-----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, JUw9n6fjnxKWpA/kfLMcQxhWDIKhWW6jIiIdMG527MWBeYuwlgccarPz4HomZLSa 65SETJPUeIr2tCYLBKUgaA== 0000950148-97-002965.txt : 19971126 0000950148-97-002965.hdr.sgml : 19971126 ACCESSION NUMBER: 0000950148-97-002965 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971124 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971125 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTION ONE INC CENTRAL INDEX KEY: 0000916230 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 931063818 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-24780 FILM NUMBER: 97727413 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PKWY CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103386930 MAIL ADDRESS: STREET 1: 3900 SW MURRAY BLVD CITY: BEAVERTON STATE: OR ZIP: 97005 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTECTION ONE ALARM MONITORING INC CENTRAL INDEX KEY: 0000916310 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 931065479 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-12181 FILM NUMBER: 97727414 BUSINESS ADDRESS: STREET 1: 6011 BRISTOL PKWY CITY: CULVER CITY STATE: CA ZIP: 90230 BUSINESS PHONE: 3103386930 MAIL ADDRESS: STREET 1: 3900 SW MURRAY BLVD CITY: BEAVERTON STATE: OR ZIP: 97005 8-K 1 FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of report (Date of earliest event reported) November 24, 1997 -------------------------------- Protection One, Inc. Protection One Alarm Monitoring, Inc. (Exact Name of Registrant (Exact Name of Registrant as Specified in Charter) as Specified in Charter) Delaware Delaware (State or Other (State or other Jurisdiction of Incorporation) jurisdiction of Incorporation) 0-247802 33-73002-01 (Commission File Number) (Commission File Number) 93-1063818 93-1065479 (I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.) 6011 Bristol Parkway, 6011 Bristol Parkway, Culver City, California 90230 Culver City, California 90230 (Address of Principal Executive Offices, (Address of Principal including Zip Code) Executive Offices, including Zip Code) (310) 342-6300 (310) 342-6300 (Registrant's Telephone Number, (Registrant's Telephone Number, including Area Code) including Area Code) N/A N/A (Former Name or Former Address, (Former Name or Former Address, if Changed Since Last Report) if Changed Since Last Report) 2 Item 1. Changes in Control of Registrant. Item 2. Acquisition or Disposition of Assets. As previously reported, on July 30, 1997, Protection One, Inc., a Delaware corporation ("POI"), and Western Resources, Inc., a Kansas corporation ("Western Resources"), entered into a Contribution Agreement dated as of July 30, 1997 (as amended, the "Contribution Agreement"). Pursuant to the Contribution Agreement, on November 24, 1997, POI issued to Western Resources an aggregate of 68,673,402 shares (the "Shares") of the common stock, par value $.01 per share, of POI ("POI Common Stock"), which shares constituted 82.4% of the shares of POI Common Stock (the only voting securities of POI) outstanding immediately after such acquisition. In consideration of the issuance of the Shares to Western Resources (the "Share Issuance"), Western Resources transferred to POI all of the outstanding capital stock of WestSec, Inc., a Kansas corporation ("WestSec"), and Westar Security, Inc., a Kansas corporation ("Westar Security" and together with WestSec, the "Western Resources Security Business"), and an aggregate of $367.4 million in cash and securities. WestSec and Westar provide security alarm monitoring services and sell, install and service security alarm systems for homes and businesses located throughout the continental United States. POI intends to continue to use the physical properties of WestSec and Westar Security in such business. The cash portion of the consideration for the Share Issuance was funded with Western Resources' working capital. The amount of such consideration was determined in arm's-length negotiations between Protection One and Western Resources, and the acquisition was accounted for under the purchase method of accounting. As provided in the Contribution Agreement, effective upon consummation of the Share Issuance, eight persons selected by Western Resources (Peter C. Brown, Howard A. Christensen, Joseph J. Gardner, William J. Gremp, Steven L. Kitchen, Carl M. Koupal, Jr., John C. Nettels, Jr. and Jane Dresner Sadaka) were elected as directors of POI. As further provided in the Contribution Agreement, POI will pay (i) to the holders of record of shares of POI Common Stock as of the close of business on November 24, 1997 (other than Western Resources), a cash dividend of $7.00 per share (the "Special Dividend"); (ii) to the holders of options to purchase shares of POI Common Stock other than Western Resources, $7.00 in cash with respect to each share of Common Stock issuable upon exercise of such options; and (iii) to a bank as the holder of record of a warrant issued by POI in 1991 and to the holders of record of warrants issued by POI in 1993, $7.00 in cash with respect to each share of Common Stock issuable upon exercise of such warrants. The Special Dividend will be paid as soon as practicable; the above-described payments to holders of options and warrants will be made on or about the date the Special Dividend is paid. As a result of the payment of the Special Dividend, each warrant issued by POI in 1995 has become exercisable for 1.629 shares of POI Common Stock at an exercise price of $4.05, and the 6-3/4% Convertible Senior Subordinated Notes due 2003 issued by Protection One Alarm Monitoring, Inc., a Delaware corporation, will be convertible into shares of Common Stock at a conversion price of $11.19 per share. 2 3 Prior to the Share Issuance, the certificate of incorporation of POI was amended to increase the maximum authorized number of shares of POI Common Stock to 150,000,000. As provided in the Contribution Agreement, immediately following the Share Issuance, POI, through a subsidiary, acquired from Western Resources (i) all of the outstanding capital stock of Centennial Security Holdings, Inc., a Delaware corporation ("Centennial"), for a cash purchase price of $94.4 million, and (ii) 2,500,000 shares (the "Guardian Common Shares") of the Class A Voting Common Stock, par value $.001 per share, and 1,875,000 shares (the "Guardian Preferred Shares") of the Series A 9-3/4% Convertible Cumulative Preferred Stock of Guardian International, Inc., a Nevada corporation ("Guardian"), for a cash purchase price of $8.5 million. The Guardian Common Shares constitute approximately 27.8 % of the outstanding shares of Guardian common stock; the Guardian Preferred Shares are convertible into an aggregate of 1,500,000 additional shares of Guardian common stock. POI used a portion of the cash contributed to POI by Western Resources to pay for the shares of Centennial and Guardian purchased by POI. The amount of such consideration was determined in arm's-length negotiations between Protection One and Western Resources and equalled the sum of (i) the amount paid by Western Resources for such securities, (ii) the fees and expense incurred by Western Resources to attorneys and other third-party advisors in connection with Western Resources' acquisition of such securities, and (iii) a carrying charge at a rate of 10% per annum (pro rated on the basis of a 365-day year) for the period Western Resources held such securities. Centennial, based in Madison, New Jersey provides security alarm monitoring services to residential and commercial subscribers located principally in Ohio, Michigan, New Jersey, New York and Pennsylvania. POI intends to continue to use the physical properties of Centennial in such business. Guardian provides security alarm monitoring services to approximately 12,000 subscribers in Florida; Guardian also monitors approximately 16,000 additional subscribers on a "wholesale" basis for certain third-party security alarm companies, sells alarm systems and provides field repair services principally to commercial accounts and,to a more limited extent, provides installation services to third-party security alarm companies. The Contribution Agreement and the Stock Option Agreement entered into between POI and Western Resources in connection therewith are filed as exhibits to this report and are incorporated herein by this reference. For additional information with respect to the businesses of WestSec and Westar Security, Centennial and Guardian, reference is made to the portions of POI's proxy statement dated November 7, 1997, also filed as an exhibit to this report and incorporated herein by reference. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. The following financial statements, pro forma financial information and exhibits are filed as a part of this Report: (a) Financial Statements of Businesses Acquired It is impracticable at this time to file the required pro forma financial information for the acquired businesses. Such statements will be filed as soon as they become available, but in no event later than January 24, 1998. 3 4 (b) Pro Forma Financial Information It is impracticable at this time to file the required pro forma financial information for the acquired businesses. Such information will be filed as soon as it becomes available, but in no event later than January 24, 1998. (c) Exhibits 2.1 Contribution Agreement dated as of July 30, 1997 (the "Contribution Agreement"), between Western Resources and Protection One. 2.2 Amendment No. 1 dated October 2, 1997, to the Contribution Agreement. 2.3 Assignment and Assumption Agreement (Centennial Security Holdings, Inc.) dated as of November 24, 1997, among Western Resources, Westar Capital, Inc. ("Westar Capital"), Westar Security, Inc. ("Westar Security") and Protection One. 2.4 Assignment and Assumption Agreement (Guardian International, Inc.) dated as of November 24, 1997, among Western Resources, Westar Capital, Westar Security and Protection One. 2.5 Form of Stock Purchase Agreement dated as of October 2, 1997, among Centennial, the shareholders of Centennial and Westar Capital. 2.6 Stock Subscription Agreement dated as of October 14, 1997, between Guardian and Westar Capital. 10.1 Stock Option Agreement dated as of July 30, 1997, between Protection One and Western Resources. 10.2 Registration Rights Agreement dated as of October 21, 1997, between Guardian and Westar Capital. 10.3 Stockholders Agreement dated as of October 21, 1997, among Guardian, Westar Capital and, inter alia, Harold Ginsburg. 10.4 Employment Agreement dated as of November 24, 1997, between Protection One and James M. Mackenzie, Jr. 10.5 Employment Agreement dated as of November 24, 1997, between Protection One and John W. Hesse. 10.6 Employment Agreement dated as of November 24, 1997, between Protection One and John E. Mack, III. 10.7 Employment Agreement dated as of November 24, 1997, between Protection One and Thomas K. Rankin. 99.1 Information included in the subsection captioned "Business of Protection One - Potential Acquisitions" on pages 74-75 and in the section captioned "The Western Resources Security Business" on pages 96-99 of Protection One's proxy statement dated November 7, 1997. Item 9. Change in Fiscal Year. Pursuant to action taken by the boards of directors of POI and Monitoring on July 30, 1997 but effective as of November 24, 1997, each of POI and Monitoring has determined to change its fiscal year to the calendar year. A transition report on Form 10-K will be filed by each of POI and Monitoring for the transition period. 4 5 SIGNATURE Pursuant to the requirements 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. PROTECTION ONE, INC. PROTECTION ONE ALARM MONITORING, INC. Date: November 24, 1997 By: /s/ JOHN W. HESSE --------------------------- John W. Hesse Executive Vice President and Chief Financial Officer 5 6 EXHIBIT INDEX Exhibit No. Description of Exhibit 2.1 Contribution Agreement dated as of July 30, 1997 (the "Contribution Agreement"), between Western Resources, Inc. ("Western Resources") and Protection One, Inc. ("Protection One") (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Protection One and Protection One Alarm Monitoring, Inc. ("Monitoring") dated July 30, 1997). 2.2 Amendment No. 1 dated October 2, 1997, to the Contribution Agreement (incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of Protection One and Monitoring dated October 2, 1997). 2.3 Assignment and Assumption Agreement (Centennial Security Holdings, Inc.) dated as of November 24, 1997, among Western Resources, Westar Capital, Inc. ("Westar Capital"), Westar Security, Inc. ("Westar Security") and Protection One. 2.4 Assignment and Assumption Agreement (Guardian International, Inc.) dated as of November 24, 1997, among Western Resources, Westar Capital, Westar Security and Protection One. 2.5 Form of Stock Purchase Agreement dated as of October 2, 1997, among Centennial, the shareholders of Centennial and Westar Capital. 2.6 Stock Subscription Agreement dated as of October 14, 1997, between Guardian and Westar Capital. 10.1 Stock Option Agreement dated as of July 30, 1997, between Protection One and Western Resources (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Protection One and Monitoring dated July 30, 1997). 10.2 Registration Rights Agreement dated as of October 21, 1997, between Guardian and Westar Capital. 10.3 Stockholders Agreement dated as of October 21, 1997, among Guardian, Westar Capital and, inter alia, Harold Ginsburg. 10.4 Employment Agreement dated as of November 24, 1997, between Protection One and James M. Mackenzie, Jr. 10.5 Employment Agreement dated as of November 24, 1997, between Protection One and John W. Hesse. 10.6 Employment Agreement dated as of November 24, 1997, between Protection One and Thomas K. Rankin 99.1 Information included in the subsection captioned "Business of Protection One - Potential Acquisitions" on pages 74-75 and in the section captioned "The Western Resources Security Business" on pages 96-99 of Protection One's proxy statement dated November 7, 1997 (incorporated by reference to Protection One's definitive proxy statement dated November 7, 1997 as filed with the Securities and Exchange Commission). EX-2.3 2 EXHIBIT 2.3 1 EXHIBIT 2.3 ASSIGNMENT AND ASSUMPTION AGREEMENT (Centennial Security Holdings, Inc.) This Assignment and Assumption Agreement is made as of November 24, 1997, among Westar Capital, Inc., a Kansas corporation ("Westar Capital"), Western Resources, Inc., a Kansas corporation ("Western Resources"), Westar Security, Inc., a Kansas corporation ("Westar Security") and Protection One, Inc., a Delaware corporation ("Protection One"), pursuant to Amendment No. 1, dated as of October 2, 1997, to the Contribution Agreement, dated as of July 30, 1997, between Western Resources and Protection One (as so amended, the "Contribution Agreement"). 1. Westar Capital hereby sells, assigns, transfers and conveys to Westar Security, without recourse to Westar Capital, Western Resources or any of its "Subsidiaries" or "Affiliates" (each as defined in the Contribution Agreement), all right, title and interest of Westar Capital in and to (i) any and all equity securities of Centennial Security Holdings, Inc., a Delaware corporation ("Centennial") held by Westar Capital, (ii) all rights and obligations of Westar Capital arising under the Stock Purchase Agreement, dated as of October 2, 1997, among Westar Capital, Centennial and the former stockholders of Centennial (the "Purchase Agreement"), (ii) the "Holdback Escrow Agreement" as defined in the Purchase Agreement (the "Holdback Escrow Agreement"), and (iii) each other agreement, instrument, certificate or document executed by or assigned to, or made in favor of, Westar Capital or any of its Subsidiaries pursuant to or in connection with the Purchase Agreement (including the Holdback Escrow Agreement, collectively the "Ancillary Agreements"). Western Resources hereby represents and warrants to Westar Security and Protection One that neither Western Resources nor any Subsidiary or Affiliate of Western Resources other than Westar Capital has any right, title or interest in any security of Centennial or in the Purchase Agreement or any Ancillary Agreement. 2. Westar Security hereby assumes and agrees to duly and timely perform all obligations of Westar Capital arising under the Purchase Agreement and the Ancillary Agreements, and Protection One hereby guarantees the performance by Westar Security of such obligations. 3. Concurrently with the parties' execution and delivery hereof, Protection One is paying to Westar Capital, and Westar Capital and Western Resources acknowledge that Westar Capital is receiving from Protection One, the sum of $94.4 million in cash, which amount constitutes the "Purchase Price" provided for in the Contribution Agreement with respect to the transfer of securities, rights and obligations herein provided for. The parties acknowledge that such sum has been paid through a dollar-for-dollar reduction in the "Cash Amount" (as defined in the Contribution Agreement) paid by Western Resources to Protection One. IN WITNESS WHEREOF, the parties have executed this Assignment and Assumption Agreement as of the date first above written. WESTERN RESOURCES, INC. PROTECTION ONE, INC. By: /s/ STEVEN L. KITCHEN By: /s/ JAMES M. MACKENZIE, JR. ------------------------------- ------------------------------- Title: Executive Vice President and Title: President ------------------------------- ------------------------------- Chief Financial Officer 2 WESTAR CAPITAL, INC. WESTAR SECURITY, INC. By: /s/ MARILYN K. DALTON By: /s/ MARILYN K. DALTON ------------------------------- ------------------------------- Title: Secretary/Treasurer Title: Secretary/Treasurer ------------------------------- ------------------------------- 2 EX-2.4 3 EXHIBIT 2.4 1 EXHIBIT 2.4 ASSIGNMENT AND ASSUMPTION AGREEMENT (Guardian International, Inc.) This Assignment and Assumption Agreement is made as of November 24, 1997, among Westar Capital, Inc., a Kansas corporation ("Westar Capital"), Western Resources, Inc., a Kansas corporation ("Western Resources"), Westar Security, Inc., a Kansas corporation ("Westar Security") and Protection One, Inc., a Delaware corporation ("Protection One"), pursuant to Amendment No. 1, dated as of October 2, 1997, to the Contribution Agreement, dated as of July 30, 1997, between Western Resources and Protection One (as so amended, the "Contribution Agreement"). 1. Westar Capital hereby assigns, transfers and conveys to Westar Security, without recourse to Westar Capital, Western Resources or any of its "Subsidiaries" or "Affiliates" (each as defined in the Contribution Agreement), all right, title and interest of Westar Capital in and to (i) 2,500,000 shares (the "Common Shares") of the Class A Voting Common Stock, par value $.001 per share, of Guardian International, Inc., a Nevada corporation ("Guardian"), and 1,875,000 shares (the "Preferred Shares") of the Series A Convertible Cumulative Preferred Stock of Guardian, (ii) each of the Stock Subscription Agreement, dated as of October 14, 1997, between Guardian and Westar Capital (the "Stock Subscription Agreement"), the Registration Rights Agreement, dated October 21, 1997, between Guardian and Westar Capital, and the Stockholders Agreement, dated as of October 21, 1997, among Guardian, Westar Capital and, inter alia, Harold Ginsburg, and (iii) each other agreement, instrument, certificate or document executed by, or made in favor of, Westar Capital or any of its Subsidiaries pursuant to or in connection with the Stock Subscription Agreement (including the agreements described in clauses (ii) and (iii), collectively the "Ancillary Agreements"). Western Resources hereby represents and warrants to Westar Security and Protection One that neither Western Resources nor any Subsidiary or Affiliate of Western Resources other than Westar Capital has any right, title or interest in any security of Guardian (other than securities included in the "Investment Shares" as defined in the Contribution Agreement) or in the Subscription Agreement or any Ancillary Agreement. 2. Westar Security hereby assumes and agrees to duly and timely perform all obligations of Westar Capital arising under the Subscription Agreement and the Ancillary Agreements, and Protection One hereby guarantees the performance by Westar Security of such obligations. 3. Concurrently with the parties' execution and delivery hereof, Protection One is paying to Westar Capital, and Westar Capital and Western Resources acknowledge that Westar Capital is receiving from Protection One, the sum of $8.5 million in cash, which amount constitutes the "Purchase Price" provided for in the Contribution Agreement with respect to the transfer of securities, rights and obligations herein provided for. The parties acknowledge that such sum has been paid through a dollar-for-dollar reduction in the "Cash Amount" (as defined in the Contribution Agreement) paid by Western Resources to Protection One. 2 IN WITNESS WHEREOF, the parties have executed this Assignment and Assumption Agreement as of the date first above written. WESTERN RESOURCES, INC. PROTECTION ONE, INC. By: /s/ STEVEN L. KITCHEN By: /s/ JAMES M. MACKENZIE, JR. ------------------------------- ------------------------------- Title: Executive Vice President Title: President ------------------------------- ------------------------------- and Chief Financial Officer WESTAR CAPITAL, INC. WESTAR SECURITY, INC. By: /s/ MARILYN K. DALTON By: /s/ MARILYN K. DALTON ------------------------------- ------------------------------- Title: Secretary/Treasurer Title: Secretary/Treasurer ------------------------------- ------------------------------- 2 EX-2.5 4 EXHIBIT 2.5 1 EXHIBIT 2.5 STOCK PURCHASE AGREEMENT BY AND AMONG THE SHAREHOLDERS OF CENTENNIAL SECURITY HOLDINGS, INC. CENTENNIAL SECURITY HOLDINGS, INC. and WESTAR CAPITAL, INC. Dated as of October 2, 1997 2 TABLE OF CONTENTS
Page 1. PURCHASE AND SALE OF STOCK..................................................-1- 1.1 Agreement to Purchase and Sell.......................................-1- 1.2 Certain Definitions..................................................-2- 2. PURCHASE PRICE AND CLOSING..................................................-6- 2.1 Purchase Price.......................................................-6- 2.2 Closing Date and Location; Payments.................................-11- 2.3 Noncompetition and Nonsolicitation Agreements.......................-11- 3. INDIVIDUAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS....................................................................-11- 3.1 Ownership of Stock..................................................-11- 3.2 Capacity and Authority, Enforceability, No Violations...............-11- 3.3 Consents and Approvals..............................................-12- 3.4 Absence of Defaults.................................................-12- 3.5 Litigation and Claims...............................................-12- 3.6 Non-Foreign Status..................................................-13- 4. JOINT REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS.................-13- 4.1 Organization and Corporate Documents................................-13- 4.2 Capitalization......................................................-14- 4.3 Sole Business; Subsidiaries; Affiliates.............................-14- 4.4 Authority of Sellers................................................-15- 4.5 Real Property.......................................................-15- 4.6 Title to Property...................................................-16- 4.7 Compliance with Laws; Litigation....................................-16- 4.8 Certain Information Regarding Assets; Insurance.....................-16- 4.9 Absence of Adverse Changes or Other Events..........................-17- 4.10 Financial Statements................................................-18- 4.11 Tax Returns and Payments............................................-18- 4.12 Agreements with Employees...........................................-19- 4.13 Intellectual Property Rights........................................-20- 4.14 Business Documents..................................................-20- 4.15 Subscriber and System Information...................................-21- 4.16 Business Market.....................................................-23- 4.17 Central Station.....................................................-23- 4.18 U.L. Certification..................................................-24- 4.19 Broker or Finder....................................................-24- 4.20 Labor and Employment Matters........................................-24- 4.21 Creditors...........................................................-26- 4.22 Contracts...........................................................-26- 4.23 Environmental Matters...............................................-27- 4.24 Banks, Officers and Powers of Attorney..............................-27- 4.25 Inventory...........................................................-27- 4.26 Liabilities.........................................................-27- 4.27 Schedules Delivered.................................................-27- 4.28 Disclosure..........................................................-28-
-ii- 3 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER.........................-28- 5.1 Authority of Buyer..................................................-28- 5.2 Consents............................................................-28- 5.3 Broker or Finder....................................................-28- 5.4 Litigation..........................................................-29- 5.5 Investment Purpose..................................................-29- 5.6 Disclosure..........................................................-29- 6. ACTIONS PRIOR TO OR ON THE CLOSING DATE....................................-29- 6.1 Prior To or At Closing..............................................-29- (a) Investigation................................................-29- (b) Preservation of Representations and Warranties...............-30- (c) Consents and Approvals.......................................-30- (d) Exclusive Dealing............................................-30- (e) Lien Searches................................................-31- (f) Maintenance of Business......................................-31- (g) Insurance....................................................-31- (h) Organization and Transition..................................-32- (i) Consummation of Agreement....................................-32- (j) Corporate Matters............................................-32- (k) Capitalization...............................................-32- (l) Accounts Receivable..........................................-32- (m) Resignations.................................................-32- (n) Crime Busters, Inc...........................................-32- (o) Payoff of Notes..............................................-33- (p) Southeast Security Management Co.............................-33- 6.2 Post-Closing........................................................-33- (a) Employees....................................................-33- (b) Access to Records............................................-34- (c) Reprogramming Costs..........................................-34- (d) Completion of Work in Progress...............................-34- (e) Collection of Accounts Receivable............................-34- 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER...............................-34- 7.1 Covenants and Warranties............................................-34- 7.2 No Restraint or Litigation..........................................-35- 7.3 Necessary Consents, Approvals and Permits...........................-35- 7.4 Opinion of Counsel..................................................-35- 7.5 Adverse Change......................................................-35- 7.6 Documents, Certificates and Other Items.............................-35- 7.7 Satisfaction of Debts...............................................-37- 7.8 Accounts Receivable.................................................-37- 7.9 Capitalization......................................................-37- 7.10 Excluded Assets.....................................................-37- 7.11 Updated Schedules...................................................-37- 7.12 Minimum RMR.........................................................-38- 7.13 Oral 3rd Party Monitoring Agreements................................-38- 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS.............................-38- 8.1 Covenants and Warranties............................................-38- 8.2 Delivery of Purchase Price..........................................-38-
-iii- 4 8.3 Documents, Certificates and Other Items.............................-38- 8.4 No Restraint or Litigation..........................................-39- 8.5 Approvals...........................................................-39- 9. INDEMNIFICATION............................................................-39- 9.1 Indemnification by Sellers and Buyer................................-39- 9.2 Notice of Claims....................................................-40- 9.3 Third Party Claims..................................................-41- 9.4 Survival of Indemnity Obligations...................................-42- 9.5 Basket and Cap......................................................-42- 9.6 Tax Indemnification/Returns.........................................-43- 9.7 Buyer's Tax Claim Defense...........................................-44- 9.8 Sole and Exclusive Remedy...........................................-44- 9.9 Deferred Payment as Source of Payment Obligations of Sellers........-45- 10. DAMAGE TO PROPERTY AND RISK OF LOSS........................................-45- 11. TERMINATION OF AGREEMENT...................................................-45- 12. GENERAL PROVISIONS.........................................................-46- 12.1 Survival of Obligations; Effect of Investigations...................-46- 12.2 Transfer Charges and Taxes..........................................-47- 12.3 Dispute Resolution..................................................-47- 12.4 Confidentiality.....................................................-48- 12.5 Public Announcements................................................-48- 12.6 Governing Law Exclusive Jurisdiction and Consent to Service of Process ..........................................................-49- 12.7 Notices.............................................................-49- 12.8 Assignment..........................................................-50- 12.9 Entire Agreement; Amendments........................................-50- 12.10 Interpretation......................................................-50- 12.11 Waivers.............................................................-51- 12.12 Expenses............................................................-51- 12.13 Partial Invalidity..................................................-51- 12.14 Further Assurances..................................................-51- 12.15 Counterparts........................................................-52- 12.16 Third-Party Beneficiaries...........................................-52-
-iv- 5 STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of this 2nd day of October, 1997 by and among WESTAR CAPITAL, INC., a Kansas corporation or its permitted assignee ("Buyer"), on the one hand, and CENTENNIAL SECURITY HOLDINGS, INC., a Delaware corporation (the "Parent") and the persons and entities listed on Schedule 1.1, (individually each a "Seller" and collectively the "Sellers"), being the owners of record of all of the issued and outstanding capital stock of the Parent. BACKGROUND WHEREAS, the Parent is the sole shareholder of CENTENNIAL SECURITY, INC. (the "Corporation"); and WHEREAS, the Corporation is the sole shareholder of RADAR SECURITY, INC., an Ohio corporation, (the "Ohio Subsidiary"); and together with the Corporation referred to herein collectively as the "Subsidiaries"); and WHEREAS, the Parent and the Subsidiaries are referred to herein collectively as the "Company;" and WHEREAS, the Company owns and operates a business engaged in the business of marketing, selling, leasing, installing and servicing residential and commercial alarm systems and providing alarm system monitoring, paging and other related services in the areas in and around California, Florida, Connecticut, Indiana, New York, New Jersey, Ohio, Michigan, Kentucky, West Virginia and Pennsylvania (the "Security Business"); and WHEREAS, Sellers own all of the issued and outstanding capital stock of Parent described on Schedule 4.2, which stock at Closing shall constitute all shares of any class of capital stock of the Parent (the "Stock"); and WHEREAS, Sellers desire to sell, and Buyer desires to purchase, all of the Stock on the following terms and conditions; and WHEREAS, Sellers have appointed Centennial Fund IV, L.P. a Delaware limited partnership, as their representative (the "Sellers' Representative") to act on their behalf with respect to certain aspects of the performance of this Agreement. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements set forth in this Agreement, and intending to be legally bound, the parties agree as follows: 1. PURCHASE AND SALE OF STOCK 1.1 Agreement to Purchase and Sell. Subject to the terms and conditions of this Agreement, Sellers agree to sell, convey, transfer, assign and deliver to Buyer, and Buyer agrees to purchase from Sellers on the Closing Date, the number of shares of Stock set forth opposite their respective names on Schedule 1.1, free and clear of any and all Encumbrances, which Stock at Closing shall constitute all shares of any class of capital stock of Parent owned of record or beneficially by such Seller. 6 1.2 Certain Definitions. As used in this Agreement, the following terms will mean the following: (a) "Adjustment Date" means that business day which is 60 days after the Valuation Date. If the 60th day is a Saturday, Sunday or holiday, the Adjustment Date shall be the next business day. (b) "Assets" means all of the assets of the Company of every kind and character, real, personal, tangible, intangible or mixed, used or useful in connection with, or necessary to its operations and business as currently conducted, other than the Excluded Assets. The Assets include the following: (i) All of the Company's rights in, to and under all tangible assets of the Company, including central station equipment, alarm systems (including local alarm systems installed, sold or acquired by the Company but which generate no recurring revenue), closed circuit television and access control equipment, electronic alarm equipment, alarm test equipment, machinery, tools, computers, related software and source/object code, office equipment, furnishings, vehicles, Inventory, spare equipment and parts reasonably necessary for day-to-day maintenance and repair, other tangible personal property of any nature, and the Company's rights in fixtures attached to real estate leased to the Company and used by the Company (collectively, the "Tangible Assets"). Certain of the leased and owned tangible assets (including all vehicles) of the Company and including all those having an estimated replacement cost of more than $1,000.00 are set forth in Schedule 1.2(b)(i). (ii) All of the Company's interest of every kind and description in real property, buildings and structures, together with all improvements thereon, all of which are set forth in Schedule 1.2(b)(ii). (iii) (A) All installed monitored alarm contracts, whether written or oral, including all installations and equipment of the Company located at Subscribers' residences or places of business related thereto, and any and all related agreements for alarm services (including monitoring, paging, test and inspections, repair service, and leasing of equipment (herein the "Alarm Services") (the "Subscriber Contracts") between the Company and their respective Subscribers (the "Alarm Accounts") all of which are identified on Schedule 1.2(b)(iii)(A); (B) All agreements to provide third-party monitoring to alarm dealers all of whom are set forth in Schedule 1.2(b)(iii)(B) (the "Wholesale Alarm Accounts"); (C) All of the Company's rights in, to and under all leases of real property and equipment that are related to and used by the Company, telephone book listing agreements, noncompetition, nonsolicitation and nondisclosure agreements with third parties, and all other agreements, licenses (including any licenses or agreements to use the names "Masada Security," "Centennial," "Habitec,"and "Sonitrol" and the names set forth on Schedule 4.1), and any licenses held personally which are necessary for the operation of the Security Business as presently conducted and transferable to the Company, permits (including permits relating to installations which are pending, currently in progress or completed) and manufacturer's warranties on tangible property that are related to the Company's conduct of its business (collectively, the "Business Documents"). A list of the Business Documents is set forth in Schedule 1.2(b)(iii)(C). -2- 7 (iv) All of the Company's rights in, to and under the following assets, intangibles and rights that are related to, and presently owned by the Company or used in its business: (A) refundable deposits from customers, prepaid service charges and prepaid income items; (B) system designs, plans and drawings; (C) options, claims, contract rights, patents, copyrights, trade secrets and trade names, including the name "Centennial Security" and the names set forth on Schedule 4.1 (under subparts "Fictitious Names"and "Rights to Use Certain Names" of such schedule) and all variations thereof; (D) cash and cash equivalents; (E) accounts receivable; (F) operating and accounting data; (G) customer lists and files (including any lists and files of former customers); (H) computer programs and documentation; (I) telephone lines and numbers (including WATS lines and numbers); (J) Work in Progress; (K) outstanding bids and proposals; (L) goodwill; and (M) the stock of the Corporation and the Ohio Subsidiary. (c) "Closing" or "Closing Date" means the consummation of this transaction which is contemplated to be on or about the last business day of the calendar month in which all of the conditions to Closing have been satisfied, unless the parties otherwise agree to an earlier or later date, but not sooner than 15 business days after the date of this Agreement. The Stock shall be transferred by Sellers to Buyer upon receipt of the payment due at Closing. (d) "Closing Financials" means (a) the audited consolidated statements of the Company's income and expenses for the period from January 1, 1997 through and including 11:59:59 p.m. of the Closing Date, and (b) the audited consolidated balance sheet of the Company as of the day preceding the Closing Date, in each case together with the report thereon of Ernst & Young, the Company's independent certified public accountants. The balance sheet shall be prepared in sufficient detail and in a format necessary to permit Buyer to prepare the Adjusted WC. (e) "Encumbrance" means any security interest, pledge, mortgage, lien (including without limitation, environmental liens, lis pendens liens, claims of liens, and Tax liens), charge, encumbrance, adverse claim, preferential arrangement or restriction of any kind, including, without limitation, any restriction on the use, voting, transfer, receipt of income or other exercise of any attributes of ownership, other than: (i) a lien of taxes not yet delinquent or the validity of which are being contested in good faith by appropriate actions and that are described on Schedule 4.11; and (ii) easements, covenants and restrictions that are presently of record and that do not materially interfere with or impair the Company's use and presently intended use of any of the real property or materially reduce the value of any of the real property used by Company. (f) "Excluded Assets" means those assets set forth on Schedule 1.2(f) which either are (i) not the property of the Company, or (ii) will be transferred by Company "AS IS" prior to the Closing to another person or entity free of all Encumbrances and without recourse to Company or Buyer. (g) "GAAP" means generally accepted accounting principles as are in effect from time to time in the United States. (h) "Valuation Period" means the 120 day period commencing as of the Closing Date and ending on the Valuation Date. (i) "Inventory" means all raw materials, work in process and finished goods produced or used by the Company in the Security Business. -3- 8 (j) "Liabilities" means any and all debts, losses, liabilities, claims, damages, fines, costs, royalties, proceedings, deficiencies or obligations (including those arising out of any claim, action, suit or proceeding, such as any settlement or compromise thereof or judgment or award therein), of any nature, whether known or unknown, absolute, accrued, contingent or otherwise and whether due or to become due, and whether or not resulting from third-party claims, and any reasonable out-of-pocket costs and expenses (including reasonable attorneys', accountants' or other fees and expenses incurred in defending any claim, action, suit or proceeding or in investigating any of the same or in asserting any rights hereunder), and including any accountability or responsibility for any of the foregoing, and including: (A) any foreign, federal, state, county or local income or other tax arising from the operation of the Security Business or the ownership of the Assets on or prior to the Closing Date; (B) any liabilities, obligation or commitment of Sellers related to the Stock, or the Company to their creditors, whether arising out of contract or tort, or to any party holding an Encumbrance on any of Stock or Assets; (C) any employee obligation relating to or arising out of the period prior to the Effective Time, including any obligation for wages, commissions, vacation and holiday pay, sick pay, bonuses, incentive compensation bonuses, severance pay, pensions, or any obligation under any collective bargaining agreement, employment agreement or employment at-will relationship, or any obligation to retain any employee of the Company after the Closing Date; (D) any severance pay or other employee benefit obligation triggered by or arising out of the consummation of this transaction after the Closing Date; (E) any liabilities the existence of which would constitute a breach of any of the representations, warranties or covenants of Sellers or Company in this Agreement; and (F) any liabilities arising because Hazardous Materials are present on the real or personal property leased or otherwise used by the Company and being transferred pursuant to this Agreement, or any Liabilities for the use, handling, generation or disposal of Hazardous Materials by the Company, or any previous owner of the Assets relating to or arising out of the period prior to the Effective Time. The term "Hazardous Materials" includes hazardous waste, hazardous substances, toxic substances and all related materials, including all materials and substances regulated by The Comprehensive Environmental Response, Compensation and Liability Act of 1980, The Resource Conservation and Recovery Act of 1976, The Superfund Amendments and Reauthorization Act of 1986, The Clean Water Act, The Clean Air Act, The Toxic Substance Control Act, all as amended from time to time, and/or any other applicable federal, state or local environmental law, statute, rule, regulation or ordinance (k) "Recurring Monthly Revenue" ("RMR") means the sum of monthly recurring revenue to be derived by the Company from all Alarm Accounts and Wholesale Alarm Accounts in service as of the Closing Date. RMR shall only include those sums derived from Alarm Accounts and Wholesale Alarm Accounts that are: (i) provided Alarm Services pursuant to Subscriber Contracts on the Company's standard written contract forms to which there have been no material alterations as to any customer, or on Customer Purchase Orders or on Modified Agreements which, collectively, do not represent more than 5% of the total Closing RMR (the "RMR Basket"); (ii) provided Alarm Services pursuant to Subscriber Contracts which do not -4- 9 contain a provision, which requires the customer's consent to the consummation of the transactions contemplated hereby, except that up to 1% of the total Closing RMR (the "RMR Change-In-Control Basket") may be from Subscriber Contracts, which do contain such "change-in-control" provisions (the "Change-In-Control Subscriber Contracts"); (iii) billed as stipulated in the applicable Subscriber Contract (including any increases in service rates imposed by the Company subsequent to the execution of any written agreement or entry of any oral agreement and prior to the date of this Agreement); (iv) not more three (3) calendar months past due from the date of the earliest unpaid invoice date for RMR issued prior to the Closing Date (which invoice date is on or before the first date of service for the applicable billing period); unless derived from Alarm Accounts that historically pay late, which are identified on a slow-pay schedule delivered to Buyer 5 business days prior to the Closing Date and approved by Buyer (the "Slow Pay Schedule"); and (v) in effect on the Closing Date and as of the Closing Date had not been canceled, and with respect to which no written notice of cancellation or oral notice of cancellation recorded in the ordinary course of business (either in writing or other media) by the Company has been received prior to the Closing Date. RMR shall not include any amounts derived from or which are expected to be derived from: (a) reimbursement for or prepayment of private line telephone line charges associated with any monitored account; (b) reimbursement for or prepayment of any false alarm assessment; (c) reimbursement for or prepayment of any amounts equal to taxes, fees, monitoring charges or other charges imposed by any governmental authority relative to the furnishing of alarm services; (d) alarm services to be provided under any agreement, which by its terms is terminable and has been terminated by the Company's customer as a result of the consummation of the transaction contemplated hereby; (e) time and material service revenue, or other revenues that are not received on a regular and recurring basis; (f) charges paid to third party response agencies (including answering service charges) for monitoring, patrol or alarm response, other than charges paid to RRSS or other third party monitoring facilities of Company identified on Schedule 4.17; (g) charges subject to reduction for lease-to- buy equipment; (h) charges which are not recurring throughout the entire remaining term of the applicable Subscriber Contract. In addition, RMR shall not include the recurring regular monthly fees and charges payable pursuant to customer contracts with respect to which on the Closing Date the alarm system has not been fully installed and operational, unless included on the Schedule 1.2(r). RMR attributable solely to the Wholesale Alarm Accounts is referred to as the "Wholesale RMR," and RMR attributable to the Alarm Accounts is referred to as "Alarm RMR." RMR shall not include any recurring revenue attributable to the Crime Buster, Inc. alarm accounts and/or Southeast Security Management Co. alarm accounts. (l) "Majority in Interest of Sellers" means any Seller or group of Sellers or holders of stock options immediately prior to Closing, who, individually or collectively, has the power to vote a majority of the shares of the Stock (assuming conversion of the options to Stock at the Closing.). (m) "Non-qualified Account" means an Alarm Account included among the Assets that did not meet the definition of RMR at the Closing Date and was not included in the Closing RMR, and is set forth on Schedule 1.2(m) to be delivered by Sellers to Buyer 2 business days prior to the Closing Date. (n) "Sellers' Representative" means Centennial Fund IV, L.P. or such other person or entity designated in writing to Buyer by a Majority in Interest of Sellers. (o) "Subscriber" means any person, business, corporation or other entity that has an Alarm Account with the Company for the provision of Alarm Services. -5- 10 (p) "Valuation Date" means the business day that coincides with or next follows the last day of the Valuation Period. (q) "Working Capital Adjustment" means the amount obtained by subtracting the total liabilities (both current and long term other than the Notes) from the current assets (on a consolidated basis) as of the Closing Date in accordance with GAAP applied on a basis consistent with the past practices of the Parent, the Corporation and the Ohio Subsidiary, as the case may be. The method of calculation and the exclusive components of the Working Capital Adjustment are set forth on Schedule 1.2(q). The Working Capital Adjustment determined by the Company at Closing is referred to as the "Closing WC." If the total liabilities included in the Working Capital Adjustment exceed the assets included in the Working Capital Adjustment, then the Working Capital Adjustment is expressed as a negative number. (r) "Work in Progress" or "WIP" means new Alarm Accounts sold prior to the Closing Date pursuant to a fully executed written contract or customer's purchase order, which have not been completely installed and are not being monitored as of the Closing Date, and shall be set forth on Schedule 1.2(r) to be delivered 2 business days prior to the Closing, which schedule shall set forth in reasonable detail, the name, address, the purchase price and/or installation fee, deposit received, work performed, the RMR associated with the Alarm Account (the "WIP RMR"), and anticipated installation completion date for each account included in the work in process (each a "WIP Account"). "WIP Losses" means the loss, if any, incurred by Company or Buyer in installing each WIP Account (the installation revenue for the WIP Account included in the Closing WC or paid to Company or Buyer after the Closing Date less an administration fee of $150.00, cost of materials, direct labor and any applicable sales commissions for such WIP Account.) (s) "Notes" means the obligations of the Company evidenced by secured or unsecured promissory notes of the Company and that are reflected under the captions "Notes Payable," and "Subordinate Notes Payable," including any portion under "Current Portion of Long Term Debt" on the Financial Statements. 2. PURCHASE PRICE AND CLOSING. 2.1 Purchase Price. (a) Determination of the Purchase Price. The purchase price ("Purchase Price") for the sale of the Stock shall be the amount obtained by taking the total of: the amount of the Company's Alarm RMR as of the Closing Date (the "Closing Alarm RMR"), multiplied by 62; plus the amount of the Company's Wholesale RMR as of the Closing Date (the "Closing Wholesale RMR") multiplied by 30; plus the Working Capital Adjustment, plus an amount equal to the WIP RMR anticipated by Buyer, in its commercially reasonable opinion, to be put in service before the Valuation Date multiplied by 62. The Purchase Price will be reduced by the amount of the Notes as of the Closing Date; (including all accrued interest, penalties and late-payment fees and all prepayment penalties, if any). On the Adjustment Date, the Purchase Price shall be increased by an amount equal to the Re-qualified RMR, if any, (as herein defined) multiplied by 31. This determination of the Purchase Price assumes that: (i) unearned income attributable to alarm services to be performed after the Closing Date for Alarm Accounts,.is included as a liability on the balance sheet of the Parent and/or the Company, and will be included in the Working Capital Adjustment and Closing WC, and if it is not so included, the Purchase Price would be reduced by the amount of the unearned income at the Closing Date; and (ii) the valuation of accounts -6- 11 receivable includes an appropriate reserve for bad debt made in accordance with GAAP consistently applied in accordance with past practices of Company. (b) Estimated Closing Purchase Price. At Closing, Buyer will prepare a good faith estimate of the Purchase Price (the "Closing Purchase Price"), subject to Sellers' Representative's review and acceptance. 85% of the Closing Purchase Price, without deduction for the amount of the Notes, less the amount of Notes, will be paid to the Sellers' Representative on behalf of the Sellers pursuant to Sellers' Representative's written wire instructions and payment authorization substantially in the form of Schedule 2.1(b)-A on the Closing Date by federal funds wire transfer or other form of immediately available funds. The balance of the Closing Purchase Price (the "Deferred Payment") will be withheld by Buyer and delivered to the Escrow Agent to be held pursuant to the terms of an escrow agreement substantially in the form of Exhibit A (the "Holdback Escrow Agreement") and as more specifically set forth in Section 2.1(c). Interest earned in the escrow account shall be distributed to Sellers' Representative on behalf of Sellers on a quarterly basis pursuant to the terms set forth in the Holdback Escrow Agreement. The amount of the Notes will be paid to the Note holders at Closing. The calculation of the Closing Purchase Price and its components shall be set forth on Schedule 2.1(b)-B, a proforma of which is attached hereto, and which proforma sets forth Sellers' estimate of the Closing Purchase Price, which estimate is not binding upon any party and is provided solely for exemplary purposes. If Sellers' Representative does not accept Buyer's determination of the Closing Purchase Price and the difference between Buyer's estimation of the Closing Purchase Price and Sellers' Representative's estimation of the Closing Purchase Price is $400,000 or less, the Closing Purchase Price will be calculated using one-half of such difference, and either Buyer or Sellers will have the right to dispute such amount after Closing pursuant to Section 2.1(h). If the difference between Buyer's determination of the Closing Purchase Price and Sellers' Representative's determination of the Closing Purchase Price is greater than $400,000, then the dispute will be submitted prior to Closing to the Independent Accountants (as herein defined) who will resolve such dispute within 10 days after such engagement, such resolution being a condition of Closing. The reasonable fees of the Independent Accountants will be allocated in the manner set forth in Section 2.1(h). (c) Deferred Payment. One-third of the Deferred Payment shall be paid to Sellers on the second anniversary of the Closing Date less any adjustments due to offsets for the indemnification obligations of Sellers under this Agreement, and any downward adjustments to the Purchase Price as set forth herein. The balance of the Deferred Payment shall be paid to Sellers on the third anniversary of the Closing Date less any adjustments due to offsets for the indemnification obligations of Sellers under this Agreement. (d) Closing Date Review. Not later than sixty (60) days after the Closing, the Sellers will, at their sole expense, cause the Company's certified public accounting firm (Ernst & Young) to deliver to the Sellers' Representatives, the Company and Buyer the Closing Financials (together with related work papers) for the Company. The Shareholders' Representative shall direct Ernst & Young to prepare the Closing Financials, at Sellers' expense, in accordance with generally accepted accounting principles applied consistently by the Company throughout the periods indicated and on a consistent basis with the Financial Statements. Buyer will cause Company to make its employees and accounting records reasonably available to Company's certified public accounting firm at the Company's offices as may be necessary to permit such accounting firm to prepare the Closing Financials. After the Valuation Date and on or before the Adjustment Date, Buyer will redetermine the Purchase Price at the Closing Date (the "Adjusted Purchase Price") and deliver to Sellers' Representative a schedule (the "Closing Date Review Schedule")setting forth: -7- 12 (i) its calculation of the Alarm RMR in effect as of the Closing Date ("Adjusted Alarm RMR");1 (ii) its calculation of the Wholesale RMR in effect as of the Closing Date ("Adjusted Wholesale RMR"); (iii) its calculation of the Working Capital Adjustment as of the Closing Date ("Adjusted WC") based upon the information provided in the Closing Financials; (iv) its calculation of the WIP RMR attributable to the WIP Accounts which meets the definition of RMR set forth in Section 1.2(j) as of the Valuation Date, have been completely installed on or prior to the Valuation Date, are capable of being monitored on the Valuation Date, (the "Adjusted WIP RMR"), and the aggregate amount of the WIP Losses, if any; (v) its calculation of the RMR attributable to Non-qualified Accounts in service on the Valuation Date, which have paid, in full, the accounts receivable balance for RMR existing as of the Closing Date, and which, on the Valuation Date, are not more than 1 calendar month past due in the payment of RMR from the earliest unpaid invoice date issued prior to the Valuation Date (provided such invoice date is earlier than the first service date for the applicable billing period) and, in all other respects, meet the definition of RMR as set forth in Section 1.2(j) as of the Valuation Date (the "Re- qualified RMR"); and (vi) its calculation of the amounts due under the Notes as of the Closing Date, (including all accrued interest, penalties and late-payment fees and all prepayment penalties, if any). (e) Adjusted Purchase Price. The Closing Date Review Schedule shall also include the resulting Buyer's calculation of the Adjusted Purchase Price determined as follows: (i) the Adjusted Alarm RMR multiplied by 62; plus (ii) the Adjusted Wholesale RMR multiplied by 30; plus (iii) the Adjusted WIP RMR multiplied by 62; minus the WIP Losses; plus (iv) the Re-qualified RMR multiplied by 31; plus (v) the Adjusted WC (which may be a negative amount); minus - -------- 1 Adjusted Alarm RMR shall not include any RMR attributable to Alarm Accounts evidenced by Customer Purchase Orders or Modified Agreements in excess of the RMR Basket; and shall not include any RMR attributable to Alarm Accounts evidenced by Change-In-Control Subscriber Contracts in excess of the RMR Change-In-Control Basket for which there are as of the Valuation Date accounts receivable in excess of 30 days. -8- 13 (vi) the amounts necessary to cancel and satisfy the Notes in full as of the Closing Date, (including all accrued interest, penalties and late-payment fees and all prepayment penalties, if any). The Closing Date Review Schedule shall be accompanied by a certificate signed by an officer of Buyer setting forth that the schedule and adjustments have been prepared in accordance with the terms and provisions of the Agreement. In the event the Adjusted Purchase Price is more or less than the Closing Purchase Price, then Deferred Payment shall be adjusted upwards or downwards by such difference accordingly. If the Adjusted Purchase Price is greater than the Closing Purchase Price, the balance shall be added to the Deferred Payment and paid into the escrow account by Buyer; and if the Adjusted Purchase Price is less than the Closing Purchase Price, the Deferred Payment will be decreased by said amount and paid out of the escrow account to Buyer. (f) Valuation Date Review: Subsequent to calculating the Adjusted Purchase Price pursuant to Section 2.1(e), and after the Valuation Date and on or before the Adjustment Date, Buyer shall recompute the Alarm RMR ("Second Look Alarm RMR") and the Wholesale RMR (the "Second Look Wholesale RMR" and together with the Second Look Alarm RMR the "Total Second Look RMR") as of the Valuation Date for the Alarm Accounts and Wholesale Alarm Accounts originally included in the RMR, and prepare and deliver to Sellers' Representative a schedule setting forth the amount of each element of the Total Second Look RMR, the amount of any further adjustment to the Adjusted Purchase Price (such adjusted purchase price being the "Final Purchase Price"), and the amount of the remaining balance of the Deferred Payment. The RMR shall be reduced only for each Alarm Account or Wholesale Alarm Account (a "Non-Performing Account") included in the RMR which is canceled or terminated for either or both of the following reasons: (i) the Non-Performing Account was canceled by Buyer, the Parent or the Company on or before the Valuation Date because: (a) a notice of cancellation, dispute or intent not to renew has been received by the Company from a Subscriber, either orally (and is reflected in the ordinary course of business in the records of Company either in writing or other stored media) or in writing, prior to the Closing Date; or (b) a notice of cancellation, dispute or intent not to renew had been received by Buyer, the Sellers, the Company, either orally (and is reflected in the ordinary course of business in the records of Company either in writing or other stored media) or in writing after the Closing Date which cancellation relates to circumstances, events or occurrences existing prior to the Closing Date; or (ii) the Non-Performing Account was canceled by Buyer after the Valuation Date but prior to the Adjustment Date because the Non-Performing Account had an accounts receivable balance for RMR at the Closing Date of one calendar month or more (whether included on the Slow-Pay Schedule or not), and Buyer did not receive, during the Valuation Period, at least one (1) payment from the Subscriber in an amount not less than the RMR attributable to the Alarm Account. Credits given to Non-Performing Accounts or Non-qualified Accounts shall not be considered payments hereunder, nor shall Sellers offer to make or actually make any payments on behalf of a Non-Performing Account or a Non-qualified Account or offer or cause to offer any gift or any other inducement or coercion to any Non-Performing Account or Non-qualified Account to make any payments to Buyer after the Closing Date. (g) Exceptions to Non-Performing Accounts. The RMR shall not be reduced for any Non-Performing Account that was canceled by Buyer pursuant to the terms of subsection -9- 14 2.1(f)(i) and/or 2.1(f)(ii), if during the Valuation Period, Buyer did any of the following with respect to such NonPerforming Account: (A) relocated the monitoring service from the monitoring facility used at Closing unless the move is from the Interactive monitoring facility to the RRSS monitoring facility or another monitoring facility currently used by the Company or Buyer; (B) increases the RMR except for increases attributable to additions or changes in services or equipment; (C) changes the billing cycle (e.g., change from a monthly to quarterly bill cycle); or (D) requests the Non-Performing Account to execute a new alarm service contract, unless the existing Subscriber Contract with the Non-Performing Account is (A) a Modified Agreement; or (B) a Customer Purchase Order that is subject to renewal during the Valuation Period. (h) Purchase Price Reduction. If after deducting the aggregate amount of the Alarm RMR and Wholesale RMR for the Non-Performing Accounts from the Closing RMR, the Second Look Alarm RMR is less than the Closing RMR then the Adjusted Purchase Price and Deferred Payment will be reduced by an amount equal to the difference between the Closing Alarm RMR and the Second Look Alarm RMR multiplied by 62. If after deducting the aggregate amount of the Wholesale RMR for the Non-Performing Accounts for the Closing Wholesale RMR, the Second Look Wholesale RMR is less than the Closing Wholesale RMR then the Adjusted Purchase Price and Deferred Payment will be reduced by an amount equal to the difference between the Closing Wholesale RMR and the Second Look Wholesale RMR multiplied by 30. However, if a new customer takes over an Alarm Account at the location of a Non-Performing Account prior to the Valuation Date, then Buyer shall add back into the Second Look Alarm RMR an amount equal to the RMR for the new customer multiplied by 52. The Adjusted Purchase Price and the Deferred Payment shall be further reduced by an amount equal to the product of $50.00 multiplied by the number of Customer Purchase Orders or Modified Agreements that exceed 3% of the total Closing RMR that are included in RMR pursuant to clause (i) of Section 1.2(k). Nothing in the immediately preceding sentence shall be interpreted to mean that the Closing RMR may include RMR related to Customer Purchase Orders or Modified Agreements in excess of the RMR Basket. (i) Purchase Price or Adjustment Dispute: Should Sellers' Representative dispute Buyer's calculation of the Adjusted Purchase Price under subsections 2.1(e) or Buyer's calculation of the Final Purchase Price under subsections 2.1(f) and 2.1(h) above, Sellers' Representative will promptly, but in no event later than 15 business days after receipt of such calculation, deliver to Buyer written notice describing in reasonable detail the dispute, together with Sellers' Representative's determination as to the Adjusted Purchase Price or Final Purchase Price, as the case may be, in reasonable detail. If the dispute is not resolved by the parties within 15 business days from the date of receipt by Buyer of such written notice from Sellers' Representative, the Sellers and Buyer agree to promptly engage Price Waterhouse (the "Independent Accountants") to resolve the dispute within 30 business days after such engagement. The Independent Accountants' determination will be restricted to the terms set forth in this Agreement and will be final and binding on the parties. All fees and costs of the Independent Accountants will be borne pro rata by Buyer and Sellers in proportion to the difference between the Independent Accountants' determination of the Adjusted Purchase Price or Final Purchase Price, as the case may be, and Sellers' Representative's and Buyer's determination of such adjustment. For example, if Sellers' Representative's determination differs by $20,000 from the Independent Accountants' determination, but Buyer's determination only differs by $5,000, Sellers will bear 20/25 of such fees and costs and Buyer will bear 5/25 of such fees and costs. -10- 15 2.2 Closing Date and Location; Payments. The consummation of the transfer and delivery of the Stock to Buyer, including the recording thereof on the stock registry records of Parent, and the receipt of the consideration therefor by Sellers will constitute the Closing. Unless otherwise mutually agreed to by the parties and subject to satisfaction of the conditions precedent set forth in Articles 7 and 8, the Closing will take place at 9:00 a.m., local time, at the offices of Buyer in Topeka, KS, on the Closing Date but in any event prior to the Termination Date, except as provided under Article 11. The effective date of the sale of the Stock will be as of 11:59:59 p.m. on the Closing Date (the "Effective Time"). 2.3 Noncompetition and Nonsolicitation Agreements. In connection with the consummation of these transactions, Robert J. Shiver ("Shiver")shall have executed a Noncompetition Agreement substantially in the form of Exhibit B-1 and Company shall have paid to Shiver the cash consideration set forth in the Noncompetition Agreement together with all severance payment obligations due to Shiver. Each of James J. Jackson, John Fay, Richard York, Richard Simonetti, Ken Obermeyer and Edward Pilot will have executed a nonsolicitation agreement substantially in the form of Exhibit B-2 (the "Nonsolicitation Agreement"), and Company shall have paid to each of them the cash consideration set forth in the Nonsolicitation Agreement. Buyer's remedy for a breach of the Noncompetition Agreement or Nonsolicitation Agreements will not be limited to any amount given as consideration for the Noncompetition Agreement or Non-solicitation Agreements and that Buyer's remedies will be as specified in the Noncompetition Agreement or Non-solicitation Agreements, as the case may be. 3. INDIVIDUAL REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS. As an inducement to Buyer to enter into this Agreement and to consummate these transactions, each Seller, individually and severally solely with respect to such Seller, represents, warrants and covenants to Buyer and agrees that as of this date and through and including the Closing Date: 3.1 Ownership of Stock Such Seller is the owner, beneficially and of record, of, and has good title to, all shares of the Stock to be transferred by such Seller hereunder, free and clear of all Encumbrances. 3.2 Capacity and Authority, Enforceability, No Violations (a) Such Seller has the requisite power, legal capacity and authority and the right to execute and deliver this Agreement and to carry out the terms and conditions applicable to such Seller under this Agreement, including the power, legal capacity, legal authority and right to sell, convey and transfer to Buyer at the Closing the Stock, free and clear of any and all Encumbrances, to be sold to Buyer by such Seller. Upon consummation of the Closing, Buyer will acquire from such Seller legal and beneficial ownership of, good and marketable title to, and all right to vote the Stock to be sold to Buyer by such Seller, free and clear of all Encumbrances. (b) This Agreement constitutes, and each other agreement and instrument to be executed and delivered pursuant to the terms of this Agreement (collectively, the "Sellers Transaction Documents") by such Seller will constitute, the legal, valid and binding obligation of -11- 16 such Seller enforceable in accordance with such Sellers Transaction Document's terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. (c) The execution and delivery of this Agreement and the other Sellers Transaction Documents by such Seller, and such Seller's consummation of the transactions contemplated hereby and thereby and the performance of such Seller's obligations hereunder and thereunder, will not (a) conflict with or result in the violation of any applicable law or rule or regulation affecting such Seller or the Stock owned by such Seller; (b) conflict with or result in the violation of any judgment, order, decree or award of any court, arbitrator, mediator or governmental agency or instrumentality to which such Seller is a party or by which such Seller or the Stock owned by such Seller may be bound or affected; or (c) conflict with, result in the violation or termination of, or accelerate the performance required by, any contract, indenture, instrument or other agreement to which such Seller is a party or by which such Seller or the Stock owned by such Seller may be bound or affected, except in the case of clauses (a), (b) and (c) for any such conflict, violation, termination or acceleration as would not have an adverse effect on such Seller's ownership of the Stock or a material adverse effect on such Seller's ability to perform its obligations under this Agreement and the other Sellers Transaction Documents or consummate the transactions contemplated hereby and thereby. 3.3 Consents and Approvals Other than as set forth on Schedule 3.3, no consent, approval, authorization or other action by, or filing or registration with, any federal, state or local governmental authority, or any other person or entity, which consent has been not obtained and is in full force and effect, is required in connection with the execution and delivery by such Seller of this Agreement, the consummation of the transactions contemplated hereby or the performance of such Seller's obligations hereunder. The transfer of the Stock from such Seller to Buyer is not subject to registration under federal law or the law of any state. 3.4 Absence of Defaults Such Seller is not in default under or in violation of (a) any contract, indenture, instrument, or other agreement, arrangement or understanding to which such Seller is a party and by which the Stock owned by such Seller beneficially and of record, may be bound or affected, and no fact, circumstance or event has occurred which, upon notice, lapse of time or both, would constitute such a default or violation; (b) any applicable law, rule or regulation affecting the Stock owned by such Seller; or (c) any judgment, order, decree, or award of any court, arbitrator, mediator or governmental agency or instrumentality by which the Stock owned by such Seller beneficially and of record is bound or affected. 3.5 Litigation and Claims Such Seller is not a party to, nor is there, any pending or to such Seller's best knowledge threatened litigation or other legal proceeding or governmental investigation against such Seller, or affecting the Stock owned by such Seller beneficially and of record, or challenging the validity or propriety of, or seeking to enjoin or set aside, (a) the execution and delivery of this Agreement or any document contemplated hereby by such Seller; (b) the consummation by such Seller of the transactions contemplated hereby or thereby; or (c) the performance by such Seller of such Seller's obligations hereunder or thereunder. -12- 17 3.6 Non-Foreign Status Such Seller is not a foreign person or entity under Section 1445 of the Internal Revenue Code of 1986, as amended. 3.7 Authority of Sellers' Representative. At Closing, the Sellers' Representative is authorized, on behalf of Seller, to execute and deliver the Wire Instructions and Payment Authorization (the form of which is attached as Schedule 2.1(b)(A)) to Buyer and Buyer may rely upon the accuracy of the information contained therein, including the amount payable to such Seller, without independent inquiry or verification. 4. JOINT REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS. As an inducement to Buyer to enter into this Agreement and to consummate these transactions, Sellers represent, warrant and covenant to Buyer and agree that as of this date and through and including the Closing Date: 4.1 Organization and Corporate Documents. (a) The Parent, and the Corporation are each a corporation duly incorporated and organized, validly existing and in good standing under the laws of the state of Delaware. The Ohio Subsidiary is a corporation duly incorporated and organized, validly existing and in good standing under the laws of the state of Ohio. Each of the Parent, the Corporation and the Ohio Subsidiary has the requisite corporate power and authority to own or lease all of the Assets owned or leased by it, to own and operate the Security Business owned and operated by it, and to carry on its business as now conducted. The Parent, the Corporation and the Ohio Subsidiary are qualified as foreign corporations in all jurisdictions in which they are required to be so qualified, except where such failure to be qualified would not have a material adverse effect on the Company or the Security Business. The Parent has no direct or indirect subsidiaries other than the Corporation and the Ohio Subsidiary. The Corporation has no direct or indirect subsidiaries other than the Ohio Subsidiary. The Company does not engage in any business or activity other than the Security Business. (b) Except as set forth on Schedule 4.1, none of the Parent, the Corporation nor the Ohio Subsidiary has, within the 6 year period immediately preceding the date of this Agreement, changed its name, been the surviving entity of a merger or consolidation, or acquired all or substantially all of the assets of any person or entity. Schedule 4.1 also sets forth all of the fictitious names under which the Parent, the Corporation and the Ohio Subsidiary or such predecessors of the Parent, the Corporation and the Ohio Subsidiary have conducted business. (c) The Articles of Incorporation of the Parent, the Corporation and the Ohio Subsidiary and all amendments thereto to date, certified by the Secretary of State of the jurisdiction of incorporation, and the Bylaws of the Parent, the Corporation and the Ohio Subsidiary, as amended to date, certified by the Secretary or an Assistant Secretary of the Parent, the Corporation and the Ohio Subsidiary, as the case may be, all of which have been, or, at least 10 business days prior to Closing, will be, delivered to Buyer, are true, complete and correct, and the minute books of the Parent, the Corporation and the Ohio Subsidiary, which Sellers will make available to Buyer and its counsel at least 10 business days prior to the Closing Date, correctly reflect all corporate actions taken at the meetings reported therein and correctly record all resolutions. The stock certificate books and ledgers of the Parent, the Corporation and Ohio -13- 18 Subsidiary, as will be made available to Buyer for inspection at least 10 business days prior to the Closing Date, and which will be delivered to Buyer at Closing, are true, correct and complete, and accurately set forth the ownership of all of the issued and outstanding capital stock of the Parent, the Corporation and Ohio Subsidiary by the persons set forth on Schedule 4.1, in the amounts set forth thereon. 4.2 Capitalization. (a) Schedule 4.2 accurately sets forth the number of all authorized shares of all classes of capital stock, the nature and description of such stock (e.g., whether common or preferred and the class and terms thereof) and the par value of the capital stock of the Parent, the Corporation and the Ohio Subsidiary. All of the issued and outstanding capital stock of the Parent, the Corporation and the Ohio Subsidiary has been validly issued, is fully paid and nonassessable, and is entitled to vote at all shareholder meetings. The issued and outstanding capital Stock of the Parent is owned beneficially and of record by the shareholders set forth in Section 1.1, free and clear of all Encumbrances, except as set forth under subsection (d) on Schedule 4.2 which Encumbrances shall be satisfied in full upon payment of the Notes. (b) Except as set forth on Schedule 4.2, there are no outstanding subscriptions, options, rights, warrants, unsatisfied preemptive rights, convertible securities, puts, calls, conversion rights, agreements or commitments of any kind which have not been waived obligating the Parent, the Corporation or the Ohio Subsidiary, or any of the Sellers with respect to the Parent, the Corporation and the Ohio Subsidiary, to purchase, redeem, issue, acquire or transfer any shares of their capital stock or other securities, and there is no security of any kind convertible into capital stock. (c) None of the shares of stock of the Parent, the Corporation or the Ohio Subsidiary has been issued in violation of any preemptive rights of its respective shareholders or transferred in violation of any transfer restrictions relating thereto. Except as set forth on Schedule 4.2, there are no existing shareholder agreements, voting agreements or voting trusts respecting any shares of the capital stock of the Parent, the Corporation or the Ohio Subsidiary. 4.3 Sole Business; Subsidiaries; Affiliates. (a) The Parent was organized and incorporated on November 22, 1993, and began conducting business on May 10, 1994. The Parent has been under the same management since March 1,1994 and the same ownership since June, 1997. The Parent has no direct or indirect interest by stock ownership or otherwise in any firm, association or business enterprise, other than the Corporation and the Ohio Subsidiary, and except as set forth on Schedule 4.3. The Sellers own beneficially and of record, all of the outstanding stock of the Parent, free and clear of all Encumbrances, except as set forth on Schedule 4.3. (b) The Corporation was organized and incorporated on February 1, 1995, and began conducting business on February 22, 1995. The Corporation has been under the same management and ownership since February 10, 1995. The Corporation has no direct or indirect interest by stock ownership or otherwise in any firm, association or business enterprise, other than the Ohio Subsidiary and except as set forth on Schedule 4.3. The Parent owns beneficially and of record, all of the outstanding stock of the Corporation, free and clear of all Encumbrances, except as set forth on Schedule 4.3. -14- 19 (c) The Ohio Subsidiary was organized and incorporated on June 21, 1985, and began conducting business on July 1, 1985. The Ohio Subsidiary has been under the same management and ownership since March 2, 1995. The Ohio Subsidiary has no direct or indirect interest by stock ownership or otherwise in any firm, association or business enterprise except as set forth on Schedule 4.3. The Corporation owns beneficially and of record, all of the outstanding stock of the Ohio Subsidiary, free and clear of all Encumbrances, except as set forth on Schedule 4.3. (d) Except as set forth on Schedule 4.3, none of the Parent, the Corporation and the Ohio Subsidiary is a party to any joint venture arrangement, nor does the Parent, the Corporation or the Ohio Subsidiary have the right to acquire any securities of or ownership interests in any other person or entity. (e) Except as set forth on Schedule 4.3, none of the Parent, the Corporation or the Ohio Subsidiary has entered into any contracts or other arrangements with any affiliate, except for those that are terminable at will or without liability. 4.4 Authority of Sellers. Except as set forth under the subsection Defaults on Schedule 4.4, none of the Parent, the Corporation or the Ohio Subsidiary is in default under or in violation of any provision of its Articles of Incorporation or Bylaws or any agreement, understanding, arrangement, indenture, contract, lease, sublease, loan agreement, note, restriction, obligation or liability to which it is a party or by which it is bound or to which it or its assets are subject which would adversely affect the Stock, or have a material adverse effect on the Security Business, the Assets or the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of these transactions will not: (a) conflict with or result in any violation of or constitute a default under (i) any term of the Articles of Incorporation or Bylaws of the Parent, the Corporation or the Ohio Subsidiary, or (ii) except as set forth on Schedule 4.4, any agreement, mortgage, debt instrument, indenture, or other instrument, judgment, decree, order, award, law, rule or regulation by which the Parent, the Corporation, the Ohio Subsidiary or Sellers are bound; (b) result in the creation of any Encumbrance upon any of the Assets; (c) result in the cancellation, modification, revocation or suspension of any license, certificate, permit or authorization held by the Parent, the Corporation or the Ohio Subsidiary except as set forth under the subsection Regulatory on Schedule 4.4; or (d) except as set forth under the subsection Constractual Consents Item No. 6 on Schedule 4.4, create a right in any person to accelerate payment of principal of any indebtedness of any Seller, the Parent, the Corporation or the Ohio Subsidiary. 4.5 Real Property. (a) The Company does not own any real property. (b) All of the real property used by the Company under lease is set forth on Schedule 1.2(b)(ii). The Company has a valid and subsisting lease for all such real property. Except as disclosed on Schedule 4.5, all such leases are fully assignable by the Company and do not require any consent or notice with respect to a change in control. True, correct and complete copies of such leases and all amendments, assignments and consents thereto have been furnished by Sellers to Buyer. -15- 20 4.6 Title to Property. Except as described on Schedule 4.6, the Parent, the Corporation or the Ohio Subsidiary has good and marketable title to all of the Assets, free and clear of all Encumbrances, defects in title, equities, covenants and other restrictions of any nature whatsoever. The Assets constitute all of the assets used in connection with or necessary to the Security Business. 4.7 Compliance with Laws; Litigation. (a) Except as set forth on Schedule 4.7, Sellers and the Company have complied with all laws, regulations, rules, writs, injunctions, ordinances, franchises, decrees or orders of any federal or state court or of any municipal or governmental department, commission, board, bureau, agency or instrumentality, except where such failure to comply would not adversely effect the Stock or have a material adverse effect on the Assets or the Security Business. (b) Except as set forth on Schedule 4.7, all reports, schedules and/or returns of any administrative agency of the federal or any state or local government required to be filed by the Company have been filed, except where such failure to comply would not adversely effect the Stock or have a material adverse effect on the Assets or the Security Business. (c) Except as set forth on Schedule 4.7, there are no lawsuits, claims, suits, proceedings or investigations pending or, to the best knowledge of Sellers or Parent, threatened against or affecting the Company, that relate to the Stock, or relate to the Sellers' interest in or ownership of Stock, nor are there any lawsuits, claims, suits or proceedings pending in which the Company or any Seller is the plaintiff or claimant, that relate to the Stock, the Assets or the Security Business and which involve the possibility of any judgment, order, award or other decision that might impair the ability of Sellers, or any of them, to perform this Agreement, or might impair the quality of title to the Assets, or might adversely affect the normal operation of the Security Business in any material respect, or might result in liability for damages or might otherwise adversely affect the Company's right, title or interest in the Assets, or the Security Business or Sellers' right, title or interest in the Stock or adversely affect the Company's or the Buyer's ability to operate and conduct the Security Business as it is presently operated and conducted. (d) There is no action, suit or proceeding pending or, to the best knowledge of Sellers, threatened which questions the legality or propriety of these transactions. 4.8 Certain Information Regarding Assets; Insurance. (a) The Tangible Assets are in good operating condition, ordinary wear and tear and routine service needs excepted. The Tangible Assets are available for immediate use in the Security Business except for those items being serviced in the ordinary course of business. Except as set forth on Schedule 4.8, all of the Tangible Assets and the state of maintenance thereof are in compliance with all applicable statutes, ordinances, rules and regulations. The Company has not delayed or deferred any maintenance or repair of the Tangible Assets other than in the ordinary course of business consistent with its standard practices, policies and procedures, and consistent with good industry practices. The Assets include all such assets (other than spare parts and Inventory which are covered under Section 4.8(b)), and properties as are necessary to conduct the Security Business as it is now being conducted, in all material respects, for the foreseeable future without substantial modification. The Inventory included in the Assets has been valued -16- 21 at the lower of cost or market value. All of the Tangible Assets are adequately covered by one or more of the insurance policies set forth in Schedule 4.8. (b) The Tangible Assets include and at Closing will include such spare parts and Inventory as are necessary to permit the operation of the Security Business as presently conducted without material interruption. (c) Schedule 4.8 sets forth a true and complete list of all insurance policies insuring any of the Assets or relating to the Security Business. Except as set forth on Schedule 4.8, all such policies are on (and for the applicable statute of limitations period plus 1 year have been on) an "occurrence basis," which means, for example, that if a claim against the Company arose after the Closing Date for an event which occurred prior to the Closing Date, the Company's applicable insurance policy in existence on the date such event occurred would cover such claim. The Company carries property damage, workers' compensation, automobile, directors and officers, general liability and errors and omissions insurance with respect to the Security Business and the Assets in such amounts as are adequate and reasonable and against such risks as are customary in relation to the character and location of such properties and the nature of such business. All such policies are in full force and effect and neither the Parent nor the Subsidiaries has received any notice of cancellation with respect thereto. During the past 5 years, no application by the Company for insurance with respect to the Assets or the Security Business has been denied for any reason. During the past 5 years, the Company has not had any claim made against it by any customer that would adversely affect the Company's insurance rating. At least 10 days prior to the Closing Date, Sellers will cause the Company's insurance agent to deliver to Buyer a copy of the Parent's, the Corporation's and the Ohio Subsidiary's insurance claims history for the past 5 years to the extent available. (d) Except as set forth on Schedule 4.8, the accounts and notes receivable reflected on the most recent Financial Statements are free and clear of any Encumbrance and are not subject to setoff, third party collection efforts or suit (other than immaterial offsets or counterclaims in an aggregate amount of no more than $5,000). 4.9 Absence of Adverse Changes or Other Events. Except as set forth on Schedule 4.9, since December 31, 1996, neither the Parent, the Corporation nor Ohio Subsidiary has: (a) created or incurred any liability (absolute or contingent) except for unsecured current liabilities under contracts entered into in the ordinary course of business; (b) loaned any money or otherwise pledged the credit of the Parent, the Corporation or the Ohio Subsidiary, or mortgaged, pledged or subjected to any Encumbrance any of the Assets; (c) suffered any losses or any other event or condition of any character adverse to its business, or waived any rights of substantial value; (d) made any capital expenditures or capital additions or improvements which in the aggregate exceed $25,000; (e) declared or paid any dividends or made any other distribution on or in respect of, or directly or indirectly purchased, retired, redeemed or otherwise acquired any shares of, its capital stock; (f) suffered any labor disputes or organizational activity by its employees; (g) issued or sold any shares of its capital stock or rights, options or warrants to purchase its capital stock, or any securities convertible into its capital stock other than as disclosed on Schedule 1.1; (h) become bound by or entered into any contract, commitment or transaction other than in the ordinary course of business; (i) disposed of any of its assets, other than in the ordinary course of business or (j) entered into any contract or agreement to do or perform any of the foregoing actions. -17- 22 4.10 Financial Statements. Exhibit C contains copies of the independently audited consolidated financial statements of the Parent, the Corporation and the Ohio Subsidiary at December 31, 1994, December 31, 1995, and December 31, 1996 (the last 3 fiscal years) and unaudited consolidated revenue reports and income statements of the Parent, the Corporation and the Ohio Subsidiary for each month during the period January 1, 1997 through July 31, 1997 (the "Financial Statements"). The financial results and condition of the Corporation and the Ohio Subsidiary are consolidated as part of the Financial Statements of the Parent. The Financial Statements accurately reflect all of the income, expenses, equity, liabilities and assets of the Company in existence at the respective dates thereof and the operation of the Company as of such dates. The Assets include all of the assets reflected in such Financial Statements and all assets acquired since the date of such Financial Statements, excepting only such assets as have been consumed in the normal course of business or as have been destroyed by fire, Acts of God or other occurrences beyond the control of the Company, or are not required to be included in accordance with GAAP. The Financial Statements, including the notes thereto: (a) are in accordance with the books and records of the Company; (b) present fairly the financial condition of the Company as of the respective dates thereof and its results of operations for the respective periods then ended; and (c) except in the case of the Financial Statements for the period January 1, 1997 through July 31, 1997 for year end adjustments and the absence of notes, or except as indicated in the notes to such Financial Statements, have been prepared in accordance with GAAP, consistently applied with prior periods, with no material difference between such statements and the financial records maintained, and the accounting methods applied, by the Parent, the Corporation and the Ohio Subsidiary for tax purposes. 4.11 Tax Returns and Payments. (a) Except as set forth on Schedule 4.11, the Company: (i) have timely and properly filed or caused to be filed, all tax returns, reports, schedules, declarations, and tax-related documents which they are or have been required to file, by any jurisdiction to which they are or have been subject to taxation, all such tax returns being true, correct and complete; (ii) have timely paid or caused to be paid in full all taxes which are or were due and payable to any taxing authorities; (iii) have made or caused to be made all withholdings of taxes required to be made, and such withholdings have either been timely paid to the appropriate governmental agency or set aside in accounts for such purpose; and (iv) have otherwise satisfied in all material respects all legal requirements applicable with respect to such obligations to all taxing jurisdictions. True, correct and complete copies of the federal, state income tax returns and state and local sales, use, real and personal property tax returns of the Company for the last 3 fiscal years have been delivered or at least 10 business days prior to Closing will be delivered by Sellers to Buyer. (b) The Company has properly accrued and reflected on the Financial Statements and will from the date hereof through the Closing Date properly accrue, all liabilities for taxes and assessments, all such accruals being in the aggregate sufficient for payment of all such taxes and assessments. Through the Closing Date, Company will timely and properly file all tax returns which they are required to file, all such tax returns to be true, correct and complete. Sellers will pay or cause to be paid when due all taxes, if any, which have become due on or before the Closing Date pursuant to such returns or reports or forms, or pursuant to assessments received by the Company, provided that Buyer will cause the Company to pay such taxes to the extent that such taxes are reflected as current liabilities in Closing WC. -18- 23 (c) The federal and state income tax returns of the Company have not been audited by the Internal Revenue Service or state taxing authority, as the case may be. (d) Except as set forth on Schedule 4.11, there are no unassessed tax deficiencies proposed or to Seller's best knowledge threatened against the Company, nor are there any agreements, waivers, or other arrangements providing for extension of time with respect to the assessment or collection of any tax against the Company or any actions, suits, proceedings, investigations or claims now pending against the Company with respect to any tax, or any matters under discussion with any federal, state, local or foreign authority relating to any taxes. (e) Except with respect to the current group, the Parent, the Corporation and the Ohio Subsidiary are not and have never been members of an affiliated group of corporations (within the meaning of Section 1504 of the Internal Revenue Code (the "IRC")). The Company is not a party to, are not bound by, and do not have any obligation under any tax sharing, tax indemnity, or similar agreement. The Company has not made and will not make a change in the method of accounting for a taxable year beginning on or before the Closing Date, which would require it to include any adjustment under Section 481(a) of the IRC in taxable income of any taxable year beginning on or after the Closing Date. The Company has not filed a consent pursuant to Section 341(f) of the Internal Revenue Code, or agreed to have Section 341(f)(2) of the IRC apply to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of the IRC) owned by it. The Parent and the Subsidiaries have not been target corporations or target affiliates in a qualified stock purchase within the meaning of Section 338 of the IRC (or any predecessor provision). (f) For purposes of this Agreement, "tax" and "taxes" includes all income, gross receipts, franchise, excise, transfer, severance, value added, sales, use, wage, payroll, workmen's compensation, employment, occupation, intangibles, and real and personal property taxes; taxes measured by or imposed on capital; levies, imposts, duties, licenses, legislation fees; other taxes imposed by a federal, state, municipal, local, foreign or other governmental authority or agency, including assessments in the nature of taxes; including interest, penalties, fines, assessments and deficiencies relating to any tax or taxes; and including any transferee or secondary liability for taxes and any liability in respect of taxes as a result of being a member of any affiliated, consolidated, combined or unitary group or any liability in respect of taxes under a tax sharing, tax allocation, tax indemnity or other agreement. (g) For purposes of this Agreement, "tax return" or "tax returns" includes all reports, estimates, information, statements and returns relating to or required to be filed in connection with any taxes pursuant to the statutes, rules or regulations of any federal, state, local or foreign government taxing authority. 4.12 Agreements with Employees. (a) Except as set forth on Schedule 4.12, the Company is not a party to any employment agreement, written or oral, which it cannot terminate at will on or after Closing without obligation or liability. (b) The names, titles and rates of compensation of all of the employees of the Company are listed on Schedule 4.12. None of the key management employees has indicated to the Company any intention to terminate his or her employment with the Company other than Robert J. Shiver. -19- 24 (c) Each of the Parent, the Corporation and the Ohio Subsidiary, have entered into a non-compete/non-solicitation/non-disclosure agreement substantially in the form included in Schedule 4.12 with each of its respective key employees designated on Schedule 4.12. 4.13 Intellectual Property Rights. Schedule 4.13 sets forth any patents (including all reissues, divisions, continuations and extensions thereof), applications for patents, patent disclosures docketed, inventions, improvements, trademarks, trademark applications, trade names and copyrights owned by the Company or under which the Company otherwise has rights, and all licenses, franchises, permits, authorizations, agreements and arrangements that concern the same or that concern like items owned by others and used by the Company. True, correct and complete copies of all such licenses, franchises, permits, authorizations, agreements and arrangements have been delivered by Sellers to Buyer. The Company has not received any notice of, any conflict with the asserted rights of others with respect to any of these intellectual property rights, or any other intellectual property rights used in connection with the Security Business. The Company owns or is the licensee of all rights to all patents, patent applications, inventions, improvements, trademarks, trademark applications, trade names and copyrights necessary to conduct the Security Business as presently conducted, including the names "Centennial," "Masada Security," "Sonitrol of Lake County," "Sonitrol of Cincinnati," Sonitrol of Dayton," and "Habitec Security." The consummation of this transaction will not cause the loss or impairment of any of Company's rights under any of the items described on Schedule 4.13.. 4.14 Business Documents. Except for the Subscriber Contracts, agreements to provide third party monitoring and Business Documents all of which are identified on Schedule 1.2(b)(iii)(A), Schedule 1.2(b)(iii)(B), and Schedule 1.2(b)(iii)(C), the Company does not have any presently existing material contract, agreement, lease, permit, consent, license or commitment, whether written or oral, affecting or relating to the Security Business. As used in the prior sentence "material" means any such agreement, document or instrument that cannot be terminated by Company on 30 day's or less notice without liability to Company, or which provides for annual payments in excess of $5,000. All of the Business Documents are valid and enforceable against the Company, and to Sellers' and Parent's best knowledge are valid and enforceable against the other parties thereto in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. Sellers will cause the Company to deliver or make available to Buyer not later than 10 business days prior to Closing copies of all of the Business Documents identified on Schedule 1.2(b)(iii)(C). Without limiting the foregoing, Sellers represent that the Security Business and all equipment used in connection with it are now being utilized, operated and maintained, in all material respects, in conformity with the Business Documents, with all applicable laws and regulations (including zoning regulations), and with the orders, rules and regulations of any government or governmental agency or authority having jurisdiction with respect thereto. Sellers warrant that the Company does not have any manner at any time failed to so utilize, operate and maintain the Security Business in a manner that could now or hereafter result in cancellation or termination of any of the Business Documents, or in liability for damages under any of the Business Documents or any other applicable laws and regulations, nor has the Company, or to the knowledge of the Sellers, any other party to the Business Documents, defaulted in its obligations pursuant to any of the Business Documents, which default could result in the cancellation of any Business Document or adversely affect the rights of the Company under that Business Document. The Company is not a party to any -20- 25 franchise, license, distributor or other similar type of agreement. Except as set forth on Schedule 4.14, all entities from whom the Company has acquired assets are governed by noncompetition agreements which (a) are not subject to termination, cancellation or modification as a result of a change of control of Company and (b) have a term that extends beyond the Closing Date. 4.15 Subscriber and System Information. (a) Except as disclosed on Schedule 4.15, the Company has entered into written agreements with all of its customers; and all of the Subscriber Contracts are valid and enforceable and are in full force and effect in accordance with their terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles, do not require the consent of any customer or require notice to any customer for a change of control of Company, and contain terms and conditions which are standard within the electronic security industry, including those involving limitation of liability/liquidated damages, third-party indemnification, automatic renewals and the right to increase customer rates. Schedule 4.15 includes a true and correct copy of each form of contract that the Company currently has in effect with its customers (the "Form Contracts"). Except as set forth on Schedule 4.15, the Company has not modified the Form Contracts and have not undertaken any obligations or made any warranties or guarantees to any customers other than those set forth in the Form Contracts. Not more than 5% of the customers included on Schedule 1.2(b)(iii)(A) are parties to an oral contract or a Form Contract that has been altered or amended in any material manner, for example, deleting or modifying the limitation of liability or third party indemnity provisions) (each such oral contract or altered or modified written contract a "Modified Agreement") or are parties to contracts other than the Form Contracts (a "Customer Purchase Order"). None of Company's customers have a history of excessive false alarms. The Company has not failed in any material respect to so utilize, operate and maintain the Security Business in a manner that could now or hereafter result in cancellation or termination of any of the Subscriber Contracts, or result in liability for damages under any of the Subscriber Contracts or any other applicable laws and regulations, nor has the Company, or to the knowledge of the Sellers, any other party to the Subscriber Contracts, defaulted in its obligations pursuant to any of the Subscriber Contracts, which default or failure could result in the cancellation of any Subscriber Contracts or materially adversely affect the rights of the Company under any Subscriber Contracts. (b) Except as set forth on Schedule 4.15, the Company has provided each residential customer with the 3-day right of rescission in compliance with the provisions of 16 C.F.R. Part 429 (Cooling-Off Period for Door-to-Door Sales) and any applicable state laws. Sellers acknowledge that any failure on the Company's behalf to comply with such regulation and laws in connection with any transaction involving a residential customer may result in such customer having the right to rescind or cancel such transaction. Sellers further acknowledge that Buyer does not intend to be responsible for the payment of any liability that might arise as a result of any such rescission or cancellation, and therefore Buyer is entitled to indemnification from Sellers as provided in Section 9 hereof. (c) Schedule 1.2(b)(iii) sets forth a true and accurate list of the amounts which the Company charges its customers for monitoring, service, maintenance, repairs, open/close, refundable deposits, reconnect fees and any other services provided by the Company to the extent an itemization of such charges is reflected on such Schedules. The Company does not have any obligations or liabilities to customers or to other users of the Company's electronic security services which are material to the Security Business, except: (i) with respect to deposits made by such customers or such other users, if any; and (ii) the obligation to supply services (including -21- 26 warranty service) to customers in the ordinary course of business. All payment calculations and other charges made or assessed by the Company pursuant to the Subscriber Contracts have been done accurately, have been appropriately disclosed to the customer and do not conflict with any applicable law, rule or regulation. To the best knowledge of Sellers, there are no complaints by customers or other users of the Company's electronic security services that, individually or in the aggregate, could have a material adverse effect upon the Assets or the financial condition or operation of the Security Business as it presently conducted and operated. (d) The Company does not have any free service liability to customers existing with respect to the Security Business, other than as set forth in Schedule 4.15, and nothing would prohibit Buyer from discontinuing, without liability or obligation, any free service after Closing. The Company does not have any obligation or liability for the refund of monies to their customers other than obligations to refund deposits made by customers in the ordinary course of business. Under applicable law, the Company is not required to pay their customers interest on these refundable deposits. Since December 31, 1996, none of the Sellers or any of the Company's officers, directors, shareholders, employees or agents have paid directly or indirectly (except for their own residences) any accounts receivable of customers. (e) All of the alarm systems installed or taken over by the Company are in good working order and condition, failure of a customer to report to the Company any problem with an alarm system which are known to the customer and customer non-use excepted, and have been installed, inspected, tested and maintained in accordance with good and workmanlike practices prevailing in the security alarm industry, in accordance with any applicable specifications or standards of U.L. and all local authorities, including local telephone companies. All such alarm systems conform in all material respects to the contracts pursuant to which they were installed and in no case has an installation been made by the Company which at the time of installation was in violation of any applicable law, code or regulation. All manufacturer's warranties applicable to any such alarm systems are freely assignable to Buyer. The Company is not aware of any difficulty in obtaining replacement parts for its product lines. All inspections, tests and repairs required to be performed pursuant to the Contracts have been performed in a timely manner. (f) The Company's average gross attrition rate(2) over the period from January 1, 1996 through July 31, 1997 and over the period from January 1, 1997 through July 31, 1997 has not exceeded 13% on an annualized basis. No one account represents more than 2% of the Company's RMR. Except as set forth on Schedule 4.15, there has been no general, overall increase in the Company's rates in the last 12 months, and Sellers agree that there will be no such increase in such rates prior to Closing; provided, however, that nothing contained herein will limit the Company's right to increase rates in the ordinary course of business on an account-by- account basis for customers whose contracts are renewed in accordance with existing practices. - -------- (2) Gross Attrition is the percentage obtained by dividing the number of Alarm Accounts existing on the first day of the measurement period and terminated or lost for any reason during the measurement period, divided by the number of Alarm Accounts existing on the first day of the period. If the measurement period is less than a year, the number of lost accounts is annualized. For example, if the number of Alarm Accounts on the first day of a six month measurement period was 1000, and the number of Alarm Accounts terminated or lost during the period was 50, the annualized Gross Attrition rate would be 10% (50 accounts lost in 6 months is 100 accounts on an annualized basis). -22- 27 Except as set forth in Schedule 4.15 Sellers are not aware of any legal or economic impediments which would prevent Buyer from instituting any rate increases after the Closing Date. (g) The Company has the sole right to use all of the telephone lines and numbers applicable to its accounts with the exception of not more than 500 Alarm Accounts which Company is in the process of converting. Schedule 4.15 sets forth a list of all of the telephone numbers (voice and data) used in connection with the operation of the Security Business, and its point of termination (e.g., Rapid Response or other monitoring facility). In addition, Schedule 4.15 sets forth the approximate number of systems monitored by each third party monitoring facility. (h) The Company is in substantial compliance with all known false alarm ordinances and has paid all false alarm fines, necessary permit fees, and/or license fees which are the obligations of the Company (as opposed to the obligation of its customers). (i) To the best knowledge of Company's key management personnel, there are no pending plans by any telephone company to change the dialing procedures or exchange numbers within the areas servicing the customers of the Security Business such that the Company would need to reprogram its customer's digital dialers within the 6 month period immediately following the Closing Date. (j) All equipment sold or leased by the Company to its customers was of merchantable quality. The Company has not breached any express or implied warranties in connection with such sales or leases. (k) The total RMR as of July 31, 1997 was not less than $1,200,000. The total Wholesale RMR as of July 31, 1997 was not more than $3,000.00. The total Non-Qualified RMR as of September 30, 1997 was not more than $40,000 excluding Alarm Accounts on the Slow Pay Schedule. (l) Other than as reflected in the Notes, the total amount of the purchase price or other consideration held back from sellers of security businesses and/or assets to Company related to the acquisition of security business and/or assets is not more than $816,000 as of the Closing Date. 4.16 Business Market. The Company's customers are located in the states set forth in Schedule 4.16. 4.17 Central Station. All of the Company's Alarm Accounts are monitored at (a) the Company's central station located in Dayton, Ohio; (b) Rapid Response Security Service ("RRSS") and (c) the other third-party monitoring facilities set forth on Schedule 4.17, pursuant to agreements between the Company and each monitoring facility, complete copies of which have been provided to Buyer. Except as set forth on Schedule 4.17, all of the Alarm Accounts are monitored on telephone receiver lines, the right to which belong to the Company and, except as set forth on Schedule 4.17 are capable of being transferred to Buyer's monitoring facilities via a line swing, and no field re-programming is necessary to transfer the monitoring of the Alarm Accounts from any of the monitoring facilities to Buyer's monitoring facilities. The Company has an existing right of first refusal to purchase the assets of RRSS which right shall survive the Closing of this transaction and shall not be void or voidable or capable of being rescinded or -23- 28 canceled by RRSS or otherwise modified as a result of the sale of Stock and the resulting change of control of the Company contemplated herein. 4.18 U.L. Certification. The central station of the Company in Dayton, Ohio, is certified by Underwriters Laboratories, Inc. ("U.L.") as qualified for the Listing Categories set forth on Schedule 4.18. Sellers acknowledge the importance to the Security Business of the U.L. certifications in the competitive climate of the electronic security industry, and Sellers and the Company are not aware of any reason why the Company could lose any of its U.L. certifications. Sellers further represents that the Company's central station recently was inspected by U.L. and nothing was found that would jeopardize that U.L. Certification. The Company is required by U.L. to perform fire inspections on the accounts set forth on Schedule 4.18, and all inspections required by U.L. to be performed prior to the Closing Date, have been timely performed or will be timely performed prior to the Closing Date. Schedule 4.18 also sets forth the alarm accounts that have been issued a U.L. Certificate. 4.19 Broker or Finder. (a) None of the Parent, Corporation, the Ohio Subsidiary, Sellers or any party acting on their behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. (b) Except as set forth on Schedule 4.19 none of Parent, Corporation or Ohio Subsidiary is a party to any agreement with a broker or finder pursuant to which it is obligated to pay any fee or commission to any broker, finder or intermediary for or on account of any acquisitions of any stock, assets or properties, including, without limitation, alarm monitoring accounts, at any time. 4.20 Labor and Employment Matters. (a) Except as set forth on Schedule 4.20, the Parent, the Corporation and the Ohio Subsidiary are not and have not been a sponsor of, party to or obligated to contribute to any employee benefit plan (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), or any employment contract, employee loan, incentive compensation, profit sharing, retirement, pension, deferred compensation, severance, termination pay, stock option or purchase plan, guaranteed annual income plan, fund or arrangement, payroll incentive, policy, fund, agreement or arrangement, non-competition or consulting agreement, hospitalization, disability, life or other insurance plan, or other employee fringe benefit program or plan, or any other plan, payroll practice, policy fund agreement or arrangement similar to or in the nature of the foregoing, oral or written ("Employee Benefit Plan(s)" or "Plan(s)"), and have not been a party to any collective bargaining agreements. No such Plan is a multiemployer plan as defined in Section 3(37) of ERISA or subject to Title IV of ERISA. True, correct and complete copies of all of the written Plans and labor agreements, and true, correct and complete written descriptions of all of the oral Plans described in Schedule 4.20 have been or at least 10 business days prior to Closing will be delivered to Buyer. (b) Except as set forth on Schedule 4.20, the Parent, the Corporation and the Ohio Subsidiary have no unfunded liabilities, or potential, contingent or actual withdrawal liabilities, on account of or in connection with any of the Plans or otherwise. All contributions or premium payments due from the Parent, the Corporation and the Ohio Subsidiary to such -24- 29 Plans have been paid in a timely manner, and any additional contributions or premium payments due on or before the Closing Date will have been paid by that date. (c) With respect to each Employee Benefit Plan: (i) all disclosures to employees relating to each such Plan and required to have been made on or before the Closing Date have been or will be duly made by that date; (ii) there is no litigation, disputed claim (other than routine claims for benefits), governmental proceeding, inquiry or investigation pending or threatened with respect to each such Plan, its related trust, or any fiduciary, administrator or sponsor of such Plan; (iii) each such Plan has been established, maintained, funded and administered in all material respects in accordance with its governing documents, and any applicable provisions of ERISA, the IRC, other applicable Law, and all regulations promulgated thereunder; (iv) the Parent, the Corporation and the Ohio Subsidiary have or prior to Closing will have delivered to Buyer a true, correct and complete copy of (A) each trust or custodial agreement and each deposit administration, group annuity, insurance or other funding contract associated with each such Plan, (B) the most recent financial information for each such Plan, (C) the most recent actuarial or valuation report relating to each such Plan, (D) if applicable, the most recent Return/Report of each Plan (including attachments) required to be filed with any governmental agency, (E) the Plan document for each such Plan, (F) the summary Plan description (including summaries of material modifications, if any) for each such Plan, and (G) if applicable, each Form 5310 (application for Determination Upon Termination, etc.) filed with the Internal Revenue Service or the Pension Benefit Guaranty Corporation (the "PBGC") with respect to any Plan in the current Plan year or any of the 5 Plan years preceding the current Plan year; (v) neither any such Plan nor any fiduciary has engaged in a prohibited transaction as defined in ERISA Section 406 or IRC Section 4975 (for which no individual or class exemption exists under ERISA Section 408 or IRC Section 4975, respectively); (vi) all filings and reports as to each such Plan required to have been made on or before the Closing Date to the Internal Revenue Service, or to the U.S. Department of Labor or to the PBGC, have been or will be duly made by that date; (vii) each such Plan which is intended to qualify as a tax-qualified retirement plan under IRC Section 401(a) has received a favorable determination letter(s) from the Internal Revenue Service as to qualification of such Plan for the period from its adoption through the Closing Date; nothing has occurred, whether by action or failure to act, which has resulted in or would cause the loss of such qualification; and each trust thereunder is exempt from tax pursuant to IRC Section 501(a); (viii) no event has occurred and no condition exists relating to any such Plan that would subject the Parent, the Corporation and the Ohio Subsidiary to any tax under IRC Sections 4972 or 4979, or to any liability under ERISA Section 502; and (ix) to the extent applicable, each such Plan has been funded in accordance with its governing documents. ERISA and the IRC, has not experienced any accumulated funding deficiency (whether or not waived) and has not exceeded its full funding limitation (within the meaning of IRC Section 412) at any time. (d) With respect to any Plan which provides group health benefits to employees of the Parent, the Corporation and the Ohio Subsidiary and is subject to the requirements of IRC Section 4980B and ERISA Title 1 Part 6 ("COBRA"): (i) such group health plan has been administered in every respect in accordance with its governing documents and COBRA; and (ii) all filings, reports, premium payments (if any) and notices as to each such group health plan required to have been made on or before the Closing Date to government agencies, participants and/or beneficiaries have been or will be duly made by that date. (e) Except as disclosed on Schedule 4.20, none of the Parent, the Corporation or the Ohio Subsidiary (i) is a party to any collective bargaining agreement or discussions or negotiations with any person or group which may reasonably be expected to result in any such agreement, (ii) has within the last 5 years experienced any strike, grievance, unfair labor practice -25- 30 claim or other labor difficulty (other than grievances and unfair labor practice claims in which the Parent's, the Corporation's and the Ohio Subsidiary's only exposure was to monetary damages of $10,000 or less), (iii) is aware of any threatened strike, grievance, unfair practice claim or other labor difficulty, and there exists no reasonable basis for the assertion of any grievance or, unfair labor practice claim or other charge or complaint against the Parent, the Corporation and the Ohio Subsidiary by or before the National Labor Relations Board or any other Governmental Authority or representative thereof, (iv) is aware of any filing by any employee or employee group seeking recognition as a collective bargaining representative or unit, or (v) has any knowledge that any former employer of any of its employees is contemplating remedial action of any nature against that employee or the Parent, the Corporation and the Ohio Subsidiary based on the employee having terminated the former employment and having become an employee of the Parent, the Corporation and the Ohio Subsidiary. (f) Except as disclosed on Schedule 4.20, the Parent, the Corporation and the Ohio Subsidiary are not obligated to and do not (directly or indirectly) provide death benefits or health care coverage to any former employees or retirees. (g) Except as disclosed on Schedule 4.20, the consummation of this transaction and the change of control of Company will not trigger, accelerate, vest or escalate any benefits, rights or features of any policy, plan or practice, including any payment thereunder, to any employees of Company (e.g., such as golden parachute obligations related to a change of control of Company or similar benefits). (h) The Parent, the Corporation and the Ohio Subsidiary have complied with all applicable provisions of the Immigration Reform and Control Act of 1986. 4.21 Creditors. Schedule 4.21 sets forth a true, complete and correct list of each of the creditors of the Company and the amount due by the Company to each such creditor. Except as set forth on Schedule 4.21, the Company has not incurred or suffered any debt, liability or other obligation of a material nature, whether accrued, absolute, contingent or material nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, except for debts, liabilities or other obligations incurred in the ordinary course of business since July 31, 1997 which are usual and normal in amount both individually and in the aggregate. Except for certain Notes designated by Buyer or as included in the Working Capital Adjustment, all of such debts, liabilities and obligations will be satisfied by Sellers or the Company on or before the Closing Date. Except as disclosed on Schedule 4.21 each of the Notes may be paid by Company or Buyer at Closing with out any prepayment penalty or other surcharge. 4.22 Contracts. Except as disclosed on Schedule 4.22 or elsewhere in this Agreement, the Company is not a party to or bound by any written or oral: (a) agreement or understanding not made in the ordinary course of its business or which is materially adverse to it; (b) continuing contract for the future purchase of materials, supplies, machinery or other equipment in excess of the requirements of its business now booked or of normal operating requirements requiring payment in excess of $50,000 in the aggregate or which cannot be canceled without liability on not more than 60 days notice; (c) sales agency agreement or advertising contract; (e) contract or agreement with any employee, director or officer; (e) contract or agreement containing covenants by Sellers, or the Company not to compete in any lines or business or with any person; (f) dealership, -26- 31 commission or distributorship agreement, right or other similar arrangement; (g) loan, credit or financing agreements, including all agreements for any commitments for future loans, credit or financing; or (h) guarantee or suretyship agreement. 4.23 Environmental Matters. The Company does not own, operate or lease or has owned, operated or leased any property that has used, generated, stored or disposed of any Hazardous Materials, nor to the best of Company's knowledge after due inquiry have there been any Hazardous Materials used, generated, stored or disposed of by any previous owner or any other third-party on any property owned, operated or leased by the Company or any of its affiliates. 4.24 Banks, Officers and Powers of Attorney. Schedule 4.24 contains: (a) a list of all banks (with account numbers) in which the Parent or the Subsidiaries has an account or safe deposit box and the names of all persons authorized to draw thereon or have access thereto; (b) the names of all incumbent directors and officers of the Parent, the Corporation and the Ohio Subsidiary; and (c) the names of all persons holding powers of attorney from the Parent, the Corporation and the Ohio Subsidiary and a summary statement of the terms thereof. 4.25 Inventory. The Inventory consists of items of a quality and quantity usable and saleable in the usual and ordinary course of business, and is reflected in the Financial Statements with adequate provision for obsolete, outdated, unsalable, unusable or damaged items. All items of Inventory consisting of finished goods meet applicable design and manufacturing specifications and comply with any and all warranties customarily given to Subscribers or customers with respect to the various items of Inventory. 4.26 Liabilities. The Company does not, and at the Closing will not have any obligations, indebtedness or Liabilities, contingent or otherwise, other than: (i) obligations of the Company to Subscribers pursuant to the Subscriber Contracts or obligations under the Business Documents from events first occurring on or after the Closing Date; (ii) those disclosed or adequately reserved for in the Financial Statements (as updated by the Closing WC); (iii) those expressly described or listed in Schedule 4.21, Schedule 4.22, and Schedule 4.26; (iv) immaterial obligations, indebtedness or liabilities arising in the ordinary course of business and not required by GAAP to be recorded in financial statements or notes thereto, and which in the aggregate do not exceed $7,500.00; (v) unexpired real and personal property lease obligations which are disclosed on the schedules hereto; and (vi) the Notes. All of the Liabilities set forth on Schedule 4.21(other than the Notes) shall have been paid by Company prior to Closing or shall be included in the Closing WC unless otherwise expressly agreed to by Buyer. 4.27 Schedules Delivered All of the schedules described in this Agreement and prepared by the Company which are being delivered to Buyer herewith or to be delivered at Closing are accurate and complete as of the date delivered, and will be accurate and complete as of the Closing Date, -27- 32 unless the schedule reflects a different date, and if so, are true, accurate and complete as of the date indicated, and have been prepared in conformity with the provisions of this Agreement. 4.28 Disclosure. No representation or warranty by Sellers in this Agreement or any Schedule or Exhibit, or any statement, list or certificate furnished or to be furnished by Sellers pursuant to this Agreement, or in connection with these transactions, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein not misleading or necessary in order to provide a prospective purchaser of the Stock or the Security Business with proper information as to such stock and business. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER As an inducement to Sellers and Parent to enter into this Agreement and to consummate these transactions, Buyer represents, warrants and covenants to Sellers and Parent, and agrees that as of this date and through and including the Closing Date: 5.1 Authority of Buyer. Buyer is a corporation duly incorporated and organized, validly existing and in good standing under the laws of the state of Kansas. Buyer has full corporate power and authority to enter into this Agreement, to consummate these transactions and to comply with its terms, conditions and provisions. This Agreement constitutes, and each other agreement and instrument to be executed and delivered pursuant to the terms of this Agreement (collectively, the "Buyer Transaction Documents") by Buyer will constitute, the legal, valid and binding obligation of Buyer enforceable in accordance with such Buyer Transaction Document's terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles. Neither the execution and delivery of this Agreement or other Buyer Transaction Documents, nor the consummation of the transactions contemplated by it or them will conflict with or result in any violation of or constitute a default under any term of the Articles of Incorporation or Bylaws of Buyer or any agreement, mortgage, debt instrument, indenture or other instrument, judgment, decree, order, award, law or regulation by which Buyer is bound. 5.2 Consents. Other than as set forth on Schedule 5.2 and other than the consents that Sellers or Company must obtain and disclosed on Schedules 4.4 and 4.5, no consent, approval, authorization or other action by, or filing or registration with, any federal, state or local governmental authority or any other person or entity, is required in connection with the execution and delivery by Buyer of this Agreement, the consummation by Buyer of the transactions contemplated hereby or the performance of Buyer's obligations hereunder. 5.3 Broker or Finder. Neither Buyer nor any party acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of these transactions, except for the services of Barnes Associates, Inc. whose fee Buyer agrees to pay. -28- 33 5.4 Litigation. There is no action, suit or preceding pending or, to the best knowledge of Buyer threatened which questions the legality or propriety of these transactions 5.5 Investment Purpose. Buyer is an accredited investor as defined in the Federal Securities Act of 1933 as amended. Other than as disclosed on Schedule 5.5, Buyer is acquiring the Stock for investment purposes only for its own account and not with a view to resell or otherwise distribute; and Buyer does not presently intend to resell or otherwise dispose of all or any part of the Stock. Buyer acknowledges that Sellers have relied upon this representation in making Sellers' representations set forth in Section 3.2(c). 5.6 Disclosure. No representation or warranty by Buyer in this Agreement or any Schedule or Exhibit, or any statement, list or certificate furnished or to be furnished by Buyer pursuant to this Agreement, or in connection with these transactions, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein not misleading. 6. ACTIONS PRIOR TO OR ON THE CLOSING DATE The parties covenant and agree to take the following actions prior to or after the Closing Date: 6.1 Prior To or At Closing. The parties covenant and agree to take the following actions prior to or on the Closing Date: (a) Investigation. (i) From the date of this Agreement through the Closing Date, and for a period of not less than 15 business days after the date of this Agreement (the "Due Diligence Period"), the Parent will provide Buyer and its representatives, consistent with the maintenance of employee morale and so as not to unreasonably interfere with the conduct of the Security Business, access during normal business hours to the employees, properties, facilities, equipment, and books and records of the Company. The Parent and Sellers acknowledge that Buyer also desires to contact customers (including making telephone inquiries and local on-site visits) and suppliers of the Company and the Company agrees to cooperate with Buyer in making such contact, in order that Buyer will have full opportunity to investigate the business affairs of the Company. All contacts with customers will be done in a manner that will not disclose the identity of Buyer or the transactions contemplated by this Agreement. All investigations by Buyer pursuant to this provision shall be completed during the Due Diligence Period. (ii) During the Due Diligence Period, Buyer and its counsel, auditors and other representatives will have access to the premises, properties (including properties held under lease), corporate and financial records, titles, deeds and other documents of the Company, and to the working papers of the auditors of the Company used in the preparation of the -29- 34 Financial Statements and will be provided such information and assistance from the officers, directors and employees of the Company and from the auditors of the Company in connection with their investigations as Buyer or its counsel, auditors or other representatives will reasonably request. (b) Preservation of Representations and Warranties. (i) Sellers and Parent will refrain, and Parent will cause the Subsidiaries to refrain from knowingly taking any action which would render untrue any representation, warranty or covenant made by the Company or Sellers contained in this Agreement, and will not knowingly omit to take any action, the omission of which would render untrue any such representation, warranty or covenant. Promptly upon the occurrence of, or promptly upon Parent or Sellers becoming aware of the impending or threatened occurrence of, any event which would cause any of the representations or warranties of Sellers or Company contained herein, or in any Schedule or Exhibit, to be materially inaccurate, Sellers will give detailed written notice thereof to Buyer and will use their best efforts to prevent or promptly remedy the same. Buyer will refrain from knowingly taking any action which would render untrue any representation, warranty or covenant made by Buyer contained in this Agreement, and will not knowingly omit to take any action, the omission of which would render untrue any such representation, warranty or covenant. Promptly upon the occurrence of, or promptly upon Buyer becoming aware of the impending or threatened occurrence of, any event which would cause any of the representations or warranties of Buyer contained herein, or in any Schedule or Exhibit, to be materially inaccurate, Buyer will give detailed written notice thereof to Parent and will use its best efforts to prevent or promptly remedy the same. (ii) Buyer on the one hand and the Parent and Sellers on the other hand will promptly notify the other party of any action, suit or proceeding that will be instituted or threatened against such party or the Company to restrain, prohibit or otherwise challenge the legality of any of these transactions. Parent or Sellers will promptly notify Buyer of any lawsuit, claim, proceeding or investigation that may be threatened, brought, asserted or commenced against Sellers relating to the Stock or the Company, or the Company and of any material damage, destruction or other casualty, whether or not insured, to the Assets. As used in the preceding sentence, "material" means an amount more than $5,000 for any single occurrence and more than $15,000 in the aggregate. (c) Consents and Approvals. Promptly after the execution of this Agreement, each party will use its best efforts to obtain all third-party consents and approvals necessary to consummate this transaction. Parent and Sellers acknowledge that obtaining all of the Required Consents is a condition of Closing by Buyer. (d) Exclusive Dealing. Sellers, the Parent and their affiliates will deal, and will cause the Company to deal, exclusively with Buyer with respect to the transactions contemplated by this Agreement, and will not solicit, encourage or entertain offers of inquiry (nor will Sellers or any of their affiliates authorize or permit any director, officer, employee, attorney, accountant or other representative or agent of Sellers, the Parent, the Corporation or the Ohio Subsidiary, to solicit, encourage or entertain offers or inquiries) from other companies, persons or entities, provide information to or participate in, or continue after the date hereof, any discussions or negotiations with any -30- 35 companies, persons or entities with a view to an acquisition of any of the Stock, the Assets or the Security Business. (e) Lien Searches. The Parent will have delivered to Buyer, at Sellers' expense, at least 3 business days prior to the end of the Due Diligence Period, complete copies of the lien searches performed by the Parent against the Parent, the Corporation and the Ohio Subsidiary showing all the UCC-1 financing statements, federal, state or local tax liens, unsatisfied judgments, and pending litigation filed against such entities. In addition, the Parent has delivered to Buyer copies of all lien searches conducted by or on behalf of the Company or obtained by the Company in connection with any prior acquisitions by the Company. (f) Maintenance of Business. The Parent and Sellers agree that they will, unless otherwise expressly consented to by Buyer in writing or as set forth on Schedule 6.1, cause the Company to: (a) continue to operate the Security Business in the ordinary course of business as presently conducted; (b) will maintain the Assets (including maintenance of the inventories of spare equipment and parts listed on Schedule 1.2(b)(i)); (c) keep all of their business books, records and files all in the ordinary course of business in accordance with past practices consistently applied; (d) continue to perform their obligations under all of the Business Documents and Subscriber Contracts; (e) not sell, transfer, assign or permit the creation of any Encumbrance on any of the Assets; (f) not, other than in the ordinary course of business, permit the amendment or cancellation of any of the Subscribers Contracts or Business Documents without the prior written consent of Buyer; (g) not enter into any contract or commitment nor incur any indebtedness or other liability or obligation of any kind relating to the Security Business that is not in the ordinary course of business without the prior written consent of Buyer; (h) not enter into any compromise or settlement of any litigation, proceeding or governmental investigation relating to its properties or business other than in the ordinary course of business; (i) not acquire any accounts, or other than in the ordinary course of business, any assets from any third-party; (j) not lend money or otherwise pledge their credit; (k) not, nor will Sellers permit any of the Company's officers, directors, shareholders, agents or employees to, pay any of the Company's accounts receivable from customers; (l) not decrease their customer rates or conduct any marketing programs, including any amnesty programs, involving free service or reduced rates for service except in the ordinary course of business consistent with the Company's past practices which are described on Schedule 6.1(f); and (m) sell all new systems and services in a commercially reasonable manner and priced in accordance with the Company's standard pricing policies and sales practices now in effect. Buyer agrees that it will not unreasonably withhold its consent where such consent is required in this section. (g) Insurance. Parent will cause the Company to maintain in full force and effect all existing insurance policies to cover and protect the Assets against damage or destruction, and insure the Company against liability. -31- 36 (h) Organization and Transition. The Parent will cause the Company to use all reasonable efforts consistent with sound business judgment to preserve intact their present business and organization, to retain the services of their present employees, to preserve their relationships with customers, suppliers and others having business relationships with them and to maintain the goodwill enjoyed within the areas served by the Security Business. If requested to do so by Buyer, Sellers's Representative will assist in Buyer, as Buyer may reasonably request, in the orderly transition of the Security Business and taking control of the Assets. (i) Consummation of Agreement. Buyer, the Parent and Sellers will use their best efforts to perform and fulfill all obligations and conditions on their part to be performed and fulfilled under this Agreement, to the end that these transactions will be fully carried out. (j) Corporate Matters. The Parent will not and the Parent will not permit the Corporation or the Ohio Subsidiary to: (a) amend their Articles of Incorporation or Bylaws; (b) issue any additional shares of capital stock; (c) issue or create any warrants, obligations, subscriptions, options, convertible securities or other commitments for the issuance of transfer of shares of capital stock; (d) declare or pay any dividend on or make any distribution in respect of capital stock; (e) directly or indirectly purchase, redeem, or otherwise acquire any shares of capital stock; or (f) agree to do any of the foregoing acts. (k) Capitalization. Sellers will cause all warrants to have been redeemed, canceled, converted to Stock or common stock, as the case may be, or otherwise extinguished. All stock options of the Parent, the Corporation, or the Ohio Subsidiary shall have been canceled, redeemed, retired or otherwise extinguished. (l) Accounts Receivable. At Closing, the Parent will deliver to Buyer an accurate, complete and up-to-date aging of all of the accounts receivable of the Company which existed as of a date which is not more than 2 days prior to the Closing Date. Sellers acknowledge that all of the accounts receivable of the Security Business existing on the Closing Date are part of the Assets. (m) Resignations. Sellers will cause all officers and members of the Board of Directors of the Parent and the Subsidiaries to submit resignations on and effective as of the Closing Date, or will remove such officers and members of the Board of Parent and the Subsidiaries who do not resign effective as of the Closing Date or sooner. (n) Crime Busters, Inc. The Company has negotiated the purchase of the alarm accounts and other assets necessary to operate a security business of Crime Busters, Inc. ("CBI") for a purchase price -32- 37 equal to the recurring monthly revenue multiplied by 35.5. A copy of the definitive executed agreement between the Company and CBI is attached hereto as Exhibit H (the "CBI Agreement"). It is contemplated by the parties that the CBI transaction will not close prior to the consummation of the transactions contemplated by this Agreement, and Buyer agrees to cause the Company to complete the transaction in accordance with the terms of the agreement set forth in Exhibit H. Upon closing the transaction, Buyer will add the amount of the deposit initially paid by Company to CBI ($75,000) to the Final Purchase Price. If the CBI transaction closes prior to the Closing Date on the terms and conditions set forth in the CBI Agreement, the cash consideration paid to CBI at or prior to the closing of the CBI transaction will be added to the Purchase Price and paid to Sellers at Closing, provided that in no event shall such cash consideration to be greater than $6,500,000 (exclusive of payments due with respect to Associates accounts and under the dealer program). If the transaction fails to close, and Buyer or Company recovers the $75,000 deposit, Buyer shall pay or cause Company to pay said amount to Sellers. Sellers' and Parent agree that the closing date contemplated in the CBI Agreement will not be advanced or accelerated without the express written consent of Buyer first obtained. Except as provided below, all reasonable attorney's fees and costs incurred by the Company after the date of this Agreement and prior to the Closing Date in connection with the acquisition of CBI will be the obligation of Buyer and will not be included as a liability in the Closing WC. Such attorney's fees shall not exceed $6,000.00, and any fees in excess of such amount shall be included as a liability in the Closing WC. Buyer acknowledges that Sellers make no representations and warranties with respect to CBI other than those set forth in this Section. (o) Payoff of Notes Sellers shall cause Buyer to have received from each holder of a Note designated by Buyer at least 7 business days prior to the Closing Date, and including Toronto Dominion Bank, a "pay-off letter" or equivalent documentation in form satisfactory to Buyer's counsel (whose approval shall not be unreasonably withheld), pursuant to which such holder shall have agreed to accept from the Buyer or Company at the Closing payment in full of all amounts owed with respect to such Note and to release all collateral, if any, for such obligation. Buyer agrees to cause Company to payoff the Notes at or immediately after Closing. (p) Southeast Security Management Co.. The Company is negotiating the purchase of the alarm accounts and other assets necessary to operate a security business of Southeast Security Management Co. ("SSM") for a purchase price equal to the recurring monthly revenue multiplied by 32. A copy of the executed letter of intent between the Company and SSM is attached hereto as Exhibit J (the "SSM Letter of Intent"). Sellers represent, warrant and covenant that Company has not entered into and will not enter into prior to the Closing a binding agreement to purchase alarm accounts and other assets from SSM. 6.2 Post-Closing. (a) Employees. No employee of the Company will automatically remain an employee of the Company as a result of these transactions. Buyer may offer employment to certain employees of the Company on terms and conditions which it announces, and Buyer may, after Closing, unilaterally implement terms and conditions of employment for such persons, including a -33- 38 condition that each potential employee execute Buyer's standard nonsolicitation/nondisclosure agreement. (b) Access to Records. Buyer shall cause the Company to give Sellers' Representative and their accountants reasonable access to all records and documents Sellers may reasonably require related to their obligations hereunder. (c) Reprogramming Costs. Sellers shall pay to Buyer the costs set forth below necessary to reprogram each Alarm Account that can not be transferred to Buyer's monitoring facilities via a line swing or telephone line call forward arrangement and must be reprogrammed either remotely or pursuant to a field visit to the customer's premises. The costs shall be $25.00 for each Alarm Account that may be remotely reprogrammed and by $75.00 for each Alarm Account which requires a field visit to be reprogrammed. However, Buyer agrees to waive the cost and related charge for the first 500 Alarm Accounts that would be subject to the charge. The total cost for reprogrammed Alarm Accounts shall be determined by Buyer after the Valuation Date and prior to the Adjustment Date, and Buyer may offset the amount due to Sellers from the Final Purchase Price. (d) Completion of Work in Progress. Buyer agrees to complete or cause the Company to complete the Work in Progress in the normal course of business and to in accordance with Buyer's standard installation practices and policies and without unreasonable delay. (e) Collection of Accounts Receivable. Buyer agrees to cause the Company to collect the accounts receivable included among the Assets in the normal course of business consistent with the Buyer's practices and policies existing at the Closing Date. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER. On or prior to the Closing Date, Sellers or Parent will have satisfied each of the following conditions, unless waived in writing by Buyer: 7.1 Covenants and Warranties. There will have been no material breach by Sellers or Parent in the performance of any of their covenants and agreements herein; each of the representations and warranties of Sellers contained or referred to in this Agreement which is qualified by materiality will be true and correct on the Closing Date as though made on the Closing Date; each of the representations and warranties of Sellers contained or referred to in this Agreement not qualified by materiality will be true and correct in all material respects on the Closing Date as though made on the Closing Date, except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by Buyer; and Sellers shall cause Sellers' Representative to deliver to Buyer a certificate to that effect, dated the Closing Date, and each Seller will have delivered to Buyer a certificate to that effect, dated the Closing Date, for the -34- 39 representations, warranties and covenants made by such Seller pursuant to Article 3 of this Agreement. 7.2 No Restraint or Litigation. No action, suit or proceeding will be pending or threatened by any third-party (excluding any affiliate of Buyer) or governmental or regulatory agency to restrain, prohibit or otherwise challenge the legality or validity of these transactions or the transfer of any of the Stock or the Assets. 7.3 Necessary Consents, Approvals and Permits. The parties will have received all of the consents listed on Schedule 7.3 (the "Required Consents") and such consents will be valid and enforceable on and after the Closing Date. In addition, the waiting period, including any extensions thereof, under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") will have expired or been terminated. 7.4 Opinion of Counsel. Sellers will have delivered to Buyer the legal opinions of Buchanan Ingersoll Professional Corporation, counsel for the Company, duly executed and substantially in the form of Exhibit D-1, and each of the Seller's identified on Schedule 7.4 will have delivered to Buyer the legal opinions of their respective counsel, duly executed and substantially in the form of Exhibit D-2. Such opinions may contain customary exclusions, qualifications and assumptions typically included in such legal opinions and acceptable to Buyer's counsel. 7.5 Adverse Change. There will not have occurred any event that could have an adverse effect on the Stock or a material adverse effect on the Security Business or on the condition of a material portion of the Assets. As used in this context "material" shall mean an economic effect of more than $250,000 that is not reflected in a downward adjustment in the Purchase Price. 7.6 Documents, Certificates and Other Items. Sellers will have delivered or caused to be delivered to Buyer: (a) duly issued certificates for all of the Stock, duly endorsed in blank or with blank stock powers attached, together with any required transfer stamps or taxes paid and attached thereto; (b) resignations or removal of all of the officers and directors of the Parent, the Corporation and the Ohio Subsidiary; (c) minute books, stock certificate and transfer books, corporate seal and other corporate records of the Parent, the Corporation and the Ohio Subsidiary which are true, correct and complete as of Closing; -35- 40 (d) the Noncompetition Agreement and Nonsolicitation Agreements described in Section 2.3 each duly executed by the parties bound thereto, together with delivery of all consideration thereunder; (e) a current Certificate of Good Standing evidencing the Parent's the Corporation's and the Ohio Subsidiary's corporate standing in each state where they are incorporated or qualified to do business; (f) a current certificate issued by the appropriate taxing authority of the states of Michigan, New York, New Jersey, Ohio, and Pennsylvania certifying that there are no tax liens of record against the Parent, Corporation, the Ohio Subsidiary or any of the entities listed on Schedule 4.1 and that the Company is not and such entities are not obligated for any taxes which are due and payable but which have not been paid, to the extent such certificates are available from such taxing authorities; (g) a consent from the spouse of each individual Seller, duly executed and substantially in the form of Exhibit E; (h) the Holdback Escrow Agreement described in Section 2.1(b), duly executed by Sellers' Representative; (i) an estoppel certificate from RRSS setting forth: a) there is no default on the part of any party to the agreement between Company and RRSS, (b) that the payment of all sums due to RRSS are current, and (c) the agreement is in full force and effect; (j) an estoppel certificate from the landlords of the real properties located at Bellerose, New York, Madison, New Jersey and Dayton, Ohio setting forth: a) there is no default on the part of any party to the agreement between Company and the landlord (b) that the payment of all sums due to the landlord are current, and (c) the lease is in full force and effect;. (k) a fully executed release from each Seller substantially in the form of Exhibit G; (l) all other documents and instruments required under this Agreement; (m) all other documents and instruments reasonably requested by Buyer in connection with the consummation of these transactions including, without limitation, all applicable lien releases in connection with the Toronto-Dominion Bank (Texas) debt facility; (n) the due execution and delivery of the Second Amendment to Asset Purchase Agreement regarding the Habitec acquisition substantially in the form attached hereto as Exhibit I; and (o) a true, correct and complete copy of the executed agreement between Sellers and Sellers' Representative authorizing Sellers' Representative to act on behalf of Sellers hereunder. -36- 41 7.7 Satisfaction of Debts. (a) Sellers will have delivered to Buyer the lien searches described in Section 6.1(e). (b) Sellers will have delivered to Buyer a true and correct list of each of the secured and unsecured creditors of the Parent, the Corporation and the Ohio Subsidiary and the and the amount due by the Parent, the Corporation and the Ohio Subsidiary to each such creditor on the Closing Date. (c) Except for the Liabilities described in Section 4.26, Sellers will have satisfied on the Closing Date all of the outstanding obligations and liabilities of the Parent, the Corporation and the Ohio Subsidiary as of the Closing Date. (d) Seller will have made appropriate arrangements for the termination of any liens and Encumbrances on file against any of the Assets and will have delivered to Buyer payoff letters evidencing the total amount due as of the Closing Date in order to remove all of the liens of record against the Parent, the Corporation and the Ohio Subsidiary. 7.8 Accounts Receivable. Sellers will have delivered to Buyer the list of accounts receivable described in Section 6.1(l). 7.9 Capitalization. All outstanding and/or authorized warrants, stock options or rights to acquire any class of capital stock (whether or not vested) of the Parent, the Corporation, or the Ohio Subsidiary shall have been canceled, redeemed, retired or otherwise extinguished. 7.10 Excluded Assets. All of the Company's right, title and interest in the assets of the Company set forth on Schedule 1.2(e), and any related liability shall have been assigned to Sellers, their designees or others, and such persons shall have acknowledged receipt of such assets and the assumption of any related liability as of or prior to the Closing Date. 7.11 Updated Schedules. Parent or Sellers may update the schedules delivered hereunder and deliver such updated schedules to Buyer not later than 3 business days prior to the Closing Date, to reflect changes to the Company, the Assets, the Security Business or the Stock that have occurred between the date of this Agreement and the Closing Date, provided that nothing contained in any of the updated schedules prepared by Sellers or the Parent shall disclose that either: (a) the ownership of the Stock by the Sellers is different than as presented in this Agreement or in any Schedule hereto as of the date hereof, or (b) the financial and operational condition of the Assets, Security Business or the Company, is adversely different in any material respects than as presented in this Agreement or in the exhibits and schedules or other documents provided herewith. As used in this context "material" shall mean an economic effect of more than $250,000 that is not reflected in a downward adjustment in the Purchase Price. -37- 42 7.12 Minimum RMR. The total RMR at Closing is not less than $1,200,000. 7.13 Oral 3rd Party Monitoring Agreements. All of the oral agreements pursuant to which Alarm Accounts are monitored by third-party monitoring companies on behalf of Company shall have been evidenced by duly executed written agreements in a form reasonably satisfactory to Buyer or the monitoring of such Alarm Accounts shall have been transferred to Rapid Response to be monitored pursuant to the existing monitoring agreement with Rapid Response. 8. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS On or prior to the Closing Date, Buyer will have satisfied each of the following conditions unless waived in writing by Sellers' Representative: 8.1 Covenants and Warranties. There will have been no material breach by Buyer in the performance of any of its covenants and agreements herein; each of the representations and warranties of Buyer contained or referred to in this Agreement will be true and correct in all material respects on the Closing Date as though made on the Closing Date, except for changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by Sellers or any transaction contemplated by this Agreement; and the President or any Vice President of Buyer will have delivered to Sellers a certificate to such effect, dated the Closing Date. 8.2 Delivery of Purchase Price. Buyer will have delivered the Purchase Price to be paid at Closing to Sellers, and the Deferred Payment to the Escrow Agent, less the amount of any closing adjustments. 8.3 Documents, Certificates and Other Items. Buyer will have delivered or caused to be delivered to Sellers' Representative: (a) the legal opinion of John Rosenberg, Esquire, general counsel for Buyer, substantially in the form of Exhibit F (such opinion may contain customary exclusions, qualifications and assumptions typically included in such legal opinions); (b) the Holdback Escrow Agreement described in Section 2.1(b), duly executed by Buyer; (c) all of the documents or instruments required under this Agreement; and (d) all other documents and instruments reasonably required by Sellers' Representative in connection with the consummation of these transactions. -38- 43 8.4 No Restraint or Litigation. No action, suit or proceeding will be pending or threatened by any third-party (excluding any affiliate of any Seller) or governmental or regulatory agency to restrain, prohibit or otherwise challenge the legality or validity of these transactions. 8.5 Approvals. The waiting period, including any extensions thereof, under the HSR Act will have expired or been terminated. All Required Consents will have been obtained. 9. INDEMNIFICATION 9.1 Indemnification by Sellers and Buyer. (a) Subject to the limitations in Sections 9.3(f), 9.4, 9.5, 9.7, 9.8 and 9.9, Sellers will indemnify, hold harmless, defend and bear all costs of defending Buyer, together with its successors and permitted assigns, from, against and with respect to any and all damage, loss, deficiency, expense (including any reasonable attorney and accountant fees, legal costs or expenses), action, suit, proceedings, demand, assessment or judgment to or against Buyer (collectively, "Buyer's Aggregate Net Loss") arising out of or in connection with: (i) any debt, obligation, commitment or Liability of Sellers which is not expressly assumed by Buyer or which is expressly assumed by Sellers in this Agreement, whether arising prior to, on or after the Closing Date and whether or not disclosed to Buyer, including those relating to environmental and employee liabilities; (ii) any debt, obligation, commitment or Liability of Company, other than the Liabilities described in Section 4.26(i), (ii), (iv), (v) and (vi), arising prior to or on the Closing Date, and whether or not disclosed to Buyer, including those relating to environmental and employee liabilities and third-party claims set forth on Schedule 4.7. (iii) any debt, obligation, penalty or Liability of Company arising out of or as a result of Company's obligation prior to Closing to provide residential customers with the 3-day notice of cancellation in compliance with the provisions of 16 C.F.R. Part 429 and any applicable state laws; (iv) any debt, obligation, penalty or Liability of Company arising out of or as a result of Company's failure prior to Closing to be licensed to provide alarm service in any state where its Alarm Accounts are located, or its failure to be qualified to do business in any state in which in conducts business; (v) any breach or violation of, or nonperformance by, Sellers or Parent of any of their representations, warranties, covenants or agreements contained in this Agreement (including a failure to disclose a Liability of the Company) or in any document, certificate or schedule required to be furnished pursuant to this Agreement; (vi) any debt, obligation or Liability of Company for acts or omissions occurring prior to or on the Closing Date arising out of or as a result of or in connection with any of (i) the Subscriber Contracts, (ii) the agreements by which Company provides third-party monitoring services to dealers and (iii) the agreements by which Alarm Accounts and Wholesale -39- 44 Alarm Accounts are monitored by third-party monitoring companies on behalf of Company, which agreements do not contain provisions limiting Company's liability and third-party indemnification provisions consistent with industry standards; (vii) any debt, obligation, penalty or Liability of the Company arising from the failure of Sellers to cause the Federal Communications Commission ("FCC") to renew all of the FCC licenses used by Company and to obtain the FCC's consent to the change of control of the licensee(s) as contemplated hereby within sixty (60) days after the Closing; (viii) any debt, obligation or Liability of Company arising out of Company's failure to have adequate telephone lines in accordance with the contracts under which services are provided and the applicable laws of the State of New York with regard to the Alarm Accounts and Wholesale Alarm Accounts located in that State as described on Schedule 4.15; and (ix) any debt, obligation or Liability of Company arising out of the problems concerning UL certificates, UL accounts and UL monitoring identified on Schedule 4.18. (b) Subject to Sections 9.3(f), 9.4, 9.5 and 9.8, Buyer will indemnify, hold harmless, defend and bear all costs of defending Sellers, together with their successors and permitted assigns, from, against and with respect to any and all damage, loss, deficiency, expense (including any reasonable attorney and accountant fees, legal costs or expenses provided that any indemnification with respect to any such attorney fees and related expenses shall be limited to those of one legal counsel who represents all of the Sellers), action, suit, proceeding, demand, assessment or judgment to or against Sellers (collectively, "Sellers' Aggregate Net Loss") arising out of or in connection with: (i) all liabilities, damages or claims incurred or accrued related to events occurring after the Closing Date and related to the Company; and (ii) any breach or violation of, or nonperformance by, Buyer of any of its representations, warranties, covenants or agreements contained in this Agreement (including Buyer's covenants in Section 9.3(f)) or in any document, certificate or schedule required to be furnished pursuant to this Agreement. (c) Should Buyer and Sellers' Representative be unable to agree as to the amount of Buyer's Aggregate Net Loss for which Buyer is to be indemnified, or the amount of Sellers' Aggregate Net Loss for which Sellers is to be indemnified, then either Buyer or Sellers' Representative, as the case may be, may commence arbitration proceedings in accordance with the provisions of Section 12.3. 9.2 Notice of Claims. If any claim is made by or against a party which, if sustained, would give rise to a liability of the other party hereunder (whether or not such claim may be subject to the basket described in Section 9.5), that party (the "Claiming Party") will promptly cause written notice of the claim to be delivered to the other party (the "Indemnifying Party") and will afford the Indemnifying Party and its counsel, at the Indemnifying Party's sole expense, the opportunity to defend or settle the claim (and, with respect to claims made by third parties, the Claiming Party will have the right to participate at its sole expense). Any notice of a claim will state, with reasonable specification, the alleged basis for the claim and the amount of liability asserted by or -40- 45 against the other party by reason of the claim. If such notice is not given, it will not release the Indemnifying Party, in whole or in part, from its obligations under this Article 9, except to the extent that the Indemnifying Party's ability to defend against such claim is actually prejudiced thereby. Alternatively, if notice is given and the Indemnifying Party fails to assume the defense of the claim within 10 days after receipt thereof with counsel satisfactory to the Claiming Party, the claim may be defended, compromised or settled by the Claiming Party without the consent of the Indemnifying Party and the Indemnifying Party will remain liable under this Article 9. 9.3 Third Party Claims. (a) Except as provided herein, the Indemnifying Party will engage counsel, reasonably acceptable to the Claiming Party, defend any claim brought by a third party involving a judicial or arbitration action or the threat of a judicial or arbitration action (a "Third Party Claim"), and will provide notice to the Claiming Party not later than 15 business days following delivery by the Claiming Party to the Indemnifying Party of a notice of a Third Party Claim, such notice to include an acknowledgment by the Indemnifying Party that it will be liable in full to the Claiming Party for any Sellers' Aggregate Net Loss or Buyer's Aggregate Net Loss, as the case may be, in connection with the Third Party Claim. If the Sellers are the Claiming Party then Buyer's indemnification obligation with respect to legal fees and costs shall be limited to the one counsel that represents all such indemnified parties. The Claiming Party will fully cooperate with such counsel. The Indemnifying Party will cause its counsel to consult with the Claiming Party, as appropriate, as to the defense of such claim, and the Claiming Party may, at its own expense, participate in such defense, assistance or enforcement, but the Indemnifying Party will control such defense, assistance or enforcement. The Indemnifying Party will cause its counsel to keep the Claiming Party, as appropriate, informed at all times of the status of such defense, assistance or enforcement. (b) The Claiming Party will have the right to engage counsel and to control the defense of a Third Party Claim if the Indemnifying Party has not notified the Claiming Party of its appointment of counsel, reasonably acceptable to the Claiming Party, and control of the defense of a Third Party Claim pursuant to Sections 9.2 and 9.3 within the time period provided therein. The Claiming Party will, in such case, cause its counsel to consult with the Indemnifying Party as to the conduct of such defense, assistance or enforcement. (c) The Indemnifying Party may settle any Third Party Claim which it is defending pursuant to Section 9.2 or 9.3(a) if such Third Party Claim solely involves monetary damages and only if the amount of such settlement is to be paid entirely by the Indemnifying Party pursuant to this Article 9. The Indemnifying Party will not enter into a settlement of a Third Party Claim which involves a non-monetary remedy or which will not be paid entirely by the Indemnifying Party pursuant to this Article 9 without the written consent of the Claiming Party, which consent will not be unreasonably withheld. (d) Notwithstanding the foregoing, in the event of any settlement of, or final judgment with respect to, a Third Party Claim which relates to acts, omissions, conditions, events or other matters occurring both before and after the Closing Date, the parties will negotiate in good faith as to the portion of such Third Party Claim as to which such indemnification is payable. In the event the parties are unable to agree on such portion, the matter will be settled pursuant to Section 12.3. (e) The parties will cooperate with one another in good faith in connection with the defense, compromise or settlement of any Third Party Claim. Without limiting the -41- 46 generality of the foregoing, the party controlling the defense or settlement of any matter will take steps reasonably designed to ensure that the other party and its counsel are informed at all times of the status of such matter. Neither party will dispose of, compromise or settle any Third Party Claim in a manner that is not reasonable under the circumstances and in good faith. (f) The amount of any indemnification under this Agreement will be reduced by (i) any insurance proceeds paid to the Claiming Party as a result of the loss or other matter for which indemnification is sought, as adjusted for any increased insurance premiums resulting from the tender of the claim to the insurance carrier and (ii) any indemnification amounts paid to the Claiming Party by a former seller of stock or assets to the Company, or offset by the Claiming Party against amounts due to such former seller by the Company, in either case as a result of the loss or other matter for which indemnification is sought. The Claiming Party will be obligated to submit to its insurance carrier all coverable claims and pursue such claims against its insurance carrier in good faith, and will not abandon or compromise any such claim without the consent of the other party. Buyer agrees to retain not less than the same general liability and errors and omissions insurance coverage or equivalent self-insurance, on an occurrence basis, as the Company had prior to the Closing Date (including the same deductible) for a period of three (3) years after the Closing Date. Buyer will provide Sellers' Representative with a certificate of insurance evidencing such coverage at the Closing and annually thereafter. 9.4 Survival of Indemnity Obligations. The rights of Buyer and Sellers to assert indemnification claims will survive for a period of three (3) years from the Closing Date, except claims related to fraud, willful misconduct, title to the Stock, and authority of Buyer and Sellers to execute and deliver this Agreement and any of the documents contemplated hereunder, and to consummate the transactions hereunder shall survive until the expiration of 75 days following the date on which the running of the statute of limitations and any extensions thereof with respect to any such claim will bar the assertion, assessment and collection of such claim. 9.5 Basket and Cap. Except for claims of or relating to the calculation of the Purchase Price, fraud, willful misconduct, title to the Assets, authority to consummate these transactions, pension and employee matters, environmental, tax and insured third party claims, Buyer and Sellers will not be required to indemnify the other until a recoupable $500,000 basket has been exceeded. For example, if Buyer has indemnifiable claims of $70,000, Sellers will have no liability to Buyer with respect to such claims because such amount is less than $500,000. Alternatively, if Buyer has indemnifiable claims of $525,000, Sellers will be liable to Buyer for the full amount of such claims. However, any Buyer's claim for indemnity of any litigation disclosed on Schedule 4.7 shall not be subject to this basket and Sellers shall be obligated to indemnify Buyer for the entire amount (subject to Section 9.9) of such Buyer's claim. Further, the aggregate amount of the indemnification obligation of Buyer to Sellers with respect to Sellers' Aggregate Net Loss, or of Sellers to Buyer with respect to Buyer's Aggregate Net Loss, as the case may be, will not exceed the amount of the Deferred Payment, exclusive of claims relating to fraud, willful misconduct, title to the Stock, and authority of Buyer and Sellers to execute and deliver this Agreement and any of the documents contemplated thereunder, and to consummate the transactions contemplated hereunder. -42- 47 9.6 Tax Indemnification/Returns. (a) Sellers will be responsible and liable for, and will indemnify and hold Buyer, the Parent and the Subsidiaries harmless from and against all taxes owed by, attributable to or accrued against the Parent, the Corporation and the Ohio Subsidiary including any taxes resulting from these transactions for all periods ending on or before the Closing Date, except to the extent of the accrual for taxes reflected as current liabilities in the Closing WC as of the Closing Date. Subject to the provisions of Section 9.6(f) below, Sellers agree with Buyer that Sellers, at their expense, will complete and file on a timely basis all federal, state and local tax returns due for the Company for the fiscal year beginning January 1, 1997 and ending on the Closing Date. Buyer agrees that it will not make a IRC Section 338 election with respect to the Stock. (b) Subject to the provisions of Section 9.6(f) below, Sellers will be responsible for the preparation and filing of all tax returns of the Company for all periods ending on or before the Closing Date. Buyer will cause the Company to furnish to Sellers all information pertaining to the Company reasonably requested by Sellers and necessary for the preparation of such returns and will otherwise cooperate fully with Sellers in the preparation of such returns. The federal income, deductions and credits with respect to the Company on such returns will be computed consistent with past practices, principles and methods and be determined on the basis of the appropriate permanent records of the Company. Prior to filing any such return for a taxable period ending on or before the Closing Date, Sellers' Representative will submit such returns to Buyer for its review. Except as otherwise provided herein, Sellers will have the obligation and authority to represent the Company, at Sellers' expense, before the Internal Revenue Service or any other governmental agency or authority or any court regarding the federal income or state tax liabilities of the Company for any taxable period ending on or prior to the Closing Date, and to settle any such matters provided Sellers have retained the liability with respect to any such taxes. If Sellers elect to contest or appeal any such matter, Buyer agrees to cooperate with Sellers in such contest or appeal. (c) Buyer, Parent and the Company will be responsible for all taxes of the Company for any taxable period beginning after the Closing Date and the post-Closing portion of any taxable period beginning prior to the Closing Date and ending after the Closing Date. Sellers agree to make available to Buyer, the Company records in the custody of Sellers or of any affiliated corporation or person, to furnish other information (including all adjustments to and changes in tax items of the Company for taxable periods of the Company ending on or before the Closing Date), and otherwise to cooperate to the extent reasonably required for the filing of tax returns relating to the Company for taxable periods ending after the Closing Date and of other tax returns relating to the Company for any taxable period. (d) Sellers acknowledge that the Parent, the Subsidiaries and Buyer will be entitled to the tax benefit of any loss, credit, or other item of the Company that: (i) has arisen or arises before the Closing Date but is reportable in or carried forward to a taxable period ending after the Closing Date; or (ii) arises after the Closing Date, although such loss, credit, or other item may be carried back to a taxable period ending on or before the Closing Date. Sellers' Representative agrees to cooperate with the Parent, the Company and Buyer in taking such action as may be necessary (including amending any return or report and filing any claim for refund) for the Parent, the Company or Buyer to realize the tax benefit of carrying such a loss, credit, or other item described in (ii) above back to a taxable period ending on or before the Closing Date. Sellers' Representative promptly will remit or cause to be remitted to Buyer: (x) any amount received as a refund; and (y) if not realized as a refund, the amount of any -43- 48 reduction in tax liability (of the Company or Sellers) resulting from the use of such a loss, credit, or other item as described in (ii) above. (e) Within 60 days after the Closing Date, Sellers' Representative will furnish Buyer a list of the net operating loss ("NOL") carryovers and investment tax credit ("ITC") carryovers attributable to the Company as of the Closing Date known to the Parent or the Sellers' Representative, if any. Sellers' Representative agrees to reasonably cooperate with Buyer to make available to Buyer the NOL and ITC carryovers attributable to the Company as of the Closing Date, subject, however, to any adjustment to or change in any tax item of the Company required by the Internal Revenue Service. Sellers will not agree to any such adjustment or change without Buyer's consent, which consent will not be unreasonably withheld. (f) If requested by Sellers' Representative, Buyer will prepare the tax returns described in subparts (a) and (b) above for the benefit of Sellers at Sellers' cost. Sellers shall reimburse Buyer or Company, as the case may be for all accounting fees incurred by Buyer or Company in the preparation of such tax returns, and if Sellers fail to pay such reimbursement, Buyer may at its option, deduct the amount due to Buyer or Company from the Deferred Payment. Buyer shall provide Sellers's Representative with copies of all bills and invoices from the accountants for the preparation of such tax returns. (g) For purposes of this Section 9.6, "tax" or "taxes" will have the meanings specified in Section 4.11(f) and "tax returns" will have the meaning specified in Section 4.11(g). 9.7 Buyer's Tax Claim Defense. Promptly after receipt by Buyer of notice of the commencement of any action or proceeding which could result in a Buyer's claim as to any tax liability (including penalties, assessments or fines) Buyer will give prompt notice of such commencement to Sellers' Representative. If in respect to any such Buyer's claim, Sellers' Representative shall request, in writing, the right to defend such action, Buyer will permit Sellers to do so (subject to the counsel retained by Sellers in connection therewith being reasonably acceptable to Buyer and Buyer's right to be kept currently advised and to participate in the defense) if: (a) Seller, in writing, shall have confirmed to Buyer, without any qualifications, whatsoever, that such claim is within the scope of the provisions of Section 9.1(a)(i); and (b) Sellers shall have paid such tax liability (including any penalties, assessments or fines) under protest, or shall have furnished an appropriate bond or other form of security as required by the taxing authority or pursuant to applicable law, or has taken such other action as may reasonably be necessary in order to prevent the imposition of any fines, penalties, forfeitures, liens or other like charges against Buyer or its assets or properties. 9.8 Sole and Exclusive Remedy. After the Closing, the indemnification provided in this Article 9 will be the sole and exclusive remedy of Buyer and Sellers with respect to the matters described in this Article 9 without regard to whether such matter involves claims framed in contract, tort, equity or otherwise, and exclusive of any claims based upon title to the Stock, authority of Buyer and Sellers to execute and deliver this Agreement and any of the documents contemplated hereunder, and to consummate the transaction contemplated by this Agreement, fraud or wilful misconduct. -44- 49 9.9 Deferred Payment as Source of Payment Obligations of Sellers. Buyer agrees that except as expressly set forth below, any Buyer's indemnity claims resolved in favor of Buyer shall be paid solely out of the Deferred Payment except with respect to Buyer's indemnity claims relating to fraud, willful misconduct, title to the Stock, and authority of Sellers, including the authority to convey the Stock, which claims may be asserted against the Parent, a specific Seller or Sellers on a several basis or paid out of the Deferred Payment or a combination of both. To the extent the Deferred Payment is depleted then claims relating to fraud, wilful misconduct, title to the Stock, and authority of Sellers, including the authority to sell the Stock, can be asserted against the Sellers on a several basis. If any Buyer's indemnity claims are unresolved or in dispute as of the date the Deferred Payment, or any portion thereof, is to be delivered to Sellers by Escrow Agent, Buyer may demand that Escrow Agent retain from the Deferred Payment an amount equal to any unresolved or disputed Buyer's indemnity claims pending resolution. The Deferred Payment shall be the sole source of payment to Buyer for all Buyer's indemnity claims, except for Buyer's indemnity claims asserting or related to fraud, willful misconduct, title to the Stock or authority of a Seller(s), including the authority to convey the Stock. Sellers acknowledge and agree that all Buyer's indemnity claims to be paid out of the Deferred Payment are joint and several obligations of the Sellers up to the aggregate amount of the Deferred Payment. 10. DAMAGE TO PROPERTY AND RISK OF LOSS The risk of any loss or damage to the Assets and the Security Business resulting from fire, theft, hurricane or any other casualty (except reasonable wear and tear), and condemnation will be borne by the Company at all times prior to 11:59:59 p.m. on the Closing Date. In the event that any such loss or damage will be sufficiently substantial so as to preclude and prevent resumption of normal operations of any material portion of the Security Business within 2 days from the occurrence of the event resulting in such loss or damage, Sellers' Representative will immediately notify Buyer in writing of their inability to resume normal operations or to replace or restore the lost or damaged property, and Buyer, at any time within 10 days after receipt of such notice, may elect either: (a) to waive such defect and proceed toward consummation of these transactions in accordance with terms of this Agreement, or (b) to terminate this Agreement. If Buyer elects to terminate this Agreement pursuant to this Section, the parties will be fully released and discharged of any and all obligations under this Agreement, except for the ongoing duty of confidentiality. If Buyer elects to consummate this transaction despite such loss or damage and does so, there will be no diminution of the Purchase Price on account of such loss or damage and all insurance proceeds payable as a result of the occurrence of the event resulting in loss or damage to the property, plus the amount of any deductible for such insurance coverage, will be delivered to Buyer, or the rights thereto will be assigned to Buyer if not yet paid over to the Company or Sellers' Representative. 11. TERMINATION OF AGREEMENT. (a) If Buyer determines, as a result of its due diligence conducted during the Due Diligence Period, that Sellers have made a misrepresentation in this Agreement (including any Exhibit or Schedule hereto) which cannot be cured by Sellers in a commercially reasonable manner prior to Closing, and the parties are unable to mutually agree on a remedy for such misrepresentation within 10 days after Buyer provides notice to Sellers of such misrepresentation, Buyer may terminate this Agreement and none of the Buyer, Company, or Sellers shall have any further liability to each other, except for the ongoing duty of confidentiality. -45- 50 (b) In the event Buyer fails to consummate the purchase of the Stock for reasons other than those set forth in Section 11(a) and Sellers have complied with all of the material terms and conditions on their part contained herein, and there is no event excusing Buyer's performance hereunder, then Buyer shall pay to the Parent the sum of $2,000,000 as liquidated damages, and this Agreement will be automatically terminated and none of the Buyer, Company, or Sellers shall have any further obligation or liability to the other hereunder or thereunder, except for the ongoing duty of confidentiality. (c) In the event Sellers or the Parent fail to consummate the sale of the Stock and Buyer has complied with all of the material terms and conditions on its part contained herein, and there is no event excusing Sellers' performance hereunder, then Sellers or Parent shall pay to Buyer the sum of $2,000,000 as liquidated damages, and this Agreement will then be automatically terminated and none of the Buyer, Company, or Sellers shall have any further obligations or liability to the other hereunder or thereunder, except for the ongoing duty of confidentiality. Alternatively, Buyer will have the right, in the exercise of its sole discretion, to elect to pursue all of its rights and remedies against Sellers, including specific performance of the terms of this Agreement. Buyer will not be required to post a bond or other security in connection with any suit brought by it for specific performance. (d) Both parties acknowledge that the actual damages a party may suffer as a result of the failure of the other to perform is difficult to ascertain in advance and therefore the amount designated as liquidated damages herein is reasonable and is not a penalty or forfeiture. (e) In the event Closing has not occurred by November 30, 1997 (the "Termination Date"), for any reason other than a delay in the termination of the HSR waiting period, and neither Buyer nor Sellers are in breach of their obligations hereunder, then either party hereto will have the right to terminate this Agreement and none of the Buyer, Company, or Sellers shall have any further liability to each other, except for the ongoing duty of confidentiality. 12. GENERAL PROVISIONS. 12.1 Survival of Obligations; Effect of Investigations. Sellers, the Parent and Buyer acknowledge that the representations, warranties, covenants and agreements of Sellers, the Parent and Buyer contained in this Agreement form an integral part of the consideration given to Buyer in exchange for the Purchase Price and to Sellers in exchange for the Stock, without which Buyer would be unwilling to purchase, and Sellers would be unwilling to sell, the Stock. Notwithstanding any investigation and review made by Buyer pursuant to this Agreement, Sellers, the Parent and Buyer agree that all of the representations, warranties, covenants and agreements of Sellers, the Parent and Buyer contained in this Agreement or in any Exhibit, Schedule, statement, report, certificate or other document or instrument required to be delivered pursuant to this Agreement will, subject to the limitations set forth in Section 9.4, survive the making of this Agreement, any investigation or review made by or on behalf of the parties and the Closing. Any inspection, preparation, or compilation of information or schedules, or audit of the inventories, properties, financial condition or other matters relating to the Parent, the Corporation, the Ohio Subsidiary or Sellers conducted by or on behalf of Buyer pursuant to this Agreement will in no way limit, affect, or impair the ability of Buyer to rely upon the representations, warranties, covenants, and agreements of Sellers and Parent set forth in this Agreement or in any Exhibit, Schedule, statement, report, certificate or other document or instrument required to be delivered pursuant to this Agreement. -46- 51 12.2 Transfer Charges and Taxes. Sellers will pay all stamp, sales, realty transfer or other taxes (federal, state or local) imposed by law and all third-party transfer charges in respect of any and all transfers pursuant to this Agreement. 12.3 Dispute Resolution. No party to this Agreement shall be entitled to take legal action with respect to any dispute relating hereto (other than disputes regarding the Purchase Price which are to be resolved pursuant to Section 2.1(h)) until it has complied in good faith with the following alternative dispute resolution procedures. This Section shall not apply to the extent it is deemed necessary to take legal action immediately to preserve a party's adequate remedy. However, nothing shall prevent any party from resorting to the judicial proceedings mentioned in this Section if interim relief from the court is necessary to prevent serious and irreparable injury to one of the parties. (a) Negotiation. The parties shall attempt promptly and in good faith to resolve any dispute arising out of or relating to this Agreement, through negotiations between representatives who have authority to settle the controversy. Any party may give the other party(ies) written notice of any such dispute not resolved in the normal course of business. Within 20 days after delivery of the notice, representatives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to exchange information and to attempt to resolve the dispute, until the parties conclude that the dispute cannot be resolved through unassisted negotiation. Negotiations extending sixty days after notice shall be deemed at an impasse, unless otherwise agreed by the parties. If a negotiator intends to be accompanied at a meeting by an attorney, the other negotiator(s) shall be given at least three working days' notice of such intention and may also be accompanied by an attorney. (b) ADR Procedure. If a dispute with more than $25,000 (Twenty-Five Thousand Dollars) at issue has not been resolved within 60 days of the disputing party's notice, a party wishing resolution of the dispute ("Claimant") shall initiate assisted Alternative Dispute Resolution ("ADR") proceedings as described in this Section. Once the Claimant has notified the other ("Respondent") of a desire to initiate ADR proceedings, the proceedings shall be governed as follows: By mutual agreement, the parties shall select the ADR method they wish to use. That ADR method may include arbitration, mediation, mini-trial, or any other method which best suits the circumstances of the dispute. The parties shall agree in writing to the chosen ADR method and the procedural rules to be followed within 30 days after receipt of notice of intent to initiate ADR proceedings. To the extent the parties are unable to agree on procedural rules in whole or in part, the current Center for Public Resources (CPR) Model Procedure for Mediation of Business Disputes, CPR Model Mini-trial Procedure, or CPR Commercial Arbitration Rules--whichever applies to the chosen ADR method--shall control, to the extent such rules are consistent with the provisions of this Section. If the parties are unable to agree on an ADR method, the method shall be arbitration. The parties shall select a single neutral third party ("Neutral") to preside over the ADR proceedings, by the following procedure: Within 15 days after an ADR method is established, the Claimant shall submit a list of 5 acceptable Neutrals to the Respondent. Each Neutral listed shall be sufficiently qualified, including demonstrated neutrality, experience and competence regarding the subject matter of the dispute. A Neutral shall be deemed to have adequate experience if an attorney or former judge. None of the Neutrals may be present or former employees, attorneys, or agents of either party. The list shall supply information about -47- 52 each Neutral, including address, and relevant background and experience (including education, employment history and prior ADR assignments). Within 15 days after receiving the Claimant's list of Neutrals, the Respondent shall select one Neutral from the list, if at least one individual on the list is acceptable to the Respondent. If none on the list are acceptable to the Respondent, the Respondent shall submit a list of 5 Neutrals, together with the above background information, to the Claimant. Each of the Neutrals shall meet the conditions stated above regarding the Claimant's Neutrals. Within 15 days after receiving the Respondent's list of Neutrals, the Claimant shall select one Neutral, if at least one individual on the list is acceptable to the Claimant. If none on the list are acceptable to the Claimant, then the parties shall request assistance from the Center for Public Resources, Inc., to select a Neutral. The ADR proceeding shall take place within 30 days after the Neutral has been selected. The Neutral shall issue a written decision within 30 days after the ADR proceeding is complete. Each party shall be responsible for an equal share of the costs of the ADR proceeding. The parties agree that any applicable statute of limitations shall be tolled during the pendency of the ADR proceedings, and no legal action may be brought in connection with this agreement during the pendency of an ADR proceeding. The Neutral's written decision shall become final and binding on the parties, unless a party objects in writing within 30 days of receipt of the decision. The objecting party may then file a lawsuit, application or complaint in any court or regulatory agency allowed by this Agreement. The Neutral's written decision shall be admissible in the objecting party's lawsuit or regulatory proceeding. All negotiations and information obtained pursuant to ADR proceedings hereunder are confidential and shall be treated as compromise and settlement negotiations for purposes of the Federal and state Rules of Evidence. 12.4 Confidentiality. Buyer and Sellers agree that they will treat in confidence in accordance with the terms of the Confidentiality Agreement entered into on or about August 21, 1997 (the "Confidentiality Agreement") all documents, materials and other information which they have obtained regarding the other party during the course of the negotiations leading to the consummation of these transactions, the investigation provided for herein and the preparation of this Agreement and other related documents. In the event these transactions are not consummated, all copies of non-public documents and material which have been furnished in connection with these transactions will be promptly returned to the party furnishing such documents and material, will continue to be treated as confidential information and will not be used for the benefit of the party who returned such confidential information. 12.5 Public Announcements. None of the Buyer, Company nor Sellers will, without the approval of the other party (which may not be unreasonably withheld), make any press release or other public announcement concerning these transactions, except as and to the extent that such party will be so obligated by law, in which case the other party will be advised and Buyer, Company and Sellers' Representative will use their best efforts to cause a mutually agreeable press release or announcement to be issued. -48- 53 12.6 Governing Law Exclusive Jurisdiction and Consent to Service of Process. This Agreement will be governed by, and construed and enforced in accordance with, the laws of the state of Delaware, without regard to its conflicts of law provisions. EACH PARTY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY SUCH LEGAL PROCEEDING. Any and all service of process and any other notice in any such legal proceeding shall be effective against such party when transmitted in accordance with Section 12.7 hereof. Nothing contained herein shall be deemed to affect the right of any party to serve process in any manner permitted by applicable law. 12.7 Notices. All notices or other communications required or permitted hereunder will be in writing and will be deemed given or delivered when delivered personally, by registered or certified mail, by legible facsimile transmission or by overnight courier (fare prepaid) addressed as follows: If to Buyer, to: with copies to: Rita A. Sharpe, President Alan L. Pepper, Esquire Westar Capital, Inc. Mitchell, Silberberg & Knupp LLP 818 S. Kansas Avenue 11377 West Olympic Boulevard Topeka, KS 66612 Los Angeles, CA 90064 Telecopy: (___)_________ Telecopy: (310) 312-3798; and John K. Rosenberg, Esquire Westar Capital, Inc. 818 S. Kansas Avenue Topeka, KS 66612 Telecopy: 785-575-1788 If to Sellers, to Seller's Representative: with copies to: Centennial Capital Fund IV, L.P. S. Bryan Lawrence III, Esquire 1330 Post Oak Blvd. Suite 1525 Buchanan Ingersoll Professional Corporation Houston, TX 77056 One Oxford Centre Attention: David Hull 301 Grant Street, 20th Floor Telecopy: (713) 627-9292 Pittsburgh, PA 15219 Telecopy: (412) 562-1041 and Morganthaler Venture Partners III L.P. 629 Euclid Avenue Suite 700 Cleveland, Ohio 44114 Attention: Paul S. Brentlinger Telecopy: (216) 621-2817 and
-49- 54 Robert J. Shiver 65 Old Route 22 Clinton, NJ 08809 Facsimile: (___)___________
or to such address as such party may indicate by a notice delivered to the other parties. Notice will be deemed received the same day (when delivered personally), 5 days after mailing (when sent by registered or certified mail) and the next business day (when delivered by overnight courier or by facsimile transmission). Any party to this Agreement may change its address to which all communications and notices may be sent by addressing notices of such change in the manner provided. 12.8 Assignment. This Agreement may not be assigned by Sellers without the prior written consent of Buyer. Buyer will have the right to assign this Agreement and the rights and obligations hereunder to its subsidiaries, affiliates, successors and assigns or to Protection One, Inc. or its subsidiaries, affiliates, successors and assigns without the prior written consent of Sellers, provided Buyer stays obligated hereunder with respect to its closing obligations and such assignment will not cause a delay beyond the Termination Date in obtaining termination or expiration of the waiting period under the HSR Act. To the extent this Agreement is assigned by Buyer, which is a corporation, to a subsidiary or affiliate of Buyer that is a partnership, all direct and indirect references herein to Buyer's corporate standing will be deemed to refer to partnership standing. This Agreement is nonrecourse to the shareholders of Buyer or the shareholders of its assignee. 12.9 Entire Agreement; Amendments. This Agreement is an integrated document, contains the entire agreement between the parties, wholly cancels, terminates and supersedes any and all previous and/or contemporaneous oral agreements, negotiations, commitments and writings of the parties with respect to such subject matter, except for the Sellers Transaction Documents, Buyer Transaction Documents and the Confidentiality Agreement. No change, modification, extension, termination, notice of termination, discharge, abandonment or waiver of this Agreement or any of its provisions, nor any representation, promise or condition relating to this Agreement, will be binding upon any party unless made in writing and signed by such party. 12.10 Interpretation. The Table of Contents, Index of Defined Terms, List of Schedules, List of Exhibits, Article titles and Section headings are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of any of the provisions of this Agreement. All references to Sections and subsections contained in this Agreement refer to the Sections and subsections of this Agreement. All references to Schedules or Exhibits contained in this Agreement are references to the Schedules or Exhibits described on the list immediately following the signature page hereto. All references to the words "include" or "including" mean "including without limitation." Any and all Schedules, Exhibits, statements, reports, certificates or other documents or instruments referred to in or attached to this Agreement, including the "Background" portion of this Agreement, are incorporated by reference as though fully set forth at the point referred to in this Agreement. There will be no presumption against any party on the ground that such party was responsible for preparing this Agreement or any part of it. Any -50- 55 representation or warranty of a party based upon "knowledge" or "best knowledge" or similar words will include actual knowledge and constructive knowledge, which means imputed knowledge under principles of agency law or knowledge that an ordinary person would have exercising prudence of a reasonable manner in the same or similar circumstances. All pronouns and any variations thereof will be deemed to refer to the masculine, feminine, neuter, singular or plural as the context may require. 12.11 Waivers. Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof, but any such waiver must be in writing and must comply with the notice provisions contained in Section 12.7. The failure of any party to enforce at any time any provision of this Agreement will not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or any part of it or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement will be held to constitute a waiver of any other or subsequent breach. 12.12 Expenses. Except as otherwise provided in this Agreement, and except for (i) filing fees under the HSR Act and (ii) out-of-pocket costs for lien searches obtained by Sellers, which, in the event the Closing occurs, will be split equally between Buyer and Sellers, Buyer and Sellers will each pay all costs and expenses incident to the negotiation and preparation of this Agreement and to the performance and compliance with all agreements and conditions on their part to be performed or complied with, including the fees, expenses and disbursements of their counsel and accountants. In addition, any such fees or costs of the Sellers arising out of professional services performed or costs incurred on or prior to the Closing Date, and fees associated with the preparation of the Closing Financials and any stub year tax returns shall be the sole responsibility of Sellers, shall be excluded from any liabilities of the Company as of the Closing Date, shall not be included in the Financials or the Closing WC, and shall not be charged to the Company; provided however, Buyer acknowledges that Company has paid or may pay certain of such expenses prior to the Closing Date and the parties intend that such expenses will also be paid from the proceeds due to Sellers at Closing. 12.13 Partial Invalidity. Wherever possible, each provision will be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of these provisions will, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provisions of this Agreement, and this Agreement will be construed as if such invalid, illegal or unenforceable provision or provisions had never been contained herein, unless the deletion of such provision or provisions would result in such a material change as to cause the completion of these transactions to be unreasonable. 12.14 Further Assurances. From time to time following the Closing Date and without further consideration, Sellers will at the request of Buyer, execute and deliver to Buyer such other instruments of conveyance and transfer as Buyer may reasonably request or as may be otherwise necessary to more effectively convey and transfer to, and vest in, Buyer and put Buyer in possession of, any -51- 56 part of the Stock or the Assets. In the case of any agreement, contract, lease, easement or other commitment which is included in the Assets but which requires the consent of a third-party because of the change of control of the Parent contemplated by this Agreement, whose consent has not been obtained prior to Closing, Sellers' Representative will cooperate with Buyer at Buyer's request in trying to promptly obtain such consent. 12.15 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be considered an original instrument and all of which together will be considered one and the same agreement, and will become effective when counterparts, which together contain the signatures of each party, will have been delivered to Buyer, Parent and Sellers. Delivery of executed signature pages by facsimile transmission will constitute effective and binding execution and delivery of this Agreement. 12.16 Third-Party Beneficiaries. This Agreement will not confer any rights or remedies upon any person other than the parties to this Agreement and their respective successors and permitted assigns. -52- 57 IN WITNESS WHEREOF, the parties have executed or have caused this Stock Purchase Agreement to be executed as of the date first written above. BUYER: WESTAR CAPITAL, INC. By:__________________________________________ Rita A. Sharpe, President PARENT: CENTENNIAL SECURITY HOLDINGS, INC. By:__________________________________________ Robert J. Shiver, President SHAREHOLDERS: CENTENNIAL FUND IV, L.P. By:__________________________________________ Name:_____________________________________ Title:____________________________________ CENTENNIAL HOLDINGS, INC. By:__________________________________________ Name:_____________________________________ Title:____________________________________ HANCOCK VENTURE PARTNERS, IV - DIRECT FUND, L.P. By:__________________________________________ Name:_____________________________________ Title:____________________________________ MORGENTHALER VENTURE PARTNERS III, L.P. By:__________________________________________ Name:_____________________________________ Title:____________________________________ S-1 58 CHASE VENTURE CAPITAL ASSOCIATES By:__________________________________________ Name:_____________________________________ Title:____________________________________ CIBC WOOD GUNDY VENTURES, INC. By:__________________________________________ Name:_____________________________________ Title:____________________________________ NORTHWOOD VENTURES By:__________________________________________ Name:_____________________________________ Title:____________________________________ NORTHWOOD CAPITAL PARTNERS LLC By:__________________________________________ Name:_____________________________________ Title:____________________________________ HABITEC MICHIGAN, L.P. HABITEC OHIO, L.P. HABITEC SECURITY LTD., L.P. By:__________________________________________ Name:_____________________________________ Title:____________________________________ SECURITY ONE LIMITED PARTNERSHIP By:__________________________________________ Name:_____________________________________ Title:____________________________________ DIVERSIFIED ALARM, INC. By:__________________________________________ Name:_____________________________________ Title:____________________________________ S-2 59 NATIONAL CITY CAPITAL CORPORATION By:__________________________________________ Name:_____________________________________ Title:____________________________________ KUHN, LOEB & COMPANY By:__________________________________________ Name:_____________________________________ Title:____________________________________ BLUE CHIP CAPITAL FUND LIMITED PARTNERSHIP By:__________________________________________ Name:_____________________________________ Title:____________________________________ BLUE CHIP CAPITAL FUND II LIMITED PARTNERSHIP By:__________________________________________ Name:_____________________________________ Title:____________________________________ MIAMI VALLEY VENTURE FUND L.P. By:__________________________________________ Name:_____________________________________ Title:____________________________________ UTECH CLIMATE CHALLENGE FUND, L.P. By:__________________________________________ Name:_____________________________________ Title:____________________________________ --------------------------------------------- Catharine Merigold, an individual --------------------------------------------- Stephen Schovee, an individual --------------------------------------------- Robert J. Shiver, an individual S-3 60 INDEX OF DEFINED TERMS PAGE Adjusted Alarm RMR.......................................................-8- Adjusted Purchase Price..................................................-7- Adjusted WC..............................................................-8- Adjusted Wholesale RMR...................................................-8- Adjusted WIP RMR.........................................................-8- Adjustment Date..........................................................-2- ADR.....................................................................-47- Alarm Accounts...........................................................-2- Alarm RMR................................................................-5- Alarm Services...........................................................-2- Assets...................................................................-2- Business Documents.......................................................-2- Buyer Transaction Documents.............................................-28- Buyer's Aggregate Net Loss..............................................-39- Buyer....................................................................-1- CBI Agreement...........................................................-33- Claimant................................................................-47- Closing Alarm RMR........................................................-6- Closing Date Review Schedule.............................................-7- Closing Date.............................................................-3- Closing Purchase Price...................................................-7- Closing Wholesale RMR....................................................-6- Closing..................................................................-3- COBRA...................................................................-25- Company..................................................................-1- Confidentiality Agreement...............................................-48- Corporation..............................................................-1- Customer Purchase Order.................................................-21- Deferred Payment.........................................................-7- Due Diligence Period....................................................-29- Effective Time..........................................................-11- Employee Benefit Plans..................................................-24- Encumbrance..............................................................-3- ERISA...................................................................-24- Excluded Assets..........................................................-3- Final Purchase Price.....................................................-9- Financial Statements....................................................-18- Form Contracts..........................................................-21- GAAP.....................................................................-3- Hazardous Materials......................................................-4- Holdback Escrow Agreement................................................-7- HSR Act.................................................................-35- Independent Accountants.................................................-10- Inventory................................................................-3- IRC.....................................................................-19- -54- 61 ITC.....................................................................-44- Liabilities..............................................................-4- Majority in Interest of Sellers..........................................-5- Modified Agreement......................................................-21- Neutral.................................................................-47- NOL.....................................................................-44- Non-Performing Account...................................................-9- Non-qualified Account....................................................-5- Notes....................................................................-6- Ohio Subsidiary..........................................................-1- Parent...................................................................-1- Plans...................................................................-24- Purchase Price...........................................................-6- Re-qualified RMR.........................................................-8- Recurring Monthly Revenue................................................-4- Respondent..............................................................-47- RMR......................................................................-4- RRSS....................................................................-23- Second Look Alarm RMR....................................................-9- Second Look Wholesale RMR................................................-9- Security Business........................................................-1- Sellers Transaction Documents...........................................-11- Sellers..................................................................-1- Sellers' Aggregate Net Loss.............................................-40- Sellers' Representative..................................................-5- Seller...................................................................-1- Stock....................................................................-1- Subscriber Contracts.....................................................-2- Subscriber...............................................................-5- Subsidiaries.............................................................-1- Tangible Assets..........................................................-2- Total Second Look RMR....................................................-9- U.L.....................................................................-24- Valuation Date...........................................................-6- Valuation Period.........................................................-3- Wholesale Alarm Accounts.................................................-2- Wholesale RMR............................................................-5- WIP Losses...............................................................-6- WIP RMR..................................................................-6- WIP......................................................................-6- Work in Progress.........................................................-6- Working Capital Adjustment...............................................-6- -55- 62 LIST OF EXHIBITS EXHIBIT PAGE ------- ---- Exhibit A: Form of Holdback Escrow Agreement..............................-7- Exhibit B-1: Form of Noncompetition Agreement..............................-11- Exhibit B-2: Form of Nonsolicitation Agreement.............................-11- Exhibit C: Financial Statements, Revenue Reports and Income Statements.........................................-18- Exhibit D-1: Form of Legal Opinions of Buchanan Ingersoll Professional Corporation......................................-35- Exhibit D-2: Form of Legal Opinions of Specific Sellers' Counsel...........-35- Exhibit E: Spousal Consent...............................................-36- Exhibit F: Form of Legal Opinion of John Rosenberg, Esquire..............-38- Exhibit G: Form of Sellers' Release......................................-36- Exhibit H: Copy of Executed CBI Purchase Agreement.......................-33- Exhibit I: Form of Second Amendment to Asset Purchase Agreement..........-36- Exhibit J: Copy of Executed SSM Letter of Intent ........................-33- -56- 63 LIST OF SCHEDULES Schedule 1.1 - Shareholders of Parent Schedule 1.2(b) - Assets Schedule 1.2(b)(i) - Tangible Assets Schedule 1.2(b)(ii) - Real Property Schedule 1.2(b)(iii)(A) - Alarm Accounts Schedule 1.2(b)(iii)(B) - Wholesale Alarm Accounts Schedule 1.2(b)(iii)(C) - Business Documents Schedule 1.2(f) - Excluded Assets Schedule 1.2(m) - Non-qualified Accounts Schedule 1.2(q) - Working Capital Adjustment Components Schedule 1.2(r) - Work in Progress Schedule 2.1(b)-A - Form of Wire Instructions and Payment Authorization Schedule 2.1(b)-B - Proforma Calculation of Closing Purchase Price Schedule 3.3 - Required Consents and Approvals Schedule 4.1 - Organization Schedule 4.2 - Capitalization Schedule 4.3 - Sole Business, Subsidiaries Schedule 4.4 - Authority of Sellers Schedule 4.5 - Real Property Schedule 4.6 - Title to Property Schedule 4.7 - Compliance with Laws Schedule 4.8 - Insurance Policies Schedule 4.9 - Changed Events Schedule 4.11 - Tax Disclosures Schedule 4.12 - Employee Agreements Schedule 4.13 - Intellectual Property Schedule 4.14 - Non-Competition Agreements from Prior Sellers Schedule 4.15 - Form Contracts Schedule 4.16 - Locations of Alarm Accounts Schedule 4.17 - Central Station Line Swing Exceptions Schedule 4.18 - U.L. Certification Schedule 4.20 - Labor/ERISA Matters Schedule 4.21 - Creditors Schedule 4.22 - Contracts Schedule 4.24 - Banks and Accounts Schedule 4.26 - Disclosed Liabilities Schedule 5.2 - Consents of Buyer Schedule 5.5 - Investment Purpose Schedule 6.1(f) - Maintenance of Business - Marketing Policies and Practices Schedule 7.3 - Required Consents Schedule 7.4 - Opinion Letters from Counsel for Specific Sellers -57- EX-2.6 5 EXHIBIT 2.6 1 EXHIBIT 2.6 STOCK SUBSCRIPTION AGREEMENT STOCK SUBSCRIPTION AGREEMENT dated as of October 14, 1997, between Guardian International, Inc., a Nevada corporation (the "Company"), and Westar Capital, Inc., a Kansas corporation (the "Purchaser"). The Purchaser desires to acquire from the Company, and the Company wishes to sell to the Purchaser, certain securities to be issued by the Company, on the terms and conditions set forth below. 1. AUTHORIZATION OF SECURITIES. The Company has authorized the issuance and sale to the Purchaser of 2,500,000 shares (the "Common Shares") of its Class A Voting Common Stock, par value $.001 per share (the "Common Stock"), for an aggregate purchase price of $3,750,000. Subject to the satisfaction of the conditions set forth in Section 5, the Company has authorized the issuance and sale to the Purchaser of 1,875,000 shares (the "Preferred Shares") of Series A 9 3/4% Convertible Cumulative Preferred Stock, par value $.001 per share (the "Preferred Stock"), for an aggregate purchase price of $3,750,000. The Preferred Shares will have the terms and conditions set forth in the Certificate of Amendment and the Certificate of Designations to the Articles of Incorporation of the Company attached hereto as Exhibits A-1 and A-2, (collectively, the "Articles of Amendment"). The Common Shares and the Preferred Shares may be collectively referred to as the "Shares". 2. CLOSINGS 2.1 COMMON SHARES CLOSING. The Company will sell to the Purchaser and, subject to the terms and conditions hereof, the Purchaser will purchase from the Company, at the closing provided for in this Section 2.1, the Common Shares at an aggregate purchase price of $3,750,000. The closing of the sale and purchase of the Common Shares (the "Common Closing") shall take place at the offices of the Company at 3880 N. 28th Terrace, Hollywood, Florida, 33020, following the satisfaction or waiver (not violative of law) of the conditions set forth in Sections 3 and 4, on October 21, 1997 (the "Common Closing Date"), unless otherwise agreed between the Purchaser and the Company. At the Common Closing, the Company will deliver to the Purchaser one or more stock certificates (as the Purchaser may designate in advance), each dated the Common Closing Date and duly registered in the Purchaser's name (or in the name of any nominee the Purchaser designates to hold the Common Shares for its account), representing the Common Shares, against receipt of $3,750,000 from the Purchaser by delivery of federal funds payable to the Company. 2.2 PREFERRED SHARES CLOSING. The Company will sell to the Purchaser and, subject to the terms and conditions hereof, the Purchaser will purchase from the Company, at the closing provided for in this Section 2.2, the Preferred Shares at an aggregate purchase price of 2 $3,750,000. The closing of the sale and purchase of the Preferred Shares (the "Preferred Closing") shall take place at the offices of the Company at 3880 N. 28th Terrace, Hollywood, Florida, 33020 or by mail if the parties agree, following the satisfaction or waiver (not violative of law) of the conditions set forth in Section 5 and the consummation of the Common Closing, on November 30, 1997 (the "Preferred Closing Date"), unless otherwise agreed between the Purchaser and the Company. At the Preferred Closing, the Company will deliver to the Purchaser one or more stock certificates (as the Purchaser may designate), each dated the Preferred Closing Date and duly registered in the Purchaser's name (or in the name of any nominee the Purchaser designates to hold the Preferred Shares for its account), representing the Preferred Shares against receipt of $3,750,000 from the Purchaser by delivery of federal funds payable to the Company. The Preferred Closing and the Common Closing may be hereinafter referred to as the "Closings." 3. CONDITIONS TO THE PURCHASER'S OBLIGATIONS RE: COMMON CLOSING. The Purchaser's obligation to acquire the Common Shares is subject to the fulfillment, prior to or at the Common Closing, of the following conditions: 3.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties of the Company contained in Section 6 shall be correct as of the date hereof and at and as of the time of the Common Closing. 3.2 PERFORMANCE AND COMPLIANCE. The Company shall have performed all agreements and complied with all conditions contained herein required to be performed or complied with by it prior to or at the Common Closing. 3.3 OFFICER'S CERTIFICATE. The Purchaser shall have received a certificate of the President and Chief Executive Officer of the Company, dated the Common Closing Date, certifying that the conditions specified in Sections 3.1, 3.2 and 3.8 have been fulfilled. 3.4 OPINIONS OF COUNSEL OF THE COMPANY. The Purchaser shall have received an opinion from Steel Hector & Davis LLP, counsel to the Company, dated the Common Closing Date and substantially in the form of Exhibit B, and an opinion from Lionel Sawyer & Collins, Nevada counsel to the Company, dated the Common Closing Date in such form as may be reasonably acceptable to the Purchaser. 3.5 WAIVERS AND CONSENTS. All waivers and consents required to be obtained by the Company in connection with the Common Closing shall be satisfactory in substance and form to the Purchaser, including but not limited to the consent of Heller Financial, Inc. 3.6 OTHER AGREEMENTS. (a) The Stockholders Agreement attached hereto as Exhibit C (the "Stockholders Agreement") shall have been executed and delivered by the Company, the Ginsburgs (as defined -2- 3 therein), and the Purchaser. All such action shall have been taken as may be necessary to elect a Board of Directors of the Company, effective upon the Common Closing, as provided in the Stockholders Agreement. (b) The Registration Rights Agreement attached hereto as Exhibit D (the "Registration Rights Agreement") shall have been executed and delivered by the Company and the Purchaser. (c) The Employment Agreements attached hereto as Exhibit E and F (the "Employment Agreements") shall have been executed and delivered by Richard Ginsburg and Darius G. Nevin and the Company. (d) The Employment Agreement attached hereto as Exhibit G (the "Harold Ginsburg Employment Agreement") shall have been executed and delivered by Harold Ginsburg and the Company. 3.7 CORPORATE ACTION. The Company shall have delivered to the Purchaser certified copies of (a) the resolutions duly adopted by an independent committee of the, and the full, board of directors of the Company authorizing the execution, delivery and performance of this Agreement, and each of the other agreements contemplated hereby, the filing of the Articles of Amendment, the issuance and sale of the Preferred Shares and the Common Shares, the reservation for issuance upon conversion of the Preferred Shares of an aggregate of 2,273,385 shares of Common Stock and the consummation of all other transactions contemplated by this Agreement, (b) the written consents of the Company's stockholders adopting the Articles of Amendment, (c) the Articles of Incorporation and Bylaws of the Company, each as amended to date, and (d) incumbency of the Company's officers. 3.8 NO MATERIAL ADVERSE CHANGE. There shall have been no material adverse change in the business, assets, liabilities, prospects, results of operations or condition, financial or otherwise, of the Company and its subsidiaries, taken as a whole ( "Material Adverse Change"). 3.9 STATUS OF PREFERRED STOCK CLOSING. All third party conditions and consents to the Preferred Stock Closing shall have been satisfied, except the passage of time with respect to the information statement delivered to stockholders of the Company in connection with the adoption of the Articles of Amendment and the filing of the Articles of Amendment with the Secretary of State of the State of Nevada. 3.10 NO PROCEEDINGS OR LITIGATION. There shall be no proceeding or action pending or threatened before any tribunal or governmental agency which seeks to restrain or effect any of the transactions contemplated herein. -3- 4 4. CONDITIONS TO COMPANY'S OBLIGATIONS RE: COMMON CLOSING. The Company's obligation to sell the Common Shares is subject to the fulfillment, prior to or at the Common Closing, of the following conditions: 4.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties of the Purchaser contained in Section 7 shall be correct at and as of the time of the Common Closing. 4.2 PERFORMANCE AND COMPLIANCE. The Purchaser shall have performed all agreements and complied with all conditions contained herein required to be performed or complied with by it prior to or at the Common Closing. 4.3 OFFICER'S CERTIFICATE. The Company shall have received a certificate of the President and Chief Executive Officer of the Purchaser, dated the Common Closing Date, certifying that the conditions specified in Sections 4.1 and 4.2 have been fulfilled. 4.4 OPINION OF COUNSEL OF THE COMPANY. The Company shall have received an opinion from John K. Rosenberg, counsel of the Purchaser, dated the Common Closing Date and substantially in the form of Exhibit H. 4.5 WAIVERS AND CONSENTS. All waivers and consents required to be obtained by the Purchaser in connection with the Common Closing shall be satisfactory in substance and form to the Company, including but not limited to the consent of Protection One, Inc. 4.6 OTHER AGREEMENTS. (a) The Stockholders Agreement shall have been executed and delivered by the Company, the Ginsburgs, and the Purchaser. All such action shall have been taken as may be necessary to elect a Board of Directors of the Company, effective upon the Common Closing, as provided in the Stockholders Agreement. (b) The Registration Rights Agreement shall have been executed and delivered by the Company and the Purchaser. (c) The Employment Agreements shall have been executed and delivered by Richard Ginsburg and Darius G. Nevin and the Company. (d) The Harold Ginsburg Employment Agreement shall have been executed and delivered by Harold Ginsburg and the Company. 4.7 FAIRNESS OPINION. The Company shall have received an opinion of Raymond James & Associates, Inc. stating that the transactions contemplated hereby are fair from a -4- 5 financial point of view to the existing stockholders of the Company and such opinion shall not have been withdrawn or adversely modified. 5. CONDITIONS RE: PREFERRED CLOSING. The parties' obligations to consummate the purchase of the Preferred Shares are subject to the fulfillment, prior to or at the Preferred Closing, of the following conditions: 5.1 COMMON CLOSING. The consummation of the Common Closing shall have occurred prior to the Termination Date set forth in Section 11. 5.2 STOCKHOLDER APPROVAL. The Articles of Amendment shall have been approved by the stockholders of the Company to the extent required by applicable law. 5.3 ARTICLES OF AMENDMENT. The Articles of Amendment shall have been filed with the Secretary of the State of Nevada and shall be in full force and effect under the laws of such state. 6. CONDITIONS TO THE PURCHASER'S OBLIGATIONS RE: PREFERRED CLOSING. The Purchaser's obligation to acquire the Preferred Shares is subject to the fulfillment, prior to or at the Preferred Closing, of the following conditions: 6.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and warranties of the Company contained in Section 7 shall be correct as of the date hereof and at and as of the time of the Preferred Closing. 6.2 PERFORMANCE AND COMPLIANCE. The Company shall have performed all agreements and complied with all conditions contained herein required to be performed or complied with by it prior to or at the Preferred Closing. 6.3 OFFICER'S CERTIFICATE. The Purchaser shall have received a certificate of the President and Chief Executive Officer of the Company, dated the Preferred Closing Date, certifying that the conditions specified in Sections 6.1, 6.2 and 6.6 have been fulfilled. 6.4 OPINION OF COUNSEL OF THE COMPANY. The Purchaser shall have received an opinion from Steel Hector & Davis LLP, counsel to the Company, dated the Preferred Closing Date and substantially in the form of Exhibit B, and an opinion from Lionel Sawyer & Collins, Nevada counsel to the Company, dated the Common Closing Date in such form as may be reasonably acceptable to the Purchaser. 6.5 WAIVERS AND CONSENTS. All waivers and consents required to be obtained by the Company in connection with the Preferred Closing shall be satisfactory in substance and form to the Purchaser, including but not limited to the consent of Heller Financial, Inc. -5- 6 6.6 NO MATERIAL ADVERSE CHANGE. There shall have been no Material Adverse Change. 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants that: 7.1 ORGANIZATION; GOOD STANDING; VALID AND BINDING. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and proposed to be conducted, to enter into this Agreement, to issue and sell the Common Shares and the Preferred Shares, and to carry out the terms hereof and thereof. Each of the Company's subsidiaries is duly organized, validly existing and in good standing under the laws of its state of incorporation. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business, and is in good standing in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes qualification necessary, except where failure to so qualify would not individually or in the aggregate have a Material Adverse Change. The execution, delivery and performance of this Agreement and all other agreements contemplated hereby to which the Company is a party have been duly authorized by the Company. Each of such agreements has been duly and validly executed and delivered by the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, liquidation, moratorium, receivership, conservatorship, readjustment of debts, fraudulent conveyance or similar laws affecting the enforcement of creditors rights generally. 7.2 INFORMATION FURNISHED; BUSINESS. The Company has furnished the Purchaser with true and complete copies of (a) the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996, as amended to date, (b) any and all of the Company's Current Reports on Form 8-K which have been filed with the Securities and Exchange Commission ("SEC") since December 31, 1996, (c) the Company's Quarterly Reports on Form 10-QSB for the quarters ended March 31, 1997 and June 30, 1997, as amended to date, (collectively "SEC Documents") and (d) all other reports and documents filed by the Company with the SEC under the Exchange Act since January 1, 1997. The financial statements contained in the SEC Documents have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as stated in the notes thereto), and present fairly (subject, in the case of unaudited statements, to normal recurring adjustments) the financial condition of the Company as of their respective dates and the results of operations and cash flows for the respective periods. Except as disclosed in the SEC Documents or as set forth on Schedule A, since January 1, 1997 there has been no Material Adverse Change. Since January 1, 1997, the Company has made all filings required to be made in compliance with the Exchange Act, and such filings, as modified by subsequent reports filed pursuant to the Exchange Act conformed in all material respects to the requirements of the Exchange Act, and the rules and regulations of the SEC thereunder, and such filings did not contain any untrue statement -6- 7 of a material fact and did not omit to state any material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which such statements were made as of their respective dates of filing. 7.3 LITIGATION. Except as disclosed on Schedule A, there are no actions, proceedings or investigations nor any judgment, decree, injunction, rule, or order pending or threatened which question or affect the validity of this Agreement, the Common Shares or the Preferred Shares, or any action taken or to be taken pursuant hereto or thereto, or which might result, either in any case or in the aggregate, in any Material Adverse Change, or in any liabilities on the part of the Company which, either in any case or in the aggregate, are or might be material and which liabilities have not been disclosed in the notes to the Company's financial statements contained in the SEC Documents and adequately reserved for on the Company's balance sheet as at June 30, 1997. 7.4 COMPLIANCE WITH OTHER INSTRUMENTS. Except for consents and approvals required to be obtained as set forth on Schedule A, the execution, delivery and performance of this Agreement and the other agreements contemplated hereby, and the issuance of the Common Shares and the Preferred Shares, do not and will not result in any violation of or be in conflict with or constitute (with or without due notice or lapse of time or both) a default or result in an adverse event under any term of the Articles of Incorporation, as amended (the "Charter"), or by-laws of the Company, or of any material agreement, instrument, obligation, license, judgment, decree, order, statute, rule or governmental regulation applicable to the Company, its assets or properties or result in the imposition or creation of any lien or encumbrance upon any asset or property of the Company. The Company is not in violation of any term of its Charter or by-laws, or of any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation which is material to the business, operations, prospects, or affairs of the Company. 7.5 GOVERNMENTAL CONSENTS. Except for such consents, approvals and authorizations as are set forth on Schedule A, neither the Company, nor any of its subsidiaries is or will be required to obtain any consent, approval or authorization of, or to make any declaration or filing with, any governmental authority as a condition precedent to the valid execution and delivery of this Agreement and the other agreements contemplated hereby, and, the valid offer, issue and delivery of the Common Shares and the Preferred Shares. Schedule 6.5 correctly sets forth the names and jurisdictions of domicile of each subsidiary of the Company. 7.6 CAPITAL STOCK. Schedule A correctly describes each class of the authorized capital stock of the Company on the date hereof, including, as to each such class, the number of shares thereof authorized and the number of shares thereof issued and outstanding. All of the outstanding shares of the Company are validly issued and outstanding, fully paid and non-assessable and free of preemptive rights. The Company has no outstanding securities convertible into or exchangeable for capital stock and no outstanding options, warrants or other rights to subscribe for or purchase, or agreements for the purchase from or the issue or sale by the -7- 8 Company of, capital stock, other than as set forth in such Schedule A, which correctly describes each such security, right or agreement and the number of shares subject thereto, whether or not reserved for on the books of the Company. Schedule A also sets forth all shares of capital stock reserved or required for issuance pursuant to any employee benefit, stock option or other similar plan. 7.7 DISCLOSURE. There is no fact known to the Company which materially adversely affects the business, operations, affairs, prospects, properties, assets or condition of the Company which has not been set forth in this Agreement or in Schedule A hereto. No representation or warranty contained in this Agreement, the other agreements contemplated hereby, or the Schedules hereto or thereto, or any officers certificate furnished thereunder, at the date hereof, or at the Common Stock Closing Date and the Preferred Stock Closing Date contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. 7.8 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in the SEC Documents or as set forth on Schedule A hereto, since January 1, 1997, the Company has in all material respects conducted its business in the ordinary course consistent with past practices. 7.9 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on Schedule A and in the SEC Documents, and liabilities incurred after January 1, 1997 in the ordinary course of business and consistent with past practices, the Company does not have any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of a nature required by GAAP to be reflected in a consolidated balance sheet (or reflected in the notes thereto). 7.10 NO DEFAULT. Except as set forth on Schedule A hereto, neither the Company nor any of its subsidiaries is in violation or breach of, or default under (and no event has occurred which with notice or the lapse of time or both would constitute a violation or breach of, or a default under) any term, condition or provision of (i) any material note, bond, mortgage, deed of trust, security interests, indenture, license, contract, agreement, plan or other instrument or obligation to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary or any of their respective properties or assets may be bound or affected, (ii) any order, writ, injunction, decree, statute, rule or regulation applicable to the Company, any subsidiary of the Company or any of their respective properties or assets or (iii) any registration, license, permit or other consent or approval of any governmental agency, except in each case for breaches, defaults or violations which would not individually or in the aggregate have a material adverse effect on the business, assets, liabilities, results of operations or condition, financial or otherwise, of the Company and its subsidiaries, taken as a whole. 8. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents and warrants that: -8- 9 8.1 NO DISTRIBUTION. The Purchaser is acquiring the Preferred Shares and the Common Shares for its own account with the present intention of holding such securities for purposes of investment, and it has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws. The Purchaser understands that the Common Shares and the Preferred Shares are "restricted securities" as defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), and have not been registered pursuant to the provisions of the Securities Act, in as much as the proposed purchase of the Common Shares and the Preferred Shares is taking place in a transaction not involving any public offering. 8.2 SOPHISTICATION. The Purchaser is knowledgeable, experienced and sophisticated in financial and business matters and is able to evaluate the risks and benefits of the investment in the Common Shares and the Preferred Shares. 8.3 ECONOMIC RISK. The Purchaser is able to bear the economic risk of its investment in the Common Shares and the Preferred Shares for an indefinite period of time because the Common Shares and the Preferred Shares have not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available. 8.4 ACCESS TO INFORMATION. The Purchaser has been furnished or otherwise had full access to such other information concerning the Company and its subsidiaries as it has requested and that was necessary to enable the Purchaser to evaluate the merits and risks of an investment in the Company, and after a review of this information, has had an opportunity to ask questions and receive answers concerning the financial condition and business of the Company and the terms and conditions of the securities purchased hereunder, and has had access to and has obtained such additional information concerning the Company and the securities as it deemed necessary. The Purchaser has carefully reviewed the information furnished pursuant to Section 7.2. 8.5 ACCREDITED INVESTOR. The Purchaser is an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. 8.6 LEGEND. The Purchaser understands that the certificate(s) representing the Common Shares and the Preferred Shares (and any Common Stock issued upon conversation of the Preferred Shares) will bear restrictive legends thereon as follows: "The securities represented by this certificate have been acquired directly or indirectly from the Company without being registered under the Securities Act of 1933, as amended (the "Act"), or any other applicable securities laws, and are restricted securities as that term is defined under Rule 144 promulgated under the Act. These securities may not be sold, pledged, transferred, distributed or otherwise disposed of in any manner unless they are registered under the Act and -9- 10 all other applicable securities laws, or unless the request for transfer is accompanied by a favorable opinion of counsel, reasonably satisfactory to the Company, stating that the transfer will not result in a violation of the Act and all other applicable state securities law." 8.7 ADDITIONAL PURCHASER REPRESENTATIONS. The Purchaser is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. The execution, delivery and performance of this Agreement and all other agreements contemplated hereby to which such Purchaser is a party have been duly authorized by the Purchaser. Each of such agreements constitutes a valid and binding obligation of the Purchaser, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, liquidation, moratorium, receivership, conservatorship, readjustment of debts, fraudulent conveyance or similar laws affecting the enforcement of creditors rights generally. The Purchaser has made or obtained all material third party and governmental consents, approvals and filings to be made or obtained prior to the Closings by the Purchaser in connection with the consummation of the transactions hereunder. The execution and delivery by the Purchaser of each of the Agreement and all other agreements contemplated hereby and the fulfillment of and compliance with the respective terms thereof by the Purchaser do not and shall not (a) conflict with or result in a breach of the terms, conditions or provisions of, (b) constitute a default under, or (c) result in a violation of the organizational documents of the Purchaser or any material agreement or instrument to which Purchaser is subject. 9. INDEMNIFICATION. 9.1 INDEMNIFICATION BY THE COMPANY. In addition to all other sums due hereunder or provided for in this Agreement and any other rights and remedies available to Purchaser under applicable law, the Company agrees to hold harmless and indemnify the Purchaser and all directors, officers and controlling persons of the Purchaser (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")) (individually referred to as an "Indemnified Person") from and against any losses, claims, damages, costs and expenses, and liabilities (including attorneys' fees and expenses of investigation) incurred by each Indemnified Person pursuant to any action, suit, proceeding or investigation against any one or more of the Company and such Indemnified Person, and arising out of or in connection with a breach by the Company of any agreement, representation, warranty, covenant, or obligation contained in this Agreement or any other agreement contemplated hereby or delivered hereunder and any and all costs and expenses incurred by any Indemnified Person in connection with the enforcement of its rights under this Agreement and the other agreements contemplated hereby. The Company further agrees, promptly upon demand by an Indemnified Person, from time to time, to reimburse each Indemnified Person for, or pay, any loss, claim, damage, liability or expense as to which the Company has indemnified the Indemnified Person pursuant to this Agreement. -10- 11 9.2 INDEMNIFICATION BY THE PURCHASER. In addition to all other sums due hereunder or provided for in this Agreement, the Purchaser agrees to hold harmless and indemnify the Company and all directors, officers and controlling persons of the Company (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) (individually referred to as an "Indemnified Person") from and against any losses, claims, damages, costs and expenses and liabilities (including attorneys' fees and expenses of investigation) incurred by each Indemnified Person pursuant to any action, suit, proceeding or investigation against any one or more of the Purchaser and such Indemnified Person, and arising out of or in connection with a breach by the Purchaser of any agreement, representation, warranty, covenant or obligation contained in this Agreement or any agreement contemplated hereby or delivered hereunder and any and all costs and expenses incurred by any Indemnified Person in connection with the enforcement of its rights under this Agreement and the agreements contemplated hereby. The Purchaser further agrees, promptly upon demand by an Indemnified Person, from time to time, to reimburse each Indemnified Person for, or pay, any loss, claim, damage, liability or expense as to which the Purchaser has indemnified the Indemnified Person pursuant to this Agreement. 9.3 PROCEDURE. Each Indemnified Person agrees to give prompt written notice to the indemnifying party after the receipt by the Indemnified Person of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which such Indemnified Person will claim indemnification or contribution pursuant to this Agreement, PROVIDED that the failure of any Indemnified Person to give notice shall not relieve the indemnifying party of its obligations except to the extent that the indemnifying party is actually prejudiced by the failure to give notice. If any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses incurred by the latter in connection with the defense thereof unless (i) in the reasonable opinion of counsel for the indemnifying party a conflict of interest exists between the indemnified party and indemnifying party, (ii) the indemnified party reasonably objects to such assumption on the basis that there may be defenses available to it which are different from or in addition to the defenses available to the indemnifying party, (iii) the indemnifying party has failed to timely assume the defense of any such action or proceeding or (iv) the indemnifying party and its counsel do not actively and vigorously pursue the defense of such action . Whether or not such defense is assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. An indemnifying party who elects not to assume the defense of an action or where a potential conflict of interest or other defenses may able available, shall not be obligated to pay the fees and expenses of more than one counsel and local counsel where appropriate for all parties indemnified by such indemnifying party with respect to such action, unless in the reasonable judgment of any indemnified party a conflict of -11- 12 interest may exist between such indemnified party and any other of such indemnified parties with respect to such action. Cost and expenses incurred by the indemnified party shall be reimbursed, from time to time, by the Company as and when bills are received or expenses are incurred. 9.4 GROSS UP. Any payment required to be made under this Section 9 shall be increased so that the net amount retained by the Indemnified Person, after deduction of any federal, state, local or foreign tax due thereon (assuming a maximum effective total statutory tax rate), shall be equal to the amount otherwise due. 10. EXCHANGE AND REPLACEMENT OF SECURITIES. Upon surrender of any Preferred Share or Common Share certificate by the Purchaser for exchange at the office of the Company, the Company, at its expense (exclusive of applicable transfer taxes or other similar taxes) will issue or cause to be issued, in exchange, a new Preferred Share or Common Share certificate in such denominations as may be requested for the same number of Preferred Shares or Common Shares, as the case may be, and registered as the Purchaser may request. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Share or Common Share certificate, upon delivery of a written agreement of indemnity reasonably satisfactory to the Company in form or amount, or, in the case of any such mutilation upon surrender and cancellation thereof, the Company, at its expense, will issue or cause to be issued a new Preferred Share or Common Share certificate in replacement of such lost, stolen, destroyed or mutilated Preferred Share or Common Share certificate. 10.1 SURVIVAL. All agreements, representations and warranties contained herein or made in writing by or on behalf of the Company or by or on behalf of the Purchaser in connection with the transactions contemplated hereby shall survive the execution and delivery of this Agreement, all investigations made by Purchaser or on Purchaser's behalf, and the issue and delivery of the Preferred Shares and the Common Shares. 11.01 TERMINATION. This Agreement may be terminated: (a) by the mutual written consent of the Purchaser and the Company; (b) by either party if the Common Closing has not occurred on or before November 30, 1997, or such later date as the parties may agree upon (the "Termination Date"); provided that the party electing termination pursuant to this clause (b) is not in material breach of any of its representations, warranties, covenants or agreements contained in this Agreement; (c) by the Purchaser if the Preferred Stock Closing has not occurred on or before December 31, 1997, or such later date as the parties may agree upon. (d) (i) by the Purchaser if any of the conditions in Section 3 have not been satisfied as of the Common Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of the Purchaser to comply with its obligations under -12- 13 this Agreement) and the Purchaser has not waived such condition on or before the Common Closing Date; (ii) by the Company, if any of the conditions in Section 4 have not been satisfied as of the Common Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of the Company to comply with its obligations under this Agreement) and the Company has not waived such condition on or before the Common Closing Date; (iii) by either party, if any of the conditions in Section 5 have not been satisfied as of the Preferred Closing Date or if satisfaction of such a condition is or becomes impossible (other than through the failure of the electing party to comply with its obligations under this Agreement) and such condition has not been waived on or before the Preferred Closing Date; or (e) by either party if a breach of any provision of this Agreement has been committed by the other party or any representation or warranty made by the other party shall have been incorrect when made and such breach, failure or misrepresentation has not been cured within 20 days after notice thereof or waived. 11.02 EFFECT OF TERMINATION. In the event of termination of this Agreement as provided in Section 11.01, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except (a) as set forth in Section 9, 13 and 15 and (b) that nothing herein shall relieve either party from liability for any breach of this Agreement. 12. NO BROKER. Each party hereto represents and warrants that it has incurred no obligation or liability, contingent or otherwise, for brokerage or finders' fees or agents' commissions or other similar payment in connection with this Agreement. 13. BREAK-UP FEE . In the event that this Agreement is terminated as a result of a breach of this Agreement by the Company, failure of the Company to obtain any required consents or approvals, or in connection with the Company entering into another transaction, the Company will pay Purchaser in same day funds a cash fee of $300,000 immediately upon termination. 14. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if hand delivered or sent by first class registered or certified mail (return receipt requested), postage prepaid, to the respective addresses of the Company and the Purchaser set forth below, unless subsequently changed by written notice. Any notice shall be deemed to be effective when it is received. -13- 14 To the Purchaser: Westar Capital, Inc. 818 South Kansas Avenue P.O. Box 889 Topeka, Kansas 66601 Attention: President Phone: 785-575-6322 Fax: 785-575-1788 With a copy to: John K. Rosenberg, Esq. 818 South Kansas Avenue P.O. Box 889 Topeka, Kansas 66601 Phone: 785-575-6322 Fax: 785-224-1788 To the Company: Guardian International, Inc. 3880 North 28th Terrace Hollywood, Florida 33020-1118 Attention: Richard Ginsburg, President Phone: 954-926-5200 Fax: 954-926-1822 With a copy to: Harvey Goldman, Esq. Steel Hector & Davis LLP 200 South Biscayne Boulevard 41st Floor Miami, FL 33131-2398 Phone: 305-577-7011 Fax: 305-577-7001 15. COSTS AND EXPENSES. Whether or not the transactions contemplated hereby close, each party will bear its own costs and expenses for due diligence and for the preparation and negotiation of this Agreement and the agreements referenced herein. The Company agrees to pay, or cause to be paid, all documentary and similar taxes levied under the laws of the United -14- 15 States of America or any state or local taxing authority thereof or therein in connection with the issuance and sale of the Preferred Shares and the Common Shares and the execution and delivery of the other agreements and documents contemplated hereby and any modification of any of such documents and will hold the Purchaser harmless without limitation as to time against any and all liabilities with respect to all such taxes. 16. RESERVED. 17. MUTUAL COVENANTS. Each of the Company and Purchaser agrees to promptly use its best efforts to secure such consents as may be necessary to effect the transactions contemplated hereunder. 18. PRESS RELEASES. Simultaneously with the execution of this Agreement, the parties hereto shall issue a press release in mutually acceptable form (the "Press Release"). The parties hereto agree to consult with each other prior to any press release regarding the transactions contemplated herein. 19. ASSIGNMENT, SUCCESSORS AND NO THIRD-PARTY RIGHTS. Neither party may assign any of its rights under this Agreement without the prior consent of the other party, except that the Purchaser may assign any of its rights under this Agreement to any "affiliate" of the Purchaser as defined in Regulation D of the Act including, but not limited to, Protection One, Inc. following the closing of the proposed transaction in which Western Resources, Inc. shall acquire not less than 50% of the outstanding equity of Protection One, Inc. Subject to the preceding sentence, this Agreement will apply to, be binding in all respects upon, and inure to the benefit of the successors and permitted assigns of the parties. Nothing expressed or referred to in this Agreement will be construed to give any person other than the parties to this Agreement any legal or equitable right, remedy or claim under or with respect to this Agreement or any provision of this Agreement. This Agreement and all of its provisions and conditions are for the sole and exclusive benefit of the parties to this Agreement and their successors and assigns. 20. SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. In the event any provision of this Agreement shall be held invalid, the parties agree to enter into such further agreements as may be necessary in order to carry out the intent and purposes of the parties herein. 21. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Florida without regard to conflict of law principles thereunder. -15- 16 22. ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all prior agreements between the parties with respect to its subject matter and constitutes (along with the documents referred to in this Agreement) a complete and exclusive statement of the terms of the agreement between the parties with respect to its subject matter. This Agreement may be not amended except by a written agreement executed by the party to be charged with the Amendment. 23. WAIVER. The rights and remedies of the parties to this Agreement are cumulative and not alternative. Neither the failure nor the delay by any party in exercising any right, power, or privilege under this Agreement or the documents referred to in this Agreement will operate as a waiver of such right, power, or privilege, and no single or partial exercise of any such right, power, or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable law, (a) no claim or right arising out of this Agreement or the documents referred to in this Agreement can be discharged by any party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other party; (b) no waiver that may be given by a party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one party will be deemed to be a waiver of an obligation of such party or of the right of the party giving such notice or demand to take further notice or demand as provided in this Agreement or the documents referred to in this Agreement. 24. ACQUISITION PROPOSALS. The Company will not, and will use its best efforts to cause its officers, directors, employees, representatives and agents not to, initiate, encourage or solicit, directly or indirectly, any inquiries or the making of any proposal with respect to, or, except to the extent advised in writing by outside counsel that said disclosure is required by their fiduciary duties, engage in negotiations concerning, provide any confidential information or data to, or have any discussions with, any person relating to, any acquisition, or purchase of all or any significant portion of the assets of, or any equity interest in, such party or any of its subsidiaries or any merger, consolidation or other business combination of such party or any of its subsidiaries with any other Person. The Company represents that as of the date hereof it has ceased any and all existing activities, discussions or negotiations with any parties conducted heretofore with respect to any of the foregoing. The Company agrees to notify the Purchaser immediately if any such negotiations, provision of confidential information or data or discussions are entered into or made or any such inquiries are received in respect thereof, and shall provide details with respect thereto. Notwithstanding the above, the Company may engage in such described behavior with respect to any proposal meeting the above definition of acquisition proposal pursuant to which the Company shall acquire the stock or assets of another entity for an aggregate purchase price not to exceed $4,000,000. 25. NOTICE OF CERTAIN EVENTS. The Company and the Purchaser shall promptly notify the other of: -16- 17 (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; and (c) any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened against, relating to or involving or otherwise affecting any party which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to this Agreement or which relate to the consummation of the transactions contemplated by this Agreement. 26. SECTION HEADINGS; COUNTERPARTS. The headings in this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 27. DISPUTE RESOLUTION. Any dispute arising from, relating to, or in connection with the matters contained herein shall be resolved in accordance with procedures set forth in Schedule B hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on their behalf as of the date first written above. GUARDIAN INTERNATIONAL, INC. By: /s/ RICHARD GINSBURG --------------------------------------- Richard Ginsburg, President and Chief Executive Officer WESTAR CAPITAL, INC. By: /s/ RITA A. SHARPE --------------------------------------- Rita A. Sharpe President -17- EX-10.2 6 EXHIBIT 10.2 1 EXHIBIT 10.2 REGISTRATION RIGHTS AGREEMENT Registration Rights Agreement dated October 21, 1997 between Guardian International, Inc., a Nevada corporation (the "Company"), and Westar Capital, Inc., a Kansas corporation (the "Stockholder"). RECITALS The Company has sold to the Stockholder 2,500,000 shares (the "Common Shares") of the Company's Class A Voting Common Stock, par value $.001 per share (the "Common Stock") and has agreed to sell to the stockholders 1,875,000 shares (the "Preferred Shares") of Series A 9 3/4% Convertible Cumulative Preferred Stock (the "Preferred Stock"), par value $.001 per share, which is convertible into Common Stock. In this Agreement, the Common Shares and the Common Stock issuable by the Company upon conversion of the Preferred Shares, together with any stock dividends, distributions, or splits or any shares issued or issuable in connection with any reclassification, recapitalization, merger or consolidation or reorganization ("Adjustments"), shall be collectively referred to as the "Shares." AGREEMENT 1. REGISTRATION RIGHTS. (a) INCIDENTAL RIGHTS. If at any time or from time to time the Company proposes to file with the Securities and Exchange Commission (the "Commission") a registration statement (other than a registration statement on Form S-8 covering solely an employee benefit plan or a registration statement on Form S-3 covering solely offers pursuant to a dividend or interest reinvestment plan) for the registration under the Securities Act of 1933, as amended (the "Securities Act") of any shares of Common Stock for sale to the public by the Company or on behalf of a stockholder of the Company for cash (excluding shares of Common Stock issuable by the Company upon the exercise of employee stock options or in connection with the merger or consolidation of the Company with one or more other corporations), the Company shall give the Stockholder and Heller Financial, Inc. ("Heller") so long as Heller has Heller Registration Rights as later defined, at least 30 days' prior written notice of the filing of the proposed registration statement. The notice shall include a list of the states and foreign jurisdictions, if any, in which the Company intends to qualify such shares, the number of shares so proposed to be registered, the proposed date of filing of such registration statement, any proposed means of distribution of such shares, any proposed managing underwriter or underwriters, and a good faith estimate by the Company or managing underwriter of the maximum offering price thereof, as such price is proposed to appear on the facing page of such registration statement. On written request of the Stockholder (and Heller, if applicable) received by the Company within 15 days after the date of the Company's delivery of its notice of intention, the Company shall, subject to the conditions and in accordance with the procedures set forth in Sections 1(c) and 1(d), and at its own expense as provided in Section 3, include in the coverage of such 1 2 registration statement and qualify for sale under the blue sky or securities laws of the various states, the aggregate number of Shares proposed to be registered (the "Registrable Shares"). Notwithstanding any other provision in this Section 1(a), if in connection with an underwritten offering the managing underwriter (which shall be a nationally recognized independent investment banking firm or such firm as the parties shall mutually agree) for the Company indicates its reasonable belief in writing that the effect of including all or part of the Registrable Shares in such underwritten offering will materially and adversely affect the sale of the Registrable Shares (which statement of the managing underwriter shall also state the maximum number of shares (the "Maximum Shares"), if any, which can be sold without materially adversely affecting the sale of the Registrable Shares), then the number of Registrable Shares to be included in the offering shall be reduced to the Maximum Shares and such Maximum Shares shall be allocated (i) first, to the Company; and (ii) second, between the Stockholder and Heller, in proportion, as nearly as practicable, as such Person's Registrable Shares bears to the aggregate number of Registrable Shares. If the managing underwriter has not limited the number of Shares to be underwritten, the Company and other holders of the Company's securities, in addition to Heller, may include securities for its (or their) own account in such registration if (A) the managing underwriter so agrees and (B) the number of shares which would otherwise have been included in such registration and underwriting will not thereby be limited and (C) such other securities are then registrable on Form S-3. No registration statement effected under this Section 1(a) shall release the Company of its obligations to file registration statements on behalf of Stockholder under Section 1(b). Notwithstanding any request for inclusion in any registration statement under this Section 1(a), the Stockholder may elect to reduce or withdraw its request for inclusion of its Shares at any time prior to execution of the underwriting agreement with respect thereto by the Stockholder. The Company shall have the right to select all underwriters, including the managing underwriter, of all public offerings of shares of Common Stock subject to the provisions of this Section 1(a). The Stockholder shall enter into (together with the Company) an underwriting agreement with the underwriter or underwriters, provided that such underwriting agreement is in a customary form and is reasonably acceptable to the Stockholder. Nothing in this Section 1(a) shall create any liability on the part of the Company to the Stockholder if the Company for any reason decides not to file such a registration statement. (b) MANDATORY RIGHTS. Upon written request by the Stockholder, the Company shall, subject to the conditions, and in accordance with the procedures, set forth in this Section 1(b) and Sections 1 (c) and 1(d), file a registration statement, including, without limitation, by means of a shelf registration pursuant to Rule 415 under the Securities Act (a "Shelf Registration") if so requested by the Stockholder, (and use its best efforts to cause such registration statement to become effective) and use its best efforts to qualify Shares owned by the Stockholder for sale under the blue sky or securities laws of such states as may be reasonably requested by the Stockholder. The request for registration pursuant to this Section 1(b) shall specify the number of Shares to be registered. The Stockholder shall have the 2 3 right to select the underwriters and managers to administer the offering, subject to approval of the Company, which approval may not be unreasonably withheld. The Company shall enter into (together with the Stockholder) an underwriting agreement with the underwriter or underwriters, provided that such underwriting agreement is in a customary form and is reasonably acceptable to the Company and the Stockholder. The Company shall be permitted to delay the filing of any registration statement requested pursuant to this Section 1(b) or to delay its effectiveness for a reasonable period of time (in no event to exceed 45 days) if, in the good faith and reasonable judgment of the Board of Directors of the Company, such registration would have a material adverse effect on pending financing transactions, corporate reorganizations or other material events involving the Company, or if the Company, in the good faith judgment of its Board of Directors, reasonably believes that the filing thereof at the time requested would require disclosure of material confidential information which would materially and adversely affect the business or prospects of the Company. Notwithstanding anything herein to the contrary, the Company shall not exercise its right to delay the effectiveness of a registration statement more than twice in any twelve (12) month period. Once the cause of such delay is eliminated, the Company shall promptly notify the Stockholder, and as soon as the Stockholder notifies the Company to proceed, the Company shall file a registration statement and use its best efforts to cause such sale to be registered under the Securities Act and qualified under the securities laws of such states as may be reasonably requested by the Stockholder, all as provided above. Notwithstanding any other provision in this Section 1(b), if the managing underwriter indicates its reasonable belief in writing that the effect of including all or part of the securities requested to be registered by the Stockholder, together with the number of shares to be registered on behalf of Heller or the Company, if any, in the coverage of such registration statement will materially and adversely affect the sale of such Registrable Shares (which statement of the managing underwriter shall also state the number of Maximum Shares, if any), then the number of Registrable Shares shall be reduced to the Maximum Shares and such Maximum Shares shall be allocated (i) first, to the Stockholder and (ii) second, between the Company and Heller, in proportion, as nearly as practicable, as such Person's Registrable Shares bears to the aggregate number of Registrable Shares. If the managing underwriter has not limited the number of Shares to be underwritten, the Company and other holders of the Company's securities, in addition to Heller, may include securities for its (or their) own account in such registration if (A) the managing underwriter so agrees and (B) the number of shares which would otherwise have been included in such registration and underwriting will not thereby be limited and (C) such other securities are then registrable on Form S-3. The Stockholder shall be entitled to request three registrations pursuant to this Section 1(b). The Company shall be obligated to maintain the effectiveness of each such registration statement until the earlier of (A) the sale of all shares registered pursuant thereto, or (B) the date that is two years after the date on which the registration statement is declared effective. The Company shall not be required by this Section 1(b) to effect a registration of Shares unless (A) Form S-3, or another equivalent short-form registration statement, is then available to the Company for such registration, 3 4 and (B) the aggregate number of the Shares requested to be registered exceeds 500,000 Shares as adjusted for any Adjustments. The Stockholder may withdraw a request under this Section 1(b) in circumstances where the Company is in material breach of its obligations hereunder and has not cured such breach after notice thereof and a reasonable opportunity to do so, or the withdrawal occurs in connection with a delay by the Company or inability of Stockholder to include all of its Shares requested by Stockholder to be so registered or the failure of any requested registration to become or remain effective as provided herein. Any request so withdrawn prior to such registration statement being declared effective shall not constitute a request for determining the number of requests to which Stockholder is entitled. (c) CERTAIN REGISTRATION CONDITIONS. The Company shall not be required to effect a registration of any Shares of the Stockholder pursuant to Section 1(a) or 1(b), or file any post-effective amendment thereto: (1) unless the Stockholder agrees (w) that it has a present intention to sell (other than in connection with a Shelf Registration) its Shares so requested (x) to sell and distribute a portion or all of its Shares in accordance with the plan or plans of distribution adopted by and through underwriters, if any, acting for the Company with respect to any request under Section 1(a), and (y) to bear a pro rata share of underwriter's discounts and commissions; (2) if, in the case of a request for registration under the provisions of Section 1(b), in the opinion of counsel for the Company and counsel for the Stockholder, the Shares for which registration has been requested may be disposed of within a comparable time frame without registration under the Securities Act and upon such disposition all legends on certificates representing such Shares which restrict transfer under the Securities Act and applicable state securities laws may be removed from such certificates and any such restriction and legends are so removed; (3) if, in the case of a request for registration of an underwritten offering under the provisions of Section 1(b), (x) a registration statement requested by the Stockholder with respect to an underwritten offering covering Common Stock became effective in the same calendar quarter in which such request was made, (y) the Company in good faith anticipates filing a registration statement for an offering of Common Stock for the Company's account within thirty (30) days after such demand date and has not abandoned such proposed offering; or (z) the Company has received a request for a demand registration from the holders of other registration rights pursuant to which the Company is effecting a registration of Common Stock within thirty (30) days of the date of the Stockholder's request; (4) unless the Company has received from the Stockholder all such information the Company reasonably requests from the Stockholder concerning the Stockholder and its intended method of distribution of the Shares to enable the Company to include in the registration statement all material facts required to be disclosed therein; or (5) if the particular Shares for which registration has been requested have been distributed to the public pursuant to an offering registered under the Securities Act, sold to the public 4 5 through a broker, dealer or market maker in compliance with Rule 144 under the Securities Act (or any similar rule then in force), or repurchased by the Company or any affiliate thereof. (d) COVENANTS AND PROCEDURES. If and whenever the Company is required hereunder to effect the registration of Shares under the Securities Act, the Company, at its expense as provided in Section 3 hereof and as expeditiously as possible, shall: (1) In accordance with the Securities Act and all applicable rules and regulations, promptly, and in any event within forty-five (45) days of the request, prepare and file with the Commission a registration statement covering the Shares requested to be registered and use its best efforts to cause such registration statement to become and remain effective. The Company will file such post-effective amendments to such registration statement (and use its best efforts to cause them to become effective) and such supplements as are necessary so that current prospectuses are at all times available until the earlier of the completion of the distribution of all shares under the registration statement or two (2) years after the effective date of the registration statement; PROVIDED that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will furnish to counsel selected by the Stockholder, and the sales or placement agent or agents, if any, for the Shares and the managing underwriter or underwriters, if any, draft copies of all such documents proposed to be filed at least seven (7) days prior to such filing, which documents will be subject to the reasonable review of the Stockholder, the sales or placement agent or agents, if any, for the Shares and the managing underwriter or underwriters, if any, and their respective agents and representatives and (x) the Company will not include in any registration statement information concerning or relating to the Stockholder to which the Stockholder shall reasonably object in writing (unless in the reasonable opinion of outside counsel the inclusion of such information is required by applicable law or the regulations of any securities exchange to which the Company may be subject), and (y), the Company will not file any registration statement pursuant to Section 1(b) or amendment thereto or any prospectus or any supplement thereto to which the Stockholder and managing Underwriter shall reasonably object in writing; If the offering is to be underwritten, in whole or in part, enter into a written underwriting agreement in form and substance reasonably satisfactory to the managing underwriter of the public offering, the Stockholder and the Company; If the Shares to be covered by the registration statement are not to be sold to or through underwriters acting for the Company, the Company shall: (w) deliver to the Stockholder, the sales or placement agent or agents, if any, and the managing underwriter or underwriters, if any, ("Underwriter or Underwriters") as promptly as practicable as many copies of preliminary prospectuses as the Stockholder reasonably requests, and the Stockholder shall keep, or cause to be kept, a written record of the distribution of such preliminary prospectuses and shall refrain from delivery of such preliminary prospectuses in any manner or under any circumstances which would violate the Securities Act or the securities laws of any other jurisdiction, including the various states of the United States, (x) deliver to the Stockholder, and the Underwriters as soon as practicable after the effective date of the registration statement, and from time to time thereafter as many copies of the prospectuses required to be delivered in connection with the sale of Shares registered under the registration statement as the Stockholder or Underwriter reasonably request, (y) in case of the 5 6 happening, after the effective date of such registration statement, of any event or occurrence which is required or may be advisable, in the judgment of the Company, the Stockholder, any Underwriter and their counsel to be set forth in an amendment of or supplement to such prospectus to make any statements therein not misleading, give the Stockholder and Underwriter written notice thereof and prepare and furnish to the Stockholder, and Underwriters in such quantities as it may reasonably request, copies of such amended prospectus or of such supplement to be attached to the prospectus in order that the prospectus, as so amended or supplemented, will 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, in the light of the circumstances under which they were made, not misleading and to comply with the Securities Act, and (z) deliver to the Company and the Underwriters upon reasonable request copies of any documents incorporated into any such registration statement, prospectus, amendment or supplement. (2) On or prior to the date on which the registration statement is declared effective, the Company shall use its best efforts to register or qualify, and cooperate with the Stockholder, the Underwriter or Underwriters, if any, and their counsel, in connection with the registration or qualification of the Shares covered by the registration statement for offer and sale under the securities or blue sky laws of each state and other jurisdiction of the United States as the Stockholder or Underwriter reasonably requests, to use its best efforts to keep each such registration or qualification effective, including through new filings, or amendments or renewals, during the period such registration statement is required to be kept effective and to do any and all other acts or things necessary or advisable to enable the disposition in all such jurisdictions of the Shares covered by the applicable registration statement; provided that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified. (3) The Company shall use its best efforts to cause all of the Stockholder's Shares included in such registration statement to be listed, by the date of the first sale of such Common Stock pursuant to such registration statement, on each securities exchange on which the Common Stock of the Company is then listed or proposed to be listed, if any. (4) The Company shall make generally available to the Stockholder and any underwriter participating in the offering conducted pursuant to the registration statement an earnings statement satisfying the provisions of Section 11(a) of the Securities Act no later than forty-five (45) days after the end of the 12-month period beginning with the first day of the Company's first fiscal quarter commencing after the effective date of the registration statement, which earnings statement shall cover said 12-month period, which requirement will be deemed to be satisfied if the Company timely files complete and accurate information on Forms 10-QSB, 10-KSB, and (if needed) 8-K under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and otherwise complies with Rule 158 under the Securities Act. (5) The Company shall cooperate with the Stockholder and the managing Underwriter or Underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing the Shares to be sold under the registration statement, and enable such securities to be in such denominations and registered in such names as the managing Underwriter or Underwriters, if any, or the Stockholder requests, subject to the obligation to return any certificates representing securities not sold. 6 7 (6) The Company shall use its best efforts to cause the Stockholder's Shares covered by the registration statement to be registered with or approved by such other governmental agencies or authorities within the United States as may be necessary to enable the Stockholder or the Underwriter or Underwriters, if any, to consummate the disposition of such Shares. (7) The Company shall make available for inspection by the Stockholder and each Underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by the Stockholder or any such Underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company, as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors, employees, and independent public accountants to supply all information reasonably requested by any such Inspector in connection with such registration statement, in each case to the extent necessary to enable the Stockholder and any Underwriter to conduct a "reasonable investigation" for purposes of Section 11(a) of the Securities Act. (8) The Company shall obtain a "cold comfort" letter from the Company's independent public accountants, and an opinion of counsel for the Company, each in customary form and covering such matters of the type customarily covered by cold comfort letters and opinions of counsel in connection with public offerings of securities, as the Stockholder or Underwriters may reasonably request. (9) If requested by the Stockholder, the Company shall promptly incorporate in a prospectus, prospectus supplement or post-effective amendment such information as the Stockholder reasonably specifies should be included therein, including, without limitation, information relating to the planned distribution of Shares, the number of Shares being sold by the Stockholder, the name and description of the Stockholder, the offering price of such Shares and any discount, commission or other compensation payable in respect of the Shares being sold, the purchase price being paid therefor to the Stockholder and information with respect to any other terms of the offering of the Shares to be sold in such offering, except to the extent that the Company is advised in a written opinion of outside counsel that the inclusion of such information is reasonably likely to violate applicable securities laws; and make all required filings of such prospectus, prospectus supplement or post-effective amendment promptly after notification of the matters to be incorporated in such prospectus, prospectus supplement or post-effective amendment. (10) If requested by the Stockholder the Company shall use reasonable efforts to participate in and assist with a "road show" any other customary marketing efforts in connection with the sale of Shares pursuant to such registration statement, at such times and in such manner as the Company and the Stockholder mutually may determine. (11) The Company shall promptly notify the Stockholder and Underwriters, after becoming aware thereof, when the registration statement or any related prospectus or any amendment or supplement has been filed, and, with respect to the registration statement or any post-effective amendment, when the same has become effective, (A) of any request by the Commission for amendments or supplements to the registration statement or the related prospectus or for additional information, (B) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, (C) of the receipt 7 8 by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation of any proceeding for such purpose or (D) of the happening of any event which makes any statement in the registration statement or any post-effective amendment thereto, prospectus or any amendment or supplement thereto, or any document incorporated therein by reference untrue in any material respect or which requires the making of any changes in the registration statement or post-effective amendment thereto or any prospectus or amendment or supplement thereto so that they will not contain any untrue statement or a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances under which they were made) not misleading. (12) In the case of a Block Trade (defined below), the Company shall: (1) obtain an opinion of counsel addressed to the Stockholder and the other party to the "block trade" covering matters that are no more extensive in scope than would be customarily covered in opinions obtained in secondary underwritten offerings by issuers with similar market capitalization and reporting and financial histories; (2) obtain a "cold comfort" letter from the independent public accountants of the Company and covering matters that are no more extensive in scope than would be customarily covered in "cold comfort" letters and updates obtained in secondary underwritten offerings by issuers with similar market capitalization and reporting and financial histories, provided that the letter described in this clause (2) shall only be required to the extent such letters are being issued in respect of non-underwritten secondary offerings under then prevailing accounting practices; and (3) deliver a certificate of a senior executive officer of the Company to cover matters no more extensive in scope than those matters customarily underwritten offerings by issuers with similar market capitalization and reporting and financial histories. "Block Trade" shall mean the disposition, in connection with a Shelf Registration, at a single time in a single transaction, including through one or more placement agents, by the Stockholder, of any or all of the Registrable Shares to one or more Institutional Investors. "Institutional Investor" shall mean any insurance company, pension fund, mutual fund, investment company, commercial bank, savings bank, savings and loan association, investment banking company, trust company or any finance or credit company, or any portfolio or investment fund managed by any of the foregoing. (13) If any person becomes a holder of shares that were included in a Shelf Registration statement subsequent to the time that the Shelf Registration statement became effective, the Company shall add such holder to the Shelf Registration statement, on a timely basis, through a post-effective amendment or a supplement to the Prospectus, as shall be necessary in accordance with the rules of the Commission under the Securities Act to include such holder as a selling stockholder in a distribution under the Shelf Registration statement. (e) HELLER REGISTRATION RIGHTS. The Stockholder acknowledges that Heller has certain incidental registration rights with respect to equity securities of the Company owned by it pursuant to that certain Agreement dated August 15, 1996 between Heller and the Company (the "Heller Registration Rights"). Accordingly, the Stockholder acknowledges that pursuant to the Heller Registration Rights, Heller has the right to participate in any registration effected pursuant to Section 1. (f) COMPANY COVENANTS. (1) The Company covenants to and with the Stockholder that to the extent it shall be required to do so under the Exchange Act, the Company shall timely file the reports required to be filed by it under the Exchange Act or the Securities Act (including, but not limited to, the reports under Sections 13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144 adopted by the Commission under the Securities Act and the rules and regulations adopted by the Commission thereunder) and shall take such further action as the Stockholder may reasonably 8 9 request, all to the extent required from time to time to enable the Stockholder to sell Shares without registration under the Securities Act within the limitations of the exemption provided by Rule 144 under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission and for the Company to qualify for use of Form S-3. Upon the request of the Stockholder, the Company shall deliver to the Stockholder a written statement as to whether it has complied with such requirements. (2) If at any time the Company is not subject to Section 13 or 15(d) of the Exchange Act and is exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, the Company agrees, upon the request of the Stockholder seeking to transfer Shares in conformity with Rule 144A under the Securities Act, to furnish to the Stockholder or prospective purchasers of the Shares from the Stockholder the information required by Rule 144A(d)(4)(i) under the Securities Act in the manner and at the times contemplated by such Rule. (3) The Company covenants to make available "adequate current public information" concerning the Company within the meaning of Rule 144(c) under the Securities Act. (4) The Company represents and covenants that it will qualify for use of Form S-3 on November 1, 1998 for transactions involving secondary offerings and that it will preserve such eligibility for so long as the Company is obligated to file and maintain the effectiveness of registration statements hereunder. (5) The Company will avoid taking any action which would cause the Common Stock to cease to be eligible for inclusion on the OTC Bulletin Board Service. 2. INDEMNIFICATION. (a) INDEMNIFICATION BY THE COMPANY. If Shares are registered under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Stockholder and each underwriter of such Shares and their respective officers and directors and each other person, if any, who controls the Stockholder or such underwriter within the meaning of the Securities Act, against any losses, claims, damages, actions (actual or threatened), liabilities, costs and expenses (including legal fees and costs of court), joint or several, to which the Stockholder or such underwriter, director, officer, or controlling person may become subject under the Securities Act or otherwise, if and to the extent that such losses, claims, damages, costs, expenses or liabilities arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained, in any registration statement under which such Shares were registered under the Securities Act, any preliminary prospectus or final 9 10 prospectus contained therein, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the Stockholder, each such underwriter, and each such controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage or liability; provided, however, that the Company shall not be liable to the Stockholder or its underwriters or controlling persons in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, preliminary prospectus or final prospectus or such amendment or supplement in reliance upon and in conformity with information furnished to the Company through a written instrument duly executed by the Stockholder or such underwriter specifically for use in the preparation thereof. (b) INDEMNIFICATION BY THE STOCKHOLDER. In connection with any registration statement in which the Stockholder is participating, Stockholder shall indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 2(a)) the Company, each director of the Company, each officer of the Company who signs such registration statement and all persons who control the Company within the meaning of the Securities Act, with respect to any statement or omission from such registration statement, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereto, to the extent, but only to the extent, such statement or omission was made in reliance upon and in conformity with information furnished to the Company through a written instrument duly executed by the Stockholder specifically for use in the preparation of such registration statement, preliminary prospectus or final prospectus or such amendment or supplement thereto, and provided that the liability of the Stockholder shall be limited to the amount of proceeds received by Stockholder in the offering giving rise to the indemnification claim. (c) INDEMNIFICATION PROCEDURES. Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in the preceding paragraphs of this Section 2, such indemnified party shall, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the indemnifying party of the commencement of such action; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to the indemnified party unless such indemnifying party is prejudiced by such omission. If any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party for any legal or other expenses incurred by the latter in connection with the defense thereof unless (i) in the reasonable opinion of counsel for the indemnification party a conflict of interest exists between the indemnified party and indemnifying party, (ii) the indemnified party reasonably objects to such assumption on the basis that there may be defenses available to it which are different from or in addition to the defenses available to the indemnifying party, (iii) the indemnifying party has failed to timely assume the defense of any such action or proceeding or (iv) the indemnifying party and its counsel do not actively and vigorously pursue the defense of such action . Whether or not such defense is assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. An indemnifying party who elects not to assume the defense of an action or where a potential conflict of interest or other defenses may be available, shall not be obligated to pay the fees and expenses of more than one counsel and local counsel where appropriate for all parties indemnified by such indemnifying party with respect to such action, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such action. Cost and expenses incurred by the indemnified party shall be reimbursed, from time to time, by the Company as and when bills are received or expenses are incurred. 10 11 (d) CONTRIBUTION. If the indemnification provided for in this Section 2 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the 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, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified parties 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, has been made by, or relates to information supplied by, such indemnifying party or indemnified parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities, and expenses referred to above shall be deemed to include all legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 2(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. 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. 3. EXPENSES. All expenses incurred by the Company and the Stockholder in connection with any registration statement covering Shares offered by the Stockholder, including, without limitation, all registration and filing fees (including all expenses incident to filing with the National Association of Securities Dealers, Inc.), printing expenses, fees and disbursements of counsel (including the reasonable fees and disbursements of one counsel for the Stockholder) and of the independent certified public accountants, and the expense of qualifying such Shares under state blue sky laws (including reasonable fees and disbursements of counsel in connection with such qualification), messenger, telephone and delivery expenses, fees and expenses of counsel for the underwriters, costs of preparation, printing, distribution and reproduction of the registration statement, each prospectus, and each amendment and supplement thereto, the cost and charges of any transfer agent and registrar, and the premiums and other costs of insurance against liability arising out of such offering, if any, shall be borne by the Company; provided, however, that the Stockholder shall bear its pro rata share of (A) underwriter's discounts and commissions and (B) any transfer taxes related to the sale of Shares. To the extent any such expenses are incurred or paid by the Stockholder, any sales or placement agent or underwriter, if any, thereof, the Company shall reimburse such person for the full amount thereof promptly after a request therefor. 4. DISPOSITIONS DURING REGISTRATION. (a) The Stockholder shall not effect any public sale or distribution (including sales pursuant to Rule 144) of equity securities of the Company, or any securities convertible or exchangeable or exercisable for such securities, during the fifteen days prior to and the 90-day period beginning on the effective date of any underwritten demand registration or underwritten incidental registration (or such longer period as the Stockholder may 11 12 agree with the underwriter). The Stockholder agrees to comply with the foregoing requirements even if its Shares are not being included in such registration. (b) RESTRICTIONS ON PUBLIC SALE BY THE COMPANY. The Company shall not effect any public or non-public sale or distribution of any securities similar to those being registered, or any securities convertible into or exchangeable or exercisable for any such securities or similar securities, during the fifteen (15) day period prior to, and during the 90-day period beginning on, the effective date of any registration statement in which the Stockholder is participating or the commencement of a public distribution of Shares pursuant to any such registration statement (except (i) as part of such registration or pursuant to registrations on Commission Forms S-4 or S-8 or any similar or successor form, or on any form filed in connection with an exchange offer or an offering of securities solely to the existing stockholders or employees of the Company or (ii) for sales or other issuances of securities pursuant to outstanding options, warrants, rights or similar obligations). 5. TRANSFER OF RIGHTS. No registration rights and benefits set forth in this Agreement, including indemnification by the Company, shall be transferable by the Stockholder in connection with the transfer of Shares except to an "affiliate" as defined in Regulation D of the Securities Act, including but not limited to, Protection One., Inc. following acquisition by Western Resources, Inc., Westar's parent, of not less than 50% of the outstanding equity of Protection One, Inc., or to any party pursuant to a Block Trade. In case of any partial assignment to more than one affiliate or Block Trade party, the affiliates or Block Trade parties who have the rights and benefits of the "Stockholder" under this Agreement shall not, as a group, have the right to any greater number of registrations than provided herein as if no such assignment occurred. 6. TERM. The obligations of the Company to register Shares hereunder shall terminate on the fifth anniversary of the date of this Agreement with respect to the registration of Shares not otherwise demanded or effected by such date provided that at the end of such period all Shares held by the Stockholder or any of its assigns hereunder, shall be freely and publicly tradable without an effective registration statement. Section 2 shall survive the termination of this Agreement. 7. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if hand delivered or sent by first class registered or certified mail (return receipt requested), postage prepaid, to the respective addresses of the Company and the Stockholders set forth below, unless subsequently changed by written notice. Any notice shall be deemed to be effective when it is received. To the Stockholder: Westar Capital, Inc. 818 South Kansas Avenue P.O. Box 889 Topeka, Kansas 66601 Attention: President Phone: 785-575-6322 Fax: 785-224-1788 12 13 With a copy to: John K. Rosenberg, Esq. 818 South Kansas Avenue P.O. Box 889 Topeka, Kansas 66601 Phone: 785-575-6322 Fax: 785-224-1788 To the Company: Guardian International, Inc. 3880 North 28th Terrace Hollywood, Florida 33020-1118 Attention: Richard Ginsburg, President Phone: 954-926-5200 Fax: 954-926-1822 With a copy to: Harvey Goldman, Esq. Steel Hector & Davis LLP 200 South Biscayne Boulevard 41st Floor Miami, FL 33131-2398 Phone: 305-577-7011 Fax: 305-577-7001 8. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE STATE OF FLORIDA WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREUNDER. 9. AMENDMENTS. This Agreement may be amended only by an instrument in writing executed by all the parties hereto. 10. COUNTERPARTS. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute the same instrument. 11. SEVERABILITY. If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. In the event any provision of this Agreement shall be held invalid, the parties agree to enter into such further agreements as may be necessary in order to carry out the intent and purposes of the parties herein. 13 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. GUARDIAN INTERNATIONAL, INC. By: /s/ RICHARD GINSBURG ------------------------------------- Richard Ginsburg President and Chief Executive Officer WESTAR CAPITAL, INC. By: /s/ RITA A. SHARPE ------------------------------------- Rita A. Sharpe President ACKNOWLEDGED AND AGREED: HELLER FINANCIAL, INC. By: /s/ JOAN HEGGEN ------------------- Joan Heggen Vice President 14 EX-10.3 7 EXHIBIT 10.3 1 EXHIBIT 10.3 GUARDIAN INTERNATIONAL, INC. STOCKHOLDERS AGREEMENT This Stockholders Agreement (this "Agreement"), dated as of October 21, 1997, is made by and among Guardian International, Inc., a Nevada corporation (the "Company"), Harold Ginsburg, Sheilah Ginsburg, Richard Ginsburg and Rhonda Ginsburg (the "Ginsburgs"), and Westar Capital, Inc., a Kansas corporation ("Westar"). The Ginsburgs and Westar are referred to collectively as the "Stockholders" and individually as a "Stockholder." Capitalized terms used herein and not defined in the text are defined in Section 1 hereof. Simultaneously with the execution hereof, Westar shall subscribe to shares (the "Shares") of Common Stock and Preferred Stock pursuant to the Stock Subscription Agreement between Westar and the Company dated as of October 14, 1997 (the "Subscription Agreement"). The Company and the Stockholders desire to enter into this Agreement for the purposes, among others, of (i) establishing the composition of the Company's Board of Directors (the "Board") and certain other voting agreements, (ii) assuring continuity in the management and ownership of the Company and (iii) limiting the manner and terms by which the Stockholder Shares may be transferred. The execution and delivery of this Agreement is a condition to Westar's subscription and the Company's sale of the Shares pursuant to the Subscription Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows: 1. Definitions. "AFFILIATE" has the meaning set forth in Section 8(e). "BOARD" has the meaning set forth in the preamble. 2 "CERTIFICATE OF DESIGNATIONS," means the Certificate of Designations to the Articles of Incorporation of the Company dated as of , 1997 defining the rights and preferences of the Preferred Stock. "COMMON SHARES" means the 2,500,000 shares of Common Stock subscribed by Westar pursuant to the Subscription Agreement. "COMMON SHARES CLOSING" has the meaning set forth for such term in the Subscription Agreement. "COMMITTEE" has the meaning set forth in Section 8(b). "COMMON STOCK" means the Company's Class A Common Stock, par value $.001 per share. "COMPANY" has the meaning set forth in the preamble. "DEFAULT" has the meaning set forth for such term in the Certificate of Designations. "FAMILY GROUP" has the meaning set forth in Section 8(e). "FULLY DILUTED BASIS" means, at any date as of which the number of shares is to be determined, (a) all shares of capital stock outstanding at such date, and (b) the maximum number of shares of capital stock issuable pursuant to warrants, options or other rights to purchase or acquire (whether or not such warrants, options or other rights are then exercisable), or pursuant to securities convertible into or exchangeable (whether or not such securities are then convertible or exchangeable) for, shares of capital stock outstanding on such date (including any shares issuable pursuant to any outstanding warrants). "NON-AFFILIATE" means any entity other than one of which Westar, its parent or its subsidiaries own or control more than 20% of the voting securities or one which Westar, its parent or its subsidiaries control, are controlled by or are under common control with. For purposes of this definition and the definition of "Affiliate", "control" means the power to direct the management and policies of an entity whether through the ownership of voting securities, contract or otherwise. "OFFER NOTICE" has the meaning set forth in Section 8(b). "OTHER STOCKHOLDER" means the Stockholder other than the Transferring Stockholder. "PERMITTED TRANSFEREE" has the meaning forth in Section 8(e). 2 3 "PERSON" means an individual, a partnership, a corporation, a limited liability company, 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 SHARES" means the 1,875,000 shares of Preferred Stock of the Company to be sold to Westar pursuant to the terms of the Subscription Agreement. "PREFERRED STOCK" means the Company's Series A 9 3/4% Convertible Cumulative Preferred Stock, par value $.001 per share, having the rights and preferences set forth in the Certificate of Designations. "PUBLIC SALE" means any sale of Stockholder Shares to the public pursuant to an offering registered under the Securities Act or to the public through a broker, dealer or market maker pursuant to the provisions of Rule 144 promulgated under the Securities Act. "SALE NOTICE" has the meaning set forth in Section 8(c). "SALE OF THE COMPANY" has the meaning set forth in Section 9(a). "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations promulgated pursuant thereto. "STOCKHOLDER SHARES" means (i) any Common Stock or Preferred Stock held, purchased or otherwise acquired by any Stockholder, (ii) any Common Stock issued or issuable directly or indirectly upon conversion of the Preferred Stock and (iii) any Common Stock or Preferred Stock issued or issuable with respect to the securities referred to in clauses (i) or (ii) above. For purposes of this Agreement, any Person who holds Preferred Stock shall be deemed to be the holder of the Stockholder Shares issuable directly or indirectly upon conversion of the Preferred Stock in connection with the transfer thereof or otherwise and regardless of any restriction or limitation on the conversion thereof. "STOCKHOLDERS" has the meaning set forth in the preamble. "SUBSCRIPTION AGREEMENT" has the meaning set forth in the preamble. "TRANSFER" has the meaning set forth in Section 8(a). "TRANSFERRING STOCKHOLDER" has the meaning set forth in Section 8(b). 2. BOARD OF DIRECTORS. a. COMPOSITION OF THE BOARD. i. From and after the Common Shares Closing and until the conversion of the Preferred Shares into Common Stock pursuant to the terms of the Certificate of Designations (the 3 4 "Conversion"), each Stockholder shall vote all of its Stockholder Shares which are voting shares and any other voting securities of the Company over which such Stockholder has voting control and shall take all other necessary or desirable actions within its control (whether in its capacity as a stockholder, director, member of a board committee or officer of the Company or otherwise, and including, without limitation, attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), and the Company shall take all necessary or desirable actions within its control (including, without limitation, calling special board and stockholder meetings), so that, subject to the remainder of this Section 2: (1) The authorized number of directors on the Board shall be estblished at eight directors; and (2) The following individuals shall be elected to the Board: (a) four representatives nominated by the Ginsburgs, who shall initially be Harold Ginsburg, Sheilah Ginsburg, Richard Ginsburg and one additional representative to be nominated by the Ginsburgs. (b) two representatives nominated by Westar, and (c) two representatives who shall not be officers or employees of the Company or of Westar or related by blood or marriage to or affiliated with any of the Ginsburgs (the "Independent Directors") nominated mutually by the Stockholders; and (3) If at any time prior to the Conversion, Westar Transfers Shares to a Non-Affiliate, Westar shall forfeit the right to nominate (a) one Board seat if it Transfers 40% or more but less than 75% of the Shares, which Board seat shall thereafter become an Independent Director seat, and (b) two Board seats if it Transfers 75% or more of the Shares. ii. After the Conversion, each Stockholder shall vote all of its Stockholder Shares which are voting shares and any other voting securities of the Company over which such Stockholder has voting control and shall take all other necessary or desirable actions within its control (whether in its capacity as a stockholder, director, member of a board committee or officer of the Company or otherwise, and including, without limitation, attendance at meetings in person or by proxy for purposes of obtaining a quorum and execution of written consents in lieu of meetings), and the Company shall take all necessary or desirable actions within its control (including, without limitation, calling special board and stockholder meetings), so that, subject to the remainder of this Section 2: 4 5 (1) The authorized number of directors on the Board shall be established at nine directors; and (2) The following individuals shall be elected to the Board: (a) three representatives nominated by the Ginsburgs, (b) three representatives nominated by Westar, (c) three representatives who shall be Independent Directors nominated mutually by the Stockholders; and (3) If at any time after the Conversion, Westar Transfers Shares of Common Stock (including those acquired upon Conversion) to a Non-Affiliate, Westar shall forfeit the right to nominate (a) one Board seat if it Transfers 25% or more but less than 45% of the Shares, which Board seat shall thereafter become an Independent Director seat, (b) two Board seats if it Transfers 45% or more but less than 70% of the Shares, which Board seats shall thereafter become Independent Director seats, and (c) three Board seats if it Transfers 70% of more of the Shares. iii. Any committees of the Board shall be created and the composition thereof determined only upon the approval of not less than one Ginsburg nominee, one Westar nominee and one Independent Director. iv. The removal from the Board (with or without cause) of any representative nominated hereunder shall be at the written request of the Person nominating such representative, but only upon such written request and under no other circumstances, subject to applicable law. v. In the event that any representative nominated hereunder resigns, is removed or otherwise ceases to serve as a member of the Board during his term of office, the resulting vacancy on the Board shall be filled by a representative nominated by the Person nomminating such representative as provided hereunder. vi. No transferee of Stockholder Shares (including Common Stock issued upon Conversion), other than Permitted Transferees, shall have any right hereunder to cause any representatives to be appointed to the Board. vii. The Company agrees to include each such designated nominee to be added to or retained on the Board pursuant to this Agreement in the slate of nominees recommended by the 5 6 Board to the Company's stockholders for election as directors and shall use its best efforts to cause the election or reelection of each such nominee to the Board, including soliciting proxies in favor of the election of such persons. b. LIMITATIONS ON BOARD COMPOSITION. Notwithstanding the provisions contained in Section 2(a), i. in the event of a Default, Westar shall have the right to elect a majority of the Board until such time as the Default is cured; and ii. the election of directors to the Board shall be subject at all times to applicable law. c. BOARD EXPENSES. The Company shall pay the reasonable out-of-pocket expenses incurred by each director in connection with attending the meetings of the Board and any committee thereof, and each Board member shall otherwise be compensated as determined from time to time by the Board. The Company shall use its best efforts to obtain and to maintain directors and officers indemnity insurance coverage at a commercially reasonable price, and the Company's articles of incorporation and bylaws shall provide for indemnification and exculpation of directors to the fullest extent permitted under applicable law. d. WRITTEN CONSENT. Each director entitled to vote at a meeting of the Board or to express consent or dissent to corporate action in writing without a meeting may authorize another director to act for him or her by proxy, but no such proxy shall be noted or acted upon after six months from its date or if such proxy is not permitted by applicable law. 3. EXECUTIVE EMPLOYMENT AGREEMENTS. In order to provide for continuity of operations and management of the Company, Westar agrees that it will, and will cause its nominees to the Board to, subject to exercise of such directors' fiduciary duties to all the stockholders of the Company, vote and take any and all action necessary or appropriate as a stockholder of the Company to cause the Company to uphold and comply with those certain Employment Agreements dated as of October , 1997 between the Company and Richard Ginsburg, between the Company and Darius G. Nevin and between the Company and Harold Ginsburg (the "Employment Agreements") pursuant to the terms thereof for the duration set forth in such Employment Agreements or its earlier termination thereof as provided therein. 4. INCENTIVE STOCK OPTION PLAN. Westar agrees to vote in favor of the establishment of a management incentive stock option plan (the "Plan") pursuant to which options not to exceed 5% of the Common Stock outstanding on the date of adoption on a Fully Diluted Basis may be issued. The Plan will contain terms customary to such incentive stock option plans, including provisions governing change of control. Options granted under the Plan will vest one-fifth each year over a five-year period. 6 7 5. FUTURE FINANCING. Westar agrees to vote in favor of a secondary public offering by the Company of up to 4,000,000 shares of Common Stock at not less than $2.00 per share in connection with an offering of Common Stock, convertible debt or debt-with-equity securities. 6. REPRESENTATIONS AND WARRANTIES. Each Stockholder represents and warrants that (i) such Stockholder is the record owner of the number of shares of the Company's capital stock set forth opposite its name on the Schedule A attached hereto, (ii) this Agreement has been duly authorized executed and delivered by such Stockholder and constitutes the valid and binding obligation of such Stockholder, enforceable in accordance with its terms, subject to bankruptcy, insolvency, reorganization, liquidation, moratorium receivership, conservatorship, readjustment of debts, fraudulent conveyance or other laws affecting the enforcement of creditors' rights generally, and (iii) such Stockholder has not granted and is not a party to any proxy, voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. No holder of Stockholder Shares shall grant any proxy or become party to any voting trust or other agreement which is inconsistent with, conflicts with or violates any provision of this Agreement. 7. LIMITATION ON OWNERSHIP. For a period commencing on the Common Shares Closing and ending on the earlier of (a) the fifth anniversary thereof, (b) the occurrence of a Default, (c) a Sale of the Company, and (d) the date of a third party offer which could result in the sale of the Company to a third party, or an unsolicited tender offer or proxy contest for control of the Company by a third party, Westar agrees to limit its ownership of the Common Stock to 45% of the Common Stock of the Company outstanding at any time on a Fully Diluted Basis, unless Westar receives the prior written consent of the Company to exceed that limit. 8. RESTRICTIONS ON TRANSFER OF STOCKHOLDER SHARES. a. TRANSFER OF STOCKHOLDER SHARES. No Stockholder shall sell, transfer, assign, pledge or otherwise dispose of (whether with or without consideration and whether voluntarily or involuntarily) any interest in its Stockholder Shares (a "Transfer"), except in compliance with the provisions of this Section 8 or pursuant to a Public Sale. Each Stockholder agrees not to consummate any such Transfer (other than a Public Sale) until 45 days after the later of the delivery to the Company and the Other Stockholder of such Stockholder's Offer Notice or Sale Notice (if any) (the "Election Period"). b. FIRST OFFER RIGHT. i. FIRST OFFER RIGHT OF THE COMPANY. (1) At least 45 days prior to making any Transfer of any Stockholder Shares (other than a Public Sale), the transferring Stockholder (the "Transferring Stockholder") shall deliver a written notice (an "Offer Notice") to an independent committee established by the Board (a "Committee") and the Other Stockholder(s). The Offer Notice shall disclose in reasonable detail the 7 8 proposed number of Stockholder Shares to be transferred, the proposed terms and conditions of the Transfer and the identity of the prospective transferee(s) (if known). (2) The Company may, by recommendation of the Committee, elect to purchase all, but not less than all of the Stockholder Shares specified in the Offer Notice at the price and on the terms specified therein by delivering written notice of such election to the Transferring Stockholder and the Other Stockholder(s) as soon as practical but in any event within 15 days after the delivery of the Offer Notice. ii. FIRST OFFER RIGHT OF THE OTHER STOCKHOLDER. (1) If the Company has not elected to purchase the Stockholder Shares within such 15-day period, the Other Stockholder(s) may elect to purchase all or any portion of its pro rata share (based on the number of Stockholder Shares held by such Person on a Fully Diluted Basis) of the Stockholder Shares specified in the Offer Notice for a price not less than 105% of the price and on the terms offered by the Company by delivering written notice of such election to the Transferring Stockholder as soon as practical but in any event within 45 days after delivery of the Offer Notice; provided, however, that the Transferring Stockholder shall not be required to sell any of the Stockholder Shares specified in the Offer Notice to any Other Stockholder(s) unless all such offered Shares are elected to be and are so purchased. (2) If the Company or the Other Stockholder(s) have elected to purchase the Stockholder Shares offered in the Offer Notice from the Transferring Stockholder, the Transfer of such shares shall be consummated as soon as practicable after the delivery of the election notice to the Transferring Stockholder, but in any event within 30 days after the expiration of the Election Period. iii. TRANSFER TO THIRD PARTIES. (1) If the Company and the Other Stockholder have not elected to purchase all of such Stockholder Shares being offered, the Transferring Stockholder may, within 120 days after the expiration of the Election Period and subject to the provisions of subsection (c) below, Transfer all such Stockholder Shares to one or more third parties at a price not less than 110% of the price offered by the Other Stockholder(s) and on other terms no more favorable to the transferees thereof than offered to the Company and the Other Stockholder(s) in the Offer Notice. (2) Any Stockholder Shares not transferred within such 120-day period shall be re-offered to the Company and the Other Stockholder(s) under this Section 8(b) prior to any subsequent Transfer. iv. The purchase price specified in any Offer Notice shall be payable solely in cash at the closing of the transaction or, if provided in the Offer Notice, in installments over time. 8 9 c. TAG-ALONG RIGHTS. i. In the event the Ginsburgs shall Transfer more than 50% of their aggregate Stockholder Shares (other than pursuant to a Public Sale), at least 30 days prior to such Transfer, the Ginsburgs will deliver a written notice (the "Sale Notice") to the Company and to Westar, specifying in reasonable detail the identity of the prospective transferee(s) and the terms and conditions of the Transfer. Westar may elect to participate in the contemplated Transfer by delivering written notice to the Ginsburgs within 30 days after delivery of the Sale Notice. ii. If Westar has elected to participate in such Transfer, the Ginsburgs and Westar will be entitled to sell in the contemplated Transfer, at the same price and terms, a number of Stockholder Shares equal to the product of (i) the quotient determined by dividing the percentage of the class of Stockholder Shares held by such person by the aggregate percentage of the class of Stockholder Shares owned by the Ginsburgs and Westar participating in such sale and (ii) the number of Stockholder Shares of such class to be sold in the contemplated Transfer. For example, if the Sale Notice contemplated a sale of 100 shares of Common Stock by the Ginsburgs (assuming such 100 shares represents more than 50% of the Ginsburgs' stock holdings), and if the Ginsburgs at such time owns 30% of all shares of Common Stock and if Westar elects to participate and owns 20% of all shares of Common Stock, the Transferring Stockholder would be entitled to sell 60 shares (30% / 50%) x 100 shares and the Other Stockholder wold be entitled to sell 40 shares (20% / 50%) x 100 shares . iii. The Ginsburgs shall use best efforts to obtain the agreement of the prospective transferee(s) to the participation of Westar in any contemplated Transfer, and the Ginsburgs shall not Transfer any of its Stockholder Shares to the prospective transferee(s) if the prospective transferee(s) declines to allow the participation of Westar as provided herein. d. PREEMPTIVE RIGHTS. i. If (1) the Company authorizes the issuance or sale of any equity securities (other than as a dividend on the outstanding Common Stock) to any Person and if, and only if, (2) such issuance or sale (individually or in the aggregate) would reduce Westar's equity ownership percentage of the Company to less than 35% of the outstanding Common Stock as of the date or dates of such authorization on a Fully Diluted Basis, the Company shall first offer to sell to Westar a portion of such equity securities equal to the quotient determined by dividing (a) the number of shares of Common Stock held by Westar on a Fully Diluted Basis by (b) the total number of shares of outstanding Common Stock on a Fully Diluted Basis (prior to giving effect to any anti-dilution adjustments with respect to any such options, warrants or convertible securities). Westar shall be entitled to purchase such equity securities for the same price and on the same terms as such equity securities are to be offered to such Person. The purchase 9 10 price for all equity securities offered to Westar shall be payable in cash by wire transfer of immediately available funds. ii. To exercise its purchase rights hereunder, Westar must within 30 days after receipt of written notice from the Company describing in reasonable detail the equity securities being offered, the purchase price thereof, the payment terms and Westar's percentage allotment, deliver a written notice to the Company describing its election hereunder. iii. Upon the expiration of the offering period described above, the Company shall be entitled to sell such equity securities which Westar has not elected to purchase during the 90 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to Westar. Any equity securities offered or sold by the Company to any other Person after such 90-day period must be re- offered to Westar pursuant to the terms of this subsection 8(d). e. PERMITTED TRANSFERS. The restrictions set forth in this Section 8 shall not apply with respect to any Transfer of Stockholder Shares by any Stockholder (i) in the case of the Ginsburgs, pursuant to applicable laws of descent and distribution or among the Ginsburgs' Family Group or (ii) in the case of Westar, among its Affiliates (collectively referred to herein as "Permitted Transferees"); provided that the restrictions contained in this Section 8 shall continue to be applicable to the Stockholder Shares after any such Transfer and provided further that the transferees of such Stockholder Shares shall have agreed in writing to be bound by the provisions of this Agreement affecting the Stockholder Shares so transferred. For purposes of this Agreement, "Family Group" means an individual's spouse and descendants (whether natural or adopted) and spouses of descendants and any trust, family limited partnership or similar entity solely for the benefit of the individual and/or the individual's spouse and/or descendants and/or spouses of their descendants, and "Affiliate" or "subsidiary" of Westar means each Person as to which Westar, directly or indirectly, (i) owns or controls 50% or more of the aggregate capital stock, partnership interests or other equity interests or (ii) any Person which controls, is controlled by or is under common control with Westar. For purposes hereof "Affiliate" shall specifically include, but not be limited to, Westar's parent, Western Resources, Inc., and any of such parent's subsidiaries including, but not limited to, Protection One, Inc., following closing of the pending acquisition by Western Resources, Inc. of not less than 50% of the outstanding equity of Protection One, Inc. 9. SALE OF THE COMPANY. a. If a Committee shall approve a cash sale of all or substantially all of the Company's assets determined on a consolidated basis or a cash sale of all of the Company's outstanding capital stock to any other person or entity (collectively, a "Sale of the Company"), Westar shall either (i) vote for, consent to and raise no objections against, such Sale of the Company or (ii) purchase the shares of outstanding Common Stock it does not then own on substantially the same terms and conditions as approved by the Committee. Westar shall have thirty days from the date of notice from the Committee of approval of any such sale to agree to such purchase. If the Sale of 10 11 Company is structured as a sale of stock, each Stockholder shall agree to sell all of its shares of capital stock of the Company and rights to acquire shares of capital stock of the Company on the terms and conditions approved by the Committee. Each Stockholder shall take all necessary or desirable actions in connection with the consummation of the Sale of the Company as reasonably requested by the Company. b. The obligations of the Stockholders with respect to the Sale of the Company are subject to the satisfaction of the following conditions: i. If any holders of a class of the Company's capital stock are given an option as to the form and amount of consideration to be received, each holder of such class of capital stock shall be given the same option; and ii. Each holder of then currently exercisable rights to acquire shares of a class of the Company's capital stock shall be given an opportunity to either (1) exercise such rights prior to the consummation of the Sale of the Company and participate in such sale as holders of such class of capital stock, or (2) upon the consummation of the Sale of the Company, receive in exchange for such rights consideration equal to the amount determined by multiplying (a) the same amount of consideration per share of the Company's capital stock received by holders of such class of capital stock in connection with the Sale of the Company less the exercise price per share of such capital stock of such rights to acquire such class of capital stock by (b) the number of shares of such class of capital stock represented by such rights. iii. The Stockholder shall not be required to make any unqualified representations or warranties to any Person in connection with such sale, except as to (i) good title to the stock being sold, (ii) the absence of encumbrances with respect to the Stock being sold, (iii) the valid existence and good standing of the Stockholder (if applicable), (iv) the authority for, and validity and binding effect of (as against such Stockholder), any agreement entered into by such Stockholder in connection with such sale, (v) all required material consents to such Stockholder's sale and material governmental approvals having been obtained (excluding any securities laws) and (vi) the fact that no broker's commission is payable by the such Stockholder as result of Stockholder's conduct in connection with the sale; and c. The Stockholder shall not be required to provide any indemnities in connection with such sale except for breach of the representations and warranties contained in Section 9(b)(iii). 10. LEGEND. Each certificate evidencing Stockholder Shares or securities convertible into Stockholder Shares and each certificate issued in exchange for or upon the Transfer of any such securities (if such securities remain Stockholder Shares or remain convertible into Stockholder 11 12 Shares after such Transfer) shall be stamped or otherwise imprinted with a legend in substantially the following form: The securities represented by this certificate are subject to voting obligations, transfer restrictions and certain other provisions set forth in a Stockholders Agreement dated as of October , 1997, among the issuer of such securities (the "Company") and certain of the Company's stockholders, as amended and modified from time to time. A copy of such Stockholders Agreement shall be furnished without charge by the Company to the holder hereof upon written request to the Company at its principal executive office. The Company shall imprint such legend on certificates evidencing Stockholder Shares and securities convertible into Stockholder Shares outstanding as of the date hereof. The legend set forth above shall be removed from the certificates evidencing any shares which cease to be Stockholder Shares in accordance with Section 11 hereof. 11. REMOVAL OF RESTRICTIONS ON TRANSFERS. a. RESTRICTIONS. Stockholder Shares are transferable in (i) a public offering registered under the Securities Act or (ii) in a transaction pursuant to Rule 144 or any other legally available means of Transfer after the Transferring Stockholder has satisfied the conditions specified in subsection (b) below. b. REMOVAL OF LEGEND. In connection with the Transfer of any Stockholder Shares (other than a Transfer in a public offering registered under the Securities Act), a Stockholder shall deliver written notice to the Company describing in reasonable detail the Transfer or proposed Transfer, together with an opinion of counsel which (to the Company's reasonable satisfaction) is knowledgeable in securities laws matters, to the effect that such Transfer of Stockholder Shares may be effected without registration of such Stockholder Shares under the Securities Act. c. TRANSFERS. If the Company is not required to deliver new certificates for such Stockholder Shares without the legend described in Section 10, a Stockholder shall not Transfer any Stockholder Shares to any Person until the prospective transferee has agreed to be bound by this Agreement and to execute and deliver to the Company and the Other Stockholder a counterpart of this Agreement. 12. TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted Transfer of any Stockholder Shares in violation of any provision of this Agreement shall be void, and the Company shall not record such Transfer on its books or treat any purported transferee of such Stockholder Shares as the owner of such shares for any purpose. 13. TERMINATION. Notwithstanding anything to the contrary contained herein, 12 13 a. This Agreement shall terminate automatically and be of no further force or effect upon the fifteenth anniversary of the date hereof unless extended by the parties hereto in accordance with applicable law. b. Sections 8 and 9 of this Agreement shall terminate and be of no further force or effect upon a Sale of the Company or the consummation of a Public Sale with respect to the Stockholder Shares sold in such Public Sale. c. This Agreement shall terminate and be of no further force and effect upon Westar's ownership of Shares being less than 10% of the outstanding Shares on a Fully Diluted Basis. 14. NEGATIVE COVENANTS. Without the prior approval of Westar, the Company will not so long as Preferred Shares are outstanding: (a) authorize or issue any equity securities equal to or senior as to dividends or upon liquidation to the Preferred Stock; or (b) authorize or make any dividends or other distributions to the holders of Common Stock. Without the prior approval of Westar, the Company will not, so long as Westar or its Affiliates own or control at least 15% of the outstanding equity securities of the Company, issue any equity security senior to the Common Stock. 15. DIVIDEND DEDUCTION. a. The purchase of the Shares by Westar has been entered into on the assumption that for federal income tax purposes the dividends on Westar's Preferred Shares will be eligible for the 80% dividends received deduction provided by Section 243 of the Internal Revenue Code of 1986, as amended to the date hereof (the "Code") (the "Dividends Received Deduction"). b. If (i) by reason of any change in the Code or the regulations thereunder as in effect on the date hereof or (ii) as a result of any change in the interpretation thereof by any Court, administrative body or the Internal Revenue Service and Westar shall not be eligible to claim the Dividends Received Deduction with respect to dividends on the Preferred Shares (other than partly or wholly as a result of Westar's failure to meet the current requirements of Section 243 of the Code), then (A) the Company shall pay to Westar, not later than 60 days following written notice to the Company by Westar of such ineligibility, such sums as, when taken together with the dividends paid to Westar as of the date of such notice of ineligibility with respect to the Preferred Shares, shall be required to cause Westar's effective after-tax yield with respect to such dividends to be the same as Westar's effective after-tax yield with respect to such dividends would have been had such ineligibility not occurred, (B) the Company shall pay to Westar, on each dividend payment date with respect to the Preferred Shares, commencing with the first such date following written notice of such ineligibility to the Company by Westar, such sums as, when taken together with the dividends paid to Westar on such dates with respect to the Preferred Shares, shall be required to cause Westar's effective after-tax yield with respect to such dividends to be the same as Westar's effective after-tax yield with respect to such dividends would have been had such ineligibility not occurred and (C) the sum due to Westar shall be calculated as follows: if X is the face amount of the Preferred Stock then outstanding, Y is the new Dividends Received Deduction rate expressed as a decimal (which shall not be less than 0.50), and Z is the number of days for which the calculation is being performed, then the sum due to Westar equals ((X *.0975) * (0.80 - Y) * (0.40) * (Z / 360)) / (0.60); PROVIDED, however, that if the Company shall have received any such notice of ineligibility, then, in lieu of making any indemnity payments described in the foregoing clause (B) of this sentence, the Company, upon written notice to Westar not later than 60 days after receipt of such notice of ineligibility, shall have the right to purchase all the Preferred Shares (subject to Westar's right to convert the Preferred Shares to Common Stock) then outstanding on the date specified in such notice (which date shall not be more than 120 days from the date of such notice) at a price equal to the greater of the average closing stock price for Common Stock for the 20 consecutive trading days immediately preceding the date of such notice and $2.00 per share plus (i) the dividends accrued but unpaid to the date of purchase, and (ii) such sums, as when taken together with the dividends paid or accrued to the date of repurchase, as shall be required to cause Westar's 13 14 effective after-tax yield with respect to such dividends to be the same as Westar's effective after-tax yield with respect to such dividends would have been had such ineligibility not occurred. c. The indemnity payments provided for herein shall not been deemed to represent amounts payable on or with respect to the Preferred Shares or to Westar, as the holder of the Preferred Shares, and shall represent a separate obligation of the Company to Westar and its Permitted Transferees. 16. MISCELLANEOUS. a. AMENDMENT AND WAIVER. Except as otherwise provided herein, no modification, amendment or waiver of any provision of this Agreement shall be effective against the Company or the Stockholders unless such modification, amendment or waiver is approved in writing by the Company and the Stockholders. The failure of any party to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. b. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Agreement in such jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. In the event any provision of this Agreement shall be held invalid, the parties agree to enter into such further agreements as may be necessary in order to carry out the intent and purposes of the parties herein. c. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this Agreement embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. d. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this Agreement shall bind and inure to the benefit of and be enforceable by the Company and its successors and assigns and the Stockholders (including Permitted Transferees) and any subsequent holders of Stockholder Shares and the respective successors and assigns of each of them, so long as they hold Stockholder Shares; PROVIDED, HOWEVER, that the rights of Westar set forth in Sections 8(c) and 8(d) shall not be assignable or Transferable (whether in connection with the Transfer of its Stockholder Shares or otherwise) other than to an Affiliate of Westar in connection with the 14 15 Transfer of its Stockholder Shares, and any assignment of such rights other than pursuant to the terms of this section shall be null and void. e. REMEDIES. The Company and the Stockholders shall be entitled to enforce their rights under this Agreement specifically, to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that money damages would not be an adequate remedy for any breach of the provisions of this Agreement and that the Company or any Stockholder may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief (without posting a bond or other security) in order to enforce or prevent any violation of the provisions of this Agreement. f. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if hand delivered or sent by first class registered or certified mail (return receipt requested), postage prepaid, to the respective addresses of Westar and the Company set forth below, unless subsequently changed by written notice. Any notice shall be deemed to be effective when it is received. To Westar: Westar Capital, Inc. 818 South Kansas Avenue P.O. Box 889 Topeka, Kansas 66601 Attention: President Phone: 785-575-6322 Fax: 785-575-1788 With a copy to: John K. Rosenberg, Esq. 818 South Kansas Avenue P.O. Box 889 Topeka, Kansas 66601 Phone: 785-575-6322 Fax: 785-575-8136 To the Company: Guardian International, Inc. 3880 North 28th Terrace Hollywood, Florida 33020-1118 Attention: Richard Ginsburg, President Phone: 954-926-5200 Fax: 954-926-1822 With a copy to: 15 16 Harvey Goldman, Esq. Steel Hector & Davis LLP 200 South Biscayne Boulevard 41st Floor Miami, FL 33131-2398 Phone: 305-577-7011 Fax: 305-577-7001 g. VISITATION RIGHTS. The Stockholders may, during normal business hours, at the Stockholders' expense, and upon reasonable prior notice to a member of the senior management of the Company (i) visit and inspect the properties of the Company and its subsidiaries, (ii) examine and copy their books of record and account, and (iii) discuss their affairs, finances and accounts with its officers, employees and independent public accountants, subject, in each case, to any confidentiality agreements to which the Company is a party; PROVIDED, however, that no such visit, inspection, examination or discussion shall unreasonably disrupt normal operations of the Company and PROVIDED, however, that such Stockholder will hold, and will cause its affiliates, representatives and advisors to hold, in strict confidence, all confidential documents and information (the "Information") provided by the Company, its officers, employees and independent public accountants, and will not release or disclose the Information to any other Person except to any Person who such Stockholder demonstrates has a need to know such Information, except that the Stockholder will have no obligation to protect any portion of the Information which is (i) publicly available, (ii) previously known to the receiving party without an obligation to keep it confidential or (iii) is required to be disclosed by law, rule, regulation or as a result of any legal process. h. AMENDMENT TO ARTICLES AND BY-LAWS. The Stockholders shall not vote to amend the Articles of Incorporation of the Company, nor shall the Company amend its by-laws in any manner which conflicts with the provisions of this Agreement. i. GOVERNING LAW. All issues and questions concerning the construction, validity, interpretation and enforceability of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Florida, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Florida or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Florida. j. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS AGREEMENT. k. PREVAILING PARTY. If a party commences an action against another party to interpret or enforce any of the terms of this Agreement or exhibits hereto or as a result of a breach by another party of any terms hereof or of the exhibits, the non-prevailing (or defaulting) party shall pay to the prevailing party reasonable attorneys' fees, costs and expenses incurred in connection with the prosecution or defense of such action (including at any appellate level). 16 17 l. BUSINESS DAYS. If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or legal holiday in the states of Florida, Kansas, Nevada, or New York the time period shall automatically be extended to the business day immediately following such Saturday, Sunday or legal holiday. m. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. n. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be an original and all of which taken together shall constitute one and the same agreement. * * * * * 17 18 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. GUARDIAN INTERNATIONAL, INC. By: /s/ RICHARD GINSBURG ------------------------------------ Richard Ginsburg, President and Chief Executive Officer /s/ HAROLD GINSBURG ------------------------------------ Harold Ginsburg /s/ SHEILAH GINSBURG ------------------------------------ Sheilah Ginsburg /s/ RICHARD GINSBURG ------------------------------------ Richard Ginsburg /s/ RHONDA GINSBURG ------------------------------------ Rhonda Ginsburg WESTAR CAPITAL, INC. By: /s/ RITA A. SHARPE ------------------------------------ Name: Rita A. Sharpe ---------------------------------- Title: President --------------------------------- 18 19 SCHEDULE A SCHEDULE OF STOCKHOLDERS
NAME NUMBER OF SHARES AND CLASS OF CAPITAL STOCK - ---- ------------------------------------------- Harold Ginsberg 1,403,533 shares Sheilah Ginsberg 903,533 shares Richard Ginsberg 629,246 shares Rhonda Ginsberg 629,245 shares Westar Capital, Inc. Common Stock: 2,500,000 shares Preferred Stock: 1,875,000 shares
19 EX-10.4 8 EXHIBIT 10.4 1 EXHIBIT 10.4 PROTECTION ONE, INC. This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 24th day of November, 1997, between James M. Mackenzie, Jr. (the "Employee") and Protection One, Inc. a Delaware corporation (including any and all subsidiaries, the "Company"). WITNESSETH: WHEREAS, Employee has for many years been an executive officer and key employee of the Company; WHEREAS, Employee and the Company have been parties to employment agreements for many years, the last the Amended and Restated Employment Agreement dated as of May 24, 1996; WHEREAS, the Company and Western Resources, Inc. have entered into a Contribution Agreement dated as of July 30, 1997 (as amended, the "Contribution Agreement"); and WHEREAS it is a condition to the closing of the Contribution Agreement that the Company and Employee enter into this Agreement which will supersede and replace all prior agreements between the Company and Employee concerning the subject matter hereof, AGREEMENT NOW, THEREFORE, in consideration of the natural covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Employee agree as follows: 1. The Company hereby employs and continues to engage the Employee as President and Chief Executive Officer, and Employee's office shall at all times be in Southern California. 2. The term of this Agreement shall commence on the date hereof and shall be continually extended such that at all times the remaining term hereof is three years; provided, however, that this Agreement shall be subject to termination as provided in Sections 10 and 11 hereof. 3. Subject to the supervision and direction of the Board, the Employee agrees that he shall, at all times, faithfully, industriously and to the best of his ability and experience, perform all the duties that may be required of him pursuant to the terms hereof to the satisfaction of the Company. The Employee shall devote his full time and attention to the duties assigned to him and shall serve the Company diligently and honestly in its business and use his best endeavors to promote the interest of the Company. 4. As long as the Employee remains employed by the Company, in consideration of the services to be performed by the Employee during the term of this Agreement, the Company shall pay or cause to be paid the Employee, and the Employee shall accept in full payment for such services, a base salary (the "Base Salary") of $379,000 per year, 2 payable monthly, subject to increase in accordance with the Company's policy with respect to executive salaries as in effect from time to time. 5. During the term of this Agreement, the Employee shall be entitled to participate in the Company's 1997 Long-Term Incentive Plan, the Company's bonus plan for senior executives, any and all stock incentive award programs now in effect or hereinafter adopted by the Board, the Company's 401(k) plan and all benefit plans, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, provided to actively employed senior executives of the Company in accordance with the terms and conditions of such plans as each plan is in effect from time to time. 6. The Company shall provide, at no cost to the Employee, insurance and health care benefits from time to time (and subject to modification) generally offered by the Company to its key employees. 7. In the event that the Employee is required to travel in connection with his employment, the Company shall advance funds to the Employee or reimburse him, for reasonable and documented travel, subsistence and other out-of-pocket expenses, as well as non-travel business entertainment expenses incurred by him, in accordance with the then prevailing policies of the Company. 8. The Employee shall receive a monthly automobile usage allowance of $500 in lieu of any other allowance for automobile expenses other than reimbursement for gas, tolls and parking away from the office when on Company business. 9. The Employee shall be entitled to vacation in accordance with vacation policies adopted from time to time by the Board for the Company's key employees. The Employee's initial vacation entitlement is three (3) weeks per year. 10. (a) The Company may terminate this Agreement for "Cause" upon 30 days written notice. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Employee involving the Company; (ii) a conviction of a felony involving moral turpitude; (iii) a continuing, repeated willful failure or refusal by Employee to perform his duties; (iv) willful or serious misconduct on the part of employee which continues and is demonstrably injurious to the Company; or (v) Employee engages in and continues to engage in any activity which is in conflict with or adverse to the business interests of the Company; provided, however, that this Agreement may not be terminated under subclauses (iii), (iv) or (v) hereof unless Employee shall have first received written notice from the Board advising Employee of the specific acts or omissions alleged to constitute and such failure or refusal to perform and such acts or omissions continue after Employee shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. In no event shall alleged incompetence in performance of Employee's duties be deemed grounds for termination for "Cause." In the event of termination for "Cause," (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. (b) If Employee shall die during the term of this Agreement, this Agreement and all of the Company's obligations hereunder shall terminate, except that Employee's estate or designated beneficiaries shall be entitled to receive (A) all earned and unpaid compensation 2 3 (including Base Salary, prior termination or otherwise), and (B) an annual termination amount (the Termination Amount") for three years equal, each year, to the Base Salary at time of death plus the last annual bonus paid or payable to Employee, paid in equal monthly installments on the first day of each calendar month during such three year period. (c) If Employee becomes ill or is injured or disabled during the term such that Employee falls to perform all or substantially all of the duties to be rendered hereunder and such failure continues for a period in excess of 180 consecutive days (a "Disability"), the Company may, at its option, terminate employee and, upon such termination, shall pay to Employee the Termination Amount each year provided that any long-term disability payments received by Employee under any disability insurance plan made available to Employee by the Company if the premiums were paid by the Company shall be deducted from the Termination Amount otherwise required to be paid to Employee hereunder. (d) If the Company elects to terminate Employee for any reason other than as expressly set forth in Sections (a), (b) and (c) above or for no reason whatsoever (a "Severance Termination"), Employee shall receive the "Separation Package." As used herein, the "Separation Package" shall mean the Termination Amount each year for three years payable monthly on the first day of each calendar month and in addition, all stock options and other awards previously granted shall become exercisable and shall remain exercisable for three years. In the event of a Severance Termination, Employee will also be provided with reasonable office space and secretarial support for up to three months, and the Company shall pay the costs of outplacement services with a provider of its choice at a level appropriate to Employee's title and position as requested by Employee. Notwithstanding the provisions of this Section 10(d), in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. 11. The Employee may terminate his employment at any time. However, Employee shall be deemed to have terminated his employment for "Good Reason" only if he terminated his employment by giving Notice of Termination as set forth below within ninety (90) days after the occurrence of any of the following events (provided the Company does not cure such event within sixty (60) days following its receipt of the Employee's Notice of Termination): (i) Without the Employee's prior written consent, the Company assigns the Employee to duties materially inconsistent in any respect with his position, authority, duties or responsibilities as set forth in Section 1, or takes any other action that results in a material diminution in Employee's current position, authority, duties, or responsibilities, including, but not limited to, failing to re-appoint or reelect the Employee as a member of the Board; provided, however that any change in the Employee's position, authority, duties or responsibility which is due solely to the Company becoming a company that is no longer publicly traded, or due to an Internal reorganization which results in the Company becoming a division of any parent of the Company, shall not be deemed to constitute good reason hereunder. (ii) The Employee's base salary, or his targeted bonus under the Company's bonus plan for any fiscal year, is reduced for any reason other than in connection with the termination of his employment. 3 4 (iii) For any reason other than in connection with the termination of the Employee's employment or in connection with any change to the Company's benefit programs applicable to all Company employees generally made in the normal course of business, the Company materially reduces benefits provided to the Employee under Section 4, unless the Company agrees, as evidenced by written agreement between the Company and the Employee, to fully compensate the Employee for any such material reduction. (iv) The assignment of the Employee, without his prior written consent, to a Company office located outside of Southern California. (v) The Company's failure to obtain an agreement from any successor or assign of the Company to assume and to agree to perform this Agreement. (vi) The Company otherwise materially breaches its obligations to make payments to the Employee under this Agreement. Any termination of the Employee's employment by the Employee other than termination upon the Employee's death, shall be communicated by written Notice of Termination to the Company. The notice shall indicate the termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. If the Employee terminates his employment for Good Reason pursuant to this Section, his Employment shall terminate on the date that is sixty (60) days after Notice of Termination is given (provided that the Company does not cure such event during that sixty (60) day period). If the Employee terminates his employment for Good Reason, the Employee shall receive the Separation Package commencing on the date his employment shall terminate. Notwithstanding the provisions of this Section 11, in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. If the Employee terminates his employment other than for Good Reason, his employment shall terminate on the date that is sixty (60) days after Notice of Termination is given and (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. 12. The Company shall be entitled to all of the benefits and profits arising from or incident to all work, service, and advice of the Employee provided to the Company by the Employee. 13. (a) The Employee during the term of employment under this Agreement will have access to and become acquainted with various trade secrets, consisting of technical data, plans and specifications, research and test results, feasibility studies, business plans, financial records, customer lists, and other business documents, which are owned by the Company, or its shareholders, and which are regularly used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment with the Company. All files, records, documents, plans, and similar items relating to the business of the Employee 4 5 or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises where the work of the Company is being carried on without the prior written consent of the Company. (b) The Employee in the course of his duties will or may be handling technical, statistical, and planning data on the future plans and requirements for customers and/or potential customers of the Company, and similar material pertaining to the Company's shareholders. All such data is confidential and shall not be disclosed, directly or indirectly, or used by the Employee in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of Employee's employment with the Company. (c) All concepts, designs, ideas, inventions, know-how, and industrial property rights (hereinafter called "Inventions") created, devised or Improved by the Employee during the term of employment relating to the business of the Company shall be the sole and exclusive property of the Company and shall be treated in a confidential manner pursuant to the Section 13(a) above. The Employee shall fully disclose all such Inventions to the Company. The handling of any Inventions made by the Employee during employment term shall be governed by the provisions set forth below: (i) The Employee agrees that any Inventions made by the Employee, solely or Jointly with others, during the term of this Agreement, that are made with the Company's equipment, supplies, facilities, trade secrets, or time; or that relate, at the time of conception or of reduction to practice, to the business of the Company or to the Company or the Company's actual or demonstrably anticipated research or development; or that result from any work performed by the Employee for the Company, shall belong to the Company, and promises to assign all such Inventions to the Company. (ii) The Employee also agrees that the Company shall have the right to keep any such Inventions as trade secrets, if the Company so chooses. (iii) The Employee agrees to assign to the Company all rights any other inventions. (iv) In order to permit the Company to claim rights to which it may be entitled, the Employee agrees to disclose to the Company in confidence all Inventions that Employee makes during the course of his employment and all patent applications filed by the Employee within a year after termination of his employment. (v) The Employee shall assist the Company in obtaining patents on all Inventions, designs, improvements, and discoveries deemed patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and exclusive title thereto, and to protect the same against infringement by others. (vi) For the purposes of this Agreement, an Invention is deemed to have been made during the period of the Employee's employment if 5 6 the Invention was conceived or first actually reduced to practice during that period, and the Employee agrees that any patent application filed within one year after termination of his employment hereunder shall be presumed to relate to an invention made during the term of the Employee's employment unless the Employee can provide conclusive written evidence to the contrary. 14. During the term of this Agreement, the Employee agrees that he will not, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any line of business in any geographical area in which the Company is engaged or has under development. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (Ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any lines of business in which the Company is engaged or has under development in any county of any state in which the Company is doing business. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, (A) entice, induce, solicit, or encourage any employee to leave the employ of the Company to engage in any line of business in which the Company is engaged or has under development as of the date of termination of Employee's employment with the Company or (B) hire any other employee of the Company to engage in any lie of business if such employee's base salary and any fixed or guaranteed bonus per year will be more than $50,000. 15. In the event that any court or tribunal of proper jurisdiction and venue shall find that the restrictions contained in Section 14 above are unreasonable, the parties agree that such court shall determine a reasonable time and/or geographical area for such restrictions. To the extent that any other obligations set forth in this Agreement shall be declared invalid or unenforceable, said clause of obligation shall be deemed to be severable, and the remaining obligations imposed by the provisions of this Agreement shall be fully enforceable as if such invalid or unenforceable provisions had not been included herein. 16. The Employee agrees that the remedy at law for any breach or threatened breach of the restrictions contained in Section 14 above will be inadequate, and that any breach or threatened breach would cause immediate and permanent damages as would be impossible to ascertain. Therefore, the Employee agrees that in the event of any breach or threatened breach of any provisions of Section 14 above by him, addition to any 6 7 and all legal, equitable and arbitral remedies available to the Company for such breach or threatened breach, including a recovery of damages, the Company shall be entitled to obtain in any court or tribunal having jurisdiction preliminary or permanent injunctive relief without the necessity of proving actual damage by reason of such breach, and to the extent permissible under the application statutes and rules of procedure, a temporary restraining order may be granted immediately upon commencement of such action. 17. The Employee represents and warrants that (a) he is not a party to or bound by any agreement or subject to any restriction or limitation, whether written, oral or arising out of any prior or current relationship, which would be violated or impaired by his entering into, and performing for the Company his obligations under this Agreement and (b) he does not possess confidential information arising out of any such relationship which would be utilized in connection with his employment by the Company. 18. This Agreement supersedes all prior agreements and understandings between the parties with respect to the employment and understandings between the parties with respect to the employment contemplated herein and sets forth a complete agreement and understanding of the parties. No change, termination or attempted waiver of any of the provisions of this Agreement shall be of any force or effect unless the same is set forth in writing, duly adopted by written resolution of the Board, and duly executed by the party against which it is sought to be enforced. 19. The failure of either party to insist in one or more instances upon the terms and conditions of this Agreement, or to exercise any right hereunder, shall not be construed as a waiver of the future performance of any such term or the future exercise of such right, and the obligation of each party with respect to such future performance shall continue in full force and effect. 20. It is the intention of the Company and the Employee that this Agreement and the performance hereunder and all suits and special proceedings that might be brought pursuant hereto be construed in accordance with the laws of the State of California, and that in any action, special proceeding, or other proceeding that may be brought arising out of, or in connection with, or by reason of this Agreement, the laws of the State of California shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted. 21. Any controversy or claim arising out of or relating to this Agreement or its interpretation or the breach thereof shall be determined by arbitration before the American Arbitration Association, which arbitration shall be held in Los Angeles, California in accordance with the Commercial Arbitration Rules of said American Arbitration Association. The award of the arbitrator shall be final and binding on the parties and may be entered as a judgment or decree in any court having jurisdiction of such proceedings. The costs and legal fees of all parties to any arbitration proceeding shall be borne by the party against whom the award is made. 22. This Agreement is not assignable by the Employee, but is assignable by the Company to any subsidiary, parent, affiliated or associated company or any company which purchases the assets of the Company. As used herein, the term "the Company" shall include any company to which this Agreement shall have been assigned. 7 8 23. Any and all notices, requests, demands or other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by certified mail or registered mail, postage prepaid to each of the parties at the following addresses: Employee: James M. Mackenzie, Jr. 3229 Leticia Drive Hacienda Heights, CA 91475 The Company: Protection One, Inc. 6011 Bristol Parkway Culver City, CA 90230 Attn: Chairman of the Board Any party may change his address for the purposes of this Section by giving written notice of such change to the other party in the manner herein provided for giving notice. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first written above. EMPLOYER EMPLOYEE PROTECTION ONE, INC. By: /s/ JOHN W. HESSE /s/ JAMES M. MACKENZIE, JR. ----------------------------------- ----------------------------------- John W. Hesse James M. Mackenzie, Jr. Executive Vice President and Chief Financial Officer 8 EX-10.5 9 EXHIBIT 10.5 1 EXHIBIT 10.5 PROTECTION ONE, INC. This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 24th day of November, 1997, between John W. Hesse (the "Employee") and Protection One, Inc. a Delaware corporation (including any and all subsidiaries, the "Company"). WITNESSETH: WHEREAS, Employee has for many years been an executive officer and key employee of the Company; WHEREAS, Employee and the Company have been parties to employment agreements for many years, the last the Amended and Restated Employement Agreement dated as of May 24, 1996; WHEREAS, the Company and Western Resources, Inc. have entered into a Contribution Agreement dated as of July 30, 1997 (as amended, the "Contribution Agreement"); and WHEREAS it is a condition to the closing of the Contribution Agreement that the Company and Employee enter into this Agreement which will supersede and replace all prior agreements between the Company and Employee concerning the subject matter hereof, AGREEMENT NOW, THEREFORE, in consideration of the natural covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Employee agree as follows: 1. The Company hereby employs and continues to engage the Employee as Executive Vice President, Chief Financial Officer and Secretary, and Employee's office shall at all times be in Dallas, Texas. 2. The term of this Agreement shall commence on the date hereof and shall be continually extended such that at all times the remaining term hereof is three years; provided, however, that this Agreement shall be subject to termination as provided in Sections 10 and 11 hereof. 3. Subject to the supervision and direction of the Board, the Employee agrees that he shall, at all times, faithfully, industriously and to the best of his ability and experience, perform all the duties that may be required of him pursuant to the terms hereof to the satisfaction of the Company. The Employee shall devote his full time and attention to the duties assigned to him and shall serve the Company diligently and honestly in its business and use his best endeavors to promote the interest of the Company. 4. As long as the Employee remains employed by the Company, in consideration of the services to be performed by the Employee during the term of this Agreement, the Company shall pay or cause to be paid the Employee, and the Employee shall accept in full payment for such services, a base salary (the "Base Salary") of $315,000 per year, payable monthly, subject to increase in accordance with the Company's policy with respect to executive salaries as in effect from time to time. 2 5. During the term of this Agreement, the Employee shall be entitled to participate in the Company's 1997 Long-Term Incentive Plan, the Company's bonus plan for senior executives, any and all stock incentive award programs now in effect or hereinafter adopted by the Board, the Company's 401(k) plan and all benefit plans, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, provided to actively employed senior executives of the Company in accordance with the terms and conditions of such plans as each plan is in effect from time to time. 6. The Company shall provide, at no cost to the Employee, insurance and health care benefits from time to time (and subject to modification) generally offered by the Company to its key employees. 7. In the event that the Employee is required to travel in connection with his employment, the Company shall advance funds to the Employee or reimburse him, for reasonable and documented travel, subsistence and other out-of-pocket expenses, as well as non-travel business entertainment expenses incurred by him, in accordance with the then prevailing policies of the Company. 8. The Employee shall receive a monthly automobile usage allowance of $500 in lieu of any other allowance for automobile expenses other than reimbursement for gas, tolls and parking away from the office when on Company business. 9. The Employee shall be entitled to vacation in accordance with vacation policies adopted from time to time by the Board for the Company's key employees. The Employee's initial vacation entitlement is three (3) weeks per year. 10. (a) The Company may terminate this Agreement for "Cause" upon 30 days written notice. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Employee involving the Company; (ii) a conviction of a felony involving moral turpitude; (iii) a continuing, repeated willful failure or refusal by Employee to perform his duties; (iv) willful or serious misconduct on the part of employee which continues and is demonstrably injurious to the Company; or (v) Employee engages in and continues to engage in any activity which is in conflict with or adverse to the business interests of the Company; provided, however, that this Agreement may not be terminated under subclauses (iii), (iv) or (v) hereof unless Employee shall have first received written notice from the Board advising Employee of the specific acts or omissions alleged to constitute and such failure or refusal to perform and such acts or omissions continue after Employee shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. In no event shall alleged incompetence in performance of Employee's duties be deemed grounds for termination for "Cause." In the event of termination for "Cause," (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. (b) If Employee shall die during the term of this Agreement, this Agreement and all of the Company's obligations hereunder shall terminate, except that Employee's estate or designated beneficiaries shall be entitled to receive (A) all earned and unpaid compensation (including Base Salary, prior termination or otherwise), and (B) an annual termination amount (the Termination Amount") for three years equal, each year, to the Base Salary at time of death plus the last annual bonus paid or payable to Employee, paid in 2 3 equal monthly installments on the first day of each calendar month during such three year period. (c) If Employee becomes ill or is injured or disabled during the term such that Employee falls to perform all or substantially all of the duties to be rendered hereunder and such failure continues for a period in excess of 180 consecutive days (a "Disability"), the Company may, at its option, terminate employee and, upon such termination, shall pay to Employee the Termination Amount each year provided that any long-term disability payments received by Employee under any disability insurance plan made available to Employee by the Company if the premiums were paid by the Company shall be deducted from the Termination Amount otherwise required to be paid to Employee hereunder. (d) If the Company elects to terminate Employee for any reason other than as expressly set forth in Sections (a), (b) and (c) above or for no reason whatsoever (a "Severance Termination"), Employee shall receive the "Separation Package." As used herein, the "Separation Package" shall mean the Termination Amount each year for three years payable monthly on the first day of each calendar month and in addition, all stock options and other awards previously granted shall become exercisable and shall remain exercisable for three years. In the event of a Severance Termination, Employee will also be provided with reasonable office space and secretarial support for up to three months, and the Company shall pay the costs of outplacement services with a provider of its choice at a level appropriate to Employee's title and position as requested by Employee. Notwithstanding the provisions of this Section 10(d), in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. 11. The Employee may terminate his employment at any time. However, Employee shall be deemed to have terminated his employment for "Good Reason" only if he terminated his employment by giving Notice of Termination as set forth below within ninety (90) days after the occurrence of any of the following events (provided the Company does not cure such event within sixty (60) days following its receipt of the Employee's Notice of Termination): (i) Without the Employee's prior written consent, the Company assigns the Employee to duties materially inconsistent in any respect with his position, authority, duties or responsibilities as set forth in Section 1, or takes any other action that results in a material diminution in Employee's current position, authority, duties, or responsibilities; provided, however that any change in the Employee's position, authority, duties or responsibility which is due solely to the Company becoming a company that is no longer publicly traded, or due to an Internal reorganization which results in the Company becoming a division of any parent of the Company, shall not be deemed to constitute good reason hereunder. (ii) The Employee's base salary, or his targeted bonus under the Company's bonus plan for any fiscal year, is reduced for any reason other than in connection with the termination of his employment. (iii) For any reason other than in connection with the termination of the Employee's employment or in connection with any change to the Company's benefit programs applicable to all Company employees generally made in the normal 3 4 course of business, the Company materially reduces benefits provided to the Employee under Section 4, unless the Company agrees, as evidenced by written agreement between the Company and the Employee, to fully compensate the Employee for any such material reduction. (iv) The assignment of the Employee, without his prior written consent, to a Company office located outside of Dallas, Texas. (v) The Company's failure to obtain an agreement from any successor or assign of the Company to assume and to agree to perform this Agreement. (vi) The Company otherwise materially breaches its obligations to make payments to the Employee under this Agreement. Any termination of the Employee's employment by the Employee other than termination upon the Employee's death, shall be communicated by written Notice of Termination to the Company. The notice shall indicate the termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. If the Employee terminates his employment for Good Reason pursuant to this Section, his Employment shall terminate on the date that is sixty (60) days after Notice of Termination is given (provided that the Company does not cure such event during that sixty (60) day period). If the Employee terminates his employment for Good Reason, the Employee shall receive the Separation Package commencing on the date his employment shall terminate. Notwithstanding the provisions of this Section 11, in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. If the Employee terminates his employment other than for Good Reason, his employment shall terminate on the date that is sixty (60) days after Notice of Termination is given and (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. 12. The Company shall be entitled to all of the benefits and profits arising from or incident to all work, service, and advice of the Employee provided to the Company by the Employee. 13. (a) The Employee during the term of employment under this Agreement will have access to and become acquainted with various trade secrets, consisting of technical data, plans and specifications, research and test results, feasibility studies, business plans, financial records, customer lists, and other business documents, which are owned by the Company, or its shareholders, and which are regularly used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment with the Company. All files, records, documents, plans, and similar items relating to the business of the Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises where the work of the Company is being carried on without the prior written consent of the Company. 4 5 (b) The Employee in the course of his duties will or may be handling technical, statistical, and planning data on the future plans and requirements for customers and/or potential customers of the Company, and similar material pertaining to the Company's shareholders. All such data is confidential and shall not be disclosed, directly or indirectly, or used by the Employee in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of Employee's employment with the Company. (c) All concepts, designs, ideas, inventions, know-how, and industrial property rights (hereinafter called "Inventions") created, devised or Improved by the Employee during the term of employment relating to the business of the Company shall be the sole and exclusive property of the Company and shall be treated in a confidential manner pursuant to the Section 13(a) above. The Employee shall fully disclose all such Inventions to the Company. The handling of any Inventions made by the Employee during employment term shall be governed by the provisions set forth below: (i) The Employee agrees that any Inventions made by the Employee, solely or Jointly with others, during the term of this Agreement, that are made with the Company's equipment, supplies, facilities, trade secrets, or time; or that relate, at the time of conception or of reduction to practice, to the business of the Company or to the Company or the Company's actual or demonstrably anticipated research or development; or that result from any work performed by the Employee for the Company, shall belong to the Company, and promises to assign all such Inventions to the Company. (ii) The Employee also agrees that the Company shall have the right to keep any such Inventions as trade secrets, if the Company so chooses. (iii) The Employee agrees to assign to the Company all rights any other inventions. (iv) In order to permit the Company to claim rights to which it may be entitled, the Employee agrees to disclose to the Company in confidence all Inventions that Employee makes during the course of his employment and all patent applications filed by the Employee within a year after termination of his employment. (v) The Employee shall assist the Company in obtaining patents on all Inventions, designs, improvements, and discoveries deemed patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and exclusive title thereto, and to protect the same against infringement by others. (vi) For the purposes of this Agreement, an Invention is deemed to have been made during the period of the Employee's employment if the Invention was conceived or first actually reduced to practice during that period, and the Employee agrees that any patent application filed within one year after termination of his employment hereunder shall be presumed to relate to an invention made during the term of the Employee's employment unless the Employee can provide conclusive written evidence to the contrary. 5 6 14. During the term of this Agreement, the Employee agrees that he will not, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any line of business in any geographical area in which the Company is engaged or has under development. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (Ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any lines of business in which the Company is engaged or has under development in any county of any state in which the Company is doing business. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, (A) entice, induce, solicit, or encourage any employee to leave the employ of the Company to engage in any line of business in which the Company is engaged or has under development as of the date of termination of Employee's employment with the Company or (B) hire any other employee of the Company to engage in any lie of business if such employee's base salary and any fixed or guaranteed bonus per year will be more than $50,000. 15. In the event that any court or tribunal of proper jurisdiction and venue shall find that the restrictions contained in Section 14 above are unreasonable, the parties agree that such court shall determine a reasonable time and/or geographical area for such restrictions. To the extent that any other obligations set forth in this Agreement shall be declared invalid or unenforceable, said clause of obligation shall be deemed to be severable, and the remaining obligations imposed by the provisions of this Agreement shall be fully enforceable as if such invalid or unenforceable provisions had not been included herein. 16. The Employee agrees that the remedy at law for any breach or threatened breach of the restrictions contained in Section 14 above will be inadequate, and that any breach or threatened breach would cause immediate and permanent damages as would be impossible to ascertain. Therefore, the Employee agrees that in the event of any breach or threatened breach of any provisions of Section 14 above by him, addition to any and all legal, equitable and arbitral remedies available to the Company for such breach or threatened breach, including a recovery of damages, the Company shall be entitled to obtain in any court or tribunal having jurisdiction preliminary or permanent injunctive relief without the necessity of proving actual damage by reason of such breach, and to the extent permissible under the application statutes and rules of procedure, a temporary restraining order may be granted immediately upon commencement of such action. 6 7 17. The Employee represents and warrants that (a) he is not a party to or bound by any agreement or subject to any restriction or limitation, whether written, oral or arising out of any prior or current relationship, which would be violated or impaired by his entering into, and performing for the Company his obligations under this Agreement and (b) he does not possess confidential information arising out of any such relationship which would be utilized in connection with his employment by the Company. 18. This Agreement supersedes all prior agreements and understandings between the parties with respect to the employment and understandings between the parties with respect to the employment contemplated herein and sets forth a complete agreement and understanding of the parties. No change, termination or attempted waiver of any of the provisions of this Agreement shall be of any force or effect unless the same is set forth in writing, duly adopted by written resolution of the Board, and duly executed by the party against which it is sought to be enforced. 19. The failure of either party to insist in one or more instances upon the terms and conditions of this Agreement, or to exercise any right hereunder, shall not be construed as a waiver of the future performance of any such term or the future exercise of such right, and the obligation of each party with respect to such future performance shall continue in full force and effect. 20. It is the intention of the Company and the Employee that this Agreement and the performance hereunder and all suits and special proceedings that might be brought pursuant hereto be construed in accordance with the laws of the State of California, and that in any action, special proceeding, or other proceeding that may be brought arising out of, or in connection with, or by reason of this Agreement, the laws of the State of California shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted. 21. Any controversy or claim arising out of or relating to this Agreement or its interpretation or the breach thereof shall be determined by arbitration before the American Arbitration Association, which arbitration shall be held in Los Angeles, California in accordance with the Commercial Arbitration Rules of said American Arbitration Association. The award of the arbitrator shall be final and binding on the parties and may be entered as a judgment or decree in any court having jurisdiction of such proceedings. The costs and legal fees of all parties to any arbitration proceeding shall be borne by the party against whom the award is made. 22. This Agreement is not assignable by the Employee, but is assignable by the Company to any subsidiary, parent, affiliated or associated company or any company which purchases the assets of the Company. As used herein, the term "the Company" shall include any company to which this Agreement shall have been assigned. 23. Any and all notices, requests, demands or other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by certified mail or registered mail, postage prepaid to each of the parties at the following addresses: Employee: John W. Hesse 4500 Windsor Drive Irving, TX 75038 7 8 The Company: Protection One, Inc. 6011 Bristol Parkway Culver City, CA 90230 Attn: Chairman of the Board Any party may change his address for the purposes of this Section by giving written notice of such change to the other party in the manner herein provided for giving notice. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first written above. EMPLOYER EMPLOYEE PROTECTION ONE, INC. By: /s/ JAMES M. MACKENZIE, JR. /s/ JOHN W. HESSE - ------------------------------------- ------------------------------------ James M. Mackenzie, Jr. John W. Hesse President and Chief Executive Officer 8 EX-10.6 10 EXHIBIT 10.6 1 EXHIBIT 10.6 PROTECTION ONE, INC. This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 24th day of November, 1997, between John E. Mack, III (the "Employee") and Protection One, Inc. a Delaware corporation (including any and all subsidiaries, the "Company"). WITNESSETH: WHEREAS, Employee has for many years been an executive officer and key employee of the Company; WHEREAS, Employee and the Company have been parties to employment agreements for many years, the last the Amended and Restated Employment Agreement dated as of May 24, 1996; WHEREAS, the Company and Western Resources, Inc. have entered into a Contribution Agreement dated as of July 30, 1997 (as amended, the "Contribution Agreement"); and WHEREAS it is a condition to the closing of the Contribution Agreement that the Company and Employee enter into this Agreement which will supersede and replace all prior agreements between the Company and Employee concerning the subject matter hereof, AGREEMENT NOW, THEREFORE, in consideration of the natural covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Employee agree as follows: 1. The Company hereby employs and continues to engage the Employee as Executive Vice President - Business Development, and Employee's office shall at all times be in Southern California. 2. The term of this Agreement shall commence on the date hereof and shall be continually extended such that at all times the remaining term hereof is three years; provided, however, that this Agreement shall be subject to termination as provided in Sections 10 and 11 hereof. 3. Subject to the supervision and direction of the Board, the Employee agrees that he shall, at all times, faithfully, industriously and to the best of his ability and experience, perform all the duties that may be required of him pursuant to the terms hereof to the satisfaction of the Company. The Employee shall devote his full time and attention to the duties assigned to him and shall serve the Company diligently and honestly in its business and use his best endeavors to promote the interest of the Company. 4. As long as the Employee remains employed by the Company, in consideration of the services to be performed by the Employee during the term of this Agreement, the Company shall pay or cause to be paid the Employee, and the Employee shall accept in full payment for such services, a base salary (the "Base Salary") of $270,800 per year, payable monthly, subject to increase in accordance with the Company's policy with respect to executive salaries as in effect from time to time. 2 5. During the term of this Agreement, the Employee shall be entitled to participate in the Company's 1997 Long-Term Incentive Plan, the Company's bonus plan for senior executives, any and all stock incentive award programs now in effect or hereinafter adopted by the Board, the Company's 401(k) plan and all benefit plans, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, provided to actively employed senior executives of the Company in accordance with the terms and conditions of such plans as each plan is in effect from time to time. 6. The Company shall provide, at no cost to the Employee, insurance and health care benefits from time to time (and subject to modification) generally offered by the Company to its key employees. 7. In the event that the Employee is required to travel in connection with his employment, the Company shall advance funds to the Employee or reimburse him, for reasonable and documented travel, subsistence and other out-of-pocket expenses, as well as non-travel business entertainment expenses incurred by him, in accordance with the then prevailing policies of the Company. 8. The Employee shall receive a monthly automobile usage allowance of $500 in lieu of any other allowance for automobile expenses other than reimbursement for gas, tolls and parking away from the office when on Company business. 9. The Employee shall be entitled to vacation in accordance with vacation policies adopted from time to time by the Board for the Company's key employees. The Employee's initial vacation entitlement is three (3) weeks per year. 10. (a) The Company may terminate this Agreement for "Cause" upon 30 days written notice. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Employee involving the Company; (ii) a conviction of a felony involving moral turpitude; (iii) a continuing, repeated willful failure or refusal by Employee to perform his duties; (iv) willful or serious misconduct on the part of employee which continues and is demonstrably injurious to the Company; or (v) Employee engages in and continues to engage in any activity which is in conflict with or adverse to the business interests of the Company; provided, however, that this Agreement may not be terminated under subclauses (iii), (iv) or (v) hereof unless Employee shall have first received written notice from the Board advising Employee of the specific acts or omissions alleged to constitute and such failure or refusal to perform and such acts or omissions continue after Employee shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. In no event shall alleged incompetence in performance of Employee's duties be deemed grounds for termination for "Cause." In the event of termination for "Cause," (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. (b) If Employee shall die during the term of this Agreement, this Agreement and all of the Company's obligations hereunder shall terminate, except that Employee's estate or designated beneficiaries shall be entitled to receive (A) all earned and unpaid compensation (including Base Salary, prior termination or otherwise), and (B) an annual termination amount (the Termination Amount") for three years equal, each year, to the Base Salary at time of 2 3 death plus the last annual bonus paid or payable to Employee, paid in equal monthly installments on the first day of each calendar month during such three year period. (c) If Employee becomes ill or is injured or disabled during the term such that Employee falls to perform all or substantially all of the duties to be rendered hereunder and such failure continues for a period in excess of 180 consecutive days (a "Disability"), the Company may, at its option, terminate employee and, upon such termination, shall pay to Employee the Termination Amount each year provided that any long-term disability payments received by Employee under any disability insurance plan made available to Employee by the Company if the premiums were paid by the Company shall be deducted from the Termination Amount otherwise required to be paid to Employee hereunder. (d) If the Company elects to terminate Employee for any reason other than as expressly set forth in Sections (a), (b) and (c) above or for no reason whatsoever (a "Severance Termination"), Employee shall receive the "Separation Package." As used herein, the "Separation Package" shall mean the Termination Amount each year for three years payable monthly on the first day of each calendar month and in addition, all stock options and other awards previously granted shall become exercisable and shall remain exercisable for three years. In the event of a Severance Termination, Employee will also be provided with reasonable office space and secretarial support for up to three months, and the Company shall pay the costs of outplacement services with a provider of its choice at a level appropriate to Employee's title and position as requested by Employee. Notwithstanding the provisions of this Section 10(d), in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. 11. The Employee may terminate his employment at any time. However, Employee shall be deemed to have terminated his employment for "Good Reason" only if he terminated his employment by giving Notice of Termination as set forth below within ninety (90) days after the occurrence of any of the following events (provided the Company does not cure such event within sixty (60) days following its receipt of the Employee's Notice of Termination): (i) Without the Employee's prior written consent, the Company assigns the Employee to duties materially inconsistent in any respect with his position, authority, duties or responsibilities as set forth in Section 1, or takes any other action that results in a material diminution in Employee's current position, authority, duties, or responsibilities; provided, however that any change in the Employee's position, authority, duties or responsibility which is due solely to the Company becoming a company that is no longer publicly traded, or due to an Internal reorganization which results in the Company becoming a division of any parent of the Company, shall not be deemed to constitute good reason hereunder. (ii) The Employee's base salary, or his targeted bonus under the Company's bonus plan for any fiscal year, is reduced for any reason other than in connection with the termination of his employment. (iii) For any reason other than in connection with the termination of the Employee's employment or in connection with any change to the Company's benefit programs applicable to all Company employees generally made in the normal 3 4 course of business, the Company materially reduces benefits provided to the Employee under Section 4, unless the Company agrees, as evidenced by written agreement between the Company and the Employee, to fully compensate the Employee for any such material reduction. (iv) The assignment of the Employee, without his prior written consent, to a Company office located outside of Southern California. (v) The Company's failure to obtain an agreement from any successor or assign of the Company to assume and to agree to perform this Agreement. (vi) The Company otherwise materially breaches its obligations to make payments to the Employee under this Agreement. Any termination of the Employee's employment by the Employee other than termination upon the Employee's death, shall be communicated by written Notice of Termination to the Company. The notice shall indicate the termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. If the Employee terminates his employment for Good Reason pursuant to this Section, his Employment shall terminate on the date that is sixty (60) days after Notice of Termination is given (provided that the Company does not cure such event during that sixty (60) day period). If the Employee terminates his employment for Good Reason, the Employee shall receive the Separation Package commencing on the date his employment shall terminate. Notwithstanding the provisions of this Section 11, in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. If the Employee terminates his employment other than for Good Reason, his employment shall terminate on the date that is sixty (60) days after Notice of Termination is given and (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. 12. The Company shall be entitled to all of the benefits and profits arising from or incident to all work, service, and advice of the Employee provided to the Company by the Employee. 13. (a) The Employee during the term of employment under this Agreement will have access to and become acquainted with various trade secrets, consisting of technical data, plans and specifications, research and test results, feasibility studies, business plans, financial records, customer lists, and other business documents, which are owned by the Company, or its shareholders, and which are regularly used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment with the Company. All files, records, documents, plans, and similar items relating to the business of the Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises where the work of the Company is being carried on without the prior written consent of the Company. 4 5 (b) The Employee in the course of his duties will or may be handling technical, statistical, and planning data on the future plans and requirements for customers and/or potential customers of the Company, and similar material pertaining to the Company's shareholders. All such data is confidential and shall not be disclosed, directly or indirectly, or used by the Employee in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of Employee's employment with the Company. (c) All concepts, designs, ideas, inventions, know-how, and industrial property rights (hereinafter called "Inventions") created, devised or Improved by the Employee during the term of employment relating to the business of the Company shall be the sole and exclusive property of the Company and shall be treated in a confidential manner pursuant to the Section 13(a) above. The Employee shall fully disclose all such Inventions to the Company. The handling of any Inventions made by the Employee during employment term shall be governed by the provisions set forth below: (i) The Employee agrees that any Inventions made by the Employee, solely or Jointly with others, during the term of this Agreement, that are made with the Company's equipment, supplies, facilities, trade secrets, or time; or that relate, at the time of conception or of reduction to practice, to the business of the Company or to the Company or the Company's actual or demonstrably anticipated research or development; or that result from any work performed by the Employee for the Company, shall belong to the Company, and promises to assign all such Inventions to the Company. (ii) The Employee also agrees that the Company shall have the right to keep any such Inventions as trade secrets, if the Company so chooses. (iii) The Employee agrees to assign to the Company all rights any other inventions. (iv) In order to permit the Company to claim rights to which it may be entitled, the Employee agrees to disclose to the Company in confidence all Inventions that Employee makes during the course of his employment and all patent applications filed by the Employee within a year after termination of his employment. (v) The Employee shall assist the Company in obtaining patents on all Inventions, designs, improvements, and discoveries deemed patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and exclusive title thereto, and to protect the same against infringement by others. (vi) For the purposes of this Agreement, an Invention is deemed to have been made during the period of the Employee's employment if the Invention was conceived or first actually reduced to practice during that period, and the Employee agrees that any patent application filed within one year after termination of his employment hereunder shall be presumed to relate 5 6 to an invention made during the term of the Employee's employment unless the Employee can provide conclusive written evidence to the contrary. 14. During the term of this Agreement, the Employee agrees that he will not, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any line of business in any geographical area in which the Company is engaged or has under development. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (Ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any lines of business in which the Company is engaged or has under development in any county of any state in which the Company is doing business. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, (A) entice, induce, solicit, or encourage any employee to leave the employ of the Company to engage in any line of business in which the Company is engaged or has under development as of the date of termination of Employee's employment with the Company or (B) hire any other employee of the Company to engage in any lie of business if such employee's base salary and any fixed or guaranteed bonus per year will be more than $50,000. 15. In the event that any court or tribunal of proper jurisdiction and venue shall find that the restrictions contained in Section 14 above are unreasonable, the parties agree that such court shall determine a reasonable time and/or geographical area for such restrictions. To the extent that any other obligations set forth in this Agreement shall be declared invalid or unenforceable, said clause of obligation shall be deemed to be severable, and the remaining obligations imposed by the provisions of this Agreement shall be fully enforceable as if such invalid or unenforceable provisions had not been included herein. 16. The Employee agrees that the remedy at law for any breach or threatened breach of the restrictions contained in Section 14 above will be inadequate, and that any breach or threatened breach would cause immediate and permanent damages as would be impossible to ascertain. Therefore, the Employee agrees that in the event of any breach or threatened breach of any provisions of Section 14 above by him, addition to any and all legal, equitable and arbitral remedies available to the Company for such breach or threatened breach, including a recovery of damages, the Company shall be entitled to obtain in any court or tribunal having jurisdiction preliminary or permanent injunctive relief without 6 7 the necessity of proving actual damage by reason of such breach, and to the extent permissible under the application statutes and rules of procedure, a temporary restraining order may be granted immediately upon commencement of such action. 17. The Employee represents and warrants that (a) he is not a party to or bound by any agreement or subject to any restriction or limitation, whether written, oral or arising out of any prior or current relationship, which would be violated or impaired by his entering into, and performing for the Company his obligations under this Agreement and (b) he does not possess confidential information arising out of any such relationship which would be utilized in connection with his employment by the Company. 18. This Agreement supersedes all prior agreements and understandings between the parties with respect to the employment and understandings between the parties with respect to the employment contemplated herein and sets forth a complete agreement and understanding of the parties. No change, termination or attempted waiver of any of the provisions of this Agreement shall be of any force or effect unless the same is set forth in writing, duly adopted by written resolution of the Board, and duly executed by the party against which it is sought to be enforced. 19. The failure of either party to insist in one or more instances upon the terms and conditions of this Agreement, or to exercise any right hereunder, shall not be construed as a waiver of the future performance of any such term or the future exercise of such right, and the obligation of each party with respect to such future performance shall continue in full force and effect. 20. It is the intention of the Company and the Employee that this Agreement and the performance hereunder and all suits and special proceedings that might be brought pursuant hereto be construed in accordance with the laws of the State of California, and that in any action, special proceeding, or other proceeding that may be brought arising out of, or in connection with, or by reason of this Agreement, the laws of the State of California shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted. 21. Any controversy or claim arising out of or relating to this Agreement or its interpretation or the breach thereof shall be determined by arbitration before the American Arbitration Association, which arbitration shall be held in Los Angeles, California in accordance with the Commercial Arbitration Rules of said American Arbitration Association. The award of the arbitrator shall be final and binding on the parties and may be entered as a judgment or decree in any court having jurisdiction of such proceedings. The costs and legal fees of all parties to any arbitration proceeding shall be borne by the party against whom the award is made. 22. This Agreement is not assignable by the Employee, but is assignable by the Company to any subsidiary, parent, affiliated or associated company or any company which purchases the assets of the Company. As used herein, the term "the Company" shall include any company to which this Agreement shall have been assigned. 23. Any and all notices, requests, demands or other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by 7 8 certified mail or registered mail, postage prepaid to each of the parties at the following addresses: Employee: John E. Mack, III 427 El Medio Drive Pacific Palisades, CA 90272 The Company: Protection One, Inc. 6011 Bristol Parkway Culver City, CA 90230 Attn: Chairman of the Board Any party may change his address for the purposes of this Section by giving written notice of such change to the other party in the manner herein provided for giving notice. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first written above. EMPLOYER EMPLOYEE PROTECTION ONE, INC. By: /s/ JAMES M. MACKENZIE, JR. /s/ JOHN E. MACK, III ------------------------------------ --------------------------------- James M. Mackenzie, Jr. John E. Mack, III President and Chief Executive Officer 8 EX-10.7 11 EXHIBIT 10.7 1 EXHIBIT 10.7 PROTECTION ONE, INC. This EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 24th day of November, 1997, between Thomas K. Rankin (the "Employee") and Protection One, Inc. a Delaware corporation (including any and all subsidiaries, the "Company"). WITNESSETH: WHEREAS, Employee has for many years been an executive officer and key employee of the Company; WHEREAS, Employee and the Company have been parties to employment agreements for many years, the last the Amended and Restated Employment Agreement dated as of May 24, 1996; WHEREAS, the Company and Western Resources, Inc. have entered into a Contribution Agreement dated as of July 30, 1997 (as amended, the "Contribution Agreement"); and WHEREAS it is a condition to the closing of the Contribution Agreement that the Company and Employee enter into this Agreement which will supersede and replace all prior agreements between the Company and Employee concerning the subject matter hereof, AGREEMENT NOW, THEREFORE, in consideration of the natural covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Employee agree as follows: 1. The Company hereby employs and continues to engage the Employee as Executive Vice President - Branch Management, and Employee's office shall at all times be in Southern California. 2. The term of this Agreement shall commence on the date hereof and shall be continually extended such that at all times the remaining term hereof is three years; provided, however, that this Agreement shall be subject to termination as provided in Sections 10 and 11 hereof. 3. Subject to the supervision and direction of the Board, the Employee agrees that he shall, at all times, faithfully, industriously and to the best of his ability and experience, perform all the duties that may be required of him pursuant to the terms hereof to the satisfaction of the Company. The Employee shall devote his full time and attention to the duties assigned to him and shall serve the Company diligently and honestly in its business and use his best endeavors to promote the interest of the Company. 4. As long as the Employee remains employed by the Company, in consideration of the services to be performed by the Employee during the term of this Agreement, the Company shall pay or cause to be paid the Employee, and the Employee shall accept in full payment for such services, a base salary (the "Base Salary") of $270,800 per year, payable monthly, subject to increase in accordance with the Company's policy with respect to executive salaries as in effect from time to time. 2 5. During the term of this Agreement, the Employee shall be entitled to participate in the Company's 1997 Long-Term Incentive Plan, the Company's bonus plan for senior executives, any and all stock incentive award programs now in effect or hereinafter adopted by the Board, the Company's 401(k) plan and all benefit plans, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, provided to actively employed senior executives of the Company in accordance with the terms and conditions of such plans as each plan is in effect from time to time. 6. The Company shall provide, at no cost to the Employee, insurance and health care benefits from time to time (and subject to modification) generally offered by the Company to its key employees. 7. In the event that the Employee is required to travel in connection with his employment, the Company shall advance funds to the Employee or reimburse him, for reasonable and documented travel, subsistence and other out-of-pocket expenses, as well as non-travel business entertainment expenses incurred by him, in accordance with the then prevailing policies of the Company. 8. The Employee shall receive a monthly automobile usage allowance of $500 in lieu of any other allowance for automobile expenses other than reimbursement for gas, tolls and parking away from the office when on Company business. 9. The Employee shall be entitled to vacation in accordance with vacation policies adopted from time to time by the Board for the Company's key employees. The Employee's initial vacation entitlement is three (3) weeks per year. 10. (a) The Company may terminate this Agreement for "Cause" upon 30 days written notice. For purposes of this Agreement, "Cause" shall mean and be limited to the following events: (i) an act of fraud, embezzlement or similar conduct by Employee involving the Company; (ii) a conviction of a felony involving moral turpitude; (iii) a continuing, repeated willful failure or refusal by Employee to perform his duties; (iv) willful or serious misconduct on the part of employee which continues and is demonstrably injurious to the Company; or (v) Employee engages in and continues to engage in any activity which is in conflict with or adverse to the business interests of the Company; provided, however, that this Agreement may not be terminated under subclauses (iii), (iv) or (v) hereof unless Employee shall have first received written notice from the Board advising Employee of the specific acts or omissions alleged to constitute and such failure or refusal to perform and such acts or omissions continue after Employee shall have had a reasonable opportunity to correct the acts or omissions cited in such notice. In no event shall alleged incompetence in performance of Employee's duties be deemed grounds for termination for "Cause." In the event of termination for "Cause," (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. (b) If Employee shall die during the term of this Agreement, this Agreement and all of the Company's obligations hereunder shall terminate, except that Employee's estate or designated beneficiaries shall be entitled to receive (A) all earned and unpaid compensation (including Base Salary, prior termination or otherwise), and (B) an annual termination amount (the Termination Amount") for three years equal, each year, to the Base Salary at time of 2 3 death plus the last annual bonus paid or payable to Employee, paid in equal monthly installments on the first day of each calendar month during such three year period. (c) If Employee becomes ill or is injured or disabled during the term such that Employee falls to perform all or substantially all of the duties to be rendered hereunder and such failure continues for a period in excess of 180 consecutive days (a "Disability"), the Company may, at its option, terminate employee and, upon such termination, shall pay to Employee the Termination Amount each year provided that any long-term disability payments received by Employee under any disability insurance plan made available to Employee by the Company if the premiums were paid by the Company shall be deducted from the Termination Amount otherwise required to be paid to Employee hereunder. (d) If the Company elects to terminate Employee for any reason other than as expressly set forth in Sections (a), (b) and (c) above or for no reason whatsoever (a "Severance Termination"), Employee shall receive the "Separation Package." As used herein, the "Separation Package" shall mean the Termination Amount each year for three years payable monthly on the first day of each calendar month and in addition, all stock options and other awards previously granted shall become exercisable and shall remain exercisable for three years. In the event of a Severance Termination, Employee will also be provided with reasonable office space and secretarial support for up to three months, and the Company shall pay the costs of outplacement services with a provider of its choice at a level appropriate to Employee's title and position as requested by Employee. Notwithstanding the provisions of this Section 10(d), in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. 11. The Employee may terminate his employment at any time. However, Employee shall be deemed to have terminated his employment for "Good Reason" only if he terminated his employment by giving Notice of Termination as set forth below within ninety (90) days after the occurrence of any of the following events (provided the Company does not cure such event within sixty (60) days following its receipt of the Employee's Notice of Termination): (i) Without the Employee's prior written consent, the Company assigns the Employee to duties materially inconsistent in any respect with his position, authority, duties or responsibilities as set forth in Section 1, or takes any other action that results in a material diminution in Employee's current position, authority, duties, or responsibilities; provided, however that any change in the Employee's position, authority, duties or responsibility which is due solely to the Company becoming a company that is no longer publicly traded, or due to an Internal reorganization which results in the Company becoming a division of any parent of the Company, shall not be deemed to constitute good reason hereunder. (ii) The Employee's base salary, or his targeted bonus under the Company's bonus plan for any fiscal year, is reduced for any reason other than in connection with the termination of his employment. (iii) For any reason other than in connection with the termination of the Employee's employment or in connection with any change to the Company's benefit programs applicable to all Company employees generally made in the normal 3 4 course of business, the Company materially reduces benefits provided to the Employee under Section 4, unless the Company agrees, as evidenced by written agreement between the Company and the Employee, to fully compensate the Employee for any such material reduction. (iv) The assignment of the Employee, without his prior written consent, to a Company office located outside of Southern California. (v) The Company's failure to obtain an agreement from any successor or assign of the Company to assume and to agree to perform this Agreement. (vi) The Company otherwise materially breaches its obligations to make payments to the Employee under this Agreement. Any termination of the Employee's employment by the Employee other than termination upon the Employee's death, shall be communicated by written Notice of Termination to the Company. The notice shall indicate the termination provision in this Agreement relied upon, and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. If the Employee terminates his employment for Good Reason pursuant to this Section, his Employment shall terminate on the date that is sixty (60) days after Notice of Termination is given (provided that the Company does not cure such event during that sixty (60) day period). If the Employee terminates his employment for Good Reason, the Employee shall receive the Separation Package commencing on the date his employment shall terminate. Notwithstanding the provisions of this Section 11, in the event that the Employee breaches any of the covenants set forth in Section 14 hereof, then the "Termination Amount" shall consist solely of the Base Salary at the time of the Employee's termination of employment and shall not include any bonus. If the Employee terminates his employment other than for Good Reason, his employment shall terminate on the date that is sixty (60) days after Notice of Termination is given and (x) Employee shall be entitled to receive that portion of the Base Salary, and all other benefits and unreimbursed expenses pursuant to Sections 4, 5, 6, 7, 8 and 9 hereof accrued through the date of termination. 12. The Company shall be entitled to all of the benefits and profits arising from or incident to all work, service, and advice of the Employee provided to the Company by the Employee. 13. (a) The Employee during the term of employment under this Agreement will have access to and become acquainted with various trade secrets, consisting of technical data, plans and specifications, research and test results, feasibility studies, business plans, financial records, customer lists, and other business documents, which are owned by the Company, or its shareholders, and which are regularly used in the operation of the business of the Company. The Employee shall not disclose any of the aforesaid trade secrets, directly or indirectly, or use them in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of his employment with the Company. All files, records, documents, plans, and similar items relating to the business of the Employee or otherwise coming into his possession, shall remain the exclusive property of the Company and shall not be removed under any circumstances from the premises where the work of the Company is being carried on without the prior written consent of the Company. 4 5 (b) The Employee in the course of his duties will or may be handling technical, statistical, and planning data on the future plans and requirements for customers and/or potential customers of the Company, and similar material pertaining to the Company's shareholders. All such data is confidential and shall not be disclosed, directly or indirectly, or used by the Employee in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of Employee's employment with the Company. (c) All concepts, designs, ideas, inventions, know-how, and industrial property rights (hereinafter called "Inventions") created, devised or Improved by the Employee during the term of employment relating to the business of the Company shall be the sole and exclusive property of the Company and shall be treated in a confidential manner pursuant to the Section 13(a) above. The Employee shall fully disclose all such Inventions to the Company. The handling of any Inventions made by the Employee during employment term shall be governed by the provisions set forth below: (i) The Employee agrees that any Inventions made by the Employee, solely or Jointly with others, during the term of this Agreement, that are made with the Company's equipment, supplies, facilities, trade secrets, or time; or that relate, at the time of conception or of reduction to practice, to the business of the Company or to the Company or the Company's actual or demonstrably anticipated research or development; or that result from any work performed by the Employee for the Company, shall belong to the Company, and promises to assign all such Inventions to the Company. (ii) The Employee also agrees that the Company shall have the right to keep any such Inventions as trade secrets, if the Company so chooses. (iii) The Employee agrees to assign to the Company all rights any other inventions. (iv) In order to permit the Company to claim rights to which it may be entitled, the Employee agrees to disclose to the Company in confidence all Inventions that Employee makes during the course of his employment and all patent applications filed by the Employee within a year after termination of his employment. (v) The Employee shall assist the Company in obtaining patents on all Inventions, designs, improvements, and discoveries deemed patentable by the Company in the United States and in all foreign countries, and shall execute all documents and do all things necessary to obtain letters patent, to vest the Company with full and exclusive title thereto, and to protect the same against infringement by others. (vi) For the purposes of this Agreement, an Invention is deemed to have been made during the period of the Employee's employment if the Invention was conceived or first actually reduced to practice during that period, and the Employee agrees that any patent application filed within one year after termination of his employment hereunder shall be presumed to relate 5 6 to an invention made during the term of the Employee's employment unless the Employee can provide conclusive written evidence to the contrary. 14. During the term of this Agreement, the Employee agrees that he will not, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any line of business in any geographical area in which the Company is engaged or has under development. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (Ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, directly or indirectly, be interested in any manner as partner, officer, director, stockholder (other than a passive investor, which shall be defined as ownership of less than 1% of the equity of a publicly traded corporation or association), consultant, advisor, employee or in any other capacity in or with respect to any other firm, corporation, partnership, trust, association or organization which is engaged in any lines of business in which the Company is engaged or has under development in any county of any state in which the Company is doing business. After the date of the termination of Employee's employment, whether pursuant to Section 10 or 11 hereof or otherwise, Employee agrees that he will not, during the period commencing on the date of termination and continuing for the longer of (i) 365 days after termination or (ii) so long as the Company is timely paying the Termination Amount each year and all other amounts due hereunder, (A) entice, induce, solicit, or encourage any employee to leave the employ of the Company to engage in any line of business in which the Company is engaged or has under development as of the date of termination of Employee's employment with the Company or (B) hire any other employee of the Company to engage in any lie of business if such employee's base salary and any fixed or guaranteed bonus per year will be more than $50,000. 15. In the event that any court or tribunal of proper jurisdiction and venue shall find that the restrictions contained in Section 14 above are unreasonable, the parties agree that such court shall determine a reasonable time and/or geographical area for such restrictions. To the extent that any other obligations set forth in this Agreement shall be declared invalid or unenforceable, said clause of obligation shall be deemed to be severable, and the remaining obligations imposed by the provisions of this Agreement shall be fully enforceable as if such invalid or unenforceable provisions had not been included herein. 16. The Employee agrees that the remedy at law for any breach or threatened breach of the restrictions contained in Section 14 above will be inadequate, and that any breach or threatened breach would cause immediate and permanent damages as would be impossible to ascertain. Therefore, the Employee agrees that in the event of any breach or threatened breach of any provisions of Section 14 above by him, addition to any and all legal, equitable and arbitral remedies available to the Company for such breach or threatened breach, including a recovery of damages, the Company shall be entitled to obtain in any court or tribunal having jurisdiction preliminary or permanent injunctive relief without 6 7 the necessity of proving actual damage by reason of such breach, and to the extent permissible under the application statutes and rules of procedure, a temporary restraining order may be granted immediately upon commencement of such action. 17. The Employee represents and warrants that (a) he is not a party to or bound by any agreement or subject to any restriction or limitation, whether written, oral or arising out of any prior or current relationship, which would be violated or impaired by his entering into, and performing for the Company his obligations under this Agreement and (b) he does not possess confidential information arising out of any such relationship which would be utilized in connection with his employment by the Company. 18. This Agreement supersedes all prior agreements and understandings between the parties with respect to the employment and understandings between the parties with respect to the employment contemplated herein and sets forth a complete agreement and understanding of the parties. No change, termination or attempted waiver of any of the provisions of this Agreement shall be of any force or effect unless the same is set forth in writing, duly adopted by written resolution of the Board, and duly executed by the party against which it is sought to be enforced. 19. The failure of either party to insist in one or more instances upon the terms and conditions of this Agreement, or to exercise any right hereunder, shall not be construed as a waiver of the future performance of any such term or the future exercise of such right, and the obligation of each party with respect to such future performance shall continue in full force and effect. 20. It is the intention of the Company and the Employee that this Agreement and the performance hereunder and all suits and special proceedings that might be brought pursuant hereto be construed in accordance with the laws of the State of California, and that in any action, special proceeding, or other proceeding that may be brought arising out of, or in connection with, or by reason of this Agreement, the laws of the State of California shall be applicable and shall govern to the exclusion of the law of any other forum, without regard to the jurisdiction in which any action or special proceeding may be instituted. 21. Any controversy or claim arising out of or relating to this Agreement or its interpretation or the breach thereof shall be determined by arbitration before the American Arbitration Association, which arbitration shall be held in Los Angeles, California in accordance with the Commercial Arbitration Rules of said American Arbitration Association. The award of the arbitrator shall be final and binding on the parties and may be entered as a judgment or decree in any court having jurisdiction of such proceedings. The costs and legal fees of all parties to any arbitration proceeding shall be borne by the party against whom the award is made. 22. This Agreement is not assignable by the Employee, but is assignable by the Company to any subsidiary, parent, affiliated or associated company or any company which purchases the assets of the Company. As used herein, the term "the Company" shall include any company to which this Agreement shall have been assigned. 23. Any and all notices, requests, demands or other communications hereunder shall be in writing and shall be deemed given when delivered personally or sent by 7 8 certified mail or registered mail, postage prepaid to each of the parties at the following addresses: Employee: Thomas K. Rankin 6011 Bristol Parkway Culver City, CA 90230 The Company: Protection One, Inc. 6011 Bristol Parkway Culver City, CA 90230 Attn: Chairman of the Board Any party may change his address for the purposes of this Section by giving written notice of such change to the other party in the manner herein provided for giving notice. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first written above. EMPLOYER EMPLOYEE PROTECTION ONE, INC. By: /s/ JAMES M. MACKENZIE, JR. /s/ THOMAS K. RANKIN ----------------------------------- ------------------------------------ James M. Mackenzie, Jr. Thomas K. Rankin President and Chief Executive Officer 8 -----END PRIVACY-ENHANCED MESSAGE-----