragraph 9B hereof need not be paid on the Dividend Payment Dates and shall accrue until otherwise payable pursuant to the terms hereof. 1C. Distribution of Partial Dividend Payments. Except as otherwise provided herein, if at any time the Corporation pays less than the total amount of dividends then accrued with respect to the Series A Preferred, such payment shall be distributed pro rata among the holders thereof based upon the aggregate accrued but unpaid dividends on the Shares held by each such holder. 1D. Participating Dividends. In the event that the Corporation declares or pays any dividends upon the Common Stock (whether payable in cash, securities or other property) other than dividends payable solely in shares of Common Stock, the Corporation shall also declare and pay to the holders of the Series A Preferred and the Series B Preferred at the same time that it declares and pays such dividends to the holders of the Common Stock, the dividends which would have been declared and paid with respect to the Common Stock issuable upon conversion of the Series A Preferred and Series B Preferred had all of the outstanding Series A Preferred and Series B Preferred been converted immediately prior to the record date for such dividend, or if no record date is fixed, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. Section 2. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation (whether voluntary or involuntary), each holder of Series A Preferred or Series B Preferred (collectively referred to herein as the "Preferred Stock") shall be entitled to be paid, before any distribution or payment is made upon any Junior Securities, an amount in cash equal to the aggregate Liquidation Value of all Shares held by such holder (plus all accrued and unpaid dividends thereon), and the holders of Preferred Stock shall not be entitled to any further payment. If upon any such liquidation, dissolution or winding up of the Corporation the Corporation's assets to be distributed among the holders of the Preferred Stock are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid under this Section 2, then the entire assets available to be distributed to the Corporation's stockholders shall be distributed pro rata among such holders based upon the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the Preferred Stock held by each such holder. Prior to the liquidation, dissolution or winding up of the Corporation, the Corporation shall declare for payment all accrued and unpaid dividends with respect to the Preferred Stock, but only to the extent of funds of the Corporation legally available for the payment of dividends. Not less than 60 days prior to the payment date stated therein, the Corporation shall mail written notice of any such liquidation, dissolution or winding up to each record holder of Preferred Stock, setting forth in reasonable detail the amount of proceeds to be paid with respect to each Share and each share of Common Stock in connection with such liquidation, dissolution or winding up. Section 3. Priority of Preferred Stock on Dividends and Redemptions. 3A. No Payments With Respect to Junior Securities. So long as any Preferred Stock remains outstanding, without the prior written consent of the holders of two-thirds of the outstanding shares of Preferred Stock, taken together as a single series, the Corporation shall not, nor shall it permit any Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any Junior Securities, nor shall the Corporation directly or indirectly pay or declare any dividend or make any distribution upon any Junior Securities. 3B. No Issuance of Senior or pari passu Securities. For so long as any Preferred Stock remains outstanding, without the prior written consent of the holders of two-thirds of the outstanding shares of the Preferred Stock, taken together as a single series, the Company shall not amend its Restated Certificate of Incorporation or take any other action to approve or issue any capital stock (including increasing the number of authorized shares of Series A Preferred or Series B Preferred) of the Company that is senior or pari passu in right to the payment of dividends, payment upon liquidation, redemption or otherwise to the Preferred Stock. Additionally, so long as any Preferred Stock remains outstanding, without the prior written consent of the holders of two-thirds of the outstanding shares of Preferred Stock, taken together as a single series, the Company shall not amend its Restated Certificate of Incorporation or take any other action that would alter the rights, preferences or privileges of the Preferred Stock as in effect on the date of the original issuance of the Preferred Stock. Section 4. Redemptions. 4A. Scheduled Redemption. On February 2, 2003 (the "Scheduled Redemption Date"), the Corporation shall redeem all outstanding Preferred Stock at a price per Share equal to the Liquidation Value thereof (plus accrued and unpaid dividends thereon). 4B. Redemption Payments. For each Share which is to be redeemed hereunder, the Corporation shall be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certifi cate representing such Share) an amount in cash in immediately available funds equal to the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon and any premium payable with respect thereto). If the funds of the Corporation legally available for redemption of Shares on any Redemption Date are insufficient to redeem the total number of Shares to be redeemed on such date, those funds which are legally available shall be used to redeem the maximum possible number of Shares pro rata among the holders of the Shares to be redeemed based upon the aggregate Liquidation Value of such Shares held by each such holder (plus all accrued and unpaid dividends thereon and any premium payable with respect thereto). At any time thereafter when additional funds of the Corporation are legally available for the redemption of Shares, such funds shall immediately be used to redeem the balance of the Shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. Prior to any redemption of Preferred Stock, the Corporation shall declare for payment all accrued and unpaid dividends with respect to the Shares which are to be redeemed, but only to the extent of funds of the Corporation legally available for the payment of dividends. 4C. Notice of Redemption. The Corporation shall mail written notice of each redemption of any Preferred Stock (other than a redemption at the request of a holder or holders of Preferred Stock) to each record holder thereof not more than 60 nor less than 30 days prior to the date on which such redemption is to be made. In case fewer than the total number of Shares represented by any certificate are redeemed, a new certificate representing the number of unredeemed Shares shall be issued to the holder thereof without cost to such holder within five business days after surrender of the certificate representing the redeemed Shares. 4D. Dividends After Redemption Date. No Share shall be entitled to any dividends accruing after the date on which the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon) is paid to the holder of such Share. On such date, all rights of the holder of such Share shall cease, and such Share shall no longer be deemed to be issued and outstanding. 4E. Redeemed or Otherwise Acquired Shares. Any Shares which are redeemed or otherwise acquired by the Corporation shall be canceled and retired to authorized but unissued shares and shall not be reissued, sold or transferred. 4F. Other Redemptions or Acquisitions. The Corporation shall not, nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of Preferred Stock, except as expressly authorized herein or pursuant to a purchase offer made pro rata to all holders of Preferred Stock on the basis of the number of Shares owned by each such holder. 4G. Payment of Accrued Dividends. The Corporation may not redeem any Series A Preferred, unless all dividends accrued on the outstanding Series A Preferred through the immediately preceding Dividend Payment Date have been declared and paid in full. 4H. Change of Control. (i) If a Change of Control has occurred or the Corporation obtains knowledge that a Change of Control is proposed to occur, the Corporation shall give prompt written notice of such Change of Control describing in reasonable detail the material terms and date of consummation thereof to each holder of Preferred Stock, but in any event such notice shall not be given later than five days after the occurrence of such Change of Control, and the Corporation shall give each holder of Preferred Stock prompt written notice of any material change in the terms or timing of such transaction. Any holder of Preferred Stock may require the Corporation to redeem all or any portion of the Preferred Stock owned by such holder at a price per Share equal to the greater of (a) $1,300 if the Change of Control occurs prior to February 2, 1999 or $1,500 if the Change of Control occurs thereafter or (b) the Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by giving written notice to the Corporation of such election prior to the later of (a) 21 days after receipt of the Corporation's notice and (b) five days prior to the consummation of the Change of Control (the "Expiration Date"). The Corporation shall give prompt written notice of any such election to all other holders of Preferred Stock within five days after the receipt thereof, and each such holder shall have until the later of (a) the Expiration Date or (b) ten days after receipt of such second notice to request redemption hereunder (by giving written notice to the Corporation) of all or any portion of the Preferred Stock owned by such holder. Upon receipt of such election(s), the Corporation shall be obligated to redeem the aggregate number of Shares specified therein on the occurrence of the Change of Control. If any proposed Change of Control does not occur, all requests for redemption in connection therewith shall be automatically rescinded, or if there has been a material change in the terms or the timing of the transaction, any holder of Preferred Stock may rescind such holder's request for redemption by giving written notice of such rescission to the Corporation. The term "Change of Control" means (a) any sale, transfer or issuance or series of sales, transfers and/or issuances of Common Stock by the Corporation or any holders thereof which results in any Person or group of Persons (as the term "group" is used under the Securities Exchange Act of 1934), other than the holders of Preferred Stock as of the date of issuance of such Shares, beneficially owning (as such term is used in the Securities Exchange Act of 1934) more than 50% of the Common Stock outstanding at the time of such sale, transfer or issuance or series of sales, transfers and/or issuances, (b) any sale or transfer of more than 50% of the assets of the Corporation and its Subsidiaries on a consolidated basis (measured either by book value in accordance with generally accepted accounting principles consistently applied or by fair market value determined in the reasonable good faith judgment of the Corporation's Board of Directors) in any transaction or series of transactions (other than sales in the ordinary course of business) and (c) any merger or consolidation to which the Corporation is a party, except for a merger in which the Corpora tion is the surviving corporation, the terms of the Preferred Stock are not changed and the Preferred Stock is not exchanged for cash, securities or other property, and after giving effect to such merger, the holders of the Corporation's outstanding capital stock possessing a majority of the voting power (under ordinary circumstances) to elect a majority of the Corporation's Board of Directors immediately prior to the merger shall continue to own the Corporation's outstanding capital stock possessing the voting power (under ordinary circumstances) to elect a majority of the Corporation's Board of Directors. (ii) Redemptions made pursuant to this paragraph 4H shall not relieve the Corporation of its obligation to redeem the Preferred Stock on the Scheduled Redemption Date pursuant to para graph 4A above. Section 5. Voting Rights. 5A. Election of Directors. In the election of directors of the Corporation, the holders of the Preferred Stock, voting separately as a single class to the exclusion of all other classes of the Corporation's capital stock and with each Share of Preferred Stock entitled to one vote, shall be entitled to elect two directors to serve on the Corporation's Board of Directors until their successors are duly elected by the holders of the Preferred Stock or they are removed from office by the holders of the Preferred Stock. If the holders of the Preferred Stock for any reason fail to elect anyone to fill any such directorship, such position shall remain vacant until such time as the holders of the Preferred Stock elect a director to fill such position and shall not be filled by resolution or vote of the Corporation's Board of Directors or the Corporation's other stockholders. 5B. Other Voting Rights. The holders of the Preferred Stock shall be entitled to notice of all stockholders meetings in accordance with the Corporation's bylaws, and except as otherwise required by applicable law, the holders of the Preferred Stock shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock voting together as a single class with each share of Common Stock entitled to one vote per share and each Share of Preferred Stock entitled to one vote for each share of Common Stock issuable upon conversion of such Share of Preferred Stock as of the record date for such vote or, if no record date is specified, as of the date of such vote. Section 6. Conversion. 6A. Conversion Procedure. (i) At any time and from time to time, any holder of Series A Preferred may convert all or any portion of the Series A Preferred (including any fraction of a Series A Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Series A Shares to be converted by $1,000 and dividing the result by the Series A Conversion Price then in effect and any holder of Series B Preferred may convert all or any portion of the Series B Preferred (including any fraction of a Series B Share) held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Series B Shares to be converted by $1,000 and dividing the result by the Series B Conversion Price then in effect. (ii) Except as otherwise provided herein, each conversion of Preferred Stock shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Preferred Stock to be converted have been surrendered for conversion at the principal office of the Corporation. At the time any such conversion has been effected, the rights of the holder of the Shares converted as a holder of Preferred Stock shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (iii) The conversion rights of any Share subject to redemption hereunder shall terminate on the Redemption Date for such Share unless the Corporation has failed to pay to the holder thereof the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon and any premium payable with respect thereto). (iv) Notwithstanding any other provision hereof, if a conversion of Preferred Stock is to be made in connection with a Change of Control or other transaction affecting the Corporation, the conversion of any Shares of Preferred Stock may, at the election of the holder thereof, be conditioned upon the consummation of such transaction, in which case such conversion shall not be deemed to be effective until such transaction has been consummated. (v) As soon as possible after a conversion has been effected (but in any event within three (3) business days after notice of such conversion has been delivered to the Corporation, provided that such conversion has been effected by such date, in the case of subparagraph (a) below), the Corporation shall deliver to the converting holder: (a) a certificate or certificates representing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomina tion or denominations as the converting holder has specified; (b) payment in an amount equal to all accrued dividends with respect to each Share converted which have not been paid prior thereto, plus the amount payable under subparagraph (x) below with respect to such conversion; and (c) a certificate representing any Shares which were represented by the certificate or certificates deliv ered to the Corporation in connection with such conversion but which were not converted. (vi) The Corporation shall declare the payment of all dividends payable under subparagraph (v)(b) above. If the Corporation is not permitted under applicable law to pay any portion of the accrued and unpaid dividends on the Preferred Stock being converted, the Corporation shall pay such dividends to the converting holder as soon thereafter as funds of the Corporation are legally available for such payment. At the request of any such converting holder, the Corporation shall provide such holder with written evidence of its obligation to such holder. If for any reason the Corporation is unable to pay any portion of the accrued and unpaid dividends on Preferred Stock being converted, such dividends may, at the converting holder's option, be converted into an additional number of shares of Conversion Stock determined by dividing the amount of the unpaid dividends to be applied for such purpose, by the lesser of (a) the Conversion Price then in effect and (b) the Market Price of a share of Common Stock. (vii) The issuance of certificates for shares of Conver sion Stock upon conversion of the Preferred Stock shall be made without charge to the holders of such Preferred Stock for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion and the related issuance of shares of Conversion Stock. Upon conversion of each Share, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. (viii) The Corporation shall not close its books against the transfer of Preferred Stock or of Conversion Stock issued or issuable upon conversion of Preferred Stock in any manner which interferes with the timely conversion of Preferred Stock. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmen tal approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (ix) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of Preferred Stock, such number of shares of Conversion Stock issuable upon the conversion of all outstanding Preferred Stock. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). The Corporation shall not take any action which would cause the number of authorized but unissued shares of Conversion Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of Preferred Stock. (x) If any fractional interest in a share of Conversion Stock would, except for the provisions of this subparagraph, be delivered upon any conversion of Preferred Stock, the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. (xi) If the shares of Conversion Stock issuable by reason of conversion of Preferred Stock are convertible into or exchangeable for any other stock or securities of the Corporation, the Corporation shall, at the converting holder's option, upon surrender of the Shares to be converted by such holder as provided herein together with any notice, statement or payment required to effect such conversion or exchange of Conversion Stock, deliver to such holder or as otherwise specified by such holder a certificate or certificates representing the stock or securities into which the shares of Conversion Stock issuable by reason of such conversion are so convertible or exchangeable, registered in such name or names and in such denomination or denominations as such holder has specified. 6B. Conversion Price. (i) The initial Series A Conversion Price shall be $8.25 and the initial Series B Conversion Price shall be $7.75. As used herein, the term "Conversion Price" shall refer to the Series A Conversion Price and/or the Series B Conversion Price, as applicable. In order to prevent dilution of the conversion rights granted under this Section 6, the Conversion Price shall be subject to adjustment from time to time pursuant to this paragraph 6B. (ii) If and whenever on or after the original date of issuance of the Preferred Stock the Corporation issues or sells, or in accordance with paragraph 6C is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Series A Conversion Price in effect immediately prior to the time of such issue or sale, then immediately upon such issue or sale or deemed issue or sale the Series A Conversion Price shall be reduced to the Series A Conversion Price determined by dividing (a) the sum of (1) the product derived by multiplying the Series A Conversion Price in effect immediately prior to such issue or sale by the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (2) the consideration, if any, received by the Corporation upon such issue or sale, by (b) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. (iii) Notwithstanding the foregoing, there shall be no adjustment in the Series A Conversion Price as a result of any issue or sale (or deemed issue or sale) of up to an aggregate of 770,000 shares of Common Stock to employees of the Corporation and its Subsidiaries pursuant to stock option plans and stock ownership plans approved by the Corporation's Board of Directors (as such number of shares is proportionately adjusted for subsequent stock splits, combinations and dividends affecting the Common Stock and as such number includes all such stock options and purchase rights outstanding at the time of the issuance of the Preferred Stock). (iv) Whenever the Series A Conversion Price is adjusted pursuant to this paragraph 6B, the Series B Conversion Price shall be reduced to the Series B Conversion Price determined by multiplying (a) the Series B Conversion Price in effect immediately prior to such adjustment by (b) a fraction the numerator of which is the Series A Conversion Price in effect immediately following such adjustment and the denominator of which is the Series A Conversion Price in effect immediately prior to such adjustment. 6C. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Series A Conversion Price under paragraph 6B, the following shall be applicable: (i) Issuance of Rights or Options. If the Corporation in any manner grants or sells any Options and the price per share for which Common Stock is issuable upon the exercise of such Options, or upon conversion or exchange of any Convertible Securities issuable upon exercise of such Options, is less than the Series A Conversion Price in effect immediately prior to the time of the granting or sale of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting or sale of such Options for such price per share. For purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount, if any, received or receivable by the Corporation as consideration for the granting or sale of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Series A Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (ii) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securi ties and the price per share for which Common Stock is issuable upon conversion or exchange thereof is less than the Series A Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (A) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (B) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Series A Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section 6, no further adjustment of the Series A Conversion Price shall be made by reason of such issue or sale. (iii) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time, the Series A Conversion Price in effect at the time of such change shall be immediately adjusted to the Series A Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold; provided that if such adjustment would result in an increase of the Series A Conversion Price then in effect, such adjustment shall not be effective until 30 days after written notice thereof has been given by the Corporation to all holders of the Preferred Stock. For purposes of paragraph 6C, if the terms of any Option or Convertible Security which was outstanding as of the date of issuance of the Preferred Stock are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change; provided that no such change shall at any time cause the Series A Conversion Price hereunder to be increased. (iv) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Series A Conversion Price then in effect hereunder shall be adjusted immediately to the Series A Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued; provided that if such expiration or termination would result in an increase in the Series A Conversion Price then in effect, such increase shall not be effective until 30 days after written notice thereof has been given to all holders of the Preferred Stock. For purposes of paragraph 6C, the expiration or termination of any Option or Convertible Security which was outstanding as of the date of issuance of the Preferred Stock shall not cause the Series A Conversion Price hereunder to be adjusted unless, and only to the extent that, a change in the terms of such Option or Convertible Security caused it to be deemed to have been issued after the date of issuance of the Preferred Stock. (v) Calculation of Consideration Received. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor (net of discounts, commissions and related expenses). If any Common Stock, Option or Convertible Security is issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation shall be the Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Option or Convertible Security, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Corporation and the holders of a majority of the outstanding Preferred Stock. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Corporation and the holders of a majority of the outstanding Preferred Stock. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Corporation. (vi) Integrated Transactions. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of $.01. (vii) Treasury Shares. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (viii) Record Date. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (b) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 6D. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corpora tion at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. 6E. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassifi cation, consolidation, merger, sale of all or substantially all of the Corporation's assets or other transaction, in each case which is effected in such a manner that the holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock, is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and sub stance satisfactory to the holders of a majority of the Preferred Stock then outstanding) to insure that each of the holders of Preferred Stock shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Preferred Stock, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Preferred Stock immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Preferred Stock then outstanding) to insure that the provisions of this Section 6 and Sections 7 and 8 hereof shall thereafter be applicable to the Preferred Stock (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation, an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Preferred Stock, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Corporation) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance satisfactory to the holders of a majority of the Preferred Stock then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. 6F. Certain Events. If any event occurs of the type contemplated by the provisions of this Section 6 but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights with equity features), then the Corporation's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Preferred Stock; provided that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section 6 or decrease the number of shares of Conversion Stock issuable upon conversion of each Share. 6G. Notices. (i) Immediately upon any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Preferred Stock, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Corporation shall give written notice to all holders of Preferred Stock at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (iii) The Corporation shall also give written notice to the holders of Preferred Stock at least 20 days prior to the date on which any Organic Change shall take place. Section 7. Liquidating Dividends. If the Corporation declares or pays a dividend upon the Common Stock payable otherwise than in cash out of earnings or earned surplus (determined in accordance with generally accepted accounting principles, consistently applied) except for a stock dividend payable in shares of Common Stock (a "Liquidating Dividend"), then the Corporation shall pay to the holders of Preferred Stock at the time of payment thereof the Liquidating Dividends which would have been paid on the shares of Conversion Stock had such Preferred Stock been converted immediately prior to the date on which a record is taken for such Liquidating Dividend, or, if no record is taken, the date as of which the record holders of Common Stock entitled to such dividends are to be determined. Section 8. Purchase Rights. If at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Preferred Stock shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Preferred Stock immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. Section 9. Events of Noncompliance. 9A. Definition. An Event of Noncompliance shall have occurred if: (i) the Corporation fails to pay on any two consecutive Dividend Payment Dates the full amount of dividends then accrued on the Series A Preferred, whether or not such payments are legally permissible or are prohibited by any agreement to which the Corporation is subject; (ii) the Corporation fails to make any redemption payment with respect to the Preferred Stock which it is required to make hereunder, whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject; (iii) the Corporation breaches or otherwise fails to perform or observe the covenants set forth in Section 8.2(j) and (k) of the Purchase Agreement; (iv) the Corporation or any material Subsidiary makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due; or an order, judgment or decree is entered adjudicating the Corporation or any material Subsidiary bankrupt or insolvent; or any order for relief with respect to the Corporation or any material Subsidiary is entered under the Federal Bankruptcy Code; or the Corporation or any material Subsidiary petitions or applies to any tribunal for the appointment of a custodian, trustee, receiver or liquidator of the Corporation or any material Subsidiary or of any substantial part of the assets of the Corporation or any material Subsidiary, or commences any proceeding (other than a proceeding for the voluntary liquidation and dissolution of a Subsidiary) relating to the Corporation or any material Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction; or any such petition or application is filed, or any such proceeding is commenced, against the Corporation or any material Subsidiary and either (a) the Corporation or any such Subsidiary by any act indicates its approval thereof, consent thereto or acquiescence therein or (b) such petition, application or proceeding is not dismissed within 60 days; (v) a judgment in excess of $5,000,000 is rendered against the Corporation or any material Subsidiary and, such judgment is not (a) discharged, bonded or otherwise satisfied within 60 days from the entry thereof, (b) covered by adequate insurance, or (c) the execution of such judgment is not stayed pending appeal or, within 60 days after the expiration of such stay, discharged or otherwise satisfied; or (vi) the Corporation or any material Subsidiary defaults in the performance of any obligation or agreement if the effect of such default is to cause an amount exceeding $10,000,000 to become due prior to its stated maturity or the holder or holders of any obligation causes an amount exceeding $10,000,000 to become due prior to its stated maturity. 9B. Consequences of Events of Noncompliance. (i) If an Event of Noncompliance has occurred and is continuing, the dividend rate on the Series A Preferred shall increase immediately by an increment of two percentage point(s). Thereafter, until such time as no Event of Noncompliance exists, the dividend rate shall increase automatically at the end of each succeeding 90-day period by an additional increment of two percentage point(s) (but in no event shall the dividend rate exceed 13%). Any increase of the dividend rate resulting from the operation of this subparagraph shall terminate as of the close of business on the date on which no Event of Noncompliance exists, subject to subsequent increases pursuant to this paragraph. (ii) If an Event of Noncompliance other than an Event of Noncompliance of the type described in subparagraphs 9A(i) or 9A(iv) has occurred and is continuing, the holders of a majority of the Preferred Stock then outstanding may demand (by written notice delivered to the Corporation) immediate redemption of all or any portion of the Preferred Stock owned by such holder or holders at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Corporation shall give prompt written notice of such election to the other holders of Preferred Stock (but in any event within five days after receipt of the initial demand for redemption), and each such other holder may demand immediate redemption of all or any portion of such holder's Preferred Stock by giving written notice thereof to the Corporation within seven days after receipt of the Corporation's notice. The Corporation shall redeem all Preferred Stock as to which rights under this paragraph have been exercised within 15 days after receipt of the initial demand for redemption. (iii) If an Event of Noncompliance of the type described in subparagraph 9A(iv) has occurred, all of the Preferred Stock then outstanding shall be subject to immediate redemption by the Corporation (without any action on the part of the holders of the Preferred Stock) at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Corporation shall immediately redeem all Preferred Stock upon the occurrence of such Event of Noncompliance. (iv) If any Event of Noncompliance of the type described in subparagraph 9A(i) has occurred, for each such occurrence of the failure to pay on any two consecutive Dividend Payment Dates the full amount of dividends then accrued on the Series A Preferred, whether or not such payments are legally permissible or are prohibited by any agreement to which the Corporation is subject, the Series A Conversion Price shall be reduced immediately by $0.50 from the Series A Conversion Price in effect immediately prior to such adjustment. In no event shall any Series A Conversion Price adjustment be rescinded. (v) If any Event of Noncompliance of the type described in subparagraph 9A(ii) has occurred, the Series A Conversion Price and Series B Conversion Price shall be reduced immediately to 75% of the lesser of (a) the applicable Conversion Price in effect immediately prior to such adjustment and (b) the Market Price of a share of Common Stock. Thereafter, until such time as no Event of Noncompliance exists, the Series A Conversion Price and Series B Conversion Price shall be automatically reduced at the end of each succeeding 90-day period to 75% of the lesser of (a) the applicable Conversion Price in effect immediately prior to such adjustment and (b) the Market Price of a share of Common Stock. In no event shall any Conversion Price adjustment be rescinded. For example, assume that the initial Series A Conversion Price is $8.25. If an Event of Noncompliance of the type described in subparagraph 9A(ii) has occurred, and the Market Price of a share of Common Stock exceeds $8.25, the Series A Conversion Price would be reduced immediately to 75% of $8.25, or $6.1875. If an Event of Noncompliance exists for an additional 90 days, and the Market Price of a share of Common Stock exceeds $6.1875, the existing Series A Conversion Price would be reduced to 75% of $6.1875, or $4.640625. Then assume that there is a two-for-one stock split, in which case the Conversion Price would be decreased hereunder from $4.640625 to $2.3203125, and assume that an Event of Noncompliance exists for an additional 90 days and that the Market Price of a share of Common Stock exceeds $2.3203125. In this case, the Series A Conversion Price would be reduced to 75% of $2.3203125, or $1.740234375. (vi) If any Event of Noncompliance of the type described in subparagraph 9A(v) has occurred, for each such occurrence the Series A Conversion Price and Series B Conversion Price shall be reduced immediately by an amount equal to the quotient of (a) the amount of the judgment referred to in subparagraph 9A(v) divided by (b) the number of shares of Common Stock Deemed Outstanding. (vii) If any Event of Noncompliance exists, each holder of Preferred Stock shall also have any other rights which such holder is entitled to under the Purchase Agreement or any other contract or agreement with such holder at any time and any other rights which such holder may have pursuant to applicable law. Section 10. Registration of Transfer. The Corporation shall keep at its principal office a register for the registration of Preferred Stock. Upon the surrender of any certificate representing Preferred Stock at such place, the Corporation shall, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate shall be registered in such name and shall represent such number of Shares as is requested by the holder of the surrendered certificate and shall be substantially identical in form to the surrendered certificate, and dividends shall accrue on the Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such Preferred Stock repre sented by the surrendered certificate. Section 11. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Preferred Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Corporation shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends shall accrue on the Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. Section 12. Definitions. "Change of Control" has the meaning set forth in paragraph 4H hereof. "Common Stock" means, collectively, the Corporation's Common Stock, $0.0001 par value per share, and any capital stock of any class of the Corporation hereafter authorized which is not limited to a fixed sum or percentage of par or stated value in respect to the rights of the holders thereof to participate in dividends or in the distribution of assets upon any liquidation, dissolution or winding up of the Corporation. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to subparagraphs 6C(i) and 6C(ii) hereof whether or not the Options or Convertible Securities are actually exercisable at such time. "Conversion Stock" means shares of the Corporation's Common Stock, par value $0.0001 per share; provided that if there is a change such that the securities issuable upon conversion of Preferred Stock are issued by an entity other than the Corpora tion or there is a change in the type or class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of Preferred Stock if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. "Convertible Securities" means any stock or securities directly or indirectly convertible into or exchangeable for Common Stock. "Junior Securities" means any capital stock or other equity securities of the Corporation, except for the Preferred Stock. "Liquidation Value" of any Share as of any particular date shall be equal to $1,000. "Market Price" of any security means the average of the closing prices of such security's sales on all securities exchanges on which such security may at the time be listed, or, if there has been no sales on any such exchange on any day, the average of the highest bid and lowest asked prices on all such exchanges at the end of such day, or, if on any day such security is not so listed, the average of the representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ System, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market Price" is being determined and the 20 consecutive business days prior to such day. If at any time such security is not listed on any secu rities exchange or quoted in the NASDAQ System or the over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Corporation and the holders of a majority of the Series A Preferred. If such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an independent appraiser experienced in valuing securities jointly selected by the Corporation and the holders of a majority of the Preferred Stock. The determination of such appraiser shall be final and binding upon the parties, and the Corporation shall pay the fees and expenses of such appraiser. "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities. "Person" means an individual, a partnership, a corpora tion, a limited liability company, a limited liability partnership, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Preferred Stock" means collectively the Series A Preferred and Series B Preferred. "Purchase Agreement" means the Purchase Agreement, dated as of February 2, 1998, by and among the Corporation and certain investors, as such agreement may from time to time be amended in accordance with its terms. "Redemption Date" as to any Share means the date specified in the notice of any redemption at the Corporation's option or at the holder's option or the applicable date specified herein in the case of any other redemption; provided that no such date shall be a Redemption Date unless the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon and any required premium with respect thereto) is actually paid in full on such date, and if not so paid in full, the Redemption Date shall be the date on which such amount is fully paid. "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that person or a combination thereof. For purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a limited liability company, partnership, association or other business entity if such Person or Persons shall be allocated a majority of limited liability company, partnership, association or other business entity gains or losses or shall be or control the managing general partner of such limited liability company, partnership, association or other business entity. Section 13. Amendment and Waiver. No amendment, modification or waiver shall be binding or effective with respect to any provision of Sections 1 to 14 hereof without the prior written consent of the holders of 66.67% of the Preferred Stock outstanding at the time such action is taken; provided that no such action shall change (a) the rate at which or the manner in which dividends on the Preferred Stock accrue or the times at which such dividends become payable or the amount payable on redemption of the Preferred Stock or the times at which redemption of Preferred Stock is to occur, without the prior written consent of the holders of at least 75% of the Preferred Stock then outstanding, (b) the Conversion Price of the Preferred Stock or the number of shares or class of stock into which the Preferred Stock is convertible, without the prior written consent of the holders of at least 75% of the Preferred Stock then outstanding, or (c) the percentage required to approve any change described in clauses (a) and (b) above, without the prior written consent of the holders of at least 75% of the Preferred Stock then outstanding; and provided further that no change in the terms hereof may be accomplished by merger or consolidation of the Corporation with another corporation or entity unless the Corporation has obtained the prior written consent of the holders of the applicable percentage of the Preferred Stock then outstanding. Section 14. Notices. Except as otherwise expressly provided hereunder, all notices referred to herein shall be in writing and shall be delivered by registered or certified mail, return receipt requested and postage prepaid, or by reputable overnight courier service, charges prepaid, and shall be deemed to have been given when so mailed or sent (i) to the Corporation, at its principal executive offices and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). EX-4 3 EXHIBIT 4.06 I:\ADVANCE\ALARM\MAIN\REGRIGHT.006 14 3/31/98 09:18 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of February 2, 1998, between Alarmguard Holdings, Inc., a Delaware corporation (the "Company"), and the Purchasers listed on Schedule I hereto (each a "Purchaser" and collectively, the "Purchasers"). RECITALS: (a) The Purchasers and the Company have entered into a Preferred Stock Purchase Agreement, dated as of the date hereof (the "Stock Purchase Agreement") (each capitalized term used herein and not otherwise defined shall have the meaning ascribed to such term in the Stock Purchase Agreement), pursuant to which the Purchasers are simultaneously with the execution hereof purchasing from the Company the number of shares of Series A Preferred or Series B Preferred (collectively referred to herein as the "Preferred Shares") of the Company set forth opposite its name on Schedule I hereto except that Advance will purchase the Preferred Shares to be purchased by it as of the Advance Closing Date. (b) As of the date hereof, the Preferred Shares purchased by the Purchasers pursuant to the Stock Purchase Agreement entitles the holder thereof to receive, upon the conversion thereof, the number of shares of Common Stock as are set forth opposite its name on Schedule I, which number of shares are subject to adjustment as set forth in the provisions of the Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"). (c) The Company desires to grant the Purchasers certain registration rights with respect to the Common Stock. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: 1. Demand Registrations. (a) Requests for Registration. Subject to paragraph 1(b) below, the holders at any time of at least 50% of the Registrable Securities may request at any time registration under the Securities Act of 1933, as amended (the "Securities Act"), of all or part of their Registrable Securities on Form S-1 or any similar long-form registration ("Long-Form Registrations"), and each holder of Registrable Securities may request registration under the Securities Act of all or part of their Registrable Securities on Form S-2 or S-3 or any similar short-form registration ("Short-Form Registrations") if available. Each request for a Demand Registration shall specify the approximate number of Registrable Securities requested to be registered and the anticipated per share price range for such offering. Within ten days after receipt of any such request, the Company will give written notice of such requested registration to all other holders of Registrable Securities and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. All registrations requested pursuant to this paragraph 1(a) are referred to herein as "Demand Registrations". (b) Long-Form Registrations. Subject to paragraph 1(a), the holders of Registrable Securities will be entitled at any time to request Long-Form Registrations in which (subject to Section 5(b)) the Company will pay all Registration Expenses ("Company-paid Long-Form Registrations"); provided that the holders of Registrable Securities may not request more than two (2) Long-Form Registrations (each a "Demand Long-Form Registration," and each of which shall be a Company-paid Long- Form Registration), such number to be reduced by the number of previously consummated Demand Long-Form Registrations. A registration will not count as one of the permitted Demand Long-Form Registrations until it has become effective, and no Company-paid Long-Form Registration will count as one of the permitted Demand Long-Form Registrations unless the holders of Registrable Securities are able to register and sell at least 85% of the Registrable Securities requested to be included in such registration; provided that in any event the Company will pay all Registration Expenses in connection with any registration initi ated as a Company-paid Long-Form Registration whether or not it has become effective. (c) Short-Form Registrations. In addition to the Long-Form Registrations provided pursuant to paragraph 1(b), each holder of Registrable Securities will be entitled to request a Short Form Registration (provided that the holders may only request up to two (2) Short-Form Registrations in any twelve- month period, which number shall be reduced by the number of previously consummated Demand Short-Form Registrations in such twelve-month period) in which the Company will pay all Registration Expenses. Demand Registrations will be Short-Form Registrations whenever the Company is permitted to use any applicable short form. The Company will use its best efforts to make Short-Form Registrations on Form S-3 available for the sale of Registrable Securities. The holders of Registrable Securities agree that they will not request a Long-Form Registration when the Company is eligible to use a Short-Form Registration; provided that the Company agrees to include in the prospectus included in any Short-Form Registration Statement, such material describing the Company and intended to facilitate the sale of securities being so registered as is reasonably requested for inclusion therein by any of the shareholders selling securities pursuant to such registration statement, whether or not the form used for such registration statement requires the inclusion of such information. (d) Priority on Demand Registrations. The Company will not include in any Demand Registration any securities which are not Registrable Securities without the prior written consent of the holders of at least 50.1% of the Registrable Securities included in such registration. If a Demand Registration is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registra ble Securities and, if permitted hereunder, other securities requested to be included in such offering exceeds the number of Registrable Securities and other securities, if any, which can be sold therein without adversely affecting the marketability of the offering, the Company will include in such registration prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold without adversely affecting the marketability of the offering, pro rata among the respective holders thereof on the basis of the number of Registrable Securities owned by each holder participating in such offering. (e) Restrictions on Long-Form Registrations and Demand Registrations. The Company will not be obligated to effect any Demand Long-Form Registration during the period starting with the date thirty (30) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred and twenty (120) days after the effective date of, a Company- initiated registration; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become and remain effective. The Company will not be obligated to effect any Demand Long-Form Registration within six (6) months after the effective date of a previous Long-Form Registration. The Company may postpone for up to six (6) months the filing or the effectiveness of a registration statement for a Demand Registration if the Company and the holders of at least 66.67% of the Registrable Securities to be covered thereby agree that such Demand Registration would reasonably be expected to have an adverse effect on any proposal or plan by the Company or any of its subsidiaries to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction; provided that in such event, the holders of Registrable Securities initially requesting such Demand Regis tration will be entitled to withdraw such request and such Demand Registration will not count as one of the permitted Demand Registrations hereunder and the Company will pay all Registration Expenses in connection with such registration. The Company will not be obligated to effect any Demand Long-Form Registration unless the anticipated aggregate offering price, net of underwriting discounts and commissions, of the Common Stock to be included in such Demand Long-Form Registration equals more than ten million dollars ($10,000,000). (f) Other Registration Rights. Except as provided in this Agreement, the Company shall not grant to any Persons the right to request the Company to register any equity securities of the Company, or any securities convertible or exchangeable into or exercisable for such securities, without the prior written consent of the holders of at least 66.67% of the Registrable Securities; provided that the Company may grant rights to em ployees of the Company and its Subsidiaries to participate in Piggyback Registrations so long as such rights are subordinate to the rights of the holders of Registrable Securities with respect to such Piggyback Registrations as provided in paragraphs 2(c) and 2(d) below. (g) Selections of Underwriters. If any Demand Registration is an underwritten offering, the selection by the Company of investment banker(s) and manager(s) for the Offering must be approved by the holders of a majority of the Registrable Securities included in such Demand Registration. Such approval will not be unreasonably withheld. 2. Piggyback Registrations. (a) Right to Piggyback. Whenever the Company proposes to register any of its securities under the Securities Act (other than pursuant to (i) a Demand Registration, (ii) a registration in connection with shares issued by the Company in connection with the acquisition of any company or companies or (iii) a registration solely of shares that have been issued pursuant to the Company's employee benefit plans) and the registration form to be used may be used for the registration of Registrable Securities (a "Piggyback Registration"), the Company will give prompt written notice to all holders of Registrable Securities of its intention to effect such a registration and will include in such registration all Registrable Securities with respect to which the Company has received written requests for inclusion therein within 15 days after the receipt of the Company's notice. (b) Piggyback Expenses. Subject to Section 5(b), the Registration Expenses of the holders of Registrable Securities will be paid by the Company in all Piggyback Registrations. (c) Priority on Primary Registrations. If a Piggyback Registration is an underwritten primary registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company will include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of Registrable Securities owned by each holder of Registrable Securities participating in such offering, and (iii) third, other securities requested to be included in such registration; provided that in any event the holders of Registrable Securities shall be entitled to register at least 20% of the securities to be included in any such registration. (d) Priority on Secondary Registrations. If a Piggyback Registration is an underwritten secondary registration on behalf of holders of the Company's securities, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company will include in such registration (i) first, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of Registrable Securities owned by each holder of Registrable Securities participating in such offering, and (ii) second other securities requested to be included in such registration. (e) Selection of Underwriters. If any Piggyback Registration is an underwritten offering, the selection by the Company of investment banker(s) and manager(s) for the offering must be approved by the holders of a majority of the Registrable Securities included in such Piggyback Registration. Such approval will not be unreasonably withheld. (f) Other Registrations. If the Company has previously filed a registration statement with respect to Registrable Securities pursuant to Paragraph 1 or pursuant to this Paragraph 3, and if such previous registration has not been withdrawn or abandoned, the Company will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8 or any successor form), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least six months has elapsed from the effective date of such previous registration. 3. Holdback Agreements. (a) Each holder of Registrable Securities agrees not to effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the ninety (90)-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration in which Registrable Securities are included (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree. (b) The Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securi ties, during the seven days prior to and during the ninety (90)-day period beginning on the effective date of any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters managing the registered public offering otherwise agree, and (ii) to cause each holder of at least 5% (on a fully-diluted basis) of its Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree. 4. Registration Procedures. Whenever the holders of Registrable Securities have requested that any Registrable Securities be registered pursuant to this Agreement, the Company will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof including the registration of common stock that may be obtained upon conversion of Preferred Shares held by a holder of Registrable Securities requesting registration as to which the Company has received reasonable assurances that only Registrable Securities will be distributed to the public, and pursuant thereto the Company will as expeditiously as possible: (a) prepare and file (in the case of a Demand Registration not more than sixty (60) days after request therefor) with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective (provided that as far in advance as practicable before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel); (b) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than one hundred and eighty (180) days (subject to Paragraph (a) above) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction); (e) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the National Association of Securities Dealers automated quotation system; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including, without limitation, effecting a stock split or a combination of shares); (i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (j) permit any holder of Registrable Securities which holder, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of the Company, to partici pate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and its counsel should be included; (k) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration statement for sale in any jurisdiction, the Company will promptly notify the holders of Registrable Securities and will use its reasonable best efforts promptly to obtain the withdrawal of such order; and (l) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the holders of a majority of the Registrable Securities being sold reasonably request; and (m) in connection with an underwritten public offering, (i) cooperate with the selling holders of Registrable Securities, the underwriters participating in the offering and their counsel in any due diligence investigation reasonably requested by the selling holders or the underwriters in connection therewith and (ii) participate, to the extent reasonably requested by the managing underwriter for the offering or the selling holder, in efforts to sell the Registrable Securities under the offering (including, without limitation, participating in "roadshow" meetings with prospective investors) that would be customary for underwritten primary offerings of a comparable amount of equity securities by the Company. 5. Registration Expenses. (a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), will be borne as provided in this Agreement, except that the Company will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees perform ing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the National Association of Securities Dealers automated quotation system. The Company shall not be required to pay an underwriting discount with respect to any shares being sold by any party other than the Company in connection with an underwritten public offering of any of the Company's securities pursuant to this Agreement. (b) In connection with each Company-paid Demand Registration, the Company will reimburse the holders of Registrable Securities covered by such registration for the reasonable fees and expenses (including the fees and expenses of counsel chosen by the holders of a majority of the Registrable Securities initially requesting such registration) incurred by such holders in connection with such registration. To the extent that there are any unreimbursed expenses incurred by the holders of Registrable Securities, each holder shall bear his or her pro rata share of such expenses based upon the number of shares of Registrable Securities held by such holder that are included in such registration relative to the number of all Registrable Securities included in such registration. (c) The Company will reimburse the holders of Registrable Securities for the reasonable fees and expenses (including the fees and expenses of counsel chosen by the holders of a majority of the Registrable Securities) incurred by such holders in enforcing any of their rights under this Agreement. 6. Indemnification. (a) Indemnification of Selling Stockholders by the Company. The Company agrees to indemnify and hold harmless each holder of Registrable Securities which are registered pursuant hereto (each a "Selling Stockholder") and each person, if any, who controls any Selling Stockholder within the meaning of Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the registration statement (or any amendment thereto), or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided, that subject to Section 6(c) below any such settlement is effected with the prior written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by such Selling Stockholder), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the Selling Stockholder expressly for use in the registration statement (or any amendment thereto), or any preliminary prospectus or the prospectus (or any amendment or supplement thereto). (b) Indemnification of Company by the Selling Stockholders. Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the registration statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense described in the indemnity contained in Section 6(a) above, as incurred, but only with respect to untrue or alleged untrue statements or omissions made in the registration statement (or any amendment thereto), or any preliminary prospectus or any prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholder with respect to such Selling Stockholder expressly for use in the registration statement (or any amendment or supplement thereto); provided, that such Selling Stockholder's aggregate liability under this Section 6 shall be limited to an amount equal to the net proceeds (after deducting the underwriting discount, but before deducting expenses) received by such Selling Stockholder from the sale of Registrable Securities pursuant to a registration statement filed pursuant to this Agreement. (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a), counsel to the indemnified parties shall be selected by the Selling Stockholders (by majority vote based on the number of Registrable Securities included in a registration hereunder) and, in the case of parties indemnified pursuant to Section 6(b), counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Contribution. (i) If a claim for indemnification under Section 6(a) or 6(b) is unavailable to an indemnified party because of a failure or refusal of a governmental authority to enforce such indemnification in accordance with its terms (by reason of public policy or otherwise), then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, in such proportion as is appropriate to reflect the relative fault of the indemnifying party and the indemnified party in connection with the actions, statements or omissions that resulted in such losses as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any losses shall be deemed to include, subject to the limitations set forth in this Section, any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. (ii) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(f) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 6(f), a holder shall not be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such holder from the sale of the Registrable Securities subject to the proceeding exceeds the amount of any damages that the holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (iii) The indemnity and contribution agreements contained in this Section are in addition to any liability that the indemnifying parties may have to the indemnified parties. 7. Participation in Underwritten Registrations. No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all question naires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 8. Definitions. "Common Stock" means the Common Stock of the Company, par value $0.0001 per share. "Registrable Securities" means (i) any Common Stock issued upon the conversion of any Preferred Shares issued pur suant to the Stock Purchase Agreement (whether held by a Purchaser or any successor or assignee of a Purchaser), and (ii) any Common Stock issued or issuable with respect to the securities referred to in clause (i) by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when they have been distributed to the public pursuant to an offering registered under the Securities Act or sold to the public through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force). For purposes of this Agreement, a Person will be deemed to be a holder of Registrable Securities whenever such Person has the right to acquire directly or indirectly such Registrable Securities (upon conversion or exercise in connection with a transfer of securities or otherwise, but disregarding any restrictions or limitations upon the exercise of such right), whether or not such acquisition has actually been effected. For purposes of calculating the percentage of Registrable Securities for voting purposes, the Preferred Shares shall be deemed to have been converted at the then applicable conversion price. "Registration Expenses" has the meaning set forth in Section 5(a) hereof. 9. Miscellaneous. (a) No Inconsistent Agreements. The Company has not entered and will not hereafter enter into any agreement with respect to its securities which is inconsistent with or violates the rights granted to the holders of Registrable Securities in this Agreement. (b) Adjustments Affecting Registrable Securities. The Company will not take any action, or permit any change to occur, with respect to its securities which would adversely affect the ability of the holders of Registrable Securities to include such Registrable Securities in a registration undertaken pursuant to this Agreement or which would adversely affect the marketability of such Registrable Securities in any such registration (including, without limitation, effecting a stock split or a combination of shares). (c) Remedies. Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement. (d) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may be amended or waived only upon the prior written consent of the Company and holders of at least 66.67% of the Registrable Securities. (e) Successors and Assigns. All covenants and agree ments in this Agreement by or on behalf of any of the parties hereto will bind and inure to the benefit of the permitted respective successors and assigns of the parties hereto whether so expressed or not. (f) Notices. Except as otherwise expressly provided herein, any and all notices, designations, consents, offers, acceptances or other communications provided for herein shall be given in writing and shall be mailed by first class registered or certified mail, postage prepaid, sent by a nationally recognized overnight courier service or transmitted via telecopier as follows: If to the Company: Alarmguard Holdings, Inc. 125 Frontage Road Orange, Connecticut 06477 Telecopy: (203) 799-9636 Attention: Russell R. MacDonnell with a copy to: Robinson & Cole LLP 695 East Main Street Stamford, Connecticut 06904 Telecopy: (203) 462-7599 Attention: Richard A. Krantz, Esq. If to Advance: Advance Capital Partners, L.P. 660 Madison Avenue 15th Floor New York, New York 10021 Telecopy: (212) 835-2020 Attention: Robert A. Bernstein with a copy to: Kirkland & Ellis 153 East 53rd Street New York, New York 10022 Telecopy: (212) 446-4900 Attention: Joshua N. Korff, Esq. If to any other Purchaser to the address set forth opposite such Purchaser's name on Schedule I hereto. Notice shall be deemed given, for all purposes, when deposited in the United States mail as registered or certified mail, in which event the fifth day following the date of postmark on the receipt of such registered or certified mail shall conclusively be deemed the date of giving of such notice, on the first Business Day following collection by the courier service or when acknowledged by the receiving telecopier. (g) Interpretation of Agreement; Severability. The provisions of this Agreement shall be applied and interpreted in a manner consistent with each other so as to carry out the purposes and intent of the parties hereto, but if for any reason any provision hereof is determined to be unenforceable or invalid, such provision or such part thereof as may be unenforceable or invalid shall be deemed severed from the Agreement and the remaining provisions carried out with the same force and effect as if the severed provision or part thereof had not been a part of this Agreement. (h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS (AND NOT THE CONFLICTS OF LAW) OF THE STATE OF NEW YORK. (i) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same Agreement. (j) Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all previous agreements. * * * * * [SIGNATURE PAGES FOLLOW] IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first written above. ALARMGUARD HOLDINGS, INC. By: Name: Title: ADVANCE CAPITAL PARTNERS, L.P. By: Advance Capital Associates, L.P., its General Partner By:Advance Capital Management, LLC, its General Partner By: Name: Robert A. Bernstein Title: Principal ADVANCE CAPITAL OFFSHORE PARTNERS, L.P. By:Advance Capital Offshore Associates, LDC, its General Partner By:Advance Capital Associates, L.P., its Sole Director By:Advance Capital Management, LLC, its General Partner By: Name: Robert A. Bernstein Title: Principal CANAAN EQUITY, L.P. By: Canaan Equity Partners, L.L.C. By: Name: Stephen L. Green Title: Member/Manager EXETER CAPITAL PARTNERS IV, L.P. By: Exeter IV Advisors, L.P. its General Partner By: Exeter IV Advisors, Inc., its General Partner By: Name: Keith R. Fox Title: President LB I GROUP INC. By: Name: Alan H. Washkowitz Title: Senior Vice President ELLIOTT ASSOCIATES, L.P. By: Name: Paul E. Singer Title: General Partner WESTGATE INTERNATIONAL, L.P. By: Martley International, Inc. as Attorney-in-Fact By: Name: Paul E. Singer Title: President ZIFF ASSET MANAGEMENT, L.P. By: Name: Philip B. Korsant Title: President OZ MASTER FUND, LTD. By: Name: Daniel S. Och Title: Managing Member OZ Management, L.L.C. IBJS CAPITAL CORPORATION By: Name: Kevin P. Falvey Title: Director CREDIT SUISSE (GUERNSEY) LIMITED as trustee of the Dynamic Growth Fund II By: Name: M.E. Zunino Title: Associate AETNA LIFE INSURANCE COMPANY By: Name: Alan Vartelas Title: Assistant Vice President GRANITE PROPERTIES MANAGEMENT CORP. By: Name: Daren J. Wells Title: Director, Private Equity By: Name: Paul Finkelstein SCHEDULE I Shares of Common Stock initially issuable upon Shares of Conversion of Shares of Series B Convertible Series A Convertible Preferred Name, Address and Convertible Preferred Stock Telecopier Number Preferred Stock Stock Advance Capital 5,524 -- 669,575.76 Partners, L.P. 660 Madison Avenue, 15th Floor New York, NY 10021 (212) 835-2020 Attn: Robert Bernstein Advance Capital 1,726 -- 209,212.12 Offshore Partners, L.P. c/o CITCO Fund Services (Cayman Islands) Limited Safehaven Corporate Centre Leward Building P.O. Box 31106 SMB West Bay Road Grand Cayman Cayman Islands B.W.I. 345-949-3877 Attn: Robert Bernstein Elliott Associates, 2,000 -- 242,424.24 L.P. 712 Fifth Avenue, 35th Floor New York, NY 10019 (212) 974-2092 Attn: Jeffrey Kaplan Westgate 2,000 -- 242,424.24 International, L.P. c/o Stonington Management Corp. 712 Fifth Avenue, 36th Floor New York, NY 10019 (212) 974-2092 Attn: Jeffrey Kaplan Exeter Capital 2,500 -- 303,030.30 Partners IV, L.P. 10 E. 53rd Street, 32nd Floor New York, NY 10022 (212) 872-1198 Attn: Keith Fox Aetna Life Insurance 5,000 -- 606,060.60 Company 151 Farmington Avenue RC21 Hartford, CT 06516 (860) 273-8650 Attention: Private Equity Group Ziff Asset 7,250 --- 878,787.88 Management, L.P. c/o Och-Ziff Management, L.L.C. 153 E. 53rd Street, 43rd Floor New York, NY 10022 (212) 292-5950 Attn: Danny Och/Joel Frank Oz Master Fund, Ltd. 2,000 --- 242,424.24 c/o Och-Ziff Management, L.L.C. 153 E. 53rd Street, 43rd Floor New York, NY 10022 (212) 292-5950 Attn: Danny Och/Joel Frank Canaan Equity L.P. -- 5,000 645,161.29 105 Rowayton Avenue Rowayton, CT 06853 (203) 854-9117 Attn: Stephen Green LB I Group Inc. 5,000 --- 606,060.60 c/o Lehman Brothers 3 World Financial Center 6th Floor New York, NY 10285 (212) 528-8821 Attn: Stephen Berkenfeld IBJS Capital 200 --- 24,242.42 Corporation One State Street New York, NY 10004 (212) 858-2768 Attn: Kevin Falvey Granite Properties 1,500 --- 181,818.18 Management Corp. 1 Cablevision Center P.O. Box 311 Liberty, NY 12754 (914) 295-2741 Attn: Daren Wells Credit Suisse 200 --- 24,242.42 (Guernsey) Limited as trustee for the Dynamic Growth Fund II P.O. Box 122, Helvetia Court South Esplanade, St. Peter Port Guernsey Channel Islands GY1 4EE ###-##-#### 710934 Attn: David Preston Paul Finkelstein 100 --- 12,121.21 EX-10 4 EXHIBIT 10.10 () ALARMGUARD HOLDINGS, INC. PREFERRED STOCK PURCHASE AGREEMENT Dated as of February 2, 1998 TABLE OF CONTENTS Page Article IDEFINITIONS 1 1.1 Definitions; Interpretation 1 Article IIISSUANCE AND SALE OF PREFERRED STOCK 6 2.1 Number of Shares and Price 6 Article IIICLOSING; CLOSING DELIVERIES 6 3.1 Closing 6 3.2 Payment for and Delivery of Preferred Shares 6 Article IVREPRESENTATIONS AND WARRANTIES OF THE COMPANY 7 4.1 Existence; Qualification; Subsidiaries 7 4.2 Authorization and Enforceability; Issuance of Shares 7 4.3 Capitalization 8 4.4 Private Sale; Voting Agreements 8 4.5 Financial Statements; Disclosure 8 4.6 Absence of Certain Changes 9 4.7 Litigation 10 4.8 Licenses, Compliance with Law, Other Agreements, Etc. 11 4.9 Third-Party Approvals 11 4.10 No Undisclosed Liabilities 11 4.11 Tangible Assets 11 4.12 Inventory 11 4.13 Owned Real Property 11 4.14 Real Property Leases 12 4.15 Agreements 12 4.16 Intellectual Property 12 4.17 Employees 12 4.18 ERISA; Employee Benefits 13 4.19 Environment, Health and Safety 13 4.20 Transactions With Affiliates 14 4.21 Taxes 14 4.22 Other Investors 14 4.23 Year 2000 Representations 14 4.24 Seniority 15 4.25 Investment Company 15 4.26 Certain Fees 15 4.27 Solicitation Materials 15 4.28 Form S-3 Eligibility 16 4.29 Listing and Maintenance Requirements Compliance 16 4.30 Registration Rights; Rights of Participation 16 4.31 Recent Results of Operations 16 4.32 Small Business Matters 16 Article VREPRESENTATIONS AND WARRANTIES OF THE PURCHASERS 17 5.1 Authorization and Enforceability 17 5.2 Government Approvals 17 Article VICOMPLIANCE WITH SECURITIES LAWS 17 6.1 Investment Intent of Purchaser 17 6.2 Status of Preferred Shares 17 6.3 Sophistication and Financial Condition of Purchaser 17 6.4 Transfer of Preferred Shares and Conversion Shares 17 6.5 Exculpation Among Purchasers. 19 Article VIICONDITIONS PRECEDENT 19 7.1 Closing Deliveries to the Purchasers 19 7.2 Closing Deliveries to the Company 20 Article VIIICOVENANTS OF THE COMPANY 20 8.1 Restricted Actions 20 8.2 Required Actions 21 8.3 Reservation of Common Stock 23 8.4 Purchasers' Rights if Trading in Common Stock is Suspended or Delisted. 23 8.5 Use of Proceeds 23 Article IXSURVIVAL 24 9.1 Survival 24 Article XINDEMNIFICATION 24 10.1 Indemnification 24 Article XIGENERAL PROVISIONS 25 11.1 Successors and Assigns 25 11.2 Entire Agreement 25 11.3 Notices 25 11.4 Purchasers Fees and Expenses 26 11.5 Amendment and Waiver 26 11.7 Counterparts 27 11.8 Headings 27 11.9 Specific Performance 27 11.10 Remedies Cumulative 27 11.11 GOVERNING LAW 27 11.12 No Third Party Beneficiaries 27 11.13 Severability 27 Schedule I Purchasers Exhibit A Amendment to the Certificate of Designations. Exhibit B Financial Statements Exhibit C Registration Rights Agreement Exhibit D Opinion of Counsel PREFERRED STOCK PURCHASE AGREEMENT PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") dated as of February 2, 1998 between Alarmguard Holdings, Inc., a Delaware corporation (the "Company"), Advance Capital Partners, L.P., a Delaware limited partnership, Advance Capital Offshore Partners, L.P., a Cayman Islands limited partnership (collectively, "Advance"), and each of the other purchasers set forth on Schedule I hereto (with Advance, each a "Purchaser" and collectively the "Purchasers"). The Purchasers desire to purchase from the Company, and the Company desires to issue to the Purchasers, shares of Series A Convertible Preferred Stock $.0001 par value per share of the Company (the "Series A Preferred") and Series B Convertible Preferred Stock $.0001 par value per share of the Company (the "Series B Preferred"). In consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement, the parties hereto agree as follows: Article I DEFINITIONS I.1 Definitions; Interpretation. (a) For purposes of this Agreement, the following terms have the indicated meanings: "Advance" has the meaning set forth in the recitals hereof. "Advance Closing" has the meaning set forth in Section 3.1. "Advance Closing Date" has the meaning set forth in Section 3.1. "Affiliate" of a person means any other person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such person. "Certificate of Designations" means the Certificate of Designations designating the rights and preferences of the Series A Preferred and Series B Preferred adopted by the Board of Directors of the Company and set forth as Exhibit A hereto. "Closing" has the meaning set forth in Section 3.1. "Closing Date" has the meaning set forth in Section 3.1. "Code" means the Internal Revenue Code of 1986, as amended. "Common Stock" means the common stock of the Company, par value $.0001 per share. "Company" has the meaning set forth in the recitals hereof. "Confidential Information" means any information concerning the Company's business other than information that (i) was already known to the Person having a duty to keep confidential such information on a nonconfidential basis prior to the time of disclosure, (ii) is or becomes generally available to the public through no act or omission of such Person or (iii) becomes available to such Person on a nonconfidential basis from a source other than any party hereto (or any agent or representative thereof) if such source was not under a prohibition against disclosing the information to such Person. "Conversion Shares" means shares of Common Stock issued or issuable upon conversion of Preferred Shares. "Credit Agreement" means that certain Third Amended and Restated Acquisition Credit and Term Loan Agreement by and among the Company, certain Subsidiaries of the Company, BankBoston, N.A. as Administrative Agent, General Electric Capital Corporation as Documentation Agent and the lenders party thereto, as the same may be amended, restated, modified or supplemented from time to time. "Current Balance Sheet" means the unaudited balance sheet of the Company dated September 30, 1997. "Environmental and Safety Requirements" means all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or by-products, asbestos, polychlorinated biphenyls, noise or radiation. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Financial Statements" means (i) the unaudited balance sheets of the Company for the quarterly periods ended June 30, 1997 and September 30, 1997, each as included in a quarterly report of the Company on Form 10-Q as filed with the SEC pursuant to the Exchange Act and the audited balance sheet of Triton Group Ltd. dated March 31, 1997 as included in the annual report of Triton Group Ltd. (a predecessor to the Company) on Form 10-K as filed with the SEC pursuant to the Exchange Act and the related unaudited and audited, as applicable, statements of income and consolidated cash flow for the quarterly and fiscal year-to-date periods then ended, each as included in the Company's applicable quarterly report or annual report on Form 10-Q and Form 10-K, as applicable, as filed with the SEC pursuant to the Exchange Act, and (ii) the unaudited balance sheet of Security Systems Holdings, Inc. for the quarterly period ended March 31, 1997 and the audited balance sheet of Security Systems Holdings, Inc. dated December 31, 1996 and the related unaudited and audited, as applicable, statements of income and consolidated cash flow for the quarterly and fiscal year-to-date periods then ended, all of which are attached as Exhibit B hereto. "Financing" means the purchase of Preferred Shares by the SBIC Holders hereunder. "GAAP" means United States generally accepted accounting principles as in effect from time to time, consistently applied. "Governmental Agency" means any federal, state, local, foreign or other governmental agency, instrumentality, commission, authority, board or body and the American Stock Exchange. "includes" and "including" mean includes and including, without limitation. "Intellectual Property" means all patents, patent applications and inventions; all trademarks, service marks, trade dress, trade names and corporate names and all goodwill associated therewith; all copyrights; all registrations, applications and renewals for any of the foregoing; all trade secrets, Confidential Information, know-how, technical and computer data, documentation and software, financial, business and marketing plans, customer and supplier lists and all other intellectual property rights; and all copies and tangible embodiments of the foregoing. "IRS" means the Internal Revenue Service. "knowledge" or "know" when used with respect to the Company means the knowledge of the senior management of the Company, or any other management personnel that has had significant involvement in the business and affairs of the Company. "Liability" means any liability or obligation (whether absolute or contingent, liquidated or unliquidated or due or to become due). "Lien" means any lien, mortgage, pledge, security interest, restriction, charge or other encumbrance. "Material Adverse Change" means any material adverse change in the business, condition (financial or otherwise), prospects or results of operations of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means any material adverse effect on (i) the business, condition (financial or otherwise), prospects or results of operations of the Company and its Subsidiaries taken as a whole, or (ii) the transactions contemplated hereby or by the Related Documents. "Ordinary Course of Business" means the ordinary course of business consistent with past practice (including with respect to quantity, quality and frequency). "Permitted Liens" means (i) liens for taxes not yet due and taxes for which adequate provision is made in the Current Balance Sheet, (ii) purchase money security interests in supplies and equipment, (iii) precautionary liens filed by lessors with respect to leased equipment, (iv) encumbrances which are not substantial in amount, do not materially detract from the value of the property subject thereto and do not materially impair the use of the property subject thereto or the operation of the Company's business, and (v) liens securing the obligations under the Credit Agreement and the other documents, agreements and instruments executed in connection therewith. "Person" means any individual, partnership, joint venture, corporation, trust, unincorporated organization or other entity. "Plan" means any employee benefit plan (as defined in Section 3(3) of ERISA), subject to Title IV of ERISA or the minimum funding requirements of Section 412 of the Code, maintained or contributed to by the Company, its predecessor or any Subsidiary at any time during the 5-calendar years immediately preceding the date of this Agreement. "Preferred Shares" has the meaning set forth in Section 2.1. "Registration Rights Agreement" means the Registration Rights Agreement between the Company and the Purchasers in the form of Exhibit C hereto. "Related Documents" means all documents and instruments to be executed or adopted by the Company in connection herewith, including the Certificate of Designations, the Preferred Shares and the Registration Rights Agreement. "SBA" means the United States Small Business Administration, and any successor agency performing the functions thereof. "SBIC" means a Small Business Investment Company licensed by the SBA under the SBIC Act. "SBIC Act" means the Small Business Investment Act of 1958, as amended. "SBIC Holders" means IBJS Capital Corporation and Exeter Capital Partners IV, L.P. "SBIC Regulations" means the SBIC Act and the regulations issued by the SBA thereunder, codified at Title 13 of the Code of Federal Regulations ("13 CFR"), Parts 107 and 121. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Series A Preferred" has the meaning set forth in the recitals hereof. "Series B Preferred" has the meaning set forth in the recitals hereof. "Subsidiary" means any corporation, partnership, association or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by the Company or (ii) if a partnership, association or other business entity, a majority of the partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by the Company. For purposes hereof, the Company shall be deemed to have a majority ownership interest in a partnership, association or other business entity if the Company, directly or indirectly, is allocated a majority of partnership, association or other business entity gains or losses, or is or controls the managing director or general partner of such partnership, association or other business entity. "Tax" means any federal, state, local, or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code 59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not. "Tax Returns" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. (b) The words "herein", "hereof" and "hereunder" refer to this Agreement as a whole and not to any particular article, section or other subdivision of this Agreement. Article II ISSUANCE AND SALE OF PREFERRED STOCK II.1 Number of Shares and Price. On the terms and subject to the conditions of this Agreement, at the Closing, the Company shall issue to the Purchasers, 27,750 shares of Series A Preferred and 5,000 shares of Series B Preferred (collectively, with the Shares of Series A Preferred to be issued to Advance at the Advance Closing, the "Preferred Shares") for a purchase price of $1,000 per share. On the terms and subject to the conditions of this Agreement, at the Advance Closing, the Company shall issue to Advance, 7,250 shares of Series A Preferred for a purchase price of $1,000 per share. Each Purchaser's obligation to purchase the number of Preferred Shares opposite such Purchaser's name on Schedule I hereto shall be subject to the prior or simultaneous purchase by each other Purchaser (other than Advance) of the number of Preferred Shares opposite such Purchaser's name on Schedule I hereto. Article III CLOSING; CLOSING DELIVERIES III.1 Closing. The closing of the transactions contemplated hereby (the "Closing") shall take place at 10:00 a.m. on February 2, 1998, at the offices of Kirkland & Ellis, New York, New York or at such other time, place and/or date as shall be agreed upon by the parties hereto except that the closing of the issuance and sale of Preferred Shares to Advance (the "Advance Closing") shall take place at 10:00 a.m. on February 13, 1998 or on such other date as shall be agreed upon by the Company and Advance. The date upon which the Closing occurs is referred to herein as the "Closing Date" and the date upon which the Advance Closing occurs is referred to herein as the "Advance Closing Date". III.2 Payment for and Delivery of Preferred Shares. At the Closing, the Company shall issue and deliver to the Purchasers, stock certificates for the Preferred Shares duly registered in the name of each Purchaser, against payment by such Purchaser, by wire transfer of immediately-available funds to the account designated by the Company, of the purchase price therefor set forth in Section 2.1. At the Advance Closing, the Company shall issue and deliver to Advance stock certificates for the Preferred Shares duly registered in the name of Advance, against payment by Advance, by wire transfer of immediately-available funds to the account designated by the Company, of the purchase price therefor set forth in Section 2.1. Article IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to each Purchaser as follows: IV.1 Existence; Qualification; Subsidiaries. The Company and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has full corporate power and authority to conduct its business and own and operate its properties as now conducted, owned and operated. The copies of the Restated Certificate of Incorporation and By-Laws of the Company and all amendments thereto previously delivered to the Purchasers are true, correct and complete copies of such documents. The Company and each Subsidiary is licensed or qualified as a foreign corporation and is in good standing in all jurisdictions where such person is required to be so licensed or qualified, except where the failure to be so licensed, qualified or in good standing would not have a Material Adverse Effect. Except as set forth on Schedule 4.1, the Company has no Subsidiaries and owns no capital stock or other securities of, and has not made any other investment in, any other entity. All of the issued shares of capital stock of each Subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable and are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or adverse claims other than liens securing the obligations under the Credit Agreement. IV.2 Authorization and Enforceability; Issuance of Shares. (a) The Company has full power and authority and has taken all required corporate and other action necessary to permit it to execute and deliver this Agreement and the Related Documents and to carry out the terms hereof and thereof and to issue and deliver the Preferred Shares and the Conversion Shares (including adoption of the Certificate of Designations), and none of such actions will violate any provision of the Restated Certificate of Incorporation of the Company, the By-Laws of the Company or of any applicable law, regulation, order, judgment or decree or rule of the stock exchange where the Company's Common Stock is listed, or result in the breach of or constitute a default (or an event which, with notice or lapse of time or both would constitute a default) under any material agreement, instrument or understanding to which the Company is a party or by which it is bound or by which it will become bound as a result of the transaction contemplated by this Agreement. This Agreement and each of the Related Documents constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and similar laws of general application related to the enforcement of creditor's rights generally and (ii) general principles of equity. (b) The Preferred Shares have been duly authorized and, when issued and delivered in accordance with this Agreement, will be validly issued and outstanding. The Preferred Shares and, when issued, the Conversion Shares, will be fully paid and nonassessable. The Conversion Shares have been duly reserved for issuance upon conversion of the Preferred Shares and, when so issued, will be duly authorized, validly issued and outstanding, fully paid and nonassessable shares of Series A Preferred, Series B Preferred or Common Stock, as the case may be. Neither the issuance and delivery of the Preferred Shares nor the issuance and delivery of any Conversion Shares upon conversion of any Preferred Shares is subject to any preemptive right of any stockholder of the Company or to any right of first refusal or other similar right in favor of any Person which has not been waived. IV.3 Capitalization. As of the Closing, the authorized capital stock of the Company shall consist of (i) 25,000,000 shares of Common Stock, par value $.0001 per share, of which 5,592,476 shares are outstanding, 4,972,434 shares are reserved for issuance upon conversion of Preferred Shares and 770,000 shares are reserved for issuance upon the exercise of certain stock options, and (ii) 5,000,000 shares of Preferred Stock, par value $.0001 per share, of which 35,700 shares have been designated Series A Preferred and 5,000 shares have been designated Series B Preferred, of which 40,000 shares will be sold to the Purchasers pursuant to this Agreement. At the time of the Closing, all of the outstanding capital stock will be validly issued, fully paid and nonassessable and will have been issued in compliance with all applicable securities laws (including the provisions of the Securities Act and the rules and regulations promulgated thereunder). Except as set forth on Schedule 4.3, as of the Closing, the Company has not granted or issued any options, convertible securities, warrants, calls, pledges, transfer restrictions (except restrictions imposed by federal and state securities laws), liens, rights of first offer, rights of first refusal, antidilution provisions or commitments of any character relating to any issued or unissued shares of capital stock of the Company other than as contemplated in the Related Documents. Except as contemplated by this Agreement and the Related Documents or as set forth in Schedule 4.3, there are no preemptive or other preferential rights applicable to the issuance and sale of securities of the Company, including the Preferred Shares. IV.4 Private Sale; Voting Agreements. Assuming the accuracy of the representations and warranties made by recipients of the Company's capital stock made in connection with the acquisition of such capital stock, the Company has not violated any applicable federal or state securities laws in connection with the offer, sale and issuance of any of its capital stock. Subject to the accuracy of the Purchaser's representations contained herein, neither the offer, sale and issuance of the Preferred Shares hereunder nor the issuance and delivery of any Preferred Shares or Conversion Shares upon conversion of any Preferred Shares requires registration under the Securities Act or any state securities laws. IV.5 Financial Statements; Disclosure. (a) The Financial Statements (together with the notes thereto, as applicable), (i) are true, correct and complete in all material respects, (ii) are in accordance with the books and records of the Company and (iii) fairly present the financial condition and results of operations of the Company as of the dates and for the periods indicated, in accordance with GAAP except that the unaudited balance sheets and related financial statements do not contain an auditors' opinion and do not contain footnotes and are subject to normal year-end audit adjustments. (b) This Agreement together with the schedules, attachments, exhibits, written statements and certificates supplied to the Purchasers by or on behalf of the Company with respect to the transactions contemplated hereby does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances in which they were made, not misleading. There is no fact which has not been disclosed to the Purchasers in writing of which the Company has knowledge, and which has had or would reasonably be anticipated to have a Material Adverse Effect. (c) As of its filing date, each document filed with the SEC by the Company, as amended or supplemented prior to the Closing Date, if applicable, pursuant to the Securities Act and/or the Exchange Act (i) complied in all material respects with the applicable requirements of the Securities Act and/or Exchange Act and (ii) did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each final registration statement filed with the SEC by the Company pursuant to the Securities Act, as of the date such statement became effective (i) complied in all material respects with the applicable requirements of the Securities Act and (ii) did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of any prospectus, in light of the circumstances under which they were made). IV.6 Absence of Certain Changes. (a) Except as set forth on Schedule 4.6 since the date of the Current Balance Sheet, neither the Company nor any Subsidiary has: (i) incurred any Liabilities other than current Liabilities incurred, or obligations under contracts entered into, in the Ordinary Course of Business and for individual amounts not greater than $250,000; (ii) paid, discharged or satisfied any claim, Lien or Liability, other than any claim, Lien or Liability (A) reflected or reserved against on the Current Balance Sheet and paid, discharged or satisfied in the Ordinary Course of Business since the date of the Current Balance Sheet or (B) incurred and paid, discharged or satisfied since the date of the Current Balance Sheet, in each case in the Ordinary Course of Business; (iii) sold, leased, assigned or otherwise transferred any of its assets, tangible or intangible (other than sales of inventory in the Ordinary Course of Business and use of supplies in the Ordinary Course of Business); (iv) permitted any of its assets, tangible or intangible, to become subject to any Lien (other than any Permitted Lien); (v) written off as uncollectible any accounts receivable other than (1) in the Ordinary Course of Business, or (2) for amounts not greater than $100,000; (vi) terminated or amended or suffered the termination or amendment of, other than in the Ordinary Course of Business, failed to perform in all material respects all of its obligations or suffered or permitted any material default to exist under, any material agreement, license or permit; (vii) suffered any damage, destruction or loss of tangible property (whether or not covered by insurance) which in the aggregate exceeds $100,000; (viii) made any loan (other than intercompany advances) to any other Person (other than advances to employees in the Ordinary Course of Business which do not exceed $5,000 individually or $25,000 in the aggregate); (ix) canceled, waived or released any debt, claim or right in an amount or having a value exceeding $100,000; (x) paid any amount to or entered into any agreement, arrangement or transaction with any Affiliate (including its officers, directors and employees) outside the Ordinary Course of Business and which was not approved by a majority of the Company's disinterested directors; (xi) declared, set aside, or paid any dividend or distribution with respect to its capital stock or redeemed, purchased or otherwise acquired any of its capital stock; (xii) other than in the Ordinary Course of Business, granted any increase in the compensation of any officer or employee or made any other change in employment terms of any officer or employee; (xiii) made any change in any method of accounting or accounting practice; (xiv) suffered or caused any other occurrence, event or transaction outside the Ordinary Course of Business which could have a Material Adverse Effect; or (xv) agreed, in writing or otherwise, to any of the foregoing. (b) Since the date of the Current Balance Sheet there has been no Material Adverse Change. IV.7 Litigation. As of the date hereof no claim, suit, proceeding or investigation is pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any officer or director thereof or the Company's and the Subsidiaries' business which if decided adversely to any such person could have a Material Adverse Effect. IV.8 Licenses, Compliance with Law, Other Agreements, Etc. The Company and each Subsidiary have all material franchises, permits, licenses and other rights to allow it to conduct its business and is not in violation, in any material respects of any order or decree of any court, or of any law, order or regulation of any Governmental Agency, or of the provisions of any material contract or agreement to which it is a party or by which it is bound, and neither this Agreement nor the Related Documents nor the transactions contemplated hereby or thereby will result in any such violation except where the failure to have any such franchise permit or license or any such violation could not be expected to have a Material Adverse Effect. The Company's and the Subsidiaries' business has been conducted in all material respects in compliance with all federal, state and local laws, ordinances, rules and regulations, except where such violations, defaults or noncompliance would not have a Material Adverse Effect. IV.9 Third-Party Approvals. Assuming the accuracy of the representations and warranties of the Purchasers contained in this Agreement, the Company is not required to obtain any order, consent, approval or authorization of, or to make any declaration or filing with, any Governmental Agency or other third party (including under any state securities or "blue sky" laws) in connection with the execution and delivery of this Agreement or the Related Documents, or the consummation of the transactions contemplated hereby or thereby to occur on the Closing Date or the Advance Closing Date, except for any consents, approvals or authorizations the failure to obtain which could not have a Material Adverse Effect. IV.10 No Undisclosed Liabilities. Neither the Company nor any of its Subsidiaries has any Liabilities except (i) as and to the extent of the amounts reflected or reserved against on the Current Balance Sheet (excluding the footnotes thereto), (ii) liabilities and obligations incurred in the Ordinary Course of Business since the date thereof, (iii) such other liabilities that in the aggregate will not result in a Material Adverse Effect, and (iv) Liabilities under the Credit Agreement (as defined therein). IV.11 Tangible Assets. The Company and its Subsidiaries own or lease all tangible assets used or reasonably necessary in connection with the conduct of its business. All material tangible assets are free from any Liens (other than Permitted Liens), are free from any material defects, have been maintained in accordance with normal industry practice and any regulatory standard or procedure to which such assets are subject, are in good operating condition and repair (subject to normal wear and tear) and are suitable for the purposes for which such assets are used or proposed to be used, other than liens, defects and wear and tear which in the aggregate could not be expected to have a Material Adverse Effect. IV.12 Inventory. All inventory of the Company and its Subsidiaries, whether reflected on the Current Balance Sheet or otherwise, consists of a quality and quantity usable or salable in the Ordinary Course of Business, subject to normal rates of defect or obsolescence not inconsistent with the Company's historical experience. IV.13 Owned Real Property. The Company and its Subsidiaries own no real property. IV.14 Real Property Leases. There exists no event of default (nor any event which with notice or lapse of time would constitute an event of default) with respect to the Company, any Subsidiary and, to the Company's knowledge, with respect to any other party thereto under any agreement pursuant to which the Company is the lessee or lessor of any real property, except for such defaults and defects in enforceability as could not in the aggregate be expected to have a Material Adverse Effect, and all such agreements are in full force and effect and enforceable against the lessor or lessee in accordance with their terms except for such defaults and defects in enforceability as could not in the aggregate be expected to have a Material Adverse Effect. IV.15 Agreements. Neither the Company nor any Subsidiary is in default, nor to the knowledge of the Company is there any basis for a valid claim of default, and to the Company's knowledge no event has occurred which, with notice or lapse of time, would constitute a default, under any agreement, arrangement or understanding to which the Company or any Subsidiary is a party, and to the knowledge of the Company no other Person is in default under any such agreement, in each case other than defaults which in the aggregate could not be expected to have a Material Adverse Effect. Additionally, neither the Company nor any Subsidiary is party to any agreement the performance of which in accordance with its terms (including any termination provision thereof) could be expected to have a Material Adverse Effect. IV.16 Intellectual Property. Schedule 4.16 sets forth a complete list of (i) all patented, registered or applied for Intellectual Property owned or filed by the Company; and (ii) all trade names and material unregistered trademarks used by the Company in connection with its business. The Company owns and possesses all right, title and interest in and to, or has a valid and enforceable license to use, the Intellectual Property necessary for the operation of its business as currently conducted and as currently proposed to be conducted, and no claim by any third party contesting the validity, enforceability, use or ownership of such Intellectual Property has been made or, to the knowledge of the Company, is threatened. The Company has not infringed or misappropriated the Intellectual Property of any third party. IV.17 Employees. Except as set forth on Schedule 4.17, since the date of the Current Balance Sheet, no key employees and no group of employees has terminated, or to the knowledge of the Company plans to terminate, employment with the Company or any Subsidiary, as applicable. Except as set forth on Schedule 4.17, the Company is not a party to or bound by any collective bargaining agreement, nor has it experienced any strike, material grievance, material claim of unfair labor practice or other collective bargaining dispute. Except as set forth on Schedule 4.17, to the knowledge of the Company there is no organizational effort being made or threatened by or on behalf of any labor union with respect to its employees. The Company has not committed any unfair labor practice or materially violated any federal, state or local law or regulation regulating employers or the terms and conditions of its employees' employment, including laws regulating employee wages and hours, employment discrimination, employee civil rights, equal employment opportunity and employment of foreign nationals, except for such violations as could not be expected to have a Material Adverse Effect. IV.18 ERISA; Employee Benefits. Each Plan (other than a Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA) that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service or has timely filed for a favorable determination letter from the Internal Revenue Service and no event has occurred since the date of the last determination letter that could reasonably be expected to materially adversely affect the qualified status of such Plan. Each Plan (other than a Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA) is in full force and effect and has been administered in all material respects in accordance with its terms and is and has been, and each plan administrator and fiduciary of a Plan is acting and has been acting, in compliance in all material respects with all applicable requirements of the Code and ERISA (including the funding, reporting and disclosure and prohibited transaction provisions thereof) and other applicable laws, regulations and rulings in connection with each such Plan. No Plan has been terminated or partially terminated. With respect to each Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, no complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) has occurred, no such Plan is in reorganization or insolvency (within the meaning of Title IV of ERISA) and no material withdrawal liability has been assessed against the Company. The Company or one of its Subsidiaries has made, accrued or provided for all contributions required under each Plan. To the knowledge of the Company, no event has occurred or is reasonably expected to occur with respect to any employee pension benefit plan of the Company or any member of the Company's controlled group (within the meaning of Section 414 of the Code), which could reasonably be expected to directly or indirectly result in any material liability (other than liability arising in the ordinary course) to the Company or any member of its controlled group pursuant to Title IV of ERISA or Section 412 of the Code. No Plan (other than a Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA) has incurred an "accumulated funding deficiency" within the meaning of Section 412 of the Code or Section 302 of ERISA. IV.19 Environment, Health and Safety. (a) The Company (as used in this Section 4.19, Company shall include the Company's Subsidiaries and its predecessor) has complied and is in compliance in all material respects with all Environmental and Safety Requirements that are applicable to the Company's business. (b) The Company has not received any written notice, report or other information regarding any liabilities or potential liabilities (whether accrued, absolute, contingent, unliquidated or otherwise), including any investigatory, remedial or corrective obligations, relating to the Company or its facilities and arising under Environmental and Safety Requirements. (c) The Company has not, either expressly or by operation of law, assumed or undertaken any liability, including without limitation any obligation for corrective or remedial action, of any other person relating to Environmental and Safety Requirements. IV.20 Transactions With Affiliates. Except as disclosed in filings made by the Company with the SEC pursuant to the Securities Act and the Exchange Act, neither the Company nor any Subsidiary is party to any agreement, arrangement or transaction with any Affiliate which is material to the Company's and its Subsidiaries business, taken as a whole. IV.21 Taxes. (a) Each of the Company, its predecessor and its Subsidiaries has filed all Tax Returns that it was required to file, and has paid all Taxes shown thereon as owing, except where the failure to file Tax Returns or to pay Taxes would not have a Material Adverse Effect on the financial condition of the Company and its Subsidiaries taken as a whole. (b) None of the Company and its Subsidiaries (A) has been a member of an affiliated group filing a consolidated federal Tax Return (other than a group the common parent of which was the Company) or (B) has any Liability for the Taxes of any Person (other than any of the Company and its Subsidiaries) under Treas. Reg. 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (c) Each of the Company, its predecessor and its Subsidiaries has withheld and paid all taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party. (d) There is no dispute or claim concerning any Tax Liability of any of the Company and its Subsidiaries either (A) claimed or raised by any authority in writing or (B) as to which any of the directors and officers (and employees responsible for Tax matters) of the Company and its Subsidiaries has knowledge based upon personal contact with any agent of such authority and which is material to the Company and its Subsidiaries taken as a whole. IV.22 Other Investors. Set forth on Schedule 4.22 is a list of all shareholders of the Company who as of the date hereof, based upon Schedule I hereto and SEC filings of shareholders, after giving effect to the terms hereof, own more than 5% of the fully diluted common equity of the Company and sets forth such percentage ownership. IV.23 Year 2000 Representations. (a) None of the computer software, computer firmware, computer hardware (whether general or special purpose) or other similar or related items of automated, computerized or software systems that are used or relied on by Company or by any of its Subsidiaries in the conduct of their respective businesses will malfunction, will cease to function, will generate incorrect data or will produce incorrect results when processing, providing or receiving (i) date-related data from, into and between the twentieth and twenty-first centuries or (ii) date-related data in connection with any valid date in the twentieth and twenty-first centuries. (b) None of the products and services sold, licensed, rendered, or otherwise provided by the Company or by any of its Subsidiaries in the conduct of their respective businesses will malfunction, will cease to function, will generate incorrect data or will produce incorrect results when processing, providing or receiving (i) date-related data from, into and between the twentieth and twenty-first centuries or (ii) date-related data in connection with any valid date in the twentieth and twenty-first centuries; and, accordingly, neither the Company nor any of its Subsidiaries is or will be subject to any claim, demand, action, suit, liability, damage, material loss, or material expense arising from, or related to, circumstances where such products and services malfunction, cease to function, generate incorrect data, or produce incorrect results when processing, providing or receiving (i) date-related data from, into and between the twentieth and twenty-first centuries or (ii) date-related data in connection with any valid date in the twentieth and twenty-first centuries. (c) Neither the Company nor any of its Subsidiaries has made any other representations or warranties regarding the ability of any product or service sold, licensed, rendered, or otherwise provided by the Company or by any of its Subsidiaries in the conduct of their respective businesses to operate without malfunction, to operate without ceasing to function, to generate correct data or to produce correct results when processing, providing or receiving (i) date- related data from, into and between the twentieth and twenty- first centuries and (ii) date-related data in connection with any valid date in the twentieth and twenty-first centuries. IV.24 Seniority. No class of equity securities of the Company is senior to the Preferred Shares in right of payment, whether upon liquidation, dissolution or otherwise. IV.25 Investment Company. The Company is not, and is not controlled by or under common control with an affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. IV.26 Certain Fees. Other than fees and expenses due and payable to Lehman Brothers, no fees or commissions will be payable by the Company to any broker, financial advisor, finder, investment banker, or bank with respect to the transactions contemplated by this Agreement. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of Lehman Brothers or other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless each of the Purchasers, its employees, officers, directors, agents and partners, and their respective affiliates (as such term is defined under Rule 405 promulgated under the Securities Act), from and against all claims, losses, damages, costs (including the costs of preparation and attorney's fees) and expenses suffered in respect to any such claimed or existing fees. IV.27 Solicitation Materials. The Company has not (i) distributed any offering materials in connection with the offering and sale of the Preferred Shares other than the disclosure materials delivered to Purchasers (the "Disclosure Materials") or (ii) solicited any offer to buy or sell the Preferred Shares by means of any form of general solicitation or advertising. None of the Disclosure Materials or any other information provided to the Purchasers by or on behalf of the Company contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. IV.28 Form S-3 Eligibility. No later than May 1, 1998, the Company will be eligible to register securities for resale with the SEC under Form S-3 promulgated under the Securities Act. IV.29 Listing and Maintenance Requirements Compliance. (i) The Company has not received notice (written or oral) from the American Stock Exchange that the Company is not in compliance with the listings or maintenance requirements of such Exchange. (ii) Upon conversion of the Preferred Shares into shares of Common Stock and upon the affirmative vote of the Company's shareholders approving the issuance of the Preferred Shares and the Conversion Shares, which vote shall occur not later than July 31, 1998, all Conversion Shares shall be listed on the American Stock Exchange. IV.30 Registration Rights; Rights of Participation. Except as described on Schedule 4.30 hereto, (A) the Company has not granted or agreed to grant to any Person any rights (including "piggy-back" registration rights) to have any securities of the Company registered with the SEC or any other governmental authority which has not been satisfied and (B) no Person, including, but not limited to, current or former shareholders of the Company, underwriters, brokers or agents, has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by this Agreement or any other related document which has not been waived. IV.31 Recent Results of Operations. Set forth on Schedule 4.31 is (i) the Company's monthly recurring revenues for the month of December 1997 and (ii) the Company's number of subscribers as of December 31, 1997, each as prepared and calculated in the Ordinary Course of Business. IV.32 Small Business Matters. The Company acknowledges that each SBIC Holder is a federally licensed SBIC under the SBIC Act. The Company, together with its "affiliates" (as that term is defined in 13 CFR 121.103), is a "small business concern" within the meaning of the SBIC Regulations, including 13 CFR 121.301. The information regarding the Company and its affiliates set forth in SBA Form 480, Form 652 and Parts A and B of Form 1031 delivered at the Closing will be accurate and complete. Neither the Company nor any of its subsidiaries will use the proceeds of the Financing directly or indirectly for any purpose, for which an SBIC is prohibited from providing funds by SBIC Regulations (including 13 CFR 107.720). Article V REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS Each Purchaser hereby represents and warrants to the Company as follows: V.1 Authorization and Enforceability. Such Purchaser has taken all action necessary to permit it to execute and deliver this Agreement and the other documents and instruments to be executed by it pursuant hereto and to carry out the terms hereof and thereof. This Agreement and each such other document and instrument, when duly executed and delivered by such Purchaser, will constitute a valid and binding obligation of such Purchaser, enforceable against such Purchaser in accordance with its terms. V.2 Government Approvals. Such Purchaser is not required to obtain any order, consent, approval or authorization of, or to make any declaration or filing with, any Governmental Agency in connection with the execution and delivery of this Agreement and the other documents and instruments to be executed by it pursuant hereto or the consummation of the transactions contemplated hereby and thereby, except for such order, consent, approval, authorization, declaration or filing as which has been or will be obtained or made. Article VI COMPLIANCE WITH SECURITIES LAWS VI.1 Investment Intent of Purchasers. Each Purchaser represents and warrants to the Company that it is acquiring the Preferred Shares for its own account, with no present intention of selling or otherwise distributing the same to the public. VI.2 Status of Preferred Shares. Each Purchaser has been informed by the Company that the Preferred Shares have not been and will not be registered under the Securities Act or under any state securities laws and are being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering. VI.3 Sophistication and Financial Condition of Purchaser. Each Purchaser represents and warrants to the Company that it is an "Accredited Investor" as defined in Regulation D under the Securities Act and that it considers itself to be an experienced and sophisticated investor and to have such knowledge and experience in financial and business matters as are necessary to evaluate the merits and risks of an investment in the Preferred Shares. VI.4 Transfer of Preferred Shares and Conversion Shares. (a) Preferred Shares and Conversion Shares may be transferred pursuant to (i) public offerings registered under the Securities Act, (ii) Rule 144 of the SEC (or any similar rule then in force), (iii) to an Affiliate of the transferor, or (iv) subject to the conditions set forth in Section 6.4(b), any other legally-available means of transfer. (b) In connection with any transfer of any Preferred Shares or Conversion Shares (other than a transfer described in Section 6.4(a)(i), (ii) or (iii)), the holder of such shares shall deliver written notice to the Company describing in reasonable detail the proposed transfer, together with an opinion of counsel (Kirkland & Ellis or such other counsel which, to the Company's reasonable satisfaction, is knowledgeable in securities law matters) to the effect that such transfer may be effected without registration of such shares under the Securities Act. The holder of the shares being transferred shall not consummate the transfer until (i) the prospective transferee has confirmed to the Company in writing its agreement to be bound by the provisions of this Section 6.4 or (ii) such holder shall have delivered to the Company an opinion of such counsel that no subsequent transfer of such Preferred Shares or Conversion Shares shall require registration under the Securities Act. Promptly upon receipt of any opinion described in clause (ii) of the preceding sentence, the Company shall prepare and deliver in connection with the consummation of the proposed transfer, new certificates for the Preferred Shares or Conversion Shares being transferred that do not bear the legend set forth in Section 6.4(c). Notwithstanding anything to the contrary contained herein, Preferred Shares may not be transferred to any of the Company's competitors listed on Schedule 6.4(b) hereto without the Company's written consent (other than pursuant to clauses (a)(i) or (a)(ii) above or a tender offer made to each holder of the Company's Common Stock). (c) Except as provided in Section 6.4(b), until transferred pursuant to clauses (a)(i) or (a)(ii) above, each certificate for Preferred Shares or Conversion Shares shall be imprinted with a legend substantially in the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON FEBRUARY 2, 1998 [OR FEBRUARY 13, 1998 IN THE CASE OF PREFERRED SHARES ISSUED ON THE ADVANCE CLOSING DATE] AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY APPLICABLE STATE SECURITIES LAW. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SET FORTH IN THE PREFERRED STOCK PURCHASE AGREEMENT DATED AS OF FEBRUARY 2, 1998 BETWEEN THE ISSUER (THE "COMPANY") AND THE PURCHASERS LISTED ON SCHEDULE I THERETO. THE COMPANY RESERVES THE RIGHT TO REFUSE ANY TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED WITHOUT CHARGE TO THE HOLDER HEREOF UPON WRITTEN REQUEST TO THE COMPANY. VI.5 Exculpation Among Purchasers. Each Purchaser acknowledges that it is not relying upon any person, firm or corporation (including without limitation any other Purchaser), other than the Company and its officers and directors, in making its investment or decision to invest in the Company. Each Purchaser agrees that no other Purchaser (acting in such capacity) nor the respective controlling persons, officers, directors, partners, agents or employees of any such other Purchaser shall be liable to any other Purchaser in connection with this investment for any action taken or omitted to be taken by any of them prior to the date hereof in connection with the Preferred Shares. Article VII CONDITIONS PRECEDENT VII.1 Closing Deliveries to the Purchasers. The following documents and items shall be delivered to the Purchasers at or prior to the Closing: (a) Evidence acceptable to the Purchasers of adoption by the Company of the Certificate of Designations; (b) A fully executed and delivered counterpart of the Registration Rights Agreement; (c) The written opinion of Robinson & Cole LLP, counsel for the Company, in the form of Exhibit D hereto dated as of the Closing Date; (d) certificates of a duly authorized officer of the Company dated as of the Closing Date: (A) stating that the following conditions have been satisfied as of the Closing Date, (i) the representations and warranties of the Company contained herein and in any writing delivered pursuant hereto shall be true and correct when made and at and as of the time of the Closing; (ii) No action, suit, investigation or proceeding shall be pending or threatened before any court or Governmental Agency to restrain, prohibit, collect damages as a result of or otherwise challenge this Agreement or any Related Document or any transaction contemplated hereby or thereby; (iii) All acts or covenants required hereunder to be performed by the Company prior to the Closing shall have been fully performed by it; (iv) No Material Adverse Change shall have occurred between the date of the Current Balance Sheet and the Closing Date; and (B) setting forth the resolutions of the board of directors of the Company authorizing the execution and delivery of this Agreement and the Related Documents (including the Certificate of Designations) and the consummation of the transactions contemplated hereby and thereby and certifying that such resolutions were duly adopted and have not been rescinded or amended; (e) such other documents relating to the transactions contemplated hereby as Advance or other Purchasers may reasonably request; and (f) to each SBIC Holder, (i) duly completed and executed SBA Forms 480, 652 and Parts A and B of 1031, and (ii) a written certification from the Company regarding its intended use of the proceeds of the Financing. VII.2 Closing Deliveries to the Company. At Closing, each Purchaser other than Advance will deliver to the Company the aggregate purchase price for the Preferred Shares purchased by it. At the Advance Closing, Advance will deliver to the Company the aggregate purchase price for the Preferred Shares purchased by it. Article VIII COVENANTS OF THE COMPANY VIII.1 Restricted Actions. Without the prior written consent of the holders of two-thirds of the then outstanding Preferred Shares the Company shall not, and shall not permit any Subsidiary to: (a) become subject to any agreement or instrument which by its terms would (under any circumstances) restrict the Company's right to comply with the terms of this Agreement or any of the Related Documents; (b) use the proceeds from the sale of the Preferred Shares other than (i) primarily for acquisitions of assets or businesses reasonably related to the Company's existing business, and repayment of indebtedness, and (ii) the remainder for other working capital purposes of the Company; (c) enter into any transaction or series of transactions with any stockholder, director, officer, employee or Affiliate which would require disclosure pursuant to Rule 404 of Regulation S-K under the Securities Act unless such transaction is approved by the Company's disinterested directors; or (e) expand the Company's Board of Directors to greater than nine members. VIII.2 Required Actions. For so long as at least 20% of the Preferred Shares remain outstanding, the Company shall, and shall cause each Subsidiary to: (a) cause all properties owned by the Company or any of its Subsidiaries or used or held for use in the conduct of its business or the business of any of its Subsidiaries to be maintained and kept in good condition, repair and working order (reasonable wear and tear excepted) and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Board of Directors may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that the foregoing shall not prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the management of the Company, desirable in the conduct of its business or the business of any of its Subsidiaries and is not disadvantageous in any material respect to the holders of Preferred Shares; (b) preserve and keep in full force and effect the corporate existence, rights (charter and statutory), licenses and franchises of the Company and each of its Subsidiaries; provided, however, that the Company shall not be required to preserve any such right, license or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries as a whole and that the loss thereof is not disadvantageous in any material respect to the holders of Preferred Shares; (c) maintain the books, accounts and records of the Company and its Subsidiaries in accordance with past custom and practice as used in the preparation of the Financial Statements except to the extent permitted or required by GAAP; (d) keep all of its and its Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company in good faith to be financially sound and responsible, against loss or damage to the extent that property of similar character is usually so insured by corporations similarly situated and owning like properties (which may include self-insurance, if reasonable and in comparable form to that maintained by companies similarly situated); (e) comply with all material legal requirements and material contractual obligations applicable to the operations and business of the Company and its Subsidiaries and pay all applicable Taxes as they become due and payable; (f) permit representatives of the holders of Preferred Shares (upon the request of holders of Preferred Shares aggregating 12.5% or more of the Preferred Shares originally issued hereunder) and their agents (including their counsel, accountants and consultants) to have reasonable access during business hours to the Company's books, records, facilities, key personnel, officers, directors, customers, independent accountants and legal counsel; (g) at all times file all reports (including annual reports, quarterly reports and the information, documentation and other reports) required to be filed by the Company under the Exchange Act and Sections 13 and 15 of the rules and regulations adopted by the SEC thereunder, and the Company shall use its best efforts to file each of such reports on a timely basis, and take such further action as any holder or holders of Securities may reasonably request, all to the extent required to enable such holders to sell Securities pursuant to Rule 144 adopted by the SEC under the Securities Act (as such rule may be amended from time to time) or any similar rule or regulation hereafter adopted by the SEC and to enable the Company to register securities with the SEC on Form S-3 or any similar short-form registration statement and upon the filing of each such report deliver a copy thereof to each holder of the Preferred Shares (or, if the Company is no longer subject to the requirements of the Exchange Act, provide reports in substantially the same form and at the same times as would be required if it were subject to the Exchange Act); (h) maintain at all times a valid listing for the Common Stock on a national securities exchange or the Nasdaq National Market System; (i) maintain all material Intellectual Property Rights necessary to the conduct of its business and own or have a valid license to use all right, title and interest in and to, such material Intellectual Property Rights; (j) within fifteen (15) days after the Advance Closing Date (but not before) and at each subsequent election of directors, (and each Purchaser agrees to use its best efforts) elect to the Board of Directors of the Company pursuant to Section 5A of the Certificate of Designations (x) one individual designated by Advance as long as Advance owns any Preferred Shares and (y) one individual elected by the holders of a plurality of the Series A Preferred and Series B Preferred, voting together as a single class; and (k) on the Closing Date, have executed and delivered the Credit Agreement on substantially the same principal terms and conditions as set forth in the commitment letter issued by the lenders a party thereto dated January 7, 1998; and (l) deliver Conversion Shares in accordance with the terms and conditions, and time periods, set forth in the Certificate of Designations. VIII.3 Reservation of Common Stock. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purposes of issuance upon conversion of the Preferred Shares, such number of shares of Common Stock as are issuable upon the conversion of all outstanding shares of the Preferred Shares. All shares of Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all Taxes, liens and charges. The Company shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately transmitted by the Company upon issuance). VIII.4 Purchasers' Rights if Trading in Common Stock is Suspended or Delisted. If at any time while any Purchaser (or any assignee thereof) owns any Preferred Shares or Conversion Shares, trading in the shares of the Common Stock is suspended on or delisted from the American Stock Exchange or any other principal market or exchange for such shares (other than as a result of the suspension of trading in securities on such market or exchange generally or temporary suspensions pending the release of material information) for more than five business days in the aggregate, at the option of any Purchaser exercisable by written notice to the Company delivered after such suspension or delisting, the Company shall redeem, in cash, one-twentieth of the Preferred Shares and Conversion Shares then held by such Purchaser, at an aggregate purchase price equal to the sum of (i) the number of Preferred Shares to be redeemed multiplied by the product of (1) the average per share market value for the five (5) business days immediately preceding (a) the day of such notice or (b) the date of payment in full of the redemption price calculated under this Section, whichever is greater and (2) a fraction, the numerator of which is 1,000 and the denominator of which is the Conversion Price on (a) the date of the repurchase notice, or (b) the date of payment in full of the redemption price pursuant to this Section, whichever is lower, (ii) the aggregate of all accrued but unpaid dividends payable in respect of all Preferred Shares to be redeemed, (iii) the number of Conversion Shares then held by such Purchaser multiplied by the average per share market value for the five (5) business days immediately preceding (A) the date of the notice or (B) the date of payment in full by the Company of the redemption price calculated under this Section, whichever is greater, and (iv) interest on the amounts set forth in (i) - (iii) above accruing from the 5th business day after such notice until the repurchase price under this Section is paid in full at the rate of 14% per annum. The Company shall provide written notice of any redemption demand made pursuant to this Section to each other holder of Preferred Shares or Conversion Shares within 24 hours of its receipt thereof. VIII.5 Use of Proceeds. At the same time the Company files its annual report on Form 10-K and at such other times as any SBIC Holder reasonably requests, the Company shall deliver to each SBIC Holder a written statement certified by the Company's president or chief financial officer describing in reasonable detail the use of the proceeds of the Financing hereunder by the Company and its Subsidiaries. In addition to any other rights granted hereunder, the Company shall grant such SBIC Holder and the SBA access to the Company's books and records for the purpose of verifying the use of such proceeds and verifying the certifications made by the Company in SBA Forms 480 and 652 delivered pursuant to Section 7.1(f) above and for the purpose of determining whether the principal business activity of the Company and its Subsidiaries continues to constitute an eligible business activity (within the meaning of the SBIC Regulations). Article IX SURVIVAL IX.1 Survival. The representations and warranties of the parties hereto contained herein, or in any writing delivered pursuant hereto, shall survive the Closing and expire 30 days following the filing of the Company's annual report on Form 10-K with the SEC for the Company's fiscal year that ends in 1999, except that, notwithstanding anything to the contrary contained herein, the representations of the Company contained in Section 4.23 hereof shall survive the Closing and expire on December 31, 2001. Article X INDEMNIFICATION X.1 Indemnification. In consideration of each Purchaser's execution and delivery of this Agreement and acquiring the Preferred Stock hereunder and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless each Purchaser and each other holder of Preferred Stock and all of their officers, directors, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses (including, without limitation, costs of suit and attorneys' fees and expenses) in connection therewith (irrespective of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought) (the "Indemnified Liabilities"), incurred by the Indemnitees or any of them as a result of, or arising out of, or relating to (a) the breach of any representation of warranty contained in any agreement relating to any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the Preferred Stock, (b) the execution, delivery, performance or enforcement of this Agreement and any other instrument, document or agreement executed pursuant hereto by any of the Indemnitees or (c) resulting from any breach of any representation, warranty, covenant or agreement made by the Company herein or in any Related Document. The Company shall reimburse the Indemnitees for the Indemnified Liabilities as such Indemnified Liabilities are incurred. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. Article XI GENERAL PROVISIONS XI.1 Successors and Assigns. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, including each subsequent holder of Preferred Shares or Conversion Shares. Except as otherwise specifically provided herein, this Agreement shall not be assignable by any party without the prior written consent of the other parties hereto. XI.2 Entire Agreement. This Agreement and the other writings referred to herein or delivered pursuant hereto constitute the entire agreement among the parties with respect to the subject matter hereof and supersede all prior arrangements or understandings. XI.3 Notices. All notices, requests, consents and other communications provided for herein shall be in writing and shall be (i) delivered in person, (ii) transmitted by telecopy, (iii) sent by first-class, registered or certified mail, postage prepaid, or (iv) sent by reputable overnight courier service, fees prepaid, to the recipient at the address or telecopy number set forth below, or such other address or telecopy number as may hereafter be designated in writing by such recipient. Notices shall be deemed given upon personal delivery, seven days following deposit in the mail as set forth above, upon acknowledgment by the receiving telecopier or one day following deposit with an overnight courier service. (a) If to the Company: Alarmguard Holdings, Inc. 125 Frontage Road Orange, Connecticut 06477 Telecopy: (203) 799-9636 Attention: Russell R. MacDonnell with a copy to: Robinson & Cole LLP 695 East Main Street Stamford, Connecticut 06904 Telecopy: (203) 462-7599 Attention: Richard A. Krantz, Esq. (b) If to Advance: Advance Capital Partners, L.P. 660 Madison Avenue 15th Floor New York, New York 10021 Telecopy: (212) 835-2020 Attention: Robert A. Bernstein with a copy to: Kirkland & Ellis 153 East 53rd Street New York, New York 10022 Telecopy: (212) 446-4900 Attention: Joshua N. Korff, Esq. (c) If to any other Purchaser to the address set forth opposite such Purchaser's name on Schedule I hereto. XI.4 Purchasers Fees and Expenses. The Company shall reimburse the Purchasers for the reasonable fees and expenses of Kirkland & Ellis incurred in connection with the documentation, negotiation and consummation of the transactions contemplated by this Agreement and the Related Documents (including any future amendments or waivers thereto) and for reasonable due diligence expenses incurred by the Purchasers. XI.5 Amendment and Waiver. No amendment of any provision of this Agreement shall be effective, unless the same shall be in writing and signed by the Company and the holders of two-thirds of the Preferred Shares and Conversion Shares held by holders of Series A Preferred and Series B Preferred, taken together. Any failure of the Company to comply with any provision hereof may only be waived in writing by the holders of two-thirds of the Preferred Shares and Conversion Shares held by holders of Series A Preferred and Series B Preferred, taken together, and any failure of any holder of Preferred Shares or Conversion Shares to comply with any provision hereof may only be waived in writing by the Company. No such waiver shall operate as a waiver of, or estoppel with respect to, any subsequent or other failure. No failure by any party to take any action against any breach of this Agreement or default by any other party shall constitute a waiver of such party's right to enforce any provision hereof or to take any such action. Notwithstanding anything to the contrary contained herein, no amendment to or waiver of Section 8.2(j) without the prior written consent of Advance shall be permitted. No amendment of any provision of this Agreement shall be effective prior to the Advance Closing. 11.6 Like Treatment of Holders. Neither the Company nor any of its affiliates shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee, payment for the redemptions or exchange of Preferred Shares, or otherwise, to any holder of Preferred Shares, for or as an inducement to, or in connection with the solicitation of, any consent, waiver or amendment of any terms or provisions of the Preferred Shares or this Agreement or the Registration Rights Agreement, unless such consideration is required to be paid to all holders of Preferred Shares bound by such consent, waiver or amendment whether or not such holders so consent, waive or agree to amend and whether or not such holders tender their Preferred Shares for redemption or exchange. The Company shall not, directly or indirectly, redeem any Preferred Shares unless such offer of redemption is made pro rata to all holders of Preferred Shares on identical terms. 11.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one agreement. 11.8 Headings. The headings of the various sections of this Agreement have been inserted for reference only and shall not be deemed to be a part of this Agreement. 11.9 Specific Performance. The Company, on the one hand, and the Purchasers, on the other hand, acknowledge that money damages would not be a sufficient remedy for any breach of this Agreement. It is accordingly agreed that the parties shall be entitled to specific performance and injunctive relief as remedies for any such breach, these remedies being in addition to any of the remedies to which they may be entitled at law or equity. 11.10 Remedies Cumulative. Except as otherwise provided herein, the remedies provided herein shall be cumulative and shall not preclude the assertion by any party hereto of any other rights or the seeking of any other remedies against any other party hereto. 11.11 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE LAWS OF CONFLICT OR CHOICE OF LAWS OF THE STATE OF NEW YORK OR OF ANY OTHER JURISDICTION THAT WOULD RESULT IN THE APPLICATION OF ANY LAWS OTHER THAN THOSE OF THE STATE OF NEW YORK. 11.12 No Third Party Beneficiaries. Except as specifically set forth or referred to herein, nothing herein is intended or shall be construed to confer upon any person or entity other than the parties hereto and their successors or assigns, any rights or remedies under or by reason of this Agreement. 11.13 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. * * * * * IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Agreement as of the date first above written. ALARMGUARD HOLDINGS, INC. By: Name: Title: ADVANCE CAPITAL PARTNERS, L.P. By: Advance Capital Associates, L.P., its General Partner By:Advance Capital Management,LLC, its General Partner By: Name: Robert A. Bernstein Title: Principal ADVANCE CAPITAL OFFSHORE PARTNERS, L.P. By:Advance Capital Offshore Associates, LDC, its General Partner By:Advance Capital Associates, L.P., its Sole Director By:Advance Capital Management, LLC, its General Partner By: Name: Robert A. Bernstein Title: Principal CANAAN EQUITY, L.P. By: Canaan Equity Partners, L.L.C. By: Name: Stephen L. Green Title: Member/Manager EXETER CAPITAL PARTNERS IV, L.P. By: Exeter IV Advisors, L.P. its General Partner By: Exeter IV Advisors, Inc., its General Partner By: Name: Keith R. Fox Title: President LB I GROUP INC. By: Name: Alan H. Washkowitz Title: Senior Vice President ELLIOTT ASSOCIATES, L.P. By: Name: Paul E. Singer Title: General Partner WESTGATE INTERNATIONAL, L.P. By: Martley International, Inc. as Attorney-in-Fact By: Name: Paul E. Singer Title: President ZIFF ASSET MANAGEMENT, L.P. By: Name: Philip B. Korsant Title: President OZ MASTER FUND, LTD. By: Name: Daniel S. Och Title: Managing Member OZ Management, L.L.C. IBJS CAPITAL CORPORATION By: Name: Kevin P. Falvey Title: Director CREDIT SUISSE (GUERNSEY) LIMITED as trustee of the Dynamic Growth Fund II By: Name: M. E. Zunino Title: Associate AETNA LIFE INSURANCE COMPANY By: Name: Alan Vartelas Title: Assistant Vice President GRANITE PROPERTIES MANAGEMENT CORP. By: Name: Daren J. Wells Title: Director, Private Equity By: Name: Paul Finkelstein EX-10 5 EXHIBIT 10.11 101 108723 BANKBOSTON, N.A. UPDIKE, KELLY & SPELLACY, P.C. (Hartford/New Haven, Connecticut) THIRD AMENDED AND RESTATED TERM LOAN AND ACQUISITION CREDIT AGREEMENT by and among ALARMGUARD, INC., as Borrower, SECURITY SYSTEMS HOLDINGS, INC., AND ALARMGUARD HOLDINGS, INC., AND PROTECTIVE ALARMS OF CANADA, INC. as the Guarantors, BANKBOSTON, N.A. (successor by merger to Bank of Boston Connecticut), GENERAL ELECTRIC CAPITAL CORPORATION, IBJ SCHRODER BANK & TRUST COMPANY, CIBC INC. AND THE OTHER BANKS AND LENDERS WHICH MAY BECOME A PARTY TO THIS AGREEMENT, as the Lenders, BANKBOSTON, N.A. (successor by merger to Bank of Boston Connecticut) as the Administrative Agent, and GENERAL ELECTRIC CAPITAL CORPORATION, as the Documentation Agent. AS OF FEBRUARY 2,JANUARY __, 1998 THIRD AMENDED AND RESTATED TERM LOAN AND ACQUISITION CREDIT AGREEMENT This THIRD AMENDED AND RESTATED TERM LOAN AND ACQUISITION CREDIT AGREEMENT (the "Agreement") is made as of this 2nd__ day of FebruaryJanuary, 1998 by and among ALARMGUARD, INC., a Delaware corporation, with its chief executive office located at 125 Frontage Road, Orange, Connecticut 06477 ("Borrower"), the Guarantors which are or may become parties to this Agreement, the banks, financial institutions and other lenders which are or may become parties to this Agreement (individually, a "Lender" and collectively, the "Lenders"), BANKBOSTON, N.A. (successor by merger to Bank of Boston Connecticut), a national banking association, with an office located at 100 Pearl Street, Hartford, Connecticut 06103 as the Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation, with an office located at 201 High Ridge Road, Stamford, Connecticut 06927-5100 335 Madison Avenue, 12th Floor, New York, New York 10017 as the Documentation Agent for the Lenders (in such capacity, the "Documentation Agent"). W I T N E S S E T H: Borrower is currently a direct wholly-owned subsidiary of Security Systems Holdings, Inc., a Delaware corporation ("SSH"), and SSH is currently a direct wholly-owned subsidiary of Alarmguard Holdings, Inc. ("Alarmguard Holdings"). Borrower, SSH, Alarmguard Holdings, Bank of Boston Connecticut, General Electric Capital Corporation and IBJ Schroder Bank & Trust Company entered into a certain Second Amended and Restated Term Loan and Acquisition Credit Agreement dated as of April 15, 1997 (the "Original Closing Date") and amended from time to time thereafter (as amended and in effect from time to time, the "Original Credit Agreement") pursuant to which Bank of Boston Connecticut, General Electric Capital Corporation and IBJ Schroder Bank & Trust Company (such Lenders being referred to in such capacity, the "Existing Lenders") agreed to make loans and advances to Borrower. Upon the execution of this Agreement, Borrower is currently indebted to the Existing Lenders in the aggregate principal amount of $46,900,000.00 (the "Existing Loans"), exclusive of accrued and unpaid interest and other amounts due and payable under the Original Credit Agreement. Borrower has requested that the Lenders amend and restate the terms and conditions of the Original Credit Agreement, inter alia, to continue the Existing Loans, to increase the amount of credit available to Borrower thereunder, to amend the purposes for which Borrower is permitted to use the proceeds of loans and advances thereunder, to make Protective Alarms of Canada, Inc., a direct wholly-owned subsidiary of Borrower, a party thereto, and to make CIBC Inc. a party thereto and a lender thereunder (CIBC Inc. being referred to in such capacity as the "Additional Lender") and to provide for the consent of the Administrative Agents, the Documentation Agent and the Lenders to the acquisition by Borrower of the capital stock of Detect, Inc. BankBoston, N.A. has succeeded to the rights and obligations of Bank of Boston Connecticut as a Lender and as the Administrative Agent for the Lenders by virtue of the merger of Bank of Boston Connecticut with and into BankBoston, N.A. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, Borrower, the Guarantors, the Lenders, the Administrative Agent and the Documentation Agent hereby agree that the Original Credit Agreement shall (subject to the satisfaction of the conditions set forth in Section 5 hereof) be amended and restated as follows: SECTION 1. DEFINITIONS All capitalized terms used in this Agreement, the Notes or the Other Documents, or in any certificate, report or other document, instrument or agreement executed or delivered pursuant hereto and thereto (unless otherwise indicated therein) shall have the meanings ascribed to such terms below. Section 1.1. "Acquisition" means the Detect Acquisition and each other acquisition of the assets or Capital Stock of a Person made by Borrower or a Subsidiary of Borrower as permitted under Section 6.32. hereof. Section 1.2. "Acquisition Documents" means the documents, agreements and instruments executed and delivered in connection with an Acquisition. Section 1.3. "Acquisition Loan" means each Revolving Loan obtained by Borrower to finance the purchase price for, and the reasonable fees, expenses and costs, including integration costs, incurred by Borrower in connection with, an Acquisition. Section 1.4. "Additional Lender" shall have the meaning set forth in the Preamble hereof. Section 1.5. "Adjusted Eurodollar Rate" means, as applied to any Interest Period for a Eurodollar Loan, a rate per annum determined by the Administrative Agent pursuant to the following formula: AER = [ IOR ] * [1.00 - RP] AER = Adjusted Eurodollar Rate IOR = Interbank Offered Rate RP = Reserve Percentage * The amount in brackets shall be rounded upwards, if necessary to the next higher 1/100 of 1%. Where: "Interbank Offered Rate" applicable to any Eurodollar Loan for any Interest Period means the rate of interest determined by the Administrative Agent to be the prevailing rate per annum at which deposits in U.S. dollars are offered to the Administrative Agent by first-class banks in the interbank Eurodollar market in which it regularly participates on or about 10:00 a.m. (Boston, Massachusetts time) two (2) Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Eurodollar Loan to which such Interest Period is to apply for a period of time approximately equal to such Interest Period. "Reserve Percentage" applicable to any Interest Period means the rate (expressed as a decimal) applicable to any member bank of the Federal Reserve System during such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including, without limitation, any basic, supplemental, emergency or marginal reserve requirement) of such member bank with respect to "Eurocurrency liabilities" as that terms is defined under such regulations. Section 1.6. "Administrative Agent" shall have the meaning set forth in the Preamble hereof and shall include any successor to the Administrative Agent appointed pursuant to Section 10.10. hereof. Section 1.7. "Administrative Questionnaire" shall have the meaning set forth in Section 10.17. hereof. Section 1.8. "Affiliate" means any Person (i) which directly or indirectly controls, or is controlled by, or is under common control with, Borrower or any Subsidiary of Borrower; (ii) which directly or indirectly beneficially owns or holds ten percent (10%) or more of any class of voting stock of Borrower or any Subsidiary of Borrower or ten percent (10%) or more of the voting stock of which is directly or indirectly beneficially owned or held by Borrower or any Subsidiary of Borrower; or (iii) which is an officer, director, joint venturer or partner of any Person referred to in clause (i) or (ii) above. The term "control" (and its correlative meanings "controlled by" and "under common control with") as used in this Section 1.8. means the possession, directly or indirectly, of the power to direct, or cause the direction of, the management and policies of a Person, whether through ownership of voting stock, by contract or otherwise. Notwithstanding any provision of this Section 1.8. to the contrary, the Administrative Agent, the Documentation Agent and the Lenders shall not be considered an Affiliate of any Credit Party for purposes of this Agreement. Section 1.9. "Affiliate Subordination Agreement" means each subordination agreement executed by an Affiliate of Borrower in favor of the Administrative Agent and the Lenders with respect to any Indebtedness due by Borrower to such Affiliate in substantially the form of Exhibit F-1 attached hereto by SSH, as any such Affiliate Subordination Agreement may be amended, supplemented, modified or confirmed from time to time. Section 1.10. "Agreement" means this Third Amended and Restated Term Loan and Acquisition Credit Agreement, including all schedules and exhibits attached hereto, and any and all amendments, modifications and supplements hereto. Section 1.11. "Alarmguard Holdings" shall have the meaning set forth in the Preamble hereof. Section 1.12. "Alarmguard Holdings Guarantee" means the Guarantee Agreement executed by Alarmguard Holdings in favor of the Administrative Agent for the ratable benefit of the Lenders on the Original Closing Date, as such Alarmguard Holdings Guarantee may be amended, supplemented, modified or confirmed on the Closing Date and from time to time thereafter. Section 1.13. "Alarmguard Holdings Pledge" means the Pledge Agreement executed by Alarmguard Holdings in favor of the Administrative Agent for the ratable benefit of the Lenders as of the Original Closing Date, as such Alarmguard Holdings Pledge may be amended, supplemented, modified or confirmed on the Closing Date and from time to time thereafter. Section 1.14. "Applicable Lending Office" means, for each Lender and for each type of Loan, the lending office of such Lender designated for such type of Loan as set forth on Schedule 1.14. attached hereto, as said Schedule 1.14. is amended, supplemented or modified from time to time, as the office by which its Loans of such type are to be made and maintained. Section 1.15. "Asset Sale" means any sale, transfer or other disposition by Borrower or any of its Subsidiaries to any Person (other than to Borrower or a Subsidiary) of any asset (including, without limitation, any Capital Stock of another Person, but excluding the sale by such Person of its own Capital Stock) of Borrower or such Subsidiary. Section 1.16. "Assignment and Acceptance" shall have the meaning set forth in Section 13.1. hereof. Section 1.17. "Bankruptcy Code" means Title 11 of the United States Code, entitled "Bankruptcy", as amended from time to time, and all rules and regulations promulgated thereunder. Section 1.18. "Base Rate" means the greater of (i) the rate of interest announced from time to time by BankBoston, N.A. at its head office located at 100 Federal Street, Boston, Massachusetts 02100 as its "Base Rate", or (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/16 of 1%). Section 1.19. "Base Rate Loan" means any Loan bearing interest at a rate determined by reference to the Base Rate. Section 1.20. "Base Rate Margin" means a percentage per annum determined as set forth in Section 2.3.5. hereof. Section 1.21. "Borrower" shall have the meaning set forth in the Preamble hereof. Section 1.22. "Borrower Pledge Agreement" means the Pledge Agreement executed by Borrower in favor of the Administrative Agent for the ratable benefit of the Lenders on the Original Closing Date, as such Borrower Pledge Agreement may be amended, supplemented, modified or confirmed on the Closing Date and from time to time thereafter. Section 1.23. "Borrower Security Agreement" means the Amended and Restated Security Agreement executed by Borrower in favor of the Administrative Agent for the ratable benefit of the Lenders on the Original Closing Date, as such Borrower Security Agreement may be amended, supplemented, modified or confirmed on the Closing Date and from time to time thereafter. Section 1.24. "Borrowing Base" means, as of any date as of which the amount thereof shall be determined, an amount which is equal to RMR as of such date multiplied by 22.5. Section 1.25. "Business Day" means, in the case of a Eurodollar Loan, any day in which dealings in foreign currencies and exchange between lenders may be carried on in the place where the Eurodollar Office is located and in Boston, Massachusetts and Hartford, Connecticut and, in all other cases, any day other than a Saturday, Sunday, legal holiday or other day on which lenders in the State of Connecticut or the Commonwealth of Massachusetts are required or permitted by law to close. Section 1.26. "Capital Expenditures" means, without duplication, for any period, the aggregate of all expenditures made by Borrower and its Subsidiaries that, in conformity with GAAP, are required to be included in the "additions to property, plant, equipment" or similar fixed asset account reflected within the consolidated Financial Statements of Borrower and its Subsidiaries. Section 1.27. "Capital Lease" means any lease of any property (whether real, personal or mixed) that, in conformity with GAAP, should be accounted for as a capital lease. Section 1.28. "Capital Stock" means any and all shares, interests, participations or other equivalents, however designated, of the capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. Section 1.29. "Cash Proceeds" means, with respect to any Asset Sale, the aggregate cash payments (including any cash received by way of deferred payment pursuant to a note receivable issued in connection with such Asset Sale, other than the portion of such deferred payment constituting interest, but only as and when so received) received by Borrower and/or any of its Subsidiaries from such Asset Sale. Section 1.30. "Change in Control Event" means any event which results in (i) Alarmguard Holdings ceasing to own directly 100% on a fully diluted basis of the Capital Stock of SSH (other than as a result of the consolidation of Alarmguard Holdings with SSH), (ii) SSH or Alarmguard Holdings ceasing to own directly 100% on a fully diluted basis of the Capital Stock of the Borrower, or (iii) any Person (other than a Continuing Shareholder) or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act) (other than a group of the Continuing Shareholders) directly or indirectly having directly or indirectly acquired beneficial or record ownership of more than 20% of the aggregate ordinary voting power represented by the issued and outstanding shares of the Capital Stock of Alarmguard Holdings (including, but not being limited to, the acquisition of such beneficial or record ownership by way of proxy, voting trust, voting agreement or stock pledge) or (iv) the board of directors of Alarmguard Holdings ceasing to consist of a majority of Continuing Directors. Section 1.31. "Closing Date" means the date hereof or, if later, the date on which all conditions precedent to the amendment and restatement of the Original Credit Agreement and the making of the initial Extension of Credit hereunder are satisfied or waived. Section 1.32. "Code" means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. Section 1.33. "Collateral" means all collateral received or delivered as security for the Obligations pursuant to the Security Documents, and any properties and interests provided in addition to or in substitution for any of the foregoing. Section 1.34. "Collateral Disclosure List" means each list completed by Borrower for the purpose of disclosing certain information with respect to the Collateral in substantially the form attached hereto as Exhibit F-2, as any such Collateral Disclosure List may be amended, supplemented or modified from time to time. Section 1.35. "Commitment" means, with respect to each Lender, at any time, such Lender's several obligation to make Revolving Loans, which obligation shall not exceed, in the case of each Lender, the amount set forth next to its name on Schedule 1.35. attached hereto, as such Schedule 1.35. may be amended, modified and/or substituted from time to time by the Administrative Agent in accordance with Section 13.2. hereof. Section 1.36. "Commitment Percentage" means, with respect to each Lender, the percentage set forth opposite such Lender's name on Schedule 1.36. attached hereto, as such Schedule 1.36. may be amended, modified and/or substituted from time to time by the Administrative Agent in accordance with Section 13.2. hereof. Section 1.37. "Consolidated Current Assets" means, as of any date as of which the amount thereof shall be determined, all amounts that should, in accordance with GAAP, be included as current assets on a consolidated balance sheet of Borrower and its Subsidiaries prepared as of such date; provided, however, that such amounts shall not include (a) cash or cash equivalents, (b) any amounts for any Indebtedness owing by an Affiliate of Borrower, unless such Indebtedness arose in connection with the sale of goods or other property in the ordinary course of business and would otherwise constitute current assets in conformity with GAAP, (c) any Capital Stock issued by an Affiliate of Borrower, (d) the cash surrender value of any life insurance policy or (e) any Consolidated Intangibles. Section 1.38. "Consolidated Current Liabilities" means, as of any date as of which the amount thereof shall be determined, all amounts that should, in accordance with GAAP, be included as current liabilities (inclusive of deferred revenue) on the consolidated balance sheet of Borrower and its Subsidiaries prepared as of such date, plus, to the extent not already included therein, (a) all Indebtedness of any such Person that is payable upon demand or within one (1) year from such date of determination unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one (1) year from such date of determination and (b) all reserves in respect of liabilities or Indebtedness payable on demand or, at the option of the Person to whom such Indebtedness is owed, within one (1) year from such date of determination, the validity of which is contested at such date, but excluding any payments in respect of any Indebtedness of any such Person (whether installment, serial maturity or sinking fund payments or otherwise) having an original term of more than one (1) year required to be made not more than one (1) year after such date of determination. Section 1.39. "Consolidated EBITDA" means, in respect of Borrower and its consolidated Subsidiaries, for any period, the sum for such period of (a) Consolidated Net Income, (b) the sum of provisions for taxes, interest expense and depreciation and amortization expense used in determining such Consolidated Net Income and (c), without duplication of any amounts set forth in subsection (b) hereof, the Direct Marketing Program Net Loss for such period. Section 1.40. "Consolidated Intangibles" means, as of any date as of which the amount thereof shall be determined, all assets of Borrower and its Subsidiaries, determined on a consolidated basis as of such date, that would be classified as intangible assets in accordance with GAAP, but in any event including, without limitation, items such as (a) unamortized debt discount and expense, (b) unamortized organization and reorganization expense, (c) costs in excess of the net asset value of acquired companies, (d) patents, trade and service marks and names, copyrights, (e) research and development expenses except prepaid expenses, (f) all reserves not already deducted from assets; (g) any write-up in the book value of assets resulting from any reevaluation thereof (other than revaluations arising out of foreign currency valuations in accordance with GAAP) subsequent to the date of the Financial Statements referred to in Section 4.7 hereof, and (h) the value of any minority interests in any Person. Section 1.41. "Consolidated Net Income" means, for any period, the consolidated net income (or deficit) of Borrower and its consolidated Subsidiaries for such period, determined in accordance with GAAP but excluding (a) the income (or deficit) of any Person accrued prior to the date on which it becomes a Subsidiary or is merged into or consolidated with Borrower or any Subsidiary, (b) the income (or deficit) of any Person (other than a Subsidiary) in which Borrower or any Subsidiary has an ownership interest, except to the extent that any such income has been actually received by Borrower or such Subsidiary in the form of dividends or similar distributions, (c) the undistributed earnings of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation or Requirement of Law applicable to such Subsidiary, (d) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such period, (e) any aggregate net gain (but not aggregate net loss) during such period arising from the sale, exchange or other disposition of capital assets (such term to include all fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets and all securities), (f) any write-up of any asset, (g) any net gain from the collection of the proceeds of life insurance policies, (h) any gain arising from the acquisition of any securities, or the extinguishment, under GAAP, of any Indebtedness, of Borrower or any Subsidiary, (i) in the case of a successor to Borrower by merger or consolidation or as a transferee of its assets, any earnings of the successor corporation prior to such merger, consolidation or transfer of assets, (j) any deferred credit representing the excess of equity in any Subsidiary at the date of acquisition over the cost of the investment in such Subsidiary and (k) any extraordinary gains or losses other than those described in (a) through (j) above. Section 1.42. "Consolidated Senior Debt" means, as of any date or for any period as of which the amount thereof shall be determined, the aggregate Indebtedness of Borrower and its Subsidiaries to the Lenders under this Agreement as of such date or during such period determined on a consolidated basis. Section 1.43. "Consolidated Total Debt Service" means, for any period, the sum of (a) the amounts deducted for Consolidated Total Interest in determining Consolidated Net Income for such period and (b) the amounts of scheduled payments of principal of Indebtedness of Borrower and its consolidated Subsidiaries during such period. Section 1.44. "Consolidated Total Debt" means, as of any date or for any period as of which the amount thereof shall be determined, the aggregate Indebtedness of any Person and its Subsidiaries as of such date or during such period determined on a consolidated basis but excluding, in the case of Borrower and its consolidated Subsidiaries, Indebtedness evidenced by the Steffanato Note. Section 1.45. "Consolidated Total Interest" means, for any period, the amount of interest which, in conformity with GAAP, would be set forth opposite the caption "interest expense" or similar caption (including without limitation, imputed interest included in payment under Capital Leases) on a consolidated income statement of Borrower and its consolidated Subsidiaries for such period, less the amount of any interest earned during such period but excluding interest accreted in respect of the Steffanato Note. Section 1.46. "Contingent Obligation" means, as applied to any Credit Party or any of its Subsidiaries, any guarantee, endorsement or other contingent or surety obligation with respect to obligations of any other Person, whether or not reflected on the consolidated balance sheet of such Credit Party and its Subsidiaries, including any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other Person. Section 1.47. "Continuing Directors" means the directors of Alarmguard Holdings on the Closing Date as set forth on Schedule 1.47. attached hereto and each other director elected or appointed after the Closing Date if such director's nomination or appointment to the board of directors is recommended by a majority of the then Continuing Directors. Section 1.48. "Continuing Shareholders" means the Persons possessing shares of the Capital Stock of Alarmguard Holdings as of the Closing Date and listed on Schedule 1.48. attached hereto. Section 1.49. "Contractual Obligation" means, as applied to any Person, any indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. Section 1.50. "Control" means the possession, directly or indirectly, of the power to direct, or cause the direction of, the management and policies of a Person, whether through ownership of voting stock, by contract or otherwise. "Controlling" and "Controlled" shall have meanings correlative thereto. Section 1.51. "Controlled Group" means all trades or businesses (whether or not incorporated) under common control that together with Borrower or any Subsidiary, are treated as a single employer under Section 413(b) or 413(c) of the Code or Section 4001 of ERISA. Section 1.52. "Credit Parties" means Borrower, each of its Subsidiaries, SSH and Alarmguard Holdings, collectively. Section 1.53. "Credit Party" means Borrower, each of its Subsidiaries, SSH or Alarmguard Holdings, individually. Section 1.54. "Customer Contracts" means contracts and agreements (x) which have been duly executed by and between Borrower and its customers, or any Subsidiary of Borrower and its customers (other than customers now or formerly of Protective Alarms of Canada, Inc.), , for regular and ongoing electrical protection, monitoring, closed circuit television and access control services and maintenance, fire and sprinkler inspection and testing and other related services and (y) which (i) have not been canceled by Borrower or any Subsidiary of Borrower in accordance with Borrower's cancellation policies and procedures in effect on the Original Closing Date as set forth in the Price Waterhouse Report, (ii) are not subject to cancellation in accordance with such policies and procedures or (iii) have not otherwise been canceled or terminated by Borrower or a customer. Section 1.54.a. "Dealer Program" means an internal marketing program conducted by Borrower, the costs and expenses of which are separately identified and segregated for accounting purposes in a manner satisfactory to the Administrative Agent and the Lenders, for the purpose of generating new Customer Contracts through authorized dealers and independent sales agents. Section 1.54.b. "Dealer Program Costs" means, as of any date as of which the amount thereof shall be determined, the aggregate amount of all Program Capital Expenditures which relate to the Dealer Program as of such date plus the Dealer Program Net Loss as of such date. Section 1.54.c. "Dealer Program Net Loss" means, for any period, the difference between (i) the revenue derived from the Dealer Program during such period less (ii) all expenses (excluding depreciation and amortization for such period relating to the Dealer Program) incurred by Borrower in connection with the Dealer Program during such period, all of the foregoing being calculated in accordance with GAAP. Section 1.55. "Default" means an event or condition that, but for the lapse of time, the giving of notice, or both, would constitute an Event of Default if that event or condition was not cured or removed within any applicable grace or cure period. Section 1.56. "Default Rate" means the rate of interest determined by increasing the rate of interest otherwise chargeable under this Agreement to a rate which shall be the lower of (i) the highest rate allowed by law or (ii) two percentage points (2.0%) above the rate of interest which would otherwise be in effect under this Agreement. Section 1.57. "Defaulting Lender" shall have the meaning set forth in Section 2.6.2. hereof. Section 1.58. "Deferred Purchase Price Obligations" means any and all obligations of any Credit Party other than Borrower or a Subsidiary of Borrower incurred as permitted under Section 8.1.(g) hereof for amounts deferred or withheld in respect of the purchase price for any Acquisition, including amounts withheld as potential set-offs against Customer Contract terminations, purchase price adjustments or otherwise. Section 1.59. "Detect" means Detect, Inc., a Connecticut corporation, having a chief executive office located at, following the consummation of the Detect Acquisition, 125 Frontage Road, Orange, Connecticut 06477. Section 1.59.ab. "Detect Acquisition" means the acquisition of the Capital Stock of Detect by Borrower as contemplated by, and in accordance with the terms and conditions of, the Detect Acquisition Documents. Section 1.59.bca. "Detect Acquisition Documents" means that certain Stock Purchase and Sale Agreement made as of December 10, 1997 by and among SSH and the stockholders of Detect and assigned by SSH to Borrower and all other documents, agreements, instruments and certificates executed and delivered in connection therewith. Section 1.59. "Direct Marketing Capital Expenditures" means, without duplication, for any period, the aggregate of all Capital Expenditures made by Borrower in connection with the Direct Marketing Program. Section 1.60. "Direct Marketing Program" means anthe internal marketing programs conducted by Borrower, the costs and expenses of which are separately identified and segregated for accounting purposes in a manner satisfactory to the Administrative Agent and the Lenders for the purpose of generating new Customer Contracts through telemarketing. dealer or other marketing techniques by making an investment in the initial installation of a residential or small commercial security alarm monitoring system .[add Dealer Program]. Section 1.61. "Direct Marketing Program Costs" means, as of any date as of which the amount thereof shall be determined, the aggregate amount of all Direct Marketing Program Capital Expenditures which relate to the Direct Marketing Program as of such date plus the Direct Marketing Program Net Loss as of such date. Section 1.62. "Direct Marketing Program Net Loss" means, for any period, the difference between (i) the revenue derived from the Direct Marketing Program during such period less (ii) all expenses (excluding depreciation and amortization for such period relating to the Direct Marketing Program) incurred by Borrower in connection with the Direct Marketing Program during such period, all of the foregoing being calculated in accordance with GAAP. Section 1.63. "Dividend" or "Dividends" means the payment of any dividend or other distribution in respect of the Capital Stock of a Person in cash or other property (excepting distribution in the form of such Capital Stock) or the redemption or acquisition of any Capital Stock or security of a Person. Section 1.64. "Documentation Agent" shall have the meaning set forth in the Preamble hereof. Section 1.65. "Dollars" and "$" means dollars in the lawful currency of the United States of America. Section 1.66. "Encumbrance or "Encumbrances" means any security interest, mortgage, pledge, lien, claim, charge, encumbrance, title retention agreement, lessor's interest under a financing lease or any analogous arrangements in any Credit Party's properties or assets, intended as, or having the effect of, security. Section 1.67. "Environmental Certificate" shall have the meaning set forth in Section 5.2.11. hereof. Section 1.68. "Environmental Laws" means any and all applicable laws, statutes, ordinances, rules, regulations, orders, or determinations of any Governmental Authority pertaining to the environment, including without limitation, the Clean Water Act, the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), and as may be further amended (all together herein called "CERCLA"), the Federal Water Pollution Control Amendments, the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), the Hazardous Materials Transportation Act of 1975, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, and any comparable or similar applicable environmental laws of the State of Connecticut and any other state in which Borrower maintains business premises. Likewise, the terms "hazardous substance," "release," and "threatened release" herein referenced in connection with Environmental Laws shall have the meanings specified in CERCLA and the terms "solid waste" and "dispose" (or "disposed") shall have the meanings specified in RCRA; provided, however, in the event either CERCLA or RCRA is amended so as to broaden the meaning of any term defined therein, such broader meaning shall apply subsequent to the effective date of such amendment, and provided further that, to the extent the laws of any state which establish a meaning for "hazardous substance," "release," "solid waste" or "disposal" which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply to business operations conducted in that particular state. Section 1.69. "ERISA" means the Employee Retirement Income Security Act of 1974 and the rules and regulations promulgated thereunder; collectively, as the same may from time to time be supplemented or amended and remain in effect. Section 1.70. "Eurodollar Loan" means any Loan which is bearing interest at a rate determined by reference to the Adjusted Eurodollar Rate. Section 1.71. "Eurodollar Margin" means a per annum percentage determined in the manner set forth in Section 2.3.5. hereof. Section 1.72. "Eurodollar Tranche" means all Eurodollar Loans with respect to which the Interest Periods applicable thereto begin on the same date and end on the same later date (whether or not such Loans were originally made on the same day). Section 1.73. "Event of Default" shall have the meaning set forth in Section 11.1. hereof. Section 1.74. "Excess Cash Flow" means, for any Fiscal Year, all amounts which would be included in Consolidated Net Income of Borrower and its Subsidiaries during such Fiscal Year, plus, (a) the sum of (i) to the extent that such amounts have been deducted in determining Consolidated Net Income for such fiscal period, all amounts attributable to depreciation and/or amortization and other non-cash charges to Consolidated Net Income and (ii) the decrease, if any, in the amount of the excess of Consolidated Current Assets over Consolidated Current Liabilities at the end of such Fiscal Year compared to the amount of the excess of Consolidated Current Assets over Consolidated Current Liabilities at the end of the immediately preceding Fiscal Year, minus, (b) the sum of (i) the amount of all regularly scheduled payments of principal of the Loans actually made during such Fiscal Year and the amount of any voluntary prepayment of principal of the Loans made during such Fiscal Year, (ii) the amount of Capital Expenditures permitted by Section 8.9. actually made during such Fiscal Year, (iii) the amount of payments made in respect of Capital Leases actually made during such Fiscal Year and (iv) the increase, if any, in the amount of the excess of Current Consolidated Assets over Consolidated Current Liabilities at the end of such Fiscal Year compared to the amount of the excess of Consolidated Current Assets over Current Consolidated Liabilities at the end of the immediately preceding Fiscal Year. Section 1.75. "Exchange Act" means the Securities Exchange Act of 1934, as amended. Section 1.76. "Existing Lenders" shall have the meaning set forth in the Preamble hereof. Section 1.77. "Existing Loans" shall have the meaning set forth in the Preamble hereof. Section 1.78. "Extension of Credit" means any Loan or other extension of credit made by the Lenders to Borrower under this Agreement. Section 1.79. "Facility Fee" shall have the meaning set forth in Section 2.4.1. hereof. Section 1.80. "Federal Funds Effective Rate" means for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three (3) Federal funds brokers of recognized standing selected by the Administrative Agent. Section 1.81. "Fees" means the Facility Fee and any other fees payable under this Agreement to the Lenders, including, but not being limited to, any fees payable under Section 2.3.7. and Section 2.5.2., but excluding any fees payable to the Administrative Agent for its own account. Section 1.82. "Financial Statement" or "Financial Statements" means, as of any date, or with respect to any period, as applicable, a financial report or reports consisting of (i) a balance sheet; (ii) an income statement; (iii) a statement of cash flow; and (iv) a statement of changes in stockholders' equity. Section 1.83. "Fiscal Quarter" means each fiscal period of Borrower and its Subsidiaries ending on each March 31, June 30, September 30 and December 31 in each Fiscal Year. Section 1.84. "Fiscal Year" means each fiscal period of Borrower and its Subsidiaries commencing on January 1 in each calendar year and ending on December 31 in such year. Section 1.85. "Forecasts" shall have the meaning set forth in Section 4.8. hereof. Section 1.86. "GAAP" means generally accepted accounting principles in the United States of America as in effect on the Closing Date, consistently applied but subject to adjustment in accordance with Section 14.20. hereof. Section 1.87. "Governing Documents" means, as to any Person, the articles or certificate of incorporation and by-laws or other organic organizational or governing documents of such Person. Section 1.88. "Governmental Authority" means any Federal, state, local or foreign court, commission or tribunal, or governmental, administrative or regulatory agency, department, authority, instrumentality or other body exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, government. Section 1.89. "Government Obligations" means securities which are general obligations of the United States of America or which are unconditionally guaranteed by the United States of America as to timely payment of principal and interest. Section 1.90. "Guarantee" means the Alarmguard Holdings Guarantee, the SSH Guarantee or any Subsidiary Guarantee, individually. Section 1.91. "Guarantees" means the Alarmguard Holdings Guarantee, the SSH Guarantee and each Subsidiary Guarantee, collectively. Section 1.92. "Guarantor" means Alarmguard Holdings, SSH or any Subsidiary of Borrower, individually. Section 1.93. "Guarantors" means Alarmguard Holdings, SSH and the Subsidiaries of Borrower, collectively. Section 1.94. "Hazardous Materials" means (i) any chemical, compound, material, mixture or substance that is now or hereafter defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste", or "toxic substances" or terms of similar import under any applicable Federal, state or local law or under the regulations adopted or promulgated pursuant thereto, including, without limitation, Environmental Laws; (ii) any oil, petroleum or petroleum derived substance, any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, any flammable substances or explosives, any radioactive materials, any hazardous wastes or substances, any toxic wastes or substances or any other materials or pollutants which (a) could pose a hazard to any properties or assets of Borrower or its Subsidiaries or (b) could cause any of such properties or assets to be in violation of any Environmental Laws; (iii) asbestos in any form, urea formaldehyde foam insulation, electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million; and (iv) any other chemical, material or substance, exposure to, or disposal of, which is now or hereafter prohibited, limited or regulated by any Federal, state or local governmental body, instrumentality or agency. Section 1.95. "Indebtedness" means, as of any date as applied to any Person, without duplication: (a) all indebtedness for borrowed money (whether by loan or the issuance and sale of debt securities); (b) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP; (c) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money; (d) any obligation owed for all or any part of the deferred purchase price of property or services if the purchase price is due more than six (6) months from the date the obligation is incurred or is evidenced by a note or similar written instrument; (e) obligations of such Person under interest rate swaps, caps, collars and similar arrangements and (f) all indebtedness secured by any Encumbrance on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person but Indebtedness shall not include Deferred Purchase Price Obligations or amounts payable by Alarmguard Holdings to the Internal Revenue Service in an aggregate amount not to exceed NINE HUNDRED SEVENTY-SEVEN THOUSAND AND N0/100 DOLLARS ($977,000.00) minus any amortization thereof since the Original Closing Date. Section 1.96. "Interest Period" means, (a) with respect to each Eurodollar Loan, the period commencing on the date of the making or continuation of, or conversion to, such Eurodollar Loan and ending one (1), two (2), three (3) or six (6) months thereafter, as Borrower may elect in the applicable Notice; and (b) with respect to each Base Rate Loan, the period commencing on the date of the making or continuation of, or conversion to, such Base Rate Loan and ending on the Maturity Date or such earlier date as the Borrower may elect in the applicable Notice; provided, however, that: (i) any Interest Period (other than an Interest Period determined pursuant to clause (iii) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans, such Business Day falls in the next calendar month, in which case such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period applicable to a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Maturity Date shall end on the Maturity Date; and (iv) notwithstanding clause (iii) above, no Interest Period applicable to a Eurodollar Loan shall have a duration of less than one (1) month and if any Interest Period applicable to such Loan would be for a shorter Interest Period, such Interest Period shall not be available hereunder. Section 1.97. "Interest Protection Arrangement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedging agreement or other similar interest rate protection agreement or arrangement. Section 1.98. "Investment" means, as applied to any Credit Party and its Subsidiaries, (i) the purchase or acquisition of (x) any share of Capital Stock, indebtedness or other equity security of any other Person, or (y) all or any material portion of the properties and assets of any Person, (ii) any loan, advance or extension of credit to, or contribution to the capital of, any other Person, (iii) any real estate held for sale or investment, (iv) any commodities futures contracts held other than in connection with bona fide hedging transactions permitted under this Agreement, (v) any other investment in any other Person, and (vi) the making of any commitment or acquisition of any option to make an Investment. Section 1.99. "Lease Assignment" means each Collateral Assignment of Lease executed by Borrower in favor of the Administrative Agent for the ratable benefit of the Lenders, substantially in the form of Exhibit F-3 attached hereto, as any such Lease Assignment may be amended, supplemented, modified or confirmed from time to time. Section 1.100. "Lease Obligations" means, for any period, the aggregate rental obligation of Borrower and its Subsidiaries payable during such period in respect of real and/or personal property (net of income from subleases thereof, but including taxes, insurance, maintenance and similar expenses which the lessee is obligated to pay under the terms of such leases), whether or not such obligations are reflected as liabilities or commitments on a consolidated balance sheet of Borrower and its Subsidiaries or in the notes thereto but excluding obligations under Capital Leases. Section 1.101. "Leasehold Mortgage" means each leasehold mortgage or deed of trust executed or amended and confirmed by Borrower in favor of the Administrative Agent for the ratable benefit of the Lenders, substantially in the form of Exhibit F-4 attached hereto, individually or collectively, as the case may be, as any such Leasehold Mortgage may be amended, supplemented, modified or confirmed from time to time. Section 1.102. "Lender" shall have the meaning set forth in the Preamble hereof, and shall specifically refer to any Existing Lender or the Additional Lender. Section 1.103. "Lenders" shall have the meaning set forth in the Preamble hereof, and shall specifically refer to the Existing Lenders and the Additional Lender. Section 1.104. "Lender Affiliate" or "Lender Affiliates" means any affiliate of the Administrative Agent, the Documentation Agent, the Lenders or their parent holding companies. Section 1.105. "Lender Agents" means the Administrative Agent, the Documentation Agent, any Lender and any Lender Affiliate, and any of their directors, officers, employees, counsel, accountants, consultants and agents. Section 1.106. "Leverage Ratio" means, for any period with respect to Borrower and its Subsidiaries, the ratio of Consolidated Total Debt as of the last day of such period to Consolidated EBITDA for such period. Section 1.107. "Line of Credit" shall have the meaning set forth in Section 2.1.1. hereof. Section 1.108. "Loan" means each Existing Loan, Revolving Loan and each Swingline Loan. Section 1.109. "Loan Account" means the account established by Borrower with the Administrative Agent for purposes of administering the Line of Credit. Section 1.110. "Mandatory Borrowing" shall have the meaning set forth in Section 2.2.4. hereof. Section 1.111. "Margin Change" shall have the meaning set forth in Section 2.3.5. hereof. Section 1.112. "Material Adverse Effect" means a material adverse effect upon the (i) business, operations, assets or financial condition or prospects of any Credit Party and its Subsidiaries, taken as a whole, or (ii) the enforceability of this Agreement, the Notes or the Other Documents or the rights or remedies of the Administrative Agent, the Documentation Agent or any Lender hereunder or thereunder or (iii) the ability of the Administrative Agent, the Documentation Agent or any Lender to enforce or collect any of the Obligations including the obligations of any Guarantor to perform, or of the Administrative Agent, the Documentation Agent or any Lender to enforce, any Guarantee. In determining whether any individual event would result in a Material Adverse Effect, notwithstanding that such event does not of itself have such an effect, a Material Adverse Effect shall be deemed to have occurred if the cumulative effect of such event and all other then existing events would result in a Material Adverse Effect. Section 1.113. "Maturity Date" means January 31, 2005. Section 1.114. "Net Proceeds" means the excess of (i) Cash Proceeds received by Borrower or any Subsidiary in connection with any Asset Sale over (ii) the out-of-pocket expenses incurred by Borrower or such Subsidiary (other than any expenses paid to any Affiliate of Borrower or such Subsidiary) in connection with such Asset Sale and the amounts of any taxes incurred in connection with such Asset Sale, in each case as certified by a Responsible Officer to the Administrative Agent at the time of such Asset Sale. Section 1.115. "Non-Defaulting Lender" means each Lender which is not a Defaulting Lender. Section 1.116. "Note" means any Revolving Credit Note or the Swingline Note. Section 1.117. "Notes" means the Revolving Credit Notes and the Swingline Note. Section 1.118. "Notice" means a Notice of Borrowing, a Notice of Continuation or Conversion or a Swingline Notice. Section 1.119. "Notice of Borrowing" shall have the meaning set forth in Section 2.1.3. hereof. Section 1.120. "Notice of Continuation or Conversion" shall have the meaning set forth in Section 2.3.2. hereof. Section 1.121. "Notice Office" means the office of the Administrative Agent located at 100 Pearl Street, Hartford, Connecticut 06103 or such other office as the Administrative Agent may designate for such purpose to Borrower and the Lenders from time to time. Section 1.122. "Obligations" means any and all loans, advances, indebtedness, liabilities, obligations, covenants or duties of any Credit PartyBorrower to the Administrative Agent, the Documentation Agent or the Lenders of any kind or nature, including obligations to pay money and to perform acts or refrain from taking action, arising under or pursuant to this Agreement, the Notes or the Other Documents, and any and all extensions and renewals thereof, and modifications and amendments thereto, whether in whole or in part, whether created directly or acquired by assignment, purchase, discount or otherwise, whether any of the foregoing are direct or indirect, joint or several, absolute or contingent under, due or to become due, now existing or hereafter arising, and whether or not evidenced by a writing and specifically including but not being limited to (i) the unpaid principal amount outstanding at any time under the Notes, plus all accrued and unpaid interest thereon, together with all fees, expenses, including attorneys' fees, penalties, and other amounts owing by or chargeable to any Credit Partythe Borrower under this Agreement, the Notes or the Other Documents and (ii) interest which accrues after the commencement of any case or proceeding in bankruptcy after the insolvency of, or for the reorganization of, any Credit Party, whether or not allowed in such case or proceeding. Section 1.123. "Original Closing Date" has the meaning set forth in the Preamble hereof. Section 1.124. "Original Credit Agreement" has the meaning set forth in the Preamble hereof. Section 1.125. "Other Documents" means the Collateral Disclosure List, the Guarantees, the Security Documents, the Affiliate Subordination Agreement and any other document, agreement or instrument executed by any Credit Party in connection with any Extension of Credit and any and all amendments, modifications and supplements thereto. Section 1.126. "Outstanding Amount" means, as of any date as of which the amount thereof shall be determined, the outstanding principal amount of all Revolving Loans as of the date of determination. Section 1.127. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or part of its functions under ERISA. Section 1.128. "Permitted Acquisition" means any Acquisition as to which all of the applicable conditions precedent set forth in Section 6.32. hereof have been satisfied. Section 1.129. "Permitted Encumbrance" shall have the meaning set forth in Section 8.5. hereof. Section 1.130. "Permitted Indebtedness" shall have the meaning set forth in Section 8.1. hereof. Section 1.131. "Permitted SSH Activities" means holding the Capital Stock of Borrower, guaranteeing the Loans and granting security therefor under the Security Documents, serving as the maker of any Indebtedness permitted to be incurred under Section 8.1. hereof, and employing corporate staff. Section 1.132. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or other entity of whatever nature, whether public or private. Section 1.133. "Plan" means, at any time, an employee pension or other benefit plan that is subject to Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code and is either (i) maintained by Borrower or any member of the Controlled Group for employees of Borrower or any member of the Controlled Group or (ii) if such plan is established, maintained pursuant to a collective bargaining agreement or any other arrangement under which more than one (1) employer makes contributions and to which Borrower or any member of the Controlled Group is then making or accruing an obligation to make contributions or has within the preceding five (5) plan years made contributions. Section 1.134. "Post Closing Matters" shall have the meaning set forth on Section 11.1. hereof. Section 1.135. "Preferred Stock Offering" means the offering of Series A Cumulative Convertible Preferred Stock and Series B Convertible Preferred Stock by Alarmguard Holdings pursuant to and in accordance withunder the Transaction Documents.[__________]. Section 1.136. "Price Waterhouse Report" means that certain Limited Collateral Analysis report dated November 8, 1996 delivered by Price Waterhouse LLP to the Administrative Agent with respect to the procedures performed by Price Waterhouse LLP related to the Customer Contracts and management information system environment of the Borrower and supplemented by that certain letter dated as of April 15, 1997. Section 1.137. "Program Capital Expenditures" means, without duplication, for any period, the aggregate of all Capital Expenditures made by Borrower in connection with the Direct Marketing Program and the Dealer Program. Section 1.1387. "Prohibited Transaction" shall have the definition set forth in Section 406 of ERISA and Section 4975 of the Code, other than those transactions in which an exemption from the prohibited transaction rules apply under Section 408 of ERISA and Section 4975(d) of the Code and applicable regulations thereunder, including prohibited transaction class exemptions. Section 1.1398. "Qualification" means, with respect to any report of independent public accountants covering any Financial Statements of Borrower and its Subsidiaries, a qualification to such report (such as a "subject to" or "except for" statement therein) (i) resulting from a limitation on the scope of examination of the Financial Statements or the underlying data; (ii) as to the capability of the Person whose Financial Statements are certified to continue operations as a going concern; or (iii) which could be eliminated by changes in the Financial Statements or notes thereto covered by such report (such as, by the creation of or increase in a reserve or a decrease in the carrying value of assets) and which if so eliminated by the making of any such change and after giving effect thereto would constitute an Event of Default; provided that the following shall not constitute a Qualification: a consistency exception relating to a change in accounting principles with which the independent public accountants for the Person whose Financial Statements are being examined have concurred. Section 1.14039. "Qualified Investments" means, as applied to Borrower and its Subsidiaries, investments in (i) Governmental Obligations; (ii) certificates of deposit or other deposit instruments or accounts of Lenders or trust companies organized under the laws of the United States or any state thereof that have capital and surplus of at least FIVE HUNDRED MILLION AND NO/100 DOLLARS ($500,000,000.00) having maturities of not more than ninety (90) days from the date of acquisition; (iii) commercial paper that is rated not less than prime-one or A-1 or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or their successors having maturities of not more than ninety (90) days from the date of acquisition; and (iv) any repurchase agreement secured by any one (1) or more of the foregoing with a term of not more than seven (7) days. Section 1.1410. "Recurring Monthly Revenue" or "RMR" means, for any calendar month, the aggregate recurring regular monthly amount billed under Customer Contracts for a one-month period (regardless of whether billed monthly or less frequently with billings made other than on a monthly basis being adjusted to the equivalent monthly amount) for electrical protection, monitoring, maintenance, closed circuit television and access control service charges, fire and police panel charges, equipment lease rental charges relating to Customer Contracts derived from the Direct Marketing Program, the Dealer Program and fire and sprinkler inspection and testing charges (but excluding revenues from any Customer Contracts relating to any non-recurring, special or other one-time charges) as such RMR is calculated by Borrower in accordance with the practices, policies and procedures followed by Borrower therefor on the Original Closing Date as set forth in the Price Waterhouse Report and reflected in the RMR Report. Section 1.1421. "Register" shall have the meaning set forth in Section 13.2. hereof. Section 1.1432. "Release" means any release, emission, disposal, leaching, or migration into the environment (including, without limitation, the abandonment or disposal of any barrels, containers, or other closed receptacles containing any Hazardous Materials), or into or out of any property owned, occupied or used by Borrower. Section 1.1443. "Replacement Lender" shall have the meaning set forth in Section 2.5.6. hereof. Section 1.1454. "Reportable Event" means any of the events described in Section 4043(b) of ERISA, other than those events as to which the thirty day notice period is waived under applicable regulations issued by PBGC. Section 1.1465. "Required Lenders" means collectively (and not individually) Non-Defaulting Lenders the sum of whose Commitments (or if after the Total Commitment Amount has been terminated, outstanding Loans and percentages of outstanding Swingline Loans) constitute at least 66.66% of the Total Commitment Amount less the aggregate Commitments of Defaulting Lenders (or if after the Total Commitment Amount has been terminated, outstanding Loans and percentages of outstanding Swingline Loans). Section 1.1476. "Requirement of Law" means any laws, ordinances, rules regulations and orders of any Governmental Authority applicable to any Credit Party or its Subsidiaries or their business, properties and assets. Section 1.1487. "Responsible Officer" means David Heidecorn, John Scerbo or any other senior officer of Borrower or any other Credit Party, as the case may be, designated as such by written notice to the Administrative Agent and acceptable to the Administrative Agent in its sole and absolute discretion. Section 1.1498. "Revolving Credit Note" or "Revolving Credit Notes" shall have the meaning set forth in Section 2.1.9. hereof. Section 1.15049. "Revolving Credit Period" means the period beginning on the Closing Date and extending through and including the Revolving Credit Termination Date or such earlier date on which the obligation of the Lenders to make Revolving Loans is terminated or the Commitment Amount is reduced to zero (0) in accordance with the terms hereof. Section 1.1510. "Revolving Credit Termination Date" means January 31, 2000. Section 1.1521. "Revolving Loans" shall have the meaning set forth in Section 2.1.1. hereof, and shall in any event include any loan(s) or advance(s) deemed made pursuant to said Section 2.1.1. Section 1.1532. "RMR Report" shall have the meaning set forth in Section 7.2.3. hereof. Section 1.1543. "Security Documents" means the Borrower Pledge Agreement, the Borrower Security Agreement, each Lease Assignment, each Leasehold Mortgage, the Alarmguard Holdings Pledge Agreement, the SSH Pledge Agreement, each Subsidiary Pledge Agreement and each Subsidiary Security Agreement. Section 1.1554. "Solvent" means, when used with respect to any Person, that as of the date as to which the Person's solvency is to be determined: (a) the fair value of such Person's properties and assets is in excess of the total amount of the liabilities (including contingent liabilities) of such Person; (b) the fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person's properties and assets would constitute an unreasonably small capital. The amount of contingent liabilities (such as litigation, Guarantees and pension plan liabilities) at any time shall be computed as the amount which, in light of all the facts and circumstances existing at the time, represents an amount which can be reasonably expected to become an actual or matured liability. Section 1.1565. "SSH" shall have the meaning set forth in the Preamble hereof. Section 1.1576. "SSH Guarantee" means the Amended and Restated Guarantee Agreement executed by SSH in favor of the Administrative Agent for the ratable benefit of the Lenders on the Original Closing Date, as such SSH Guarantee may be amended, supplemented, modified or confirmed on the Closing Date and from time to time thereafter. Section 1.1587. "SSH Pledge" means the Amended and Restated Pledge Agreement executed by SSH in favor of the Administrative Agent for the ratable benefit of the Lenders on the Original Closing Date, as such SSH Pledge may be amended, supplemented, modified or confirmed on the Closing Date and from time to time thereafter. Section 1.1598. "Steffanato Note" means that certain promissory note, dated September 29, 1994, made by Borrower in favor of Alarmguard of New York, Inc. (succeeded to by Borrower), in the original principal amount of ONE MILLION ONE HUNDRED THIRTY-TWO THOUSAND TWO HUNDRED SIXTEEN AND NO/00 DOLLARS ($1,132,216.00), which promissory note was thereafter endorsed to John Steffanato, Sr. Section 1.16059. "Subordinated Indebtedness" means Indebtedness, whether now existing or hereafter arising, with respect to which the payment of the principal of and interest on is expressly subordinated and junior in right of payment as set forth on Exhibit L attached hereto or in such other form and on terms approved by the Administrative Agent and the Lenders in writing to the prior indefeasible payment in full of the Obligations and which is not subject to terms, conditions, rights or remedies, including but not limited to, events of default, affirmative and negative covenants and otherwise, which are either (i) more restrictive upon any Credit Party than those set forth in this Agreement or (ii) more favorable to the holders of any such Subordinate Indebtedness than those possessed by the Lenders under this Agreement. Notwithstanding any provision of this Section 1.160161. to the contrary, no Subordinated Indebtedness shall contain or be subject to any covenant with respect to which the compliance by any Credit Party therewith is determined by reference to the financial performance or financial condition of such Credit Party. Section 1.1610. "Subsidiary" means any Person of which more than fifty percent (50%) or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such Person is held or Controlled by Borrower or a Subsidiary of Borrower; or any other such organization the management of which is Controlled by Borrower or a Subsidiary of Borrower; or any joint venture, whether incorporated or not, in which Borrower has more than fifty percent (50%) ownership interest. Section 1.1621. "Subsidiary Guarantee" means each Guarantee Agreement executed by a Subsidiary of Borrower in favor of the Administrative Agent for the ratable benefit of the Lenders, substantially in the form of Exhibit F-53 attached hereto, as any such Subsidiary Guarantee may be amended, supplemented, modified or confirmed from time to time. Section 1.1632. "Subsidiary Pledge Agreement" means each Pledge Agreement executed by a Subsidiary of Borrower in favor of the Administrative Agent for the ratable benefit of the Lenders, substantially in the form of Exhibit F-64 attached hereto, as any such Subsidiary Pledge Agreement may be amended, supplemented, modified or confirmed from time to time. Section 1.1643. "Subsidiary Security Agreement" means each Security Agreement executed by a Subsidiary of Borrower in favor of the Administrative Agent for the ratable benefit of the Lenders, substantially in the form of Exhibit F-75 attached hereto, as any such Subsidiary Security Agreement may be amended, supplemented, modified or confirmed from time to time. Section 1.1654. "Swingline" shall have the meaning set forth in Section 2.2.1. hereof. Section 1.1665. "Swingline Commitment" means the amount of TWO MILLION AND NO/100 DOLLARS ($2,000,000.00). Section 1.1676. "Swingline Loans" means each loan and advance made by the Administrative Agent to Borrower under the Swingline. Section 1.1687. "Swingline Note" shall have the meaning set forth in Section 2.2.3. hereof. Section 1.1698. "Swingline Notice" shall have the meaning set forth in Section 2.2.2. hereof. Section 1.17069. "Total Commitment Amount" means, as of any date as of which the amount thereof shall be determined, (a) if such date is prior to the Revolving Credit Termination Date, the amount of NINETY MILLION AND NO/100 DOLLARS ($90,000,000.00) or any lesser amount, including zero (0), resulting from a termination or reduction of such amount in accordance with Section 2.1.12. or Section 12.1. hereof and (b) if such date is on or after the Revolving Credit Termination Date, the outstanding principal amount of the Loans as of such date. Section 1.1710. "Transaction Documents" means any and all documents, agreements, certificates and instruments executed and/or delivered by any Credit Party in connection with the Preferred Stock Offering or any transactions associated therewith, including, without limitation, the documents and agreements listed and described on Schedule 1.171. attached hereto. Section 1.1721. "Type" means, as to any Loan, such Loan's characterization as either a Base Rate Loan or a Eurodollar Loan. Section 1.1732. "Unused Commitment" means, in the case of each Lender, as of the date as of which the amount thereof shall be determined, the positive difference, if any, between (i) the amount of such Lender's Commitment as of such date and (ii) such Lender's Commitment Percentage of the Outstanding Amount as of such date. Section 1.1743. "Unused Total Commitment Amount" means, as of any date as of which the amount thereof shall be determined, the positive difference, if any, between (i) the Total Commitment Amount as of such date and (ii) the Outstanding Amount as of such date. Section 2. THE CREDIT FACILITIES Section 2.1. The Line of Credit. Section 2.1.1. Revolving Loans. Upon the execution of this Agreement, the Lenders agree to extend to Borrower a line of credit, so that as long as no Default or Event of Default has occurred and is continuing and all conditions precedent to the making of any Extension of Credit have been satisfied, the Existing Lenders agree, subject to the provisions of Section 2.1.4.(b) hereof, to continue the Existing Loans and each Lender severally agrees to make revolving credit loans ("Revolving Loans") from time to time during the Revolving Credit Period in an aggregate principal amount at any one time not to exceed the lesser of (i) such Lender's Unused Commitment, and (ii) such Lender's Commitment Percentage of the Borrowing Base then in effect; provided, that in no event shall any Revolving Loan be made if, after giving effect to such Revolving Loan, the sum of the Unused Total Commitment Amount and the aggregate amount of Swingline Loans then outstanding would exceed the Total Commitment Amount (the "Line of Credit"). During the Revolving Credit Period, the Borrower may use the Commitments by borrowing, prepaying Existing Loans and Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. Section 2.1.2. Requirements for Revolving Loans. Except as otherwise provided in this Agreement or permitted by the Lenders, Revolving Loans shall be (i) designated in U.S. Dollars, (ii) in an amount which is at least, in the case of Base Rate Loans, THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($300,000.00) and, in the case of Eurodollar Loans, ONE MILLION AND NO/100 DOLLARS ($1,000,000.00), (iii) in an amount which is an integral multiple of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00), (iv) at the option of Borrower, obtained and maintained as, or continued or converted into, Base Rate Loans or Eurodollar Loans, and (v) limited, in the case of Eurodollar Loans, to no more than five (5) Eurodollar Tranches. Section 2.1.3. Notice of Borrowing. Except as provided in Section 2.3.6. hereof, whenever Borrower desires to obtain a Revolving Loan (excluding Revolving Loans incurred pursuant to a Mandatory Borrowing or under Section 2.1.4.(b) hereof), Borrower shall provide the Administrative Agent with written notice (or telephonic notice promptly confirmed in writing) received at its Notice Office no later than 12:00 noon (Boston, Massachusetts time) on the date one (1) Business Day before the day on which the requested Revolving Loan is to be made as a Base Rate Loan, and received no later than 12:00 noon (Boston, Massachusetts time) on the date three (3) Business Days before the day on which the requested Revolving Loan is to be made as a Eurodollar Loan. Each such notice (a "Notice of Borrowing") shall, except as provided in Section 2.3.6. hereof, be irrevocable, be in the form of Exhibit A attached hereto and be appropriately completed to specify: (i) the amount of the requested Revolving Loan; (ii) the effective date of such Revolving Loan, (iii) the Type of Loan to be applicable thereto; (iv) whether such Revolving Loan is to be an Acquisition Loan and (v) the duration of the Interest Period, if any (subject to the provisions of the definition of Interest Period). The Administrative Agent shall, except as provided in Section 2.2.4. hereof, promptly (and in no event later than 1:00 p.m. (Boston, Massachusetts time)) give each Lender written notice (or telephonic notice promptly confirmed in writing) of each requested Revolving Loan, such Lender's proportionate share thereof and such other matters covered by the Notice of Borrowing. Borrower hereby acknowledges and agrees that the Administrative Agent may, prior to the receipt of written confirmation, act without liability upon the basis of any telephonic notice provided under this Section 2.1.3., believed by the Administrative Agent, in good faith, to be from a Responsible Officer of Borrower and Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice. Revolving Loans which relate to Mandatory Borrowings shall be made upon the delivery of the notice specified in Section 2.2.4. hereof with Borrower hereby irrevocably agreeing, by its incurrence of any Swingline Loan to the making of Mandatory Borrowings as set forth in such Section 2.2.4. hereof. Section 2.1.4. Funding of Loans. (a) Except as set forth in subsection (b) below and Section 2.2. hereof, not later than 2:00 p.m. (Boston, Massachusetts time) on the date of the making of each Revolving Loan, each Lender shall make available to the Administrative Agent, at the office designated by the Administrative Agent for payment on the Administrative Questionnaire, in U.S. Dollars and in immediately available funds, such Lender's pro rata share of the requested Revolving Loan. The Administrative Agent will, except as set forth in subsection (b) below, promptly make such amounts available to Borrower by depositing to the Loan Account the aggregate of such amounts so made available to the Administrative Agent in the type of funds received. (b) Notwithstanding any provision of this Agreement to the contrary, on the Closing Date the Additional Lender and each Existing Lender that is making Revolving Loans in an amount in excess of the then outstanding Existing Loans of such Existing Lender shall make a Revolving Loan at the place and in the manner set forth in subsection (a) above in the amount which is necessary to cause the Loans made or continued by any such Lender as of the Closing Date (after taking into account any Revolving Loan requested by Borrower as of the Closing Date) to be in the proportion that such Lender's Commitment bears to the Total Commitment Amount as set forth in Section 2.1.5. hereof. Notwithstanding any provision of subsection (a) above to the contrary, the Administrative Agent shall pay any proceeds of any such Revolving Loans pro rata to each Existing Lender to reduce the outstanding Existing Loans of such Existing Lender as of the Closing Date to an amount which is equal to the proportion which such Existing Lender's Commitment bears to the Total Commitment Amount as of the Closing Date. The Administrative Agent shall pay any such amounts in immediately available funds to such Existing Lenders by wire transfer on the Closing Date (subject to the receipt of any such amounts from the Additional Lender and any Existing Lender providing the same). Any part of any Existing Loan refinanced between the Lenders as aforesaid shall be deemed to be repaid in accordance with the terms of this Agreement with the proceeds of the aforementioned Revolving Loans. Section 2.1.5. Relationship of Revolving Loans to Total Commitment Amount. Each Loan shall consist of either an Existing Loan continued by or a Revolving Loan made by each Lender in respect of its Commitment, which Loan shall be continued or made by each Lender in the proportion that such Lender's Commitment bears to the Total Commitment Amount; provided, however, that, except as provided in Section 2.2. hereof, if at any time, for any reason, the proportion that any Lender's Unused Commitment bears to the Unused Total Commitment Amount is not equal to the proportion that the Commitment of such Lender bears to the Total Commitment Amount, then, each such Lender shall promptly purchase or sell, as may be necessary, participations in the Loans held by the other Lenders in such amounts as will (but only if and to the extent that the purchase of such participations would not cause any Lender to have outstanding Loans in an amount in excess of its Commitment and would not cause any Lender to exceed its lending limit or to violate any other legal requirement to which it is subject), and make such other adjustments from time to time as shall be necessary to, cause the proportion that such Lender's Unused Commitment bears to the Unused Total Commitment Amount to be equal to the proportion that such Lender's Commitment bears to the Total Commitment Amount. Section 2.1.6. Loan Account. Each Loan shall be recorded in the Loan Account. There shall also be recorded in the Loan Account all prepayments and payments made by Borrower in respect of the Line of Credit and other appropriate debits and credits as herein provided. The Administrative Agent shall from time to time, but at least monthly, and upon Borrower's reasonable request, render and send to Borrower a statement of the Loan Account showing the respective outstanding principal balance of the Line of Credit, together with interest and other appropriate debits and credits as of the date of the statement. The statement of the Loan Account shall be considered correct in all respects and accepted by and be conclusively binding upon Borrower absent manifest error unless Borrower makes specific written objection thereto within sixty (60) days after the date the statement of the Loan Account is sent. Section 2.1.7. Several Obligations. The failure of any Lender to make available its proportionate share of any Revolving Loan on the date specified therefor shall not relieve any other Lender of its obligation to make available its proportionate share of such Revolving Loans on such date, but no Lender shall be responsible for the failure of any other Lender to make available such other Lender's proportionate share of the Revolving Loan. Section 2.1.8. Calculation of Borrowing Base. The Borrowing Base as of any time shall be calculated by reference to the most recent RMR Report and other financial reports delivered by Borrower under Sections 6.1.2. or 7.2.3. hereof and such other information as may be available to the Administrative Agent, the Documentation Agent or the Lenders from time to time. Section 2.1.9. Revolving Credit Notes. On the Closing Date, Borrower shall issue to each of the Lenders a promissory note executed by Borrower in substantially the form attached hereto as Exhibit B with all blanks appropriately completed in conformity with this Agreement (each a "Revolving Credit Note" and, collectively, the "Revolving Credit Notes"), with all blanks therein appropriately completed. The Revolving Credit Notes shall evidence the obligation of Borrower to repay to the Lender to which it is issued all Loans continued or made by such Lender to Borrower on account of such Lender's Commitment, including all Revolving Loans made by any Lender under Section 2.1.4.(b) hereof. Each Revolving Credit Note shall (i) be payable to the Lender to which it is issued or its registered assigns, (ii) be dated as of the Closing Date, (iii) be in a stated principal amount equal to the Commitment of such Lender, (iv) be payable in the principal amount of such Lender's pro rata percentage of the Loans evidenced thereby, (v) mature on the Maturity Date, (vi) bear interest as provided in Section 2.3.4. hereof, (vii) be subject to voluntary prepayments as provided in Section 2.1.13. hereof and mandatory prepayments as provided in Section 2.1.14. hereof and (viii) be entitled to the benefit of this Agreement and the Other Documents, and all security granted or provided to the Administrative Agent for the ratable benefit of the Lenders thereunder. Each Lender shall prior to any transfer or assignment of its Revolving Credit Note endorse on the reverse side thereof the outstanding principal amounts of the Loans evidenced thereby; provided, however, that such Lender's failure to make any such record or endorsement shall not affect Borrower's obligations in respect thereof. In addition, following the effectiveness of this Agreement, and, if possible, on the Closing Date, each of the Existing Lenders shall deliver to the Administrative Agent the notes or promptly thereafter an affidavit of lost note then held by such Existing Lender evidencing loans and advances under the Original Credit Agreement for delivery to and cancellation by the Borrower. Section 2.1.10. Payment of Principal. The aggregate unpaid principal amount of all Loans, together with accrued and unpaid interest thereon, as evidenced by the Revolving Credit Notes, shall, unless sooner accelerated by the Lenders following the occurrence of an Event of Default, be repaid by Borrower in twenty (20) consecutive quarterly installments in an amount equal to the following percentages of the outstanding principal amount of the Loans on the Revolving Credit Termination Date commencing on April 30, 2000 and continuing on the last day of each succeeding calendar quarter thereafter as follows: DATE OF PAYMENT PERCENTAGE OF OUTSTANDING PRINCIPAL AMOUNT April 30, 2000 3.75% July 31, 2000 3.75% October 31, 2000 3.75% January 31, 2001 3.75% April 30, 2001 5% July 31, 2001 5% October 31, 2001 5% January 31, 2002 5% April 30, 2002 5% July 31, 2002 5% October 31, 2002 5% January 31, 2003 5% April 30, 2003 5% July 31, 2003 5% October 31, 2003 5% January 31, 2004 5% April 30, 2004 6.25% July 31, 2004 6.25% October 31, 2004 6.25% January 31, 2005 6.25% Section 2.1.11. Use of Proceeds. Revolving Loans shall be used solely for the working capital needs and general corporate purposes of Borrower, for Permitted Acquisitions, for Direct Marketing Program Costs, for Dealer Program Costs, to refinance the existing Indebtedness of Borrower set forth on Schedule 2.1.11. attached hereto and to pay expenses associated with the consummation of the transactions contemplated by this Agreement and, as long as no Default or Event of Default shall have occurred and be continuing, or occur as a result thereof, to pay amounts to SSH to pay, at the scheduled maturity date thereof, certain Subordinated Indebtedness as set forth in item 1 on said Schedule 8.1. attached hereto.2.1.11. Section 2.1.12. Reduction of Total Commitment Amount. Borrower may from time to time, by written notice delivered to the Administrative Agent at least five (5) Business Days prior to the date of the requested reduction, reduce the Unused Total Commitment Amount by integral multiples of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00). No reduction of the Total Commitment Amount shall be subject to reinstatement. Section 2.1.13. Voluntary Prepayments. Borrower shall have the right to prepay the Loans, in whole or in part, without penalty or premium except as otherwise provided in this Agreement from time to time on the following terms and conditions: (i) Borrower shall provide written notice to the Administrative Agent at its Notice Office (or telephonic notice promptly confirmed in writing) of its intent to prepay the Loans, whether such Loans are Existing Loans, Revolving Loans or Swingline Loans, the amount of such prepayment and, in the case of Eurodollar Loans, the specific Loans to which such prepayment is to be made, which notice shall be provided prior to 12:00 noon (Boston, Massachusetts time) (x) at least one (1) Business Day prior to the date of such prepayment in the case of Base Rate Loans, (y) on the date of such prepayment in the case of Swingline Loans and (z) at least three (3) Business Days prior to the date of such prepayment in the case of Eurodollar Loans and (ii) each prepayment shall be in an aggregate principal amount of at least ONE MILLION AND NO/100 DOLLARS ($1,000,000.00)(or ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00) in the case of Swingline Loans); provided, that no partial prepayment of any Eurodollar Loan shall reduce the remaining aggregate outstanding principal amount of such Eurodollar Loan to an amount which is less than the minimum borrowing amount applicable under this Agreement for Eurodollar Loans. Except with respect to prepayments of Swingline Loans, the Administrative Agent shall promptly notify each Lender of any such intended prepayment. Upon receipt by the Administrative Agent, any such prepayment shall be applied pro rata among the Loans of each of the Lenders; provided, however, that such prepayment shall not be applied to any Loans of a Defaulting Lender, until such time as the proportion that such Lender's Unused Commitment bears to the Total Commitment Amount is equal to the proportion that such Lender's Commitment bears to the Total Commitment Amount. Section 2.1.14. Mandatory Prepayments. (a) If, at any time, the Outstanding Amount, together with the amount of the Swingline Loans, shall exceed the Borrowing Base in effect from time to time then any such excess amount shall be immediately due and payable without notice or demand by the Administrative Agent or the Lenders. Any payments made by Borrower under this subsection (a) shall be applied first to any outstanding Swingline Loans and then to outstanding Revolving Loans. (b) Borrower shall prepay the Loans in an amount equal to the Net Proceeds from any Asset Sale in excess of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00). Notwithstanding the foregoing proviso, any Asset Sale of Borrower's "Sonitrol" assets shall be subject to subsection (a) above if any such Asset Sale results in the applicability of such subsection (a). Any amounts payable under this subsection (b) shall be payable concurrently with Borrower's receipt of any such Net Proceeds. (c) Borrower shall prepay the Loans in an amount equal to fifty percent (50%) of Excess Cash Flow for each Fiscal Year commencing with the Fiscal Year ending December 31, 20001999, together with interest on the amount being prepaid. Any amounts payable under this subsection (c) shall be payable on or before the earlier of (i) the date on which the Financial Statements required to be delivered under Section 7.1.1. hereof in respect of such Fiscal Year are required to be delivered or (ii) the date on which such Financial Statements are actually delivered. (d) Any amounts payable under this Section 2.1.14. shall be applied prior to the Revolving Credit Termination Date to Swingline Loans and then to all other Loans outstanding under the Line of Credit and following the Revolving Credit Termination Date to installments of principal due on the Loans in inverse order of maturity. Section 2.2. Swingline Loans. Section 2.2.1. The Swingline. Upon the execution of this Agreement, the Administrative Agent in its individual capacity hereby agrees to extend to Borrower a line of credit, so that as long as no Default or Event of Default has occurred and is continuing, the Administrative Agent agrees to lend to Borrower, and Borrower may borrow, repay and reborrow, on a revolving basis, in one (1) or more Swingline Loans from time to time during the period commencing on the Closing Date and continuing through the close of business on the Revolving Credit Termination Date, amounts which do not exceed at any one time outstanding the Swingline Commitment (the "Swingline"). All Swingline Loans shall constitute usage of the Administrative Agent's Commitment under this Agreement. Notwithstanding any provision of this Agreement to the contrary, Swingline Loans (i) shall be made and maintained as Base Rate Loans, (ii) shall be denominated in U.S. Dollars, (iii) may be repaid and reborrowed in accordance with the provisions of this Agreement, (iv) shall not exceed in the aggregate at any one time outstanding the Swingline Commitment and (v) shall not, together with all Revolving Loans, exceed in the aggregate at any one time outstanding the lesser of the Borrowing Base or the Total Commitment Amount. Section 2.2.2. Notice for Swingline Loans. Except as provided in Section 2.2.4. hereof, whenever Borrower desires to obtain a Swingline Loan, Borrower shall provide the Administrative Agent with written notice (or telephonic notice promptly confirmed in writing) received at its Notice Office no later than 12:00 noon (Boston, Massachusetts time) on the day on which the requested Swingline Loan is to be made. Each such notice (a "Swingline Notice") shall be irrevocable, be in substantially the form of Exhibit C attached hereto and be appropriately completed to specify: (i) the amount of the requested Swingline Loan and (ii) the effective date of such Swingline Loan. Borrower hereby acknowledges and agrees that the Administrative Agent may, prior to the receipt of written confirmation act without liability upon the basis of any telephonic notice provided under this Section 2.2.2., believed by the Administrative Agent, in good faith, to be from a Responsible Officer of Borrower and Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice. Notwithstanding the foregoing, the Administrative Agent shall not make any Swingline Loans if the Administrative Agent has received prior to the making of the requested Swingline Loan a certificate or notice from Borrower or any Lender stating the existence of Default or Event of Default or that any conditions to the making of such Swingline Loan have not been satisfied. Section 2.2.3. Swingline Note. On the Closing Date, Borrower shall issue to the Administrative Agent a promissory note executed by Borrower in substantially the form attached hereto as Exhibit D with all blanks appropriately completed in conformity with this Agreement (the "Swingline Note"). The Swingline Note shall evidence the obligation of Borrower to repay to the Administrative Agent all Swingline Loans by the Administrative Agent to Borrower. The Swingline Note shall (i) be payable to the Administrative Agent or its registered assigns, (ii) be dated as of the Closing Date, (iii) be in a stated principal amount equal to the Swingline Commitment, (iv) be payable in the principal amount of the Swingline Loans evidenced thereby, (v) mature on the Revolving Credit Termination Date, (vi) bear interest as provided in Section 2.3.4. hereof, (vii) be subject to voluntary prepayments as provided in Section 2.1.13. hereof and mandatory prepayments as provided in Section 2.1.14. hereof and (viii) be entitled to the benefit of this Agreement and the Other Documents, and all security granted or provided to the Administrative Agent for the ratable benefit of the Lenders thereunder. The Administrative Agent shall record on its internal records the amount of each Swingline Loan made by it and each payment received by it in respect thereof and will prior to any transfer or assignment of the Swingline Note endorse on the reverse side thereof the outstanding principal amount of the Swingline Loan evidenced thereby; provided, however, that the Administrative Agent's failure to make any such record or endorsement shall not affect Borrower's obligations in respect thereof. Section 2.2.4. Mandatory Borrowings. On any Business Day, the Administrative Agent may, in its sole discretion, and, in any event, upon the day which is seven (7) days after the borrowing of a Swingline Loan (or if such day is not a Business Day, the next succeeding Business Day) shall provide notice (which notice shall be deemed to have been automatically provided upon the occurrence of a Default or Event of Default under Section 11.1.(g) or 11.1.(h)) to the Lenders that all outstanding Swingline Loans shall be repaid pursuant to Revolving Loans to be made by the Lenders as Base Rate Loans on the immediately succeeding Business Day (such Revolving Loans, a "Mandatory Borrowing") pro rata based upon each Lender's Commitment Percentage, and the proceeds of such Revolving Loans shall be applied directly to repay the Administrative Agent for such outstanding Swingline Loans. Each Lender hereby irrevocably agrees to make Base Rate Loans upon one (1) Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner provided in the foregoing sentence and on the date specified by the Administrative Agent notwithstanding (i) that the amount of the Mandatory Borrowing may not comply with the minimum borrowing amount otherwise required under this Agreement, (ii) whether any of the conditions precedent in Section 6 of this Agreement shall have been satisfied, (iii) whether a Default or Event of Default shall have occurred and be continuing, (iv) the date of such Mandatory Borrowing and (v) any reduction in the Total Commitment Amount after such Swingline Loans were made. In the event that any Mandatory Borrowing cannot be made as set forth above for any reason, including, without limitation, the commencement of a proceeding under the Bankruptcy Code with respect to Borrower), each Lender (other than the Administrative Agent) hereby agrees that it shall forthwith purchase from the Administrative Agent (without recourse or warranty) an assignment of such outstanding Swingline Loans as shall be necessary to cause the Lenders to share in such Swingline Loans ratably based upon their respective Commitment Percentages; provided, however, that all interest payable on the Swingline Loans shall be for the account of the Administrative Agent until the effective date of the purchase of each respective assignment and, to the extent attributable to the purchased assignment, shall be payable to the Lender purchasing the same from and after such effective date. Section 2.3. Interest on the Loans. Section 2.3.1. Base Rate. Each adjustment in the Base Rate shall result immediately, without notice or demand of any kind, in a new rate of interest effective with respect to periods on and after the date of such adjustment. The Base Rate is a base interest rate for loans making reference thereto and is not necessarily the lowest rate at which any Lender may lend money. The Base Rate is neither tied to any external rate of interest nor is it a rate charged by any Lender to any particular class or category of customer. If the Base Rate shall be discontinued or for any other reason not be available for determining the rate of interest chargeable under this Agreement, then the Administrative Agent (with the consent of the Required Lenders) shall select a substitute method of determining the rate of interest chargeable under this Agreement and shall notify Borrower of such selection, which method shall, in the Administrative Agent's estimation, yield a rate of return to each Lender substantially equivalent to the rate of return that such Lender would have expected to receive if the Base Rate remained available for that purpose. Section 2.3.2. Continuation or Conversion of Loans. As long as no Default or Event of Default shall have occurred and be continuing, Borrower may continue or convert all or any part (in integral multiples of ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00)) of any outstanding Loan as a Loan of the same Type or into a Loan of any other Type provided for in this Agreement. If Borrower wishes to continue or convert a Loan as aforesaid, Borrower shall provide the Administrative Agent with written notice (or telephonic notice promptly confirmed in writing) received at its Notice Office no later than 10:00 a.m. (Boston, Massachusetts time) on the date one (1) Business Day before the day on which the requested Loan is to be continued as or converted to a Base Rate Loan, and received no later than 10:00 a.m. (Boston, Massachusetts time) on the date three (3) Business Days before the day on which the requested Loan is to be continued as or converted to a Eurodollar Loan. Each such notice (a "Notice of Continuation or Conversion") shall, except as provided in Section 2.3.6. hereof, be irrevocable, be in the form of Exhibit E attached hereto and be appropriately completed to specify: (i) the amount of the Loan to be continued or converted, (ii) the effective date of such continuation or conversion which shall, in the case of Eurodollar Loan, be the last day of the Interest Period applicable thereto, (iii) the Type or Types of Loans to be applicable thereto; and (iv) the duration of the Interest Period, if any (subject to the provisions of the definition of Interest Period). The Administrative Agent shall promptly give each Lender written notice (or telephonic notice promptly confirmed in writing) of each requested continuation or conversion of a Loan, such Lender's proportionate share thereof and such other matters covered by the Notice of Conversion or Continuation. Borrower hereby acknowledges and agrees that the Administrative Agent may, prior to the receipt of written confirmation act without liability upon the basis of any telephonic notice provided under this Section 2.3.2. believed by the Administrative Agent, in good faith, to be from a Responsible Officer of Borrower and Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice. Section 2.3.3. Duration of Interest Periods. (a) Subject to the provisions of the definition of Interest Period, the duration of each Interest Period applicable to a Loan shall be as specified in the applicable Notice. (b) If the Administrative Agent does not receive a Notice for a Eurodollar Loan pursuant to subsection (a) above within the applicable time limits specified therein, or if, when such notice must be given, a Default or Event of Default shall have occurred and be continuing, Borrower shall be deemed to have elected to convert such Loan in whole into a Base Rate Loan on the last day of the then current Interest Period with respect thereto. (c) Notwithstanding the foregoing, Borrower may not select an Interest Period that would end, but for the provisions of the definition of Interest Period, after the Maturity Date. Section 2.3.4. Interest Rates and Payments of Interest. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the Base Rate in effect from time to time plus the Base Rate Margin. Interest accruing in respect of each Base Rate Loan shall be payable on the last day of each month commencing February 28, 1998May 31, 1997 and continuing until such Base Rate Loan is due (whether at maturity, by reason of acceleration, prepayment or otherwise). (b) Each Eurodollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the Adjusted Eurodollar Rate plus the Eurodollar Margin, which interest shall be payable on the last day of each Interest Period (but, in the case of Interest Periods having a duration of six (6) months or greater, if available, at least quarterly) and when such Eurodollar Loan is due (whether at maturity, by reason of acceleration or otherwise). (c) Interest shall be computed daily on the basis of a year of three hundred sixty (360) days and paid for the actual number of days elapsed during each Interest Period. If the due date for any payment of principal is extended by operation of law, interest shall be payable for such extended time. If any payment required by this Agreement becomes due on a day that is not a Business Day such payment may be made on the next succeeding Business Day (subject to clause (i) of the definition of Interest Period), and such extension shall be included in computing interest in connection with such payment. Section 2.3.5. Interest Rate Margins. As of the Closing Date and during any period in which a Default or Event of Default shall have occurred and be continuing, the Base Rate Margin shall be 1.50% and the Eurodollar Margin shall be 2.75%. Commencing with the end of the first Fiscal Quarter following the Closing Date and continuing on the last day of each succeeding Fiscal Quarter, and as long as no Default or Event of Default shall have occurred and be continuing, the Base Rate Margin and the Eurodollar Margin shall be subject to change (each such change, a "Margin Change") by reference to Borrower's Leverage Ratio as of the last day of any such Fiscal Quarter as follows: LEVERAGE RATIO BASE RATE MARGIN EURODOLLAR MARGIN Equal to or greater 1.50% 2.75% than 3.75 to 1.0 (or if a Default or Event of Default shall exist) Equal to or greater 1.25% 2.50% than 3.50 to 1.0 but less than 3.75 to 1.0 Equal to or greater 1.00% 2.25% than 3.00 to 1.0 but less than 3.50 to 1.0 Less than 3.0 to .75% 2.00% 1.0 The calculation of the Leverage Ratio for purposes of a Margin Change shall be reviewed and verified by the Administrative Agent, in its sole and absolute discretion, by reference to the Financial Statements to be provided by Borrower under Section 7.1. hereof. In making such calculation, and for purposes of the determination of any Margin Change only, Consolidated EBITDA shall be calculated on an annualized basis by reference to the most recent Fiscal Quarter then ending multiplied by four (4). Each Margin Change shall be effective, including with respect to Loans which are then outstanding, as of the date on which the Financial Statements referred to in Section 7.1. hereof are provided to the Administrative Agent (notwithstanding the fact that the calculation of the Leverage Ratio associated with such Margin Change is reviewed and verified by the Administrative Agent at a later date). The Administrative Agent shall review and verify the Borrower's calculation of the Leverage Ratio no later than three (3) Business Days after its receipt of such Financial Statements. The Administrative Agent shall, as soon as practicable, promptly notify each Lender of the occurrence of any Margin Change. Section 2.3.6. Changed Circumstances. In the event that (x) in the case of clause (i) below, the Administrative Agent or (y) in the case of clause (ii) below, any Lender, shall have determined in a commercially reasonable manner (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date on which the Eurodollar Rate would otherwise be set the Administrative Agent shall have determined in good faith (which determination shall be final and conclusive) that adequate and fair means do not exist for ascertaining the Interbank Offered Rate, or (ii) at any time such Lender shall have determined in good faith that: (A) the making or continuation of or conversion of any Loan to a Eurodollar Loan has been made impracticable or unlawful by (1) the occurrence of a contingency that materially and adversely affect the interbank Eurodollar market or (2) compliance by such Lender in good faith with any Requirement of Law enacted after the date hereof or interpretation or change thereof after the date hereof by any Governmental Authority charged with the interpretation or administration thereof or with any request or directive of any such Governmental Authority (whether or not having the force of law); or (B) the Adjusted Eurodollar Rate shall, after the date hereof, no longer represent the effective cost to such Lender for U.S. dollar deposits in the interbank Eurodollar market for deposits in which it regularly participates; then, and in any such event, such Lender (or the Administrative Agent in the case of clause (i) above) shall (x) within five (5) Business Days after any such event and (y) within five (5) Business Days of the date on which such event no longer exists give notice (in writing or by telephone confirmed in writing) to Borrower and (except in the case of clause (i) above) to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to the other Lenders). Thereafter, (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Administrative Agent notifies Borrower and the Lenders that the circumstances giving rise to such notice by the Administrative Agent no longer apply, and any Notice given by Borrower with respect to Eurodollar Loans which have not yet been incurred shall be deemed rescinded by Borrower and (y) in the case of clause (ii) above, Borrower shall, as applicable, either (a) pay to such Lender, upon written demand therefor (accompanied by the written notice referred to below), any such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender may determine in its sole discretion) as shall be required to compensate such Lender for any increased costs or reductions in amounts received or receivable under this Agreement (a written notice as to the additional amounts owed to such Lender showing the basis for the calculation thereof, submitted to Borrower by such Lender, shall, absent manifest error, be final and conclusive and binding upon all parties hereto) or (b), as promptly as possible, and, in any event, with the time period required by law, either (A), if any affected Eurodollar Loan has not yet been made, continued or converted, cancel any such Notice by giving the Administrative Agent a telephonic notice (confirmed promptly in writing) thereof on the same date that Borrower was notified by a Lender as aforesaid or (B), if any affected Eurodollar Loan has been made, continued or converted, upon at least three (3) Business Days' notice to the Administrative Agent, require the affected Lender (and any other similarly affected Lender) to convert each such affected Eurodollar Loan into a Base Rate Loan (which conversion shall occur no later than the last day of the Interest Period then applicable to such Eurodollar Loan (or such earlier date if required by any Requirement of Law). Section 2.3.7. Compensation. Borrower shall compensate each Lender, promptly upon its written request (which request shall be accompanied by a notice setting forth the basis for such compensation), for all reasonable losses, expenses and liabilities (including, without limitation, any such loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund its Eurodollar Loans but excluding loss of anticipated profit with respect to any Eurodollar Loans) which such Lender may sustain: (i) if for any reason (other than a default by the Administrative Agent or such Lender) a Eurodollar Loan is not made, continued or converted on the date specified therefor in a Notice (whether or not withdrawn by Borrower or deemed withdrawn under Section 2.3.6. hereof), (ii) if any repayment (including any voluntary or mandatory repayment under Sections 2.1.13. and 2.1.14. hereof or as the result of the acceleration of the Loans) or conversion of Eurodollar Loan occurs on a date which is not the last day of the Interest Period applicable thereto, (iii) if any prepayment of any Eurodollar Loans is not made on any date specified in a notice of prepayment given by Borrower, (iv) as a consequence of (x) any other failure or default by Borrower to repay Eurodollar Loans when required by this Agreement or (y) any election by Borrower under Section 2.3.6. hereof. The calculation of all amounts payable to a Lender under this Section 2.3.7. shall be made as though that Lender has actually funded its relevant Eurodollar Loan through the purchase of a Eurodollar deposit bearing interest at the Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Loan, having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of such Lender to a domestic office of such Lender; provided, however, that each Lender may fund each of its Eurodollar Loans in any manner which it elects in its sole and absolute discretion. It is further understood and agreed by Borrower that if any repayment of Eurodollar Loans pursuant to Sections 2.1.13. or 2.1.14. or any conversion of Eurodollar Loans shall occur on a day which is not the last day of an Interest Period applicable thereto, such repayment or conversion shall be accompanied by any amounts owing to any Lender under this Section 2.3.7. Section 2.3.8. Interest under the Original Credit Agreement. On the Closing Date, the Borrower shall pay or cause to be paid to the Administrative Agent for the account of the Existing Lenders all interest accrued but unpaid in respect of the Existing Loans as of the Closing Date (calculated at the rates and in the manner set forth in the Original Credit Agreement as of the close of business on the day immediately preceding the Closing Date). Section 2.4. Fees Applicable to this Agreement and Extensions of Credit. Section 2.4.1. Facility Fee. Borrower shall pay to the Administrative Agent for the account of the Lenders during the Revolving Credit Period a facility fee (the "Facility Fee") computed at the rate of .375% per annum on the average daily amount of the Unused Total Commitment Amount in effect during the period for which payment is made. The Facility Fee shall be payable quarterly in arrears commencing April 30, 1998 and continuing on the last day of each quarter thereafter during the Revolving Credit Period and on the Revolving Credit Termination Date. Section 2.4.2. Agency Fee. Borrower shall pay to the Administrative Agent for its own account an agency fee in the amount of FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00) for each year or portion thereof in which the Obligations remain outstanding in consideration of its service as the Administrative Agent for the Lenders under this Agreement (the "Agency Fee"). The Agency Fee shall be payable in advance on the Closing Date and on each anniversary thereof; provided, however, that the Agency Fee payable on the Closing Date shall be reduced by TEN THOUSAND AND NO/100 DOLLARS ($10,000.00)pro rated to account for payments made by Borrower in respect of the Agency Fee under the Original Credit Agreement. Section 2.4.3. Calculation of Fees. Any Fees due and payable under this Section 2.4. (excluding fees payable under Section 2.4.4.) to the Administrative Agent for the account of the Lenders shall be calculated on the basis of a year of 360 days and according to the actual number of days elapsed in each accrual period. Section 2.4.4. Fees under the Original Credit Agreement. On the Closing Date, the Borrower shall pay or cause to be paid to the Administrative Agent for the account of the Existing Lenders all fees, charges and other amounts due and owing to such Existing Lenders under the Original Credit Agreement as of the Closing Date (calculated at the rates and in the manner set forth in the Original Credit Agreement as of the close of business on the day immediately preceding the Closing Date). Section 2.5. General Terms Applicable to Any Extension of Credit Section 2.5.1. Increased Costs and Capital Adequacy. (a) If the Administrative Agent, the Documentation Agent or any Lender determines that any change in any law or regulation or directive or bulletin or in the interpretation thereof after the Closing Date by any court or administrative or governmental authority charged with the administration thereof shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against any credit extended by the Administrative Agent, the Documentation Agent or any Lender under this Agreement, or (ii) impose on the Administrative Agent, the Documentation Agent, any Lender or their parent holding company any other condition regarding this Agreement and the result of any event referred to in the preceding clause (i) or (ii) above shall be to increase the cost to the Administrative Agent, the Documentation Agent, any Lender or such holding company of issuing, funding or maintaining any Extension of Credit (which increase in cost shall be determined by the Administrative Agent's, the Documentation Agent's or such Lender's reasonable allocation of the aggregate of such cost increases resulting from such event), then, upon written demand by the Administrative Agent, the Documentation Agent or any such Lender, Borrower shall pay to the Administrative Agent, the Documentation Agent or such Lender from time to time as specified by the Administrative Agent, the Documentation Agent or any such Lender, additional amounts which shall be sufficient to compensate the Administrative Agent, the Documentation Agent or any such Lender for such increased cost from the date of such change. A certificate as to such increased cost incurred by the Administrative Agent, the Documentation Agent or any Lender as a result of any event mentioned in clause (i) or (ii) above prepared in reasonable detail (which shall include the method employed by the Administrative Agent, the Documentation Agent or any such Lender in determining the allocation of such costs to Borrower) and otherwise in accordance with this subsection (a), submitted by the Administrative Agent, the Documentation Agent or any such Lender to Borrower, shall be conclusive evidence, absent manifest error, as to the amount thereof. (b) If the Administrative Agent, the Documentation Agent or any Lender shall determine that the adoption after the Closing Date of any applicable law, rule or regulation pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, or regulation regarding capital adequacy, or any change therein, or any change after the date hereof in the interpretation or administration thereof, or compliance by the Administrative Agent, the Documentation Agent, any Lender or their parent holding company with any requirement or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, except any such adoption or change or any such compliance with a request or directive which applies or has been applied solely to the Administrative Agent, the Documentation Agent, any such Lender or such parent holding company by reason of events or conditions relating solely to the Administrative Agent, the Documentation Agent or any such Lender, has the effect of reducing the rate of return on the Administrative Agent's, the Documentation Agent's, any Lender's or their parent holding company's capital as a consequence of its commitment hereunder or to a level below that which the Administrative Agent, the Documentation Agent, any such Lender or such holding company could have achieved but for such adoption, change or compliance by an amount deemed by the Administrative Agent, the Documentation Agent or any such Lender to be material (for which reduction of the rate of return shall be determined by the Administrative Agent's, the Documentation Agent's, any such Lender's or such holding company's reasonable allocation of such reduction of the rate of return resulting from such event) then, upon written demand by the Administrative Agent, the Documentation Agent or any such Lender, Borrower shall pay to the Administrative Agent, the Documentation Agent or such Lender, from time to time as specified by the Administrative Agent, the Documentation Agent or any such Lender, such additional amount or amounts which shall be sufficient to compensate the Administrative Agent, the Documentation Agent or any such Lender for such reduction. A certificate as to such increased cost incurred by the Administrative Agent, the Documentation Agent or any such Lender as a result of any event mentioned in this subsection (b), prepared in reasonable detail (which shall include the method employed by the Administrative Agent, the Documentation Agent or any such Lender in determining the allocation of such costs to Borrower) and otherwise in accordance with this subsection (b) submitted by the Administrative Agent, the Documentation Agent or any such Lender to Borrower, shall be conclusive evidence, absent manifest error, as to the amount thereof. (c) Amounts payable by Borrower pursuant to this Section 2.5.1. shall be payable within ten (10) Business Days of receipt by Borrower of a certificate described in subsection (a) or (b) of this Section 2.5.1. Section 2.5.2. Method of Payment. All payments and prepayments of principal and all payments of Fees and interest shall be made by Borrower to the Administrative Agent for the ratable account of the Lenders at the head office of the Administrative Agent (or such other place specified by the Administrative Agent for such purpose) in immediately available funds and in U.S. Dollars, on or before 12:00 noon (Boston, Massachusetts time) on the due date thereof, free and clear of, and without any deduction or withholding for, any taxes or other payments. Any payments which are made later than 12:00 noon (Boston, Massachusetts time) shall be deemed to have been made on the next Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day (unless otherwise provided herein), the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension as the applicable rate in effect immediately prior to such extension of time. Section 2.5.3. Taxes. All payments by Borrower under this Agreement shall be made without set-off, counterclaim or other claim or defense. Except as otherwise provided herein, all payments by or on behalf of Borrower hereunder shall be made free and clear of, and without deduction or withholding for, any and all current or future taxes, levies, imposts, duties, fees, assessments or other charges of any kind or nature now or hereinafter imposed by a Governmental Authority with respect to any such payment but excluding, except as provided below, (i) any tax imposed on or measured by the net income or net profits of any Lender or transferee or assignee thereof (a "Transferee") pursuant to any Requirement of Law, or (ii) or franchise taxes imposed on net income or in lieu thereof on any Lender or Transferee or (iii) any tax imposed by reason of any connection between the jurisdiction imposing such tax and any Lender or Transferee (other than a connection arising solely by virtue of the making of any Extension of Credit under this Agreement) and all interest, penalties or similar liabilities (all such non- excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to as "Taxes"). If any Taxes are required to be withheld or deducted from any payment under this Agreement, Borrower agrees to pay the full amount of such Taxes deducted to the relevant Government Authority in accordance with applicable law, and the payments under this Agreement shall be increased by such additional amounts as may be necessary so that every payment under this Agreement, after required withholding or deduction on account of any Taxes, will not be less than the amount otherwise required to be paid under this Agreement. Borrower shall furnish to the Administrative Agent within thirty (30) days after the date the payment of any Taxes is due certified copies of any tax receipts evidencing such payment by Borrower. Borrower agrees to indemnify and hold harmless the Administrative Agent, the Documentation Agent and each Lender, and reimburse the Administrative Agent, the Documentation Agent and each Lender upon its written request, for the amount of any Taxes specified in this Section 2.5.3. as are paid by such Lender, the Administrative Agent or the Documentation Agent. A certificate as to the amount of any such indemnification prepared by such Lender, the Administrative Agent or the Documentation Agent shall, absent manifest error, be final, conclusive and binding for all purposes. Section 2.5.4. Withholding Tax Exemption. Each Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) agrees to deliver to Borrower and the Administrative Agent on or prior to the Closing Date (i) two complete executed copies of Internal Revenue Service Form 4224 or Form 1001 (or successor forms thereto) certifying such Lender's entitlement to an exemption from United States withholding tax with respect to payment to be made under this Agreement or (ii) if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Form 4224 or Form 1001, a certificate in a form approved by the Administrative Agent and two complete executed copies of Internal Revenue Service Form W-8 (or successor form thereto) certifying such Lender's entitlement to exemption from such withholding. In addition, each Lender agrees to deliver to Borrower and the Administrative Agent updates or replacements to the foregoing forms and certificates from time to time when due to the lapse of time, the change in circumstances or otherwise, any such form or certificate previously provided under this Section 2.5.4. shall become obsolete or inaccurate. Each Lender agrees to immediately notify Borrower and the Administrative Agent in the event that it is unable to certify that it is entitled to an exemption from withholding as aforesaid. Notwithstanding any provision of Section 2.5.3 or this Section 2.5.4. to the contrary, Borrower shall be entitled, to the extent required by any Requirement of Law, to deduct and withhold income or similar taxes imposed by the United States (or any other Governmental Authority) from interest, fees or other amounts payable hereunder for the account of any Lender which is not a United States person (as defined above) for U.S. Federal income tax purposes to the extent that such Lender has not provided to Borrower forms establishing an exemption therefrom as aforesaid and Borrower shall not be obligated to pay any amounts under this Section 2.5.4. hereof in respect of income or withholding taxes imposed by the United States if any Lender has not provided the forms required to be provided pursuant to this Section 2.5.4. hereof or, in the case of a payment, other than interest, to a Lender to the extent that any such forms do not establish a complete exemption from withholding of such taxes. Section 2.5.5. Lending Offices. Loans of each Type made by any Lender shall be made and maintained at such Lender's Applicable Lending Office for Loans of such Type. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.3.6., 2.5.1. or 2.5.3. hereof with respect to such Lender, it will, if requested by Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Extension of Credit affected by such event; provided that in the sole judgment of such Lender, such Lender and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequences of the event giving rise to the operation of any of the foregoing Sections. Nothing in this Section 2.5.5. shall affect or postpone any of the obligations of Borrower or the rights of any Lender under said Sections 2.3.6., 2.5.1. or 2.5.3. Section 2.5.6. Replacement of Lenders. (x) If any Lender becomes a Defaulting Lender, (y) upon the occurrence of any event giving rise to the operation of Sections 2.3.6., 2.5.1. or 2.5.3. with respect to any Lender which results in such Lender charging to Borrower increased costs in excess of those being generally charged by the other Lenders or (z) in the case of a refusal by a Lender to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Required Lenders as provided in Section 10.14. hereof Borrower shall have the right, if no Default or Event of Default then exists or, in the case of clause (z) above, would exist after giving effect to such replacement, to replace such Lender (the "Replaced Lender") with one or more other lenders, none of whom shall constitute a Defaulting Lender at the time of such replacement (collectively, the "Replacement Lender") and each of whom shall be acceptable to the Administrative Agent; provided that (i) at the time of any replacement pursuant to this Section 2.5.6., the Replacement Lender shall enter into an Assignment and Acceptance pursuant to Section 13.1. (and with all fees payable pursuant to said Section 13.1 to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire the Commitment and the Loans of the Replaced Lender and, in connection therewith, shall pay to (x) the Replaced Lender in respect thereof an amount equal to the sum of (A) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender and (B) an amount equal to all accrued, but theretofore unpaid, Fees owing to the Replaced Lender and (y) the Administrative Agent an amount equal to such Replaced Lender's pro rata share of any Mandatory Borrowing to the extent such amount was not theretofore funded by such Replaced Lender, and (ii) all obligations of Borrower then owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid, but including all amounts, if any, owing under Section 2.3.6.) shall be paid in full to such Replaced Lender concurrently with such replacement. Upon the execution of the respective Assignment and Acceptance, the payment of amounts referred to in clauses (i) and (ii) above, recordation of the assignment on the Register by the Administrative Agent pursuant to Section 13.2. and, if so requested by the Replacement Lender of the appropriate Note or Notes executed by Borrower, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder, except with respect to indemnification provisions under this Agreement, which shall survive as to such Replaced Lender. Section 2.6. Payments among the Administrative Agent and the Lenders. Section 2.6.1. Pro Rata Treatment. Except as otherwise provided herein: (A) each borrowing from the Lenders pursuant to Section 2.1.1. hereof will be made from the Lenders pro rata in accordance with the amounts of their respective Commitment Percentages, (B) payments and prepayments of principal or interest will be made to the Administrative Agent for the account of the Lenders pro rata in accordance with the unpaid principal amount of the Line of Credit, (C) any reduction in the Total Commitment Amount shall reduce each Lender's Commitment Percentage pro rata based upon their then respective Commitment Percentages and (D) all payments of Fees made to the Administrative Agent for the account of the Lenders shall be made pro rata based upon their then respective Commitment Percentages. Section 2.6.2. Non-Receipt of Funds by the Administrative Agent. (a) Unless the Administrative Agent shall have received notice from a Lender prior to the date on which such Lender is to provide funds to the Administrative Agent for a Revolving Loan under such Lender's Commitment (including Revolving Loans required to be made under Section 2.1.4.(b) hereof) that such Lender will not make available to the Administrative Agent such funds, the Administrative Agent may assume that such Lender has made such funds available to the Administrative Agent on such date, and the Administrative Agent, in its sole discretion, may, but shall not be obligated to, in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent such Lender shall not have so made such funds available to the Administrative Agent, such Lender (a "Defaulting Lender") agrees to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to Borrower until the date such amount is repaid to the Administrative Agent, at the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Revolving Loan under its Commitment for purposes of this Agreement. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent shall be entitled to all interest earned thereon or Fees earned in respect thereof through the date of the payment of any such amount by such Lender. A Defaulting Lender (regardless of whether such Lender serves as the Administrative Agent) shall be deemed to have assigned to the extent of the delinquency any and all payments due to it from Borrower, whether on account of outstanding Loans, interest, fees or otherwise, to the remaining Non-Defaulting Lenders for application to, and reduction of, their respective pro rata shares of all outstanding Loans. The Defaulting Lender hereby authorizes the Administrative Agent to distribute such payments to the Non-Defaulting Lenders in proportion to their respective pro rata shares of all outstanding Loans. A Defaulting Lender shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payments to all outstanding Loans of the Non-Defaulting Lenders, the Lenders' respective pro rata shares of all outstanding Loans have returned to those in effect immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. (b) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date, and the Administrative Agent in its sole discretion may, but shall not be obligated to, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand, which shall be made promptly after discovery thereof, such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Effective Rate. (c) Nothing contained in this Section 2.6.2. shall be construed to relieve any Lender of its obligation to make funds available to the Administrative Agent under this Agreement except as otherwise expressly provided herein, nor to relieve the Borrower of its obligations to make any payment when due. (d) The Administrative Agent shall have no obligation to remit to the Lenders any amounts under this Agreement not actually collected from the Borrower. In addition, in the event that any payment received by the Administrative Agent is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or upon the appointment of any intervenor or conservator of, or trustee or similar official for, the Borrower or any substantial part of its properties or assets, or otherwise, and if the Administrative Agent paid any Lender its pro rata share of such payment, then such Lender shall, on demand from the Administrative Agent, immediately pay to the Administrative Agent an amount equal to such Lender's pro rata share of any such payment which must be rescinded, restored or returned by the Administrative Agent. Any such amount shall be paid no later than 3:00 p.m. (Boston, Massachusetts time) on the Business Day following the date of demand for payment by the Administrative Agent and shall bear interest at the rate and in the manner set forth in Section 2.6.2.(b) hereof. Section 2.6.3. Sharing of Payments, Etc. Borrower hereby agrees that, in addition to (and without limitation of) any right of set-off, banker's lien or counterclaim a Lender may have hereunder or otherwise, each Lender and Lender Affiliate shall be entitled at its option, to offset balances held by it at any of its offices against any principal of or interest on any Revolving Loans, or any fee or expense payable to the Administrative Agent, the Documentation Agent or the Lenders that is not paid when due (regardless of whether such balances are then due to Borrower), in which case it shall promptly notify Borrower and the Administrative Agent thereof; provided, that its failure to give such notice shall not affect the validity thereof. If a Lender shall effect payment of any principal, interest, fee or expense under this Agreement through the exercise of any right of set-off, banker's lien, counterclaim or similar right, it shall be deemed to have purchased from each of the other Lenders participations in the Loans made by the other Lenders in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that the Lenders shall share the benefit of such payment pro rata in accordance with the respective amounts of unpaid principal of and interest on the Revolving Loans made by each of them. To such end, the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. Borrower agrees that any Lender so purchasing a participation in the Revolving Loans made by the other Lenders may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of the Revolving Loans in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of Borrower to such Lender. SECTION 3. SECURITY FOR THE OBLIGATIONS Section 3.1. Collateral Disclosure List. Borrower shall deliver to the Administrative Agent and the Documentation Agent on or prior to the Closing Date a completed Collateral Disclosure List certified by a Responsible Officer. Section 3.2. Security. The Obligations shall be secured by: Section 3.2.1. All properties and assets of Borrower, including goods, accounts receivable, inventory, contract rights, accounts, documents, instruments and chattel paper, business and financial records and general intangible assets of Borrower (including all Capital Stock of each Subsidiary of Borrower), (other than, unless otherwise required by the Lenders, Protective Alarms of Canada, Inc.)), and all proceeds thereof, as more particularly defined in and pursuant to the Borrower Pledge Agreement and the Borrower Security Agreement. Section 3.2.2. The guarantee of Alarmguard Holdings and SSH pursuant to the Alarmguard Holdings Guarantee and the SSH Guarantee, respectively. Section 3.2.3. A pledge of all of SSH's right, title and interest in and to all shares of Capital Stock of Borrower pursuant to the SSH Pledge Agreement. Section 3.2.4. A pledge of all of Alarmguard Holding's right, title and interest in and to all shares of Capital Stock of SSH pursuant to the Alarmguard Holdings Pledge Agreement. Section 3.2.5. A leasehold mortgage, deed of trust or collateral assignment with respect to all of Borrower's right, title and interest, as lessee, in, to and under leases for the premises listed and described on Schedule 3.2.5. attached hereto pursuant to a Leasehold Mortgage or a Lease Assignment, respectively. Section 3.2.6. The guarantee of each Subsidiary of Borrower (excluding, unless otherwise required by the Lenders, Protective Alarms of Canada, Inc.) pursuant to a Subsidiary Guarantee. Section 3.2.7. All properties and assets of each Subsidiary of Borrower which has executed a Subsidiary Guarantee, including goods, accounts receivable, inventory, contract rights, accounts, documents, instruments and chattel paper, business and financial records and general intangible assets of each such Subsidiary (including all Capital Stock of any Subsidiaries of any such Subsidiary), and all proceeds thereof, as more particularly defined in or pursuant to a Subsidiary Pledge Agreement and a Subsidiary Security Agreement. SECTION 4. REPRESENTATIONS AND WARRANTIES In order to induce the Administrative Agent, the Documentation Agent and the Lenders to enter into this Agreement and to make any Extension of Credit, each Credit Party, as applicable, makes the following representations and warranties to the Administrative Agent, the Documentation Agent and the Lenders, which shall be deemed made both before and after giving effect to the Preferred Stock Offering as of the date hereof and, except as otherwise provided in this Section 4., on the date of each Extension of Credit. Any knowledge acquired by the Administrative Agent, the Documentation Agent or the Lenders shall not diminish their rights to rely upon such representations and warranties. Section 4.1. Corporate Existence. Each Credit Party is a corporation duly incorporated, validly existing and in good standing under the laws of its respective state of incorporation and is duly qualified in all other jurisdictions in which the properties and assets owned, leased or operated by it, or the nature of the business conducted by it, make such qualification necessary and where failure to so qualify could reasonably be expected to have a Material Adverse Effect. Section 4.2. Corporate Authority. The execution, delivery and performance of this Agreement, the Notes, the Other Documents and the Transaction Documents, the consummation of the transactions herein and therein contemplated, the fulfillment of and compliance with the terms and provisions hereof and thereof have been duly authorized by all necessary corporate action of each Credit Party and are within its corporate power and will not result in a violation of its Governing Documents. Section 4.3. Binding Obligations. This Agreement, the Notes, the Other Documents and the Transaction Documents constitute the legal, valid and binding obligations of each Credit Party which is a party thereto, enforceable against it in accordance with their respective terms. Section 4.4. Noncontravention. The execution, delivery and performance by each Credit Party of this Agreement, the Notes, the Other Documents and the Transaction Documents will not violate any existing law, ordinance, rule, regulation or order of any Governmental Authority or result in a breach of any of the terms of, or constitute a default under, any Contractual Obligation to which any such Credit Party is a party or by which it or any of its properties or assets are bound or result in or require the imposition of any Encumbrance on any of such Credit Party's properties or assets except to the extent that such violation or breach could not reasonably be expected to have a Material Adverse Effect. Section 4.5. Permits. Each Credit Party possesses all material permits, authorizations, licenses, approvals, waivers and consents, without unusual restrictions or limitations, the failure of which to possess could not reasonably be expected to have a Material Adverse Effect, all of which are in full force and effect. Section 4.6. No Consents. The execution, delivery and performance of this Agreement, the Notes, the Other Documents and the Transaction Documents does not require any approval, consent or waiver under any Contractual Obligation except where the absence thereof could not reasonably be expected to have a Material Adverse Effect. No approval, authorization, consent, waiver or order of, or registration, application or filing with, any Governmental Authority is required in connection with the transactions contemplated by this Agreement, the Notes, the Other Documents and the Transaction Documents except where the absence thereof could not reasonably be expected to have a Material Adverse Effect. Section 4.7. Financial Statements. Borrower has provided to the Administrative Agent and the Documentation Agent the consolidated Financial Statements of SSH(i) Alarmguard Holdings and its Subsidiaries and (ii) Borrower and its Subsidiaries, each dated as of December 31, 1996, and related footnotes, audited and certified by Ernst & Young, LLP. Borrower has also provided to the Administrative Agent and the Documentation Agent the internally prepared consolidated Financial Statements of (i) Borrower and its Subsidiaries and (ii) the Direct Marketing Program and the Dealer Program, each dated as of November_________ __,30, 1997, certified by a Responsible Officer but subject, however, to normal, recurring year-end adjustments that shall not in the aggregate be material in amount. All Financial Statements of any Credit PartyBorrower heretofore provided to the Administrative Agent and the Documentation Agent present fairly the financial condition and results of business operations of the Persons covered thereby for the periods indicated in accordance with GAAP. Neither Alarmguard Holdings, Borrower nor any of their Subsidiaries has any material direct or contingent liabilities, liabilities for taxes, unusual commitments or unrealized or unanticipated losses not disclosed in such Financial Statements. Since the date of the latest dated consolidated balance sheet included in the Financial Statements specified in this Section 4.7., there has been no development or event which could reasonably be expected to have a Material Adverse Effect and no Dividends have been declared or made to stockholders, nor has any of its Capital Stock been purchased or acquired by any Person in any manner nor has Alarmguard Holdings, SSH, Borrower or any of their Subsidiaries made any Investment except as set forth on Schedule 4.7 attached hereto. Section 4.8. Financial Forecasts. Borrower has provided to the Administrative Agent and the Documentation Agent forecasted Financial Statements together with appropriate supporting details and a statement of the underlying assumptions, prepared on a monthly basis covering the fiveone (51) year period commencing on January 1, 1998 (the "Forecasts"). The Forecasts have been prepared in good faith and have a reasonable basis. Section 4.9. Financial Information. All written data, reports and information which any Credit Party has supplied to the Administrative Agent, the Documentation Agent or the Lenders or caused to be so supplied by a third party on its behalf in connection with this Agreement, was, at the time so supplied, when taken as a whole, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information at such time in light of the circumstances under which such information was provided. Section 4.10. Business Relationships. There exists no actual or, to any Credit Party's knowledge threatened, termination, cancellation or limitation of, or any modification or change in, the business relationship of any Credit Party with any customer or group of customers, or with any supplier (other than in the ordinary course of business where one supplier is replaced by another offering terms which are no less favorable to such Credit Party) which could reasonably be expected to have a Material Adverse Effect. Section 4.11. Brokers. No broker or finder has brought about the obtaining, making or closing of, and no broker's or finder's fees or commissions will be payable by any Credit Party or its Affiliates to any Person in connection with, the transactions contemplated by this Agreement. Section 4.12. Use of Proceeds. Borrower is not an "investment company," or a company "controlled by" an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (14 U.S.C. 80(a)(1) et seq.). No Extension of Credit, the application of the proceeds and repayment thereof by Borrower or the performance of the transactions contemplated by this Agreement will violate any provision of said Act, or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. The proceeds of each Extension of Credit will be used only for the purposes set forth in this Agreement. None of the proceeds of any Extension of Credit will be used, or have been used, directly or indirectly, for the purpose of purchasing or carrying any "margin stock" or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry any "margin stock" or for any other purpose which might constitute such Extension of Credit a "purpose credit" within the meaning of said Regulation U or Regulations G or X of the Federal Reserve Board. Borrower will not take, or permit any Person acting on its behalf to take, any action which might cause this Agreement or any document or instrument delivered pursuant hereto to violate any regulation of the Federal Reserve Board. Section 4.13. Statutory Compliance. Each Credit Party is in compliance with all material laws, ordinances, rules, regulations and orders of any Governmental Authority applicable to it, its properties or assets or the business conducted by it (excepting ERISA and Environmental Laws which are the subject of other provisions of this Agreement), except where non-compliance could not reasonably be expected to have a Material Adverse Effect. Section 4.14. Commitments. No Credit Party has any fixed, contingent or other obligations to issue any of its Capital Stock except as set forth on Schedule 4.14. attached hereto. Section 4.15. Events of Default. No Default or Event of Default has occurred and is continuing. Section 4.16. Other Defaults. No Credit Party is in default in the performance, observance or fulfillment of any Contractual Obligation which could reasonably be expected to have a Material Adverse Effect. Section 4.17. Taxes. Each Credit Party has filed all tax returns and reports required to be filed by it with any Governmental Authority and has paid in full, or made adequate provisions or established adequate reserves in accordance with GAAP for, the payment of all taxes, interest, penalties, assessments or deficiencies shown to be due or claimed to be due on or in respect to such tax returns and reports. Section 4.18. Ownership of Borrower. SSH is the holder of all of the issued and outstanding shares of capital stock of Borrower, and no other Person has any rights and/or claim to any issued or unissued shares of such capital stock. Section 4.19. Solvency. Both before and after giving effect to (a) any Extension of Credit to be made on the Closing Date or such other date on which any Extension of Credit requested hereunder is made, (b) the disbursement of the proceeds of any such Extension of Credit pursuant to the instructions of Borrower, (c) the Preferred Stock Offering and the other transactions contemplated by this Agreement, the Other Documents and the Transaction Documents and (d) the payment and accrual of costs and expenses incurred in connection with the foregoing, each Credit Party is Solvent. No Credit Party is contemplating either the filing of a petition by it under Bankruptcy Code or any state bankruptcy or insolvency law or the liquidating of all or a major portion of its properties and assets, and no Credit Party has any knowledge of any Person contemplating the filing of any such petition against it. Section 4.20. Business Name. Each of Borrower and its Subsidiaries conducts its business solely through the names set forth on Schedule 11 of the Collateral Disclosure List, without the use of any trade name, or the intervention of or through any other Person. Neither Borrower nor any of its Subsidiaries has, except as set forth in the Collateral Disclosure List, during the preceding five (5) years, conducted its business through any other name or trade name or been the surviving corporation in a merger or consolidation or acquired all or substantially all of the assets of any other Person. Section 4.21. Affiliate Contracts. Except as otherwise provided in this Agreement or as set forth on Schedule 4.21. hereof, all contracts and transactions between any Credit Party and any Affiliate or Subsidiary of such Credit Party have been executed or will be executed on such terms as would be contained in an agreement executed at arms' length with an unrelated third party. Section 4.22. Capitalization. The outstanding shares of Capital Stock of each Credit Party which have been pledged to the Administrative Agent for the ratable benefit of the Lenders under the Security Documents have been duly issued and are fully paid and non-assessable. Section 4.23. Litigation. Except as set forth on Schedule 4.23. attached hereto, there are no actions, suits or proceedings by or before any Governmental Authority or any arbitration or alternate dispute resolution proceeding, pending or, to the knowledge of any Credit Party or any of its officers, threatened, against any Credit Party or its properties and assets, which if adversely determined, could reasonably be expected to have a Material Adverse Effect. Section 4.24. Title to Properties. Each of Borrower and its Subsidiaries has good and marketable title to all of its properties and assets as are reflected in the Financial Statements referred to in Section 4.7. (except such properties, assets or rights as have been disposed of in the ordinary course of business since the date thereof), free from all Encumbrances except Permitted Encumbrances or those Encumbrances disclosed in Schedule 4.24. attached hereto, and, free from all defects of title that could reasonably be expected to have a Material Adverse Effect. The properties, assets and rights of Borrower and its Subsidiaries are sufficient to permit Borrower and such Subsidiaries to conduct the business in which it is presently engaged. Borrower and its Subsidiaries possess all trademarks, service marks, trade names, trade service styles, copyrights and patents that may be necessary to own their properties and assets, and to conduct their business as it is presently conducted or as intended to be conducted hereafter, without any infringement or conflict with the rights of any other Person or any violation of law which could reasonably be expected to have a Material Adverse Effect. Section 4.25. Labor Relations. No Credit Party is a party to any collective bargaining or other agreement with any union and there are no material grievances, disputes or controversies with any union or other organization of such Credit Party's employees, or threats of strikes, work stoppages or demands by any union or such other organization. Section 4.26. Contingent Obligations. No Credit Party is a party to any Guarantee or other similar type of agreement, and it has not offered its endorsement to any Person which would in any way create a contingent liability (except by endorsement of negotiable instruments payable at sight for deposit or collection or similar banking transactions in the ordinary course of business). Section 4.27. Subsidiaries. As of the date of this Agreement, all of the Subsidiaries and Affiliates of Borrower are set forth on Schedule 13 of the Collateral Disclosure List. Borrower or a Subsidiary of Borrower is the owner free and clear of all Encumbrances, of all of the issued and outstanding Capital Stock of each Subsidiary. Neither Borrower nor any of its Subsidiaries is engaged in any joint venture, partnership or other business arrangement with any other Person except as described on said Schedule 13. Section 4.28. ERISA. Each Credit Party and each member of the Controlled Group have fulfilled their obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in substantial compliance in all material respects with the applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or a Plan under Title IV of ERISA except where non-compliance or liability could not reasonably be expected to have a Material Adverse Effect; and no Prohibited Transaction or Reportable Event has occurred with respect to any Plan. Section 4.29. Environmental Protection. Except as set forth on Schedule 4.29. attached hereto: (a) The business operations of each of Borrower and its Subsidiaries comply in all material respects with all Environmental Laws except where non-compliance could not reasonably be expected to have a Material Adverse Effect. (b) Neither Borrower nor any of its Subsidiaries has received (i) any notice or claim to the effect that it is or may be liable to any Person as a result of the Release or threatened Release of any Hazardous Materials or (ii) any letter or request for information under CERCLA or any other Environmental Laws, and, to the best of Borrower's or any such Subsidiaries' actual knowledge, based upon reasonable investigation, the business operations of Borrower and such Subsidiaries are not the subject of any investigation by any Governmental Authority evaluating whether any remedial action is needed to respond to a Release or threatened Release of any Hazardous Material or claim, or threatened lawsuit or claim arising under or related to any Environmental Law except, in each case, where non-compliance could not reasonably be expected to have a Material Adverse Effect. (c) Borrower, its Subsidiaries and their properties, assets and operations are not subject to any outstanding written order or agreement with any Governmental Authority or private party respecting any Environmental Laws except for any such written order or agreement which could not reasonably be expected to have a Material Adverse Effect. (d) Neither Borrower nor any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment or disposal of Hazardous Materials, and none of the operations of Borrower or any such Subsidiaries involve the generation, transportation, treatment, storage or disposal of Hazardous Materials except where such activity could not reasonably be expected to have a Material Adverse Effect. (e) To the best of Borrower's and its Subsidiaries' actual knowledge, based upon reasonable investigation, no Hazardous Material exists on, under or about any of the properties or assets of Borrower or any such Subsidiaries, real or personal, in a manner that is likely to give rise to any claim or suit against Borrower or any such Subsidiaries, and neither Borrower nor any Subsidiary of Borrower has filed any notice or report of a Release of any Hazardous Materials that could give rise to any such claim or suit against Borrower except, in each case, where such claim or suit or filing could not reasonably be expected to have a Material Adverse Effect. Section 4.30. Investments. Except as set forth on Schedule 4.30., attached hereto no Credit Party has an Investment in any Person other than existing Investments in Subsidiaries and Qualified Investments. Section 4.31. Security Documents. (a) The provisions of each Security Document are effective to create in favor of the Administrative Agent for the ratable benefit of the Lenders, a legal, valid and enforceable lien or security interest in all right, title and interest of the Credit Party which is a party thereto in the Collateral described therein. (b) (i) When UCC financing statements, assignment and/or amendments have been filed in the offices in the jurisdictions listed in Schedule 3 of the Collateral Disclosure List, the Borrower Security Agreement and each Subsidiary Security Agreement, as applicable, shall constitute a fully perfected first lien on, and security interest in, all right, title and interest of the applicable Credit PartyBorrower in the Collateral described therein, which can be perfected by such filing. (ii) When certificates representing the Pledged Stock (as such term is defined in the Borrower Pledge Agreement) are delivered to the Administrative Agent, together with stock powers endorsed in blank by a duly authorized officer of Borrower, the Borrower Pledge Agreement shall constitute a fully perfected first lien on, and security interest in, all right, title and interest of Borrower in the Collateral described therein. (iii) When certificates representing the Pledged Stock (as such term is defined in the SSH Pledge Agreement) are delivered to the Administrative Agent, together with stock powers endorsed in blank by a duly authorized officer of SSH, the SSH Pledge Agreement shall constitute a fully perfected first lien on, and security interest in, all right, title and interest of SSH in the Collateral described therein. (iviii) When certificates representing the Pledged Stock (as such term is defined in the Alarmguard Holdings Pledge Agreement) are delivered to the Administrative Agent, together with stock powers endorsed in blank by a duly authorized officer of Alarmguard Holdings, the Alarmguard Holdings Pledge Agreement shall constitute a fully perfected first lien on, and security interest in, all right, title and interest of Alarmguard Holdings in the Collateral described therein. (iv) When the Leasehold Mortgage, or assignments and amendments thereto, have been filed in the offices and jurisdictions listed in Schedule 2 of the Collateral Disclosure List, each Leasehold Mortgage shall constitute a fully perfected first lien on all right, title and interest of Borrower in the Collateral described therein. (c) Borrower does not own any properties or assets, or have any interest in any properties or assets, that is not subject to a fully perfected first priority lien on, or security interest in, such properties or assets in favor of the Administrative Agent, other than properties or assets having an aggregate fair market value at any one time not exceeding $50,000.00. Section 4.32. Insurance. Each of Borrower and its Subsidiaries maintains its properties and assets insured against fire and other hazards (so called "All Risk Coverage") in amounts and with companies set forth on Schedule 4.32. attached hereto covering such risks as is customary in such Credit Party's line of business. Borrower and each of its Subsidiaries also maintain public liability coverage against claims for personal injuries or death, errors and omissions, directors and officers coverage, business interruption, worker's compensation, employment or similar insurance with coverages and in amounts as set forth on Schedule 4.32. Section 4.33. Year 2000 Compatibility. All of the Borrower's and its Subsidiaries' computer-based systems are able to operate and effectively process data including dates on or after January 1, 2000, and none of the products and services sold, licensed, rendered, or otherwise provided by Borrower or its Subsidiaries will malfunction or will cease to function as a result of the Year 2000. SECTION 5. CONDITIONS TO OBLIGATION OF THE LENDERS The Administrative Agent, the Documentation Agent and the Lenders shall have no obligation under this Agreement to amend and restate the Original Credit Agreement or to continue or make any Extension of Credit unless and until they are satisfied, in their sole and absolute discretion, that all of the following conditions shall have been satisfied prior to or on the Closing Date: Section 5.1. Representations and Warranties True. The representations and warranties contained in Section 4 are true and correct, and each Credit Party, by a Responsible Officer, shall have so certified to the Administrative Agent, the Documentation Agent and the Lenders. Section 5.2. Delivery of Documents. Each Credit Party shall have duly executed and delivered to the Administrative Agent, the Documentation Agent and the Lenders, in form and substance satisfactory to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel, this Agreement, the Notes, the Other Documents and all further documents as the Administrative Agent, the Documentation Agent and the Lenders may request to evidence the Obligations or to create, perfect or continue any security interest or lien contemplated by this Agreement and the Other Documents. In addition, the Administrative Agent, the Documentation Agent and the Lenders shall have received or agreed in writing to waive or delay the receipt of: Section 5.2.1. Copies of all corporate action taken by each Credit Party to authorize the execution and delivery of this Agreement, the Notes, the Other Documents and the Transaction Documents, together with a certificate of the corporate secretary of such Credit Party certifying that the same are true, correct and complete as of the Closing Date. Section 5.2.2. Copies of each Credit Party's Governing Documents, together with a certificate of the corporate secretary of such Credit Party certifying that the same are true, correct and complete as of the Closing Date. Section 5.2.3. A certificate issued by the office of the Secretary of State of the state of each Credit Party's incorporation to the effect that each such Credit Party is legally existing and in good standing under the laws of such states. Section 5.2.4 A certificate issued by the office of the Secretary of State of each state in which each Credit Party is qualified as a foreign corporation to the effect that each such Credit Party is duly qualified and in good standing as a foreign corporation under the laws of such states. Section 5.2.5. A certificate of the corporate secretary of each Credit Party certifying to the incumbency and signatures of all officers of such Credit Party who are authorized to execute this Agreement, the Notes, the Other Documents and the Transaction Documents. Section 5.2.6. An ALTA title insurance policy or endorsement with respect to the Leasehold Mortgages satisfactory in form and substance to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel. Section 5.2.7. UCC and land record searches conducted by a Person satisfactory to the Administrative Agent and the Documentation Agent for each Credit Party under each name set forth on the Collateral Disclosure List listing the filings against each such Credit Party as debtor under such names at each filing office in each jurisdiction in which any Collateral or Credit Party is located. Section 5.2.8. Objective evidence satisfactory to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel that the Indebtedness (other than Indebtedness under this Agreement and the Steffanato Note) of each Credit Party to any Person in excess of $600,000 as of the Closing Date constitutes Subordinated Indebtedness. Section 5.2.9. Such UCC financing statements, assignments and amendments as the Administrative Agent, the Documentation Agent and the Lenders deem necessary to perfect any security interests contemplated by this Agreement or the Other Documents. Section 5.2.10. Insurance policies and certificates evidencing adequate insurance coverage in amounts satisfactory to the Administrative Agent and the Documentation Agent on the Credit Parties' properties and assets which insurance policies shall name the Administrative Agent as an additional insured/loss payee. Section 5.2.11. A confirmation of the environmental certificate and indemnity agreement executed by Borrower on the Original Closing Date, satisfactory in form and substance to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel (as confirmed, the "Environmental Certificate"). Section 5.2.12. True and correct copies of the employment agreements by and between any Credit Party and Russell MacDonnell and David Heidecorn. Section 5.2.13. Such further documents, instruments and agreements as the Administrative Agent, the Documentation Agent and the Lenders shall reasonably request, all satisfactory in form and substance satisfactory to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel. Section 5.3. Validity of Liens. All Encumbrances in the Collateral shall have been created or maintained in favor of the Administrative Agent for the benefit of the Lenders, which Encumbrances shall constitute legal, valid and enforceable and, unless otherwise consented to by the Administrative Agent, the Documentation Agent and the Lenders, first security interests in and liens upon the Collateral. All filings, recordings, deliveries of instruments and other actions necessary or desirable in the sole and absolute discretion of the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel to create said Encumbrances shall have been made, taken and/or effected. Section 5.4. Transaction Documents. The Administrative Agent and the Documentation Agent shall have received, with a copy for each Lender, a true and correct copy of the Transaction Documents, including all schedules and exhibits thereto, and such other documents, agreements and instruments executed and delivered in connection therewith or otherwise affecting the terms thereof. The terms and conditions of the transactions contemplated by the Transaction Documents shall have not been amended, modified or supplemented in any manner from those principal terms and conditions set forth in the term sheet dated December 19, 1997 issued by Advanced Capital______________________. Section 5.5. Preferred Stock Offering. The Preferred Stock Offering shall have been consummated in all material respects in accordance with the terms and conditions of the Transaction Documents, shall have resulted in gross proceeds to Alarmguard Holdings of at least THIRTY MILLION AND NO/100 DOLLARS ($30,000,000.00), and the Administrative Agent and the Documentation Agent shall have received objective evidence satisfactory to it as to the consummation thereof as aforesaid. Section 5.6. Capitalization. The Administrative Agent, the Documentation Agent and the Lenders shall have received objective evidence satisfactory to it that, immediately after the consummation of the Preferred Stock Offering and any Extension of Credit to be made on the Closing Date, that the capitalization of Borrower, SSH, and Alarmguard Holdings shall be as set forth on Schedule 5.6 attached hereto, the terms and conditions, and documentation, of all matters relating to such capitalization shall be in form and substance satisfactory to the Administrative Agent, the Documentation Agent and the Lenders. In addition, Borrower or SSH shall have redeemed at no more than par TWO MILLION AND NO/100 DOLLARS ($2,000,000.00) in respect of outstanding Deferred Purchase Price Obligations with proceeds from the Preferred Stock Offering. Section 5.7. RMR. The Administrative Agent, the Documentation Agent and the Lenders shall have received a certificate of a Responsible Officer of Borrower, satisfactory in form and substance to the Administrative Agent and the Documentation Agent, certifying that RMR as of December 31, 1997the Closing Date is at least $2,085,000.00.[$1,400,000.00]. The Administrative Agent, the Documentation Agent and the Lenders shall have received the Price Waterhouse Report. Section 5.8. Opinions of Counsel. The Administrative Agent, the Documentation Agent and the Lenders shall have received from legal counsel for the Credit Parties a written opinion, in the substantially the form of Exhibit G-1 attached hereto, satisfactory in form and substance to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel. Section 5.9. Payment of Fees. Borrower shall have paid any applicable fees and expenses due to the Administrative Agent, the Documentation Agent and the Lenders at closing, including the fees and expenses of their legal counsel. Section 5.10. Legal Matters. All legal matters incident to the transactions hereby contemplated shall be satisfactory to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel. SECTION 6. CONDITIONS TO EXTENSION OF CREDIT The Administrative Agent, the Documentation Agent and the Lenders shall have no obligation to make any Extension of Credit, including the initial Extension of Credit, unless and until, they are satisfied, in their sole and absolute discretion, that all of the following conditions shall have been fulfilled prior to or contemporaneously with the making of such Extension of Credit. Section 6.1. In General. Section 6.1.1. Notice of Borrowing. The Administrative Agent shall have received, in a timely manner, a Notice of Borrowing in a form satisfactory to the Administrative Agent. Section 6.1.2. RMR Report. The Administrative Agent and the Documentation Agent shall have received a RMR Report, in a timely manner, as required under Section 7.2.3. hereof, satisfactory in form and substance to the Administrative Agent and the Documentation Agent showing that the Borrowing Base is sufficient to permit the Lenders to make the requested Extension of Credit. Section 6.1.3. Truth of Representations and Warranties. All of the representations and warranties set forth in Section 4 of this Agreement (with the exception of representations and warranties which, by their terms, are limited to an earlier date) are true and correct as of the date on which the requested Extension of Credit is made. Section 6.1.4. No Default. No Default or Event of Default shall have occurred and be continuing or shall occur as a result of the requested Extension of Credit or the application of the proceeds of such Extension of Credit. Section 6.1.5. Payment of Fees. Borrower shall have paid any applicable fees and expenses due to the Administrative Agent, the Documentation Agent and the Lenders including any fees and expenses of their legal counsel. Section 6.1.6. Corporate Action. The corporate action of each Credit Party referred to in Section 5.2.1. continues to be in full force and effect and the incumbency of officers continues to be as stated in the certificates of incumbency delivered pursuant to Section 5.2.5. or as subsequently reflected in a new certificate of incumbency delivered to the Administrative Agent in connection with the requested Extension of Credit. Section 6.1.7. Legal Matters. All legal matters incident to the transactions contemplated by the requested Extension of Credit shall be satisfactory to the Administrative Agent, the Documentation Agent and their legal counsel and no change shall have occurred in any law or regulation or interpretation thereof, which, in the opinion of either the Administrative Agent or, the Documentation Agent and their respective legal counsel, would make it illegal or against the policy of any Governmental Authority for the Lenders to make the requested Extension of Credit. Section 6.2. Detect Acquisition. In addition to the satisfaction of the conditions set forth in Section 6.1. hereof, the obligation of the Lenders to make any Acquisition Loan in connection with the Detect Acquisition is subject to the satisfaction of the following conditions precedent: Section 6.2.1. Detect Acquisition Documents. The Administrative Agent, the Documentation Agent and the Lenders shall have received the proposed form of Detect Acquisition Documents and any amendments thereto as in effect on the Closing Date. Section 6.2.2. Financial Information. The Administrative Agent, the Documentation Agent and the Lenders shall have received: (i) a copy of Detect's most recent compiled Financial Statements and internally prepared Financial Statements; (ii)a forecasted RMR Report reflecting the consummation of the Detect Acquisition; (iii)an estimated analysis of the purchase price for the Detect Acquisition and the sources of funds to be used for the payment thereof; (iv)a summary analysis of the RMR being acquired in connection with the Detect Acquisition; and (v) such further financial and related information as the Administrative Agent, the Documentation Agent and the Lenders may request in connection with the Detect Acquisition, all of the foregoing items set forth in subsections (i) through (v) above to be satisfactory in form and substance to the Administrative Agent, the Documentation Agent and the Lenders. Section 6.2.3. Liabilities. Borrower shall not incur or assume any Indebtedness, Contractual Obligations, Contingent Liabilities or other liabilities in connection with the Detect Acquisition except for Acquisition Loans necessary to pay all or a portion of the purchase price relating thereto or as set forth in the Detect Acquisition Documents. Section 6.2.4. Collateral. Borrower shall have delivered an updated Collateral Disclosure List reflecting the proposed consummation of the Detect Acquisition. Borrower and each other Credit Party shall take such actions, and execute and deliver such documents, agreements and instruments as the Administrative Agent and the Documentation Agent and their respective legal counsel shall require to insure that the Administrative Agent obtains, subject to the provisions of Sectionno 6.2.5. hereof, a first priority perfected lien on, and the right to access any of the properties and assets acquired by Borrower or such other Credit Party in connection with the Detect Acquisition, including but not being limited to uniform commercial code financing statements and termination statements, all of the foregoing to be acceptable to the Administrative Agent, the Documentation Agent, the Lenders and their respective legal counsel. Section 6.2.5. Structure and Subsidiaries. The proposed Acquisition will be effected through the purchase bymerger of Protective Alarms, Inc. with and into Borrower of all of the outstanding shares of Capital Stock of Detect, with Detect being maintained following the consummation of the Detect Acquisition as a direct wholly-owned Subsidiary of Borrower (although Borrower shall have the right to subsequently merge Detect with and into Borrower as permitted under this Agreement). concurrently with the consummation of the Detect Acquisition. DetectInterstate Central Systems, Inc. shall, if required by the Lenders, become a party to this Agreement by executing a joinder agreement in a form satisfactory to the Administrative Agent and its legal counsel, shall guarantee the Obligations pursuant to a Subsidiary Guarantee, shall grant a lien and security interest in all of its properties and assets to the Administrative Agent for the ratable benefit of the Lenders pursuant to a Subsidiary Security Agreement and Borrower shall pledge all of the Capital Stock of Detectsuch to the Administrative Agent for the ratable benefit of the Lenders, all in a manner satisfactory to the Administrative Agent, the Documentation Agent, the Lenders and their respective legal counsel. Section 6.2.6. No Default. Borrower shall have certified by a Responsible Officer that no Default or Event of Default exists as of the date on which the Detect Acquisition shall be consummated, or would result as a result of the making of any Acquisition Loan in connection therewith, the consummation of the Detect Acquisition or the application of the proceeds of such Acquisition Loan. Section 6.2.7. Certificate as to the Detect Acquisition. Borrower shall deliver a certificate to the Administrative Agent, the Documentation Agent and the Lenders stating that (i) the Detect Acquisition shall have been consummated in accordance with the terms and conditions of the Detect Acquisition Documents in effect on the Closing Date without material amendment, modification or revision and (ii) none of the parties to the Detect Acquisition shall have failed to perform any material agreement, obligation or covenant or make any representation or warranty required to be performed or made by such party, as applicable, in connection therewith. Section 6.2.8. Legal Opinions. The Administrative Agent, the Documentation Agent and the Lenders shall have received from legal counsel for the Credit Parties a written opinion satisfactory in form and substance to the Administrative Agent, the Documentation Agent, the Lenders and their legal counsel as to certain matters relating to the Detect Acquisition. The Administrative Agent, the Documentation Agent and the Lenders shall have received, and be entitled to rely upon, from legal counsel to DetectProtective Alarms the written opinion to be delivered to BorrowerSSH in connection with the Detect Acquisition. Section 6.2.9. Detect RMR. Borrower shall not include any RMR resulting from the Detect Acquisition within the Borrowing Base unless and until Borrower has delivered to the Administrative Agent a Notice of Borrowing with respect to the Detect Acquisition. Borrower shall not include any RMR resulting from the Detect Acquisition unless and until Borrower has satisfied (i) any and all terms and conditions imposed by the Lenders in connection with the Detect Acquisition and (ii) all of the legal matters associated with the Detect Acquisition have been satisfied to the satisfaction of the Administrative Agent and its legal counsel. Section 6.32. Subsequent Acquisition Loans. In addition to the satisfaction of the conditions set forth in Section 6.1. hereof, the obligation of the Lenders to make any Acquisition Loan (other than in connection with the Detect Acquisition) is subject to the satisfaction of the following conditions precedent: Section 6.32.1. Consent of Lenders. The Administrative Agent, the Documentation Agent and the Lenders shall have consented to the proposed Acquisition in writing; provided, however, that the consent of the Administrative Agent, the Documentation Agent and the Lenders shall not be required if: (i) the proposed Acquisition involves a purchase price (including any Deferred Purchase Price Obligations) which does not exceed (x) $5,000,000.00 or (y) $10,000,000.00 if $5,000,000.00 or more of the purchase price paid in connection with such Acquisition consists of the capital stock of Alarmguard Holdings; and (ii)the purchase price (including any Deferred Purchase Price Obligations) for the proposed Acquisition, when aggregated with the purchase price (including Deferred Purchase Price Obligations) of all other Acquisitions completed by Borrower (other than the DetectPro Acquisition) since the Closing Date, does not exceed $15,000,000; and (iii)the proposed Acquisition consists solely of, and is structured as, the acquisition by Borrower of assets which consist of, Customer Contracts (and, in each case, inventory and vehicles not to exceed $100,000 of the purchase price thereof) and will not result in the creation of a new Subsidiary of Borrower; and (iv)the proposed Acquisition will not result in an expansion of Borrower's business outside of the geographic areas set forth on Schedule 6.32. attached hereto. Section 6.32.2. Liabilities. Neither Borrower nor any Subsidiary of Borrower shall incur or assume any Indebtedness, Contractual Obligations, Contingent Liabilities or other liabilities in connection with the proposed Acquisition except for Acquisition Loans necessary to pay all or a portion of the purchase price relating thereto. Section 6.32.3. Subordination of Deferred Purchase Price Obligations. Any Deferred Purchase Price Obligations shall comply with the terms of Section 8.1.(g) hereof. Section 6.32.4. Collateral. Borrower and each other Credit Party shall promptly take such actions, and execute and deliver such documents, agreements and instruments as the Administrative Agent and the Documentation Agent and their respective legal counsel shall require to insure that the Administrative Agent obtains a first priority perfected lien on any of the properties and assets acquired by Borrower or such other Credit Party in connection with the proposed Acquisition, including but not being limited to uniform commercial code financing statements and termination statements, all of the foregoing to be acceptable to the Administrative Agent, the Documentation Agent, the Lenders and their respective legal counsel. Section 6.32.5. Subsidiaries. If the proposed Acquisition will be effected by Borrower through the establishment of a new Subsidiary or the acquisition of the Capital Stock of a Person with the effect of establishing such Person as a new Subsidiary of Borrower, such Subsidiary shall become a party to this Agreement by executing a joinder agreement in a form satisfactory to the Administrative Agent and its legal counsel, shall guarantee the Obligations pursuant to a Subsidiary Guarantee, shall grant a lien and security interest in all of its properties and assets to the Administrative Agent for the ratable benefit of the Lenders pursuant to a Subsidiary Security Agreement and/or Subsidiary Pledge Agreement and Borrower shall pledge all of the Capital Stock of such Subsidiary to the Administrative Agent for the ratable benefit of the Lenders, all in a manner satisfactory to the Administrative Agent, the Documentation Agent, the Lenders and their respective legal counsel. Section 6.32.6. No Default. Borrower shall have certified by a Responsible Officer that no Default or Event of Default exists as of the date of the requested Acquisition Loan, or would result as a result of the making of such Acquisition Loan, the consummation of the proposed Acquisition or the application of the proceeds of such Acquisition Loan. Section 6.32.7. Hostile Acquisitions. The proposed Acquisition shall not be considered by the Administrative Agent, the Documentation Agent and the Lenders, in their sole and absolute discretion, to be a so-called "hostile acquisition." Section 6.32.8. RMR From Permitted Acquisitions. Borrower shall not include any RMR resulting from an Acquisition which does not require the consent of the Lenders under Section 6.32.1. hereof within the Borrowing Base unless and until Borrower has delivered to the Administrative Agent a Notice of Borrowing with respect to the pProposed Acquisition, accompanied by a true and correct copy of the proposed draft purchase and sale agreement relating to the Acquisition. Borrower shall not include any RMR resulting from any Acquisition requiring the consent of the Lenders unless and until Borrower has satisfied (i) any and all terms and conditions imposed by the Lenders in connection with the provision of such consent and (ii) all of the legal matters associated with such Acquisition have been satisfied to the satisfaction of the Administrative Agent and its legal counsel, including, but not being limited to, the confirmation of the filing of any and all documents, agreements and instruments required under Section 6.32.4. hereof and the receipt of opinions from legal counsel to Borrower as to certain matters relating to the proposed Acquisition satisfactory in form and substance to the Administrative Agent, the Lenders and their legal counsel. Section 6.32.9. Certificate as to the Proposed Acquisition. Within three (3) Business Days following the consummation of any Permitted Acquisition, Borrower shall deliver a certificate to the Administrative Agent, the Documentation Agent and the Lenders stating that (i) the proposed Acquisition shall have been consummated in accordance with (x) the terms and conditions of the Acquisition Documents relating thereto and (y), in the case of Acquisitions requiring the prior consent of the Lenders, the terms and conditions approved by the Lenders without material amendment, modification or revision, (ii) none of the parties to the proposed Acquisition shall have failed to perform any material agreement, obligation or covenant or make any representation or warranty required to be performed or made by such party, as applicable, in connection therewith and (iii) the Administration Agent has a first priority Encumbrance in the Collateral acquired. If Borrower fails to deliver such certificate within such three (3) Business Day period, then any RMR purchased in connection with such Acquisition shall be immediately deleted from the Borrowing Base and Borrower shall, if necessary comply with the requirements of Section 2.1.14.(a) hereof. SECTION 7. AFFIRMATIVE COVENANTS Borrower and each of the other Credit Parties, as applicable, covenant and agree that from the date hereof until the payment and performance in full of the Obligations and the termination of the Commitments: Section 7.1. Financial Statements and Reporting Requirements. Borrower shall furnish to the Administrative Agent, the Documentation Agent and the Lenders: Section 7.1.1. Annual Reports. As soon as available, but in no event later than ninety (90) days after the end of each Fiscal Year of Borrower, consolidated Financial Statements for such Fiscal Year of (i) Alarmguard Holdings and its Subsidiaries and (ii) Borrower and its Subsidiaries, in each case audited and certified by Ernst & Young (or other independent certified public accountants of nationally recognized standing) and consisting of a consolidated balance sheet as of the end of such Fiscal Year and the related statements of income and statements of cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, and reported on without a Qualification. Section 7.1.2. Monthly Reports. As soon as available, but in no event later than thirty (30) days after the end of each calendar month (forty-five (45) days if the end of such calendar quarter coincides with the end of a Fiscal Quarter), an unaudited, internally prepared consolidated and consolidating balance sheet of Borrower, the Direct Marketing Program, the Dealer Program and the consolidated Subsidiaries of Borrower as of the end of such calendar month, and the related unaudited, internally prepared consolidated and, if applicable, consolidating statements of income and statements of cash flows for such calendar month and the portion of the Fiscal Year through such calendar month, all in form and substance satisfactory to the Administrative Agent, the Documentation Agent and the Required Lenders and setting forth in each case in comparative form the figures for the previous Fiscal Year and the Forecasts, certified by a Responsible Officer as being fairly stated in all material respects when considered in relation to the consolidated Financial Statements of Borrower and its consolidated Subsidiaries but subject, however, to normal, recurring year-end adjustments that shall not in the aggregate be material in amount and the absence of footnotes. Section 7.1.3. GAAP Compliance. All Financial Statements provided under this Section 7.1. shall fairly present the financial conditions and results of business operations for the periods indicated in accordance with GAAP (but subject, in the case of monthly or other interim Financial Statements, to the absence of footnotes and year-end adjustments). Section 7.2. Certificates and Other Information. Borrower shall furnish to the Administrative Agent, the Documentation Agent and the Lenders: Section 7.2.1. Default Certificate. Concurrently with the delivery of the Financial Statements referred to in Section 7.1.1. above, a certificate of Ernst & Young, LLP (or such other independent certified public accountant) reporting on such Financial Statements stating that in making the examination necessary therefor no knowledge was obtained of the existence of any Default or Event of Default as a result of non-compliance by any Credit Party with any of the financial covenants set forth in Section 9 hereof except as set forth in such certificate. Section 7.2.2. Officer's Certificate. Concurrently with the delivery of the Financial Statements referred to in Section 7.1.1. and 7.1.2. above, a certificate of a Responsible Officer substantially in the form of Exhibit H attached hereto, (i) stating that, to the best of such officer's knowledge, Borrower and each other Credit Party, as applicable, during the period covered by any such Financial Statements has observed or performed all of its covenants, obligations and other agreements, and satisfied the terms and conditions, contained in this Agreement to be observed, performed or satisfied by Borrower or such Credit Party, and that such Responsible Officer has obtained no knowledge of the occurrence or continuance of any Default or Event of Default except as set forth in such certificate and (ii) showing in detail the breakdown and calculation of Borrower's compliance with the financial covenants set forth in Section 9 of this Agreement. Section 7.2.3. RMR Report. Concurrently with the delivery of the Financial Statements referred to in Section 7.1.2. above, a report setting forth RMR for the month covered by such Financial Statements and such other information in respect of RMR, any component thereof and the calculation thereof as the Administrative Agent or the Documentation Agent may require, and being accompanied by an internally prepared report reconciling said report and the information set forth thereon to such Financial Statements, all of the foregoing being in substantially the form of Exhibit I attached hereto, and being certified as being true, correct, complete, and calculated in accordance with the requirements of Section 1.1410. hereof by a Responsible Officer (the "RMR Report"). Section 7.2.4. Forecasts. As soon as available, but in no event later than thirty (30) days after the end of each Fiscal Year, forecasts as to the operating budget and cash flow of Borrower and its Subsidiaries for the next succeeding Fiscal Year, and including a forecasted consolidated balance sheet and the related statement of income and statement of cash flow, and accompanied by a certificate of a Responsible Officer to the effect that such forecasts have been prepared in accordance with the standards set forth in Section 4.8. hereof and that such officer has no reason to believe that the same are false or misleading in any material respect. Section 7.2.5. Management and Other Reports. Within five (5) days following the receipt thereof, copies of any and all reports or similar documents submitted to any Credit Party by Ernst & Young, including, without limitation, any formally issued management letter commenting upon any Credit Party's internal controls, submitted by such accountants to management in connection with their annual audit report. Section 7.2.6. Shareholder and SEC Reports. Within ten (10) days after the same are sent, copies of all financial statements and financial and other reports which any Credit Party sends to its shareholders or which any such Credit Party makes or files with any securities exchange or the United States Securities and Exchange Commission (or any successor or analogous Governmental Authority), and promptly upon the availability of the same, copies of all other notices and proxy statements sent or made available and all final registration and prospectuses, if any, filed by any such Credit Party with any such securities exchange or Governmental Authority. Section 7.2.7. Insurance. During the month of September in each calendar year, a report of a reputable insurance broker with respect to the insurance maintained by Borrower and its Subsidiaries in accordance with the provisions of this Agreement and the Security Documents and such other supplemental reports relating thereto as the Administrative Agent and the Documentation Agent may reasonably request from time to time. Section 7.2.8. Acquisition Information. As soon as available, but in no event later than thirty (30) days following the consummation thereof, the following documents, agreements, reports and other information with respect to each Acquisition: (a) True and correct copies of any and all documents, agreements and instruments executed and delivered in connection with the Acquisition, together with all schedules and exhibits thereto, certified as true, correct and complete by a Responsible Officer of Borrower; (b) An updated Collateral Disclosure List reflecting the consummation of the Acquisition if the proposed Acquisition requires the consent of the Lenders under Section 6.3.1. hereof; (c) A pro forma consolidated balance sheet for Borrower reflecting the consummation of the Acquisition if the purchase price for the proposed Acquisition is greater than FIVE MILLION AND N0/100 DOLLARS ($55,0000,000.00); and (d) Such other information as the Administrative Agent, the Documentation Agent or the Lenders may reasonably request relating to any such Acquisition. Section 7.2.9. Other Information. Promptly following any request therefor, such additional financial and other operating information in respect of the Credit Parties which the Administrative Agent, the Documentation Agent or any Lender may reasonably request from time to time. Section 7.3. Fire and Hazard Insurance. Each of Borrower and its Subsidiaries shall keep its properties and assets insured against fire and other hazards (so called "All Risk Coverage") in amounts and with companies reasonably satisfactory to the Administrative Agent and the Documentation Agent to the same extent and covering such risks as is customary in such Credit Party's line of business (but in no event shall such insurance fail to cover such risks or be in amounts less than the insurance coverages in effect on the Closing Date as set forth on Schedule 4.32. attached hereto) which policies shall name the Administrative Agent as first loss payee for the ratable benefit of the Lenders as its interest may appear. Borrower and each of its Subsidiaries shall also maintain public liability coverage against claims for personal injuries or death, errors and omissions, business interruption, worker's compensation, employment or similar insurance with coverage and in amounts satisfactory to the Administrative Agent and the Documentation Agent and as may be required by applicable law (but in no event shall such insurance fail to cover such risks or be in amounts less than the insurance coverages in effect on the Closing Date as set forth on Schedule 4.32. attached hereto). Such all risk policy shall name the Administrative Agent as an additional insured and provide for a minimum of thirty (30) days' written cancellation or material change notice to the Administrative Agent. Borrower agrees to deliver full information as to all of the aforesaid insurance policies to the Administrative Agent, the Documentation Agent and the Lenders upon request therefor. In the event of any loss or damage to the Collateral, Borrower shall give immediate written notice to the Administrative Agent and to its insurers of such loss or damage and shall promptly file proof of loss with its insurers. Borrower also agrees to review the foregoing insurance in connection with each Acquisition and increase the amount of coverage thereunder as a result of any such Acquisition if requested by the Required Lenders. Section 7.4. Maintenance of Existence. Except as otherwise permitted under Section 8 of this Agreement, each Credit Party shall preserve and maintain its corporate existence and its material rights, franchises and privileges, including its corporate name, in the jurisdiction of its incorporation, and qualify and remain qualified as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable. Section 7.5. Preservation of Collateral. Each Credit Party shall preserve and maintain the Collateral in good repair, working order and operating condition (ordinary wear and tear excepted) and shall promptly notify the Administrative Agent of any event causing material loss in the value of the Collateral. Section 7.6. Taxes and Other Assessments. Each Credit Party shall pay and discharge, and maintain adequate reserves for the payment and discharge of, all taxes, assessments, government charges or levies, or claims for labor, supplies, rent or other obligations made against it or its properties and assets which, if unpaid, might become an Encumbrance against such Credit Party or its properties and assets, except liabilities which are being contested in good faith in appropriate proceedings. Each Credit Party shall file all Federal, state and local tax returns and other reports that it is required by law to file and shall promptly notify or cause notice to be given to the Administrative Agent of any pending or future audits of its income tax returns by the Internal Revenue Service or by any state in which any such Credit Party conducts business operations and the results of each such audit. Section 7.7. Books and Records; Inspection Rights. Each Credit Party will, and will cause each of its Subsidiaries to, keep proper books of record and account, in which full, true and complete entries are made of all dealings and transactions in all material respects in relation to its business and activities. Each Credit Party will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or the Documentation Agent (upon prior notice to the Administrative Agent), and as long as no Default or Event of Default shall have occurred, upon reasonable prior notice to Borrower, to visit and inspect its properties, to examine and make abstracts of its books and records, and to discuss its affairs, finances and condition with its officers and, subject to a representative of any such Credit Party being provided the opportunity to be present, independent accountants, all at such reasonable times and as often as reasonably requested. In handling any information obtained in connection with any of the foregoing, the Administrative Agent, the Documentation Agent, the Lenders or their respective designees shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types, to maintain the confidentiality of any non-public information thereby received or received pursuant to Section 7.1. or Section 7.2. hereof except that disclosure of such information may be made (i) to Lender Affiliates in connection with their present or prospective business relations with Borrower; (ii) to prospective transferees or purchasers of an interest in the Obligations; (iii) as, in the opinion of Lender's legal counsel, required by law, regulation, rule or order, subpoena, judicial order or similar order; (iv) as may be requested or required in connection with the examination, audit or similar investigation of any Lender, (v) to any legal counsel or other professional advisors of the Administrative Agent, the Documentation Agent or any Lender, (vi) in connection with the exercise of any rights and remedies under this Agreement, the Notes or the Other Documents or any other litigation or proceeding to which the Administrative Agent, the Documentation Agent or any Lender is a party or (vii) to the extent that any such information ceases to be confidential through no fault of the Administrative Agent, the Documentation Agent or the Lenders. Section 7.8. Notices. Borrower shall promptly upon becoming aware of the occurrence of a Default or Event of Default notify the Administrative Agent and the Lenders thereof in writing. Borrower shall also advise the Administrative Agent and the Lenders as soon as practicable: (a) of any action, suit, or proceeding by or before any Government Authority or arbitration or alternate dispute resolution proceeding, which could reasonably be expected to have a Material Adverse Effect; (b) of any change in Borrower's independent certified public accountants from Ernst & Young; or (c) of the occurrence of an "Event of Noncompliance" as defined in the Transaction Documents; or (dc)of any other matter which could be reasonably expected to have aother matter which could be reasonably expected to have a Material Adverse Effect under the Transaction Documents. Each notice pursuant to this Section 7.8. shall be accompanied by a statement of a Responsible Officer setting forth details relating to the matters reported therein and the action which Borrower or any other Credit Party proposes to take with respect thereto. Section 7.9. Maintenance of Permits. Except as otherwise permitted under this Section 7, Borrower and its Subsidiaries shall obtain and/or maintain in full force and effect all material permits, authorizations, licenses, approvals, waivers and consents which it presently possesses or which may become necessary in the future to conduct its business operations. Section 7.10. Use of Proceeds. Borrower will use the proceeds of any Extension of Credit solely for the purposes set forth in Section 2.1.11. hereof. Section 7.11. INTENTIONALLY OMITTED. Section 7.12. Additional Offices. Borrower shall give the Administrative Agent written notice of each additional facility or office of Borrower or its Subsidiaries to be opened after the Closing Date. Except to the extent set forth in any such notice, the chief executive office of Borrower and all records relating to the Collateral shall be located at the locations set forth in the Collateral Disclosure List. Section 7.13. Access to Collateral. With respect to each location at which the Collateral is now or hereafter located, Borrower will obtain such lien waivers, estoppel certificates or subordination agreements as the Administrative Agent, the Documentation Agent or the Lenders may reasonably require to insure the priority and perfection of their security interest in, and their ability to take possession of, the Collateral situated at such locations. Section 7.14. Compliance with Laws. Each Credit Party shall comply with all Requirements of Law applicable to it and its Subsidiaries in all material respects except where non-compliance is being contested in good faith and in accordance with applicable procedures therefor. Section 7.15. ERISA. The Credit Parties shall: (i) make prompt payments of contributions required to meet the minimum funding standards set forth under ERISA with respect to each and every Plan and, promptly after the filing thereof, furnish to the Administrative Agent copies of each annual report required to be filed under ERISA in connection with each and every Plan for each and every Plan year; (ii) notify the Administrative Agent immediately of any fact, including, but not limited to, any Reportable Event, arising in connection with any Plan which might constitute grounds for the termination thereof by the PBGC or for the appointment by the appropriate United States district court of a trustee to administer the Plan; (iii) promptly after the issuance thereof, furnish to the Administrative Agent a copy of any notice of any Reportable Event given to the PBGC with respect to any Plan; (iv) promptly after receipt thereof, furnish to the Administrative Agent a copy of any notice received from the PBGC relating to the intention of the PBGC to terminate any Plan or to appoint a trustee to administer any Plan; and (v) furnish to the Administrative Agent, promptly upon its request therefor, such additional information concerning each and every Plan as may be reasonably requested. Section 7.16. Compliance with Environmental Laws. (a) Borrower shall, from time to time, if requested by the Administrative Agent or the Required Lenders, upon reasonable cause, retain, at Borrower's expense, an independent professional consultant to prepare a report relating to Hazardous Materials at any or all of the properties and assets of Borrower or any of its Subsidiaries and to conduct an investigation of any or all of the properties and assets of Borrower or any of its Subsidiaries. Borrower agrees also that the Administrative Agent (or its agentsAdministrative Agents) may, from time to time retain, an independent professional consultant to advise the Administrative Agent as to any such report relating to Hazardous Materials and Borrower shall be responsible for the reasonable fees and expenses of such consultant. Borrower hereby grants to the Administrative Agent, its Administrative Agents, employees, consultants and contractors the right to enter into or onto Borrower's or its Subsidiaries' business premises to view the premises as is reasonably necessary to provide such advice, provided, however, that the Administrative Agent shall provide reasonable prior notice of such visit and not unreasonably interfere with operations at such premises. (b) Borrower shall promptly advise the Administrative Agent and the Lenders in writing and in reasonable detail of any of the following to the extent that the occurrence thereof could reasonably be expected to have a Material Adverse Effect: (i) any Release of any Hazardous Material required to be reported to any Governmental Authority under any applicable Environmental Laws; (ii) any and all written communications with respect to claims or suits under such laws or any Release of Hazardous Materials required to be reported to any Governmental Authority; (iii) any remedial action taken by Borrower, any of its Subsidiaries or any other Person in response to (A) any Hazardous Materials on, under or about the properties or assets of Borrower or any of its Subsidiaries or (B) any claim or suit arising under Environmental Laws; (iv) Borrower's discovery of any occurrence or condition on any real property adjoining or in the vicinity of Borrower's or any of its Subsidiaries' business premises that could reasonably be expected to cause such premises or any part thereof to be classified as "border-zone property" or to be otherwise subject to any restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws; and (v) any request for information from any Governmental Authority that indicates such authority, instrumentality or agency is investigating whether Borrower or any of its Subsidiaries may be potentially responsible for a Release of Hazardous Materials. (c) Borrower shall, at its own expense, provide copies of such documents or information as the Administrative Agent, the Documentation Agent or any Lender may reasonably request in relation to any matters disclosed pursuant to this Section 7.16. (d) Borrower and its Subsidiaries shall comply with all Environmental Laws in all material respects. Borrower and its Subsidiaries shall promptly take any and all necessary remedial action in connection with the presence, storage, use, disposal, transportation or Release of any Hazardous Materials on, under or about its business premises. If Borrower or any of its Subsidiaries undertakes any remedial action with respect to any Hazardous Materials on, under or about its business premises, Borrower or such Subsidiary shall conduct and complete such remedial action in compliance with the policies, orders and directives of any Governmental Authority except when and only to the extent that Borrower's or such Subsidiary's liability for such presence, storage, use, disposal, transportation or discharge of any Hazardous Material, or such policies, orders or directives, are being contested in good faith by Borrower or such Subsidiary. Section 7.17. Interest Rate Protection. Borrower shall obtain no later than one (1) year following the Closing Date and thereafter maintain at all times an Interest Protection Arrangement in respect of a minimum of thirty percent (30%) of the Total Commitment Amount, the terms and conditions of said Interest Protection Arrangement to be satisfactory to the Required Lenders. Section 7.18. Use of Proceeds for Direct Marketing Program and Dealer Program. The proceeds of any Revolving Loan requested with respect to the Direct Marketing Program or the Dealer Program shall be used solely to finance Direct Marketing Program Costs and Dealer Program Costs, as applicable. Section 7.19. Year 2000 Compatibility. On or before December 31, 1998, Borrower shall take all action necessary to ensure that the Borrower's and its Subsidiaries' computer-based systems are able to operate and effectively process data including dates on or after January 1, 2000, and that none of the products and services sold, licensed, rendered, or otherwise provided by Borrower or its Subsidiaries will malfunction or will cease to function as a result of the Year 2000. At the request of the Administrative Agent, the Borrower and its Subsidiaries shall provide the Administrative Agent reasonable assurance of such "Year 2000 Compatibility." SECTION 8. NEGATIVE COVENANTS Borrower and each other Credit Party, as applicable, covenants and agrees that from the date hereof until the payment and performance in full of the Obligations and the termination of the Commitments: Section 8.1. Limitation on Indebtedness. Neither any Credit Party nor any of its Subsidiaries shall create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness other than the following ("Permitted Indebtedness"): (a) Indebtedness of Borrower or any of its Subsidiaries incurred in respect of any Extension of Credit under this Agreement; (b) Indebtedness existing as of the date of this Agreement and disclosed on Schedule 8.1. attached hereto or in the Financial Statements referred to in Section 4.7. hereof and any refinancings or refundings of such Indebtedness which will not increase the principal amount of such Indebtedness being refinanced or refunded or change the amortization thereof (other than to extend the same) and otherwise be on terms and conditions no less favorable to any Credit Party or the Lenders, as determined by the Required Lenders, than the Indebtedness being refinanced or refunded; (c) Indebtedness consisting of Capital Leases and motor vehicle and office equipment and furnishings installment sales contracts permitted under Section 8.9. hereof; (d) Subordinated Indebtedness due to SSH, Alarmguard Holdings or any other Affiliate of Borrower covered by the Affiliate Subordination Agreement or otherwise incurred with the prior consent of the Required Lenders; (e) Subordinated Indebtedness due to any Person other than an Affiliate of Borrower and not incurred in connection with an Acquisition existing on the date hereof or otherwise incurred with the prior consent of the Required Lenders; (f) Indebtedness consisting of an Interest Rate Protection Arrangement having terms acceptable to the Required Lenders and entered into solely in respect of all or a portion of the Loans and other Extensions of Credit under this Agreement as required by Section 7.17. hereof and as such Interest Rate Protection Arrangement may be amended, modified or supplemented from time to time with the prior consent of the Required Lenders; (g) Indebtedness constituting Deferred Purchase Price Obligations; provided, that (A) the aggregate unpaid principal amount of all such Indebtedness shall not exceed TEN MILLION AND NO/100 DOLLARS ($10,000,000.00) at any time and (B) such Indebtedness shall be unsecured; and (h) other Indebtedness of Borrower and its Subsidiaries in an aggregate outstanding principal amount not exceeding FIVETWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($500250,000.00) in the aggregate at any time. Section 8.2. Contingent Liabilities. Neither any Credit Party nor any of its Subsidiaries shall create, incur, assume, guarantee or remain liable with respect to any Contingent Obligations other than the following: (a) The Guarantees; (b) Contingent Obligations existing on the date of this Agreement and disclosed on Schedule 8.2. attached hereto; (c) Contingent Obligations resulting from the endorsement of negotiable instruments for collection in the ordinary course of business; (d) Contingent Obligations with respect to surety, appeal performance and return-of-money and other similar obligations incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money) not exceeding TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($250,000.00) in any one (1) instance of FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) in the aggregate at any time; (e) Contingent Obligations of normal trade debt relating to the acquisition of goods and supplies; and (f) Contingent Obligations which consist of normal and customary buyer indemnification obligations incurred by SSH or Alarmguard Holdings in connection with Permitted Acquisitions. Section 8.3. Leases. No Credit Party shall during any Fiscal Year enter into any agreement in respect of, or become liable for, Lease Obligations except that any Credit Party or its Subsidiaries may enter into any such agreement in respect of, or become liable for, Lease Obligations which do not increase the aggregate amount of Lease Obligations of such Credit Party and its Subsidiaries in excess of FIVETWO HUNDRED THOUSAND AND NO/100 DOLLARS ($5200,000.00) in any Fiscal Year. Section 8.4. Sale and Leaseback. Neither any Credit Party nor any of its Subsidiaries shall enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property owned by it in order to lease such property or lease other property that any such Credit Party or Subsidiary intends to use for substantially the same purpose as the property being sold or transferred. Section 8.5. Encumbrances. Neither any Credit Party nor any of its Subsidiaries shall create, incur, assume or suffer to exist any Encumbrance upon any of its properties and assets, or assign or otherwise convey any right to receive income, with or without recourse, except the following ("Permitted Encumbrances"): (a) Encumbrances in favor of the Administrative Agent under the Security Documents for the ratable benefit of the Lenders; (b) Encumbrances existing as of the date of this Agreement, consented to by the Required Lenders and disclosed in Schedule 4.24. attached hereto; (c) liens for taxes, fees, assessments and other governmental charges to the extent that payment of the same may be postponed, is being contested and is otherwise not required to be paid in accordance with the provisions of Section 7.6. hereof; (d) landlords' and lessors' liens in respect of rent not in default or liens in respect of pledges or deposits under worker's compensation, unemployment insurance, social security laws, or similar legislation (other than ERISA) or in connection with appeal and similar bonds incidental to litigation; mechanics', laborers' and materialmen's and similar liens, if the obligations secured by such liens are not then delinquent; liens securing the performance of bids, tenders, contracts (other than for the payment of money); and statutory obligations incidental to the conduct of its business and that do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business; (e) attachments, garnishments and judgment liens not constituting an Event of Default; (f) liens in favor of lessors under Capital Leases and sellers under motor vehicles installment sales contracts permitted under Section 8.9. hereof as long as the collateral subject thereto is limited solely to the property that is the subject of such Capital Leases or sales contracts and secures only the amounts owing in respect of such leases and contracts; (g) easements, rights of way, restrictions and other similar charges or Encumbrances relating to real property and not interfering in a material way with the ordinary conduct of its business; (h) Encumbrances on property or assets created in connection with the refinancing or refunding of Indebtedness referred to in Section 8.1.(b) hereof; provided, however, that the amount of Indebtedness secured by any such Encumbrance shall not be increased as a result of such refinancing or refunding and no such Encumbrance shall extend to property and assets of any such Credit Party or Subsidiary not encumbered prior to any such refinancing or refunding; and (i) Encumbrances securing Indebtedness for Capital Expenditures to the extent such Indebtedness is permitted under Section 8.1 hereof, provided, that (i) each such Encumbrance is given solely to secure the purchase price of such property, does not extend to any other property and is given at the time of acquisition of the property, and (ii) the Indebtedness secured thereby does not exceed the lesser of the cost of such property or its fair market value at the time of acquisition. Section 8.6. Sale or Lease of Assets; Merger; Consolidation. Neither Borrower nor any of its Subsidiaries shall sell, lease or otherwise dispose of properties or assets (valued at the lower of cost or market); provided, however, that subject to the requirements of Section 2.1.14. hereof, Borrower may effect (a) the sale of any asset for cash, for aggregate consideration not exceeding FIFTY THOUSAND AND NO/100 DOLLARS ($50,000.00) in any calendar year, the Net Proceeds of which are intended to be invested in the acquisition of new RMR or applied to repay the Loans in accordance with Section 2.1.14. hereof, (b) the sale of any obsolete or worn out tangible asset for cash the Net Proceeds of which are to be reinvested in replacement tangible assets; provided, however, that if such Net Proceeds are not reinvested in the acquisition of tangible assets replacing the obsolete or worn out assets being sold by Borrower within three (3) months following the date of sale, such Net Proceeds shall be automatically applied to repay the Loans under Section 2.1.14. hereof and (c) the leasing of commercial or residential systems to customers, for aggregate consideration not exceeding ONE MILLIONTHREE HUNDRED THOUSAND AND NO/100 DOLLARS ($1,000300,000.00) in any calendar year, in connection with the provision of monitoring services under Customer Contracts. Neither Borrower nor any Subsidiary of Borrower may merge or consolidate into or with any other Person; provided, however, that any Subsidiary of Borrower may merge or consolidate into or with (i) Borrower if no Default or Event of Default has occurred and is continuing or would result from such merger and if Borrower is the surviving company, or (ii) any other wholly-owned Subsidiary of Borrower. Section 8.7. Additional Stock Issuance. Borrower shall not permit any of its Subsidiaries to issue any additional shares of its Capital Stock or any securities convertible thereto other than to Borrower. Neither Borrower nor any of its Subsidiaries shall sell, transfer or otherwise dispose of any of the Capital Stock of a Subsidiary, except (i) to Borrower or any of its wholly-owned Subsidiaries, or (ii) in connection with a transaction permitted by Section 8.6. Section 8.8. Dividends. Borrower shall not pay any Dividends on any class of its Capital Stock or make any other distribution or payment on account of or in redemption, retirement or purchase of such Capital Stock. This Section 8.8 shall not apply to (i) the issuance, delivery or distribution by Borrower of shares of its Capital Stock pro rata to its existing shareholders, (ii) the purchase or redemption by Borrower of its Capital Stock solely with the proceeds of the issuance of additional shares of Capital Stock or (iii) payments permitted under Section 8.14.(d) hereof. Alarmguard Holdings shall not redeem any shares of the Capital Stock issued pursuant to the Preferred Stock Offering except in accordance withas set forth in the Transaction Documents. Section 8.9. Capital Expenditures. Neither Borrower nor any of its Subsidiaries shall make or commit to make any Capital Expenditures (excluding ProgramDirect Marketing Capital Expenditures and normal replacements and maintenance which are properly charged to current operations and excluding replacements of obsolete or used equipment involving expenditures in an amount in any Fiscal Year not exceeding the lesser of (i) the Net Proceeds of the sale of any obsolete or used equipment and (ii) ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00)) except for Capital Expenditures in the ordinary course of business not exceeding, in the aggregate, during any Fiscal Year, the following amounts: Fiscal Year Ending Amount December 31, 1997 $600,000.00 (calculated from the Original Closing Date) December 31, 1998 $1,200,000.00 December 31, 1999 and $1,500,000.00 thereafter If during any Fiscal Year the amount of Capital Expenditures permitted during such Fiscal Year (exclusive of any carryover from a preceding Fiscal Year) is not so utilized, such unutilized amount may be carried over and made in the immediately following Fiscal Year (but not in any subsequent Fiscal Year). In addition, during the Fiscal Year ending December 31, 1998, Borrower may make Capital Expenditures (which may not be carried over as set forth in the preceding sentence) in an amount not to exceed ONE MILLION AND NO/100 DOLLARS ($1,000,000.00) in connection with the renovation and upgrade of its central station located in Orange, Connecticut and its Cos Cob, Connecticut office. Section 8.10. Investments. Neither Borrower nor any of its Subsidiaries shall make or maintain any Investments other than (i) existing Investments in Subsidiaries, (ii) Permitted Acquisitions, (iii) extensions of trade credit in the ordinary course of business in accordance with Borrower's historic business practices; (iv) advances to employees in accordance with Borrower's historic practices thereof in an amount not to exceed ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00) in the aggregate at any time or (v) Qualified Investments. Section 8.11. ERISA. Neither Borrower nor any member of the Controlled Group shall permit any Plan maintained by it to (i) engage in any Prohibited Transaction; (ii) incur any "accumulated funding deficiency" (as defined in Section 302 of ERISA) whether or not waived which could reasonably be expected to have a Material Adverse Effect; or (iii) terminate any Plan in a manner that could result in the imposition of an Encumbrance on the property and assets of Borrower or any of its Subsidiaries pursuant to Section 4068 of ERISA. Section 8.12. Change in Terms and Prepayment of Subordinated Indebtedness. Borrower shall not, except as provided in Section 8.1.(b) hereof: (a) effect or permit any change in or amendment to (i) the terms by which any Subordinated Indebtedness purports to be subordinated to the payment and performance of the Obligations, (ii) the terms relating to the repayment (other than extensions of the time during which payment is due) of any Subordinated Indebtedness or (iii) increase the rate of interest applicable thereto; or (b) directly or indirectly, make any payment of any principal of or in redemption, retirement or repurchase of Subordinated Indebtedness except payments required by the instruments evidencing such Indebtedness. Section 8.13. Change Name or Location. Neither Borrower nor any of its Subsidiaries shall change its corporate name or conduct its business under any name other than those set forth in the Collateral Disclosure List or change its chief executive office, place of business or location of the Collateral or records relating to the Collateral from the locations set forth in the Collateral Disclosure List unless it has given the Administrative Agent at least thirty (30) days prior written notice. Section 8.14. Affiliate Transactions. Borrower will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) on terms and conditions not less favorable to Borrower or such Subsidiary than could be obtained on an arm's length basis from unrelated third parties, (b) transactions between or among Borrower and/or its wholly owned Subsidiaries (other than Protective Alarms of Canada, Inc.) not involving any other Affiliate, (c) the transactions listed and described on Schedule 8.14. attached hereto and (d) following the end of each Fiscal Quarter (i) for which Borrower shall have delivered the monthly Financial Statements required by Section 7.1.2. hereof which coincide with the end of such Fiscal Quarter and (ii) during or in respect of which no Default or Event of Default shall have occurred and be continuing (or result from the payment of any amount permitted under this subsection (d)), Borrower may pay to SSH a management fee in an amount not to exceed the amount of FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) in any Fiscal Year to reimburse SSH and Alarmguard Holdings for amounts actually expended by SSH in respect of normal and customary fees, expenses, franchise tax and similar obligations and filing fees. Any management fee permitted to be paid by Borrower under this subsection (d) shall be payable as of the end of each Fiscal Quarter only following payment by Borrower of any principal, interest, Fees and other amounts due under this Agreement and for amounts actually paid during such Fiscal Quarter (or previously due but not paid by Borrower) and the submission to the Administrative Agent of a certificate setting forth the fees, expenses or obligations for which reimbursement is sought and demonstrating the making of any such payment shall not result in the occurrence of a Default or Event of Default. With respect to any Fiscal Quarter during or in respect of which a Default or Event of Default shall have occurred, such management fee shall accrue (without interest thereon) but may not be paid; provided, however, that if (i) such Default or Event of Default shall have been cured by Borrower, and for so long as no other Default or Event of Default shall have occurred and be continuing, any such accrued management fees may be paid by Borrower to SSH or Alarmguard Holdings in quarterly installments not to exceed ONE HUNDRED THOUSAND AND NO/100 DOLLARS ($100,000.00), commencing with the end of the Fiscal Quarter next following the calendar month in which such Event of Default shall have been cured and (ii) if such Default or Event of Default shall have been waived by the requisite percentage of Lenders, such accrued and unpaid management fees may not be paid by Borrower to SSH unless and until the Required Lenders shall consent to such payment. Section 8.15. Lines of Business. No Credit Party shall make a material change in or discontinue its existing lines of business nor enter into any new line or lines of business except for the possible discontinuance of the Direct Marketing Program, the Dealer Program or the Borrower's integrated systems, i.e., "Sonitrol", business. In addition, Borrower shall not materially alter or changeamend, in a material way, the existing role and purposeoperations of Protective Alarms of Canada, Inc. from that in effect on the Closing Date, i.e., as a adjunct to Borrower's national accounts business. Section 8.16. Fiscal Year. Borrower shall not change the end of its Fiscal Year from December 31. Section 8.17. Governing Documents . Borrower shall not amend its Governing Documents in any manner which could be reasonably expected to have a Material Adverse Effect; provided, however, that in no event may any such amendment establish or authorize a new series or other issue of its Capital Stock or change the rights, powers or preferences of an existing series or other issue of its Capital Stock. Alarmguard Holdings shall not amend its Governing Documents in any manner which could be reasonably expected to have a Material Adverse Effect; provided, however, that in no event may any such amendment establish or authorize a new series or other issue of its Capital Stock or change the rights, powers or preferences of an existing series or other issue of its Capital Stock. Section 8.18. RMR Policies and Procedures. Borrower shall not change, amend, revise or otherwise modify the practices, policies and procedures followed by Borrower for the calculation of RMR or any component thereof from those practices, policies and procedures in effect on the Original Closing Date. In addition, Borrower shall not change, amend, revise or otherwise modify Borrower's policies and procedures for the cancellation of Customer Contracts from those in effect on the Original Closing Date. Section 8.19. Acquisitions. No Credit Party shall make an Acquisition except for Permitted Acquisitions. Section 8.20. Subsidiaries. Borrower shall not create any Subsidiaries except for Subsidiaries created with the prior consent of the Lenders in connection with Permitted Acquisitions. Section 8.21. Transaction Documents. No Credit PartyBorrower shall not amend the Transaction Documents. In addition, no Credit Party shall amend the Transaction Documents to which it is a party. SECTION 9. FINANCIAL COVENANTS. Borrower covenants and agrees that from the date hereof, until the payment and performance in full of the Obligations and the termination of the Commitments: Section 9.1. RMR. Alarmguard Holdings shall not permit the ratio of Consolidated Total Debt of Alarmguard Holdings to RMR to exceed 30 to 1 at any time. Section 9.2. Adjusted RMR. Borrower shall not permit the ratio of its Consolidated Senior Debt to RMR to exceed 22.5 to 1 at any time. Section 9.3. Interest Coverage. Borrower shall not permit the ratio of its Consolidated EBITDA to its Consolidated Total Interest to be less than 2.0 to 1.0 as of the end of each calendar month. Borrower's compliance with this covenant shall be determined on a rolling basis by reference to the month then ending and the eleven (11) immediately preceding calendar months. Section 9.4. Debt Service Coverage. Borrower shall not permit the ratio of its Consolidated EBITDA to its Consolidated Total Debt Service to be less than 1.20 to 1.0 as of the end of each calendar month. Borrower's compliance with this covenant shall be determined on a rolling basis by reference to the month then ending and the eleven (11) immediately preceding calendar months. Section 9.5. Leverage Ratio. Borrower shall not permit the ratio of its Consolidated Senior Debt to its Consolidated EBITDA to exceed the following amount5.0 to 1.0 as of the end of each of the following calendar months. For purposes of this covenant, Consolidated EBITDA shall be calculated by multiplying Consolidated EBITDA for the calendar month then ending and the two (2) immediately preceding calendar months by 4. LEVERAGE RATIO CALENDAR MONTH ENDING 6.0 to 1.0 (and 5.0 to 1.0 if January 31, 1998 through May the Detect Acquisition is not 30, 1998 consummated) 5.0 to 1.0 June 30, 1998 and thereafter For purposes of this covenant, Consolidated EBITDA shall be calculated by multiplying Consolidated EBITDA for the calendar month then ending and the two (2) immediately preceding calendar months by 4. Section 9.6. Adjusted Leverage Ratio. Borrower shall not permit the ratio of its Consolidated Senior Debt to its Consolidated EBITDA to exceed (i) 5.0 to 1.0 as of the end of the calendar months ending January 31, 1998 and February 28, 1998 and (ii) 4.50 to 1.0 as of the end of each calendar month thereafter. For purposes of this covenant, (i) Consolidated EBITDA shall be calculated by multiplying Consolidated EBITDA for the calendar month then ending and the two (2) immediately preceding calendar months by 4 and (ii) any Loans used in connection with the Direct Marketing Program and the Dealer Program and Acquisition Loans made to Borrower during the calendar month then ending and the two (2) immediately preceding calendar months shall be excluded from the calculation of Consolidated Senior Debt. Section 9.7. Direct Marketing Program Creation Multiples. Borrower shall not permit (a) the multiple resulting from dividing (x) the aggregate amount of Direct Marketing Program Costs by (y) the amount of RMR created therebyby such Direct Marketing Program Costs to exceed 35 or (b) the multiple resulting from dividing (x) the aggregate amount of Dealer Program Costs by (y) the amount of RMR created thereby to exceed 35. Borrower's compliance with this covenant shall be determined as of the end of each calendar month and be calculated in the manner set forth in Exhibit I attached hereto. Section 9.8. Direct Marketing Program Costs. Borrower shall not permit (i) the aggregate amount of Direct Marketing Program Costs to exceed the amount of EIGHT MILLION AND NO/100 DOLLARS ($8,000,000.00) or (ii) the aggregate amount of Dealer Program Costs to exceed the amount of TWELVE MILLION AND NO/100 DOLLARS ($12,000,000.00). Borrower's compliance with this covenant shall be calculated as of the end of each calendar month on a cumulative basis dating from the end of the calendar month immediately preceding the Original Closing Date. SECTION 10. THE AGENTS Section 10.1. Appointment, Powers and Immunities. Each Lender and each subsequent holder of the Notes hereby irrevocably appoints and authorizes BankBoston, N.A.Bank of Boston Connecticut to act as its Administrative Agent and General Electric Capital Corporation to act as its Documentation Agent under this Agreement and the Other Documents with such powers as are specifically delegated to the Administrative Agent and the Documentation Agent by the terms of this Agreement and the Other Documents together with such other powers as are reasonably incidental thereto. The Administrative Agent and the Documentation Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the Other Documents and shall not be a trustee for any Lender. The Administrative Agent and the Documentation Agent shall not be responsible to the Lenders for any recitals, statements, representations or warranties contained in this Agreement or the Other Documents or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or the Other Documents, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the Other Documents or any other document referred to or provided for herein or therein or for the collectibility of the Loans or for any failure by the Borrower or any other Person to perform any of its obligations under this Agreement, the Notes or the Other Documents. The Administrative Agent and the Documentation Agent may employ agentsAdministrative Agents and attorneys-in-fact and shall not be answerable, except as to money or securities received by it or its authorized agentsAdministrative Agents, for the negligence or misconduct of any such agentsAdministrative Agents or attorneys-in-fact selected by it with reasonable care. Neither the Administrative Agent, the Documentation Agent nor any of its directors, officers, employees or agentsAdministrative Agents shall be liable or responsible for any action taken or omitted to be taken by it or them under this Agreement, or under the Other Documents or in connection herewith or therewith, except for its or their own gross negligence or willful misconduct. Section 10.2. Reliance. The Administrative Agent and the Documentation Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telex, telegram or cable) believed by the Administrative Agent and the Documentation Agent to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by the Administrative Agent and the Documentation Agent. As to any matters not expressly provided for by this Agreement or the Other Documents, the Administrative Agent and the Documentation Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or the Other Documents in accordance with instructions signed by the Required Lenders, and such instructions of the Required Lenders and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Administrative Agent and the Documentation Agent shall be entitled to take, and to rely on, advice of counsel concerning all matters pertaining to its rights and duties under this Agreement and the Other Documents. The Administrative Agent and the Documentation Agent may utilize the services of such Persons as the Administrative Agent or the Documentation Agent in its sole discretion may reasonably determine, and all reasonable fees and expenses of any such Persons shall be paid by Borrower. Section 10.3. Payments. (a) A payment by the Borrower to the Administrative Agent and the Documentation Agent under this Agreement, the Notes or any of the Other Documents for the account of any Lender shall constitute a payment to such Lender. Except as otherwise provided in this Agreement, the Administrative Agent and the Documentation Agent, as applicable, agree promptly to distribute to each Lender such Lender's pro rata share of payments received by the Administrative Agent or the Documentation Agent for the account of the Lenders. (b) If in the opinion of the Administrative Agent or the Documentation Agent, the distribution of any amount received by the Administrative Agent or the Documentation Agent in such capacity hereunder, under this Agreement, the Notes or any of the Other Documents could reasonably be expected to involve the Administrative Agent or the Documentation Agent in liability, the Administrative Agent or the Documentation Agent may refrain from making distribution until the Administrative Agent's or the Documentation Agent's right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Administrative Agent or the Documentation Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Administrative Agent or the Documentation Agent, as applicable, its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. Section 10.4. Holders of Notes. The Administrative Agent and the Documentation Agent may deem and treat the payee of any Note as the absolute owner for all purposes hereof until the Administrative Agent or the Documentation Agent, as applicable, shall have been furnished in writing by the Lender with a different name by such payee or be a subsequent holder, assignee or transferee. Section 10.5. Events of Default. Neither the Administrative Agent or the Documentation Agent shall be deemed to have knowledge of the occurrence of an Event of Default or the occurrence of an event that, with the giving of notice, the lapse of time or both, would constitute an Event of Default (other than the nonpayment of principal of or interest on the Loans) unless the Administrative Agent and the Documentation Agent has received notice from a Lender or the Borrower specifying such Event of Default or Default and stating that such notice is a "Notice of Default." In the event that the Administrative Agent or the Documentation Agent receives such a "Notice of Default" or in the event of any nonpayment of principal or interest on the Loans, the Administrative Agent and the Documentation Agent, as applicable, shall give notice thereof to the Lenders and the Administrative Agent shall take such action with respect to such Event of Default or Default as shall be directed by such Lenders as required under Section 10.14. hereof. Section 10.6. Rights as a Lender. With respect to its Commitment and the Loans made by it, each of the Administrative Agent and the Documentation Agent in its capacity as a Lender hereunder shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as the Administrative Agent or the Documentation Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include the Administrative Agent and the Documentation Agent, as applicable, in its individual capacity. The Administrative Agent, the Documentation Agent and their Lender Affiliates may (without having to account therefor to any Lender) accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with any Credit Party, as if it were not acting as the Administrative Agent or the Documentation Agent, and the Administrative Agent and the Documentation Agent may accept fees and other consideration from any Credit Party Borrower for services in connection with this Agreement or any of the Other Documents or otherwise without having to account for the same to the Lenders. Section 10.7. Indemnification. The Lenders shall indemnify the Administrative Agent (to the extent not reimbursed by Borrower under Section 13.4. hereof), ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Administrative Agent in its capacity as the Administrative Agent, as applicable, under this Agreement in any way relating to or arising out of this Agreement or any of the Other Documents or any other document contemplated hereby or thereby or referred to herein or therein (including, without limitation, the costs and expenses which Borrower is obligated to pay under Section 143.54. hereof, but excluding, unless an Event of Default has occurred and is continuing, normal administrative costs and expenses incident to the performance of its agency duties hereunder) or the enforcement of any of the terms of this Agreement, the Other Documents or of any such other documents; provided, however, that no Lender shall be liable for any of the foregoing to the extent they arise from the gross negligence or willful misconduct of the Person to be indemnified. Section 10.8. Non-Reliance on the Administrative Agent, the Documentation Agent and other Lenders. Each Lender agrees that it has, independently and without reliance on the Administrative Agent, the Documentation Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of Borrower and each other Credit Party and of its decision to enter into this Agreement and that it will, independently and without reliance upon the Administrative Agent, the Documentation Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or the Other Documents. Neither the Administrative Agent or the Documentation Agent shall be required to keep itself informed as to the performance or observance by any Credit Party of this Agreement or the Other Documents or any other document referred to or provided for herein or therein or to inspect the properties or books of any Credit Party. Except for notices, reports and other documents and written information delivered by any Credit Party to the Administrative Agent or the Documentation Agent hereunder or under the Other Documents, neither the Administrative Agent nor the Documentation Agent shall have any duty or responsibility to provide any Lender with any credit or other information concerning the financial condition or business of any Credit Party, which may come into the possession of the Administrative Agent, the Documentation Agent or any of their Lender Affiliates. Section 10.9. Failure to Act. Except for action expressly required of the Administrative Agent or the Documentation Agent hereunder or under the Other Documents, the Administrative Agent and the Documentation Agent shall in all cases be fully justified in failing or refusing to act hereunder or thereunder unless it shall be indemnified to its satisfaction by the Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Section 10.10. Resignation. The Administrative Agent or the Documentation Agent may resign at any time by giving sixty (60) days prior written notice thereof to the Lenders and Borrower; provided, however, that such resignation shall not be effective in the case of the Administrative Agent until the appointment of a successor Administrative Agent as provided for herein. Upon any such resignation, the Lenders shall have the right, upon consultation with Borrower, to appoint a successor Administrative Agent or successor Documentation Agent. Unless a Default or Event of Default shall have occurred and be continuing, such successor Administrative Agent or successor Documentation Agent shall be reasonably acceptable to Borrower. If no successor Administrative Agent shall have been so appointed by the Lenders and shall have accepted such appointment within thirty (30) days after the Administrative Agent's giving of notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a Lender or financial institution having total assets in excess of FIVE HUNDRED MILLION AND NO/100 DOLLARS ($500,000,000.00). In addition, the Administrative Agent or the Documentation Agent may be removed by the Required Lenders at any time on not less than thirty (30) days prior written notice to the Administrative Agent, the Documentation Agent and the Lenders, as applicable. Upon the acceptance of any appointment as the Administrative Agent or the Documentation Agent hereunder by a successor Administrative Agent or successor Documentation Agent, such successor Administrative Agent or successor Documentation Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent or retiring Documentation Agent, and the retiring Administrative Agent or retiring Documentation Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's or retiring Documentation Agent's resignation, the provisions of this Agreement and the Other Documents shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by the Administrative Agent or the Documentation Agent while it was acting as the Administrative Agent or the Documentation Agent. Section 10.11. Cooperation of Lenders. The Administrative Agent and the Documentation Agent shall provide the other Lenders with such information and documentation as such other Lender shall reasonably request relating to the performance of its duties hereunder, including all information relative to the outstanding balance of principal, interest and other sums owed to such other Lenders by Borrower; and cooperate with the other Lenders with respect to any and all collections and/or foreclosure procedures at any time commenced against Borrower or otherwise in respect of the Collateral on behalf of the Lenders. Section 10.12. Actions by Administrative Agent. In case one or more Events of Default have occurred and shall be continuing, and whether or not acceleration of the Obligations shall have occurred, the Administrative Agent shall, if (a) so requested by the Required Lenders and (b) the Required Lenders have provided to the Administrative Agent such additional indemnities and assurances against expenses and liabilities as the Administrative Agent may reasonably request, proceed to enforce the provisions of any of the Other Documents authorizing the sale or other disposition of all or any part of the Collateral and exercise all or any such other legal and equitable and other rights or remedies as it may have in respect of such Collateral. The Required Lenders may direct the Administrative Agent in writing as to the method and the extent of any such sale or other disposition and exercise of such other rights or remedies as it may have in respect of such Collateral, the Lenders hereby agreeing to indemnify and hold the Administrative Agent, harmless from all liabilities incurred in respect of all actions taken or omitted in accordance with such directions; provided, however, that the Administrative Agent need not comply with any such direction to the extent that the Administrative Agent reasonably believes the Administrative Agent's compliance with such direction to be unlawful or commercially unreasonable in any applicable jurisdiction. In any event, the Lenders agree, as among themselves, that the Administrative Agent shall not, without the consent or approval of the Required Lenders and subject to Section 10.14. hereof, (i) make any sale or disposition of the Collateral, (ii) release or subordinate the security interest of the Lenders in any of the Collateral or release or discharge any Person which is a party to this Agreement or the Other Documents, (iii) consent or agree to any amendment or waiver of any material provision of this Agreement or the Other Documents, (iv) declare any Default, (v) exercise any right or remedy with respect to the acceleration or collection of the Obligations or (vi) take any other action which requires the consent or approval of the Lenders under this Agreement or the Other Documents. Section 10.13. Security. (a) The Administrative Agent acknowledges to the other Lenders that it is acting in an agency capacity hereunder and that the liens and security interests in the Collateral secures the Obligations of Borrower owing to all of the Lenders. In the event of any Default, the Administrative Agent will apply and/or pay over to the Lenders any net proceeds derived from the Collateral in the manner set forth in Section 10.3. hereof. (b) Notwithstanding anything to the contrary set forth herein, each of the parties hereto acknowledges and agrees that the respective rights, benefits and privileges of the Administrative Agent, the Documentation Agent and the Lenders under each of the Other Documents and all other instruments, documents and agreements providing the benefit of any collateral security or guarantees for the prompt payment and performance of the Obligations are for the ratable benefit of the Lenders, and each of the rights, benefits and privileges thereunder shall be exercised (or not exercised) solely by the Administrative Agent but only at the direction and with the consent and approval of such Lenders as are required by Section 10.14. hereof. Section 10.14. Required Approval. Any action which requires the consent or approval of the Lenders under this Agreement may be taken upon the affirmative consent or approval of the Required Lenders to be effective; provided, however, that the following action shall require the unanimous affirmative approval of all of the Lenders: (a) any increase or decrease in the amount of the Total Commitment Amount or the Swingline Commitment which can be issued or created hereunder; (b) any amendment of the Borrowing Base which would have the effect of increasing credit availability thereunder; (c) any extension of the Revolving Credit Termination Date or the Maturity Date; (d) any increase or decrease in any Lender's Commitment Percentage, Commitment other than in connection with assignments under Section 13 hereof or in any provision of this Agreement providing for pro rata payments among the Lenders, the sharing of payments of principal, interest, fees and any other amounts due and payable under this Agreement and the sharing of any amounts obtained by any Lender by set-off or otherwise; (e) any decrease in the rate of interest applicable to the Loans (other than as a result of fluctuations in the Base Rate) or in any Fees (other than fees assessed for the account of the Administrative Agent); (f) the release of any Collateral (except for Collateral having a de minimis value or as otherwise expressly provided in this Agreement or in the Security Documents); (g) any amendment of this Section 10.14. and Sections 10.15., 13., 14.11. or 14.12. of this Agreement and any provision of this Agreement providing for the reimbursement of the Lenders for any fees, costs or expenses or the indemnification of any Lender; (h) the release of any Credit Party under any Guarantee; or (i) the amendment or modification of the definition of the term "Required Lenders"; or (j) any amendment or waiver of the provisions of Section 5 or 6 of this Agreement, including, but not being limited to, the provision of any consent of the Lenders in respect of Permitted Acquisitions required under Section 6.2.1. hereof; or (k) any deferral or postponement in the payment or accrual of interest or Fees; or (l) any amendment to the amortization schedule for the Loans. Section 10.15. Replacement of Non-Consenting Lenders. If, in connection with any proposed change, waiver, discharge or termination to any of the provisions of this Agreement as contemplated by Section 10.14. hereof, the consent of the Required Lenders is obtained but the consent of one or more other Lenders whose consent is required is not obtained, then Borrower shall have the right, so long as all non-consenting Lenders whose individual consent is required are treated as described in either clause (A) or (B) below, to either (A) replace each such non- consenting Lender or Lenders with one or more Replacement Lenders pursuant to Section 2.5.6. so long as at the time of such replacement, each Replacement Lender consents to the proposed change, waiver, discharge or termination or (B) terminate such non-consenting Lender's Commitment and repay in full such Lender's outstanding Loans; but only if, in each such case, such Replacement Lender and such action is acceptable to the Administrative Agent and the Documentation Agent provided that, unless the Commitment which is terminated and Loans which are repaid pursuant to the preceding clause (B) are immediately replaced in full at such time through the addition of new Lenders or the increase of the Commitments and/or outstanding Revolving Loans of existing Lenders (who in each case must specifically consent thereto), then in the case of any action pursuant to preceding clause (B) the Required Lenders (determined before giving effect to the proposed action) shall specifically consent thereto. Section 10.16. Amendment. Borrower hereby agrees that the foregoing provisions of this Section 10 constitute an agreement among, and solely for the benefit of, the Lenders, the Administrative Agent and the Documentation Agent, and the Lenders acknowledge that no Credit Party is a party to or bound by such foregoing provisions and that any and all of the provisions of this Section 10 may be amended at any time by the Lenders, with the consent of the Administrative Agent and the Documentation Agent, without the consent or approval of, or notice to, any Credit Party (other than the requirement of notice to the Borrower of the resignation of the Administrative Agent or the Documentation Agent). Section 10.17. Questionnaire. In order to assist the Administrative Agent and the Documentation Agent in the administration and performance of their duties under this Agreement, each of the Lenders hereby agrees to complete and deliver to the Administrative Agent and the Documentation Agent a questionnaire in substantially the form of Exhibit J attached hereto (an "Administrative Questionnaire"). SECTION 11. DEFAULT Section 11.1. The occurrence of any of the following events shall constitute a default under this Agreement, the Notes and the Other Documents (an "Event of Default"): (a) Borrower shall fail to pay (i) any outstanding principal amount of the Loans when due, (ii) any accrued and unpaid interest on the Loans within three (3) days of the due date therefor or (iii) any fees or expenses payable under this Agreement, the Notes or the Other Documents within five (5) days of the due date therefor; or (b) Any Credit Party shall fail to perform any term, covenant or agreement contained in Sections 7.1., 7.2., 7.3., 7.4., 7.5., 7.6., 7.7., 7.8., 7.12., 7.15., 7.17., 7.18. and 8.1. through 8.210. of this Agreement; provided, however, that no Event of Default shall occur under this subsection (b) by virtue of Borrower's failure to timely deliver any financial statement or report required to be delivered under any of the foregoing sections until the lapse of a ten (10) day grace period; or (c) Any Credit Party shall fail to perform any other term, covenant or agreement (other than in respect of terms, covenants and agreements which are the subject of Sections 11.1.(a) or 11.1.(b) and Section 11.1.(k) hereof) contained in this Agreement and such default shall continue for thirty (30) days after notice thereof has been sent to Borrower by the Administrative Agent; or (d) any default or event of default shall occur under (i) the Other Documents or (ii) the Transaction Documents which could have a Material Adverse Effect; or (e) any representation or warranty of any Credit Party made in this Agreement, the Notes, the Other Documents or the Transaction Documents or in any certificate or report delivered hereunder or thereunder shall prove to have been false in any material respect upon the date when made or deemed to have been made; or (f) Borrower or any of its Subsidiaries shall (i) default in any payment of principal of or interest of any Indebtedness (other than the Loans) or in the payment of any Contingent Obligation or any Lease Obligation, beyond any period of grace (not to exceed thirty (30) days), if any, provided in the instrument or agreement under which such Indebtedness, Contingent Obligation or Lease Obligation was created, if the aggregate amount of the Indebtedness, Contingent Obligations or Lease Obligations in respect of which such default or defaults shall have occurred is at least FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($500,000.00) or (ii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness, Contingent Obligation or Lease Obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to permit the holder or holders of such Indebtedness, Contingent Obligation or Lease Obligations to cause, with the giving of notice if required, the same to become due prior to its stated maturity, to become payable or to terminate Borrower or any Subsidiary's use thereof prior to the specified term therefor; or (g) Any Credit Party shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of itself or of all or a substantial part of its properties and assets; (ii) be generally not paying its debts as such debts become due; (iii) make a general assignment for the benefit of its creditors; (iv) commence a voluntary case under the Bankruptcy Code; (v) take any action or commence any case or proceeding under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, or any other law providing for the relief of debtors; (vi) fail to contest in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or other law; (vii) take any action under the laws of its jurisdiction of incorporation or organization similar to any of the foregoing; or (viii) take any corporate action for the purpose of effecting any of the foregoing; or (h) a proceeding or case shall be commenced, without the application or consent of any Credit Party in any court of competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts; (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its properties and assets; or (iii) similar relief in respect of it, under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts or any other law providing for the relief of debtors, or an order for relief shall be entered in an involuntary case under the Bankruptcy Code, against any such Credit Party; or action under the laws of the jurisdiction of incorporation or organization of any such Person similar to any of the foregoing shall be taken with respect to any such Credit Party; or (i) an uninsured or self-insured judgment or order for the payment of money shall be entered against any Credit Party by any court, or a warrant of attachment or execution or similar process shall be issued or levied against property of any Credit Party, that in the aggregate exceeds TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($250,000.00) in value and such judgment, order, warrant or process shall continue undischarged or unstayed for sixty (60) days; or (j) Any Credit Party or any member of the Controlled Group shall fail to pay when due an amount or amounts aggregating in excess of TWO HUNDRED FIFTY THOUSAND AND NO/100 DOLLARS ($250,000.00) that it shall have become liable to pay to the PBGC or to a plan under Title IV of ERISA; intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by any Credit Party, any member of the Controlled Group, any plan administrator or any combination of the foregoing, other than in the case of a "statutory termination" as defined in Title IV of ERISA, when the amount of such liability to any Credit Party could reasonably be expected to have a Material Adverse Effect; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans or a proceeding shall be instituted by a fiduciary of any such Plan or Plans against any Credit Party and such proceedings shall not have been dismissed within thirty (30) days thereafter where the liability to any Credit Party could have a Material Adverse Effect; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated where the liability to any Credit Party could have a Material Adverse Effect; or (k) Borrower shall fail to meet any financial covenant set forth in Section 9. hereof; or (l) The failure of any Credit Party to execute, deliver or address, or cause to be executed, delivered and addressed, the matters set forth on Schedule 11.1. attached hereto within the time periods set forth on said Schedule 11.1. (the "Post Closing Matters"); or (m) Any Governmental Authority shall condemn, seize or otherwise appropriate, or take custody or control of, or file a lien, levy or assessment in respect of, all or any substantial portion of the properties or assets of any Credit Party or any of its Subsidiaries; or (n) Any Governmental Authority or other Person shall garnish, seize or levy or execute upon any monies of Borrower or any of its Subsidiaries on deposit with or otherwise in the custody of the Administrative Agent, the Documentation Agent, the Lenders or any Lender Affiliate; or (o) This Agreement, the Notes or the Other Documents shall cease to be in full force and effect in any material respect, or any Credit Party shall so assert, or, except to the extent resulting from the negligent or willful acts or omissions of the Administrative Agent, the Encumbrances created by the Security Documents shall cease to be fully perfected enforceable first priority security interest on the Collateral as provided herein and therein; or (p) Any Guarantee shall cease to be in full force and effect, or any Guarantor shall so assert; or (q) SSH shall engage in any activity other than Permitted SSH Activities; or (r) a Change in Control Event shall have occurred; or (s) an "Event of NoncomplianceAdvers Effect" (as defined in the Transaction Documents) shall have occurred in connection with the redemption of, or which otherwise requirespermits the redemption of, the Capital Stock issued under the Transaction Documents.. SECTION 12. REMEDIES Section 12.1. Remedies. Upon the occurrence of an Event of Default, and at any time thereafter while such Event of Default is continuing, immediately and automatically in the case of an Event of Default specified in Section 11.1(g) or 11.1.(h), and in all other cases, upon the Administrative Agent's declaration at the request or consent of the Required Lenders: (a) The Administrative Agent's and the Lenders' obligation to make any Extension of Credit shall terminate; (b) the unpaid principal amount of the Loans, together with accrued interest thereon, and all other Obligations shall become immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived; (c) The Administrative Agent, the Documentation Agent, the Lenders and any Lender Affiliate may exercise any right of setoff granted to the Administrative Agent, the Documentation Agent, the Lenders and any Lender Affiliate pursuant to Section 14.2.4. hereof; and (d) The Administrative Agent, the Documentation Agent and the Lenders may exercise any and all other rights and remedies they have under this Agreement, the Notes or the Other Documents or at law or in equity, and proceed to protect and enforce their rights by any action at law, in equity or other appropriate proceeding. Section 12.2. Default Interest Rate. Immediately upon the occurrence of an Event of Default specified in Section 11.1.(a) hereof, and in all other cases at the option of the Required Lenders, which may be exercised following the occurrence of any other Event of Default, and whether or not the Lenders exercise any other right or remedy, the Obligations (including, to the extent permitted by law, overdue interest and fees) shall bear interest thereafter until paid in full at the Default Rate. SECTION 13. ASSIGNMENT Section 13.1. Assignment. (a) Each Lender may assign to one or more Persons all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the same portion of the Loans at the time owing to it and the Notes held by it); provided, however, that (i) except in the case of an assignment to a Lender or a Lender Affiliate, the Administrative Agent and, as long as no Default or Event of Default shall have occurred or be continuing, the Borrower must give their prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed); (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's interests, rights and obligations under this Agreement; (iii) the amount of the Commitment and the Loans of the assigning Lender subject to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) or, if less, the entire remaining Commitment and all of the Loans at the time owing to such assigning Lender; (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent an assignment and acceptance in the form of Exhibit K attached hereto (the "Assignment and Acceptance"), together with the Note or Notes subject to such assignment and a processing and recordation fee of TWO THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($2,500.00); (v) the assignee shall be a Lender or financial institution having total assets in excess of FIVE HUNDRED MILLION AND NO/100 DOLLARS ($500,000,000.00); (vi) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; (vii) as long as no Default or Event of Default shall have occurred or be continuing, such assignment shall not result in increased costs to any Credit Party by virtue of such assignment; and (viii), in the case of BankBoston, N.A., no such assignment shall result, unless otherwise agreed by Borrower, in a reduction of the amount of the Commitment of BankBoston, N.A. to less than TWENTY MILLION AND NO/100 DOLLARS ($20,000,000.00). Upon such execution, delivery, acceptance and recording pursuant to Section 13.2. hereof from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement; and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's interests, rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of any indemnity, waiver, release or limitation of liability contained herein, as well as to any Fees accrued for its account and not yet paid). (b) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment and the outstanding balances of its Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance; (ii) except as set forth in subsection (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, the Notes, the Other Documents or any other agreement, document or instrument furnished pursuant hereto or thereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent Financial Statements delivered pursuant to Section 7.1. hereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent or the Documentation Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent and the Documentation Agent to take such action as Administrative Agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent and the Documentation Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. Section 13.2. Maintenance of a Register. The Administrative Agent shall maintain at one of its principal offices a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment and the Commitment Percentage, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and Borrower, the Administrative Agent, the Documentation Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. The Administrative Agent shall also be authorized to amend, modify and substitute Schedule 1.35. attached hereto and Schedule 1.36. attached hereto from time to time to properly reflect the Commitments and the Commitment Percentages of the Lenders under this Agreement. Section 13.3. Questionnaire. Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee together with the Note subject to such assignment, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in Section 13.1. above and, if required, the written consent of the Administrative Agent and/or Borrower to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance; (ii) record the information contained therein in the Register; and (iii) give prompt notice thereof to the Lenders. Within five (5) Business Days after receipt of notice, Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for the surrendered Note, a new Note to the order of such assignee in a principal amount equal to the applicable Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment, a new Note to the order of such assigning Lender in a principal amount equal to the applicable Commitment retained by it. Such new Note shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note; shall be dated the date of the surrendered Notes which they replace and shall otherwise be in substantially the form of Exhibit B attached hereto, as applicable. Canceled Notes shall be returned to the Borrower. Section 13.4. Sale of Participations. Each Lender may without the consent of the Borrower or the Administrative Agent sell participations to one or more Lenders, financial institutions or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the same portion of the Loans owing to Lender and the Note held by it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged; (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iii) the participating Lenders, financial institutions or other entities shall be entitled to the benefit of the cost protection provisions contained in this Agreement only to the extent the Lender or Lenders selling a participation to them are entitled thereto; (iv) Borrower, the Administrative Agent, the Documentation Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights, interests and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any Fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest or other amounts on the Loans or changing or extending the Commitments or Section 2.1.14. hereof) and (v) such participation shall not result in increased costs to any Credit Party by virtue of the sale of such participation. Section 13.5. Disclosure of Information. Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 13, disclose to the assignee or participant or proposed assignee or participant any information relating to Borrower furnished to such Lender by or on behalf of Borrower; provided, however, that, prior to any such disclosure of information designated by Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information in accordance with Section 7.7. hereof. Section 13.6. Assignee or Participant Affiliated with Borrower. If any assignee Lender is an Affiliate of Borrower, then any such assignee Lender shall have no right to vote as a Lender hereunder or under any of the Other Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or other modifications to this Agreement or any of the Other Documents or for purposes of making requests to the Administrative Agent pursuant to Section 10 hereof, and the determination of the Lenders shall for all purposes of this Agreement and the Other Documents be made without regard to such assignee Lender's interest in any of the Loans. If any Lender sells a participating interest in any of the Loans to a participant, and such participant is Borrower or an Affiliate of the Borrower, then such transferor Lender shall promptly notify the Administrative Agent of the sale of such participation. A transferor Lender shall have no right to vote as a Lender under this Agreement or any of the Other Documents for purposes of granting consents or waivers or for purposes of agreeing to amendments or modifications to this Agreement or any of the Other Documents or for purposes of making requests to the Administrative Agent pursuant to Section 10 hereof to the extent that such participation is beneficially owned by Borrower or any Affiliate of Borrower, and the determination of the Lender shall for all purposes of this Agreement and the Other Documents be made without regard to the interest of such transferor Lender in the Loans to the extent of such participation. Section 13.7. Miscellaneous Assignment Provisions. If any assignee Lender is not incorporated under the laws of the United States of America or any state thereof, it shall, prior to the date on which any interest or fees are payable under this Agreement or any of the Other Documents for its account, deliver to Borrower and the Administrative Agent certification as to its exemption from deduction or withholding of any United States federal income taxes. Anything contained in this Section 13 to the contrary notwithstanding, any Lender may at any time pledge all or any portion of its interest and rights under this Agreement (including all or any portion of its Note) to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the Federal Reserve Act. No such pledge or the enforcement thereof shall release the pledgor Lender from its obligations under this Agreement or any of the Other Documents. Section 13.8. No Assignment or Delegation by Borrower. Borrower shall not assign or delegate any of its rights or duties under this Agreement. SECTION 14. MISCELLANEOUS Section 14.1. Cross Collateral. The security interests, liens and other rights and interests in and relative to any collateral now or hereafter granted to the Administrative Agent, the Documentation Agent or the Lenders by Borrower by or in any instrument or agreement, including but not limited to this Agreement and the Other Documents, shall serve as security for any and all obligations of Borrower or any other Credit Party to the Administrative Agent, the Documentation Agent and the Lenders, and, for the repayment thereof, the Administrative Agent, the Documentation Agent or the Lenders may resort to any security held by them in such order and manner as they may elect. Section 14.2. Waivers. Section 14.2.1. In General. Borrower waives presentment, demand, notice, protest, notice of acceptance, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect both to the Obligations and the Collateral, Borrower assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of the Collateral, to the addition or release of any party or Person primarily or secondarily liable therefor, to the acceptance of partial payments thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Lenders may deem advisable in their sole and absolute discretion. The Administrative Agent, the Documentation Agent and the Lenders shall have no duty, other than to act in a commercially reasonable manner, as to the collection or protection of the Collateral or any income thereon, as to the preservation of rights or remedies against prior parties, or as to the preservation of any rights and remedies pertaining thereto. The Administrative Agent, the Documentation Agent and the Lenders may exercise their rights and remedies with respect to the Collateral without resorting or regard to other collateral or sources of reimbursement for liability. The Administrative Agent, the Documentation Agent and the Lenders shall not be deemed to have waived any of their rights and remedies with respect to the Obligations or the Collateral unless such waiver be in writing. No delay or omission on the part of the Administrative Agent, the Documentation Agent or the Lenders in exercising any right or remedy shall operate as a waiver of such right or remedy or any other right or remedy. A waiver on any one occasion shall not be construed as a bar to any subsequent enforcement by the Administrative Agent, the Documentation Agent or the Lenders. All rights and remedies of the Administrative Agent, the Documentation Agent or the Lenders with respect to the Obligations or the Collateral shall be cumulative and may be exercised singularly or concurrently. Section 14.2.2. PREJUDGMENT REMEDY. EACH CREDIT PARTY ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS AGREEMENT IS A PART IS A COMMERCIAL TRANSACTION AND HEREBY WAIVES ITS RIGHT TO NOTICE AND HEARING UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES OR BY OTHER APPLICABLE LAW WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH THE ADMINISTRATIVE AGENT, THE DOCUMENTATION AGENT OR THE LENDERS MAY DESIRE TO USE. Section 14.2.3. JURY TRIAL. EACH CREDIT PARTY HEREBY WAIVES TRIAL BY JURY IN ANY COURT IN ANY SUIT, ACTION OR PROCEEDING OR ANY MATTER ARISING IN CONNECTION WITH OR IN ANY WAY RELATED TO THE TRANSACTION OF WHICH THIS AGREEMENT IS A PART AND/OR IN THE ENFORCEMENT BY THE ADMINISTRATIVE AGENT, THE DOCUMENTATION AGENT OR THE LENDERS OF ANY OF THEIR RIGHTS AND REMEDIES HEREUNDER OR UNDER APPLICABLE LAW. EACH CREDIT PARTY ACKNOWLEDGES THAT IT MAKES THIS WAIVER KNOWINGLY, VOLUNTARILY AND ONLY AFTER CONSIDERATION OF THE RAMIFICATIONS OF THIS WAIVER WITH ITS ATTORNEY. Section 14.2.4. Lien and Setoff. Regardless of the adequacy of any collateral or other means of obtaining repayment of the Obligations, any deposits (general or special, time or demand, the provisional or final), balances or other sums credited by or due from the Administrative Agent, the Documentation Agent, the Lenders, or any Lender Affiliate to any Credit Party (other than payroll and payroll tax deposit accounts) may, at any time and from time to time after the occurrence of an Event of Default, without notice to any such Credit Party or compliance with any other condition precedent now or hereafter imposed by statute, rule of law, or otherwise (all of which are hereby expressly waived) be setoff, appropriated, and applied by the Administrative Agent, the Documentation Agent, the Lenders or any Lender Affiliate against any and all obligations of the Credit Parties to the Administrative Agent, the Documentation Agent, the Lenders or any Lender Affiliate in such manner as the Administrative Agent, the Documentation Agent, the Lenders or any Lender Affiliate in their sole and absolute discretion may determine, and each Credit Party hereby grants to the Administrative Agent, the Documentation Agent and the Lenders a continuing security interest in such deposits, balances or other sums for the payment and performance of all such obligations. The rights provided to the Administrative Agent, the Documentation Agent, the Lenders and any Lender Affiliate in this Section 14.2.4. shall be in addition to and shall not limit any common law right of setoff available to the Administrative Agent, the Documentation Agent, the Lenders or any Lender Affiliate. Section 14.2.5. Claims. Borrower does hereby (i) waive any claim in tort, contract or otherwise which Borrower may have against the Administrative Agent, the Documentation Agent, the Lenders, any Lender Affiliate or any Lender Agents which may arise out of the relationship between Borrower and the Administrative Agent, the Documentation Agent, the Lenders or any Lender Affiliate prior to the Closing Date; and (ii) absolutely and unconditionally release and discharge the Administrative Agent, the Documentation Agent, the Lenders and any Lender Affiliate or Lender Agents from any and all claims, causes of action, losses, damages or expenses which may arise out of any relationship between it and the Administrative Agent, the Documentation Agent, the Lenders or any Lender Affiliate which Borrower may have as of the Closing Date. Borrower acknowledges that it makes this waiver and release knowingly, voluntarily and only after considering the ramifications of this waiver and release with its attorney. Section 14.3. Notices. All notices, requests, demands or other communications required by this Agreement shall be made in writing, and unless otherwise specifically provided herein, shall be deemed to have been duly given when delivered by hand or mailed, first class mail postage prepaid, or, in the case of telecopy or facsimile notice, when transmitted, answer back received, addressed as follows, or to such other address as either party may designate in writing: If to the Administrative Agent: BankBoston, N.A. 100 Pearl Street Hartford, CT 06103 Attn: Roger J. Roche, Jr., Director Telephone: (860) 727-6567 Telecopier: (860) 727-6575 If to the Documentation Agent: General Electric Capital Corporation 335 Madison Avenue, 12th Floor New York, NY 10017 Attn: Daniel Gagliardo, AssociateAlarmguard Account Officer Telephone: (212) -370-8085 Telecopier: (212) -983-8766 If to any Lender, at the address set forth on the Administrative Questionnaire. If to Borrower: Alarmguard, Inc. 125 Frontage Road Orange, CT 06477 Attn: David Heidecorn, Chief Financial Officer Telephone: (203) 795-9000 Telecopier: (203) 7995-9636 Section 14.4. Retention of Documents. The Administrative Agent, the Documentation Agent and any Lender may, in accordance with the Administrative Agent's, the Documentation Agent's or such Lender's customary practices, destroy or otherwise dispose of all documents, schedules, invoices or other papers, delivered by any Credit Party to the Administrative Agent, the Documentation Agent or such Lender unless such Credit Party requests in writing the same be returned. Upon any such request and at such Credit Party's expense, the Administrative Agent, the Documentation Agent or such Lender shall return such papers when the Administrative Agent's, the Documentation Agent's or such Lender's actual or anticipated need for same has terminated. Section 14.5. Fees and Expenses; Indemnity. (a) Whether or not the transactions contemplated hereby shall be consummated, Borrower agrees to pay promptly all reasonable out-of-pocket (unless otherwise specifically permitted below) fees, costs and expenses incurred by the Administrative Agent, the Documentation Agent and the Lenders in connection with any matters contemplated by or arising out of this Agreement, the Notes or the Other Documents as set forth below the following, and all such fees, costs and expenses shall be part of the Obligations, payable on demand and secured by the Collateral: (a) reasonable out-of-pocket fees, costs and expenses (including reasonable attorneys' fees) incurred by the Administrative Agent in connection with the examination, review, due diligence investigation, documentation and closing of the transactions contemplated by this Agreement, the Notes and the Other Documents; (b) reasonable fees, costs and expenses of the Administrative Agent (including reasonable attorneys' fees, allocated costs of internal counsel and fees and expenses of accountants retained by the Administrative Agent) incurred in connection with the administration of this Agreement and the Other Documents and any amendments, modifications and waivers relating thereto; (c) reasonable out-of-pocket fees, costs and expenses (including reasonable attorneys' fees and allocated costs of internal counsel) incurred by the Administrative Agent within six (6) months after the Closing Date in connection with the syndication of the Loans; (d) reasonable out-of-pocket fees, costs and expenses incurred in creating, perfecting and maintaining perfection of Encumbrances in favor of the Administrative Agent on behalf of the Lenders, including lien search fees, filing and recording fees, taxes and expenses, title insurance policy fees, fees and expenses of attorneys for providing such opinions as the Administrative Agent may reasonably request and fees and expenses of attorneys to the Administrative Agent; (e) reasonable fees, costs and expenses (including attorneys' fees and allocated costs of internal counsel) incurred in connection with the review, documentation, negotiation, closing and administration of any subordination or intercreditor agreements; (f) reasonable out-of-pocket fees, costs and expenses incurred in connection with forwarding to Borrower the proceeds of Loans including the Administrative Agent's standard wire transfer fee; (g) reasonable out-of-pocket fees, costs, expense and bank charges, including bank charges for returned checks, incurred by the Administrative Agent in establishing, maintaining and handling lock box accounts, blocked accounts or other accounts for collection of the Collateral; and (h) reasonable out-of-pocket fees, costs and expenses of the Administrative Agent, the Documentation Agent and the Lenders (including attorneys' fees, allocated costs of internal counsel and fees of environmental consultants, industry consultants, accountants and other professionals retained by the Administrative Agent, the Documentation Agent or any Lender) incurred in collecting upon or enforcing rights against the Collateral after the occurrence and during the continuance of a Default or an Event of Default or incurred in any action to enforce this Agreement or the Other Documents or to collect any payments due from any Credit Party under this Agreement, the Notes or the Other Documents or incurred in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement, whether in the nature of a "workout" or in connection with any insolvency or bankruptcy proceedings or otherwise. (b) Each Credit Party shall, jointly and severally, indemnify and hold the Administrative Agent, the Documentation Agent, the Lenders, any Lender Affiliate and any Lender Agents harmless from and against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any suit, action, investigation, litigation or other proceeding (whether or not any such Person is a party thereto and whether or not any such suit, action, investigation, litigation or other proceeding is between or among any such Person, or any third Person or otherwise) related to the entering into and/or the performance of (a) this Agreement, the Notes or the Other Documents, the use of the proceeds of any Extension of Credit, the consummation of any other transaction contemplated hereby and thereby or the exercise of any rights or remedies under this Agreement, the Notes or the Other Documents, (b) the Transaction Documents, the Triton Merger or any other transaction contemplated thereby or (c) any Acquisition (but excluding any such losses, liabilities, claims, damages or expenses to the extent solely incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified as finally determined by a court of competent jurisdiction) and including, in any case, and without limitation, the reasonable fees and expenses of legal counsel and other professional advisors incurred in connection with any such action, suit, investigation, litigation or other proceeding. NO LENDER AGENT SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO THIS AGREEMENT, THE NOTES OR THE OTHER DOCUMENTS, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT, THE NOTES OR THE OTHER DOCUMENTS OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER. Section 14.6. Term of Agreement. This Agreement shall continue in force and effect so long as the Lenders have any commitment to extend credit or any of the Obligations shall be outstanding. Section 14.7. Stamp Tax. Borrower will pay any stamp, franchise or other recording tax which becomes payable in respect of this Agreement, the Notes or the Other Documents. Section 14.8. Schedules and Exhibits. The schedules and exhibits which are attached hereto are and shall constitute a part of this Agreement. Section 14.9. Governing Law; Consent to Jurisdiction. This Agreement, the Notes and the Other Documents, and the rights and obligations of the parties hereunder and thereunder, shall be governed by, and construed and interpreted in accordance with, the laws of the State of Connecticut. Borrower agrees that any suit for the enforcement of this Agreement, the Notes or the Other Documents may be brought in the courts of the State of Connecticut or any federal court sitting therein and consents to the non-exclusive jurisdiction of such court and to service of process in any such suit being made upon Borrower by mail at the address referred to in Section 14.312.3. hereof. Borrower hereby waives any objection that Borrower may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient court. Section 14.10. Survival of Representations. All representations, warranties, covenants and agreements contained in this Agreement, the Notes or the Other Documents shall survive the Closing Date and continue in full force and effect until the payment and the performance of the Obligations in full and the termination of the Commitments. Section 14.11. Amendments. No modification or amendment of this Agreement, the Notes or the Other Documents shall be effective unless the same shall be in writing and signed by Borrower and the Required Lenders (or, if required by Section 10.14.,10.13., all of the Lenders) and, if the modification or amendment relates to any duties, obligations or rights of the Administrative Agent or the Documentation Agent, the Administrative Agent and the Documentation Agent, as applicable. Section 14.12. Binding Effect of Agreement. This Agreement shall be binding upon and inure to the benefit of the Administrative Agent, the Documentation Agent, the Lenders, Borrower and their respective successors and assigns; provided, however, that Borrower may not assign or transfer its rights or obligations hereunder. Section 14.13. Interest Rate. If the rate of interest payable by Borrower under this Agreement, the Notes or the Other Documents shall be or become usurious or otherwise unlawful under laws applicable thereto, the interest rate shall be reduced to the maximum lawful rate and any amount paid by Borrower in excess of the maximum lawful rate shall be considered a payment in reduction of principal or, at the sole election of the Lenders, shall be returned to Borrower. Section 14.14. Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signatures hereto and thereto were upon one and the same instrument. Section 14.15. No Agency Relationship. Neither the Administrative Agent, the Documentation Agent nor any Lender is the agentAdministrative Agent, fiduciary or representative of Borrower nor is Borrower the agentAdministrative Agent, fiduciary or representative of the Administrative Agent, the Documentation Agent or any Lender and this Agreement shall not make the Administrative Agent, the Documentation Agent or any Lender liable to any third party, including but not limited to, Borrower's shareholders, directors, officers, creditors or any other person. Section 14.16. Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. Section 14.17. Headings. All article, section and subsection headings in this Agreement, the Notes and the Other Documents are included for convenience of reference only and shall not constitute a part of this Agreement, the Notes or the Other Documents for any other purpose. Section 14.18. Reinstatement. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any amount received by the Administrative Agent, the Documentation Agent or any Lender in respect of the Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent, the Documentation Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Credit Party or upon the appointment of any intervenor or conservator of, or trustee or similar official for, any Credit Party or any substantial part of its properties or assets, or otherwise, all as though such payments had not been made. Section 14.19. Interpretation and Construction. The following rules shall apply to the interpretation and construction of this Agreement, the Notes and the Other Documents unless the context requires otherwise: (a) the singular includes the plural and the plural includes the singular; (b) words importing any gender include the other gender; (c) references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute to which reference is made and all regulations promulgated pursuant to such statutes; (d) references to "writing" shall include printing, photocopy, typing, lithography and other means of reproducing words in a tangible, visible form; (e) the words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; (f) references to the introductory paragraph, preliminary statements, articles, sections (or subdivisions of sections), exhibits or schedules are to those of this Agreement unless otherwise indicated; (g) references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications to such instruments, but only to the extent that such amendments and other modifications are permitted or not prohibited by the terms of this Agreement; (h) references to Persons include their respective permitted successors and assigns; and (i) "or" is not exclusive. Section 14.20. GAAP and Accounting Changes. Unless otherwise specifically provided herein, any accounting term used in the Agreement shall have the meaning customarily given such term in accordance with GAAP, and all financial computations thereunder shall be computed in accordance with GAAP consistently applied. That certain items or computations are explicitly modified by the phrase "in accordance with GAAP" shall in no way be construed to limit the foregoing. If any "Accounting Changes" (as defined below) occur and such changes result in a change in the calculation of the financial covenants, standards or terms used in the Agreement or any of the Other Documents, then the Credit Parties, the Administrative Agent, the Documentation Agent and the Lenders agree to enter into negotiations in order to amend such provisions of the Agreement so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating any Credit Party's and its Subsidiaries' financial condition shall be the same after such Accounting Changes as if such Accounting Changes had not been made. "Accounting Changes" means (a) changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or opinion by the Financial Accounting Standards Board of the American Institute of Certified Public Accountants (or successor thereto or any agency with similar functions); (b) changes in accounting principals concurred in by any Credit Party's certified public accountants; (c) purchase accounting adjustments under A.P.B. 16 and/or 17 and EITF 88-16, and the application of the accounting principles set forth in FASB 109, including the establishment of reserves pursuant thereto and any subsequent reversal (in whole or in part) of such reserves; and (d) the reversal of any reserves established as a result of purchase accounting adjustments. All such adjustments resulting from expenditures made subsequent to the Original Closing Date (including capitalization of costs and expenses or payment of pre-Closing Date liabilities) shall be treated as expenses in the period the expenditures are made and deducted as part of the calculation of Consolidated EBITDA in such period. If the Credit Parties, the Administrative Agent, the Documentation Agent and the Lenders agree upon the required amendments, then after appropriate amendments have been executed and the underlying Accounting Change with respect thereto has been implemented, any reference to GAAP contained in this Agreement or in any of the Other Documents shall, only to the extent of such Accounting Change, refer to GAAP, consistently applied after giving effect to the implementation of such Accounting Change. If the Credit Parties, the Administrative Agent, the Documentation Agent and the Lenders cannot agree upon the required amendments within thirty (30) days following the date of implementation of any Accounting Change, then all Financial Statements delivered and all calculations of financial covenants and other standards and terms in accordance with this Agreement and the Other Documents shall be prepared, delivered and made without regard to the underlying Accounting Change. [SIGNATURE PAGE S-1 FOLLOWS NEXT] IN WITNESS WHEREOF, Borrower, the Guarantors, the Lenders, the Administrative Agent and the Documentation Agent have executed this Agreement as of the date first above written. THE BORROWER: ALARMGUARD, INC. By: ___________________________ Name: Title: THE GUARANTORS: SECURITY SYSTEMS HOLDINGS, INC. By: ___________________________ Name: Title: ALARMGUARD HOLDINGS, INC. By: ___________________________ Name: Title: PROTECTIVE ALARMS OF CANADA, INC. By: ____________________________ Name: Title: THE LENDERS: BANKBOSTON, N.A. (successor by merger to Bank of Boston Connecticut) By:___________________________ Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION By: __________________________ Name: Title: IBJ SCHRODER BANK & TRUST COMPANY By: __________________________ Name: Title: CIBC INC. By: __________________________ Name: Title: THE ADMINISTRATIVE AGENT: BANKBOSTON, N.A. (successor by merger to Bank of Boston Connecticut) By: ___________________________ Name: Title: THE DOCUMENTATION AGENT: GENERAL ELECTRIC CAPITAL CORPORATION By: ___________________________ Name: Title: EX-10 6 EXHIBIT 10.12 STAM1-618313-11 03/30/98 6:49 PM ASSET PURCHASE AND SALE AGREEMENT DATED AS OF MARCH 5, 1998, by and among SECURITY SYSTEMS, INC., JAMES W. LEES, EDWARD A. SILVEY and ALARMGUARD, INC. TABLE OF CONTENTS 1. Assets to be Sold and Purchase Price 6 1.1 Assets 6 1.2 Excluded Assets 8 1.3 Assumed Obligations 8 1.4 Excluded Obligations 9 1.5 Purchase Price 9 1.6 Asset Transfer 9 1.7 Allocation of Purchase Price 10 1.8 Payments 10 1.9 Closing Revenue Adjustment 10 1.10 Revenue Guarantee Adjustment 12 1.11 Accounts Receivable 12 1.12 Best Efforts. 13 1.13 Taxes 13 2. Assumption of Liabilities 13 3. Representations and Warranties of Seller and Stockholders 13 3.1 Incorporation, Powers and Qualification 13 3.2 Authority 14 3.3 No Conflict 14 3.4 Financial Information 14 3.5 Ownership of Property 15 3.6 Litigation; Liabilities 15 3.7 Compliance; Hazardous Substances 15 3.8 Customer Lists 16 3.9 Parties 16 3.10 No Broker 16 3.11 Material Statements 16 3.12 Tax Matters 16 3.13 Alarm Systems 17 3.14 Condition of Assets Upon Transfer 17 3.15 Contracts and Commitments 17 3.16 Intellectual Property 18 3.17 Employee Benefit Plans; Wages and Benefits of Seller Employees. 18 3.18 Labor and Employee Relations 19 3.19 Indebtedness 19 3.20 Books and Records 19 3.21 Powers of Attorney 19 3.22 Customer Claims Insurance 19 3.23 Non-Compete Agreements/Goodwill Rights 19 3.24 Limitations. 19 4. Representations and Warranties of Purchaser 20 4.1 Incorporation, Powers and Qualification 20 4.2 Authority 20 4.3 No Conflict 20 4.4 No Broker 20 4.5 Material Statements 20 5. Pre-Closing Covenants 21 5.1 Conduct of Business 21 5.2 Insurance 22 5.3 Employee Meetings 22 5.4 Access to Properties 23 5.5 Confidentiality; No Disclosure 23 6. Conditions Precedent to the Closing 23 6.1 Conditions Precedent to the Obligations of Purchaser 23 6.2 Representations and Warranties True as of Closing 23 6.3 Obligations, Covenants, Agreement and Conditions Performed 23 6.4 No Material Change 24 6.5 Delivery of Closing Documents 24 6.6 No Actions, etc. 24 6.7 Necessary Consents 24 7. Closing. 24 8. Post Closing 26 8.1 Warranties and Representations 26 8.2 Seller's Obligations 26 8.3 State Filings 26 8.4 Assumption of Obligations 26 8.5 Access to Information 26 8.6 Use of Trade Names 26 8.7 Mail and Communications 26 8.8 Telephone Numbers 27 8.9 Employee and Other Accounts 27 9. Indemnification 27 9.1 Indemnification by Seller and Stockholders 27 9.2 Indemnification by Purchaser 28 9.3 Limitation of Indemnity. 28 10. Miscellaneous 28 10.1 Notices 28 10.2 Expenses 30 10.3 Risk of Loss 30 10.4 Benefit and Burden 30 10.5 Governing Law 30 10.6 Assignment 30 10.7 Attorneys' Fees 31 10.8 Further Assurances 31 10.9 Severability 31 10.10 Jurisdiction; Waivers 31 10.11 Entire Agreement 31 10.12 Number and Gender 32 10.13 Headings for Convenience 32 10.14 Amendments 32 10.15 Execution of Counterparts 32 EXHIBITS AND SCHEDULES Exhibit A-1: The Tangible Assets Exhibit A-2: The Intangible Assets Exhibit A-3: Service Contracts Exhibit A-4: Leases of Real and Personal Property; Motor Vehicles Exhibit A-5: Telephone Numbers Exhibit A-6: Intentionally Omitted Exhibit A-7: Work in Process Exhibit B-1: Excluded Assets Exhibit B-2: Allocation of Aggregate Purchase Price Exhibit C: Escrow Agreement Exhibit D: Consulting Agreement Exhibit E: Form of Non-Compete Agreement Exhibit F: Form of Opinion of Seller's Counsel SCHEDULE 3.1: Ownership of Securities SCHEDULE 3.5: Title to Assets SCHEDULE 3.6: Pending Litigation or Proceedings Involving Seller SCHEDULE 3.8: Increases in Rates SCHEDULE 3.15: Contracts and Commitments SCHEDULE 3.16: Seller's Intellectual Property SCHEDULE 3.17(a): Seller's Employee Benefit Plans SCHEDULE 3.17(d): Seller's Employees SCHEDULE 3.18: Labor and Employee Relations SCHEDULE 3.19: Indebtedness SCHEDULE 3.22: Material Customer Claims SCHEDULE 3.23: Seller's Rights Under Noncompetition Obligations ASSET PURCHASE AND SALE AGREEMENT THIS ASSET PURCHASE AND SALE AGREEMENT (as amended and supplemented from time to time, this "Agreement") is made as of March 5, 1998, by and among SECURITY SYSTEMS, INC. d/b/a SENTRY PROTECTIVE SYSTEMS, a Massachusetts corporation with its principal place of business at 110 Florence Street, Malden, Massachusetts 02148 ("Seller"), JAMES W. LEES ("Lees") and EDWARD A. SILVEY ("Silvey"), each having an address in care of Seller (Lees and Silvey, collectively, the "Stockholders"), and ALARMGUARD, INC., a Delaware corporation with its principal place of business at 125 Frontage Road, Orange, CT 06477 ("Purchaser"). WITNESSETH: WHEREAS, Seller is engaged in the electronic security (burglar and fire alarm) business primarily in New England under the tradename "Sentry Protective Systems" and is also engaged in the uniformed personnel security (guard and patrol) business primarily in New England under the tradenames Security Systems, Inc. and S.S.I.; and WHEREAS, Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, certain of the assets used by Seller in the burglar and fire alarm business primarily in New England (the "Business"), which Business shall not include Seller's uniformed guard and patrol business; and NOW, THEREFORE, in consideration of the mutual agreements set forth herein, and for other good and valuable consideration received or to be received as stated herein, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Assets to be Sold and Purchase Price. 1.1 Assets. Subject to the terms and conditions of this Agreement and in reliance on the representations and warranties set forth herein, on the Closing Date (as hereinafter defined), Seller shall sell, assign and deliver to Purchaser, and Purchaser shall purchase from Seller, free and clear of all Liens (as hereinafter defined), all of the assets, properties and rights of every kind, nature and description, whether tangible or intangible, of the Business, excluding only the Excluded Assets (as hereinafter defined), all as the same shall exist on the Closing Date. Seller represents that all of Seller's tangible assets used in the Business are set forth on Exhibit A-1 attached hereto. Seller represents that all of Seller's intangible assets used in the Business are set forth on Exhibit A-2 attached hereto. Such assets, properties and rights used in the Business, excluding only the Excluded Assets, as the same shall exist on the Closing Date, are referred to herein as the "Assets", and shall include without limitation the following: (a) Seller's alarm system lease, monitoring, maintenance and other service contracts described in Exhibit A-3 attached hereto and made a part hereof; and (b) all of Seller's trademarks, service marks associated with the Business; and (c) the motor vehicle leases used or usable in connection with the Business, to the extent same can be assigned, and the motor vehicles described in Exhibit A-4 and made a part hereof; and (d) all of Seller's goodwill associated with the Business, including without limitation any non-compete agreements or goodwill rights held by Seller as the result of business acquisitions or from employment arrangements; and (e) the use of the name "Sentry Protective Systems" in the security and alarm industry at all times after the Closing Date; and (f) use of the telephone numbers listed in Exhibit A-5 and made a part hereof and the advertisements used in connection with the Business placed in the "Yellow Pages," "Yellow Book" or any similar local periodical, to the extent Seller can confer such right, including without limitation any contracts for telephone service; and (g) Seller's pending contracts for installation of alarm systems listed on Exhibit A-7 attached hereto and made a part hereof; and (h) all central station equipment that is owned or leased by Seller and utilized in connection with the Business; and (i) all inventories and supplies of the Business; and (j) all rights, claims and benefits of Seller under all contracts, leases, service agreements, supply orders, purchase orders, bids, quotations, understandings, commitments and other agreements (including dealer agreements), whether or not written, including without limitation all accounts receivable of Seller, in each case in connection with the Business; and (k) all of Seller's interest in and claims and rights with respect to all of the copyrights, copyright renewal rights, trademarks, service marks, logos and trade names (and, in each case, any applications therefor) related to the Business, including the name "Sentry Protective Systems" and the goodwill appurtenant thereto; and (l) all items of prepaid expense; and (m) all rights of Seller under or pursuant to all warranties, representations and guarantees made by suppliers or other parties affecting the Assets, or by providers of services furnished to Seller or affecting the Assets, in each case relating to the Business; and (n) all licenses, permits, or other authorizations for operating the Business held by Seller to the extent assignable; and (o) all books, records, files and papers, whether in hard copy or computer format, used in the Business, including without limitation manuals and data, customer lists, credit files, sales and advertising materials, promotional literature, market information, marketing information, information systems, computer programs and software, sales and purchase correspondence, lists of present supplies, and copies of all personnel and employment records for the Seller Employees (as hereinafter defined) used in or relating to the Assets or the Business (collectively the "Records"); and (p) the trade secrets of Seller related to the Business. 1.2 Excluded Assets. The following assets of Seller (collectively, the "Excluded Assets") are not included in the Assets: (a) cash and cash equivalents; (b) deposits with third parties (other than deposits in connection with Assumed Obligations); (c) any agreement pursuant to which a third party provides monitoring or maintenance services to customers of Seller; (d) contracts with customers which are not Customer Contracts (as defined below); (e) any leases of real or personal property other than leases of personal property listed on Exhibit A-4 hereto; (f) the assets (including any vehicles owned by Seller which Purchaser has determined not to purchase) listed on Exhibit B-1 hereto; (g) Seller's right to receive payments as the result of litigation with former customers to which Seller is not, as of the Closing Date, providing any services; (h) all interests of Seller in, and all obligations of Seller under, any Employee Benefit Plans (as hereinafter defined); (i) all assets of Seller used solely in its uniformed personnel security (guard and patrol) business, including its contracts, accounts receivable, goodwill, inventory and other assets including the corporate name Security Systems Inc. and its trade names "Security Systems" and "SSI"; (j) all interests of Seller in the Genesis software provided by ITI, provided, however, that Seller shall permit Purchaser to utilize such software for a period of up to one year from the Closing Date without charge or other fee, except that Purchaser shall reimburse Seller for all fees and other charges paid to ITI; (k) all interests of Seller in its radio systems, provided, however, that Seller shall permit Purchaser to utilize its radio system for a period of up to one year from the Closing Date without charge, except that Purchaser shall be liable for all costs of repairing or replacing equipment used by, or under the control of, Purchaser from and after the Closing Date; (l) the electrical generator of Seller located in Malden, Massachusetts; and (m) any interest in the Class C Contractors License held by Lees. 1.3 Assumed Obligations. At the Closing, Purchaser shall assume and, subject to all rights of offset, defenses, causes of action, counterclaims and claims of any nature against third persons that may be available to Seller in respect of the Assumed Obligations, agree to satisfy and discharge, as the same shall become due, all of the liabilities and obligations of Seller (the "Assumed Obligations") under the contracts, agreements, commitments and leases of Seller, including but not limited to the service and monitoring agreements between Seller and its burglar and fire alarm customers, which are specifically identified in Exhibit A-3, Exhibit A-4 and/or Exhibit A-2, and are assigned to Purchaser at Closing, if and to the extent assignable, but only to the extent any such liabilities and obligations arise and accrue or are to be performed after the Closing. 1.4 Excluded Obligations. Purchaser shall not assume or be responsible for any liabilities, obligations, debts or commitments of Seller other than the Assumed Obligations. Without limiting the generality of the immediately preceding sentence, Purchaser shall not have any obligation to any party to this Agreement to hire any employee of Seller other than Lees as a consultant or to pay any employment related expense of Seller. 1.5 Purchase Price. The total purchase price to be paid by Purchaser to Seller for the Assets (the "Purchase Price") shall be an amount equal to (i) 48 times Seller's Net Monthly Recurring Revenue (as hereinafter defined) as of the Closing Date (ii) plus 12 times Seller's Wholesale NMRR (as hereinafter defined) as of the Closing Date, (iii) plus 40 times Seller's Net Monthly Recurring Revenue to be derived from the customers constituting high volume Work in Process as set forth on Exhibit A-7(a) that is installed within 60 days of the Closing Date, (iv) plus 40 times Seller's Net Monthly Recurring Revenue to be derived from customers constituting custom Work in Process as set forth on Exhibit A-7(b) installed by Purchaser or its agents or representatives, and (v) less the amount of Seller's Deferred Service Revenue (as hereinafter defined) as of the Closing Date, plus the fair market value of Seller's inventory on the Closing Date (valued at 100% of the cost of new and usable inventory and 50% of the cost of used and usable inventory), plus the amount of Seller's accounts receivable as of the Closing Date as agreed on prior to the Closing, minus a bad debt reserve for Seller's uncollectible accounts receivable as of the Closing Date in an amount agreed on prior to the Closing and minus all deposits held by Seller for any work or services not yet completed other than deposits for Work in Process (the aggregate of all additions to, or deductions from, the Revenue Purchase Price set forth in (v) shall be referred to herein as the "Working Capital Purchase Price"). The sum of (i) and (ii) above is referred to herein as the "Revenue Purchase Price". For purposes of this Agreement, "Deferred Service Revenue" means amounts billed on or prior to the Closing Date for prepaid services to be rendered on or after the Closing Date. All costs of installation of Work in Process set forth on Exhibit A-7(a) shall be borne solely by Seller. As used herein, the term net gross margin of Purchaser shall mean (i) the aggregate installation gross revenue actually billed and received by the Purchaser less the applicable direct installation labor cost calculated at the agreed-upon rate of $24.00 per hour, less direct equipment costs, less the cost of any direct sales commissions, in each case paid by Purchaser (ii) divided by the aggregate gross revenue billed and received by Purchaser. Notwithstanding any other provision herein, the net gross margin for all installations referred to in Exhibit A-7(b) shall not be less than 20% and to the extent a net gross margin is less than 20%, Seller will pay Purchaser on the Adjustment Date the shortfall, if any, necessary to make the net gross margin on all such installations not less than 20%. The Purchase Price determined under this Section 1.5 shall be subject to adjustment as provided in Sections 1.9, 1.10 and 1.11, but, not withstanding any other provision of this Agreement, the Purchase Price shall not be reduced to an amount less than $11,000,000. 1.6 Asset Transfer. At the Closing, upon Purchaser's making of the payment required to be made at the Closing pursuant to Section 1.8, Seller shall deliver to Purchaser possession of the Assets and shall further deliver to Purchaser proper assignments, conveyances and warranty bills of sale sufficient to convey to Purchaser good and marketable title to the Assets, free and clear of all liens, mortgages, leases, pledges, conditional sales agreements, security interests, options, charges, claims, restrictions and encumbrances of any kind ("Liens"), subject only to the Assumed Liabilities, as well as such other instruments of conveyance as may be necessary or appropriate to effect or evidence the transfers contemplated hereby. 1.7 Allocation of Purchase Price. The Purchase Price determined under Section 1.5 shall be allocated as set forth on Exhibit B-2 hereto. 1.8 Payments. (a) Purchaser has previously paid $250,000 to Seller as a deposit on the Purchase Price and Purchaser is paying Seller an additional $600,000 as additional deposit on the date hereof. If the Closing fails to occur as a result of Seller or Stockholder having failed to satisfy a condition set forth in Section 6 hereof, Seller shall promptly return the full amount of the deposit to Purchaser. (b) Purchaser shall make the following payments to Seller (subject to adjustment as provided herein) at the Closing or on the Adjustment Date, as applicable, on account of the Purchase Price determined in accordance with Section 1.5 using the amounts of Net Monthly Recurring Revenue, Wholesale NMRR and Deferred Service Revenue certified by Seller on the Closing Date, provided that solely for purposes of calculating amounts payable on the Closing Date, the amounts of Net Monthly Recurring Revenue and Wholesale NMRR to be certified by Seller on the Closing Date shall be reduced by (i) 50% of the Net Monthly Recurring Revenue and Wholesale NMRR relating to customers whose oldest invoice relating to recurring revenue is outstanding more than 90 days but less than 121 days, and (ii) 100% of the Net Monthly Recurring Revenue and Wholesale NMRR relating to customers whose oldest invoice relating to recurring revenue is outstanding for more than 120 days. The Purchase Price shall be adjusted as set forth in this Agreement. (c) On the Closing Date, Purchaser shall pay to Seller by wire transfer (x) 90% of the Revenue Purchase Price, plus or minus (y) 100% of the Working Capital Purchase Price, minus (z) all amounts previously paid to Seller as a deposit. (d) On the Closing Date, Purchaser shall pay the balance of the Purchase Price, as adjusted herein to the Escrow Agent specified in the Escrow Agreement attached hereto as Exhibit C. On the Adjustment Date, the Seller shall be paid the balance of the Purchase Price and the Escrow Agent shall pay the Seller and the Purchaser, pursuant to the terms of the Escrow Agreement, the amount then held in escrow. If the Purchase Price, as adjusted, is less than the payment made to Seller pursuant to Section 1.8(c), Seller shall pay to Purchaser, on the Adjustment Date, by certified or cashier's check or by wire transfer, the amount of such excess. 1.9 Closing Revenue Adjustment. (a) The Purchase Price determined under Section 1.5 shall be adjusted upward or downward, as the case may be, on the date that is nine months after the Closing Date (the "Adjustment Date"), by (i) $48 for each dollar that Net Monthly Recurring Revenue from active customers of Seller on the Closing Date was greater than or less than the amount of Net Monthly Recurring Revenue certified by Seller on the Closing Date, and (ii) $12 for each dollar that Wholesale NMRR from active customers of Seller on the Closing Date was greater than or less than the amount of Wholesale NMRR certified by Seller on the Closing Date. Between the Closing Date and the Adjustment Date, Purchaser shall determine the Net Monthly Recurring Revenue and the Wholesale NMRR from active customers on the Closing Date. A customer shall be considered to be an "active customer" on the Closing Date if (i) any invoice issued to it by Seller is less than 90 days overdue and Seller has not received a notice of cancellation, or (ii) on or before the Adjustment Date, the customer has paid any invoice for recurring revenue issued by Purchaser after the Closing Date, or (iii) the customer was not a party to a Customer Contract (as hereinafter defined) on the Closing Date but has signed a customer contract with Purchaser before the Adjustment Date and the customer has paid any recurring revenue invoice issued by Purchaser after the Closing Date by the Adjustment Date or (iv) the Customer is at a location for which the Seller previously provided service and the Customer reactivates such service and has paid any recurring revenue invoices issued by the Purchaser after the Closing Date by the Adjustment Date. A customer shall only be considered other than an active customer on the Closing Date if (i), on or before the Adjustment Date, the Purchaser, as a result of non-payment, has canceled service in writing or has given written notice of cancellation, or (ii), on the Closing Date, Seller is not providing services for recurring revenue, unless reactivated pursuant to clause (iv) above. (b) The Purchase Price shall also be adjusted upward or downward on the Adjustment Date by $1 for each $1 that Deferred Service Revenue on the Closing Date was greater than or less than the amount of Deferred Service Revenue certified by Seller on the Closing Date. Purchaser shall have the right to verify Seller's calculation of Deferred Service Revenue after the Closing Date. (c) For purposes of this Agreement, "Net Monthly Recurring Revenue" means, as of a given date, the total recurring regular monthly amounts billed to Seller's commercial or residential customers who have a direct account with Seller (which customers shall not include any person or entity that resells any of Seller's services) with installed systems (billings made other than on a monthly basis shall be adjusted to the equivalent monthly amount) under Customer Contracts for electrical protection, monitoring, closed circuit television, access control services, guard response services, fire and police panel charges and equipment lease rental and charges and fire testing, less all monthly charges incurred by Purchaser after the Closing Date (charges billed to Purchaser other than on a monthly basis shall be adjusted to the equivalent monthly amount) for direct wire telephone lines used to transmit alarm signals, antenna rental charges for radio frequency alarm systems, answering services, sales taxes, false alarm charges not rebillable to customers, guard response costs, city franchise and police panel fees and charges paid by Purchaser for receiving alarms applicable to such accounts, if any (collectively, "Charges"). For purposes of this Agreement, "Wholesale NMRR" means, as of a given date, the total recurring regular monthly amount billed to Seller's wholesale accounts pursuant to which Seller provided monitoring services to entities reselling Seller's services, less Charges. For purposes of this Section 1.9, Charges shall be determined (A) under contracts in existence at the Closing Date and (B) from invoices to pay Charges received by Purchaser or Seller, as the case may be, prior to the Adjustment Date for the monthly period (or greater period including the monthly period) in which the Closing Date occurs. (d) For purposes of this Agreement, "Customer Contracts" means valid contracts calling for recurring payments for alarm system leasing, monitoring or maintenance or other services, at least 90% of which are in writing and are duly executed by all purported parties thereto (which, for residential customers shall mean that at least one of the owners or lessees of the residence has signed), have an original term of at least one year, and contain provisions that state that unless either party shall give the other written notice of intent to terminate, the agreement shall renew for an additional term of one year, and which further do not contain terms to the effect that same will terminate, give rise to a right to terminate or otherwise be at all affected by the sale of assets contemplated by this Agreement, and contain clauses limiting the liability of the alarm company or companies which installed and/or monitor said alarm systems or equipment which are customary in the industry and which are valid and enforceable in the jurisdiction whose law governs said contracts. (e) Notwithstanding any of the foregoing provisions, the Purchase Price shall not be reduced to an amount less than $11,000,000. 1.10 Revenue Guarantee Adjustment. The Purchase Price determined under Section 1.5 shall be further reduced by 48 times the amount by which Net Monthly Recurring Revenue and by 12 times the amount by which Wholesale NMRR as of the date that is six months after the Closing Date (the "Calculation Date") from active customers on the Closing Date is less than 94% of the Net Monthly Recurring Revenue and Wholesale NMRR, respectively, from active customers on the Closing Date, as finally determined under Section 1.9. A Customer shall be considered an active customer on the Calculation Date if (i) it was an active customer on the Closing Date as provided in Section 1.9(a), (ii) any invoice for recurring revenue is less than ninety days past due, (iii) it continues to be provided services by Purchaser for which monthly or recurring revenue is billable, and (iv) Purchaser has not been given notice of cancellation by the customer. Notwithstanding the foregoing, a customer whose invoice for recurring revenue is over ninety days past due shall only be considered other than an active customer on the Calculation Date if, on or before the Adjustment Date, the Purchaser as a result of non-payment, has canceled service in writing or has been given notice of cancellation. There shall be excluded from such reduction any account which is canceled due to (i) a notice from Purchaser of an increase, or due to an actual increase, in rates by Purchaser, or (ii) Purchaser failing to provide monitoring or other services consistent with Seller's past practices and staffing levels for any period of time, or (iii) a customer entering into an equivalent contract with an affiliate (as hereinafter defined) of Purchaser. There shall also be excluded from such reduction any customer who ceases being an active customer of Purchaser but again becomes an active customer of Purchaser or its affiliate prior to the Adjustment Date (net of any costs or expenses of the Purchaser or its affiliate entering into new contracts). Seller shall make a payment in the amount of such adjustment, if any, on the Adjustment Date in accordance with Section 1.8. As used herein, an "affiliate" shall be defined as an entity controlling, controlled by or under common control with another entity. Purchaser shall provide Seller and Lees with reasonable notice of each account for which Purchaser receives notice of intent to cancel prior to the time Purchaser terminates service to that account, and shall further cooperate with Lees in the timely making of reasonable attempts to save any such accounts. 1.11 Accounts Receivable. Unless otherwise specified by the Customer in writing, payments received from customers of Seller by Purchaser after the Closing Date shall be applied to the oldest invoice outstanding. Purchaser shall have the right to verify the amounts of the accounts receivable of Seller as of the Closing Date after the Closing Date. Each of Seller and Purchaser shall have the right to verify amounts received by Purchaser or Seller, respectively, for payment of Seller's accounts receivable by audits conducted by Seller's or Purchaser's respective accountants conducted at reasonable intervals. Prior to the Adjustment Date, Purchaser shall provide to Seller an accounting every week after the Closing as to the accounts receivable received by Purchaser. On the Adjustment Date, the Purchase Price shall be reduced to the extent of the face value of any of the accounts receivable purchased by Purchaser from Seller at Closing which are not collected by Purchaser prior to the Adjustment Date, less the bad debt reserve referred to in Section 1.5, and shall further cooperate with Lees in the timely making of reasonable attempts to save any such account. 1.12 Best Efforts. Purchaser shall use its best efforts to provide monitoring and repair services to Seller's former customers and collect its accounts receivable in accordance with ordinary and customary practices in the alarm industry. 1.13 Taxes. Purchaser shall pay all sales, use, transfer, conveyance, registration, stamp and VAT or other similar taxes or duties (collectively "Transfer Taxes") arising out of or incurred in connection with the transfer of the Assets pursuant to this Agreement. 2. Assumption of Liabilities. Purchaser shall assume no liabilities or obligations of Seller other than (x) the Assumed Obligations; and (y) the liabilities and obligations arising out of the operation of the Assets after the Closing Date ((x) and (y) collectively, the "Assumed Liabilities"). On and after the Closing Date, (a) Seller shall have no obligations or liabilities with regard to Assumed Liabilities; (b) Seller shall discharge, when and as they become due and payable, all liabilities and obligations of Seller and/or the Business other than the Assumed Liabilities; and (c) Purchaser shall have no obligations or liabilities with regard to any obligations or liabilities of Seller or the Business, whenever incurred or arising, other than the Assumed Liabilities. 3. Representations and Warranties of Seller and Stockholders. Subject to the limitations set forth in Sections 1.5, 1.9(e) and 9.1(a) hereof, in order to induce Purchaser to enter into this Agreement and to consummate the transactions contemplated hereby, Seller and each of the Stockholders, jointly and severally, hereby represent and warrant the following to Purchaser: 3.1 Incorporation, Powers and Qualification. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of Massachusetts and is qualified to do business as a foreign corporation in those states in which Seller is required to be so qualified. Seller has all requisite corporate power to execute, deliver and perform this Agreement and to own the Assets and to carry on its businesses as now being conducted and to own, lease or operate the properties and assets (including without limitation the Assets) it now owns, leases or operates and holds all permits, licenses, orders and approvals of all federal, state and local governmental or regulatory bodies necessary or required therefor. Seller has no subsidiaries. The ownership of all of the issued and outstanding securities of Seller is as set forth on Schedule 3.1 hereto. Seller's principal business is not the sale of merchandise from stock. 3.2 Authority. The execution and delivery of this Agreement and each of the other documents contemplated hereby by Seller and the performance by Seller of its obligations hereunder and thereunder have been approved by all necessary corporate action, and no other proceedings on the part of Seller or its shareholders will be necessary to effect or approve the transactions contemplated by this Agreement or any other document contemplated hereby. Except with regard to the vehicle leases described in Exhibit A-4, and the use of the telephone numbers, facsimile number and advertising referred to in Section 1.1(f), no filing, notice or recordation with, or consent or approval from any governmental agency or any third party is required (a) in order to permit Seller to enter, or as a result of Seller entering, into this Agreement or (b) in order for Seller to consummate, or as a result of Seller's consummation or performance of, this Agreement or any transaction contemplated hereby. This Agreement has been executed and delivered by Seller. This Agreement and each of the other documents to be delivered pursuant hereto are and will be the legal, valid and binding obligations of Seller, enforceable against Seller in accordance with their respective terms. 3.3 No Conflict. Neither Seller's execution or delivery of this Agreement, nor Seller's consummation of the transactions contemplated hereby, nor Seller's fulfillment of the terms hereof, nor Seller's compliance with the terms and provisions hereof, will conflict with, result in a breach of the terms, conditions or provisions of, constitute a default under or create any liability under (a) Seller's certificate of incorporation or by-laws, (b) any agreement or instrument to which Seller is a party or by which it or any of its properties is bound or which would in any way have an adverse effect on the Assets or Purchaser's enjoyment of any of the Assets or (c) any law, regulation or ordinance, injunction, decree, order or judgment applicable to or binding upon Seller. 3.4 Financial Information. (a) To the best of Seller's or Stockholders' knowledge, Seller has no liabilities or obligations of any nature (contingent or otherwise) except those shown in the Financial Statements (as defined below). Seller has delivered to Purchaser (i) financial statements for Seller showing Seller's balance sheets as of, and the results of operations and statements of changes in equity and cash flows for the years ended, December 31, 1994,1995, and 1996, each audited by Robert Ercolini & Company, Boston, Massachusetts and (ii) additional unaudited financial statements showing Seller's balance sheet as of, and the results of operations and cash flows for the nine months ended, September 30, 1997 (collectively, the "Financial Statements"). The Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied and do not omit any information necessary to make the information contained therein not misleading. Seller has no undisclosed liabilities, fixed or contingent, matured or unmatured, which individually or in the aggregate have or would have a material adverse effect on the Business of Seller. (b) To the best of Seller's or Stockholders' knowledge, since the date of the latest Financial Statement, there has been no material adverse change in the condition, financial or otherwise, of Seller, or its assets, liabilities or business prospects or any transaction outside the ordinary course of business, any termination or waiver of rights material to the conduct of Seller's business, any unpaid commitment to spend in excess of $50,000 for capital improvements, any material increase in employee wages or consulting fees, if any, or any change in accounting methods. (c) To the best of Seller's or Stockholders' knowledge, all of the Records and information in Seller's possession which have been or will be revealed to Purchaser for Purchaser's due diligence purposes and for purposes of determining any adjustments to the Aggregate Purchase Price or otherwise pursuant to this Agreement are true, correct and complete in all material respects. (d) The amounts of Net Monthly Recurring Revenue, Wholesale NMRR and Deferred Service Revenue as of the Closing Date certified by Seller pursuant to Section 1.9(a) are true and correct in all material respects. 3.5 Ownership of Property. Except as set forth on Schedule 3.5 and attached hereto and made a part hereof, Seller has, in all material respects, good and marketable title to the Assets free and clear of all Liens of any nature whatsoever. All of the property used in the conduct of the Business is owned by Seller as an Asset. Except as set forth on Schedule 3.5, the Seller does not own or use any Internet domain name. At the Closing, Seller shall deliver to the Purchaser good and marketable title to the Assets free and clear of all Liens of any nature whatsoever. The Business has been conducted under the names set forth on Schedule 3.5 and at the locations set forth on Schedule 3.5 for the lesser of five years or since its dates of incorporation. Except as set forth in Schedule 3.5, Seller has not acquired the assets of another business during the last five years. Seller does not own any real property. 3.6 Litigation; Liabilities. (a) Except as set forth on Schedule 3.6 attached hereto and made a part hereof, Seller is not a party to or threatened with, nor is there any event which may give rise to, any litigation or governmental or other proceeding relating to or in connection with the Business in which any person or entity incurred any Damages (as hereinafter defined) prior to the Closing Date. (b) The amounts to be paid to Seller on the Closing Date and thereafter under this Agreement are sufficient to satisfy in full all of Seller's obligations to third parties, whether currently liquidated or not. (c) Seller is not in default of any agreement, nor will the consummation of the transactions contemplated by this Agreement result in such a default, the continued existence of which is material to the continued operation of Seller's business (including without limitation the Business). 3.7 Compliance; Hazardous Substances. (a) Seller is operating and has operated the Business in compliance with all federal, state and local laws (including alarm company licensing or permit laws), ordinances, regulations and orders. Without limiting the generality of the immediately preceding sentence, Seller is in compliance with all employment and employee benefit laws. (a) Seller has not, nor has any third party, engaged in the generation, use, manufacture, treatment, transportation, storage or disposal of any Hazardous Substance (as defined below) on or from any site owned or occupied (now or previously) by Seller. Neither Seller nor any third party has received, nor is Seller aware of any basis for, any notice of violation of any Applicable Environmental Law (as defined below) with respect to any site owned or operated, now or previously, by Seller. (b) "Hazardous Substance" means any substance, chemical or waste that is listed as hazardous, toxic or dangerous under any Applicable Environmental Law, and any petroleum products. (c) "Applicable Environmental Law" means any federal, state or local law, regulation or ordinance which prohibits, regulates or limits the use of hazardous, toxic or dangerous materials or pollution of air or water or the destruction of natural resources. 3.8 Customer Lists. Attached hereto as Exhibit A-3 is, to the best of Seller's knowledge, a true and correct list of all Seller's customers as of the date of this Agreement, representing no less than $500,000 of Net Monthly Recurring Revenue, that are parties to Customer Contracts. The list shows as to each customer: name, billing address, recurring rate and billing cycle. Except as set forth on Schedule 3.8, there has not been any general increase in rates charged to customers by Seller since January 1, 1997. 3.9 Parties. Except as set forth in Section 3.10, no person other than Seller has any right to obtain any payment with respect to the sale of Seller's Assets as contemplated herein. 3.10 No Broker. Except for the fee payable to Deerfield Partners LLC, as to which Seller is solely liable, Seller represents that it has not dealt with any broker in connection with the transactions contemplated by this Agreement. 3.11 Material Statements. No representation or warranty contained in this Agreement, or any document delivered to Purchaser by Seller pursuant hereto or in connection herewith, contains or will contain an untrue statement of material fact or omits to state any material fact necessary to make any statement of fact contained herein or therein not misleading, where a true statement or accurate disclosure would have a material adverse effect on the investment decision of the Purchaser to acquire the Business. 3.12 Tax Matters. All federal, state, local and foreign tax returns and tax reports required to be filed at any time with respect to the business (including without limitation the Business) and/or assets (including without limitation the Assets) of Seller have been filed, all of the foregoing are true, correct and complete, and all amounts shown as owing thereon have been paid. Seller has delivered to Purchaser true and correct copies of Seller's federal, state and local tax returns for the last two years. 3.13 Alarm Systems. To the best of Seller's or Stockholders' knowledge, each of the alarm systems of Seller's customers designed, installed, partially installed, or contracted for installation by Seller prior to the Closing Date, and each supervisory alarm panel owned or operated by Seller as of the Closing Date, has been, and will, as of the Closing Date (where applicable), be in good working order and condition, ordinary wear and tear, subscriber negligence and subscriber non-use excepted, and (where applicable) will have been designed, installed and maintained, and will be operating and operated in accordance with good and workmanlike practices which are or were customary in the industry in the locality where the installation is located at the time of design, installation or maintenance. With respect to those alarm systems and panels where the applicable contract calls for it, each such alarm system will be designed, installed, partially installed or contracted for installation by Seller substantially in accordance with the specifications or standards of Underwriters Laboratories, local authorities and applicable telephone operating company requirements. All alarm systems designed, installed or partially installed by Seller prior to the Closing Date will conform in all material respects to the contracts pursuant to which they were designed or installed, and no design, installation or partial installation will have been made by Seller which was in violation of any applicable law, code or regulation when designed or installed. Seller has not installed any alarm system or panel where the applicable contract calls for specifications or standards of the Insurance Services Office or Factory Mutual Insurance Company. 3.14 Condition of Assets Upon Transfer. To the best of Seller's or Stockholders' knowledge, all of the Assets, including without limitation tangible personal property, and improvements, fixtures and appurtenances on or to any real property leased by Seller and included in the Assets, are in good operating condition, order and repair, ordinary wear and tear and customer abuse and/or neglect excepted, are suitable for the purposes for which they are presently being used, and perform in all material respects in accordance with the purposes for which they were designed to be used. All the Assets have been operated and maintained in conformity in all material respects with all applicable laws, ordinances, regulations, warranties, orders and other legal and safety requirements relating thereto. To the best of Seller's or Stockholders' knowledge, the Assets have no material defects, or needed material repairs, and are usable in the ordinary course of the Business. 3.15 Contracts and Commitments. To the best of Seller's or Stockholders' knowledge, each Assumed Obligation is valid and in effect and no other party thereto is in default. To the best of Seller's or Stockholders' knowledge, Seller is not in default under any such Assumed Obligation, has received no notice of default thereunder, and no event has occurred or is expected to occur which (after notice and lapse of time or both) would become a breach or default under, or otherwise permit modification, cancellation, acceleration or termination of, any such Assumed Obligation. Seller has delivered to Purchaser a true, complete and correct copy of each written Assumed Obligation to which Seller is a party and any amendments thereto and an accurate description of every oral Assumed Obligation to which Seller is a party. Attached hereto as Schedule 3.15 is a true and complete copy of each form of customer contract used by Seller at any time during the past ten years. 3.16 Intellectual Property. "Intellectual Property" includes trademarks (whether or not registered), trade names, service marks (whether or not registered), copyrights (whether or not registered), trademark and service mark registrations (and pending applications therefor), computer software (owned by Seller, or authored or developed for Seller by any of its employees or agents), licenses, sublicenses, and franchise agreements of Seller, and all formulae, processes, techniques, confidential business information, designs, trade secrets, and other proprietary information and technology used in the Business. Schedule 3.16 sets forth a complete list of all such Intellectual Property. Except as disclosed in Schedule 3.16, Seller has not granted any outstanding licenses or other rights to Intellectual Property, and Seller is not liable, nor has Seller made any contract or arrangement whereby Seller may become liable, to any person or entity for any royalty or other compensation for the use of any Intellectual Property. Except as disclosed in Schedule 3.16, none of the rights of Seller in, to or under any Intellectual Property will be adversely affected by the consummation of the transactions contemplated hereby. Use of the Intellectual Property in the Business in the manner conducted by Seller prior to the Closing will not infringe any patent or copyright of any third party, or constitute a misappropriation of the trade secrets or other proprietary rights of any third party. 3.17 Employee Benefit Plans; Wages and Benefits of Seller Employees. (a) All of the employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), multi-employer plans (as defined in Section 4001(a)(3) of ERISA), and compensation programs and employment arrangements which are maintained, or contributed to, by Seller for the employees of the Business are listed in Schedule 3.17(a) (collectively, "Employee Benefit Plans"). All obligations of Seller to contribute to Employee Benefit Plans on behalf of employees for all calendar years prior to 1997 have been satisfied, and all obligations of Seller to contribute to Employee Benefit Plans on behalf of such employees for the period ending on the Closing Date will be satisfied by Seller. (b) Except as listed in Schedule 3.17(a), Seller neither maintains nor sponsors, and is not required to make contributions to, any written or oral pension, profit sharing, thrift, deferred compensation, bonus, incentive, stock purchase, severance, hospitalization, insurance or other similar plan, agreement, or arrangement relating to employee benefits for any employee or to former employees of Seller who were employed in connection with the Business. (c) The Employee Benefit Plans conform to and have been administered in material compliance with their terms and applicable laws and regulations (including without limitation ERISA), and no condition exists with respect to any Employee Benefit Plan that could have a material adverse effect on the Assets or Purchaser. (d) Schedule 3.17(d) sets forth, for each Seller Employee, his or her title, his or her current wages and benefits (including current vacation time per year), his or her years of service, and all other terms and conditions of his or her employment. 3.18 Labor and Employee Relations. Seller is not a party to any collective bargaining agreement nor are its employees members of a collective bargaining unit or union, nor, to the best of Seller's knowledge, has there been any recent unionization activity, and Seller has complied with all laws relating to the employment of labor, including provisions relating to wages, hours, collective bargaining, health and safety, and the payment of social security, withholding and similar taxes, and is not liable for any arrears of wages or any taxes or penalties for failure to comply with such laws, where, in any such case, the violation of which or liability for which would have a material adverse effect on the Assets. Except as described in Schedule 3.18, no employee of the Business has given any notice or made any threat, or otherwise revealed an intent, to cancel or otherwise terminate his or her relationship with Seller and all employees of the Business are terminable at will by Seller, and all employees of the Business will be free of all employment obligations to Seller and will be free to become at will employees of Purchaser. 3.19 Indebtedness. Except as set forth in Schedule 3.19, Seller does not have (a) any obligations, whether or not secured by any or all of the Assets, for money borrowed or under any guarantee, (b) any agreements or arrangements to borrow money or to enter into any such guarantee, or (c) any agreements or commitments to enter into any of the foregoing agreements or guarantees. 3.20 Books and Records. The Records, including without limitation the books of account and other financial corporate records, relating to the Business that are not Excluded Assets are complete and correct and are maintained in accordance with good business practices or generally accepted accounting principles, consistently applied, as applicable. 3.21 Powers of Attorney. No person has any power of attorney to act on behalf of Seller in connection with any of the Assets or the Business other than such powers to so act as normally pertain to the officers of a corporation. 3.22 Customer Claims Insurance. Seller maintains in effect insurance covering its assets and business (including without limitation the Assets and the Business) and any liabilities relating thereto in amounts customarily carried by persons or organizations conducting similar businesses. Except as set forth on Schedule 3.6 or Schedule 3.22, there have been no material customer claims against Seller relating to or in connection with the Business during the past six years, no such claim is currently pending, and there is no basis for any such claim. 3.23 Non-Compete Agreements/Goodwill Rights. Except as set forth on Schedule 3.23, Seller has not entered into or become bound by any non-compete agreements or acquired any goodwill rights as the result of business acquisitions or employment agreements. 3.24 Limitations. Notwithstanding any of the foregoing provisions, no warranty or representation of the Seller or the Stockholders set forth herein shall be construed to have been written, agreed to or paid for for the benefit of any third party whatsoever, nor should any such warranty or representation be construed as a waiver, abrogation or release of any limitation of liability contained in any alarm monitoring, maintenance, repair, service or installation contract entered into between Seller and any customer of Seller prior to the Closing. 4. Representations and Warranties of Purchaser. Purchaser hereby represents and warrants the following to Seller: 4.1 Incorporation, Powers and Qualification. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware, and Purchaser is qualified to do business in the states of Rhode Island, Massachusetts and Connecticut. Purchaser has all requisite corporate power to carry on its business as it is now conducted and to own, lease or operate the properties and assets it now owns, leases or operates. 4.2 Authority. The execution and delivery of this Agreement by Purchaser and the performance by Purchaser of its obligations hereunder have been approved by all necessary corporate action, and no other proceedings on the part of Purchaser or Purchaser's stockholders will be necessary to effect or approve the transactions contemplated by this Agreement. No filing, notice or recordation with, or consent or approval from any governmental agency or any third party is required (a) in order to permit Purchaser to enter, or as a result of Purchaser entering, into this Agreement or (b) in order for Purchaser to consummate, or as a result of Purchaser's consummation or performance of, this Agreement or any transaction contemplated hereby. This Agreement has been executed and delivered by Purchaser. This Agreement and each of the other documents to be executed and delivered by Purchaser pursuant hereto are and will be the legal, valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their respective terms subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally from time to time in effect, and subject to any general principles of equity, including without limitation equitable principles limiting the right to obtain specific performance of Purchaser hereunder or thereunder. 4.3 No Conflict. Neither the execution nor the delivery of this Agreement, nor Purchaser's consummation of the transactions contemplated hereby, nor Purchaser's fulfillment of the terms hereof, nor Purchaser's compliance with the terms and provisions hereof, will conflict with, result in a breach of the terms, conditions or provisions of, constitute a default under or create any liability under (a) Purchaser's certificate of incorporation or by-laws, (b) any agreement or instrument to which Purchaser is a party or by which it or any of its properties is bound, or (c) any law, regulation or ordinance, injunction, decree, order or judgment applicable to or binding upon Purchaser. 4.4 No Broker. Purchaser has not dealt with any broker in connection with the transactions contemplated by this Agreement. 4.5 Material Statements. No representation or warranty contained in this Agreement, or any document delivered to Seller by Purchaser pursuant hereto or in connection herewith, contains or will contain an untrue statement of material fact or omits to state any material fact necessary to make any statement of fact contained herein or therein not misleading. 5. Pre-Closing Covenants. 5.1 Conduct of Business. From the date of this Agreement to the Closing, Seller will operate the Business only in the ordinary course and substantially in the same manner as presently conducted, maintain the Records in substantially the same manner as presently maintained and preserve the relationships of the Business with its material suppliers and customers, and, in particular, Seller, without the prior written consent of Purchaser, will not, with respect to the Business,: (a) cancel or permit any insurance to lapse or terminate, unless renewed or replaced by like coverage; (b) be in default under any material contract, agreement, commitment or undertaking of any kind to which any Seller is a party or by which any of its assets or properties (including without limitation any of the Assets) are bound, where such default could have a material adverse effect on the Business or the Assets; (c) violate or fail to comply with all laws, regulations and rules applicable to it or its properties or business (including without limitation the Business), or fail to maintain in effect or its good standing under all permits and licenses necessary to conduct the Business, where such violation or failure could have a material adverse effect on the Business or the Assets; (d) sell, transfer or otherwise dispose of, or agree to sell, transfer or otherwise dispose of, any of its assets, properties or rights, including without limitation inventories, of the type to be included in the Assets or cancel or otherwise terminate, or agree to cancel or otherwise terminate, any debts or claims, except in the ordinary course of business; (e) except in the ordinary course of its business, make or permit any amendment or termination of any material contract, agreement or license to which it is a party or by which it or any of its assets or properties (including without limitation any of the Assets) are subject; (f) except in the ordinary course of business, increase or agree to increase the rate of compensation payable or to become payable to any of its employees, or adopt any new, or make any increase in, any employee benefit plan, payment or arrangement made to, for or with any Seller's employees; (g) except for a capital expenditure made in the ordinary course of Seller's dealer program, make any expenditure, commitment or accrual for the purchase, acquisition, construction or improvement of a capital asset related to the Business, which in any event, equals or exceeds individually or in the aggregate $50,000; (h) make any change in the relationship or course of dealing between Seller and its material suppliers or customers which could have a material and adverse effect on the Business or prospects of any Seller; (i) increase or decrease any customer rates other than in the ordinary course of the Business; (j) enter into or assume any pledge or other title retention agreement or permit any Lien to attach upon any of the Assets; (k) take any action that results in any of its representations or warranties set forth in this Agreement becoming untrue (including the accuracy of the Schedules hereto), in Seller's inability to satisfy any of the conditions to Closing, or in any of the Assets becoming materially less valuable than on the date of this Agreement; (l) fail promptly to advise Purchaser in writing of the occurrence of any matter or event that is material to the Business, the Assets, or to Seller's ability to satisfy any of the conditions to Closing or the representations or warranties of Seller in this Agreement; (m) fail to maintain and/or repair any tangible assets included in the Assets in accordance with good standards of maintenance and as required in any leases or other agreements pertaining thereto; and/or (n) merge, consolidate or agree to merge or consolidate with or into any other corporation or entity. Notwithstanding the foregoing, Seller may acquire prior to the Closing, on terms and conditions previously disclosed to Purchaser, certain assets and alarm monitoring accounts from (i) U.S. Protective Systems, Inc., (ii) McGinn Smith and (iii) JMS Security Inc.. 5.2 Insurance. Seller shall maintain or cause to be maintained, in full force and effect, through the Closing Date, all of its insurance policies unless replaced by substantially comparable insurance coverage. Seller shall promptly advise Purchaser of any fire, accident or other casualty occurring on or before the Closing Date. 5.3 Employee Meetings. Prior to the Closing Date, representatives of Purchaser shall be entitled to hold an initial meeting with each employee of Seller (such employees being referred to herein as the "Seller Employees"), upon reasonable notice to Seller, to interview such Seller Employees and explain and answer questions about the conditions, policies and benefits of any potential employment by Purchaser at which a representative of Seller shall be present. Thereafter, until the Closing, Seller shall cooperate with Purchaser in communicating to the Seller Employees any additional information concerning any potential employment by Purchaser that the Seller Employees may seek, or which Purchaser may desire to provide, and during normal working hours shall allow such additional meetings by representatives of Purchaser with the Seller Employees as Purchaser may reasonably request. Seller shall be entitled to have one or more representatives attend all such meetings. Nothing contained in this Agreement shall indicate or in any way be construed as an offer by Purchaser to employ or otherwise retain the services of any Seller Employee at any time. 5.4 Access to Properties. Purchaser, by authorized representatives designated by Purchaser, shall have the right to examine the properties, books and accounts of Seller's Business at any time prior to the Closing Date during regular business hours upon twenty-four (24) hours' prior notice to the Seller. 5.5 Confidentiality; No Disclosure. Each party hereto shall keep confidential and shall not divulge any data or information it obtains regarding any other party hereto. No party hereto will make any public announcement of the negotiations among the parties related to this Agreement, or the transactions contemplated hereby, except as may be required by law. The parties agree that they shall each use best efforts to advise and confer with each other prior to the issuance of any reports, statements or press releases pertaining to this Agreement or the transactions contemplated hereby. 6. Conditions Precedent to the Closing. 6.1 Conditions Precedent to the Obligations of Purchaser. The obligations of Purchaser under this Agreement are subject to the satisfaction of each of the following conditions except to the extent that (i) the failure to satisfy any such condition would not have a material adverse effect on the Business or the Purchaser or (ii) any of such conditions are waived by Purchaser. 6.2 Representations and Warranties True as of Closing. Each of the representations and warranties of Seller, Stockholders and Purchaser contained in this Agreement shall be materially true and correct when made and on and as of the Closing Date as if then made, except to the extent that such representations and warranties are expressly made as of a specified date and, as to such representations and warranties, the same shall be true and correct as of such specified date. At the Closing, Purchaser shall have been furnished with a certificate executed by Seller with respect to the accuracy of such representations and warranties as of the Closing Date as if then made and to the fulfillment of the conditions stated in this Section 6 to the extent that such conditions are precedent to the obligations of Purchaser. 6.3 Obligations, Covenants, Agreement and Conditions Performed. Seller shall have performed all material obligations required to be performed by it under this Agreement at or prior to the Closing Date, and Purchaser shall have received a certificate signed by the chief executive officer of Seller, to that effect. 6.4 No Material Change. There shall have been no material adverse change in the business (including without limitation the Business), property or affairs of Seller between the date of this Agreement and the Closing Date. 6.5 Delivery of Closing Documents. Purchaser shall have received the documents described in Section 7.2. 6.6 No Actions, etc. There shall be no action pending or threatened before any court or other governmental authority which seeks to (i) invalidate or set aside, in whole or in part, this Agreement or any of the agreements contemplated hereby, (ii) restrain, prohibit, invalidate or set aside, in whole or in part, the consummation of the transactions contemplated hereby or thereby or (iii) obtain material damages in connection herewith or therewith. 6.7 Necessary Consents. Seller shall have obtained the consent in writing of all necessary persons to the transactions contemplated by this Agreement, including without limitation the Bill of Sale and/or such amendments or modifications of such documents as may be required in order that the purchase of the Assets hereunder will not result in the termination of, or any default under, any contracts, agreements, obligations, leases, permits or licenses transferred to Purchaser pursuant to this Agreement, except such consents, amendments or modifications which if not obtained will not have a material adverse effect on Purchaser's ability to operate the Business after the Closing Date, as determined in Purchaser's sole discretion. 7. Closing. 7.1 The closing of the purchase and sale of the Assets provided for in this Agreement (the "Closing") shall take place at the offices of Robinson & Cole LLP, Financial Centre, Stamford, Connecticut, on or before March 16, 1998, at 10:00 A.M. local time or at such other date, time and place as the parties shall mutually agree. 7.2 At the Closing, the Purchaser shall (i) make the payments required to be made on the Closing Date and (ii) deliver to Seller evidence of insurance maintained by Purchaser to insure personal injury and property damage claims arising from the operation of the Business subsequent to the Closing, which insurance shall provide coverage of at least $1,000,000 per person for personal injury and an aggregate limit of not less than $10,000,000 for personal injury or property damage. Seller shall execute and deliver the items called for above and the following: (a) Non-Compete Agreements in the form of Exhibit E attached hereto, signed by Seller, James Lees and Edward Silvey; and (b) An Assignment of all written contracts with customers, customer orders and all other customer records in form acceptable to Purchaser; and (c) A General Bill of Sale and Assignment for the Assets in form acceptable to Purchaser (the "Bill of Sale"); and (d) a five year lease from Non Vista Mare Corp. to Purchaser, in form and substance satisfactory to Purchaser, for rental payments which do not exceed Seller's payments under its existing lease of such premises, of Seller's premises located at Malden, Massachusetts; and (e) The Certificates of Net Monthly Recurring Revenue, Wholesale NMRR and Deferred Service Revenue, as called for in Section 1.9(a); and (f) An opinion of counsel to Seller in the form of Exhibit F attached hereto; and (g) A good standing certificate regarding Seller of recent date from the jurisdiction where it is incorporated and from each other jurisdiction where Seller is qualified to do business; and (h) An incumbency certificate of Seller; and (i) A certified copy of the resolutions adopted at a meeting or by written consent by the Board of Directors and, if applicable, the shareholders of Seller authorizing the execution and delivery by Seller of this Agreement and all related agreements and the consummation of the transactions contemplated hereby; and (j) a certificate signed by James Lees, an authorized officer of Seller, to the effect that the representations and warranties of Seller made herein are true and correct as of the Closing Date and that Seller has performed in all material respects all of its pre-closing commitments hereunder; and (k) All consents obtained by Seller pursuant to Section 6.7; and (l) Tax clearance letters for Seller from the Massachusetts Department of Revenue Services with respect to the sales and use tax and the corporation business tax; and (m) Evidence of the repayment and termination of all Seller's obligations to State Street Bank and all other lenders holding a security interest in all or part of the Assets in form and substance satisfactory to Purchaser in its sole discretion, including without limitation UCC-3 termination statements with respect thereto; and (n) A consulting agreement between Lees and Purchaser in the form of Exhibit D attached hereto and made a part hereof; and (o) Updated Schedules and Exhibits to this Agreement dated as of the Closing Date; and (p) Such other documents as Purchaser reasonably requires to consummate the transactions contemplated in this Agreement. 7.3 Liquidated Damages. Seller and the Stockholders acknowledge and agree that its or their sole remedy arising out of or related to Purchaser's failure or refusal to consummate the transactions contemplated by this Agreement at the Closing will be limited to the value of the deposit or deposits held by Seller. 8. Post Closing. 8.1 Warranties and Representations. The respective representations and warranties of Seller, the Stockholders and Purchaser contained herein shall survive the Closing for a period of one (1) year, except that all representations and warranties of Seller relating in any way to taxes shall survive the Closing for the longer of (a) five (5) years and (b) the last expiring applicable statute of limitations. 8.2 Seller's Obligations. Seller will expeditiously after the Closing pay or perform all liabilities and obligations of Seller which are outstanding on the Closing Date and are not Assumed Liabilities, including without limitation all liabilities and obligations that arise after the Closing Date. 8.3 State Filings. Seller shall, to the extent not completed prior to the Closing Date, file, or cooperate with Purchaser in filing, any notices required under applicable state law relating to the sale of Seller's assets and shall send a copy of any response received from any state or any other governmental authority to Purchaser upon receipt. 8.4 Assumption of Obligations. To the extent that any of the Assumed Obligations are not assignable without the consent of another party, Seller and Purchaser each agree to use reasonable efforts to obtain such consent to the assignment thereof to Purchaser. If such consent shall not be obtained for any Assumed Obligation, Seller and Purchaser shall make suitable arrangements, without cost to Purchaser, whereby Purchaser may nevertheless enjoy the benefits and rights of Seller and perform the obligations of Seller thereunder. 8.5 Access to Information. For a period of five (5) years after the Closing Date, Seller shall afford to representatives of Purchaser, including its counsel and auditors, upon reasonable prior notice during normal business hours, access to any and all information and written materials in the possession or control of Seller relating to the Business and not in the possession of Purchaser. 8.6 Use of Trade Names. From and after the Closing Date, Seller shall not use the name "Sentry Protective Systems" or any derivation thereof or any similar names in or in connection with the security or alarm industry, without the prior written consent of Purchaser. 8.7 Mail and Communications. After the Closing, Seller will promptly deliver to Purchaser the original of any mail or other communication received by Seller pertaining to the Assets or the Business with respect to periods commencing on or after the Closing Date. 8.8 Telephone Numbers. After the Closing, Seller waives its rights to use the telephone and facsimile numbers and advertising materials referred to in Section 1.1(g) and consents to Purchaser's right to use such numbers and advertising in connection with the Business, and Seller shall provide reasonable assistance to Purchaser for it to retain the use of such numbers and advertising. 8.9 Employee and Other Accounts. Purchaser shall make available its standard employee discount in effect from time to time to all employees of Seller employed by Purchaser. In addition, Purchaser agrees to provide alarm monitoring service without charge for a period of up to five years to twelve customers to be specified by Lees; provided, however, that each such customer enter into Purchaser's standard alarm monitoring contract. 9. Indemnification. 9.1 Indemnification by Seller and Stockholders. (a) Claims. Seller and each of the Stockholders hereby severally and jointly agree to indemnify and defend Purchaser and each of Purchaser's officers, directors, employees and agents (individually and collectively, an "Indemnified Person") against, and to hold each Indemnified Person harmless from, any and all damages, losses, liabilities, costs and expenses, including without limitation reasonable attorneys' fees and costs (collectively "Damages"), incurred or suffered by any Indemnified Person, arising out of or related to (i) subject to Section 8.1, any misrepresentation or breach of any warranty, covenant or agreement made or to be performed by Seller or the Stockholders in or pursuant to this Agreement or any other document or agreement delivered in connection herewith or (ii) the operation of any of Seller's businesses (including without limitation the Business) or any portion thereof prior to the Closing Date or (iii) any obligations or liabilities of Seller (including those arising pursuant to this Agreement) other than Assumed Liabilities or (iv) any claim for a brokerage or similar commission due from Seller arising out of the transactions contemplated by this Agreement made against any Indemnified Person for such a commission owed by Seller or (v) any liability of Purchaser for Damages suffered by any person or entity prior to the Closing Date in connection with the Business. Payments to Seller otherwise due from Purchaser or the Stockholders after the Closing Date may be withheld in reasonable amounts pending resolution of any claims brought against any Indemnified Person as to which this indemnity is or may be applicable; provided, however, that Seller and Stockholders shall not be liable for any Damages (other than Damages relating to a breach of representations and warranties of Seller relating in any way to taxes) to the extent that all such Damages do not exceed an aggregate of $75,000; provided further, however, that Seller and the Stockholders shall indemnify the Indemnified Persons from and against all Damages (i) arising out of or relating to a representation and warranty of Seller relating in any way to taxes, or (ii) if such Damages exceed an aggregate of $75,000; provided further, however, that the liability of Seller hereunder shall not exceed $10,000,000; provided further, however, that the liability of Silvey hereunder shall not exceed $1,000,000; provided further, however, that the liability of Lees hereunder shall not exceed $10,000,000. (b) Notice. Purchaser agrees to give prompt notice to Seller and the Stockholders of the assertion of any claim or the commencement of any suit, action or proceeding in respect of which indemnity may be sought hereunder. Seller and the Stockholders may, in their sole discretion, assume the defense of any such claim, suit, action, or proceeding at their own expense and may dispose of any such claim, suit, action or proceeding in their sole discretion without any liability or expense to any Indemnified Person. In any event, each Indemnified Person shall have the right to participate in or with respect to any such claim, suit, action or proceeding with counsel of its own choice and at its own expense. 9.2 Indemnification by Purchaser. (a) Claims. Purchaser hereby agrees to indemnify Seller and the Stockholders against, and to hold Seller and the Stockholders harmless from, any and all Damages incurred or suffered by Seller and the Stockholders in connection with any claim, action, suit or proceeding arising out of or related to (i) any misrepresentation or breach of any warranty, covenant or agreement made or to be performed by Purchaser in or pursuant to this Agreement or (ii) the operation of the Assets by Purchaser from and after the Closing Date, or (iii) the Assumed Liabilities or (iv) any claim for a brokerage or similar commission arising out of the transactions contemplated by this Agreement made against Seller for such a commission owed by Purchaser. In connection with matters set forth in (ii) above, Purchaser shall maintain no less than $10,000,000 of insurance coverage with respect to such liabilities on terms and conditions either (i) similar and customary to those prevailing in Purchaser's industry or (ii) equivalent to those currently maintained by Purchaser. (b) Notice. Seller and the Stockholders agree to give prompt notice to Purchaser of the assertion of any claim or the commencement of any suit, action or proceeding in respect of which indemnity may be sought hereunder. Purchaser may, in its sole discretion, assume the defense of any such claim, suit, action or proceeding at its own expense and may dispose of any such claim, suit, action or proceeding in its sole discretion without any liability or expense to Seller and the Stockholders. In any event, Seller and the Stockholders shall have the right to participate in or with respect to any such claim, suit, action or proceeding with counsel of its own choosing and at its own expense. 9.3 Limitation of Indemnity. No claim for indemnification pursuant to Sections 9.1 or 9.2 hereunder may be made for Damages occurring more than two years after the Closing; provided, however, that the obligations of Seller and the Stockholders to indemnify Purchaser for the breach of any representation or warranty relating to taxes shall survive for the periods set forth in Section 8.1 hereunder. 10. Miscellaneous. 10.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when sent by overnight courier or by registered or certified mail, deposited in the United States mail, postage prepaid, return receipt requested, to the appropriate party at its or his address below or at such other address for such party (as shall be specified by written notice): (a) If to Seller or the Stockholders, at: Mr. James W. Lees Security Systems, Inc. 110 Florence St. Malden, Massachusetts 02148 and Mr. Edward A. Silvey Security Systems, Inc. 110 Florence St. Malden, Massachusetts 02148 with a copy to: Edward George & Associates 11 Beacon Street, Suite 1125 Boston, Massachusetts 02108 Attention: Edward George, Jr., Esq. (b) If to Purchaser at: Mr. Russell R. MacDonnell Alarmguard, Inc. 125 Frontage Road P.O. Box 1249 Orange, CT 06477-7249 with a copy to: Robinson & Cole LLP Financial Centre P.O. Box 10305 695 East Main Street Stamford, CT 06904 Attention: Richard A. Krantz, Esq. 10.2 Expenses. Each of the parties hereto shall bear its own expenses in connection with the negotiation and consummation of the transactions contemplated hereby. 10.3 Risk of Loss. The risk of loss, damage or destruction to any of the Assets from fire or other casualty or cause shall be borne by Seller at all times prior to the Closing. In the event of any such loss, damage or destruction, the proceeds of any claim for any loss payable under any insurance policy covering such loss shall be payable to Seller. In the event of any such material loss, damage or destruction, Seller shall specify in writing to Purchaser with particularity the loss, damage or destruction incurred, the cause thereof, if known or reasonably ascertainable, and the extent to which restoration, replacement and repair of the Assets lost, damaged or destroyed will be reimbursed under any insurance policy with respect thereto. If such insurance proceeds are not sufficient to restore, replace or repair the lost or destroyed Assets, Seller shall either (i) make any additional payments required to restore, replace or repair the lost or destroyed Assets to their condition immediately prior to such loss, damage or destruction, or (ii) unless Purchaser is willing to forego any deficiency between the value of the lost or destroyed Assets and the insurance proceeds thereon, terminate this Agreement without liability. If any such material loss or destruction shall occur within thirty (30) days prior to the Closing, Seller shall have the right, upon written notice, to postpone the Closing until such time as the Assets have been completely restored, replaced or repaired unless the same cannot be reasonably effected within thirty (30) days of the original Closing Date. If such restoration, replacement or repair cannot be effected within such period, Purchaser shall have the option to elect in writing to either: (a) terminate this Agreement and thereafter all obligations of the parties shall cease without further liability to conclude the sale; or (b) elect to consummate the Closing and accept the property in its "then" condition, in which event Seller shall assign to Purchaser all of Seller's rights under any insurance claim covering the loss and pay over any insurance proceeds received by Seller in connection therewith, and Seller shall pay to Purchaser an amount equal to any additional amount required to restore, replace or repair such property to its condition immediately prior to such loss, damage or destruction. 10.4 Benefit and Burden. This Agreement shall be binding upon, and shall inure to the benefit of, and be enforceable by, the parties hereto and their respective successors, administrators and permitted assigns. 10.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut (excluding application of any choice of law doctrines that would make applicable the law of any other state.) 10.6 Assignment. This Agreement shall not be assignable by any party hereto except with the written consent of the other parties. Any other attempted assignment shall be void. The foregoing notwithstanding, Purchaser may assign its rights hereunder, and under any agreement or document entered into or received hereunder, to any affiliated entity and/or as collateral to any lender providing funds to be used in Purchaser's acquisition or operation of the Assets. No such assignment shall relieve the assignor of its obligations hereunder. 10.7 Attorneys' Fees. If any action or proceeding is brought to enforce or interpret any provision of this Agreement, each party shall bear its own attorney's fees. 10.8 Further Assurances. Before, during and after the Closing Date, without further consideration, the parties hereto shall each execute and deliver such further instruments and documents and take such further actions as the other party shall reasonably request to consummate, or in furtherance of, the transactions contemplated by this Agreement and to perfect Purchaser's title to the Assets. Without limiting the generality of the preceding sentence, at any time and from time to time after the Closing Date, at Purchaser's reasonable request and without further consideration, Seller will execute and deliver such other instruments of conveyance and transfer as Purchaser reasonably may require more effectively to convey to, transfer to, and vest in Purchaser, or to put Purchaser in possession of, any or all of the Assets. 10.9 Severability. If any provision of this Agreement shall be held invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision, only to the extent and in the particular jurisdiction in which it is invalid or unenforceable, and shall not in any manner affect or render invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. 10.10 Jurisdiction; Waivers. (a) Each party hereto hereby irrevocably submits to the jurisdiction of any Connecticut or United States Federal Court sitting in Fairfield County, Connecticut, over any action or proceeding arising out of or relating to this Agreement or any document or instrument executed and/or delivered in connection herewith, and each party hereto hereby irrevocably agrees that all claims in respect of such action or proceeding may be heard and determined in such Connecticut or Federal court. Each party hereto irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to such party at its address specified in Section 10.1 hereof. Each party hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Each party hereto further waives any objection to venue in such state and any objection to an action or proceeding in such state on the basis of forum non conveniens. Each party hereto further agrees that any action or proceeding brought against any other party hereto shall be brought only in Connecticut or United States Federal court sitting in Fairfield County. (b) EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHTS ANY OF THEM MAY HAVE TO JURY TRIAL. 10.11 Entire Agreement. This Agreement and the documents delivered in connection herewith constitute the entire agreement of the parties hereto, and no oral statement or prior written matter shall have any force or effect. 10.12 Number and Gender. Whenever the sense of this Agreement requires, the use of the singular number shall include the plural, and the use of the masculine gender shall include the feminine and/or neuter genders. 10.13 Headings for Convenience. The titles of Sections of this Agreement herein are for convenience of reference only, are not a part of this Agreement, and shall not be deemed to modify or affect the interpretation of this Agreement. 10.14 Amendments. This Agreement may not be modified except by a writing signed by the party against whom the enforcement of any modification is sought. 10.15 Execution of Counterparts. For the convenience of the parties, this Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same document. THE NEXT PAGE IS THE SIGNATURE PAGE IN WITNESS WHEREOF, the undersigned have duly executed this Agreement as of the date first above written. PURCHASER: ALARMGUARD, INC. By__________________________ Name: Russell R. MacDonnell Title: Chairman Duly Authorized SELLER: SECURITY SYSTEMS, INC. d/b/a SENTRY PROTECTIVE SYSTEMS By____________________________ Name: James W. Lees Title: Chief Executive Officer Duly Authorized _______________________________ James W. Lees _______________________________ Edward A. Silvey EX-21 7 EXHIBIT 21.1 Exhibit 21.1 ALARMGUARD HOLDINGS, INC. SUBSIDIARY CORPORATIONS AS OF DECEMBER 31, 1997 State of Name Incorporation Security Systems Holdings, Inc. Delaware Alarmguard, Inc. Delaware Protective Alarms Canada, Inc. Ontario, Canada EX-23 8 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Post Effective Amendment No.1 on Form S-8 to the Registration Statement (Form S-4 No. 333-23307) pertaining to the 1994, 1995 and 1996 Stock Option Plans and the Registration Statement (Form S-8 No. 333-30523) pertaining to the 1997 Long-Term Stock Incentive Plan of Alarmguard Holdings Inc. of our report dated March 18, 1998, with respect to the consolidated financial statements and schedule of Alarmguard Holdings Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ Ernst & Young LLP Stamford, Connecticut March 30, 1998 EX-27 9 EXHIBIT 27.1
5 The 1997 second and third quarter financial schedules are being resubmitted to reflect revised earnings per share amounts as required by SFAS 128. 1,000 12-MOS 9-MOS 6-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 2,629 2,394 2,348 0 0 0 6,561 7,480 6,411 1,003 479 408 3,065 2,497 2,049 11,595 12,825 11,342 21,494 22,108 21,117 10,948 10,620 9,707 69,850 74,164 74,612 21,088 22,566 22,564 0 0 0 0 0 0 0 0 0 1 1 1 (3,198) (1,245) 1,949 69,850 74,164 74,612 3,751 2,823 1,719 34,260 24,611 14,984 3,751 2,823 1,719 14,411 10,445 6,241 27,502 19,300 12,233 1,214 581 442 4,683 3,329 1,995 (12,336) (9,044) (5,927) 0 0 0 (12,336) (9,044) (5,927) 0 0 0 (813) (813) (813) 0 0 0 (13,149) (9,857) (6,740) (2.78) (1.76) (1.40) (2.78) (1.76) (1.40)
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