-----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, ALq0cbWvZQfi5TkPtvHqCTJ8G9JEFWTJw0BnwIZ94k+Heihd7ICG9cft+PftPr+S tBoqoNHZTEwTQabNluALUg== 0000950116-96-001003.txt : 19960926 0000950116-96-001003.hdr.sgml : 19960926 ACCESSION NUMBER: 0000950116-96-001003 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960925 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLMES PROTECTION GROUP INC CENTRAL INDEX KEY: 0000926764 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 061070719 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09025 FILM NUMBER: 96634063 BUSINESS ADDRESS: STREET 1: 440 9TH AVE CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2127600630 MAIL ADDRESS: STREET 1: 440 9TH AVENUE CITY: NEW YORK STATE: NY ZIP: 10001 S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996 REGISTRATION NO. 333-9025 ============================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ Amendment No. 1 to FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------ HOLMES PROTECTION GROUP, INC. (Exact name of registrant as specified in its charter)
Delaware 7382 06-1070719 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification No.)
440 Ninth Avenue George V. Flagg New York, New York 10001-1695 President and Chief Executive Officer (212) 760-0630 440 Ninth Avenue (Address, including zip code, and New York, New York 10001-1695 telephone number, (212) 760-0630 including area code, of registrant's (Name, address, including zip code, principal executive offices) and telephone number, including area code, of agent for service ------ Copies to: Jeffrey W. Rubin, Esq. Michael Hirschberg, Esq. Squadron, Ellenoff, Plesent & Piper & Marbury L.L.P. Sheinfeld, LLP 1251 Avenue of the Americas 551 Fifth Avenue New York, New York 10020 New York, New York 10176 (212) 835-6000 (212) 661-6500 ------ Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ================================================================================
Proposed Proposed Amount to be Maximum Maximum Amount of Title of Each Class of Registered Offering Price Aggregate Registration Securities to be Registered (1) Per Share Offering Fee Price - ---------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share 1,150,000 $9.75 $11,212,500 $3,866.38(2) - ---------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share 115,000 $11.00 $1,265,000 $436.21(3)
================================================================================ (1) Includes 165,000 shares which the Underwriters have the option to purchase from the Company solely to cover over-allotments. (2) Registration fee paid previously. (3) Additional registration fee paid herewith, computed pursuant to Rule 457(a) under the Securities Act of 1933, as amended, on the basis of the offering price of the additional shares of the Company's Common Stock. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ============================================================================= CROSS-REFERENCE SHEET Showing Location in Prospectus of Information Required by Items of Form S-1 Pursuant to Item 501(b) of Regulation S-K
Registration Statement Item and Heading Location in Prospectus - --------------------------------------- --------------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus...................... Outside Front Cover of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges .......................... Prospectus Summary; Risk Factors; Not Applicable 4. Use of Proceeds .................................... Prospectus Summary; Use of Proceeds 5. Determination of Offering Price .................... Outside Front Cover of Prospectus; Underwriting 6. Dilution ........................................... Not Applicable 7. Selling Security Holders ........................... Not Applicable 8. Plan of Distribution ............................... Outside Front Cover of Prospectus; Underwriting 9. Description of Securities to be Registered.......... Description of Capital Stock 10. Interests of Named Experts and Counsel.............. Legal Matters 11. Information with Respect to the Registrant ......... Prospectus Summary; Risk Factors; Use of Proceeds; Price Range of Common Stock and Dividend Policy; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal Stockholders; Description of Capital Stock; Financial Statements; Financial Statement Schedules 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Not Applicable 13. Other Expenses of Issuance and Distribution ........ Part II 14. Indemnification of Directors and Officers........... Part II 15. Recent Sales of Unregistered Securities............. Part II 16. Exhibits and Financial Statement Schedules.......... Part II; Exhibits 17. Undertakings ....................................... Part II
PROSPECTUS LOGO 1,100,000 SHARES HOLMES PROTECTION GROUP, INC. COMMON STOCK ------ All of the 1,100,000 shares of common stock, par value $.01 per share (the "Common Stock"), offered hereby are being sold by Holmes Protection Group, Inc. ("Holmes" or the "Company"). On September 23, 1996, the Company's Common Stock began trading on the Nasdaq National Market under the symbol "HLMS." From March 27, 1995 to September 20, 1996, the Common Stock traded on the Nasdaq SmallCap Market and prior thereto, the Common Stock traded on the London Stock Exchange. On September 24, 1996, the last sale price for the Common Stock as reported by the Nasdaq National Market was $10.50. ------ The shares offered hereby involve a high degree of risk. See "Risk Factors" beginning on page 6 hereof. ------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================== Underwriting Price to Discounts and Proceeds Public Commissions (1) to Company (2) - ------------------------------------------------------------------------------- Per Share ..... $11.00 $0.88 $10.12 - ------------------------------------------------------------------------------- Total (3) .... $12,100,000 $968,000 $11,132,000 =============================================================================== (1) The Company has agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the offering payable by the Company estimated to be $500,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to an aggregate of 165,000 additional shares of Common Stock on the same terms and conditions as the Common Stock offered hereby solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $13,915,000, $1,113,200 and $12,801,800, respectively. See "Underwriting." The shares of Common Stock offered hereby are offered by the Underwriters, subject to prior sale when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the certificates representing shares of Common Stock will be made at the offices of Brean Murray & Co., Inc. in New York, New York on or about September 30, 1996. ------ BREAN MURRAY & CO., INC. ------ The date of this Prospectus is September 25, 1996 Public Offices Holmes Protection Group, Inc. Industrial Sites Still the First. Protecting People and Property Since 1858. [LOGO] Commercial Facilities Residential Premises ------ IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." The shares of Common Stock offered hereby involve a high degree of risk and investors should carefully consider information set forth in "Risk Factors." Unless otherwise indicated, all information contained in this Prospectus assumes that the Underwriters' over-allotment option as described in "Underwriting" is not exercised. THE COMPANY Holmes provides security alarm monitoring services and designs, sells, installs and services electronic security systems for commercial and mid- to high-end residential subscribers. These systems include event detection devices, surveillance equipment and access control devices which restrict access to specified areas. The Company currently provides its services in the Northeast, primarily in New York, New Jersey and Pennsylvania, and conducts its operations through four branch offices, two central monitoring stations and 46 independent alarm service dealers and franchisees. In addition, the Company recently acquired a central monitoring station in Southern California which provides monitoring services for other alarm companies. According to a published survey, the Company was the twelfth largest provider of electronic security services in the United States in terms of total 1995 revenues. Following an internal management transition and reorganization that occurred during 1995, the Company engaged the services of several former senior executives of The National Guardian Corporation ("National Guardian"), a large national electronic security alarm services company which was acquired by Ameritech Monitoring Services, Inc. in October 1995. Among the executives hired by the Company was George V. Flagg, the Company's President and Chief Executive Officer, who served as the President and Chief Executive Officer of National Guardian from 1986 to 1995. During Mr. Flagg's tenure, National Guardian became one of the four largest electronic security services companies in the United States based upon revenues, which grew from approximately $40 million in 1985 to over $200 million in 1995. Under the direction of the Company's new management team, the Company is implementing a new business strategy involving a combination of strategic acquisitions and internal growth. In regard to strategic acquisitions, the Company intends to pursue both (i) fold-in acquisitions, which consist of businesses or portfolios of alarm monitoring accounts that can be readily combined with the Company's existing branch offices and management structure and (ii) new market acquisitions, which consist of companies in the electronic security services industry located outside the Company's current geographic market. In regard to its internal growth strategy, the Company intends to capitalize on public recognition of the historic Holmes brand name (which has been utilized in the security services industry since 1858) in connection with (i) expanding its security services product offerings, including the HolmesNet system for wireless data communications; (ii) establishing a national accounts program; (iii) increasing its sales and marketing efforts; and (iv) expanding its dealer operations. The Company's revenues consist primarily of recurring payments under written contracts for security alarm monitoring activities and associated services, which represented approximately 74% of total revenues in 1995. The Company monitors digital alarm signals arising from various activities, including burglaries, fires and other events, through security systems installed at subscribers' premises. These signals are received and processed at one of the Company's central monitoring stations. In order to reduce overall manpower requirements, achieve economies of scale and other cost efficiencies, and enhance the quality of service being provided, the Company is in the process of consolidating its central monitoring stations located in the Northeast into one state-of-the-art facility with monitoring capacity of approximately 60,000 accounts. In order to avail itself of more extensive technological resources, the Company entered into a ten-year information technology services agreement with a subsidiary of Electronic Data Systems Corporation ("EDS") in 1995. Pursuant to this agreement, the Company has consolidated four central monitoring stations into two, and completion of the consolidation activities is scheduled for the fourth quarter of 1996. The Company currently monitors approximately 35,000 accounts from its central monitoring stations located in the Northeast and 14,500 accounts from its central monitoring station located in Southern California. An additional 16% of the Company's total revenues in 1995 was comprised of direct sales and installation of security equipment. 3 The balance of the Company's revenues in 1995 was derived from (i) jewelry vault rentals, (ii) insured parcel delivery services for the jewelry trade and (iii) royalty fees and product sales relating to its franchise and dealer operations. Approximately 80% of the Company's business is derived from commercial customers, including financial institutions, jewelry and fine art dealers, corporate headquarters, manufacturers, distribution facilities and health care and education facilities. The Company's residential business focuses principally on mid- to high-end customers. Electronic security services is a consolidating but still a highly fragmented industry, consisting of a large number of local and regional companies and several integrated national companies. The fragmented nature of the industry can be attributed to the low capital requirements associated with performing basic installation and maintenance of electronic security systems. However, the business of a full service, integrated electronic security services company providing central station monitoring services is capital intensive, and the Company believes that the high fixed costs of establishing both central monitoring stations and full service operations contribute to the small number of national competitors. The low marginal cost of monitoring additional customers has been one of the principal factors leading full service, integrated electronic security services companies to seek acquisitions of other electronic security businesses to consolidate into their existing operations. The principal focus of the Company's business strategy is to aggressively pursue acquisitions in this environment. The Company was incorporated as a Delaware corporation on October 29, 1982. The Company's principal executive offices are located at 440 Ninth Avenue, New York, New York 10001-1695, and its telephone number is (212) 760-0630. Unless the context indicates otherwise, references to the "Company" or "Holmes" in this Prospectus are to Holmes Protection Group, Inc. and its direct and indirect subsidiaries. THE OFFERING
Common Stock Offered by the Company .............. 1,100,000 shares Common Stock Outstanding After the Offering(1) ... 5,663,062 shares Use of Proceeds .................................. To finance the Company's business expansion plans, including pursuing strategic acquisitions, expanding its security services product offerings, establishing a national accounts program, increasing its sales and marketing efforts, and expanding its dealer operations. Nasdaq National Market Symbol .................... "HLMS"
- ------ (1) Excludes (i) 57,846 and 165,429 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Executives Plan and the Directors Plan (each as defined in "Management--Stock Option Plans"), respectively; (ii) 878,864 shares of Common Stock reserved for issuance upon exercise of the Investor Warrants and Institution Warrants (each as defined in "Risk Factors--Control by Certain Stockholders"); (iii) 166,666 shares of Common Stock reserved for issuance upon exercise of the New Bank Warrants (as defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources"); and (iv) 830,000 shares of Common Stock reserved for issuance upon exercise of options which have been granted under the 1996 Stock Incentive Plan (the "1996 Plan"), subject to and conditioned upon stockholder approval of the 1996 Plan at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. See "Management--Stock Option Plans," "Business--Historical Developments" and Notes 7 and 8 to Notes to Consolidated Financial Statements. 4 SUMMARY FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended June 30, Year Ended December 31, ----------------------------- ------------------------------------------------------------ (unaudited) 1996 1995 1995 1994 1993 1992 1991 ---------- --------------- ---------- ---------- ---------- ---------- --------- Statement of Operations Data:(1) Revenues .......................... $24,483 $25,123 $50,075 $51,402 $53,500 $56,173 $59,042 Cost of sales (exclusive of depreciation expense) ............ (12,809) (12,563) (26,262) (24,885) (26,916) (29,560) (32,152) Gross profit ...................... 11,674 12,560 23,813 26,517 26,584 26,613 26,890 Selling, general and administrative expenses ......................... (6,844) (7,760) (16,668) (15,051) (17,837) (17,287) (18,157) Depreciation and amortization ..... (5,432) (5,095) (10,390) (9,736) (8,919) (8,139) (8,034) Income (loss) before cumulative effect of change in accounting principle and extraordinary item . (736) (640) (3,674) 404 (55) (3,795) (73,066) Net income (loss) ................. (736) 1,837 (1,197) 404 (55) 19,392 (73,066) Income (loss) per common share before cumulative effect of change in accounting principle and extraordinary item ............... (0.17) (0.14) (0.82) 0.11 (0.02) (3.04) (372.10) Net income (loss) per common share(2) ......................... (0.17) 0.41 (0.27) 0.11 (0.02) 15.54 (372.10) Weighted average shares outstanding 4,459 4,459 4,459 3,580 2,944 1,250 196 At June 30, 1996 ----------------------------- (unaudited) Actual As Adjusted(3) Balance Sheet Data: Working capital ................... $(6,176) $4,456 Total assets ...................... 76,601 87,233 Long-term debt, net of current maturities ....................... 3,668 3,668 Shareholders' equity .............. 46,936 57,568
- ------ (1) Results of operations vary significantly among the years due to several reorganizations and a recapitalization of the Company. Net loss for 1995 reflects the effect of a non-recurring charge of $2,074,000 recorded in the fourth quarter of 1995 and the cumulative effect of a change in the method of accounting for non-refundable payments received from customers for company-owned systems resulting in a net credit after tax of $2,477,000. See Notes 3 and 4 to Notes to Consolidated Financial Statements for further explanations. Net income for 1992 reflects the effect of an extraordinary gain, net of tax of $23,187,000, resulting from the restructuring of debt that occurred in August 1992. Net income for 1991 includes a non-recurring charge of $70,412,000 for the writedown of subscriber contracts, goodwill, fixed assets and other items resulting from management's assessment of the adequacy of the carrying values of such assets and other non-recurring expenses. (2) The net income (loss) per common share data has been adjusted to give effect to the one-for-fourteen reverse stock split of the Common Stock on March 27, 1995. (3) Adjusted to reflect the sale of 1,100,000 shares of Common Stock offered by the Company hereby at the offering price set forth on the cover page of this Prospectus (after deducting underwriting discounts and commissions and estimated offering expenses) and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." 5 RISK FACTORS This Prospectus contains certain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of certain uncertainties set forth below and elsewhere in this Prospectus. An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to the other information set forth in this Prospectus, in connection with an investment in the shares of Common Stock offered hereby. RECENT NET LOSSES AND ACCUMULATED DEFICIT The Company incurred a net loss of $1,197,000 in 1995. This loss reflects the effect of a non-recurring charge of $2,074,000 and the cumulative effect of the change in the method of accounting for non-refundable payments received from customers for company-owned systems resulting in a net credit after tax of $2,477,000. The Company had net income of $404,000 in 1994 and net loss of $55,000 in 1993. At December 31, 1995, the Company had an accumulated deficit of $70,188,000, up from $68,991,000 at December 31, 1994, and a working capital deficit of $5,246,000 up from $1,818,000 at December 31, 1994. Although the Company has experienced a decline in revenues in recent years, the percentage rate of decline in revenues over the past three years has been reduced. For a further discussion of the effect of the non-recurring charge and the cumulative effect of the change in the method of accounting for non-refundable payments, see Notes 3 and 4 to Notes to the Consolidated Financial Statements. See "Risk Factors -- Customer Cancellation Rates" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." GEOGRAPHIC CONCENTRATION The Company's existing subscriber base is geographically concentrated in New York, New Jersey and Pennsylvania. Accordingly, the performance of the Company may be adversely affected by regional or local economic conditions. The Company may from time to time make acquisitions in regions outside of its current operating area. The acquisition of companies in other regions, or in metropolitan areas in which the Company does not currently have subscribers, requires an investment by the Company. In order for the Company to expand successfully into a new area, the Company must acquire companies with a sufficient number and density of subscriber accounts in such area to support the investment. There can be no assurance that the Company will find such opportunities or that an expansion into new geographic areas will generate operating profits. RISK RELATED TO GROWTH THROUGH ACQUISITIONS One of the Company's primary strategies is to increase its revenues and the markets it serves through the acquisition of other companies in the electronic security services industry and portfolios of alarm monitoring accounts. There can be no assurance that the Company will be able to acquire or profitably manage suitable acquisition candidates or successfully integrate such businesses into its operations without substantial costs, delays or other problems. In addition, there can be no assurance that any businesses acquired will be profitable at the time of their acquisition or will achieve sales and profitability that justify the investment therein or that the Company will be able to realize expected operating and economic efficiencies following such acquisitions. Acquisitions may involve a number of special risks, including adverse effects on the Company's reported operating results, diversion of management's attention, increased burdens on the Company's management resources and financial controls, dependence on retention and hiring of key personnel, risks associated with unanticipated problems or legal liabilities, and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's operations and financial performance. See "Use of Proceeds" and "Business -- Business Strategy." CUSTOMER CANCELLATION RATES The Company is heavily dependent on its recurring monitoring and service revenues. Given the relatively fixed nature of monitoring and service expenses, increases and decreases in monitoring and service revenues have a significant impact on the Company's profitability. Substantially all of the Company's monitoring and ser- 6 vice revenues are derived from recurring charges to subscribers for the provision of various services. Although no single subscriber represents more than one-half of one percent of the Company's recurring revenue base, the Company is vulnerable to subscribers cancelling their contracts. In recent years, lost recurring revenues from such cancellations have exceeded the new recurring revenues added by the Company's sales efforts. However, the Company's cancellation rate (as defined in detail below), representing lost recurring revenues from cancellations as a percentage of gross recurring revenues, decreased significantly from 15.2% in 1991 to 10.9% in 1995. Although the Company's rate of subscriber cancellations has been substantially reduced since 1991, there can be no assurance that this rate may not increase in the future for a variety of reasons associated with general economic conditions, market competition and the level of customer satisfaction with the Company's services. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." As described herein, the "cancellation rate" means the gross recurring revenues lost through cancellation in a given period; less those recurring revenues derived from subscribers who cancel their service with the Company in order to move and then contract for the Company's services at their new premises; and less those recurring revenues derived from new subscribers who occupy a vacant premises where the Company has an existing company-owned system and who contract for the Company's services using that equipment; divided by the gross recurring revenues in force at the beginning of the period, annualized and expressed as a percentage. COMPETITION The electronic security services industry is highly competitive and fragmented. The Company competes with national and regional companies, as well as smaller local companies, in all of its operations. Furthermore, new competitors are continuing to enter the industry and the Company may encounter additional competition from such future industry entrants. Subject to regulatory compliance, certain companies engaged in the telephone and cable business are competing in the electronic security services industry and other such companies may, in the future, enter the industry. Certain of the Company's current competitors have, and new competitors may have, substantially greater financial resources than the Company. See "Business -- Competition." SIGNIFICANT OWNERSHIP OF COMMON STOCK BY CERTAIN STOCKHOLDERS The Company believes that at September 24, 1996, seven U.S. insurance companies and other institutions (the "Institutions") owned approximately 35% (37% including warrants to purchase an aggregate of 193,150 shares of Common Stock at $10.68 per share (the "Institution Warrants") of the Company's outstanding shares of Common Stock. Following this offering, the Institutions will own approximately 28% (30% including the Institution Warrants) of the Company's outstanding shares of Common Stock. Pursuant to the Exchange Agreement, dated as of December 18, 1991, which agreement was amended as of January 31, 1992, May 24, 1992 and June 30, 1992 (the "Exchange Agreement"), between the Institutions and the Company, the Institutions will be entitled to nominate two directors (the "Institution-Nominees") to the Board based on their ownership of Common Stock upon consummation of this offering. At September 24, 1996, HP Partners L.P., a Delaware limited partnership (the "Investor"), owned approximately 33% (42% including warrants to purchase 685,714 shares of Common Stock at an exercise price of $4.58 per share (the "Investor Warrants") of the Company's outstanding shares of Common Stock. Following this offering, the Investor will own approximately 27% (35% including the Investor Warrants) of the Company's outstanding shares of Common Stock. Pursuant to the Investment Agreement dated as of June 29, 1994 between the Investor and the Company (the "Investment Agreement"), the number of directors the Investor is entitled to nominate to the Board (the "Investor-Nominees") upon consummation of this offering will be reduced from four to three directors. Following the offering, the size of the Board will remain at nine members. The Company anticipates that the Investor will cause one of the Investor-Nominees to resign from the Board upon consummation of this offering. However, as of today's date, the Company does not know which Investor-Nominee will resign and has no immediate plans to fill the anticipated vacant seat on the Board created by such resignation. As of a result of these separate agreements with the Company, the Institution-Nominees and the Investor-Nominees constitute a majority of the Company's directors and are therefore in a position to control the Company. See "Business -- Historical Developments." LIABILITY FOR EMPLOYEE ACTS AND DEFECTIVE EQUIPMENT The nature of the security services provided by the Company potentially exposes it to greater risk of liability claims for employee acts or omissions or system failure than may be inherent in many other service busi- 7 nesses. Although (i) substantially all of the Company's customers have subscriber agreements which contain provisions for limited liability and predetermined liquidated damages and (ii) the Company carries insurance which it believes provides adequate coverage for businesses of the Company's type, there can be no assurance that such existing arrangements will prevent the Company from being adversely affected as a result of damages arising from the acts of its employees, defective equipment or because some jurisdictions prohibit or restrict limitations on liabilities and liquidated damages. In addition, certain of the Company's insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive damages and for certain other kinds of damages arising from employee misconduct. See "Business -- Risk Management." POSSIBLE ADVERSE EFFECTS OF GOVERNMENT REGULATIONS The Company's operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. Many of the states in which Holmes operates, as well as certain local authorities, require Holmes to obtain licenses or permits to conduct a security alarm services business. Certain governmental entities also require persons engaged in the security alarm services business to be licensed and to meet certain standards in the selection and training of employees and in the conduct of business. The loss of such licenses, or the imposition of conditions on the granting or retention of such licenses, could have a material adverse effect on the Company. The Company believes that it holds the required licenses and is in substantial compliance with all licensing and regulatory requirements in each jurisdiction in which it operates. See "Business -- Regulation." DEPENDENCE UPON SENIOR MANAGEMENT The success of the Company's business is dependent upon the active participation of the executive officers of the Company, most of whom have only recently been employed by the Company. In the event that the services of certain of such officers are lost for any reason, the Company's business may be materially and adversely affected. See "Management -- Directors and Executive Officers of the Company." POSSIBLE ANTI-TAKEOVER EFFECTS OF DELAWARE LAW The Company is subject to the provisions of Section 203 of the General Corporation Law of Delaware. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner or unless the interested stockholder acquires at least 85% of the corporation's voting stock (excluding shares held by certain designated stockholders) in the transaction in which it becomes an interested stockholder. A "business combination" includes mergers, asset sales, and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within the previous three years did own, 15% or more of the corporation's voting stock. This provision of the Delaware law could delay and make more difficult a business combination even if the business combination could be beneficial, in the short term, to the interests of the stockholders. This provision of the Delaware law could also limit the price certain investors might be willing to pay in the future for shares of Common Stock. CLASSIFIED BOARD OF DIRECTORS; NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SUPERMAJORITY VOTING Certain provisions of the Restated Certificate of Incorporation could have an anti-takeover effect by making it more difficult to acquire the Company by means of (i) a tender offer, a proxy contest or otherwise and (ii) the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to negotiate first with the Company. However, these provisions could also delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by the Company's stockholders. The Company's Restated Certificate of Incorporation and By-Laws provide for the division of the Board into three classes of directors serving staggered three-year terms. The By-Laws provide that the size of the Board 8 shall be nine, provided that the Board, by vote of three-quarters of the directors then in office, may increase or decrease the number of directors in any class. The classified board provision may prevent any party who acquires control of a majority of the outstanding voting stock of the Company from obtaining control of the Board until the second annual stockholders meeting following the date the acquiror obtains the controlling interest. See "Business -- Historical Developments/The 1994 Investment Agreement" and "-- Historical Developments/The 1992 Restructuring" for a description of certain arrangements relating to the size and composition of the Board. The Restated Certificate of Incorporation of the Company also provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of meeting. Additionally, the Restated Certificate of Incorporation requires an affirmative vote of three-quarters of the Company's voting power (unless three-quarters of the total number of directors then in office shall have approved the amendment) to amend the provisions of the Restated Certificate of Incorporation with respect to the number and classification of the Board, stockholder action without written consent, director liability, indemnification and amendments to the Restated Certificate of Incorporation. See "Business -- Historical Developments/Other Certificate of Incorporation and By-Law Provisions." POSSIBLE ADVERSE EFFECT OF "FALSE ALARMS" ORDINANCES According to certain data concerning the residential security alarm market prepared in 1995 by J.P. Freeman & Co. (the "Freeman Data"), approximately 97% of alarm activations that result in the dispatch of police or fire department personnel are not emergencies, and thus are "false alarms." Significant concern has arisen in certain municipalities about this high incidence of false alarms. This concern could cause a decrease in the likelihood or timeliness of police response to alarm activations and thereby decrease the propensity of consumers to purchase or maintain alarm monitoring services. A number of local governmental authorities have considered or adopted various measures aimed at reducing the number of false alarms. Such measures include (i) subjecting alarm monitoring companies to fines or penalties for transmitting false alarms, (ii) licensing individual alarm systems and the revocation of such licenses following a specified number of false alarms, (iii) imposing fines on alarm subscribers for false alarms, (iv) imposing limitations on the number of times the police will respond to alarms at a particular location after a specified number of false alarms and (v) requiring further verification of an alarm signal before the police will respond. Enactment of such measures could adversely affect the Company's future business and operations. POSSIBLE VOLATILITY OF STOCK PRICE The stock market has from time to time experienced extreme price and volume fluctuations that have been unrelated to the operating performance of particular companies. The market price of the Company's Common Stock may be significantly affected by quarterly variations in the Company's operating results, changes in financial estimates by securities analysts or failure by the Company to meet such estimates, litigation involving the Company, general trends in the security alarm industry, actions by governmental agencies, national economic and stock market conditions, industry reports and other factors, many of which are beyond the control of the Company. See "Price Range of Common Stock and Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS Upon completion of this offering, the Company will have 5,663,062 shares of Common Stock outstanding (5,828,062 shares if the Underwriters' over-allotment option is exercised in full). In addition, 878,864 shares of Common Stock are reserved for issuance upon the exercise of outstanding Investor Warrants and Institution Warrants, 166,666 shares of Common Stock are reserved for issuance upon exercise of outstanding New Bank Warrants (as hereinafter defined in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources"), 223,275 shares of Common Stock are reserved for issuance upon exercise of outstanding options and 830,000 shares of Common Stock are reserved for issuance upon exercise of options which have been granted under the 1996 Plan, subject to and conditioned upon stockholder approval of the 1996 Plan at the Company's annual meeting of stockholders, scheduled for October 31, 1996. Substantially all of the shares of Common Stock outstanding following this offering will be freely tradeable, except for (i) any such shares held at any time by an "affiliate" of the Company, as such term is defined under 9 Rule 144 promulgated under the Securities Act ("Rule 144"), (ii) certain shares subject to the Registration Rights Agreements described below and (iii) shares subject to the "lockup agreements" described below. The possibility that substantial amounts of Common Stock may be sold in the public market could have a material adverse effect on prevailing market prices of the Common Stock and could impair the Company's ability to raise capital or make acquisitions through the sale of its equity securities. The Company, its officers and directors and certain of its principal stockholders (who beneficially hold in the aggregate 4,031,495 shares of Common Stock, including shares of Common Stock issuable upon exercise of outstanding options and warrants beneficially owned by them), have agreed not to sell, offer to sell, issue, distribute or otherwise dispose of any shares of Common Stock of the Company for a period of 90 days from the date of this Prospectus (subject, in the case of the Company, to certain limited exceptions), without the prior written consent of the Representative (as hereinafter defined in "Underwriting"). See "Shares Eligible for Future Sale" and "Underwriting." Pursuant to the terms of their Registration Rights Agreements (as hereinafter defined in "Business -- Historical Developments"), the Investor and each Institution have been granted certain registration rights with respect to their shares of Common Stock presently held or shares of Common Stock issuable upon exercise of their warrants. In connection with this offering, the Investor and each Institution have waived their respective registration rights for a period of 180 days from the date of this Prospectus. In the future, however, the Company may experience added costs and complexity in the event such registration rights are exercised. In addition, the exercise of such rights could have an adverse effect on the market price of the Common Stock. See "Business -- Historical Developments." 10 USE OF PROCEEDS The net proceeds to the Company from the sale of shares of Common Stock offered hereby after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, are estimated to be $10,632,000 ($12,301,800 if the Underwriters' over-allotment option is exercised in full), based upon the public offering price set forth on the cover page of this Prospectus. The Company currently intends to use the net proceeds from the sale of the Common Stock offered hereby to pursue its business strategy, as follows:
Percentage of Net Proceeds -------------- Funding Strategic Acquisitions ................ 45% Establishing a National Accounts Program ...... 25% Expanding Dealer Operations ................... 15% Increasing Sales and Marketing Efforts ........ 10% Expanding Security Services Product Offerings . 5% -------------- 100% ==============
The Company has entered into a letter of intent to purchase the assets of a Texas-based alarm company (the "Texas Company"). The consideration to be paid by the Company with respect to this acquisition is expected to consist of cash received from the proceeds of this offering. The acquisition of the Texas Company is subject to the negotiation and execution of definitive agreements with the Texas Company and there can be no assurance that this purchase will be consummated. The proposed acquisition would not be deemed significant under applicable accounting rules and, accordingly, would not require separate financial statements to be included in this Prospectus. The Company is actively exploring other acquisition opportunities and has had discussions with a number of acquisition candidates. Except as discussed above, the Company has not entered into any other contracts, understandings or arrangements for any acquisition. Any decision to make an acquisition will be based upon a variety of factors, including the purchase price and other financial terms of the transaction, the business prospects and competitive position of and services provided by the acquisition candidate and the extent to which any such acquisition would enhance the Company's future prospects. In addition, bank approval is necessary for certain acquisitions in accordance with the Company's Credit Facility (as hereinafter defined in "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources"). See "Risk Factors -- Risk Related to Growth Through Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Business -- Business Strategy." The foregoing represents the Company's best estimate of its allocation of the estimated net proceeds from the sale of shares of Common Stock offered hereby and is subject to a reapportionment of proceeds among the categories listed above or to new categories in response to, among other things, changes in the Company's business plans, industry conditions and future revenues and expenditures. The amount and timing of expenditures will vary depending on a number of factors, including changes in the Company's contemplated operations or business plan and changes in economic and industry conditions. Pending the application of such proceeds, the Company intends to invest the net proceeds of this offering in government securities and investment-grade, short-term interest-bearing securities. 11 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock began trading on the Nasdaq National Market on September 23, 1996 under the symbol "HLMS." From March 27, 1995 to September 20, 1996, the Common Stock traded on the Nasdaq SmallCap Market and prior thereto, the Common Stock traded on the London Stock Exchange through March 24, 1995. The following table sets forth, as applicable for the periods indicated, the range of the high and low mid-market closing prices for the Common Stock as reported by the London Stock Exchange and the range of high and low sale prices as reported by the Nasdaq SmallCap Market. The prices set forth below have been adjusted to give effect to the one-for-fourteen reverse stock split of the Common Stock effected on March 27, 1995.
U.S. Dollars* British Pounds ------------------ ------------------ High Low High Low ------- ------- ------- ------- 1994 pounds pounds sterling sterling First Quarter .................. $ 7.70 $6.72 5.18 4.48 Second Quarter ................. 6.86 3.78 4.48 2.52 Third Quarter .................. 6.58 5.46 4.20 3.50 Fourth Quarter ................. 6.30 4.90 3.92 3.08 1995 First Quarter (on London Stock pounds pounds Exchange through March 24, sterling sterling 1995) ........................ $ 6.25 $5.81 3.92 3.64 First Quarter (on the Nasdaq SmallCap Market effective March 27, 1995) .............. 6.25 6.25 -- -- Second Quarter ................. 7.25 5.50 -- -- Third Quarter .................. 9.25 4.25 -- -- Fourth Quarter ................. 6.50 3.75 -- -- 1996 First Quarter .................. $ 9.00 $4.38 -- -- Second Quarter ................. 9.25 7.75 -- -- Third Quarter (through September 20, 1996) .................... 11.50 9.00 -- --
- ------ * For purposes of this table, historical pound/dollar exchange rates have been used based on the average of the rates at the end of each month during each quarterly period. On September 24, 1996 the last reported sales price for the Company's Common Stock on the Nasdaq National Market was $10.50 per share. At September 19, 1996, the Company had approximately 769 stockholders of record. The Company has not paid cash dividends on the Common Stock since 1989 and does not anticipate paying such dividends in the foreseeable future. The Company currently intends to retain any future earnings for use in the Company's business. The payment of any future dividends will be determined by the Board in light of the conditions then existing, including the Company's financial condition and requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board. In addition, the Company is subject to certain restrictions regarding the payment of cash dividends and the making of other distributions in respect of the Common Stock pursuant to the Credit Facility (as hereinafter defined in "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources") and any other new financing arrangements. 12 CAPITALIZATION The following table sets forth the actual capitalization of the Company as of June 30, 1996 and as adjusted to give effect to the sale of the 1,100,000 shares of Common Stock offered by the Company hereby at the public offering price set forth on the cover page of this Prospectus (after deducting underwriting discounts and commissions and estimated offering expenses) and the application of the estimated net proceeds of $10,632,000 therefrom. See "Use of Proceeds." This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this Prospectus.
At June 30, 1996 --------------------------- (unaudited) Actual As Adjusted ---------- ------------- (in thousands) Short-term obligations: Existing term note ......................................... $ 2,250 $ 2,250 Capital lease obligations .................................. 184 184 Other debt ................................................. 34 34 ---------- ------------- Total short-term obligations ............................. $ 2,468 $ 2,468 ========== ============= Long-term obligations: Existing term note ......................................... $ 2,813 $ 2,813 Capital lease obligations .................................. 731 731 Other debt ................................................. 124 124 ---------- ------------- Total long-term obligations ............................. $ 3,668 $ 3,668 ========== ============= Shareholders' equity: Preferred Stock, $1.00 par value; 1,000,000 shares authorized; none issued and outstanding .............................. $ -- $ -- Common Stock, $.01 par value; 12,000,000 shares authorized; 4,466,399 shares issued and outstanding (5,566,399 as adjusted) (1) ............................................ 45 56 Additional paid-in capital ................................. 120,763 131,384 Accumulated deficit ........................................ (70,924) (70,924) Minimum pension liability adjustment ....................... (2,863) (2,863) Less: treasury stock (7,142 shares) ........................ (85) (85) ---------- ------------- Total shareholders' equity .............................. $ 46,936 $ 57,568 ========== =============
- ------ (1) Excludes (i) 57,846 and 165,429 shares of Common Stock reserved for issuance upon exercise of outstanding options under the Executives Plan and the Directors Plan, respectively; (ii) 878,864 shares of Common Stock reserved for issuance upon exercise of the Investor Warrants and Institution Warrants (each as defined in "Risk Factors -- Control by Certain Stockholders"); (iii) 166,666 shares of Common Stock reserved for issuance upon exercise of the New Bank Warrants; and (iv) 830,000 shares of Common Stock reserved for issuance upon exercise of options which have been granted under the 1996 Plan, subject to and conditioned upon stockholder approval of the 1996 Plan at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. See "Management -- Stock Option Plans," "Business -- Historical Developments" and Notes 7 and 8 to Notes to Consolidated Financial Statements. 13 SELECTED FINANCIAL DATA The following selected financial data for the years ended December 31, 1991, 1992, 1993, 1994 and 1995 were derived from financial statements of the Company which have been audited by Arthur Andersen LLP, independent certified public accountants. The unaudited balance sheet data as of June 30, 1996 and the unaudited statement of operations data for the six months ended June 30, 1995 and June 30, 1996 have been prepared on the same basis as the audited financial statements and in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth herein. Results for the six months ended June 30, 1996 are not necessarily indicative of the results to be expected for the year ending December 31, 1996. The data should be read in conjunction with the financial statements, related notes and the other financial information included elsewhere herein.
Six Months Ended June 30, Year Ended December 31, ------------------------ --------------------------------------------------------------- (unaudited) 1996 1995 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (in thousands, except per share amounts) Statement of Operations Data:(1) Revenues ................... $24,483 $25,123 $50,075 $51,402 $53,500 $56,173 $59,042 Cost of sales (exclusive of depreciation expense) ..... (12,809) (12,563) (26,262) (24,885) (26,916) (29,560) (32,152) Gross profit ............... 11,674 12,560 23,813 26,517 26,584 26,613 26,890 Selling, general and administrative expenses ... (6,844) (7,760) (16,668) (15,051) (17,837) (17,287) (18,157) Depreciation and amortization .............. (5,432) (5,095) (10,390) (9,736) (8,919) (8,139) (8,034) Income (loss) before income taxes and cumulative effect of change in accounting principle ...... (909) (673) (5,793) 982 145 3,803 (77,461) Income (loss) before cumulative effect of change in accounting principle and extraordinary item ........ (736) (640) (3,674) 404 (55) (3,795) (73,066) Cumulative effect of change in accounting principle ...... -- 2,477 2,477 -- -- -- -- Extraordinary item ......... -- -- -- -- -- 23,187 -- Net income (loss) .......... (736) 1,837 (1,197) 404 (55) 19,392 (73,066) Income (loss) per common share before cumulative effect of change in accounting principle and extraordinary item ........ (0.17) (0.41) (0.82) 0.11 (0.02) (3.04) (372.10) Net income (loss) per common share(2) .................. (0.17) .41 (0.27) 0.11 (0.02) 15.54 (372.10) Weighted average shares outstanding ............... 4,459 4,459 4,459 3,580 2,944 1,250 196
Six Months Ended June 30, Year Ended December 31, -------------------- ------------------------------------------------------- (unaudited) 1996 1995 1995 1994 1993 1992 1991 -------- -------- -------- --------- -------- --------- -------- (in thousands) Other Data: EBITDA (3) ................... $4,841 $4,787 $7,392 $11,659 $9,649 $12,312 $9,217 Interest expense ............. 318 365 721 941 585 370 8,232 Capital expenditures ......... 4,296 3,440 7,494 7,361 7,883 7,074 6,423 Net cash provided by operating activities .................. 4,523 3,035 6,144 6,164 2,335 1,797 3,618
At June 30, At December 31, ---------------------- ---------------------------------------------------------------- (unaudited) 1996 1995 1995 1994 1993 1992 1991 ---------- -------- ---------- ---------- ---------- ---------- ----------- (in thousands) Balance Sheet Data: Working capital .............. $(6,176) $ 242 $(5,246) $(1,818) $(9,107) $(8,307) $(73,158) Total assets ................. 76,601 82,115 81,629 87,148 84,078 83,450 87,862 Long-term debt, net of current maturities .................. 3,668 5,732 4,862 6,709 5,995 435 851 Shareholders' equity ......... 49,936 50,257 47,672 48,420 39,319 38,006 (22,142)
- ------ (1) Results of operations vary significantly among the years due to several reorganizations and a recapitalization of the Company. Net loss for 1995 reflects the effect of a non-recurring charge of $2,074,000 recorded in 14 the fourth quarter of 1995 and the cumulative effect of a change in the method of accounting for non-refundable payments received from customers for company-owned systems resulting in a net credit after tax of $2,477,000. See Notes 3 and 4 to Notes to Consolidated Financial Statements for further explanations. Net income for 1992 reflects the effect of an extraordinary gain, net of tax of $23,187,000, resulting from the restructuring of debt that occurred in August 1992. Net income for 1991 includes a non-recurring charge of $70,412,000 for the writedown of subscriber contracts, goodwill, fixed assets and other items resulting from management's assessment of the adequacy of the carrying values of such assets and other non-recurring expenses. (2) The net income (loss) per common share data has been adjusted to give effect to the one-for-fourteen reverse stock split of the Common Stock effected on March 27, 1995. (3) EBITDA means earnings before interest, taxes, depreciation and amortization and is presented because it is an accepted and useful financial indicator of a company's ability to service and incur debt. EBITDA should not be considered (i) as an alternative to net income or any other GAAP measure of performance, (ii) as an indicator of operating performance or cash flows generated by operating, investing or financing activities or (iii) as a measure of liquidity. EBITDA for 1995 does not reflect the cumulative effect of a change in accounting principle of $2,477,000 or a non-recurring charge of $2,074,000. EBITDA for 1992 does not reflect an extraordinary gain of $23,187,000. EBITDA for 1991 does not reflect a non-recurring charge of $70,412,000. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
Six Months Ended June 30, Year Ended December 31, ------------------------ ------------------------------------- (unaudited) (in thousands) 1996 1995 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- Monitoring and service ...................... $ 18,012 $ 18,975 $ 37,912 $ 39,747 $ 41,004 Installation ................................ 4,482 4,267 8,155 8,425 9,141 Franchise royalties, product sales and other 1,989 1,881 4,008 3,230 3,355 ---------- ---------- ---------- ---------- ---------- Total revenues .............................. 24,483 25,123 50,075 51,402 53,500 Cost of sales (exclusive of depreciation expense shown below) ....................... (12,809) (12,563) (26,262) (24,885) (26,916) ---------- ---------- ---------- ---------- ---------- Gross profit ................................ 11,674 12,560 23,813 26,517 26,584 Selling, general and administrative expenses (6,844) (7,760) (16,668) (15,051) (17,837) Depreciation and amortization ............... (5,432) (5,095) (10,390) (9,736) (8,919) Non-recurring charge ........................ -- -- (2,074) -- -- Other income (expense) ...................... 11 (13) 247 193 902 Interest expense, net ....................... (318) (365) (721) (941) (585) ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of change in accounting principle .................................. (909) (673) (5,793) 982 145 Provision (benefit) for income taxes ........ (173) (33) (2,119) 578 200 ---------- ---------- ---------- ---------- ---------- Income (loss) before cumulative effect of change in accounting principle ............. (736) (640) (3,674) 404 (55) Cumulative effect of change in accounting principle, net of tax of $1,942 ............ -- 2,477 2,477 -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss) ........................... $ (736) $ 1,837 $ (1,197) $ 404 $ (55) ========== ========== ========== ========== ==========
OVERVIEW The majority of the Company's revenues is derived from a combination of (i) recurring payments received from subscribers for providing monitoring, service and equipment relating to electronic security systems, primarily under renewable contracts which generally have an initial five-year term, (ii) non-refundable charges received in connection with the installation of company-owned systems in subscribers' premises, (iii) direct sales of electronic security systems and (iv) billable service charges, primarily from subscribers who own their systems outright. The remainder of the Company's revenues is derived from its insured parcel delivery service for the jewelry trade, jewelry vault rentals and royalties and product sales relating to its franchise and dealer operations. Recurring revenues are payable monthly, quarterly or annually in advance and are recognized as service is provided. Effective January 1, 1995, the Company changed its method of accounting for installation revenues with respect to the recording of non-refundable payments received from customers upon the completion of the installation of company-owned systems. The cumulative net effect of this change was to increase net income by $2.5 million in 1995. However, excluding the cumulative effect, this change resulted in an increase in net loss of $.4 million in 1995. Prior to this change, the Company deferred the difference between these payments and estimated selling costs and amortized such difference over the life of the non-cancelable subscriber contracts (generally five years). The Company believes that, on an ongoing basis, this change will not have a significant effect on net income. In addition, the Company further believes that recognizing revenues upon completion of the installation results in a better matching of revenues and expenses, better reflects the actual level of new business activity and conforms with the dominant practice being followed by the electronic security services industry. See Note 3 to Notes to Consolidated Financial Statements. 16 Direct installation costs of company-owned systems, which include materials, labor and installation overhead, are capitalized and depreciated over the average useful life of subscriber contracts (including renewals), estimated by the Company to be twelve years. Other than direct installation costs of company-owned systems, all costs are recognized in the period in which they are incurred. SIX MONTHS ENDED 1996 COMPARED WITH SIX MONTHS ENDED 1995 Revenues declined $.6 million (2.6%) in the six months ended June 30, 1996 to $24.5 million from $25.1 million in the six months ended June 30, 1995. The decline was attributable to reductions in revenues of $1.0 million from the Company's monitoring and service operations relating to the cancellation of annual recurring revenues in excess of new sales. The annualized subscriber cancellation rate was 11.8% in the six months ended June 30, 1995 compared to 11.7% in the six months ended June 30, 1995. The annual recurring revenue base declined from $36.5 million at June 30, 1995 to $34.3 million at June 30, 1996. The annual recurring revenue base was $35.5 million at December 31, 1995. The decrease in recurring and service revenue was partially offset by a $.4 million increase in installation revenue and other revenues associated with the One Service business acquired on March 27, 1995. Cost of sales increased $.2 million (2.0%) to $12.8 million for the six months ended June 30, 1996 from $12.6 million for the comparable period of 1995, due primarily to the acquisition of the One Service business. Selling, general and administrative expenses decreased by $1.0 million (11.8%) to $6.8 million for the six months ended June 30, 1996 compared to $7.8 million for the same period of 1995, reflecting the reduced costs from staff reductions initiated in the fourth quarter of 1995. Depreciation and amortization expense increased $.3 million (6.6%) to $5.4 million for the six months ended June 30, 1996 compared to $5.1 million for the six months ended June 30, 1995. This increase relates primarily to depreciation expense on additions of Company-owned systems on subscribers premises. Income (loss) from operations reflected a loss of $.6 million for the six months ended June 30, 1996 compared to a loss of $.3 million for the same period in 1995, primarily as a result of decreased revenue and increased depreciation expense, offset by lower selling, general and administrative expenses, as described above. Income (loss) before cumulative effect of change in accounting principle was a loss of $.7 million for the six months ended June 30, 1996 compared to a loss of $.6 million for the six months ended June 30, 1995. The Company's tax (benefit) expense in each period reflects the minimum capital tax accrual plus a proportionate estimate of deferred federal and state income tax (benefits) expenses that were based on the full year's forecasted pre-tax income in accordance with generally accepted accounting principles. FISCAL YEAR ENDED 1995 COMPARED WITH FISCAL YEAR ENDED 1994 Revenues declined $1.3 million (2.6%) to $50.1 million in 1995 from $51.4 million in 1994. A portion of the decline was attributable to a reduction in revenues of $1.8 million from the Company's monitoring and service operations relating to the cancellation of annual recurring revenues in excess of new sales. Such annual recurring revenue base declined from $37.4 million at December 31, 1994 to $35.5 million at December 31, 1995. In addition, reduced revenues resulted from a decline in revenues of $.7 million from franchise and dealer operations and $.7 million from the change in the method of accounting for non-refundable installation fees on company-owned systems. The decline in revenues was partially offset by revenues from the insured parcel delivery service of $1.4 million, which business was acquired in March 1995. In 1995, the franchise and dealer operations experienced the loss of several franchisees and a reduction in related royalties and product sales. The change in accounting policy regarding non-refundable installation fees, while having a favorable cumulative effect on net income, resulted in lower installation income recognition in 1995. The Company's cancellation rate continued to improve from a high in 1991 of 15.2%, to 10.9% in 1995, which was slightly better than the 11.1% cancellation rate in 1994. This improvement reflects continued efforts to upgrade older accounts with new systems and to provide high quality service to subscribers. Cost of sales increased by $1.4 million (5.5%) to $26.3 million in 1995 from $24.9 million in 1994 primarily due to costs incurred in the operation of the insured parcel delivery business. 17 Selling, general and administrative expenses increased by $1.6 million (10.7%) to $16.7 million in 1995 from $15.1 million in 1994. The increase relates in part to legal and professional fees incurred in connection with the Outsourcing Agreement (as hereinafter defined in "Business -- Historical Developments/The 1995 Outsourcing Agreement") and a significant prospective acquisition which did not materialize. Increased selling expenses were incurred in connection with new marketing efforts relating to the ProWatch and LifeNet systems. Depreciation and amortization expense increased $.7 million (6.7%) to $10.4 million in 1995 from $9.7 million in 1994. The increase relates to additional depreciation of installation costs relating to new company-owned systems as well as those systems which have been upgraded. Interest expense, net of interest income, declined by $.2 million (23.4%) from $.9 million in 1994 to $.7 million in 1995 primarily due to an increase in interest income on investments and a declining debt balance under the Loan Agreement. Non-recurring charges of $2.1 million in 1995 included $1.1 million relating to (i) severance pay and related benefit costs in connection with the selective reduction of approximately 70 employees in the Company's work force, all of whom were terminated, notified or identified at December 31, 1995 and (ii) approximately $1.0 million relating to the write-off of unamortized leasehold improvements and other assets in connection with the Company's central station consolidation and the relocation of the Company's corporate headquarters scheduled for late 1996. See Note 4 to Notes to Consolidated Financial Statements. In 1995, the Company changed its method of accounting for non-refundable installation fees on company- owned systems. The cumulative net effect of this change was to increase net income by $2.5 million in 1995. However, excluding the cumulative effect, this change resulted in an increase in net loss of $.4 million in 1995. The Company believes that, on an ongoing basis, the effect on net income of this change will not be significant. See Note 3 to Notes to Consolidated Financial Statements. The Company recorded a net loss in 1995 of $1.2 million compared to net income of $.4 million in 1994. The net reduction in income of $1.6 million in 1995 is due to all the various changes described above. FISCAL YEAR ENDED 1994 COMPARED WITH FISCAL YEAR ENDED 1993 Revenues declined $2.1 million (3.9%) to $51.4 million in 1994 from $53.5 million in 1993. The decline was primarily attributable to a reduction of $1.3 million in monitoring and service revenues owing to the net loss of recurring revenues from the base, despite the acquisition of $.7 million of annual recurring revenues in the first quarter of 1994. The subscriber cancellation rate was 11.1% in both 1994 and 1993. There was also a decline of $.7 million in installation revenues from 1993 to 1994, mainly as a result of the very severe weather in the first quarter of 1994 which adversely impacted the Company's sales and installation activities. Finally, franchise revenues declined $.1 million from 1993 and 1994, mainly as a result of lower royalty payments and equipment purchases by franchisees caused by the imposition of stricter credit controls by the Company. Cost of sales decreased by $2.0 million (7.5%) to $24.9 million in 1994 from $26.9 million in 1993, thus improving the Company's gross margin from 49.7% to 51.6% of revenues. The decline in cost of sales resulted primarily from a decline in monitoring and service costs of $1.9 million related to a headcount reduction of 13, the refurbishment of older alarm systems and the termination and renegotiation of certain real estate leases. Installation costs also declined by $.4 million from 1993 to 1994 mainly as a result of lower material usage related to the lower level of installation activity. Franchise costs increased by $.4 million primarily owing to a change in the equipment sales mix. Selling, general and administrative expenses decreased $2.8 million (15.6%) to $15.0 million in 1994 from $17.8 million in 1993. This decrease was mainly as a result of lower selling costs related to the lower level of sales activity in 1994, and reductions in general and administrative salary costs and professional fees. Depreciation and amortization expense increased $.8 million (9.2%) to $9.7 million in 1994 from $8.9 million in 1993. The increase is due to additional depreciation of installation costs relating to new company-owned systems as well as those refurbished. Amortization expense increased due to additional amortization of two groups of acquired subscriber monitoring contracts. 18 Interest expense increased $.4 million (60.9%) to $.9 million in 1994 from $.6 million in 1993. This increase was due to higher interest rates and additional debt incurred for acquisitions of subscriber monitoring contracts and to fund other liabilities, primarily consisting of prior years' obligations including a portion of the pension fund and retroactive insurance premium liabilities. Net income increased by $.5 million to $.4 million in 1994 from a loss of $.1 million in 1993. This increase was primarily due to the reduction in costs exceeding the reduction in revenues described above, despite the fact that the income tax provision increased from $.2 million in 1993 to $.6 million in 1994. LIQUIDITY AND CAPITAL RESOURCES SIX MONTHS ENDED 1996 Cash and cash equivalents increased by $.1 million from $.4 million on January 1, 1996 to $.5 million on June 30, 1996. Net cash provided by operating activities for the six months ended June 30, 1996 was $4.5 million, offset by cash utilized by investing activities of $2.2 million and cash utilized by financing activities (debt repayment) of $2.2 million. Net cash provided by operating activities for the six months ended June 30, 1996 consisted primarily of $4.7 million in cash provided by sales of electronic security services, adjusted by a decrease in accounts payable and accrued expenses of $1.8 million, an increase in prepaid expenses and other current assets of $.7 million, a decrease in accounts receivable of $1.1 million, and an increase of deferred revenue of $.3 million. Net cash of $2.2 million used in investing activities for the six months ended June 30, 1996 consisted primarily of $4.3 million of additions to company-owned equipment on subscribers' premises and other fixed assets, offset by a net reduction of $2.1 million from net maturities of short-term investments. Net cash used by financing activities of $2.2 million during this period consisted primarily of principal repayments under the Loan Agreement (as hereinafter defined) of $1.1 million and repayments of short-term borrowings of $.9 million from a margin account which was secured against the value of securities in the Company's short-term investment account. FISCAL YEAR ENDED 1995 Cash and cash equivalents declined by $1.0 million from $1.4 million in 1994 to $.4 million in 1995. In 1995, net cash provided by operating activities of $6.1 million was offset by $1.5 million of cash used by financing activities and $5.6 million of cash used by investing activities. Net cash provided by operating activities of $6.1 million in this period principally consisted of cash provided by sales of electronic security services, adjusted for non-cash charges for depreciation and amortization, an increase in accounts receivable of $1.6 million, an increase in accounts payable and accrued expenses of $2.3 million and a decrease in customer deposits and other liabilities of $1.6 million. The excess of current liabilities over current assets increased from $1.8 million in 1994 to $5.2 million in 1995 primarily as a result of a reduction in long-term debt, additions to property, plant and equipment and establishment of the reserve for severance and related benefit costs. Net cash of $5.6 million used by investing activities in 1995 consisted of $7.5 million of capital expenditures (primarily for installation of alarm equipment on subscribers' premises), offset by a net reduction of $1.9 million from net maturities of short-term investments. Net cash of $1.5 million used by financing activities during this period consisted principally of repayments of amounts due under the Loan Agreement and short-term borrowings under the Company's margin account. See Note 6 to Notes to Consolidated Financial Statements. FUTURE COMMITMENTS Liquid assets available to the Company as of December 31, 1995 included cash and cash equivalents of $.4 million. Additionally, the Company purchased short-term U.S. government and federal agency securities during 19 the third quarter of 1994, of which $2.0 million remained available in a short-term investment account at December 31, 1995 to provide for working capital and other liabilities. The assets in the short-term investment account provide collateral for borrowing under a Company margin account. At December 31, 1995, $.9 million was outstanding under this margin account. Liquid assets available to the Company as of June 30, 1996 included cash and cash equivalents of $.5 million. During the six months ended June 30, 1996, the Company repaid the $.9 million outstanding under the margin account and converted the remaining assets in the short-term investment account into cash and cash equivalents. In September 1993, the Company entered into an Amended and Restated Loan Agreement with Fleet Bank, N.A. (formerly NatWest Bank N.A.) (the "Bank"), dated September 30, 1993 (the "Loan Agreement"), providing for a $9 million five-year term note (the "Term Note") and a $3 million revolving loan facility (the "Credit Note"). In 1993 and 1994, the Company borrowed approximately $12 million under the Loan Agreement. Such amounts were used to replace the Company's existing short-term borrowings, to finance acquisitions and to provide working capital. In August 1994, the Company repaid all outstanding amounts under the Credit Note, and no further borrowings were made thereunder. In November 1995, the Bank informed the Company that there would be no further extensions of credit under the Credit Note. In September 1994, the Company began making scheduled principal payments under the Term Note. On March 10, 1995, the Loan Agreement was amended to permit an additional borrowing of $2 million, during the month of December 1995 only, for the purpose of paying a portion of the costs of consolidation pursuant to the Outsourcing Agreement (as such term is defined below). This facility expired, unused. At June 30, 1996 and December 31, 1995, the outstanding balance on the Term Note was $5.6 and $6.2 million, respectively. The Term Note was repaid in full with the proceeds from the Credit Facility (as hereinafter defined), and the Loan Agreement was terminated on August 30, 1996 as described below. See Notes 6 and 14 to Notes to Consolidated Financial Statements. The Company entered into a credit agreement dated as of August 30, 1996 with Merita Bank Ltd and Bank of Boston Connecticut (together, the "New Banks") pursuant to which the New Banks have agreed, subject to the terms and conditions set forth therein, to provide a two-year $25 million revolving credit facility to the Company which converts into a five-year term loan on September 30, 1998 (the "Credit Facility"). Up to $12.5 million of the Credit Facility became available for borrowing upon the closing thereof on August 30, 1996, and up to an additional $12.5 million will become available if the Company receives at least $10 million in gross proceeds from the sale of newly issued Common Stock by October 31, 1996. Such condition is expected to be satisfied by the sale of the shares of Common Stock offered hereby. At September 24, 1996, the outstanding balance under the Credit Facility was $8.3 million. Such funds have been used to pay $4.7 million to the Bank to repay the outstanding balance under the Loan Agreement, and to pay $1.0 million to PremiTech for its consolidation activities under the Outsourcing Agreement, with the balance used to meet the Company's working capital needs. The remaining available proceeds of the Credit Facility will be used to finance capital expenditures and permitted acquisitions and for general corporate purposes. The following summary of the material provisions of the Credit Facility does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Credit Agreement and related documents, copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. The Credit Facility matures on September 30, 2003 with principal payments payable in increasing quarterly installments commencing December 31, 1998. Borrowings under the Credit Facility bear interest, at the Company's option, at an annual rate equal to either a base rate, defined as the higher of the prime rate or a specified federal funds rate, or a specified Eurodollar rate plus, in each case, an applicable margin which varies with the Company's leverage (the ratio of total debt to EBITDA less capital expenditures). The Company is obligated to pay a commitment fee of 1/2 % per annum of any undrawn amounts. The New Banks also received warrants to purchase an aggregate of 166,666 shares of Common Stock at an initial exercise price of $9.75 per share (the "New Bank Warrants") and were granted certain registration rights in connection therewith. Mandatory prepayment of the Credit Facility will be required with the proceeds of certain issuances of indebtedness, the sale of assets outside the ordinary course of business and 50% of the Company's Excess Cash Flow (as defined in the Credit Facility) for the preceding fiscal year commencing May 1, 2000 in respect of fiscal year 1999. 20 The Credit Facility contains a number of negative covenants customary in credit agreements for this type of loan, including, without limitation, restrictions on additional indebtedness, certain acquisitions, dividends, investments, mergers and sales of assets, creation of liens, guarantees, issuance of capital stock by the Company's subsidiaries and transactions with affiliates. The Company is also required to comply with various financial covenants, tests and ratios, including those relating to (i) ratios of total debt to recurring monthly revenue, (ii) minimum debt service coverage, (iii) minimum net worth, (iv) maximum capital expenditures and (v) maximum subscriber attrition rate (as defined in the Credit Facility). Failure to satisfy many of the financial and other covenants will constitute an event of default under the Credit Facility, notwithstanding the ability of the Company to meet its debt service obligations. The Credit Facility also contains other events of default. The Credit Facility is secured by all current and future assets, and the pledge of the capital stock, of the Company's subsidiaries. On April 4, 1995, the Company entered into a ten-year information technology services agreement, as amended (the "Outsourcing Agreement"), with PremiTech Corporation ("PremiTech"), a subsidiary of EDS. The Outsourcing Agreement provides for PremiTech to manage the Company's technological infrastructure, perform certain of the Company's administrative functions, and assist in the consolidation of the Company's central monitoring facilities. For ongoing services during the ten-year term of the agreement, the Company is obligated to pay PremiTech a total of $47.7 million in equal monthly installments aggregating $4.8 million per year, subject to certain adjustments. In addition, the Company is obligated to pay PremiTech a total of $3.3 million for its consolidation activities, of which $2.0 million has been paid to date. The Company is currently engaged in negotiations with PremiTech regarding the completion of PremiTech's consolidation activities and the timing and other terms of the Company's payment of the remaining balance of $1.3 million due therefor. The Company believes it has sufficient funds available under the Credit Facility to make all such payments. The Outsourcing Agreement also provides for additional payments to PremiTech in the event of a substantial increase in the number of the Company's subscriber accounts. See "Business -- Historical Developments/The 1995 Outsourcing Agreement" and Note 2 to Notes to Consolidated Financial Statements. The Company has in the past experienced cash flow shortages. The Company believes that net cash provided by operations, together with funds available under the Credit Facility, will enable it to meet its future cash operating needs. Net proceeds available from the sale of the shares of Common Stock offered hereby will enable the Company to pursue its business strategy. See "Use of Proceeds." In the course of its business, the Company plans ongoing annual capital expenditures for company-owned alarm equipment installed at subscriber premises. Additionally, the Company continues to invest in the replacement and modernization of the equipment utilized in its central monitoring activities and associated security services. All such capital expenditures will require substantial financial resources which are expected to be provided by internally generated funds and, as necessary, supplemental funding from other sources. 21 BUSINESS THE COMPANY Holmes provides security alarm monitoring services and designs, sells, installs and services electronic security systems for commercial and mid- to high-end residential subscribers. These systems include event detection devices, surveillance equipment and access control devices which restrict access to specified areas. The Company currently provides its services in the Northeast, primarily in New York, New Jersey and Pennsylvania, and conducts its operations through four branch offices, two central monitoring stations and 46 independent alarm service dealers and franchisees. In addition, the Company recently acquired a central monitoring station in Southern California which provides monitoring services for other alarm companies. According to a published survey, the Company was the twelfth largest provider of electronic security services in the United States in terms of total 1995 revenues. Following an internal management transition and reorganization that occurred during 1995, the Company engaged the services of several former senior executives of National Guardian, a large national electronic security alarm services company which was acquired by Ameritech Monitoring Services, Inc. in October 1995. Among the executives hired by the Company was George V. Flagg, the Company's President and Chief Executive Officer, who served as the President and Chief Executive Officer of National Guardian from 1986 to 1995. During Mr. Flagg's tenure, National Guardian became one of the four largest security services companies in the United States based upon revenues, which grew from approximately $40 million in 1985 to over $200 million in 1995. Under the direction of the Company's new management team, the Company is implementing a new business strategy involving a combination of strategic acquisitions and internal growth. In regard to strategic acquisitions, the Company intends to pursue both (i) fold-in acquisitions, which consist of businesses or portfolios of alarm monitoring accounts that can be readily combined with the Company's existing branch offices and management structure and (ii) new market acquisitions, which consist of companies in the electronic security services industry located outside the Company's current geographic market. In regard to its internal growth strategy, the Company intends to capitalize on public recognition of the historic Holmes brand name (which has been utilized in the security services industry since 1858) in connection with (i) expanding its security services product offerings, including the HolmesNet system for wireless data communications; (ii) establishing a national accounts program; (iii) increasing its sales and marketing efforts; and (iv) expanding its dealer operations. The Company's revenues consist primarily of recurring payments under written contracts for security alarm monitoring activities and associated services, which represented approximately 74% of total revenues in 1995. The Company monitors digital alarm signals arising from various activities, including burglaries, fires and other events, through security systems installed at subscribers' premises. These signals are received and processed at one of the Company's central monitoring stations. In order to reduce overall manpower requirements, achieve economies of scale and other cost efficiencies, and enhance the quality of service being provided, the Company is in the process of consolidating its central monitoring stations located in the Northeast into one state-of-the-art facility with monitoring capacity of approximately 60,000 accounts. In order to avail itself of more extensive technological resources, the Company entered into a ten-year information technology services agreement with a subsidiary of EDS in 1995. Pursuant to this agreement the Company has consolidated four central monitoring stations into two, and completion of the consolidation activities is scheduled for the fourth quarter of 1996. The Company currently monitors approximately 35,000 accounts from its central monitoring stations located in the Northeast and 14,500 accounts from its central monitoring station located in Southern California. An additional 16% of the Company's total revenues in 1995 was comprised of direct sales and installation of security equipment. The balance of the Company's revenues in 1995 was derived from (i) jewelry vault rentals, (ii) insured parcel delivery services for the jewelry trade and (iii) royalty fees and product sales relating to its franchise and dealer operations. Approximately 80% of the Company's business is derived from commercial customers, including financial institutions, jewelry and fine art dealers, corporate headquarters, manufacturers, distribution facilities and health care and education facilities. The Company's residential business focuses principally on mid- to high-end customers. Electronic security services is a consolidating but still a highly fragmented industry, consisting of a large number of local and regional companies and several integrated national companies. The fragmented nature of 22 the industry can be attributed to the low capital requirements associated with performing basic installation and maintenance of electronic security systems. However, the business of a full service, integrated electronic security services company providing central station monitoring services is capital intensive, and the Company believes that the high fixed costs of establishing both central monitoring stations and full service operations contribute to the small number of national competitors. The low marginal cost of monitoring additional customers has been one of the principal factors leading full service, integrated electronic security services companies to seek acquisitions of other electronic security businesses to consolidate into their existing operations. The principal focus of the Company's business strategy is to aggressively pursue acquisitions in this environment. MARKET OVERVIEW AND TRENDS The Company is a leading competitor in the electronic security services industry, offering services in both the commercial and mid- to high-end residential segments of the market. The products and services marketed in the electronic security services industry range from alarm systems that provide basic intrusion and fire detection to sophisticated systems incorporating such features as closed circuit television and access control. The industry consists of companies that design, sell, install, monitor and maintain intrusion, fire alarm and other electronic security systems. It includes companies using both hardwire and wireless technology for systems installed on subscribers' premises and digital, multiplex and wireless (radio) technologies for the transmission of alarm signals to a central monitoring center, such as the Company's central station monitoring facilities. The Company believes that the electronic security services industry is characterized by the following attributes: o High Degree of Fragmentation. The electronic security services industry is comprised of a large number of local and regional companies and several integrated national companies. The Company believes that, based on industry studies, there are approximately 11,000 separate companies in the industry generating approximately $12 to $13 billion in revenues annually. A survey published by SDM magazine (formerly Security Distributing and Marketing) in May 1996 reported that in 1995, based upon information provided by the respondents, the 100 largest companies in the industry accounted for approximately 23% of total industry revenues. According to the same survey, the Company ranks twelfth among the 100 largest companies in the industry in terms of total 1995 revenues. o Trend Toward Consolidation. The Company believes that because the central station monitoring sector of the electronic industry has relatively high fixed costs but relatively low marginal costs associated with servicing additional subscribers, the industry offers significant opportunities for consolidation. In addition, the Company believes that the fragmented nature of the industry can be attributed to the low capital requirements associated with performing basic installation and maintenance of electronic security systems. However, the business of a full service, integrated electronic security services company which provides central station monitoring services is capital intensive, and the Company believes that the high fixed costs of establishing both central monitoring stations and full service operations contribute to the small number of national competitors. The marginal cost of monitoring additional customers is low and has been one of the principal factors leading full service, integrated electronic security services companies to seek acquisitions of other electronic security services businesses to consolidate into their existing operations. The Company intends to actively participate in the industry consolidation by pursuing its acquisition business strategy. o Continued Product Diversification and Integration of Services. A recent trend in the commercial electronic security services industry has been increased integration of different types of products into single systems provided by single vendors. The Company believes that this trend has resulted from commercial needs for enhanced security services on a more cost-effective basis. Whereas basic alarm systems were once adequate for many businesses, it appears that many companies now require access control and closed circuit television systems integrated into a single system to provide for their overall security needs. A security system which provides burglar and fire alarm monitoring along with closed circuit television and access control, all integrated into one central system, not only provides enhanced security services, but also is more cost-effective than four separate systems installed by four separate vendors. In this environment, the Company believes that it can gain a competitive advantage over smaller companies in the industry that do not have the infrastructure or the expertise to support the larger and more sophisticated integrated systems. Hence, the Company is aggressively positioning itself to take advantage of this trend by expanding the breadth of its electronic security service offerings. 23 o Advances in Digital Communications Technology. Prior to the development of digital communications technology, alarm monitoring required a dedicated telephone line, which made long-distance monitoring uneconomic. Consequently, in order to achieve a national or regional presence, alarm monitoring companies were required to maintain a large number of geographically dispersed monitoring stations. The development of digital communications technology eliminated the need for dedicated telephone lines, reducing the cost of monitoring services to the subscriber and permitting the monitoring of subscriber accounts over a wide geographic area from a central monitoring station. The elimination of local monitoring stations has decreased the cost of providing alarm monitoring services and has substantially increased the economies of scale for larger alarm service companies. In addition, the concurrent development of microprocessor-based control panels has substantially reduced the cost of the equipment available to subscribers in the residential and commercial markets and has substantially reduced service costs because many diagnostic and maintenance functions can be performed from a company's office without having to send a technician to the customer's premises. The Company believes that several factors contribute to a favorable market for electronic security services generally in the United States. o Increase in Crime Rates. According to the Uniform Crime Report published by the Federal Bureau of Investigation in 1995 (the "UCR"), between 1985 and 1994 the number of violent crimes reported in the United States increased by more than 40.3% and the total number of reported criminal offenses increased by 12.6%. The UCR also reported that although the number of reported criminal offenses decreased on a nationwide basis from 1993 to 1994 by 1.1%, a property crime was committed in the United States in 1994 once every three seconds. o High Level of Concern About Crime. As violent crime and the reporting of crime by the news media has increased, the perception by Americans that crime is a significant problem has also grown. Concurrently, demand for security systems has grown with greater awareness of risk management within the business community. In addition to the protection that electronic detection and surveillance systems provide, the Company believes that such systems also have a deterrent effect against crime. o Insurance Requirements and Premium Discounts. The increase in demand for security systems may also be attributable, in part, to the requirement of insurance companies that businesses install an electronic security system as a condition of insurance coverage. The purchase of an electronic alarm system often entitles the subscriber to obtain premium discounts as well. In addition, in order to comply with many municipal fire codes, the installation of an electronic fire system is required in many localities. BUSINESS STRATEGY In January 1996, the Company engaged the services of several former senior executives of National Guardian, including George V. Flagg, who had been the President and Chief Executive Officer of National Guardian from 1986 to 1995. See "Management -- Directors and Executive Officers of the Company." During Mr. Flagg's tenure, National Guardian became one of the four largest electronic security services companies in the United States based upon revenues, which grew from approximately $40 million in 1985 to over $200 million in 1995. Such growth resulted, in part, from National Guardian's acquisition program and from its internal sales and marketing strategy. During the same period, National Guardian's business was focused primarily on commercial and mid- to high-end residential subscribers, with an important component of its commercial subscriber base being large, national account businesses with multiple locations nationwide that required electronic security services at each site. The background, experience and combined expertise of the new management team has been integral to the development of the Company's new business strategy. The new management team believes that Holmes is uniquely positioned to pursue a new business strategy involving a combination of strategic acquisitions and internal growth. Because the historic Holmes brand name is well established in the Northeast and has been utilized since 1858, the Company believes that it can capitalize on public recognition of this name and its historic reputation in connection with expanding into new geographic markets throughout the United States, establishing a national accounts program, increasing its sales and 24 marketing strategy and expanding its dealer operations and achieving continued market penetration by increasing its sales force. The Company further believes that its new management team's previous experience will be helpful in successfully implementing its business strategy. GROWTH THROUGH ACQUISITIONS The Company intends to become an active participant in the consolidation of its industry by aggressively pursuing two fundamental types of acquisitions: fold-in acquisitions and new market acquisitions. Various factors will be considered when evaluating any potential acquisition, including the purchase price and other financial terms of the transaction, the business prospects and competitive position of and services provided by the acquisition candidate and the extent to which any such acquisition would enhance the Company's future prospects. In addition to determining the economic viability of the proposed acquisition, an acquisition candidate will be evaluated for stability of subscriber base, market share, quality of operations, compatibility of equipment and contract terms and growth opportunities. Fold-in Acquisitions. Fold-in acquisitions will mainly target businesses or portfolios of alarm monitoring accounts that can be readily consolidated with existing Holmes branch offices and monitoring centers. Such acquisitions are attractive because the Company believes that, through consolidation, cost savings will be achieved due to the low variable cost associated with monitoring and supporting additional subscriber accounts. In addition, the Company believes that productivity gains and economies of scale may be realized through the elimination of redundant monitoring centers and increased usage of its newly consolidated state-of-the-art central monitoring facilities in the Northeast and of its central monitoring facility in Southern California. The Company believes that certain fold-in acquisitions may also add specialized expertise to the Company. For example, acquiring a business that specializes in fire system installation would bring many of the expected financial benefits of a typical fold-in acquisition, and in addition, would enhance the Company's ability to broaden its product and service offerings with the added industry-specific knowledge and management obtained through the acquisition. New Market Acquisitions. The Company also intends to expand its operations through strategic acquisitions of electronic security services companies in new geographic markets throughout the United States, thereby diversifying its business base beyond the Northeast. In the Company's view, expansion into new geographic markets will also create additional opportunities for fold-in acquisitions. The Company believes that acquiring existing companies that have established a local market presence in areas outside of the Northeast is a less costly alternative to the internal development of new markets. In addition, through the retention of certain of the existing employees of acquired companies who are familiar with local markets, the Company believes it will be able to capitalize on local affiliations and relationships. New market acquisitions will be sought in geographic markets which the Company believes can serve as a framework for establishing national accounts business from subscribers who require electronic security services at multiple locations nationwide. As of September 19, 1996, the Company acquired a Southern California-based alarm monitoring company (the "California Corporation") which provides alarm monitoring services for customers of other alarm companies through its state-of-the-art central monitoring facility. The consideration paid by the Company to the shareholders of the California Corporation consisted of 103,805 newly issued shares of Common Stock of the Company in exchange for all the outstanding common stock of the California Corporation. In connection therewith, the shareholders of the California Corporation received "piggy-back" registration rights with respect to certain non-underwritten public offerings of the Company's securities. The Company intends to maintain the Southern California monitoring facility in order to monitor the accounts of customers of other alarm companies as well as those of authorized Holmes dealers. The Company does not anticipate consolidating this newly acquired California monitoring facility with its central monitoring facility located in Edison, New Jersey. The acquisition of the California Corporation was not deemed significant under applicable accounting rules and, accordingly, does not require separate financial statements to be included in this Prospectus. The Company has entered into a letter of intent to purchase the assets of a Texas-based alarm company (the "Texas Company"). The consideration to be paid by the Company with respect to this acquisition is expected to 25 consist of cash received from the proceeds of the sale of the Common Stock offered hereby. The acquisition of the Texas Company is subject to the negotiation and execution of definitive agreements with the Texas Company and there can be no assurance that this purchase will be consummated. The proposed acquisition would not be deemed significant under applicable accounting rules and, accordingly, would not require separate financial statements to be included in this Prospectus. The Company is actively exploring other acquisition opportunities and has had discussions with a number of acquisition candidates. Except as disclosed above, the Company has entered into no other contracts, understandings or arrangements for an acquisition as of the date of this Prospectus. INTERNAL GROWTH The Company plans to grow internally by expanding its product and service offerings, establishing a national accounts program which will focus on commercial subscribers conducting business in multiple locations nationwide, enhancing its sales and marketing activities and expanding its dealer operations. The Company believes that this proposed expansion will increase usage and cost efficiencies of its newly consolidated state-of-the-art central monitoring station in the Northeast, which in turn should result in overall improved productivity and enhanced operating margins. The Company's target market will remain oriented toward the commercial and mid- to high-end residential subscriber, where the Company's sophisticated and specialized security systems have been relied upon since 1858. Expanding Security Services Product Offerings. The Company believes that it has established a reputation as a provider of quality systems and services and that this reputation is the result, in part, of the Company's attention to advances in technology and their application to the Company's products and services. In this regard, the Company has recently established an Equipment Evaluation Committee that evaluates new products and the development of improvements to existing products and services. The Company is committed to offering a broad range of services, products and features that incorporate the latest technology generally available to the industry. As a result, the Company has entered into a relationship with ARDIS, a company owned by Motorola, Inc., under which the Company plans to utilize a national wireless data communications network for highly reliable and immediate transmissions of alarm signals as part of its HolmesNet system. Wireless data transmission methods are less susceptible to accidental or intentional signal transmission interruptions because they are less reliant on land-based telephone wiring networks. Due to its high level of security and reliability, the Company believes that the HolmesNet system will be attractive to customers such as jewelry stores, banks and others who require more than a conventional digital (telephone based) alarm system. The Company also offers other specialized services using products from various manufacturers to allow itself maximum flexibility in the types of systems and services that it provides. These include, but are not limited to, LifeNet, a sophisticated vehicle tracking system which uses global positioning satellite ("GPS") technology and is designed to provide a high level of security to executives while they travel in automobiles; CargoNet, also a GPS-based system, designed to protect trucks and trailers from theft; and ProWatch, an integrated security system for high-rise office buildings designed to automate fire and burglar alarms and access control systems located on tenants' premises as well as in the buildings' common areas, thereby reducing the need for physical guards on-site. Establishing A National Accounts Program. The Company believes that large companies conducting business on a national scale with multiple locations throughout the United States can achieve cost benefits by centralizing all of their security needs with a single vendor. The Company currently has several regional and national accounts, but has not generally pursued business outside the Northeast. The Company intends to establish a national accounts program that will enable it to compete for business from large commercial subscribers with multi-location security needs. This program is designed to offer national account subscribers, through an account manager, a single source for centralized and standardized system design, installation, service, billing, comprehensive activity and data reporting, nationwide monitoring and system operation for all of the subscriber's locations. The Company believes that a national accounts program will enhance its competitive position and increase the marketability of its services and products. A dedicated management team and sales force will implement and operate the national accounts business. It is intended that the Company's branch offices and dealers from its dealer program, under the direction of the centralized management team, will provide service and installation support for national account subscribers. 26 Increasing Sales and Marketing Activities. The Company will continue to focus its marketing efforts on increasing its visibility throughout the United States. The Company intends to aggressively market and sell its products and services through its existing sales force and through the hiring of additional sales people. Sales compensation and incentive plans are being revised to increase the motivation of the sales force by reducing base salaries and increasing incentive compensation. The Company intends to provide its sales force and operational personnel with advanced training and market resources, including professionally prepared literature and presentation manuals, background research and technical information. The Company believes that such training and resources will expand the expertise and knowledge of its employees and enable each branch office to offer a full range of security products and services. In addition, the Company is returning to one of the original Holmes logos used in the early part of this century, which it believes will further increase public recognition and awareness of Holmes and its historical presence and long-standing reputation in the industry. Expanding Dealer Operations. The Company plans to expand its dealer operations by adding a number of new independent dealers to its authorized Dictograph dealer program and by implementing a separate Holmes authorized dealer program. The Dictograph program had previously been operated as a franchise network prior to 1996. Recently, the Company hired a dealer operations manager, with seven years of experience managing an extensive national dealer network, to market both of its dealer programs and to identify new dealer candidates. Increased recruiting efforts for the Dictograph and Holmes dealer programs began in the third quarter of 1996. As of September 24, 1996, the Company had 11 Dictograph dealers and six Holmes dealers. New Dictograph dealers will acquire exclusive territories from the Company and will be required to purchase a minimum quota of specialized proprietary security equipment from the Company. On the other hand, while authorized Holmes dealers will not be provided with exclusive territories, they will be allowed to purchase specialized proprietary security equipment from the Company without meeting minimum purchase requirements. In addition, Holmes dealers will be authorized to use the Holmes brand name to gain market advantage. It is intended that both Dictograph and Holmes dealers will be offered the opportunity to provide service and installation support for certain of the Company's national accounts subscribers. It is also anticipated that the Company will provide central monitoring services to some of its dealers' customers. Both Dictograph and Holmes dealers will be provided with literature, access to Holmes' products and services, including monitoring, and other benefits. The Company believes that its dealer programs will provide it with a presence in local markets in which the Company may not have an office and thereby broaden recognition of its brand names. In addition, the dealers, who will be located throughout the United States, will give the Company greater geographic coverage for its developing national accounts business by providing subcontractor installation services. The Company believes that the development of these dealer programs will be an important aspect of establishing and supporting its national accounts program. In addition, the Company anticipates that, as a result of its dealer programs, revenues may be increased through the provision of monitoring services to its dealers' customers and by sales of its products to its dealers. DESCRIPTION OF THE BUSINESS The Company provides security alarm monitoring services and designs, sells, installs and services electronic security systems for commercial and residential subscribers. During 1995, approximately 74% of the Company's revenues was derived from security alarm monitoring activity and associated services. An additional 16% of the Company's 1995 revenues was derived from the direct sale and installation of security equipment. The remainder of Holmes' revenues in 1995 was derived from (i) jewelry vault rentals, (ii) insured parcel delivery services for the jewelry trade and (iii) royalty fees and product sales relating to its franchise and dealer operations. ALARM MONITORING SERVICES Central Monitoring Activity. The Company monitors signals arising from various activities, including burglaries, fires and other events, through certain of the systems described below which are installed at the subscriber's premises. The Company's monitored security systems consist of sensors, transmitters and other event detection devices designed to detect a variety of conditions including, but not limited to, entry, movement, fire, 27 temperature, water flow and electric power interruption. The sensors and other event detection devices are connected to a control panel/transmitter which sends signals to one of four central monitoring stations maintained by the Company. Signals may be transmitted over leased telephone lines, multiplex circuits, public telephone lines and cellular and radio networks. The control panel/transmitters are generally microprocessor-based and can identify the nature of the emergency and the area within a building where the sensor or other device was activated. Company personnel at its central monitoring stations respond to incoming alarm signals by contacting the subscriber, alerting the police, the fire department or other emergency response services or, where contracted, dispatching a Holmes response agent. Central Monitoring Stations. The Company monitors its subscriber accounts at one of two central monitoring stations located in New York City and Edison, New Jersey. Currently, each of these Company's central monitoring stations is operated separately by the Company's branch operation where each such central monitoring station is located, with alarm signals being processed by a central computer system located at the Company's branch operation in New York City. In order to reduce overall manpower requirements, achieve economies of scale and other cost efficiencies and enhance the quality of service being provided, the Company is in the process of consolidating its central monitoring facilities in the Northeast into one state-of-the-art facility to be located in Edison, New Jersey. To date, the Company has consolidated four central monitoring stations located in the Northeast into two and anticipates that its consolidation activities will be completed by the fourth quarter of 1996. In order to avail itself of more extensive technological resources, the Company entered into the Outsourcing Agreement in 1995. See "Business -- Historical Developments/The 1995 Outsourcing Agreement." The Company monitors the accounts of customers of other alarm companies at its central monitoring station located in Southern California. The Company intends to monitor the accounts of customers of its authorized Holmes dealers at this location as well. See "Business -- Business Strategy/Growth through Acquisitions." The Company's central monitoring stations incorporate the use of communications and computer systems that route incoming alarm signals and telephone calls to operators at each station. Each operator sits before a computer monitor that provides immediate information concerning the nature of the alarm signal, the subscriber whose alarm has been activated and the premises on which such alarm is located. All telephone conversations are automatically recorded. Due to the security-sensitive nature of their employment, the Company's central monitoring employees are subject to extensive pre-employment screening. The Company's central computer system in the Northeast, which consists of two computers with built-in redundancy, has the capacity to monitor up to 60,000 subscriber accounts. The Company's central computer system in Southern California also consists of two computers with built-in redundancy and has the capacity to monitor up to 60,000 customer accounts. The equipment at each of the Company's three central monitoring stations includes: phone switching equipment; digital receivers that process the incoming signals; a multi-channel, voice-activated recording system; an uninterruptable power supply; dual backup generators supplied by different fuel sources; and other equipment in support of specialized services such as LifeNet, CargoNet and ProWatch. The Company's central monitoring stations are listed by Underwriters Laboratories Inc. ("UL"). The Company also offers Factory Mutual Research Corporation ("FM") approved services through its New York City central monitoring station. UL and FM specifications for central monitoring stations include building integrity, back-up systems, staffing and standard operating procedures. UL and FM confirm compliance with their respective specifications through periodic on-site inspections. In many jurisdictions, applicable law requires that security alarms for certain buildings be monitored by UL-listed and/or FM-approved facilities. In addition, such listing and/or approval is required by certain commercial subscribers' insurance companies as a condition to insurance coverage. Operation of Central Monitoring Stations. Depending upon the type of service for which the subscriber has contracted, central monitoring station personnel respond to alarms by relaying information to the local fire or police departments, notifying the subscriber, or taking other appropriate action, such as dispatching alarm response personnel to the subscriber's premises where this service is available. Other non-emergency administrative signals are generated by low battery status, deactivation and reactivation of the alarm monitoring system, and test signals, and are processed automatically by computer. Each of the Company's central monitoring stations operates 24 hours per day, seven days a week, including all holidays. Each operator receives training that includes familiarization with substantially every type of alarm system in the Company's subscriber base. The 28 Company's training program encompasses classroom study as well as personalized instruction by experienced operators on all aspects of alarm monitoring procedure. Subscriber Contracts. The Company's alarm monitoring subscriber contracts generally have initial terms of five years in duration and provide for automatic renewal terms for fixed periods (typically one or two years) unless the Company or the subscriber elects to cancel the contract at the end of its term. In the normal course of its business, the Company experiences customer cancellations of monitoring and related services as a result of subscribers relocating, the cancellation of purchased accounts in the process of assimilation into the Company's operations, unfavorable economic conditions, dissatisfaction with field maintenance services and other reasons. This attrition is offset to a certain extent by revenues from the sale of additional services to existing subscribers, price increases, the reconnection of premises previously occupied by subscribers and conversions of accounts previously monitored by other alarm companies. See "Risk Factors - -- Customer Cancellation Rates" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Alarm Response Services. The Company supplements its security alarm monitoring services by providing to certain subscribers "alarm response service" in connection with alarm system activations. Upon receipt of an alarm activation signal from an alarm response service subscriber, a response guard is dispatched by the Company to the subscriber's premises. If the Company's response guard observes potential criminal activity upon arrival at the Subscriber's premises, the response guard will report the activity to the dispatch office, which will in turn notify local law enforcement. The response guard will then maintain surveillance until law enforcement officers arrive. Depending upon a subscriber's preference, the dispatch of the Company's response guards may be used as an alternative to the dispatch of local police. The Company's patrol and response officers are subject to extensive pre-employment screening. Patrol and response officers are required to have firearm permits and applicable state and city guard licenses. The Company's training program for patrol and response officers includes arrest procedure, criminal law, firearms usage and patrol and search tactics. This training program complies with state-mandated requirements. The provision of patrol and alarm response services subjects the Company to greater risks, including those relating to accidents or inappropriate employee behavior, than other types of services. The Company believes that demand for alarm response service may increase as a result of a trend on the part of local police departments to limit their response to alarm activations and other factors that may lead to a decrease of police presence. In addition, the Company believes that alarm response service is an effective means to assist subscribers in reducing their exposure to false alarm fines. Electronic Security Alarm Systems and Associated Services Electronic Security Systems. The Company uses what it believes to be the highest quality, most cost-effective components and products in the design and installation of electronic security systems for its customers. An effort is being made to incorporate the most suitable combination of products such that each system provides the highest level of security required at competitive prices. The Company designs, sells, installs and services the following types of security alarm systems: Intrusion Detection Systems incorporate control panels and sensors to detect glass breakage, unauthorized door and window openings, vibration, motion and noise, together with personal emergency alarms and other peripheral equipment such as sirens and bells. Activity indicating the presence of intruders is automatically communicated to the Company's central monitoring stations, a monitoring facility at the subscriber's own premises or the local police or fire department. Commercial and industrial businesses are the traditional users of these types of systems and generally regard them as a necessary business expense. In addition, residential purchases of these systems have grown in recent years. In an effort to minimize false alarms and improve customer service, the Company provides a video alarm verification system (Computect VS) for use in conjunction with intrusion detection systems. The Company is in the process of adding two-way voice capabilities to its central monitoring facility being consolidated in Edison, New Jersey. 29 Fire Detection Systems incorporate heat, ionization, smoke and flame sensing devices, manual pull stations, evacuation sounders, sprinkler systems, elevator controls and evacuation systems. Fire detection systems are designed to comply with applicable fire codes. Activities indicating fire related conditions or events are automatically communicated to the Company's central monitoring stations, a local police or fire department or a monitoring center at the subscriber's own premises. Access Control Systems are primarily designed to exclude unauthorized personnel from specified areas. These systems provide access control that is generally card-activated and can be integrated with fire and burglary detection systems. Entry and exit activity can be monitored or recorded, and may be controlled on the basis of time and authority level. In addition to standard access control systems, the Company has introduced ProWatch, an integrated building security system specially designed for multi-tenant office buildings. ProWatch integrates access control and intrusion and fire detection systems, which systems may be controlled and monitored by a Holmes central monitoring station. Closed Circuit Television Systems can monitor and record entry and exit activity or provide surveillance of designated areas. These systems can deter theft and vandalism or support other access control systems. These systems can be monitored either by a video recorder or in real time via a monitoring screen. Critical Condition Monitoring provides supervision of various commercial systems and processes. A common form of this service is monitoring of sprinkler system functions, such as water flow, air and water pressure, fire pump conditions, shut-off valves and water tank levels. Additionally, these systems can consist of ambient temperature sensors that signal failure of heating or refrigeration systems, devices that monitor manufacturing processes, and other equipment that monitors power levels, water levels and energy waste. Vehicle Tracking Systems provide covert tracking of vehicles and can pinpoint the location of a vehicle anywhere in the continental United States using global positioning satellite technology. In addition to providing tracking capabilities, the Company's LifeNet system and CargoNet system control a vehicle's engine functions thereby allowing LifeNet or CargoNet, as the case may be, to direct a vehicle to a complete halt. CargoNet also protects commercial trucks and trailers from theft. Wireless Security Transmission Systems are designed to be monitored by a central monitoring facility via wireless security transmissions. In 1996 the Company introduced HolmesNet, an in-building wireless security transmission system which is constantly monitored by a Holmes central monitoring station. HolmesNet is also a two-way communication network that allows a subscriber to send a message directly to a Holmes central monitoring station and receive a confirmation that such message was received. Field Repair Services. The Company believes one of the most effective ways of improving customer retention is the provision of quality, responsive field repair service by Company employees. Repair services generate revenues primarily through billable field service calls and contractual payments under the Company's extended service program. The increasing density of the Company's subscriber base, as a result of the Company's continuing effort to infill areas surrounding its branch operations with new subscribers, permits more efficient scheduling and routing of field service technicians, and results in economies of scale at the branch level. The increased efficiency in scheduling and routing also allows the Company to provide faster field services response and support, which leads to a higher level of subscriber satisfaction. FRANCHISE AND DEALER OPERATIONS The Company acquired the business of Dictograph Franchise Corporation in 1988. Headquartered in Edison, New Jersey, this business operates a widespread franchise network and authorized Dictograph dealer program throughout the United States and the Caribbean. As of September 24, 1996, the Company had 29 independent franchisees and 11 independent Dictograph dealers, all authorized to do business under the name of Dictograph Security Systems. The Company is in the process, however, of phasing out its franchise operations and, since 1993, has not established additional franchise relationships. Accordingly, the existing Dictograph franchisees are being given an option either to convert their franchises into dealerships by March 31, 1997 or to maintain their franchises under existing franchise agreements. The Company's franchise agreements require franchisees to purchase products based on individual minimum quotas and pay royalties based on a percentage of their revenues. 30 In accordance with its current business strategy, the Company plans to increase the number of Dictograph dealers in the Dictograph dealer program and is in the process of establishing an authorized Holmes dealer program. As of September 24, 1996, the Company had six independent Holmes dealers. Under both programs, dealers are independent electronic security services businesses which sell, install and service security equipment. These businesses are typically small and often cannot properly provide monitoring services because they lack a sufficient number of subscribers to support the fixed operating expenses associated with such services. Hence, Dictograph and Holmes dealers are able to have their customers' security systems monitored by the Company. Other Company services are also available to dealers under both programs, including technical support, sales training and marketing assistance. In addition, it is intended that both Dictograph and Holmes dealers will be offered the opportunity to provide service and installation support for certain of the Company's national accounts subscribers. Pursuant to dealership arrangements under the Dictograph dealer program, dealers acquire exclusive operating territories and are required to purchase a minimum quota of specialized proprietary security equipment from the Company on an annual basis. On the other hand, under the Holmes program, authorized Holmes dealers will not be provided with exclusive operating territories, but will be allowed to purchase specialized proprietary security equipment from the Company without meeting minimum purchase requirements. In addition, Holmes dealers will be authorized to use the Holmes brand name to gain market advantage. In connection with the Company's efforts to expand its dealer operations, a dealer operations manager, with seven years of experience managing an extensive national dealer network, was recently hired to market both of the Company's dealer programs and to identify new dealer candidates. Increased recruiting efforts for the Dictograph and Holmes dealer programs began in the third quarter of 1996. To date, the Company's revenues from its franchise and dealer operations are derived primarily from (i) the gross margin on the sale of security equipment to franchisees and Dictograph dealers, (ii) royalties received from franchisees based upon their revenues and (iii) subcontract monitoring charges from security alarm services performed for monitoring franchisee and Dictograph dealer accounts. See "Business -- Business Strategy." OTHER SERVICES Jewelry Vault Rentals. The Company operates a maximum security safe deposit vault facility in the jewelry district of New York City. Vault rentals are provided on a short-term or long-term basis to jewelers, many of whom also utilize the Company's security alarm services for their businesses located in the jewelry district. Insured Parcel Delivery. In 1995, the Company began providing insured parcel delivery services to the jewelry markets of New York City, Los Angeles and other locations after acquiring the assets of its One Service business. This business involves the arranging of overnight shipping of insured jewelry parcels from jewelry centers in New York, Los Angeles and other locations to various points throughout the United States. The Company's insured parcel delivery service provides a number of special handling features to ensure the security of the parcel, including computerized tracking and proof of delivery. In addition, insurance coverage is provided for each parcel in an amount up to $50,000 of the declared value of such parcel with no deductible. MARKETING AND SALES The Company is currently focusing its marketing efforts on increasing its visibility throughout the United States. This is accomplished through national and local advertising in various forms of print media, direct mail campaigns, telemarketing efforts, referrals from existing customers and attendance at national trade shows. Additionally, the Company's marketing strategy includes the return to one of the original Holmes logos used in the early part of this century. The Company believes that use of this original logo will increase public recognition and awareness of Holmes and its historical presence and long-standing reputation in the industry. The Company also intends to provide its sales force with extensive training and market resources, including professionally prepared literature and presentation materials, background research and technical information. The Company installs security equipment either on the basis of an outright sale of the equipment to the subscriber, or as a "company-owned system" where Holmes charges the subscriber for the installation, but retains title to the equipment. Each of the Company's four branch offices has sales representatives for new system sales and for offering additional services to existing customers. In total, the Company currently employs 47 sales representatives. It is anticipated that additional sales representatives will be hired in the future to support 31 the national accounts program and to support the Company's continued sales and marketing efforts. Sales of alarm systems are generally made at the customer's premises, typically through visits by a sales representative. The Company's sales representatives analyze a customer's security needs and, acting in coordination with necessary technical support staff, design or specify an appropriate security system to meet those needs and coordinate the installation of the system in the customer's premises. The Company maintains installation and field service personnel, as well as inventories of parts, in each of its branch offices. See "Business -- Business Strategy." COMPETITION The electronic security services industry in the United States is highly competitive and highly fragmented, with new competitors continually entering the field. Competition is based primarily on price in relation to quality of service. The Company believes that it derives competitive strength from its emphasis on high quality systems and services and its attention to technological advances. Sources of competition in the electronic security services industry are other providers of central monitoring services, systems directly connected to local police and fire departments, local alarm systems and other methods of protection, such as locks and gates and manned guarding. The Company believes that it competes with numerous local, regional and national companies. The Company's primary nationwide competitors include ADT Security Systems, Inc., Ameritech Monitoring Services, Inc., Wells Fargo Alarm Services and Honeywell, Inc. Some of the Company's national competitors have greater financial, marketing and other resources than the Company. It is possible that, subject to regulatory compliance, companies such as those engaged in the telephone and cable business, if not already competing, may in the future endeavor to enter the electronic security services industry. SUPPLIERS The Company currently has multiple sources of supply for the components used in the electronic security and fire detection systems that it designs and installs. The Company does not manufacture any of the equipment or components that it designs and installs. The Company believes that a variety of alternative sources of supply are available on reasonable terms. However, the Company has no guaranteed supply arrangements with its suppliers and purchases components pursuant to purchase orders placed from time to time in the ordinary course of business. There can be no assurance that shortages of components will not occur in the future. Failure of sources of supply and the inability of the Company to develop alternative sources of supply if required in the future could have a material adverse effect on the Company's operations. REGULATION The Company's operations are subject to a variety of federal, state, county and municipal laws, regulations and licensing requirements. Many of the states in which Holmes operates, as well as certain local authorities, require Holmes to obtain licenses or permits to conduct a security alarm services business. Certain governmental entities also require persons engaged in the security alarm services business to be licensed and to meet certain standards in the selection and training of employees and in the conduct of business. The Company believes that it holds the required licenses and is in substantial compliance with all licensing and regulatory requirements in each jurisdiction in which it operates. In addition, there has been a trend recently on the part of municipalities and other localities to attempt to reduce the level of false alarms through various measures such as the licensing of individual alarm systems and the imposition of fines upon customers, revocation of customer licenses or non-response to alarms after a certain number of false alarms. While such statutes and ordinances have not had a material adverse effect on Holmes' business operations to date, Holmes is unable to predict whether such statutes or ordinances, or any similar statues or ordinances enacted by other jurisdictions, will adversely affect its business and operations in the future. The security alarm industry is also subject to the oversight and requirements of various insurance, approval, listing and standards organizations. Adherence to the standards and requirements of such organizations may be mandatory or voluntary depending upon the type of customer served, the nature of security service provided and the requirements of the local governmental jurisdiction. The Company has not had any material difficulties in complying with such standards and requirements in the past. 32 Holmes' electronic security business relies on the use of telephone lines and radio frequencies to transmit signals and to communicate with field personnel. The cost of such lines and the type of equipment which may be utilized in telephone line transmissions are regulated by both the federal and state governments. The operation and utilization of radio frequencies are regulated by the Federal Communications Commission and state public utilities commissions. RISK MANAGEMENT The nature of the services provided by Holmes potentially exposes it to greater risks of liability for employee acts or omissions, or system failures, than may be inherent in many other service businesses. To reduce those risks, substantially all of Holmes' customers have subscriber agreements which contain provisions for limited liability and predetermined liquidated damages to customers and indemnification by customers against third party claims; however, some jurisdictions prohibit or restrict limitations on liability and liquidated damages. Holmes carries insurance of various types, including general liability and errors and omissions insurance to insure it from liability arising from acts or omissions of its employees. Holmes' general and umbrella liability insurance policies combined provide up to $15 million of coverage, depending on the nature of claims. Certain of Holmes' insurance policies and the laws of some states may limit or prohibit insurance coverage for punitive or certain other kinds of damages arising from employee misconduct. In addition, in some states the contractual limitation of liability and indemnification provisions may be ineffective in cases of gross negligence or intentional misconduct and in certain other situations. INTELLECTUAL PROPERTY Holmes Protection and Dictograph are the Company's principal trademarks and service marks. The Company also uses the Computect service mark in connection with its alarm services and related products, the LifeNet and CargoNet service marks for its vehicle tracking systems, the HolmesNet service mark in connection with its wireless transmission system and the One Service service mark for its insured parcel delivery service. The Company believes that its rights in these trademarks and service marks are of unlimited duration and adequately protected by registration or applications to register. In addition, the ProWatch trademark is authorized for use by the Company from a third party. The Company believes that certain of its trademarks and service marks are important to the marketing of its security alarm services, particularly as the Company strives to establish a strong identity for Holmes with its customers. In addition, the Company relies on trade secret and other laws to protect its proprietary rights in its security systems and programs. No assurance can be given that the Company will be able to successfully enforce or protect its rights to its trademarks, service marks or proprietary information in the event that any of them is subject to third party infringement or misappropriation. The Company's central monitoring operations utilize proprietary software which the Company has licensed from a third party. EMPLOYEES As of September 24, 1996, the Company had approximately 434 full-time employees. The Company believes that relations with its employees and their unions are satisfactory. All of the Company's installation and service personnel and a small portion of its response personnel are represented by unions under the following collective bargaining agreements with the Company's subsidiaries: 33
Agreement Employees Subsidiary Union Expiration Date Covered ---------------------------------- --------------------------- --------------------- ----------- Holmes Protection of Long Island, United Service Workers of December 31, 1996 10 Inc. America, Local 355 Holmes Protection of Philadelphia, Local No. 98, International May 10, 1996(1) 16 Inc. Brotherhood of Electrical Workers Holmes Protection of New Jersey, United Service Workers of September 30, 1996(2) 36 Inc. America, Local 355 Holmes Protection of New York, Local 3, International January 31, 1997 66 Inc. Brotherhood of Electrical Workers Holmes Protection of New York, United Service Workers of March 29, 1997 17 Inc. America, Local 355
- ------ (1) Although this collective bargaining agreement expired on May 10, 1996, the parties thereto are currently negotiating a new agreement. (2) The Company has negotiated a new five year collective bargaining agreement with the Union. The Union has ratified this new collective bargaining agreement, and the Company anticipates that it will be executed on or prior to September 30, 1996. HISTORICAL DEVELOPMENTS THE 1995 OUTSOURCING AGREEMENT On April 4, 1995, the Company entered into a ten-year, $51 million information technology services agreement, as amended (the "Outsourcing Agreement"), with PremiTech Corporation ("PremiTech"), a subsidiary of EDS. Pursuant to the Outsourcing Agreement, PremiTech is assisting the Company in consolidating the Company's four central monitoring stations located in the Northeast to a single location, managing all of the Company's technological infrastructure and performing certain of the Company's administrative functions. As part of the consolidation plan, PremiTech is administering the expansion of the Company's Edison, New Jersey facility to accommodate the computer equipment, voice and data transmission lines and monitoring workstations necessary for Holmes' employees to perform all central monitoring activities and dispatch functions. In regard to the Company's technological infrastructure, PremiTech has assumed ongoing responsibility for maintaining all of the Company's computer hardware and software systems, as well as all telephone and other voice and data communication systems and equipment. In addition, PremiTech is managing Holmes' customer service, purchasing, billing and collection functions. In accordance with the Outsourcing Agreement, 40 former employees of the Company became employees of PremiTech during 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." PremiTech's obligations under the Outsourcing Agreement are guaranteed by EDS, a Texas-based corporation which is a world leader in the application of information technology. PremiTech is a limited partner in the Investor, holding a partnership interest equivalent to approximately 6% of the Company's Common Stock. THE 1994 INVESTMENT AGREEMENT On August 1, 1994, pursuant to the Investment Agreement, the Investor purchased 1,515,886 shares of Common Stock (the "Investor Shares") and the Investor Warrants for an aggregate consideration of $10 million. The Investment Agreement and the transactions contemplated thereby, including amendments to the Company's By-Laws and the adoption of the Restated Certificate of Incorporation of the Company which effected the one- for- fourteen reverse stock split of the Common Stock, were approved by the Company's stockholders at a meeting held on July 29, 1994. 34 In connection with the Investment Agreement, the Investor received the right to nominate four Investor- Nominees, subject to adjustment as described below, to the Company's Board. In the event that the number of shares of Investor Securities (as defined herein) as adjusted pursuant to stock splits and recapitalizations, shall be fewer than the number of shares set forth below and the Board shall at the date of such determination consist of nine or more members, the number of Investor-Nominees shall be reduced to the number set forth opposite the number and percentage of shares below: Percentage of Number of Outstanding Common Stock Number of Investor Securities As of December 31, 1995 Investor-Nominees - ------------------- ------------------------ ----------------- 1,532,709 34.4% 3 1,149,531 25.8% 2 862,148 19.3% 1 478,971 10.7% 0 In the event that the number of Institution-Nominees shall be fewer than three, the Investment Agreement provides that the Investor shall use its best efforts to cause the Investor-Nominees to vote to reduce the size of the Board to seven members. Upon the adoption by the Board of such resolution reducing the number of directors constituting the entire Board to seven members, the number of Investor-Nominees shall be reduced to three. Thereafter, the number of Investor-Nominees shall be subject to further reduction according to the reduction in the number of Investor Securities as follows: Percentage of Number of Outstanding Common Stock Number of Investor Securities As of December 31, 1995 Investor-Nominees - ------------------- ------------------------ ----------------- 1,532,709 34.4% 2 1,053,737 23.6% 1 478,971 10.7% 0 As described below under the caption "The 1992 Restructuring," it is anticipated that, upon consummation of this offering, the number of permitted Institution-Nominees will be reduced from three to two. In such event, the Investment Agreement provides that the number of Investor-Nominees shall be reduced from four to three upon the condition that the size of the Board is reduced to seven directors. the Company anticipates that the Investor will cause the number of Investor-Nominees to be reduced from four to three upon consummation of this offering. However, the Investor and the Company have agreed to waive the condition regarding a reduction in the size of the Board. Accordingly, the size of the Board will remain at nine members, subject to change as provided by the By-Laws. As of the date hereof, it has not been determined which of the Investor-Nominees will resign from the Board upon the consummation of this offering. The Company has no immediate plans to fill the anticipated vacant seat on the Board created by such resignation. See "Business--Historical Developments/The 1992 Restructuring," "--Historical Developments/Other Certificate of Incorporation and By-Law Provisions" and "Management-Nomination of Certain Directors." In the event of the death, resignation or removal of a director of the Company (other than an Investor-Nominee or an Institution-Nominee) on or prior to August 1, 1996, the remaining directors then in office shall use their best efforts to elect a successor director to fill the vacancy created thereby. In the event that they shall fail to elect a successor director within 60 days following the date of such death, resignation or removal, and shall not, by a majority vote of the directors remaining in office within such period, agree to leave such directorship position vacant until the next annual meeting of stockholders, the Company shall use its best efforts to, and the Investor, to the extent permitted by the By-Laws shall, call a special meeting of stockholders for the purpose of electing a successor director to serve for the unexpired term created by the vacancy. George Flagg, the President and Chief Executive Officer of the Company, was appointed in May 1996 to fill such a vacancy. Notwithstanding the foregoing, the Investment Agreement provides that in the event the percentage interest of the Investor and the Investor Affiliates, as defined herein, represented by the Investor Securities shall be less than 8.5% of the issued and outstanding number of shares of Common Stock (including up to 400,000 shares of Common Stock issuable upon the exercise of the Investor Warrants), the Investor shall not be entitled to designate any Investor-Nominees. Except for such 8.5% minimum requirement, the percentage of the outstanding Common Stock represented by the number of Investor Securities set forth in the preceding tables does not affect the number of Investor-Nominees. 35 As defined in the Investment Agreement, "Investor Affiliates" means collectively, Mark S. Hauser, David Jan Mitchell, William Spier (the foregoing, the "Individuals"), any partner of the Investor at August 1, 1994 ("Partner"), any former partner of the Investor who, upon withdrawal as a partner or upon the liquidation of the Investor, shall have received in distribution or liquidation any shares of Common Stock or Investor Warrants (a "Former Partner"), any wholly-owned subsidiary of any Partner or Former Partner, any successor to any Partner or Former Partner by reason of merger or the sale or disposition of all or substantially all of the business of such Partner or Former Partner (provided that such Partner or Former Partner has substantial operating activities), any immediate family member of any Partner or Former Partner or any of the Individuals or any trust for the benefit of any Partner or Former Partner or any of the Individuals or his or her immediate family members, and the estate, personal representative or the beneficiary of the estate of any Partner or Former Partner or any of the Individuals. As defined in the Investment Agreement, "Investor Securities" means all the shares of Common Stock (without duplication) beneficially owned solely, or on a shared basis exclusively with any Investor Affiliates, by the Investor and any Investor Affiliates, together with such number of shares of Common Stock beneficially owned by the Investor or any Investor Affiliates which are issuable upon the exercise of the Investor Warrants; provided that, for purposes of such definition, the number of such shares of Common Stock issuable upon the exercise of the Investor Warrants shall not exceed 400,000. The Investor Securities deemed to be held by any Investor Affiliate does not include any shares of Common Stock held by any Partner or Former Partner prior to the date such person first became a Partner. REGISTRATION RIGHTS AGREEMENTS In connection with the Investment Agreement, the Company entered into substantially similar Registration Rights Agreements, each dated August 1, 1994, with the Investor and each of the Institutions, respectively (the "Registration Rights Agreements"). Pursuant to the Registration Rights Agreements, the Company agreed to use its best efforts to prepare and file with the Securities and Exchange Commission and thereafter keep effective for a period of up to 15 years a registration statement under the Securities Act of 1933 (the "Securities Act") permitting the public resale of the Investor Shares, the 1,588,105 shares held by the Institutions on August 1, 1994, and the shares of Common Stock issuable upon exercise of the Investor Warrants and the Institution Warrants. The Registration Rights Agreements provide that the Company may not grant any "piggyback" registration rights with respect to underwritten offerings to any person without the written consent of the Investor and the holders of more than 50% of Registrable Securities (as defined therein) held by the Institutions. All expenses incident to the Company's performance of or compliance with the Registration Rights Agreements will be borne by the Company except that underwriters' discounts and commissions with respect to sales of Registrable Securities and fees and disbursements of counsel for the holders of Registrable Securities will be paid by such holders. In connection with this offering, the Investor and each Institution have waived their respective registration rights until 180 days following the date of this Prospectus. WARRANTS Investor Warrants. The Investor Warrants entitle the holder thereof to purchase an aggregate of 685,714 shares of Common Stock, and are exercisable at an exercise price of $4.58 per share at any time prior to expiration, subject to adjustment upon certain dilutive events. The Investor Warrants expire on August 1, 2004. Institution Warrants. The Institution Warrants initially entitled the holders thereof to purchase an aggregate of 147,572 shares of Common Stock, subject to adjustment upon certain dilutive events. The Institution Warrants expire on August 13, 2002. The Institution Warrants are exercisable at any time prior to expiration at an exercise price which is subject to adjustment upon certain dilutive events. As a result of the antidilution provisions contained in the Institution Warrants, upon the issuance of the Investor Shares and Investor Warrants to the Investor pursuant to the Investment Agreement, the Institution Warrants were adjusted to provide for an increase in the number of shares purchasable to 193,150 and a reduction in the exercise price from $13.97 to $10.68. Upon approval of the 1996 Plan (as hereinafter defined in "Management -- Stock Option Plans"), the Institution Warrants will be adjusted in accordance with the antidilution provisions contained therein to increase the 36 number of shares purchasable and to reduce the exercise price thereof. Such adjustment will reflect the issuance of the New Bank Warrants and the stock options granted under the 1996 Plan. The Company does not believe that upon such adjustment the number of shares purchasable will exceed 210,000 and the exercise price thereof will be reduced below $10.00 per share. The material provisions of the Investor Warrants and the Institution Warrants (collectively, the "Warrants") are substantially similar. Each of the Warrants provides that the exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment from time to time upon the occurrence of the following events: upon issuance of shares of Common Stock below certain specified prices, payment of dividends by the Company in shares of Common Stock or extraordinary cash dividends, subdivision by the Company of its Common Stock, combination by the Company of the outstanding shares of Common Stock into a smaller number of shares of Common Stock, issuance by the Company of certain rights, options, warrants, evidences of its indebtedness or assets, or in case of any consolidation, merger or sale of substantially all the assets of the Company. Also, as stated below, the terms of the Warrants generally prohibit the Company from issuing preferred stock. OTHER CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS In connection with the 1994 Investment Agreement, stockholders of the Company approved certain modifications to the Company's Restated Certificate of Incorporation and Amended and Restated By-Laws (the "By-Laws"). Under the Restated Certificate of Incorporation, the Board has the authority to issue Preferred Stock in one or more series and to determine its rights, preferences, privileges and restrictions, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such series, without any further vote or action by the stockholders, except that (i) any voting rights conferred on such Preferred Stock require the consent of three-quarters of the entire Board and a majority of the shares of Common Stock then outstanding and (ii) no regular dividends may be paid with respect to the Preferred Stock without the consent of the holders of a majority of the shares of Common Stock then outstanding. It should be noted, however, that pursuant to the terms of the Warrants, the Company is prohibited from issuing any capital stock of any class which has the right to more than one vote per share or which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding up of the Company. The Company's Restated Certificate of Incorporation and By-Laws were amended in 1994 to provide for the division of the Board into three classes of directors serving staggered three-year terms. The By-Laws fix the initial size of the Board at nine, provided that the Board, by vote of three-quarters of the directors then in office, may increase or decrease the size of the Board and the number of directors in any class. Currently, the Board is comprised of 9 directors. The Restated Certificate of Incorporation also provides that stockholder action can be taken only at an annual or special meeting of stockholders and cannot be taken by written consent in lieu of a meeting. Additionally, the Restated Certificate of Incorporation requires an affirmative vote of three-quarters of the Company's voting power (unless three-quarters of the total number of directors then in office shall have approved the amendment) to amend provisions of the Certificate of Incorporation with respect to the number and classification of the directors, stockholder action without written consent, director liability, indemnification and amendments to the Restated Certificate of Incorporation. THE 1992 RESTRUCTURING On August 13, 1992, the Company effected a financial restructuring (the "1992 Restructuring") pursuant to the Exchange Agreement, dated as of December 18, 1991, which agreement was amended as of January 31, 1992, May 24, 1992 and June 30, 1992 (the "Exchange Agreement"). Stockholder approval of the Exchange Agreement was received on August 10, 1992. The Exchange Agreement provided for the satisfaction of the Notes representing approximately $72.6 million of loans to the Company by the Institutions (including accrued interest and penalties thereon, as at June 30, 1992), by a combination of cash payment, an exchange of Common Stock for debt, and forgiveness of approximately $34.5 million of debt. The Company implemented a 25 for 1 37 reverse stock split and then sold for 8.75 British pounds (approximately $16.91) per share additional shares of Common Stock to the Institutions as well as a total of 1,151,947 shares to its existing stockholders and directors and to certain institutional investors. Upon the completion of the 1992 Restructuring, the Institutions received a total of 1,603,224 new shares of Common Stock (representing 54.3% of the resulting outstanding shares of Common Stock), warrants (the "Institution Warrants") to purchase an aggregate of 147,572 shares of Common Stock at 8.75 British pounds per share (representing 5% of the resulting outstanding shares), and a cash payment of $12.6 million. As of August 13, 1992, after giving effect to the reverse stock split, the average trading price of the Common Stock on the London Stock Exchange was 7.28 British pounds per share and, based upon such price, the aggregate value of the shares issued to the Institutions was approximately $22.5 million. (United States dollar equivalents stated in this paragraph assume an exchange rate of $1.9323 per British pound.) John Hancock Mutual Life Insurance Company and The Mutual Life Insurance Company of New York, and their respective affiliates, are currently the two largest stockholders among the Institution group. In connection with the 1992 Restructuring and pursuant to the Exchange Agreement, the Institutions received the right to nominate three directors of the Company, subject to adjustment based on their percentage ownership of total Common Stock. Specifically, the Exchange Agreement provides that so long as the Institutions in the aggregate continue to hold at least the percentage of the issued and outstanding Common Stock of the Company set forth below, the Institutions owning Common Stock (or such of the Institutions who wish to participate in the selection) shall have the right to nominate the following number of persons to the Board: Percentage of Outstanding Common Number of Stock Held by Institutions Directors ------------------------------------ ------------- 30.0% 3 20.0% 2 7.5% 1 Following this offering, the aggregate share ownership of the Institutions will be reduced below 30%, and, accordingly, the Institutions will have the right to nominate only two directors. See also "Business -- Historical Developments/The 1994 Investment Agreement." The Exchange Agreement provides with respect to any Institution that so long as such Institution holds any shares of Common Stock, if at any time the Company engages in any transaction that involves the offer or issuance of securities to its stockholders generally (including rights offerings and exchange offers), the Company will (i) allow such Institution to participate in any such transaction on identical terms, if such participation can be made pursuant to an exemption under the Securities Act of 1933 or (ii) in the event of a rights offering, at such Institution's option, provide for the sale by the Company of such Institution's rights or the underlying securities at the market price of such securities and the transmittal of the sale proceeds to such Institution in connection with such sale. See also the discussion under "Warrants" above for a description of additional rights received by the Institutions pursuant to the Institution Warrants. 38 PROPERTIES As of September 24, 1996, the Company leased the following principal properties:
Square Annual Address Principal Use Feet Rental Lease Expires ------------------------- -------------------------------- -------- ---------- ----------------- 95F Hoffman Lane Service center and sales office 3,848 $ 25,008 June 30, 1997 Islandia, Long Island, NY 440 9th Avenue Corporate and sales offices and 20,000 $392,800 February 28, 2002 New York, NY central station 580 5th Avenue Service and response center 6,500 $217,000 June 30, 2000 New York, NY and vaults 524 West 29th Street Service and response center 12,755 $128,125 June 30, 1999 New York, NY 21 Northfield Avenue Sales office, service center and 15,620 $127,476 August 31, 1999 Edison, NJ central station 701 Callowhill Street Sales office and service center 10,000 $ 35,000 August 31, 1999 Philadelphia, PA 19123
LEGAL PROCEEDINGS The Company experiences routine litigation in the normal course of its business, which claims are generally covered under the Company's insurance policies. The Company believes that none of such pending litigation will have a material adverse effect on its consolidated financial condition, future results of operations or liquidity. The Company is a defendant in a lawsuit captioned Pan American Diamond Corporation and Wasko Gold v. Holmes Protection of New York, Inc. commenced in New York State Supreme Court, New York County, on January 7, 1994. The complaint seeks compensatory, consequential and punitive damages in excess of $1,000,000 arising out of a burglary at a New York City jewelry manufacturing company in which an employee of the Company participated. In the event that it is determined that the Company's applicable insurance coverage for acts of employee dishonesty is limited to $100,000 at the date of the loss, the Company faces an uninsured exposure for any damages that may be awarded in excess of such amount. However, there are a variety of legal, factual and insurance coverage issues to be determined before an evaluation can be made as to the likely outcome of the action and the effect, if any, it may have on the Company. The Company intends to continue to vigorously defend this action. 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The executive officers and directors of the Company are set forth in the following table:
Class of Name Age Director(1) Position ---------------------- ----- ----------- ---------------------------------------------- George V. Flagg (2) 54 B President, Chief Executive Officer and Director James L. Boehme (2) 48 -- Executive Vice President -- Sales and Marketing Glenn C. Riker 51 -- Senior Vice President of Human Resources and Assistant Secretary Lawrence R. Irving (2) 39 -- Vice President -- Finance Pierre Besuchet 63 A Director Daniel T. Carroll (3) 70 A Director Lawrence R. Glenn 58 B Director Mark S. Hauser (4) 38 C Director, Vice Chairman of the Board William P. Lyons (4) 55 C Director, Chairman of the Board David Jan Mitchell (4) 35 C Director Edward L. Palmer 79 B Director William Spier (4) 61 C Director
- ------ (1) In accordance with the Restated Certificate of Incorporation and the By-Laws of the Company, the Board is divided into three classes of directors serving staggered three-year terms. The terms of the Class A, Class B and Class C directors will expire at the annual meetings of stockholders in 1998, 1996 and 1997, respectively. Each class of directors serves for three years, with the terms of office of the respective classes expiring in successive years. (2) Mr. Flagg and Mr. Boehme assumed their respective positions as officers of the Company on January 8, 1996 and Mr. Irving assumed his position as an officer of the Company on May 13, 1996. Mr. Flagg became a director of the Company in May 1996. (3) Mr. Carroll became a director of the Company on June 27, 1996. (4) Pursuant to the Investment Agreement, the number of directors the Investor is entitled to nominate will be reduced from four to three. As of the date hereof, it has not been determined which of the Investor-Nominees will resign from the Board upon consummation of this offering and the Company has no immediate plans to fill the anticipated vacant seat created by such resignation. See "Business -- Historical Developments/The 1994 Investment Agreement" and "Management -- Nomination of Certain Directors." George V. Flagg. Mr. Flagg joined the Company on January 8, 1996 as President and Chief Executive Officer. Prior thereto, from September 1985 to December 1995, Mr. Flagg served in various executive capacities at National Guardian, a security alarm services company, and most recently as President (from May 1986 to December 1995) and Chief Executive Officer (from May 1991 to December 1995). Mr. Flagg became a director of the Company in May 1996. James L. Boehme. Mr. Boehme was appointed Executive Vice President-Sales and Marketing of the Company on January 8, 1996. Prior thereto, from March 1988 to December 1995, Mr. Boehme served in various executive capacities at National Guardian, and most recently as Senior Vice President, Sales and Marketing (from June 1994 to December 1995) and Vice President, Sales and Marketing (from January 1990 to June 1994). Glenn C. Riker. Mr. Riker has been with the Company since December 1989, starting as Director of Human Resources and currently serving as Senior Vice President of Human Resources and Assistant Secretary. Prior to joining the Company, Mr. Riker was Vice President of Human Resources at Atlas Copco North America, Inc., a manufacturer of industrial equipment. 40 Lawrence R. Irving. Mr. Irving joined the Company in May 1996 as Vice President-Finance. From July 1995 to April 1996, Mr. Irving served as Controller, and then as Vice President-Finance and Treasurer, respectively, of Centennial Security Holdings, Inc., a security alarm services company. Prior thereto, from April 1987 to June 1995, Mr. Irving served as Assistant Controller, and then as Assistant Vice President/Assistant Controller, respectively, of National Guardian. Pierre Besuchet. Mr. Besuchet has been a director since 1991. Mr. Besuchet has been the President of Gerant des Fortunes, a Swiss investment management company since 1983. He is also a non-executive director of Faisal Finance (Switzerland) S.A., a Swiss investment firm. Daniel T. Carroll. Mr. Carroll has been a director since June 1996. Since 1982, Mr. Carroll has been the Chairman of The Carroll Group, a management consulting company. He is also a director of A.M. Castle & Co., American Woodmark Corporation, Aon Incorporated, Comshare, Inc., DeSoto, Inc., Diebold Incorporated, Oshkosh Truck Corporation, Wolverine World Wide, Inc. and Woodhead Industries Inc. Lawrence R. Glenn. Mr. Glenn has been a director since February 1996. Since 1995, Mr. Glenn has been Chairman of J.W. Goddard and Company, a privately owned investment company dealing in real estate, corporate finance and financial advisory services. Mr. Glenn is the retired former Chairman of the Credit Policy Committee of Citicorp and Citibank, N.A. He is also a director of First Bank of Americas and Gerber Childrenswear Holdings, Inc. Mark S. Hauser. Mr. Hauser has been a director since 1994. He was elected Vice Chairman of the Board in May 1995. He is the founder and, since 1991, has been a Managing Director of Tamarix Capital Corporation, a New York-based private investment banking firm. Prior thereto, Mr. Hauser was a Managing Director at Hauser, Richards & Co., and Ocean Capital Corporation, private international investment banking firms. He is also a director of ICC Technologies, Inc. and EA Industries, Inc. William P. Lyons. Mr. Lyons has been a director since 1994. He was elected Chairman of the Board in May 1995. He has been President and Chief Executive Officer of William P. Lyons and Co., Inc., a private investment firm, since 1975. From 1992 to 1995, Mr. Lyons served as Chairman of JVL Corp., a pharmaceutical manufacturer, and from 1988 to 1991, he served as Chairman and Chief Executive Officer of Duro-Test Corporation, a manufacturer of specialty lighting products. Mr. Lyons was an adjunct Professor of Management and Law at Yale University from 1973 to 1989. Mr. Lyons is also a director of Lydall, Inc., Video Lottery Technologies, Inc. and DeSoto, Inc. David Jan Mitchell. Mr. Mitchell has been a director since 1994. Since January 1991, Mr. Mitchell has been President of Mitchell & Company, Ltd., a New York-based private merchant banking company he founded. Since March 1992, Mr. Mitchell has been a partner of Pertherton Capital Corporation, a privately held real estate investment company. From April 1988 to December 1990, Mr. Mitchell served as a managing principal and a director of Rodman & Renshaw, Inc., a publicly traded investment banking and brokerage firm. Mr. Mitchell also serves as a director of Kellstrom Industries, Inc. and Bogen Communications International. Edward L. Palmer. Mr. Palmer has been a director since 1992. He is the retired Chairman of the Executive Committee of Citicorp and Citibank, N.A. Mr. Palmer's current directorships include Devon Group, Inc., SunResorts Ltd. N.V., FondElec Group and Energy Services International Corporation. Mr. Palmer has also served on the board of directors of several U.S. and international corporations. William Spier. Mr. Spier has been a director since 1994. He has served as Chairman of DeSoto, Inc., a detergent manufacturer, since 1991. From 1991 to 1994 and again since September 1995, Mr. Spier has been Chief Executive Officer of DeSoto, Inc. Since 1991, he has also served as Chairman and President of Sutton Holding Corp., an investment company. He is also a director of DeSoto, Inc., Geotek Communications, Inc., Video Lottery Technologies, Inc. and EA Industries, Inc. NOMINATION OF CERTAIN DIRECTORS The Company is party to the Exchange Agreement and the Investment Agreement which entitle certain stockholders to nominate members of the Board. Messrs. Palmer and Glenn were initially nominated by the Institutions and appointed to the Board on November 30, 1992 and February 8, 1996, respectively, in accordance 41 with the terms of the Exchange Agreement. Upon consummation of this offering, the aggregate share ownership of the Institutions will be reduced below 30%, and, accordingly, the Institutions will have the right to nominate only two directors. See "Business -- Historical Developments/The 1992 Restructuring." Messrs. Hauser, Lyons, Mitchell and Spier were nominated by HP Partners L.P. and elected to the Board on July 29, 1994 in accordance with the terms of the Investment Agreement. Messrs. Hauser, Mitchell and Spier are stockholders and directors of the general partner of HP Partners L.P. and Messrs. Mitchell and Spier are also limited partners of HP Partners L.P. Pursuant to the Investment Agreement, the number of directors the Investor is entitled to nominate to the Board following this offering will be reduced from four to three. As of the date hereof, it has not been determined which of the Investor-Nominees will resign from the Board upon consummation of this offering and the Company has no immediate plans to fill the anticipated vacant seat created by such resignation. See "Business -- Historical Developments/The 1994 Investment Agreement" and "--Historical Developments/The 1992 Restructuring." BOARD COMMITTEES AND COMPENSATION The Board has designated an Audit Committee that reviews the scope and results of the audit and other services performed by the Company's independent accountants. The Audit Committee currently consists of Messrs. Carroll, Glenn, Lyons, Mitchell, Palmer (Chairman) and Spier. The Board has also designated a Compensation Committee that establishes objectives for the Company's senior executive officers, sets the compensation of directors, executive officers and other employees of the Company and is charged with the administration of the Company's employee benefit plans. The Compensation Committee currently consists of Messrs. Besuchet, Carroll, Lyons (Chairman), Palmer and Spier. The Board of Directors also has a Retirement Benefits Committee which provides oversight for the Company's pension and retirement benefit plans. The Retirement Benefits Committee currently consists of Messrs. Glenn, Hauser (Chairman) and Mitchell. Upon resignation of one of the Investor-Nominees, vacancies in certain of the above committees will be created. The Company has no immediate plans to fill vacancies created on any of the above committees as a result of such resignation. Each non-employee director receives an annual director's fee of $15,000 (except for the Chairman who receives an annual fee of $25,000) and a fee of either $500 per day for attending in person meetings of the Board or Committees of the Board, or $250 per day for participating in such meetings by telephone. Non-employee directors are reimbursed for their reasonable expenses incurred in connection with attendance at or participation in such meetings. In addition, under the 1996 Plan, each non-employee director who was a director of the Company on December 4, 1995 was granted an option to purchase 25,000 shares of Common Stock. Messrs. Glenn and Carroll were each granted an option to purchase 25,000 shares of Common Stock on February 8, 1996 and June 27, 1996, respectively, at the time of their respective appointments to the Board. Such grants and the terms thereof are subject to and conditioned upon stockholder approval of the 1996 Plan at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. See "Management -- Stock Option Plans." Directors who are employees of the Company receive no additional compensation for their services as directors. However, such directors are reimbursed for their reasonable expenses incurred in connection with attendance at or participation in meetings of the Board or Committees of the Board. COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION During the Company's fiscal year ended December 31, 1995, the Compensation Committee of the Board consisted of Messrs. Besuchet, Lyon (Chairman), Palmer and Spier. None of these individuals has ever served as an officer or an employee of the Company (other than by reason of the officer status conferred upon the Chairman of the Board pursuant to the Company's By-Laws). In addition, no executive officer of the Company has ever served as (i) a member of the compensation committee or equivalent of another entity, one of whose executive officers served on the Company's Compensation Committee, (ii) a director of another entity, one of whose executive officers served on the Compensation Committee or (iii) a member of the compensation committee or equivalent of another entity, one of whose executive officers served as a director of the Company. EXECUTIVE COMPENSATION The following table sets forth a summary of annual and long-term compensation earned by or paid to the former Chief Executive Officer and each of the other four most highly compensated current or former executive officers of the Company (collectively, the "Named Officers") for services rendered to the Company during each of the last three fiscal years: 42 SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation Awards ----------------------------------- -------------- Other Securities Annual Underlying All Other Compen- Options/ Compen- Salary Bonus sation SARs sation Name and Principal Position Year ($) ($) ($) (#) ($)(1) ----------------------------------- ------ ---------- --------- --------- -------------- ----------- Richard Hickson (2) ............... 1993 $183,300 $ 7,600 $ -- -- $ -- President and Chief Executive 1994 208,333 5,346 -- 35,418(3) -- Officer 1995 108,605 -- -- -- -- Brian H. Jaffe (4) ................ 1993 115,000 6,000 10,400 -- 3,630 Vice President, General Counsel and 1994 117,884 13,151 10,400 8,854(3) 3,931 Secretary 1995 122,000 25,010 10,400 -- 4,325 Eugene G. Lestardo (5) ............ 1993 125,000 17,455 11,700 -- 4,500 Acting Chief Operating Officer 1994 128,128 42,667 11,700 13,281(3) 4,624 1995 141,300 16,250 12,425 15,000(6) 4,628 Glenn C. Riker .................... 1993 86,000 15,300 13,000 -- 3,039 Senior Vice President of Human 1994 88,150 12,782 13,000 8,854(3) 3,209 Resources 1995 91,260 20,716 13,000 -- 3,476 William C. Sholl (7) .............. 1993 54,692 3,783 6,320 -- 208 Vice President Management 1994 90,000 10,378 10,400 -- 3,011 Information Systems 1995 93,150 20,027 10,400 8,854 3,339
- ------ (1) Represents matching contributions by the Company under the Company's 401(k) Plan. 20% of accrued matching contributions become vested on each of the second through sixth anniversaries of employment and are fully vested thereafter. (2) Mr. Hickson resigned as President and Chief Executive Officer and a director of the Company, effective May 30, 1995. His outstanding stock options were cancelled on such date pursuant to the terms of the Executives Plan (as defined in "Management-Stock Option Plans"). From May 31 through September 30, 1995, Mr. Hickson served as a consultant to the Company for which services he received additional compensation of $6,531. (3) 1994 option grants replaced a like number of options previously granted under the Executives Plan to Messrs. Hickson, Lestardo and Riker in 1992 and Mr. Jaffe in 1994. (4) Mr. Jaffe resigned as Vice President, General Counsel and Secretary of the Company, effective as of April 27, 1996. His unvested options to purchase 6,198 shares of Common Stock were cancelled. Mr. Jaffe's vested options to purchase 2,656 shares of Common Stock remain outstanding through June 30, 1997. Mr. Jaffe is serving as a consultant to the Company in exchange for compensation on a per diem basis. (5) Mr. Lestardo served in the capacity of Acting Chief Operating Officer of the Company from June 14 to December 31, 1995. Mr. Lestardo continues to serve as President of Holmes Protection of New York, Inc., a wholly-owned subsidiary of the Company. (6) Represents a grant of stock options made in December 1995 under the 1996 Plan. The 1996 Plan will be submitted for stockholder approval at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. All options granted thereunder are subject to and conditioned upon approval of the 1996 Plan by stockholders of the Company. (7) Mr. Sholl joined the Company on May 26, 1993, which accounts for the lower compensation level for such year. Mr. Sholl resigned from his position with the Company, effective March 31, 1996. Under the terms of the Executives Plan, his unvested options to purchase 6,198 shares of Common Stock were cancelled on such date. Mr. Sholl's vested options to purchase 2,656 shares of Common Stock will remain outstanding through September 30, 1996. All information under "Executive Compensation" herein relating to stock options (except for those granted under the 1996 Plan) and related exercise and hurdle prices have been adjusted to give effect to the one-for- fourteen reverse stock split of the Common Stock effected on March 27, 1995. 43 The following table contains information concerning the grant of stock options made to the Named Officers during 1995 under the Executives Plan or the 1996 Plan: OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Individual Grants Realizable Value ------------------------------------------------------------------------ at Assumed Percent of Annual Total Rates of Number of Option/SARs Market Stock Price Securities Granted to Exercise Price on Appreciation For Underlying Employees or Base Grant Option Term(2) Options/SARs in Fiscal Price Date Expiration ----------------------- Name Granted (#) Year ($/sh)(1) ($/sh) Date 5% ($) 10% ($) ----------------------- -------------- ------------- ---------- ---------- ------------ --------- ---------- Eugene G. Lestardo (3) . 15,000 60% $5.50 $5.50 12/4/2005 $51,884 $131,484 William C. Sholl (4) .. 8,854 100% 7.28 6.12(5) 1/12/2005 23,807 76,089
- ------ (1) Once vested, all options which have been granted under the Executives Plan become exercisable only if the price per share of the Common Stock on the Nasdaq SmallCap Market or the Nasdaq National Market, as the case may be, is not less than $13.30 for 30 consecutive trading days. Such condition had not been met as of September 24, 1996. The 1996 Plan and all options granted thereunder are subject to and conditioned upon stockholder approval at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. (2) Amounts indicated under the "Potential Realizable Value" columns above have been calculated by multiplying the market price on the date of grant by the annual appreciation rate shown (compounded for the term of the options), subtracting the exercise price per share and multiplying the gain per share by the number of shares covered by the options. (3) Represents a grant of stock options made under the Company's 1996 Plan. Such grant and the terms thereof are subject to and conditioned upon the approval of the 1996 Plan by stockholders at the Company's 1996 annual meeting of stockholders. (4) Mr. Sholl resigned from his position with the Company, effective March 31, 1996. Under the terms of the Executives Plan, certain of his stock options were cancelled. See Note 7 to Summary Compensation Table. (5) On the date of grant, January 12, 1995, the Company's Common Stock traded on the London Stock Exchange. Accordingly, the dollar- denominated market price on the grant date has been converted at an assumed exchange rate of $1.56 per British pound. Except as disclosed above, no other grants of stock options were made in 1995 to any of the Named Officers. No stock options were exercised by any of the Named Officers during 1995. The following table sets forth information with respect the unexercised options held by each of the Named Officers as of the end of 1995: AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES Value of Number of Securities Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at Fiscal Year-End (#) at Fiscal Year-End ($) Name Exercisable/Unexercisable Exercisable/Unexercisable - ------------------- ------------------------- ------------------------- Richard Hickson ... 0/0 0/0 Brian H. Jaffe .... 2,656/0(1) 0/0 Eugene G. Lestardo.. 3,984/24,297(1)(2) 0/0 Glenn C. Riker .... 2,656/6,198(1) 0/0 William C. Sholl .. 0/8,854(1) 0/0 - ------ (1) Options were granted pursuant to the Executives Plan on July 29, 1994, except in the case of Mr. Sholl whose options were granted on January 12, 1995. (2) Includes options which were granted pursuant to the 1996 Plan on December 4, 1995. EMPLOYMENT CONTRACTS Mr. Flagg is employed by the Company pursuant to an employment agreement dated January 8, 1996, which expires on December 31, 1997, but continues year-to-year thereafter unless terminated in accordance with its terms. Mr. Flagg's employment agreement provides for an annual base salary of no less than $200,000. Mr. 44 Boehme is employed by the Company pursuant to an employment agreement dated January 8, 1996, which expires on December 31, 1997, but continues year-to-year thereafter unless terminated in accordance with its terms. Mr. Boehme's employment agreement provides for an annual base salary of no less than $150,000. Mr. Irving is employed by the Company pursuant to an employment agreement dated May 13, 1996, which expires on May 31, 1998, but continues year-to-year thereafter unless terminated in accordance with its terms. Mr. Irving's employment agreement provides for an annual base salary of no less than $105,000. The salaries provided under all of these employment agreements may be increased at the discretion of the Board or the Compensation Committee thereof. Under the terms of Messrs. Flagg's, Boehme's and Irving's respective employment agreements, options to purchase shares of Common Stock under the Company's 1996 Plan (260,000 shares in the case of Mr. Flagg, 195,000 shares in the case of Mr. Boehme and 25,000 shares in the case of Mr. Irving) have been granted subject to and conditioned upon stockholder approval of the 1996 Plan at the Company's 1996 annual meeting of stockholders. Messrs. Flagg, Boehme and Irving are also provided with certain other benefits and perquisites pursuant to their respective employment agreements. Upon termination of employment with the Company, Messrs. Flagg, Boehme and Irving are each subject to a non-compete period of six months. In accordance with Messrs. Flagg's, Boehme's and Irving's respective employment agreements, upon a termination of employment by the Company for reasons other than (i) "Cause," (ii) "Disability" (each as defined in such employment agreements), or (iii) death, incompetency or bankruptcy, the Company will be obligated to pay to each of Messrs. Flagg, Boehme and Irving 12 months base salary, and to maintain certain benefits. Upon termination of employment by the Company within 12 months of a "Change-of-Control Event" (as defined below), Messrs. Flagg, Boehme and Irving shall each be entitled to receive their respective base salaries and certain other benefits for an additional period of 12 months. As defined in Messrs. Flagg's, Boehme's and Irving's respective employment agreements, a "Change-of-Control Event" means the consummation of (i) a proxy contest for control of the Company's Board resulting in the person or entity or group of affiliated persons or entities (collectively, a "Control Group") initiating such proxy contest electing a majority of the members of the Company's Board; (ii) the purchase by a Control Group of the Common Stock or other securities of the Company which, when aggregated with any other securities of the Company then held by such Control Group, gives such Control Group "beneficial ownership" (as defined in Rule 13d-3 promulgated under the Exchange Act) of securities representing more than 50% of the combined voting power of the Company; or (iii) any such transaction that the Company's Board shall have favorably recommended to stockholders of the Company at any time prior to its consummation, and such recommendation shall not have been withdrawn. Mr. Riker is employed by the Company pursuant to an employment agreement dated October 12, 1994, which expires on December 31, 1996, and which provides for an annual base salary of $91,260. Mr. Lestardo is employed by the Company pursuant to an employment agreement dated June 22, 1995, which expires on June 12, 1997, and which provides for an annual base salary of $150,000. The salaries provided under these employment agreements may be increased at the discretion of the Board or the Compensation Committee thereof. Under the terms of their respective employment agreements, Messrs. Riker and Lestardo are entitled to receive cash bonus awards under a senior management incentive plan, provided certain targets with regard to Company performance are met or exceeded. Messrs. Riker and Lestardo are also provided with certain other benefits and perquisites pursuant to their respective employment agreements. Upon termination of employment with the Company, Messrs. Riker and Lestardo are each subject to a non-compete period of four months and six months, respectively. In accordance with Messrs. Riker's and Lestardo's respective employment agreements, upon a termination of employment by the Company for reasons other than (i) "Cause," (ii) "Disability" (each as defined in such employment agreements), (iii) death, incompetency or bankruptcy, or (iv) the expiration of the term of such employment agreement, the Company will be obligated to pay six months base salary in the case of Mr. Lestardo, and four months base salary in the case of Mr. Riker, and to maintain certain benefits. Upon termination of employment by the Company within 12 months of a "Contested Takeover Event" (as defined below), Messrs. Riker and Lestardo shall each be entitled to receive their respective base salaries and certain other benefits for a period of 12 months. As defined in Messrs. Riker's and Lestardo's respective employment agreements, a "Contested Takeover Event" means the consummation of (i) a proxy contest for control of the Company's Board resulting in the person or entity or group of affiliated persons or entities (collectively, a "Control Group") initiating such proxy contest electing a majority of the members of the Company's Board, or (ii) the purchase by a 45 Control Group of the Common Stock or other securities of the Company which, when aggregated with any other securities of the Company then held by such Control Group, gives such Control Group "beneficial ownership" (as defined in Rule 13d-3 promulgated under the Exchange Act) of securities representing more than 50% of the combined voting power of the Company; provided that no "Contested Takeover Event" shall be deemed to occur if the Company's Board shall have favorably recommended the transaction to stockholders of the Company at any time prior to its consummation, and such recommendation shall not have been withdrawn. Upon the occurrence of a "Change-of-Control Event" and/or a "Contested Takeover Event," as the case may be, the Company's maximum aggregate salary payment obligation would be $1,151,200. Such amount is calculated by combining the 1996 base salaries of each of Messrs. Flagg, Boehme and Irving for a period of 24 months, together with the 1996 annual base salaries of each of Messrs. Riker and Lestardo for a period of 12 months. Messrs. Hickson, Jaffe and Sholl were employed by the Company pursuant to employment agreements which contained substantially similar terms to those in the employment agreements of Messrs. Riker and Lestardo. Following the termination of their respective employment agreements, Messrs. Hickson, Jaffe and Sholl were each subject to non-compete periods of six months, three months and three months, respectively. STOCK OPTION PLANS SENIOR EXECUTIVES' OPTION PLAN The Company's Amended and Restated Senior Executives' Option Plan (the "Executives Plan") was adopted by the Company's Board on June 29, 1994 and approved by the stockholders of the Company on July 29, 1994 (the "Effective Date"). The Executives Plan, as amended and restated (i) replaced all options outstanding under a previous senior executives' option plan with a like number of new ten-year options at a reduced exercise price of $7.28 per share; (ii) commenced a new vesting period for such options providing for vesting at a rate of 30% on the first anniversary of the Effective Date, 20% on each of the second and third anniversaries and 15% on each of the fourth and fifth anniversaries; (iii) set the "hurdle rate" at $13.30 representing the price at which the shares must trade for 30 consecutive trading days prior to becoming exercisable; and (iv) contained certain provisions necessary to satisfy the requirements of Rule 16b-3 of the Exchange Act. The purpose of the Executives Plan is to provide long-term incentives and rewards to officers and key employees of the Company, to assist the Company in attracting and retaining the services of such individuals on a basis competitive with industry practices, to align those individuals' interests with those of the Company's stockholders and to provide additional compensation to Executives Plan participants. The Executives Plan provides for granting to certain designated senior executives and key employees of incentive stock options ("ISOs") or nonqualified stock options ("NSOs"), each as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). A maximum of 138,722 shares of Common Stock have been reserved for issuance under the Executives Plan pursuant to which outstanding options to purchase 57,846 shares have been granted and were outstanding at September 24, 1996. The Executives Plan is administered by the Compensation Committee of the Board. Subject to the provisions of the Executives Plan and the terms of the initial option grants provided for therein, the Compensation Committee determines when and to whom options will be granted, the number of shares to be covered by each option, the option price, the period during which each option is exercisable and certain other terms and conditions relating to the options under the Executives Plan. The Compensation Committee also exercises all the powers and authority necessary or advisable in the administration of the Executives Plan, subject to the provisions of the Executives Plan. If the 1996 Plan is approved by stockholders, no further grants will be made under the Executives Plan. See "Management -- Stock Option Plans/1996 Stock Incentive Plan." If the Compensation Committee determines that any dividend, distribution, recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange or similar transaction effects the stock such that an adjustment is appropriate in order to prevent the dilution or enlarge- 46 ment of the rights of option holders, then the Compensation Committee will make such equitable changes or adjustments to any or all of (i) the number of shares of stock available for options, (ii) the number of such shares covered by outstanding options and/or (iii) the exercise price per share of options, to the extent equitably required to preserve the economic value of the options. In the event of a change in control of the Company (as defined in the Executives Plan), outstanding options vest immediately and become exercisable in full, whether or not otherwise vested or exercisable. If a grantee under the Executives Plan ceases to be in the service or employ of the Company due to death, disability or termination without cause (as defined in the Executives Plan ), such grantee's vested options will expire six months from the date of such cessation. The Compensation Committee may in its discretion extend this period of exercisability. If a grantee under the Executives Plan ceases to be in the service or employ of the Company for any other reason, such options will expire on the date of such cessation. DIRECTORS' OPTION PLAN The Company's 1992 Directors' Option Plan (the "Directors Plan") was adopted by the Company's Board on July 16, 1992, approved by the stockholders of the Company on August 10, 1992 and became effective on August 13, 1992. On such effective date, one-time grants of options were made under the Directors Plan to Mr. Besuchet and to certain former directors. Currently, there are only three individuals holding options that were granted under the Directors Plan, including Mr. Besuchet. No additional grants are permitted under the Directors Plan. The purpose of the Directors Plan was to aid the Company in attracting and retaining the services of directors who joined the Board prior to the 1992 Restructuring and to afford such directors an opportunity to acquire a proprietary interest in the Company through stock ownership. Outstanding options to purchase 165,429 shares of Common Stock were granted and outstanding at September 24, 1996. The Directors Plan is administered by the Compensation Committee which exercises all the powers and authority necessary or advisable in the administration of the Directors Plan, subject to the provisions of the Directors Plan. All options under the Directors Plan vested on January 1, 1993 and have an exercise price of $13.97 per share. However, no option under the Directors Plan will become exercisable until the price of the shares subject thereto reaches or has reached a trading price of not less than $24.45, and remains at or above such price for 30 consecutive trading days. Mr. Besuchet's options expire August 13, 2002. Upon the occurrence of a capitalization issue, a rights issue or a subdivision, consolidation of shares or reduction of capital, the Compensation Committee will adjust, to reflect such change, the number of shares covered by outstanding options under the Directors Plan and the option price to preserve the economic value of the options and to give grantees the same proportion of the equity as that to which they were previously entitled. The Directors Plan provides that if the service of a grantee terminates (other than by reason of death, disability or involuntary termination without cause, as such terms are defined in the Directors Plan), all options of such grantee, unless earlier terminated in accordance with their terms, shall terminate on the date of such termination. The Directors Plan also provides that if a grantee ceases to be in the service or employ of the Company due to death, disability or termination without cause, such grantee's options shall expire on June 30, 1997. Options to purchase an aggregate of 147,545 shares are held by two former directors, Keith Anderson and Eric F. Kohn, whose services were deemed to have been terminated without cause pursuant to the Directors Plan. Except in certain very limited circumstances (such as by will or pursuant to a "qualified domestic relations order" as defined in the Code), an option may not be transferred by a grantee except that Mr. Kohn may assign the right to exercise his options under the Directors Plan, and the Common Stock issuable upon exercise of such options, to a corporation controlled by him. 47 Under the Directors Plan, in the event of a change in control of the Company (as defined in the Directors Plan), outstanding options vest immediately and become exercisable in full, whether or not otherwise vested or exercisable. 1996 STOCK INCENTIVE PLAN On December 4, 1995, the Board approved and recommended, and at the 1996 annual meeting of stockholders, scheduled for October 31, 1996, the stockholders will be asked to approve, the 1996 Stock Incentive Plan (the "1996 Plan"). The purpose of the 1996 Plan is to provide an incentive to the Company's key employees, consultants and directors and to attract, secure and retain key employees, consultants and directors. The 1996 Plan provides for the grant of options to acquire a maximum of 2,000,000 shares of Common Stock. Of such shares, as of September 24, 1996, 830,000 shares were subject to outstanding options (subject to stockholder approval). The 1996 Plan provides that, upon approval by stockholders, no further options or other awards will be granted under either the Executives Plan or the Directors Plan. All options outstanding under the prior plans will continue to be governed by the terms of those plans. The 1996 Plan permits the granting of ISOs or NSOs, at the discretion of the Compensation Committee with regard to employee or consultant optionees, and NSOs to non-employee directors. The 1996 Plan is administered by the Compensation Committee. Subject to the terms of the 1996 Plan, the Compensation Committee determines the terms and conditions of options granted under the 1996 Plan to employees and consultants of the Company. The Compensation Committee, however, has no discretion with respect to the selection of non-employee directors to receive options, the number of shares of Common Stock subject to any such options, the purchase price thereunder or the timing of grants of options to non-employee directors. Options granted under the 1996 Plan are not transferable, except by the laws of descent and distribution, and are evidenced by written agreements which contain such terms, conditions, limitations and restrictions as the Compensation Committee deems advisable and which are not inconsistent with the terms of the 1996 Plan. The option exercise price must be paid in full at the time the notice of exercise of the option is delivered to the Company and must be tendered in cash or by transferring shares of Common Stock upon terms and conditions determined by the Compensation Committee. The Board has certain rights to suspend, amend or terminate the 1996 Plan provided stockholder approval is obtained. In the event of a change in control (as defined in the 1996 Plan), outstanding options vest immediately and become exercisable in full, whether or not otherwise vested or exercisable. In addition, the optionee has the right to surrender his or her options for cancellation within sixty days after a change in control and receive a cash payment therefor. Non-Employee Director Awards. The 1996 Plan provides for awards of options to directors ("Eligible Directors") of the Company who are not employees of the Company or its affiliates and who have not, within one year immediately preceding the determination of such director's eligibility, received any award under any other plan of the Company or its affiliates that entitles the participants therein to acquire stock, stock options or stock appreciation rights of the Company or its affiliates (other than options granted under any other plan under which participants' entitlements are governed by provisions meeting the requirements of Rule 16b-3(c)(2)(ii) promulgated under the Exchange Act.) The exercise price of the options is equal to 100% of the fair market value (as such term is defined in the 1996 Plan) of the Common Stock on the date of grant. The options are exercisable in whole or in part at all times during the period beginning on the date of grant until five years from the date of grant. Pursuant to the 1996 Plan, subject to stockholder approval, each non-employee director then in office in December 1995 was awarded an Initial Grant (as defined below). In addition, upon first election or appointment to the Board, each newly elected or appointed Eligible Director will be granted an option to purchase 25,000 shares of Common Stock (the "Initial Grant"). Immediately following each annual meeting of stockholders commencing with the meeting following the close of fiscal year 1996, each Eligible Director will be granted an additional option to purchase 1,000 shares of Common Stock (an "Annual Grant"). If an optionee's service as a director terminates for any reason other than disability, cause (each as defined in the 1996 Plan) or death, the optionee may exercise options in the three-month period following such termi- 48 nation. If the optionee's service as a director terminates by reason of resignation or removal from the Board due to disability, the optionee may exercise options in the one-year period following such termination. If an optionee dies while a director or within three months after termination of service as a director, any options held by such director may be exercised in the twelve-month period following the optionee's death by the person to whom such rights under the option pass by will or pursuant to the laws of descent and distribution. If an optionee's service as a director terminates for cause, any options granted to such optionee will terminate immediately. Other Awards. The 1996 Plan provides that the Compensation Committee must establish an exercise price for employee stock options that is not less than the fair market value (as defined in the 1996 Plan) of the Common Stock on the date of grant. Each ISO must expire within ten years of the date of grant. However, if ISOs are granted to persons owning more than 10% of the voting stock of the Company, the 1996 Plan provides that the exercise price may not be less than 110% of the fair market value per share at the date of grant and that the term of such ISOs may not exceed five years. Each employee option vests at a rate designated by the Compensation Committee. If an optionee's employment is terminated by reason of death, disability or retirement (as defined in the 1996 Plan), the Compensation Committee may determine that any options held by such person become immediately exercisable and may be exercised at any time prior to the expiration date of the options or within twelve months (three months with regard to ISOs) after the date of termination. If an optionee's employment is terminated for any reason other than death, disability or retirement or if the Compensation Committee does not provide the treatment discussed in the prior sentence, all unvested options held by such person will terminate and all vested options will be exercisable for a period of three months after the date of termination. 49 PRINCIPAL STOCKHOLDERS The following table sets forth information with respect to the beneficial ownership, as of September 24, 1996, of the Company's Common Stock by (i) any person known by the Company to beneficially own more than 5% of the outstanding Common Stock; (ii) each director of the Company; (iii) each of the Named Officers; and (iv) all directors and executive officers of the Company as a group, including the Named Officers. All share and warrant amounts and related exercise prices have been adjusted to give effect to the one-for-fourteen reverse stock split of the Common Stock completed on March 27, 1995. On September 24, 1996, there were 4,563,062 shares of Common Stock issued and outstanding.
Number of Shares of Common Stock Percentage(1) Beneficially --------------------------------- Name of Beneficial Owner Owned(1) Before Offering After Offering - ------------------------ ------------------- --------------- -------------- HP Partners L.P.(2).................................. 2,201,600 42.0% 34.7% c/o HP Management, Inc. 444 Madison Avenue, 38th Floor New York, New York 10022 John Hancock Mutual Life............................ 636,095 13.7% 11.1% Insurance Company(2) John Hancock Place P.O. Box 111 Boston, Massachusetts 02117 The Mutual Life Insurance Company ................. 397,716 8.6% 7.0% of New York(2) 1740 Broadway New York, New York 10019 TJS Partners, L.P.(2)................................ 399,000 8.7% 7.1% 52 Vanderbilt Avenue 5th Floor New York, New York 10017 Pierre Besuchet(3)(6) ......................... 19,048 * * Daniel T. Carroll(6) .......................... -- -- -- George V. Flagg(6) ............................ 6,000 * * Lawrence R. Glenn(6) .......................... -- -- -- Mark S. Hauser(4)(6)(7) ....................... 2,201,600 42.0% 34.7% Richard Hickson ............................... 142 * * Brian H. Jaffe(5) ............................. 306 * * Eugene G. Lestardo(5)(6) ...................... 1,000 * * William P. Lyons(4)(6)(7) ..................... 2,210,600 42.1% 34.8% David Jan Mitchell(4)(6)(7) ................... 2,204,600 42.0% 34.7% Edward L. Palmer(6) ........................... 2,592 * * Glenn C. Riker(5) ............................. -- -- -- William C. Sholl .............................. 2,207 * * William Spier(4)(6)(7) ........................ 2,209,600 42.1% 34.8% All directors and executive officers as a group 2,252,895 42.9% 35.5% (16 persons)(3)(4)(5)(6) .....................
- ------ * Represents less than 1% of outstanding Common Stock. 50 (1) Each director and executive officer has sole voting and investment power with respect to the shares beneficially owned, except as otherwise noted in the footnotes to this table. For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of Common Stock which such person has the right to acquire on or within 60 days of September 24, 1996. For purposes of computing the percentage of outstanding Common Stock held by each person or group of persons named above, any shares which such person has or has the right to acquire on or within 60 days after September 24, 1996 are deemed to be outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (2) Includes shares issuable upon the exercise of warrants having a current exercise price of $10.68 per share, as follows: John Hancock Mutual Life Insurance Company and affiliates - 68,394; and The Mutual Life Insurance Company of New York and affiliates - 42,764. With respect to HP Partners L.P., includes 685,714 shares of Common Stock issuable upon the exercise of warrants having a current exercise price of $4.58 per share. The information in the foregoing table and in this note is based on the Company's records and on a Schedule 13G (or Schedule 13D, as amended, in the case of TJS Partners, L.P.) filed with the Securities and Exchange Commission by each of the following stockholders and dated as indicated: HP Partners L.P., dated January 20, 1995; John Hancock Mutual Life Insurance Company, dated January 16, 1996; The Mutual Life Insurance Company of New York, dated March 2, 1995; and TJS Partners, L.P., dated June 17, 1996. The Schedule 13D filed by TJS Partners, L.P. states that TJS Management, L.P., TJS Corporation, and Thomas J. Salvatore may be deemed to own beneficially the shares owned beneficially by TJS Partners, L.P. (3) Excludes vested options to purchase 17,884 shares of Common Stock granted to Mr. Besuchet under the Directors Plan. Such options have a current exercise price of $13.97 per share, however, they become exercisable only if the price per share of the Common Stock on the Nasdaq SmallCap Market or the Nasdaq National Market, as the case may be, is not less than $24.45 for 30 consecutive trading days. Such condition had not been met as of September 24, 1996. (4) Includes 1,515,886 shares of Common Stock and warrants to purchase 685,714 shares of Common Stock owned by HP Partners L.P. Messrs. Hauser, Mitchell and Spier are stockholders and directors of the general partner of HP Partners L.P. and Messrs. Mitchell and Spier are also limited partners of HP Partners L.P. Messrs. Hauser, Mitchell and Spier are also the sole stockholders of the special limited partner of HP Partners L.P. which is entitled to various rights relating to 285,714 of the partnership's warrants. Pursuant to HP Partners L.P.'s partnership agreement, Mr. Lyons has an arrangement to participate in any economic benefit which Mr. Spier obtains as a result of Mr. Spier's shareholding interest in such general partner. (5) Excludes vested options granted under the Executives Plan to each of Messrs. Jaffe, Lestardo, Riker, Sholl and one other former executive officer to purchase 2,656, 3,984, 2,656, 2,656 and 2,656 shares of Common Stock, respectively, at an exercise price of $7.28 per share. These options become exercisable only if the price per share of the Common Stock on the Nasdaq SmallCap Market or the Nasdaq National Market, as the case may be, is not less than $13.30 for 30 consecutive trading days. Such condition had not been met as of September 24, 1996. (6) Excludes options granted under the 1996 Plan to each of Messrs. Besuchet, Carroll, Glenn, Hauser, Lestardo, Lyons, Mitchell, Palmer and Spier to purchase 25,000, 25,000, 25,000, 40,000, 15,000, 85,000, 55,000, 25,000 and 40,000 shares of Common Stock, respectively, at exercise prices ranging from $5.50 to $5.56 per share. Also excludes options granted under the 1996 Plan to each of Messrs. Flagg, Boehme and Irving to purchase 260,000, 195,000 and 25,000 shares of Common Stock, respectively, in accordance with their respective employment agreements. The grant of all options under the 1996 Plan and terms thereof are subject to and conditioned upon approval of such plan by stockholders at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. (7) The address of such stockholder is: c/o Holmes Protection Group, Inc., 440 Ninth Avenue, New York, New York 10001-1695. 51 CERTAIN TRANSACTIONS Mr. Eric F. Kohn joined the Company on September 24, 1991 as Chief Executive Officer and Director and ceased serving in such capacities on May 4, 1993 and July 29, 1994, respectively. During such time period, Mr. Kohn was a director of Barons Financial Services SA ("BFSSA"). From late 1991 to May 1993 BFSSA received fees from the Company at the rate of $15,000 per month (paid three months in advance) for making the resources, equipment, services and expertise of its Geneva office available to the Company, and $20,000 per month (paid three months in advance) for making the services of Mr. Kohn available to the Company in the United States and Europe. In addition, the Company paid the costs of Mr. Kohn's accommodation in the New York area and reasonable out-of-pocket expenses. During the same time period, Mr. Kohn was also a director of Barons (UK) Limited ("BUK"). From late 1991 to May 1993 BUK received fees from the Company at the rate of $7,500 per month (paid three months in advance), for providing office facilities and services for Holmes in London. These arrangements were terminated by the Board on May 4, 1993. While the Company believed that the fee arrangements with BFSSA and BUK fairly reflected the value of the services provided to the Company, the Company is unable to determine whether the terms of its agreements with such parties were no less favorable than could have been obtained from an unaffiliated third party. The Company subsequently paid U.S. federal, state and local withholding taxes and related interest in an aggregate amount of $155,192 with respect to such fees paid in 1991, 1992 and 1993 to BFSSA for Mr. Kohn's services. In 1994, Mr. William Spier, a director of the Company, entered into an agreement with PremiTech, which is a limited partner of HP Partners L.P., to acquire PremiTech's limited partnership interest for approximately $2,000,000, at the option of PremiTech, in the event that PremiTech did not enter into an agreement for the provision of information technology services to the Company. Such information technology agreement was subsequently executed on April 4, 1995, thereby terminating PremiTech's option to sell its interest to Mr. Spier. On December 4, 1995, each of Messrs. Hauser, Lyons, Mitchell and Spier, directors of the Company, were granted options under the 1996 Plan to purchase 15,000, 60,000, 30,000 and 15,000 shares of Common Stock, respectively, at an exercise price of $5.56 per share. Such grants were made in recognition of the extraordinary services that each of these individuals provided to the Company in connection with the management transition and reorganization that occurred during 1995. The grant of all options under the 1996 Plan and the terms thereof are subject to and conditioned upon stockholder approval at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. DESCRIPTION OF CAPITAL STOCK DESCRIPTION OF SECURITIES The following summary of the terms of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the applicable provisions of Delaware law, the Company's Restated Certificate of Incorporation and the Company's By-Laws. As set forth in the Restated Certificate of Incorporation of the Company, the Company's authorized capital stock consists of 12,000,000 shares of Common Stock, par value $.01 per share, of which 4,563,062 shares were outstanding as of September 24, 1996, and 1,000,000 shares of undesignated Preferred Stock, par value $1.00 per share, of which no shares are outstanding. On March 27, 1995, the Company effected a reverse stock split pursuant to which one new share of Common Stock, $.01 par value, was exchanged for every fourteen (14) whole shares of Common Stock, $.25 par value, then issued or outstanding and shareholders received a cash payment in lieu of any fractional shares. All share amounts and related share price information in this Prospectus have been adjusted to give effect to such reverse stock split. 52 COMMON STOCK The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Subject to the prior right of any holders of Preferred Stock with respect to dividends, the holders of Common Stock are entitled to receive ratably such dividends as are declared by the Board out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock have the right to a ratable portion of assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of Preferred Stock. Except with respect to the Institutions pursuant to the Exchange Agreement as described above under "Business-Historical Developments/The 1992 Restructuring," the holders of Common Stock have no preemptive rights or rights to convert their Common Stock into any other securities and are not subject to future calls or assessments by the Company. All outstanding shares of Common Stock are fully paid and non-assessable. PREFERRED STOCK The Board has the authority to issue the Preferred Stock in one or more series and to determine the rights, preferences, privileges and restrictions, including the dividend rights, dividend rate, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such series, without any further vote or action by the stockholders, except that (i) any voting rights conferred on such Preferred Stock require the consent of three-quarters of the entire Board and a majority of the shares of Common Stock then outstanding and (ii) no regular dividends may be paid with respect to the Preferred Stock without the consent of the holders of a majority of the shares of Common Stock then outstanding. These rights and privileges of the Preferred Stock could adversely affect the voting power of holders of Common Stock or their rights to receive dividends or liquidation proceeds. The Company has no present plans to issue any shares of Preferred Stock. It should be noted, however, that pursuant to the terms of the Institution Warrants and the Investor Warrants, the Company is prohibited from issuing any capital stock of any class which has the right to more than one vote per share or which is preferred as to dividends or as to the distribution of assets upon voluntary or involuntary dissolution, liquidation or winding up of the Company. DELAWARE LAW The Company is subject to the provisions of Section 203 of the Delaware General Corporate Law which prohibit publicly held Delaware corporations from engaging in certain business combinations with interested stockholders. See "Risk Factors-Possible Anti-Takeover Effects of Delaware Law." CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS Certain provisions of the Company's Restated Certificate of Incorporation and By-Laws may make a change in control of the Company more difficult to effect. See "Business -- Historical Developments/Other Certificate of Incorporation and By-Law Provisions" and "Risk Factors -- Classified Board of Directors; No Stockholder Action by Written Consent; Supermajority Voting." TRANSFER AGENT AND REGISTRAR ChaseMellon Shareholder Services, L.L.C. serves as Transfer Agent and Registrar for the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 5,663,062 shares of Common Stock outstanding (5,828,062 shares if the Underwriters' over-allotment option is exercised in full). An additional 878,864 shares of Common Stock may be issued upon the exercise of the outstanding Investor Warrants and Institution Warrants, 166,666 shares of Common Stock may be issued upon exercise of the outstanding New Bank Warrants, 223,275 shares of Common Stock may be issued upon the exercise of outstanding options and 830,000 shares of Common Stock are reserved for issuance upon exercise of options which have been granted under the 1996 53 Plan, subject to and conditioned upon stockholder approval at the Company's 1996 annual meeting of stockholders, scheduled for October 31, 1996. Substantially all of these shares, including the 1,000,000 shares of Common Stock sold in this offering, will be freely tradeable without restriction under the Securities Act, except for (i) any such shares held at any time by an "affiliate" of the Company, as such term is defined under Rule 144 promulgated under the Securities Act ("Rule 144"), (ii) certain shares subject to the Registration Rights Agreements and (iii) shares subject to the "lockup agreements" described below. In general, under Rule 144, as currently in effect, a person who has beneficially owned shares for at least two years, including an "affiliate," as that term is defined in Rule 144, is entitled to sell, within any three- month period, a number of "restricted" shares that does not exceed the greater of 1% of the then-outstanding shares of Common Stock and the average weekly trading volume during the four calendar weeks preceding such sale. Sales under Rule 144 are subject to certain manner of sale limitations, notice requirements and the availability of current public information about the Company. Rule 144(k) provides that a person who is not deemed an "affiliate" during the three months preceding a sale and who has beneficially owned shares for at least three years is entitled to sell such shares at any time under Rule 144 without regard to the limitations described above. The Company, its officers and directors and certain of its principal stockholders (who beneficially hold in the aggregate 4,031,495 shares of Common Stock, including shares of Common Stock issuable upon the exercise of outstanding options and warrants beneficially owned by them) have agreed not to sell, offer to sell, issue, distribute or otherwise dispose of any shares of Common Stock of the Company for a period of 90 days from the date of this Prospectus (subject, in the case of the Company, to certain limited exceptions), without the prior written consent of the Representative (as defined in "Underwriting"). The Company is unable to estimate the number of shares that may be sold in the future by its existing stockholders or the effect, if any, that sales of such shares will have on the market price of the Common Stock prevailing from time to time. Sale of substantial amounts of Common Stock by existing stockholders could adversely affect prevailing market prices. See "Risk Factors-Shares Eligible for Future Sale; Registration Rights." 54 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to each of the underwriters named below (the "Underwriters"), for which Brean Murray & Co., Inc. is acting as representative (the "Representative"), and each of the Underwriters severally has agreed to purchase from the Company the aggregate number of shares of Common Stock set forth opposite its name below. Underwriters Number of Shares ------------ ---------------- Brean Murray & Co., Inc....................... 560,000 Advest, Inc. ................................. 30,000 Arnhold and S. Bleichroeder, Inc. ............ 30,000 Cruttenden Roth Incorporated ................. 30,000 First Albany Corporation ..................... 30,000 First of Michigan Corporation ................ 30,000 Jefferies & Company, Inc. .................... 30,000 Ladenburg, Thalmann & Co. Inc. ............... 30,000 Laidlaw Equities Inc. ........................ 30,000 Morgan Keegan & Company, Incorporated ........ 30,000 Needham & Company, Inc. ...................... 30,000 Pennsylvania Merchant Group Ltd. ............. 30,000 Sands Brothers & Co., Ltd. ................... 30,000 Scott & Stringfellow, Inc. ................... 30,000 Southcoast Capital Corporation ............... 30,000 Stephens Inc. ................................ 30,000 Unterberg Harris ............................. 30,000 Van Kasper & Company ......................... 30,000 Vector Securities International, Inc. ........ 30,000 ---------------- Total ................................ 1,100,000 ================ Under the terms and conditions of the Underwriting Agreement, the Company is obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock set forth in the above table if any of the shares of Common Stock are purchased. The Underwriters propose to offer the shares of Common Stock to the public initially at the public offering price set forth on the cover page of this Prospectus, and to selected dealers at such public offering price less a concession not to exceed $0.50 per share. The Underwriters or such dealers may reallow a commission to certain other dealers not to exceed $0.10 per share. After the offering to the public, the offering price, the concessions to selected dealers and the reallowance to other dealers may be changed by the Representative. In connection with this offering, certain Underwriters may engage in passive market making transactions in the Common Stock on the Nasdaq SmallCap Market or Nasdaq National Market, as the case may be, immediately prior to the commencement of sales in this offering, in accordance with Rule 10b-6A under the Securities Exchange Act of 1934. Passive market making consists of displaying bids on the Nasdaq SmallCap Market or Nasdaq National Market, as the case may be, limited by the bid prices of independent market makers and purchases limited by such prices and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified prior period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 165,000 additional shares of Common Stock to cover over-allotments, if any, at the public offering price, less underwriting discounts and commissions, as set forth on the cover page of this Prospectus. If the Underwriters exercise this option, then each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriters' initial commitment as indicated in the table above. The Underwriters may exercise such option only to cover over- allotments made in connection with the sale of the shares of Common Stock offered hereby. The Company, its officers and directors and certain of its principal stockholders (who beneficially hold in the aggregate 4,031,495 shares of Common Stock, including shares of Common Stock issuable upon exercise of outstanding options and warrants beneficially owned by them) have agreed not to sell, offer to sell, issue, distribute or otherwise dispose of any shares of Common Stock of the Company for a period of 90 days from the date of this Prospectus (subject, in the case of the Company, to certain limited exceptions), without the prior written consent of the Representative. The Company has agreed to reimburse the Underwriters for up to $150,000 of the Underwriters' out-of- pocket expenses (including fees of its counsel) in connection with the sale of the Common Stock offered hereby. The Company has also agreed to indemnify the Underwriters or contribute to losses arising out of certain liabilities that may be incurred in connection with this offering, including liabilities under the Securities Act. 55 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York. Certain legal matters will be passed upon for the Underwriters by Piper & Marbury L.L.P., New York, New York. EXPERTS The financial statements and schedule of the Company as of December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. AVAILABLE INFORMATION The Company is subject to the information requirements of the Exchange Act, as amended, and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information may be inspected without charge at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional Offices at Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661; and 13th Floor, Seven World Trade Center, New York, New York 10048. Copies of such material may be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Company has filed with the Securities and Exchange Commission, a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit to the Registration Statement, each such statement is qualified in all respects by such reference to such exhibit. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N. W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from such office after payment of fees prescribed by the Commission. In addition, reports, proxy statements and other information concerning the Company may be inspected at the offices of the Nasdaq Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006. 56 INDEX TO FINANCIAL STATEMENTS
Page -------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ........................................................ F-2 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 1995 and 1994 and as of June 30, 1996 (unaudited) ................................................................................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 and for the Six Months Ended June 30, 1996 and 1995 (unaudited) ................................ F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 and for the Six Months Ended June 30, 1996 (unaudited) ............................ F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 and for the Six Months Ended June 30, 1996 and 1995 (unaudited) ................................ F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................................................... F-7 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS ................................................ S-1
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Holmes Protection Group, Inc.: We have audited the accompanying consolidated balance sheets of Holmes Protection Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Holmes Protection Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 3 to the consolidated financial statements, effective January 1, 1995, the Company changed its revenue recognition policy of accounting for non-refundable payments received from customers upon completion of installation of Company owned systems. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed on the Index to Financial Statements is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York March 20, 1996 F-2 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (000'S OMITTED)
June 30, (Unaudited) December 31, ----------- ------------------------ 1996 1995 1994 ----------- ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents .................... $ 539 $ 435 $ 1,409 Short-term investments ....................... -- 2,043 3,986 Accounts receivable, less allowance for doubtful accounts of $1,097 in 1996, $1,340 in 1995 and $1,315 in 1994 ................. 3,948 4,997 3,855 Inventories .................................. 1,756 1,923 1,980 Prepaid expenses and other ................... 2,597 3,320 3,660 ----------- ---------- ---------- Total current assets ............... 8,840 12,718 14,890 ----------- ---------- ---------- FIXED ASSETS, net ................................. 45,516 45,231 46,091 SUBSCRIBER CONTRACTS, at cost, less accumulated amortization of $23,814 in 1996, $22,522 in 1995 and $19,942 in 1994 ............................. 17,602 18,894 21,515 TRADENAMES, less accumulated amortization of $1,984 in 1996, $1,875 in 1995 and $1,705 in 1994 ...... 4,137 4,234 4,404 OTHER ASSETS ...................................... 506 552 248 ----------- ---------- ---------- $ 76,601 $ 81,629 $ 87,148 =========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings ........................ $ -- $ 943 $ -- Current maturities of long-term debt ......... 2,468 2,497 2,687 Accounts payable and accrued expenses ........ 7,640 10,110 7,040 Deferred revenue ............................. 3,007 2,664 4,535 Customer deposits ............................ 1,901 1,750 2,446 ----------- ---------- ---------- Total current liabilities .......... 15,016 17,964 16,708 ----------- ---------- ---------- LONG-TERM LIABILITIES: Long-term debt ............................... 3,668 4,862 6,709 Other long-term liabilities .................. 684 834 4,110 Deferred income taxes ........................ 10,297 10,297 11,201 ----------- ---------- ---------- Total long-term liabilities ........ 14,649 15,993 22,020 ----------- ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 12) SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value; 1,000 authorized; none outstanding ............... -- -- -- Common stock, $0.01 par value; 12,000 authorized shares; 4,466 issued in 1996, 1995 and 1994 .............................. 45 45 45 Additional paid-in capital ................... 120,763 120,763 120,763 Accumulated deficit .......................... (70,924) (70,188) (68,991) Minimum pension liability adjustment ......... (2,863) (2,863) (3,312) ----------- ---------- ---------- 47,021 47,757 48,505 Less- Treasury stock - 7 shares in 1996, 1995 and 1994 at cost ........................... (85) (85) (85) ----------- ---------- ---------- Total shareholders' equity ......... 46,936 47,672 48,420 ----------- ---------- ---------- $ 76,601 $ 81,629 $ 87,148 =========== ========== ==========
The accompanying notes to financial statements are an integral part of these balance sheets. F-3 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (000'S OMITTED, EXCEPT EARNINGS PER SHARE DATA)
Six Months Ended June 30, (Unaudited) Year Ended December 31, ---------------------- ------------------------------- 1996 1995 1995 1994 1993 --------- --------- ---------- ---------- -------- REVENUES: Monitoring and service ........................ $18,012 $18,975 $37,912 $39,747 $41,004 Installation .................................. 4,482 4,267 8,155 8,425 9,141 Franchise royalties, product sales and other .. 1,989 1,881 4,008 3,230 3,355 --------- --------- --------- --------- ---------- Total revenues ........................ 24,483 25,123 50,075 51,402 53,500 --------- --------- --------- --------- ---------- COST OF SALES (exclusive of depreciation expense shown below): Monitoring and service ........................ 8,869 9,469 18,554 18,632 21,004 Installation .................................. 2,117 1,992 3,971 3,595 3,606 Franchise royalties, product sales and other .. 1,823 1,102 3,737 2,658 2,306 --------- --------- --------- --------- ---------- Total cost of sales ................... 12,809 12,563 26,262 24,885 26,916 SELLING, GENERAL AND ADMINISTRATIVE ............. 6,844 7,760 16,668 15,051 17,837 DEPRECIATION AND AMORTIZATION ................... 5,432 5,095 10,390 9,736 8,919 NON-RECURRING CHARGE ............................ -- -- 2,074 -- -- --------- --------- --------- --------- ---------- 25,085 25,418 55,394 49,672 53,672 --------- --------- --------- --------- ---------- Income (Loss) from operations .............. (602) (295) (5,319) 1,730 (172) OTHER INCOME (EXPENSE) .......................... 11 (13) 247 193 902 INTEREST EXPENSE (net of interest income of $17 and $108 in the six months ended June 30, 1996 and 1995, respectively, $276 in 1995, $70 in 1994 and $-0- in 1993) ........................ (318) (365) (721) (941) (585) --------- --------- --------- --------- ---------- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ...... (909) (673) (5,793) 982 145 PROVISION (BENEFIT) FOR INCOME TAXES ............ (173) (33) (2,119) 578 200 --------- --------- --------- --------- ---------- Income (Loss) before cumulative effect of change in accounting principle ............. (736) (640) (3,674) 404 (55) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of income taxes of $1,942 ...... -- 2,477 2,477 -- -- --------- --------- --------- --------- ---------- Net Income (Loss) ..................... $(736) $1,837 $(1,197) $404 $ (55) ========= ========= ========= ========= ========= EARNINGS (LOSS) PER COMMON SHARE: Earnings (Loss) before cumulative effect of change in accounting principle ............. $(0.17) $(0.14) $ (0.82) $0.11 $ (0.02) Cumulative effect of change in accounting principle .................................. -- 0.55 0.55 -- -- --------- --------- --------- --------- ---------- Net Earnings (Loss) per common share .......... $(0.17) $ 0.41 $ (0.27) $0.11 $ (0.02) --------- --------- --------- --------- ---------- WEIGHTED AVERAGE SHARES OUTSTANDING ............. 4,459 4,459 4,459 3,580 2,944 ========= ========= ========= ========= =========
The accompanying notes to financial statements are an integral part of these statements. F-4 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (000'S OMITTED)
Minimum Additional Pension Common Treasury Paid-In Liability Accumulated Stock Stock Capital Adjustment Deficit Total ---------- ---------- ------------ ------------ ------------- ---------- BALANCE, January 1, 1993 ....... $ 10,330 $(85) $101,978 $(4,877) $(69,340) $38,006 Net loss for year ............ -- -- -- -- (55) (55) Change in minimum pension obligation (net of taxes of $1,076) ................... -- -- -- 1,368 -- 1,368 ---------- ---------- ------------ ------------ ------------- ---------- BALANCE, December 31, 1993 ..... 10,330 (85) 101,978 (3,509) (69,395) 39,319 Net income for year .......... -- -- -- -- 404 404 Proceeds from issuance of shares of common stock .... 5,305 -- 4,695 -- -- 10,000 Common stock issuance and other related costs ....... -- -- (1,500) -- -- (1,500) Change in minimum pension obligation (net of taxes of $155) ..................... -- -- -- 197 -- 197 Effect of reverse stock split (14,518) -- 14,518 -- -- -- Effect of change in par value (1,072) -- 1,072 -- -- -- ---------- ---------- ------------ ------------ ------------- ---------- BALANCE, December 31, 1994 ..... 45 (85) 120,763 (3,312) (68,991) 48,420 Net loss for year ............ -- -- -- -- (1,197) (1,197) Change in minimum pension obligation (net of taxes of $307) ..................... -- -- -- 449 -- 449 ---------- ---------- ------------ ------------ ------------- ---------- BALANCE, December 31, 1995 ..... 45 (85) 120,763 (2,863) (70,188) 47,672 Net loss (unaudited) ......... -- -- -- -- (736) (736) ---------- ---------- ------------ ------------ ------------- ---------- BALANCE, June 30, 1996 (unaudited) .................. $ 45 $(85) $120,763 $(2,863) $(70,924) $46,936 ========== ========== ============ ============ ============= ==========
The accompanying notes to financial statements are an integral part of these statements. F-5 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000'S OMITTED)
Six Months Ended June 30, (Unaudited) Year Ended December 31, ---------------------- -------------------------------------- 1996 1995 1995 1994 1993 --------- --------- ----------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) ......................... $ (736) $ 1,837 $(1,197) $ 404 $ (55) Adjustments to reconcile net income (loss) to net cash provided by operating activities- Depreciation and amortization .......... 5,432 5,095 10,390 9,736 8,919 Provision for doubtful accounts ........ (58) 135 486 506 586 Cumulative effect of change in accounting principle ................. -- (2,477) (2,477) -- -- Non-recurring charge ................... -- -- 2,074 -- -- Deferred income taxes .................. (273) (133) (2,319) 484 -- Changes in operating assets and liabilities- Decrease (increase) in accounts receivable ........................ 1,107 (49) (1,628) (423) (432) Decrease (increase) in inventories ... 167 (18) 57 337 (441) Decrease (increase) in prepaid expenses and other current assets . 737 68 140 957 (268) Decrease in other assets ............. -- -- -- 58 173 (Decrease) increase in accounts payable and accrued expenses ...... (1,811) (890) 2,259 (2,812) (1,769) Increase (decrease) in customer deposits .......................... 151 (324) (696) 376 672 Increase (decrease) in deferred revenue ........................... 343 295 (123) (801) (874) Decrease in pension and other liabilities ....................... (536) (504) (822) (2,658) (4,176) --------- --------- ----------- ---------- ---------- Net cash provided by operating activities ................. 4,523 3,035 6,144 6,164 2,335 --------- --------- ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets .................. (4,296) (3,440) (7,494) (7,361) (7,883) Purchase of subscriber contracts .......... -- (71) -- (1,840) (2,415) Purchase of short-term investments ........ -- (4,516) (6,601) (5,486) -- Maturities of short-term investments ...... 2,043 4,850 8,544 1,500 -- Other ..................................... -- (50) (50) -- -- --------- --------- ----------- ---------- ---------- Net cash used by investing activities ................. (2,253) (3,227) (5,601) (13,187) (10,298) --------- --------- ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from secured note ................ -- -- -- 3,405 9,037 Payments on secured note .................. (1,125) (1,125) (2,250) (3,681) (1,837) Payments on other long-term debt .......... (98) (92) (210) (449) -- Proceeds from issuance of common stock .... -- -- -- 10,000 -- Transaction and other related costs ....... -- -- -- (1,500) -- Proceeds from short-term borrowings ....... -- -- 943 -- -- Payment on short-term borrowings .......... (943) -- -- -- -- --------- --------- ----------- ---------- ---------- Net cash provided (used) by financing activities ....... (2,166) (1,217) (1,517) 7,775 7,200 --------- --------- ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents .. 104 (1,409) (974) 752 (763) CASH AND CASH EQUIVALENTS, beginning of period .................................... 435 1,409 1,409 657 1,420 --------- --------- ----------- ---------- ---------- CASH AND CASH EQUIVALENTS, end of period .... $ 539 $ -- $ 435 $ 1,409 $ 657 ========= ========= =========== ========== ========== CASH PAYMENTS FOR: Interest .................................. $ 337 $ 489 $ 1,016 $ 992 $ 524 Income taxes .............................. $ 111 $ 84 $ 167 $ 155 $ 189 NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations ................. $ -- $ 189 $ 234 $ 302 $ 511
The accompanying notes to financial statements are an integral part of these statements. F-6 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO JUNE 30, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Holmes Protection Group, Inc. (the "Company"), a Delaware corporation, is the holding company for its subsidiaries which operate in the security alarm business primarily in the Northeastern United States. The consolidated financial statements incorporate all the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. Certain amounts for prior periods have been reclassified to conform to the 1995 presentation. INTERIM FINANCIAL INFORMATION The unaudited consolidated balance sheet at June 30, 1996 and the consolidated statements of operations, shareholders' equity and cash flows for the six months ended June 30, 1996 and 1995 include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company's financial position and the Company's results of operations and cash flows. REVENUE RECOGNITION The Company's subsidiaries design, install, service and monitor security alarm systems, which are either sold outright ("customer owned") or the Company retains title to the equipment ("Company owned"). Installation revenue, and related cost under customer owned contracts, is recognized upon completion of installation. In contracts relating to Company owned equipment, the Company changed its method of accounting for installation revenue (see Note 3). In both cases, revenue from monitoring and servicing activities is recognized on a straight-line basis over the life of the contract. ALLOWANCE FOR DOUBTFUL ACCOUNTS Management reviews the collectibility of accounts receivables on a regular basis. Amounts, if any, which are determined to be uncollectible are provided for in the financial statements in the period such determination is made. FIXED ASSETS Fixed assets are recorded at cost. The Company's equipment installed on the subscribers' premises is capitalized on the basis of the cost of materials, labor and overhead relating to the specific installation. The Company provides for depreciation of equipment on subscribers' premises, central stations and vaults using the straight-line method over an average life of 12 years. Periodically, management will review these lives to assess their adequacy given changes in its business. If circumstances warrant a significant change in lives, management will adjust such lives to those which are more representative of its business environment. The Company depreciates other equipment, including computers, utilizing the straight-line method over a period ranging between 5 to 12 years, and automotive equipment over the equipment's useful lives ranging from 3 to 5 years. Leasehold improvements are depreciated utilizing the straight-line method over the asset's useful life or the remaining lease term, whichever is shorter. Assets held under capital lease obligations are depreciated utilizing the straight line method over the life of the lease or asset, whichever is applicable. Repair and maintenance costs are expensed as incurred. SUBSCRIBER CONTRACTS The cost of acquired subscriber contracts is amortized, based upon average experience, on a straight-line basis over their estimated useful lives which has been determined to be 12 years. Such life is periodically reviewed by management in order to assess its reasonableness. When, in the opinion of the Company's manage- F-7 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) ment, a permanent diminution in the value of subscriber contracts has occurred, the amount of the diminution would be included in the consolidated statements of operations. In order to determine whether a permanent diminution in value has occurred, management monitors the Company's cancellation rates. If an increasing trend in cancellation rates exists and is recurring, and such cancellation rates indicate nonrecoverability of the assets, a write down of assets is reflected in the consolidated statement of operations based upon the discounted future net cash flows of the remaining subscriber contracts or other method to determine fair market value of such assets. Amortization expense was $1,292,000 and $1,295,000 for the six months ended June 30, 1996 and 1995, respectively, and $2,580,000, $2,483,000 and $2,320,000 in 1995, 1994 and 1993, respectively. TRADENAMES Tradenames are amortized on a straight-line basis over a period of forty years. Such life is periodically reviewed by management in order to assess its adequacy. When, in the opinion of the Company's management, a permanent diminution in the value of tradenames has occurred, the amount of the diminution would be included in the consolidated statements of operations. Amortization expense was $85,000 for each of the six months ended June 30, 1996 and 1995 and $170,000 for each year presented. INVENTORIES Inventories consist primarily of parts used in the installation and repair of equipment on subscribers' premises and equipment sold to franchise dealers. Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. Inventories consist of the following (000's omitted): June 30, December 31, ---------- ------------------------------ 1996 1995 1994 ---------- --------- --------- Materials ..... $1,334 $1,390 $1,495 Work-in-process 422 533 485 ---------- --------- --------- $1,756 $1,923 $1,980 ========== ========= ========= CASH AND CASH EQUIVALENTS Cash equivalents consist principally of short-term investments having original maturities of 90 days or less, and are carried at cost, which approximates market. SHORT-TERM INVESTMENTS Short-term investments consist primarily of short-term U.S. Government obligations ($1,853,000 at December 31, 1995), which have an original maturity of greater than 90 days, as well as certificates of deposit ($190,000 at December 31, 1995). The maturities of the short-term investments range from January 1996 to May 1996. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This Statement requires the classification of debt and equity securities based on whether the securities will be held to maturity, are considered trading securities or are available for sale. Classification within these categories may require the securities to be reported at their fair market value with unrealized gains and losses included either in current earnings or reported as a separate component of shareholders' equity, depending on the ultimate classification. The Company adopted the provisions of this statement effective January 1, 1994, the adoption of which had no impact on the F-8 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued) Company's consolidated financial statements. As of December 31, 1995, all short-term investments used as part of the Company's investment management have been classified as held to maturity. These investments are stated at cost which approximates market. Interest is accrued as earned. INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on the enacted tax law rates. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. EARNINGS PER SHARE Earnings per common share calculations are based on the weighted average number of shares of common stock outstanding and dilutive common stock equivalents outstanding. All earnings per share amounts have been adjusted to give effect of the reverse stock split (Note 7). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. NEW ACCOUNTING PRONOUNCEMENTS In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The Company's required adoption date is January 1, 1996. SFAS 121 standardizes the accounting practices for the recognition and measurement of impairment losses on certain long-lived assets. The Company anticipates the adoption of SFAS 121 will not have a material impact on its results of operations or financial position. 2. INFORMATION TECHNOLOGY SERVICES AGREEMENT On April 4, 1995, the Company entered into an information technology services agreement with PremiTech Corporation ("PremiTech"), a subsidiary of Electronic Data Systems Corporation. The ten year $51 million outsourcing agreement provides for PremiTech to consolidate and manage the Company's data processing, communications and certain administrative functions. In connection with the consolidation of the Company's operations, it will pay to PremiTech $3.3 million. This amount is to compensate PremiTech for the cost to construct a new central station facility and leasehold improvements. The Company negotiated a standby credit facility with its bank which allowed the Company to borrow $2 million in December 1995 to pay a portion of the $3.3 million consolidation amount due PremiTech. No amounts were drawn upon this standby credit facility, which expired unused. The amount of $500,000 paid in 1995 relating to the consolidation was obtained from existing internal cash of the Company. The remaining amount due for the consolidation will be paid in various installments through 1996. PremiTech is a limited partner of the Investor (see Note 7), holding a partnership interest equivalent to approximately 6% of the Company's common stock. Payments made to PremiTech for managing the Company's data processing, communications and certain administrative functions amounted to $3,073,000 during 1995. F-9 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 3. CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 1995 the Company changed its method of accounting for installation revenue with respect to the recording of non-refundable payments received from customers upon the completion of the installation of Company owned systems. Previous to this change, the Company deferred the difference between these payments and estimated selling costs and amortized such difference over the life of the non-cancelable customer monitoring and service contract (generally five years). The Company believes that recognizing revenue upon completion of the installation results in a better matching of revenue and expenses, better reflects recorded installation revenues with the actual level of new business activity, and conforms with the dominant practice being followed by the security alarm industry. Excluding the cumulative effect, this change resulted in an increase in net loss of $443,000 or $0.10 net loss per share in 1995. The Company estimates that the effect of adopting this accounting principle would have resulted in a decrease in the results from operations of $470,000 or $0.13 per share in 1994 and $470,000 or $0.16 per share in 1993. 4. NON-RECURRING CHARGE In connection with the Company entering into the information technology services agreement (see Note 2), the Company determined that certain existing asset and resource requirements were to be redeployed or no longer required. After analyzing numerous alternatives regarding its consolidation, during the fourth quarter, management determined that certain existing assets and personnel resources would no longer be necessary. Accordingly, the Company recorded a non-recurring charge of $2,074,000, which consists of severance and related benefit costs of $1,133,000 covering selected reductions in work force throughout the Company of approximately 70 employees, all of whom have been terminated, notified or identified at December 31, 1995 and writedowns of leasehold improvements and other fixed assets amounting to $941,000 which would no longer be utilized. As of December 31, 1995, the reserve for severance and related benefit costs was $1,020,000. 5. FIXED ASSETS Fixed assets consist of the following (000's omitted):
June 30, December 31, ---------- ------------------------ 1996 1995 1994 ---------- ---------- ---------- Subscriber installation costs ..... $100,869 $ 97,558 $ 91,141 Central station and other equipment 9,613 9,588 8,656 Leasehold improvements ............ 5,232 4,087 5,671 Furniture and fixtures ............ 921 917 1,312 Construction in progress .......... 1,544 615 721 ---------- ---------- ---------- 118,179 112,765 107,501 Less- Accumulated depreciation .... (72,663) (67,534) (61,410) ---------- ---------- ---------- $ 45,516 $ 45,231 $ 46,091 ========== ========== ==========
Depreciation expense relating to cost of sales is $3,180,000 and $3,197,000 for the six months ended June 30, 1996 and 1995, respectively, and $6,378,000, $6,507,000 and $5,056,000 for 1995, 1994 and 1993, respectively. 6. DEBT SHORT-TERM BORROWINGS: Short-term borrowings of $943,000 at December 31, 1995 consisted of borrowings from a margin account, which are secured against the value of the securities in the Company's short term investment account. The weighted average interest rate on the outstanding balances during 1995 was 8%. F-10 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 6. DEBT - (Continued) LONG-TERM DEBT: The Company had the following long-term indebtedness outstanding (000's omitted):
June 30, December 31, ---------- ---------------------- 1996 1995 1994 ---------- --------- --------- Term Note ....................................... $5,063 $6,188 $8,438 Capital lease obligations, interest rates ranging from 7.4% to 10.9%, maturing through August 2000 915 981 958 Other ........................................... 158 190 -- ---------- --------- --------- 6,136 7,359 9,396 Less- Current portion ........................... 2,468 2,497 2,687 ---------- --------- --------- $3,668 $4,862 $6,709 ========== ========= =========
The maturities of long-term debt due within the next five years are as follows (000's omitted):
1995 --------- 1996 .............................................. $2,497 1997 .............................................. 2,506 1998 .............................................. 1,952 1999 .............................................. 260 2000 .............................................. 144 --------- $7,359 =========
In 1993 the Company negotiated a credit facility of $12 million (the "loan agreement") with its bank. The loan agreement provides a $9 million five-year term note ("Term Note") and a $3 million revolving loan facility ("Credit Note"). These amounts were used in 1993 and 1994 to replace the Company's existing short-term borrowings, to finance acquisitions and to provide working capital. The Term Note bears interest on the outstanding balance at the bank's prime rate (8.5 percent at December 31, 1995) plus 2 percent. However, the Company has a separate agreement with its bank which provides for a minimum and a maximum interest rate on its term note of 8% and 10.25%, respectively, the fair market value of which was $6,300 at December 31, 1995. Principal payments of the Term Note began September 30, 1994, at $187,500 per month for 48 months. The Credit Note bears interest on any outstanding balance at the bank's prime rate (8.5 percent at December 31, 1995) plus 1 percent and is subject to renewal at the option of the bank on May 31, 1996. The loan agreement includes a provision that any outstanding balance on the $3 million Credit Note be repaid in full for a minimum of 30 days prior to September 1, each year. The outstanding balance on the Term Note was $6,188,000 on December 31, 1995. The Company is currently unable to draw down on the Credit Note as its bank has informed the Company that there will be no further extensions of credit. The Company is presently discussing alternative arrangements with certain banks and other financial institutions. The Company is subject to and was in compliance with certain covenants under the loan agreement. The covenants include, but are not limited to, requirements that the Company maintain both defined levels of net worth and specified financial ratios, and stay within defined limitations on capital expenditures and additional indebtedness. In addition, the Company is prohibited from paying cash dividends or making other distributions (i) if there is an Event of Default (as described therein) under the agreement or (ii) if the profits of the Company for the most recent fiscal year do not equal or exceed $1,000,000. In the event such profits exceed $1,000,000, F-11 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 6. DEBT - (Continued) the Company's dividends for such fiscal year cannot be greater than the amount by which tangible net worth (as defined therein) at fiscal year end for the previous fiscal year exceeded $26,500,000 in 1995 and increasing amounts thereafter. The Notes are secured principally against the Company's subscriber contracts and trade receivables. The Company has an outstanding letter of credit amounting to $450,000. Letter of credit fees of 2% are payable on outstanding letters of credit. The carrying amounts of the Company's short-term borrowings and long-term debt approximate their fair value. The fair value of the Company's long-term debt is estimated based on current rates offered to the Company for debt with similar remaining maturities. 7. COMMON STOCK On August 1, 1994, the Company sold to HP Partners L.P. (the "Investor") for $10,000,000 (i) 1,515,886 shares of common stock and (ii) warrants to purchase 685,714 shares of common stock at an exercise price of $4.58 per share. The warrants are exercisable at any time prior to their expiration date on August 1, 2004 and are subject to adjustment upon certain dilutive events. On August 13, 1992, the Company issued warrants to purchase 193,150 shares of common stock, subject to adjustment upon certain dilutive events, in connection with a restructuring of debt. These warrants expire on August 13, 2002 and are exercisable at any time prior to expiration at an exercise price of $10.68, subject to adjustment upon certain dilutuve events. On March 27, 1995, the Company effected a reverse stock split pursuant to which one share of common stock, $.01 par value, was exchanged for every 14 shares of common stock, $.25 par value, then issued or outstanding. In addition, the Company reduced its authorized shares of preferred and common stock from 10,000,000 and 100,000,000 shares to 1,000,000 and 12,000,000 shares, respectively. The share information included in the accompanying financial statements reflect the effect of the reverse stock split effected March 27, 1995. At December 31, 1995, the Company has 604,151 shares of common stock reserved for share option plans and 878,864 for warrants. Changes in common stock outstanding are as follows (000's omitted):
Common Treasury Stock Stock -------- ---------- January 1, 1993 .................. 2,951 7 Additions ....................... -- -- -------- ---------- December 31, 1993 ................ 2,951 7 Additions - Sales of common stock 1,515 -- -------- ---------- December 31, 1994 ................ 4,466 7 Additions ....................... -- -- -------- ---------- December 31, 1995 ................ 4,466 7 Additions ....................... -- -- -------- ---------- June 30, 1996 .................... 4,466 7 ======== ==========
F-12 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 8. STOCK OPTIONS The Company, with the approval of its stockholders, adopted the 1992 Senior Executives' Option Plan (the "Executives Plan") and the 1992 Directors' Option Plan (the "Directors Plan"). The Executives Plan and the Directors Plan (collectively, the "Option Plans") took effect on August 13, 1992. On such date, one-time grants of options were made to certain current and former directors under the Directors Plan. No additional grants are permitted under the Directors Plan. On July 29, 1994 (the "Effective Date"), the Company's stockholders approved the amendment and restatement of the Executives Plan, which amendment and restatement, (i) replaced all options outstanding under the Plan with a like number of options at a reduced exercise price of $7.28 per share, (ii) commenced a new vesting period for such options, (iii) reduced the "hurdle rate" relating to the price at which the shares must trade prior to becoming exercisable and (iv) modified the provisions of the Plan to satisfy the requirements of Rule 16b-3 of the Securities Exchange Act of 1934. The Option Plans are administered by the Compensation Committee (the "Committee") of the Board of Directors (the "Board") or, at the Board's discretion, a stock option committee consisting of not less than two directors of the Company who are selected by the Board. Subject to the provisions of the Executives Plan and the terms of the initial option grants provided for therein, the Committee will determine when and to whom options will be granted, the number of shares to be covered by each option, the option price, the period during which each option shall be exercisable and certain other terms and conditions relating to the options under such plan. The Committee may also exercise all the powers and authority necessary or advisable in the administration of the Option Plans, subject to and not inconsistent with the provisions of the Option Plans. Grants of options may be made under the Executives Plan to (i) certain designated senior executives (the "Designated Executives") and to (ii) selected executives of the Company and its subsidiaries. Under the Executives Plan, initial option grants to Designated Executives made on the Effective Date will become exercisable as to thirty percent (30%) of the option shares on the first anniversary of the Effective Date; twenty percent (20%) of the option shares on the second and third anniversaries of the Effective Date and as to fifteen percent (15%) of the option shares on each of the fourth and fifth anniversaries of the Effective Date. Options granted to all other executives will become exercisable over the exercise period, at such times and upon such conditions as the Committee may determine (as reflected in the agreement evidencing the option grant), and the Committee may accelerate the exercisability of any outstanding option under such circumstances as it deems appropriate. No option granted to any executive will become exercisable until the price of the shares subject thereto reaches or has reached a trading price of $13.30 and remains at or above such price for 30 consecutive trading days. The options will expire ten years after the date of grant. Under the Directors Plan, all options vested on January 1, 1993, and no option will become exercisable until the price of the shares subject thereto reaches or has reached a trading price of not less than $24.45 and remains at or above such price for 30 consecutive trading days. The options will expire ten years after the date of grant. On December 4, 1995, the Board approved the granting of various options to purchase the Company's common stock, under a proposed stock option plan (the "Plan") to be submitted for shareholder approval. The Board granted options to certain executives to purchase a total of 25,000 shares at an exercise price of $5.50. Also, under the Plan, each current director would be granted an option at the same exercise price of $5.50 to purchase 25,000 shares of the Company's common stock, vesting immediately and exercisable for five years; and all new directors, upon being appointed or elected, would receive a similar grant at the then quoted market price. A total of 150,000 shares were granted as of December 31, 1995 to existing directors. In addition, a special committee of the Board granted certain directors and a consultant a total of 125,000 options to purchase the Company's common stock under the Plan, vesting immediately at a $5.56 exercise price. F-13 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 8. STOCK OPTIONS - (Continued) Upon approval of the Plan by the stockholders of the Company, no further stock options or other awards shall be granted under the Executives Plan and the Directors Plan. All stock options outstanding under the Executives Plan and the Directors Plan shall continue to be governed by the terms of the respective plans, and the relevant stock option agreement pertaining to each such stock option. Stock options issued under these plans are as follows:
Number of Shares Exercise Price ----------- -------------- Options outstanding, January 1, 1993 . 265,637 $ 7.28-$13.97 Granted ......................... 8,854 $ 7.28 Canceled ........................ (26,563) $ 7.28-$13.97 Exercised ....................... -- -- ----------- -------------- Options outstanding, December 31, 1993 247,928 $ 7.28-$13.97 Granted ......................... 73,930 $ 7.28-$13.97 Canceled ........................ (29,515) $13.97 Exercised ....................... -- -- ----------- -------------- Options outstanding, December 31, 1994 292,343 $ 7.28-$13.97 Granted ......................... 308,854 $ 5.50- $7.28 Canceled ........................ (56,672) $ 5.50- $7.28 Exercised ....................... -- -- ----------- -------------- Options outstanding, December 31, 1995 544,525 $ 5.50-$13.97 Granted ......................... 530,000 $ 6.00-$10.00 Canceled ........................ (21,250) $ 7.28-$13.30 Exercised ....................... -- -- ----------- -------------- Options outstanding, June 30, 1996 ... 1,053,275 $ 5.50-$13.97 =========== ==============
At December 31, 1995, options to purchase 275,000 shares of common stock were exercisable at $5.50 to $5.56. There were 59,626 options available for future grant at December 31, 1995. 9. INCOME TAXES Income tax provision (benefit) include current and deferred taxes as follows (000's omitted):
For the Years Ended December 31 ---------------------------------------------------- 1995 1994 1993 ---------- ------- ------ Current: Federal ......... $ -- $ -- $ -- State ........... 200 94 200 ---------- ------- ------ 200 94 200 ---------- ------- ------ Deferred: Federal ......... (1,764) 301 -- State ........... (555) 183 -- ---------- ------- ------ (2,319) 484 -- ---------- ------- ------ $(2,119) $578 $200 ========== ======= ======
F-14 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 9. INCOME TAXES - (Continued) The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to a significant portion of the deferred tax liability and deferred tax asset and their approximate tax effects are as follows at December 31 (000's omitted):
1995 1994 ----------- ---------- Current deferred tax asset: Accrued expenses ................ $ 414 $ 604 Deferred revenues ............... -- 769 Allowance for doubtful accounts . 589 579 Other ........................... 145 31 ----------- ---------- Net current deferred tax asset ........... 1,148 1,983 ----------- ---------- Noncurrent deferred tax liability: Fixed assets .................... (11,867) (12,336) Subscriber contracts ............ (4,990) (5,757) Net operating loss carryforward . 7,418 5,830 Deferred revenues ............... -- 1,173 Accrued expenses and other ...... (858) (111) ----------- ---------- Net noncurrent deferred tax liability ....... (10,297) (11,201) ----------- ---------- Net deferred tax liability ........... $ (9,149) $ (9,218) =========== ==========
The tax expense allocated to shareholders' equity related to the change in the minimum pension obligation was $307,000, $155,000 and $1,076,000 in 1995, 1994 and 1993, respectively. Reconciliation of tax at the U.S. statutory income tax rate of 34% to the provision (benefit) for income taxes was as follows (000's omitted):
1995 1994 1993 ---------- ------- ------ U.S. statutory rate ...... $(1,970) $334 $ 49 Nondeductible amortization 58 58 -- State income taxes ....... (234) 163 200 Other .................... 27 23 (49) ---------- ------- ------ Tax provision (benefit) .. $(2,119) $578 $200 ========== ======= ======
The Company has net operating loss carryforwards for tax purposes at December 31, 1995 of approximately $17,000,000 which expire through 2010, of which $4,500,000 is limited as to its utilization due to a prior change in ownership of the Company. Future changes in ownership, as defined by Section 382 of the Internal Revenue Code, could limit the amount of net operating loss carryforwards in any one year. 10. PENSION PLANS The Company covers approximately 22 percent of its employees under two defined benefit pension plans which were frozen at June 30, 1987. The benefits under these plans are based upon compensation levels and length of service. The pension plans are being funded in accordance with the Employee Retirement Income Security Act of 1974. F-15 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 10. PENSION PLANS - (Continued) The components of net periodic pension cost were as follows:
1995 1994 --------- ------- Components: Service cost - benefits earned during period ............................... $ 150 $ 150 Interest cost on projected benefit obligation ........................... 1,623 1,598 Actual return on assets ................ (3,174) (660) Net amortization and deferral .......... 1,795 (725) --------- --------- Net periodic pension cost .... $ 394 $ 363 ========= ========= Assumptions: Discount rate for benefit obligations .. 7.5% 8.5% Expected long-term rate of return on assets ............................... 8.5% 8.5%
The following table sets forth the funded status of the plans at September 30, 1995 and 1994 and amounts recognized in the Company's consolidated balance sheets at December 31, 1995 and 1994, respectively (000's omitted):
1995 1994 ------------------------- ------------ Over Under Under Funded Funded Funded Plan Plan Plans ---------- ----------- ------------ Vested benefits .................................. $(1,601) $(19,838) $(19,822) ---------- ----------- ------------ Accumulated benefit obligation ................... (1,603) (19,892) (19,879) ---------- ----------- ------------ Project benefit obligation ....................... (1,603) (19,892) (19,879) Plan assets at fair value ........................ 1,645 18,871 18,052 ---------- ----------- ------------ Plan assets in excess of (less than) projected benefit obligation ......... 42 (1,021) (1,827) ---------- ----------- ------------ Unrecognized net (gain) loss ..................... 602 5,164 5,965 Unrecognized prior service cost .................. -- -- -- Unrecognized net transition obligation (asset) ... (10) (5) (50) Fourth quarter contribution ...................... 18 203 243 Adjustment required to recognize minimum liability -- (5,159) (5,915) ---------- ----------- ------------ Prepaid (accrued) pension cost recognized in the balance sheet ...... $ 652 $ (818) $ (1,584) ========== =========== ============
Pension plan assets are primarily invested in corporate common stocks and bonds and U.S. government securities. F-16 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 11. SUPPLEMENTARY FINANCIAL STATEMENT DATA
June 30, December 31, ---------- ----------------------- 1996 1995 1994 ---------- ---------- --------- (000's omitted) Prepaid expenses and other: Prepaid insurance .............. $ 698 $ 1,297 $1,312 Deferred tax assets ............ 1,148 1,148 1,983 Prepaid pension cost ........... 652 652 -- Other .......................... 99 223 365 ---------- ---------- --------- $2,597 $ 3,320 $3,660 ========== ========== ========= Accounts payable and accrued expenses: Accounts payable ............... $5,213 $ 3,975 $2,281 Accrued insurance .............. 438 1,421 1,002 Accrued pension ................ 354 740 1,057 Accrued severance .............. 790 1,020 -- Accrued expenses ............... 845 2,954 2,700 ---------- ---------- --------- $7,640 $10,110 $7,040 ========== ========== ========= Other long-term liabilities: Deferred installation revenue .. $ -- $ -- $2,667 Other .......................... 684 834 1,443 ---------- ---------- --------- $ 684 $ 834 $4,110 ========== ========== =========
12. COMMITMENTS AND CONTINGENCIES The Company conducts its operations principally from leased facilities and has entered into capital lease arrangements for certain fixed assets. Future minimum lease payments with respect to leases in effect at December 31, 1995 are as follows (000's omitted):
Capital Operating --------- ----------- 1996 ............................. $ 309 $1,406 1997 ............................. 293 1,194 1998 ............................. 274 1,090 1999 ............................. 242 857 2000 ............................. 103 529 2001 and thereafter .............. -- 471 --------- ----------- 1,221 $5,547 =========== Less- Amount representing interest (240) --------- $ 981 =========
Rental expense for the years ended December 31, 1995, 1994 and 1993 was approximately $1,084,000, $1,166,000, and $1,250,000, respectively. Certain subsidiaries of the Company are defendants or co-defendants in various lawsuits, some of which claim damages in substantial amounts. Management of the Company is of the opinion that the ultimate resolution of all these claims is not likely to have a material adverse effect on the consolidated financial condition of the Company, future results of operations or liquidity. The Company has entered into employment agreements with certain of its employees which terminate through May 31, 1997. Future payments under these employment agreements are approximately $618,000. Ter- F-17 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 12. COMMITMENTS AND CONTINGENCIES - (Continued) mination of employment for reasons other than (i) "Cause" (ii) such employee's "Disability" (each defined in the Employment Agreements), (iii) the employee's death, incompetence or bankruptcy or (iv) the expiration of the term of the employment agreement will obligate the Company to pay the employee's salary for periods ranging from three to six months and maintain certain benefits. The amount of this obligation would be approximately $218,000. In addition, the employment agreements grant these employees the right to receive their respective salaries and certain other benefits for a period of twelve months if the Company terminates any of such employees within twelve months of a change in control of the Company (as defined). Upon a change in control, the salary obligation would result in an aggregate payment of approximately $555,000 based upon such employees 1995 salary. 13. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1995 and 1994:
Three Months Ended ----------------------------------------------------------- March 31* June 30* September 30* December 31 ----------- ---------- --------------- ------------- (000's omitted, except per share data) 1995: Revenue ............................ $12,584 $12,539 $12,569 $12,383 Gross profit ....................... 6,405 6,155 5,787 5,466 Income (loss) before cumulative effect of accounting change ...... 5 (645) (1,040) (1,994) Net income (loss) .................. 2,482 (645) (1,040) (1,994) --------- ---------- --------- --------- Earnings (loss) per share before cumulative effect of accounting change ........................... $ -- $ (0.14) $ (0.23) $ (0.45) Earnings (loss) per share .......... $ 0.55 $ (0.14) $ (0.23) $ (0.45) ========= ========== ========== ==========
Three Months Ended --------------------------------------------------------- March 31 June 30 September 30 December 31 ---------- ---------- -------------- ------------- (000's omitted, except per share data) 1994: Revenue ..... $12,865 $12,967 $12,942 $12,628 Gross profit 6,791 6,906 6,673 6,147 Net income (**) ...... 128 154 97 25 ---------- ---------- --------- ---------- Earnings per share ..... $ 0.04 $ 0.05 $ 0.02 $ -- ========== ========== ========= ==========
- ------ (*) First, second and third quarter 1995 results have been restated for the change in accounting principle (see Note 3). (**) The results for the first, second and third quarters have been restated to record a reduction of $103,000, $135,000 and $66,000, respectively, in previously reported net earnings in order to reflect a more accurate effective tax rate. Accordingly, earnings per share for the first, second and third quarters was reduced by $0.03, $0.05 and $0.02, respectively. F-18 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited with respect to June 30, 1996 and the six months ended June 30, 1996 and 1995) 14. SUBSEQUENT EVENTS (UNAUDITED) The Company entered into a credit agreement dated as of August 30, 1996 with Merita Bank Ltd and Bank of Boston Connecticut (together, the "New Banks") pursuant to which the New Banks have agreed, subject to the terms and conditions set forth therein, to provide a two-year $25 million revolving credit facility to the Company which converts into a five-year term loan on September 30, 1998 (the "Credit Facility"). Up to $12.5 million of the Credit Facility became available for borrowing upon the closing thereof on August 30, 1996, and up to an additional $12.5 million will become available if the Company receives at least $10 million in gross proceeds from the sale of newly issued Common Stock by October 31, 1996. At September 24, 1996, the outstanding balance under the Credit Facility was $8.3 million. Such funds have been used to pay $4.7 million to its bank to repay the outstanding balance under the Term Note and to pay $1.0 million to PremiTech for its consolidation activities under the information technology services agreement, with the balance used to meet the Company's working capital needs. The remaining available proceeds of the Credit Facility will be used to finance capital expenditures and permitted acquisitions and for general corporate purposes. The Credit Facility matures on September 30, 2003 with principal payments payable in increasing quarterly installments commencing December 31, 1998. Borrowings under the Credit Facility bear interest, at the Company's option, at an annual rate equal to either a base rate, defined as the higher of the prime rate or a specified federal funds rate, or a specified Eurodollar rate plus, in each case, an applicable margin which varies with the Company's leverage (the ratio of total debt to EBITDA less capital expenditures). The Company is obligated to pay a commitment fee of 1/2 % per annum of any undrawn amounts. The New Banks also received warrants to purchase an aggregate of 166,666 shares of Common Stock at an initial exercise price of $9.75 per share (the "New Bank Warrants") and were granted certain registration rights in connection therewith. Mandatory prepayment of the Credit Facility will be required under certain conditions. The Company is subject to certain covenants under the Credit Facility which include, but are not limited to, ratios of total debt to recurring monthly revenue, minimum debt service coverage, minimum net worth, maximum capital expenditures, maximum subscriber attrition rate (as defined in the Credit Facility), restrictions on additional indebtedness, certain acquisitions, dividends, investments, mergers and sales of assets, creation of liens, guarantees and issuance of capital stock by the Company's subsidiaries. The Credit Facility is secured by all current and future assets, and the pledge of the capital stock, of the Company's subsidiaries. F-19 HOLMES PROTECTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENT SCHEDULE SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (000'S OMITTED)
Charged Balance at to Costs Charged Balance at Beginning and to Other (A) End of Description of Period Expenses Accounts Deductions Period -------------------------------- ------------ ---------- ---------- ------------ ------------ Allowance for doubtful accounts: December 31- 1995 ...................... 1,315 486 -- 461 1,340 1994 ...................... 1,240 506 -- 431 1,315 1993 ...................... 1,359 586 -- 705 1,240
- ------ (A) Deductions represent the net effect of write-offs and recoveries. S-1 LifeNET - A technically advanced vehicle tracking system utilizing both cellular and global positioning satellite technology. ProWATCH - With ProWATCH, an integrated building security system, tenants have access after hours by using an access card at a convenient building entrance, while after-hours visitors use an entry phone. Central Station - In our state-of-the-art facility trained professionals monitor virtually all security needs such as fire, burglar, access control and closed circuit television at locations including businesses and homes. Alarm Video Verification - When an alarm is triggered the system provides a visual transmission of the actual event to our central station. Patrol Service - Our patrol service patrols premises to ensure the integrity of the site and to facilitate emergency procedures as needed. ============================================================================= No dealer, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell or a solicitation of any offer to buy any security other than in connection with the offer made by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy, the shares of Common Stock by anyone in any jurisdiction in which such an offer or solicitation is not authorized, or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to its date. ----------------- TABLE OF CONTENTS ----------------- Page -------- Prospectus Summary ......................... 3 Risk Factors ............................... 6 Use of Proceeds ............................ 11 Price Range of Common Stock and Dividend Policy .................................... 12 Capitalization ............................. 13 Selected Financial Data .................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................ 16 Business ................................... 22 Management ................................. 40 Principal Stockholders ..................... 50 Certain Transactions ....................... 52 Description of Capital Stock ............... 52 Shares Eligible for Future Sale ............ 53 Underwriting ............................... 55 Legal Matters .............................. 56 Experts .................................... 56 Available Information ...................... 56 Index to Financial Statements .............. F-1 ============================================================================= ============================================================================= 1,100,000 Shares HOLMES PROTECTION GROUP, INC. LOGO Common Stock ($.01 par value) ---------- PROSPECTUS ---------- Brean Murray & Co., Inc. September 25, 1996 ============================================================================= PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is an itemization of all expenses (subject to future contingencies) incurred or expected to be incurred by the Company in connection with the issuance and distribution of the securities being offered hereby (items marked with an asterisk (*) represent estimated expenses): SEC Registration Fee .................. $ 4,302.59 Legal Fees and Expenses ............... 150,000.00(*) Blue Sky Fees (including counsel fees) 5,000.00(*) NASD Filing Fee ....................... 1,747.75 NASDAQ Fee ............................ 1,000.00(*) Accounting Fees and Expenses .......... 100,000.00(*) Transfer Agent and Registrar Fees ..... 2,500.00(*) Printing and Engraving Expenses ....... 50,000.00(*) Underwriting Expense Allowance ........ 150,000.00 Miscellaneous Expenses ................ 35,449.66(*) --------------- Total .............................. $500,000.00 =============== ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Delaware General Corporation Law (the "DGCL"), Section 102(b)(7), enables a corporation in its original certificate of incorporation, or an amendment thereto validly approved by stockholders, to eliminate or limit personal liability of members of its Board for violations of a director's fiduciary duty of care. However, the elimination or limitation shall not apply where there has been a breach of the duty of loyalty, failure to act in good faith, intentional misconduct or a knowing violation of a law, the payment of a dividend or approval of a stock repurchase which is deemed illegal or an improper personal benefit is obtained. The Company's Restated Certificate of Incorporation eliminates the liability of directors to the extent permitted by Section 102(b)(7) of the DGCL. Reference is made to Section 145 of the DGCL which provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with specified actions, suits or proceedings, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation (a "derivative action"); if they acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. A similar standard is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys' fees) incurred in connection with defense or settlement of such action, and the statute requires court approval before there can be any indemnification where the person seeking indemnification has been found liable to the corporation. The statute provides that it is not exclusive of other indemnification that may be granted by a corporation's charter, by-laws, disinterested director vote, stockholder vote, agreement or otherwise. The Restated Certificate of Incorporation of the Company provides for such indemnification of its directors and officers as permitted by Delaware law. Reference is made to Article Eleventh of the Restated Certificate of Incorporation of the Company for certain indemnification rights of officers and directors of the Company. In addition, the Company maintains a directors' and officers' liability insurance policy. The Underwriting Agreement provides for reciprocal indemnification among the Company and the Underwriters and their respective officers, directors and control persons against certain liabilities in connection with this Registration Statement, including liabilities under the Securities Act. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Pursuant to the Investment Agreement, on August 1, 1994, the Company sold 1,515,886 shares of Common Stock and warrants to purchase 685,714 shares of Common Stock at an exercise price of $4.58 per share to the Investor for an aggregate cash consideration of $10 million. The Company believes that this issuance was exempt from registration under Section 4(2) of the Securities Act based on the limited nature of the offering and the representations made by the purchasing stockholder. In connection with the Credit Facility, on August 30, 1996, the Company issued warrants to purchase 166,666 shares of Common Stock at an exercise price of $9.75 per share to the New Banks. The Company believes that this issuance was exempt from registration under Section 4(2) of the Securities Act based on the limited nature of the offering and the representations made by the New Banks. As of September 19, 1996, the Company issued 103,805 shares of Common Stock in exchange for all of the outstanding shares of a non-public California corporation. The Company believes that this issuance was exempt from registration under Section 4(2) of the Securities Act based on the limited nature of the offering and the representations made by the purchasers. The purchaser of the securities described above has represented that it understands that the securities acquired may not be sold or otherwise transferred absent registration under the Act or the availability of an exemption from the registration requirements of the Act, and each certificate evidencing the securities owned by such purchaser bears or will bear upon issuance a legend to that effect. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (A) EXHIBITS.
Exhibit No. ------------ 1.1 Form of the Underwriting Agreement(**) 3.1 Restated Certificate of Incorporation of the Company(*) 3.2 Amended and Restated By-Laws of the Company(*) 4.1 Specimen of Common Stock Certificate(*) 4.3 Investor Warrant(*) 4.4 Form of Institution Warrant(*) 4.5 New Bank Warrants(**) 5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld(**) 10.1 Investment Agreement between HP Partners L.P. ("Investor") and the Company dated as of June 29, 1994(*) 10.2 Registration Rights Agreement between Investor and the Company dated August 1, 1994(*) 10.3 Exchange Agreement, dated as of December 18, 1991, among the Company and a number of insurance companies and other institutions listed therein ("Institutions")(*) 10.4 First Amendment to the Exchange Agreement dated January 31, 1992(*) 10.5 Second Amendment to the Exchange Agreement dated May 24, 1992(*) 10.6 Third Amendment to the Exchange Agreement dated June 30, 1992(*) 10.7(a) Amended and Restated Loan Agreement, dated September 30, 1993, between the Company and NatWest Bank N.A. n/k/a Fleet Bank, N.A. (formerly National Westminster Bank USA) ("Loan Agreement")(*) 10.7(b) Amendment No. 1 to Loan Agreement dated October 10, 1994(*) 10.7(c) Amendment and Supplement No. 2 to Loan Agreement dated as of March 10, 1995(*) 10.7(d) Amendment No. 3 to Loan Agreement dated as of April 4, 1995(*) 10.8 Holmes Protection Group, Inc. 1992 Directors' Option Plan(*) 10.9 Amended and Restated Senior Executives Option Plan(*) 10.10 Master Lease Agreement No. 12223 dated December 18, 1992 between Data General Corporation and the Company(*) 10.11 Letter Agreement dated July 12, 1995 and Lease Schedule No. 006 dated July 26, 1995 to Master Lease Agreement No. 12223 between Data General Corporation and the Company(*)
II-2
Exhibit No. ------------ 10.11(a) Letter Agreement dated September 3, 1996 and Revised Lease Schedule No. 006 to Master Lease Agreement No. 12223 between Data General Corporation and the Company(**) 10.12 Software License and Sublicense Agreement dated April 4, 1995 among Monitoring Automation Systems, PremiTech Corporation and the Company(*) 10.13 Employment Agreement between the Company and Eugene G. Lestardo dated June 22, 1995(*) 10.14 Employment Agreement between the Company and Glenn C. Riker dated October 12, 1994(*) 10.15 Employment Agreement between the Company and Neville N. Rosemin dated October 12, 1994(*) 10.16 Employment Agreement between the Company and Brian H. Jaffe dated January 1, 1995(*) 10.17 Employment Agreement between the Company and William C. Sholl dated August 29, 1994(*) 10.18 Employment Agreement between the Company and George V. Flagg dated January 8, 1996(*) 10.19 Employment Agreement between the Company and James L. Boehme dated January 8, 1996(*) 10.19(a) Amendment to Employment Agreement between the Company and James L. Boehme dated June 5, 1996(*) 10.20 Employment Agreement between the Company and Lawrence R. Irving dated May 13, 1996(*) 10.21 Lease Agreement, dated as of July 1, 1995, between Holmes Protection of New York Inc. ("HPNY") and Forty-Seventh- Fifth Company; Lease Guaranty by the Company dated as of July 1, 1995(*) 10.22(a) Lease Agreement, dated March 2, 1987, between HPNY and Ninth Avenue Associates (including First Amendment dated August 9, 1988 thereto)(*) 10.22(b) Second Amendment to Lease Agreement dated October 7, 1987(*) 10.22(c) Third Amendment to Lease Agreement dated October 27, 1994(*) 10.22(d) Fourth Amendment to Lease Agreement dated November 13, 1995(*) 10.23 Lease Agreement, dated June 1992, among Holmes Protection of Long Island, Inc., Holmes Protection Group, Inc. and J&B Properties Ltd.(*) 10.24 Lease Agreement, dated January 31, 1974, between Holmes Protection of Philadelphia, Inc. and George Shapiro (including amendments thereto)(*) 10.25 Lease Agreement, dated August 15, 1989, between Dictograph Security Systems Inc. and Center Realty(*) 10.26 Lease Agreement, dated June 8, 1989, between Holmes Protection, Inc. and High Ridge Enterprises, Inc.(*) 10.27 Form of Registration Rights Agreement with Institutions(*) 10.28 Agreement For Information Technology Services dated as of April 4, 1995 between PremiTech Corporation (formerly Premisys Corporation) and the Company ("Outsourcing Agreement")(*) 10.29 First Amendment to Outsourcing Agreement dated as of August 1, 1995(*) 10.30 Second Amendment to Outsourcing Agreement dated as of December 14, 1995(*) 10.31 Third Amendment to Outsourcing Agreement dated as of January 19, 1996(*) 10.32 Parent Corporation Guarantee dated April 4, 1995 among Electronic Data Systems Corporation, PremiTech Corporation and the Company(*) 10.33 Credit Agreement, among Merita Bank Ltd., Bank of Boston Connecticut, Holmes Holding Company, Inc. and the Company, dated as of August 30, 1996 (**) 10.34 Registration Rights Agreement between the Company and the New Banks, dated as of August 30, 1996(**) 18.1 Letter from Arthur Andersen LLP dated March 20, 1996 regarding change in accounting principle(*) 21.1 Subsidiaries of the Company(*) 23.1 Consent of Arthur Andersen, LLP(**) 23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the opinion filed as Exhibit 5.1)(**) 24.1 Power of Attorney(*)
- ------ (*) Previously filed. (**) Filed herewith. II-3 (B) FINANCIAL STATEMENT SCHEDULES. Schedule II -- Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS. The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on September 25, 1996. HOLMES PROTECTION GROUP, INC. By:/s/ George V. Flagg -------------------------------- George V. Flagg President, Chief Executive Officer and Director In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
Signatures Title Date -------------------------- ------------------------------------------------- -------------------- /s/ George V. Flagg President, Chief Executive Officer (Principal September 25, 1996 ------------------------- Executive Officer) and Director George V. Flagg /s/ Lawrence R. Irving Vice President -- Finance (Principal Financial September 25, 1996 ------------------------- and Accounting Officer) Lawrence R. Irving /s/ Pierre Besuchet Director September 25, 1996 ------------------------- Pierre Besuchet /s/ Daniel T. Carroll Director September 25, 1996 ------------------------- Daniel T. Carroll /s/ Lawrence R. Glenn Director September 25, 1996 ------------------------- Lawrence R. Glenn /s/ Mark S. Hauser Director September 25, 1996 ------------------------- Mark S. Hauser /s/ William P. Lyons Director September 25, 1996 ------------------------- William P. Lyons /s/ David Jan Mitchell Director September 25, 1996 ------------------------- David Jan Mitchell /s/ Edward L. Palmer Director September 25, 1996 ------------------------- Edward L. Palmer /s/ William Spier Director September 25, 1996 ------------------------- William Spier
II-5 EXHIBIT INDEX
Exhibit No. Description Page ------------ ----------------------------------------------------------------------------------------- -------- 1.1 Form of the Underwriting Agreement(**) 3.1 Restated Certificate of Incorporation of the Company(*) 3.2 Amended and Restated By-Laws of the Company(*) 4.1 Specimen of Common Stock Certificate(*) 4.3 Investor Warrant(*) 4.4 Form of Institution Warrant(*) 4.5 New Bank Warrants(**) 5.1 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld(**) 10.1 Investment Agreement between HP Partners L.P. ("Investor") and the Company dated as of June 29, 1994(*) 10.2 Registration Rights Agreement between Investor and the Company dated August 1, 1994(*) 10.3 Exchange Agreement, dated as of December 18, 1991, among the Company and a number of insurance companies and other institutions listed therein ("Institutions")(*) 10.4 First Amendment to the Exchange Agreement dated January 31, 1992(*) 10.5 Second Amendment to the Exchange Agreement dated May 24, 1992(*) 10.6 Third Amendment to the Exchange Agreement dated June 30, 1992(*) 10.7(a) Amended and Restated Loan Agreement, dated September 30, 1993, between the Company and NatWest Bank N.A. n/k/a Fleet Bank, N.A. (formerly National Westminster Bank USA) ("Loan Agreement")(*) 10.7(b) Amendment No. 1 to Loan Agreement dated October 10, 1994(*) 10.7(c) Amendment and Supplement No. 2 to Loan Agreement dated as of March 10, 1995(*) 10.7(d) Amendment No. 3 to Loan Agreement dated as of April 4, 1995(*) 10.8 Holmes Protection Group, Inc. 1992 Directors' Option Plan(*) 10.9 Amended and Restated Senior Executives Option Plan(*) 10.10 Master Lease Agreement No. 12223 dated December 18, 1992 between Data General Corporation and the Company(*) 10.11 Letter Agreement dated July 12, 1995 and Lease Schedule No. 006 dated July 26, 1995 to Master Lease Agreement No. 12223 between Data General Corporation and the Company(*) 10.11(a) Letter Agreement dated September 3, 1996 and Revised Lease Schedule No. 006 to Master Lease Agreement No. 12223 between Data General Corporation and the Company(**) 10.12 Software License and Sublicense Agreement dated April 4, 1995 among Monitoring Automation Systems, PremiTech Corporation and the Company(*) 10.13 Employment Agreement between the Company and Eugene G. Lestardo dated June 22, 1995(*) 10.14 Employment Agreement between the Company and Glenn C. Riker dated October 12, 1994(*) 10.15 Employment Agreement between the Company and Neville N. Rosemin dated October 12, 1994(*) 10.16 Employment Agreement between the Company and Brian H. Jaffe dated January 1, 1995(*) 10.17 Employment Agreement between the Company and William C. Sholl dated August 29, 1994(*) 10.18 Employment Agreement between the Company and George V. Flagg dated January 8, 1996(*) 10.19 Employment Agreement between the Company and James L. Boehme dated January 8, 1996(*)
Exhibit No. Description Page ------------ ----------------------------------------------------------------------------------------- -------- 10.19(a) Amendment to Employment Agreement between the Company and James L. Boehme dated June 5, 1996(*) 10.20 Employment Agreement between the Company and Lawrence R. Irving dated May 13, 1996(*) 10.21 Lease Agreement, dated as of July 1, 1995, between Holmes Protection of New York Inc. ("HPNY") and Forty-Seventh- Fifth Company; Lease Guaranty by the Company dated as of July 1, 1995(*) 10.22(a) Lease Agreement, dated March 2, 1987, between HPNY and Ninth Avenue Associates (including First Amendment dated August 9, 1988 thereto)(*) 10.22(b) Second Amendment to Lease Agreement dated October 7, 1987(*) 10.22(c) Third Amendment to Lease Agreement dated October 27, 1994(*) 10.22(d) Fourth Amendment to Lease Agreement dated November 13, 1995(*) 10.23 Lease Agreement, dated June 1992, among Holmes Protection of Long Island, Inc., Holmes Protection Group, Inc. and J&B Properties Ltd.(*) 10.24 Lease Agreement, dated January 31, 1974, between Holmes Protection of Philadelphia, Inc. and George Shapiro (including amendments thereto)(*) 10.25 Lease Agreement, dated August 15, 1989, between Dictograph Security Systems Inc. and Center Realty(*) 10.26 Lease Agreement, dated June 8, 1989, between Holmes Protection, Inc. and High Ridge Enterprises, Inc.(*) 10.27 Form of Registration Rights Agreement with Institutions(*) 10.28 Agreement For Information Technology Services dated as of April 4, 1995 between PremiTech Corporation (formerly Premisys Corporation) and the Company ("Outsourcing Agreement")(*) 10.29 First Amendment to Outsourcing Agreement dated as of August 1, 1995(*) 10.30 Second Amendment to Outsourcing Agreement dated as of December 14, 1995(*) 10.31 Third Amendment to Outsourcing Agreement dated as of January 19, 1996(*) 10.32 Parent Corporation Guarantee dated April 4, 1995 among Electronic Data Systems Corporation, PremiTech Corporation and the Company(*) 10.33 Credit Agreement, among Merita Bank Ltd., Bank of Boston Connecticut, Holmes Holding Company, Inc. and the Company, dated as of August 30, 1996(**) 10.34 Registration Rights Agreement between the Company and the New Banks, dated as of August 30, 1996(**) 18.1 Letter from Arthur Andersen LLP dated March 20, 1996 regarding change in accounting principle(*) 21.1 Subsidiaries of the Company(*) 23.1 Consent of Arthur Andersen, LLP(**) 23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the opinion filed as Exhibit 5.1)(**) 24.1 Power of Attorney(*)
- ------ (*) Previously filed. (**) Filed herewith. EX-1.1 2 EXHIBIT 1.1 1,000,000 Shares HOLMES PROTECTION GROUP, INC. Common Stock UNDERWRITING AGREEMENT September __, 1996 BREAN MURRAY & CO., INC. As Representative of the several Underwriters 570 Lexington Avenue New York, New York 10022 Ladies and Gentlemen: HOLMES PROTECTION GROUP, INC., a Delaware corporation (the "Company"), proposes to sell an aggregate of 1,000,000 shares (the "Firm Shares") of the Common Stock, par value $.01 per share (the "Common Stock"), of the Company, to you and the other underwriters named in Schedule I hereto (collectively, the "Underwriters"), for whom you are acting as representative (the "Representative"). The Company also has agreed to grant to you and the other Underwriters an option (the "Option") to purchase up to an additional 150,000 shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section l(b) hereto. The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." As the Representative, you have advised the Company (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Company hereby confirms as follows its agreement with the Representative and the several other Underwriters. 1 1. Agreement to Sell and Purchase (a) On the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions of this Agreement, the Company agrees to sell to each Underwriter and each Underwriter, severally and not jointly, agrees to purchase from the Company at a purchase price of $_________ per share, the number of Firm Shares set forth opposite the name of such Underwriter on Schedule I hereto, plus such additional number of Shares which such Underwriter may become obligated to purchase pursuant to Sections 1(b) or 10 hereof. (b) Subject to all the terms and conditions of this Agreement, the Company grants the Option to the several Underwriters to purchase, severally and not jointly, the Option Shares at the same price per share as the Underwriters shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time and from time to time on or before the 30th day after the date of this Agreement (or on the next business day if the 30th day is not a business day), upon notice (the "Option Shares Notice") in writing or by telephone (confirmed in writing) by the Representative to the Company no later than 5:00 p.m., New York City time, at least two and no more than five business days before the date specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased on the Option Closing Date. On the Option Closing Date, the Company will sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice, and each Underwriter will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing, as adjusted by the Representative in such manner as it deems advisable to avoid fractional shares. 2. Delivery and Payment. Delivery of the Firm Shares shall be made to the Representative for the accounts of the Underwriters at the office of Brean Murray & Co., Inc., 570 Lexington Avenue, New York, New York 10022, and in exchange therefor payment of the purchase price shall be made to the Company by wire transfer of immediately available funds to the Company's account at ____________________ (the "Closing"). Such delivery and payment shall be made at 10:00 a.m., New York time, on the third full business day following the date of this Agreement, or at such other time on such other date as may be agreed upon by the Company and the Representative (such date is hereinafter referred to as the "Closing Date"). (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligations of each Underwriter hereunder. To the extent the Option is exercised, delivery of the Option Shares against payment by the Underwriters (in the manner specified above) will take place at the offices specified above for the Closing Date at the time and date (which may be the Closing Date) specified in the Option Shares Notice. 2 Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as the Representative shall request at least two business days prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case may be. 3. Representations and Warranties of the Company. The Company represents, warrants and covenants to each Underwriter that: (a) A registration statement on Form S-1 (Registration No. 333-9025) relating to the Shares, including a preliminary prospectus relating to the Shares and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") promulgated thereunder and has been filed with the Commission. The Commission has not issued any order preventing or suspending the use of the Prospectus (as defined below) or any Preliminary Prospectus (as defined below) or instituted or, to the knowledge of the Company, threatened any proceeding for that purpose. The term "Preliminary Prospectus" as used herein means a preliminary prospectus relating to the Shares omitting therefrom such information as permitted in reliance upon Rule 430A included at any time as part of the foregoing registration statement or any amendment thereto before it became effective under the Act and any prospectus filed with the Commission by the Company pursuant to Rule 424(a) of the Rules and Regulations. Copies of such registration statement and amendments and of each related Preliminary Prospectus have been delivered to the Representative. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final Preliminary Prospectus, necessary to permit such registration statement to become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus relating to the Shares containing information permitted to be omitted at the time of effectiveness by Rule 430A of the Rules and Regulations will be filed by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations promptly after execution and delivery of this Agreement. The term "Registration Statement" means the registration statement at the time such registration statement becomes or became effective (the "Effective Date"), together with any registration statement filed by the Company pursuant to Rule 462(b) under the Act, including all financial statements and schedules and all exhibits, documents incorporated therein by reference and all information contained in any final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or in a term sheet described in Rule 434 of the Rules and Regulations in accordance with Section 5 hereof and deemed to be included therein as of the Effective Date by Rule 430A of the Rules and Regulations. The term "Prospectus" means the prospectus relating to the Shares as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus relating to the Shares included in the Registration Statement at the Effective Date. References herein to any document or other information incorporated by reference in the Registration Statement shall include documents or other information incorporated by reference in the Prospectus (or if the Prospectus is not in existence, in the most recent Preliminary Prospectus). References herein to any Preliminary Prospectus or the Prospectus shall be deemed to include all documents and information incorporated by reference therein. 3 (b) On the date that any Preliminary Prospectus was filed with the Commission, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations (if required), at all times subsequent to and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement, each Preliminary Prospectus and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply with all applicable provisions of the Act and the Rules and Regulations and did or will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to any Underwriter as set forth in Section 16 hereof furnished by such Underwriter in writing to the Company by the Representative specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. There are no contracts or other documents required to be filed as exhibits to the Registration Statement by the Act or the Regulations that have not been so filed. The documents which are incorporated by reference in any Preliminary Prospectus or the Prospectus or from which information is so incorporated by reference, when they became effective or were filed with the Commission, as the case may be, complied in all material respects with the requirements of the Act and the Rules and Regulations or the Exchange Act and the rules and regulations thereunder, as applicable, and did not, when such documents were so filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and any documents so filed and incorporated by reference subsequent to the effective date of the Registration Statement shall, when they are filed with the Commission, conform in all material respects with the requirements of the Act and the Rules and Regulations and the Exchange Act and the rules and regulations thereunder, as applicable. 4 (c) The Company has the following subsidiaries: Holmes Protection of New York, Inc., a New York corporation, Holmes Protection of Long Island, Inc., a New York corporation, Holmes Protection of New Jersey, Inc., a New Jersey corporation, Holmes Protection, Inc., a New York corporation, Holmes Protection of Philadelphia, Inc., a Pennsylvania corporation, Dictograph Franchise Corporation, a New Jersey corporation, Holmes Holding Company, Inc., a Delaware corporation, and Holmes Central Services, Inc., a New Jersey corporation (collectively, the "Subsidiaries"). The Company does not own and, at the Closing Date and the Option Closing Date, if any, will not own, an interest in any corporation (except for the Subsidiaries), joint venture, trust, partnership or other business entity. The Company has been and, at the Closing Date and Option Closing Date, if any, will be, duly incorporated and validly existing as a corporation under the laws of the State of Delaware and is, and at the Closing Date and the Option Closing Date, if any, will be, in good standing in the State of Delaware. The Company has all corporate power and authority necessary to own its properties and conduct its business as currently being carried on and as described in the Registration Statement and Prospectus. The Company is, and at the Closing Date and the Option Closing Date, if any, will be, duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business or use of its property and assets makes such qualification necessary and in which the failure to so qualify would have a material adverse effect on the business, financial condition or properties of the Company. (d) The outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable (except as disclosed in the Registration Statement) and are not subject to any preemptive or similar rights, and the holders thereof, are not subject to personal liability by reason of being such holders. The Firm Shares to be sold hereunder to the Underwriters, and the Option Shares to be sold hereunder to the Underwriters in the event the Option is exercised, will be duly authorized and validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability by reason of being such holders. The Company has, and, upon completion of the sale of the Shares, will have, an authorized, issued and outstanding capitalization as set forth in the Registration Statement and the Prospectus under the caption "Description of Capital Stock" (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). The description of the securities of the Company in the Registration Statement and the Prospectus under the caption "Description of Capital Stock" (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) is, and at the Closing Date and, if later, the Option Closing Date, will be, complete and accurate in all respects. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights for or relating to the registration of any shares of Common Stock or other securities of the Company, except such rights as have been disclosed in the Registration Statement or as have been satisfied, waived or terminated. 5 (e) The financial statements and the related notes of the Company included in the Registration Statement and in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus) comply in all material respects with the requirements of the Act and the Rules and Regulations, present fairly the financial condition, results of operations and cash flows of the Company at the dates and for the periods covered thereby and have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the entire periods involved (except as otherwise stated therein). Arthur Andersen LLP (the "Accountants"), who have reported on those of such financial statements and related notes which are audited, are independent accountants with respect to the Company as required by the Act and the related rules and regulations. (f) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets, (iii) access to material assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (g) Except as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date and, if later, the Option Closing Date, (i) there has not been, and will not have been, any material adverse change in the business, properties, key personnel, condition (financial or otherwise), net worth or results of operations of the Company (ii) the Company has not, and will not have, incurred any material liabilities or obligations, direct or contingent, or, entered into any material transactions not in the ordinary course of business other than pursuant to this Agreement, (iii) the Company has not, and will not have, paid or declared any dividends or other distributions of any kind on any class of its capital stock, and (iv) there has not been, and will not have been, any change in the capital stock, or a material change in the short-term or long-term debt, or any issuance of options, warrants, convertible securities or other rights to purchase capital stock of the Company, other than changes in capital stock and issuances of rights, options and shares pursuant to the Company's Amended and Restated Senior Executives' Option Plan, 1992 Directors' Option Plan and 1996 Stock Incentive Plan. (h) The Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), as owned by it, free and clear of all liens, security interests, restrictions, pledges, encumbrances, charges, equities, claims, easements, leases and tenancies (collectively, "Encumbrances") other than those described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and those that will not materially affect the value of such properties and assets and will not interfere with the use made and proposed to be made of such properties and assets. The Company has valid, subsisting and enforceable leases for the properties and assets described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) as leased by it, free and clear of all Encumbrances, other than those described in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and those that will not materially affect the value of such properties and assets and will not interfere with the use made and proposed to be made of such properties and assets. 6 (i) The Company owns or possesses all material patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and rights necessary for the conduct of the business of the Company as currently carried on and as described in the Registration Statement, and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and except as stated in the Registration Statement or Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), to the Company's knowledge, no name which the Company uses and no other aspect of the business of the Company may in the future involve or give rise to any infringement of or license or similar fees for, any patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets or other similar rights of others material to the business or prospects of the Company, and the Company has not received any notice alleging any infringement or fee. (j) Except as set forth in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no actions, suits, arbitrations, claims, governmental or other proceedings (formal or informal), or investigations pending or, to the knowledge of the Company, threatened against or affecting the Company, or any of the properties or assets owned or leased by the Company, before or by any Federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign (collectively, a "Governmental Body"), which might result in any material adverse change in the business, properties, prospects, condition (financial or otherwise), net worth or results of operations of the Company. The Company is not in violation of, or in default with respect to, any law, rule or regulation, or any order, judgment or decree, except as described in the Prospectus (or if the Prospectus is not in existence, in the most recent Preliminary Prospectus) or such as in the aggregate do not now have and can reasonably be expected in the future not to have a material adverse effect upon the operations, business, properties or assets of the Company; nor is the Company presently required to take any action in order to avoid any such violation or default. (k) The Company has, and at the Closing Date and, if later, the Option Closing Date will have, all material governmental licenses, permits, consents, orders, approvals, franchises, certificates and other authorizations (collectively, "Licenses") necessary to carry on its business and owns or leases its properties as contemplated in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and all such Licenses are, and at the Closing Date and, if later, the Option Closing Date will be, in full force and effect. The Company has, and at the Closing Date and, if later, the Option Closing Date will have, complied in all material respects with all laws, regulations and orders applicable to it or its business, assets and properties. The Company is not, nor at the Closing Date and, if later, the Option Closing Date will it be, in violation of its Restated Articles of Incorporation or Bylaws or in default (nor has any event occurred which, with notice or lapse of time or both, would constitute a default) in the due performance and observation of any term, covenant or condition of any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its properties are bound or affected, the violation of which would individually or in the aggregate have a material adverse effect on the business, properties, condition (financial or otherwise), net worth or results of operations of the Company. There are no governmental proceedings or actions pending or, to the Company's knowledge, threatened for the purpose of suspending, modifying or revoking any License held by the Company. 7 (l) No consent, approval, authorization or order of, or any filing or declaration with, any Governmental Body is required for the execution, delivery or performance of this Agreement or for the consummation of the transactions contemplated by this Agreement or in connection with the sale of the Shares by the Company, except such as have been obtained and such as may be required under the Act, the Rules and Regulations, any state securities or Blue Sky laws or the bylaws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares to be sold hereby. (m) The Company has full power (corporate and other) and authority to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company, and is enforceable against the Company in accordance with the terms hereof, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter affecting creditors' rights generally or by general principles of equity relating to the availability of remedies and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. Except as disclosed in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the execution, delivery and the performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any Encumbrance upon any of the properties or assets of the Company pursuant to the terms or provisions of, or result in a breach or violation of or conflict with any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, (i) the Restated Articles of Incorporation or Bylaws of the Company, in each case as amended, or (ii) any contract or other agreement to which the Company is a party or by which it or any of the respective assets or properties are bound or affected, the violation of which would individually or in the aggregate have a material adverse effect on the business, properties, condition (financial or otherwise), net worth or results of operations of the Company or (iii) any judgment, ruling, decree, order, law, statute, rule or regulation of any Governmental Body applicable to the Company or its business or properties, the violation of which would individually or in the aggregate have a material adverse effect on the business, properties, condition (financial or otherwise), net worth or results of operations of the Company. 8 (n) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to the Representative was or will be, when made, inaccurate, untrue or incorrect. Each certificate signed by an officer of the Company and delivered to the Representative or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (o) Neither the Company nor the Subsidiaries nor, to the Company's knowledge, any of its directors or officers has taken, nor will he, she or it take, directly or indirectly, any action designed, or which might reasonably be expected in the future, to cause or result in, under the Act or otherwise, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or otherwise. (p) The Company is not involved in any labor dispute with its employees nor is any such dispute threatened or imminent. (q) Neither the Company nor, to the Company's best knowledge, any employee or agent of the Company has made any payment of funds of the Company or received or retained any funds of the Company in violation of any law, rule or regulation or of a character required to be disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). (r) The business, operations and facilities of the Company have been and are being conducted in compliance in all material respects with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, or pollution, or protection of health or the environment (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) of any governmental department, commission, board, bureau, agency or instrumentality of the United States or any state or political subdivision thereof, and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto; and the Company has not received any notice from any governmental instrumentality or any third party alleging any violation thereof or material liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances and/or damages to natural resources). The intended use and occupancy of each of the facilities owned or operated by the Company complies in all material respects with all applicable codes and zoning laws and regulations, and there is no pending or, to the Company's knowledge, threatened condemnation, zoning change, environmental or other proceeding or action that will in any material respect adversely affect the size of, use of, improvements on, construction on or access to such facilities. 9 (s) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof and is not in default in any taxes which were payable pursuant to said returns, other than any which the Company is contesting in good faith. (t) Neither the Company nor, to the knowledge of the Company, any of its directors or officers in such capacity is subject to any order or directive of, or party to any agreement with, any regulatory agency having jurisdiction with respect to its business or operations except as disclosed in the Prospectus (or if the Prospectus is not in existence, in the most recent Preliminary Prospectus). (u) The Company, each officer and director of the Company and certain of the principal stockholders of the Company have delivered to the Representative an agreement to the effect that he, she or it will not, for a period of 90 days after the date hereof, without the prior written consent of the Representative, directly or indirectly, offer, sell or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or securities convertible into, or exercisable or exchangeable for, shares of Common Stock. (v) The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act or the Rules and Regulations to be distributed by the Company. (w) The Common Stock of the Company is quoted on the NASD Automated Quotation National Market System ("NASDAQ"). 4. Representations and Warranties of the Underwriters. Upon your authorization of the release of the Firm Shares, the several Underwriters propose to offer the Firm Shares for sale to the public upon the terms set forth in the Prospectus. The Representative represents and warrants to the Company that, assuming compliance by the Company with all relevant provisions of the Act in connection with the Registration Statement, the Representative will conduct all offers and sales of the Shares in compliance with the relevant provisions of the Act and the Rules and Regulations, all applicable state securities laws and regulations and the bylaws and rules of the NASD. 10 5. Agreements of the Company. The Company covenants and agrees with each of the several Underwriters as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an Underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Representative within a reasonable period of time prior to the filing thereof and the Representative shall not have objected thereto in good faith within a reasonable amount of time from receipt from the Company of such proposed amendment or supplement to the Registration Statement. (b) If the Registration Statement is not yet effective, the Company will use its best efforts to cause the Registration Statement to become effective not later than the time indicated in Section 7(a) hereof. The Company will notify the Representative promptly, and will confirm such advice in writing, (i) when the Registration Statement has become effective (if later than the date hereof) and when any post-effective amendment thereto becomes effective, (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) 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 or the threat thereof, (iv) of the happening of any event during the period mentioned in the third sentence of Section 5(f) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading and (v) of receipt by the Company or any representative or attorney of the Company during the period mentioned in the third sentence of Section 5(f) of any other communication from the Commission relating to the Company, the Registration Statement, any Preliminary Prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. The Company will prepare the Prospectus in a form approved by the Representative and will file such Prospectus pursuant to Rule 424(b) of the Rules and Regulations not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) of the Rules and Regulations. If the Company has omitted any information from the Registration Statement pursuant to Rule 430A of the Rules and Regulations, the Company will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to Rule 430A of the Rules and Regulations and to notify the Representative promptly of all such filings. (c) If, at any time when a Prospectus relating to the Shares is required to be delivered under the Act, any event has occurred as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or the Registration Statement, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, or if for any other reason it is necessary at any such time to amend or supplement the Prospectus or the Registration Statement to comply with the Act or the Rules and Regulations, the Company will promptly notify the Representative thereof and, subject to Section 5(b) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. 11 (d) The Company will furnish to the Representative, without charge, two signed copies of the Registration Statement and of any post-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and will furnish to the Representative, without charge, for transmittal to each of the other Underwriters, copies of the Registration Statement and any post-effective amendment thereto, including financial statements and schedules but without exhibits. (e) The Company will comply with all the provisions of all undertakings contained in the Registration Statement. (f) On the Effective Date, and thereafter from time to time for such period as the Prospectus is required by the Act to be delivered, the Company will deliver to each of the Underwriters, without charge, as many copies of the Prospectus or any amendment or supplement thereto as the Representative may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the several Underwriters and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or counsel to the Underwriters should be set forth in the Prospectus in order to make any statement therein, in the light of the circumstances under which it was made, not misleading, or in the Registration Statement in order to make any statement therein not misleading, or if it is necessary to supplement or amend the Prospectus or the Registration Statement to comply with law, the Company will forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto and will deliver to each of the Underwriters, without charge, such number of copies thereof as the Representative may reasonably request. (g) Prior to any public offering of the Shares by the Underwriters, the Company will cooperate with the Representative and its counsel in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representative may request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject or subject itself to taxation as doing business in any jurisdiction. 12 (h) During the period of five years commencing on the Effective Date, the Company will furnish to the Representative and each other Underwriter who may so request in writing copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock and will furnish to the Representative and each other Underwriter who may so request in writing a copy of each annual or other report it shall be required to file with the Commission. (i) The Company will make generally available to holders of its securities, as soon as may be practicable, but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, a consolidated earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (j) The Company will not for a period of 90 days after the date hereof, without the prior written consent of Representative, directly or indirectly, offer, sell or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exercisable or exchangeable for, shares of Common Stock, except pursuant to Section 1 hereof and except that the Company may grant options, and issue shares pursuant to the options granted, under the Company's stock option and employee stock purchase plans. (k) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. (l) The Company shall apply the net proceeds of the sale of the Shares as set forth in the Prospectus. (m) The Company shall not invest, or otherwise use, the proceeds received by the Company from the sale of the Shares to the Underwriters in such a manner as would require the Company or any of its subsidiaries to register as an investment company under the Investment Company Act of 1940, as amended. (n) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company or if required for NASDAQ designation, a registrar for its Common Shares. 13 6. Expenses. Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Representative, all costs and expenses incident to the performance of its obligations under this Agreement and the transactions contemplated by this Agreement, including, but not limited to, costs and expenses of or relating to (i) the preparation, printing and filing of the Registration Statement and exhibits thereto, each Preliminary Prospectus, the Prospectus, any amendment or supplement to the Registration Statement or the Prospectus, (ii) the preparation and delivery of certificates representing the Shares, (iii) the printing of this Agreement, the Agreement among Underwriters, any Dealer Agreements and any Underwriters' Questionnaire, (iv) furnishing (including costs of shipping and mailing) such copies of the Registration Statement, the Prospectus and any Preliminary Prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold, (v) the quotation of the Shares on The Nasdaq Stock Market, (vi) any filings required to be made by the Underwriters with the NASD, (vii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 5(g), including the reasonable fees, disbursements and other charges of counsel to the Underwriters in connection therewith, and the preparation and printing of preliminary, supplemental and Blue Sky memoranda, (viii) counsel and accountants to the Company and (ix) the transfer agent for the Shares. Whether or not the transactions contemplated by this Agreement are consummated or if this Agreement shall be terminated by the Company pursuant to any provisions hereof, the Company will reimburse the Representative for all of its accountable out-of-pocket fees and expenses including, among other things, its travel and travel related expenses and its counsel fees and expenses, incurred by it in connection herewith, up to an aggregate amount of $150,000. 7. Conditions to the Obligations of the Underwriters. The obligations of each Underwriter hereunder are subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by the Representative not later than 4:00 p.m., New York time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Representative and all filings required prior to such effectiveness by Rule 424 of the Rules and Regulations and Rule 430A of the Rules and Regulations shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect, and no proceeding for such purpose shall be pending before or threatened or contemplated by the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Representative and the Representative did not object thereto in good faith, and the Representative shall have received certificates, dated the Closing Date and the Option Closing Date, if any, and signed by the Chief Executive Officer of the Company and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of the foregoing clauses (i), (ii) and (iii). 14 (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the general affairs, business, business prospects, properties, management, condition (financial or otherwise) or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, and (ii) the Company shall not have sustained any material loss or interference with its business, assets or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in the judgment of the Representative any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares by the Underwriters at the initial public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company or, to the knowledge of the Company, any of its officers, directors or shareholders in their capacities as such, or any of its assets or properties, before or by any Governmental Body in which litigation or proceeding an unfavorable ruling, decision or finding would materially and adversely affect the business, properties, business prospects, condition (financial or otherwise), net worth or results of operations of the Company. (e) Each of the representations and warranties of the Company contained herein shall be true and correct at the Closing Date and, with respect to the Option Shares, if any, at the Option Closing Date, as if made on such date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date and, with respect to the Option Shares, if any, at or prior to the Option Closing Date, shall have been fully performed, fulfilled or complied with. (f) The Representative shall have received an opinion, dated the Closing Date and the Option Closing Date, from Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New York, counsel for the Company, to the following effect: (i) The Company has been duly incorporated and is validly existing as a corporation under the laws of the State of Delaware. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business or use of its property and assets makes such qualification necessary and in which the failure to so qualify would have a material adverse effect on the business, financial condition or properties of the Company; 15 (ii) The capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock." The Company has an authorized capitalization as set forth in the Prospectus; all of the issued and outstanding shares of Common Stock have been duly authorized and validly issued by the Company, are fully paid and nonassessable and are free of any preemptive or similar rights pursuant to the Company's Articles of Incorporation, Bylaws or any agreement or other instrument known to such counsel to which the Company is a party or by which it is bound, and the holders thereof are not subject to personal liability by reason of being such holders; the Shares, when sold by the Company and paid for in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and will conform in all material respects to the description thereof contained under the caption "Description of Capital Stock" in the Prospectus and will not be subject to any preemptive, subscription or similar rights pursuant to the Company's Articles of Incorporation, Bylaws or any agreement or other instrument known to such counsel to which the Company is a party or by which it is bound; to such counsel's knowledge, neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated hereby gives rise to any rights for or relating to the registration of any Shares of Common Stock or other securities of the Company, except as disclosed in the Registration Statement, or such rights as have been satisfied, waived or terminated; (iii) To such counsel's knowledge, except as described in the Registration Statement and Prospectus, there are no options, warrants, agreements, contracts or other rights in existence to purchase or acquire from the Company any shares of capital stock of the Company; (iv) The Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by Rule 424(b) of the Rules and Regulations; and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, and to such counsel's knowledge no proceedings for that purpose have been instituted or are pending or, to the best knowledge of such counsel, are threatened or contemplated under the Act; (v) The Registration Statement originally filed with respect to the Shares and each amendment thereto and the Prospectus and, if any, each amendment and supplement thereto (except the financial statements, schedules and other financial data contained therein, as to which such counsel need not express any opinion), complied as to form in all material respects with the requirements of the Act and the related rules and regulations thereunder; (vi) Insofar as statements in the Prospectus purport to summarize the status of litigation in which we are counsel to the Company or the provisions of laws, rules, regulations, orders, judgments, decrees, contracts, agreements, instruments, leases, or licenses, such statements have been prepared or reviewed by such counsel and accurately reflect the status of such litigation and provisions purported to be summarized and are correct in all material respects; 16 (vii) To such counsel's knowledge, there are no contracts or documents which are required by the Act to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described therein or filed as required by the Act and the Rules and Regulations; (viii) To the knowledge of such counsel, there is not pending or threatened against the Company any action, suit, arbitration, claim, governmental or other proceeding (informal or formal) or investigation before or by any Governmental Body of a character required to be disclosed in the Registration Statement or the Prospectus which is not so disclosed therein. To the knowledge of such counsel, the Company is not in violation of, or in default with respect to, any law, rule or regulation of the State of Delaware or the United States of America, or any order, judgment or decree, except as described in the Registration Statement or Prospectus or such as in the aggregate do not now have and can reasonably be expected in the future not to have a material adverse effect upon the operations, business, properties or assets of the Company; (ix) The Company has the corporate power and authority to enter into this Agreement and to consummate the transactions provided for herein; this Agreement has been duly authorized, executed and delivered by the Company; this Agreement, assuming due authorization, execution and delivery by each other party hereto, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors rights generally or by general principles of equity relating to the availability of remedies and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws; (x) None of the Company's execution or delivery of this Agreement, its performance hereof or its consummation of the transactions contemplated herein conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any Encumbrance upon, any property or assets of the Company pursuant to (A) the terms of the Articles of Incorporation or Bylaws of the Company, in each case as amended; (B) the terms of any material contract or other material agreement known to such counsel without independent investigation to which the Company is a party or by which it is or may be bound or to which any of its properties is or may be subject; (C) any statute, rule or regulation of the State of Delaware or the United States of America; or (D) the terms of any judgment, decree or order known to such counsel of any arbitrator or Governmental Body having jurisdiction over the Company; and no consent, approval, authorization or order of, or filing with, any Governmental Body has been or is required for the execution, delivery and performance of this Agreement or for the consummation of the transactions contemplated hereby, except such as have been obtained under the Act or may be required under state securities or Blue Sky laws in connection with the purchase and distribution by the Underwriters of the Shares; and 17 (xi) To such counsel's knowledge, the Company is not in any breach or violation of any of the terms or provisions of, or in default under (nor has an event occurred which with notice or lapse of time or both would constitute a default or acceleration under), (A) the terms of its Articles of Incorporation or Bylaws, in each case as amended; or (B) the terms of any material contract or other material agreement known to such counsel to which the Company is a party or by which the Company is bound or to which any of its properties or assets is subject. (xii) The Underwriters have acquired good, valid and marketable title to the Shares free and clear of all liens, encumbrances, equities, claims and security interests. In addition, such counsel shall state that, in the course of the preparation of the Registration Statement and the Prospectus, such counsel has examined the documents referred to in the Registration Statement and Prospectus and participated in conferences with officers and representatives of the Company and with the Accountants, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Registration Statement and the Prospectus and, solely on the basis of the foregoing and such other actions as such counsel deemed appropriate, no facts have come to such counsel's attention that causes such counsel to believe that the Registration Statement as of the date it was declared effective and as of the date of such opinion contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statement therein not misleading or that the Prospectus as of the date thereof and as of the date of such opinion, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need not make any statement with respect to the financial statements, schedules and other financial data included in the Registration Statement or the Prospectus). In rendering any such opinion, such counsel may (i) state that such counsel expresses no opinion as to the laws of any jurisdiction other than the corporate laws of the State of Delaware, the laws of the State of New York and federal law and (ii) may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials and, as to matters involving the application of laws of any other jurisdiction than the States of Delaware and New York and the United States (to the extent reasonably satisfactory in form and scope to counsel for the Underwriters) on the opinion of local counsel. The foregoing opinion shall also state that the Underwriters are justified in relying upon such opinion of local counsel, and copies of such opinion shall be delivered to the Representative and its counsel. References to the Registration Statement and the Prospectus in this paragraph (f) shall include any amendment or supplement thereto at the date of such opinion. 18 (g) The Representative shall have received an opinion, dated the Closing Date and the Option Closing Date, from Piper & Marbury L.L.P., counsel to the Underwriters, which opinion shall be satisfactory in all respects to the Representative. (h) Concurrently with the execution and delivery of this Agreement, or, if the Company elects to rely on Rule 430A of the Rules and Regulations, on the date of the Prospectus, the Accountants shall have furnished to the Representative a letter, dated the date of its delivery (the "Original Letter"), addressed to the Representative and in form and substance satisfactory to the Representative, to the effect that: (i) they are independent certified public accountants with respect to the Company within the meaning of the Act, the Exchange Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited financial statements and schedules audited by them and included in the Registration Statement and the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations thereunder; (iii) on the basis of reading of the latest available interim unaudited financial statements of the Company, carrying out certain specified procedures (which do not constitute an audit made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company and inquiries of certain officials of the Company who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that at a specific date not more than five business days prior to the date of such letter, there were any changes in the shares of capital stock or indebtedness of the Company or any decreases in total assets, current assets or shareholders' equity of the Company, in each case compared with amounts shown on the June 30, 1996 consolidated balance sheet included in the Registration Statement and the Prospectus, or for the period from July 1, 1996 to such specified date there were any decreases, as compared with the corresponding period of the preceding fiscal year, in net revenues, net income before income taxes or total or per share amounts or net income of the Company, except in all instances for changes, decreases or increases set forth in such letter or as set forth in or contemplated in the Prospectus; and (iv) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and are included in the Registration Statement and the Prospectus, and have compared such amounts, percentages and financial information with such records of the Company and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation. 19 In the event that the letters referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that (A) such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representative deems such explanation unnecessary, and (B) such changes, decreases or increases do not, in the sole judgment of the Representative, make it impractical or inadvisable to proceed with the purchase and delivery of the Shares as contemplated by the Registration Statement, as amended as of the date hereof. At the Closing Date and, as to the Option Shares, if any, the Option Closing Date, the Accountants shall have furnished to the Representative a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the Original Letter, that nothing has come to their attention during the period from the date of the Original Letter referred to in the prior sentence to a date (specified in such letter) not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, which would require any change in the Original Letter if it were required to be dated and delivered at the Closing Date or the Option Closing Date, as the case may be. (i) At the Closing Date and, as to the Option Shares, if any, the Option Closing Date, there shall be furnished to the Representative an accurate certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Representative, to the effect that: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, (x) the Registration Statement does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading and (y) the Prospectus does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (B) since the Effective Date, no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect; (ii) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all respects; each of the covenants required herein to be performed by the Company on or prior to the date of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the delivery of such certificate has been duly, timely and fully complied with. (iii) No stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto and no order directed at any document incorporated by reference in the Registration Statement or any amendment thereto or the Prospectus has been issued, and no proceedings for that purpose have been instituted or threatened or, to the best of the Company's knowledge, are contemplated by the Commission. 20 (j) The Shares shall be qualified for sale in such states as the Representative may reasonably request and each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date and the Option Closing Date, if any. (k) The Representative shall have received at or prior to the Closing Date from Piper & Marbury L.L.P. a memorandum or summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representative may reasonably have designated to the Company. (l) The Firm Shares, and Option Shares, if any, have been approved for listing upon official notice of issuance on the NASDAQ. (m) The Company shall have furnished to the Representative such certificates, letters and other documents, in addition to those specifically mentioned herein, as the Representative may have reasonably requested as to the accuracy and completeness at the Closing Date, if any, and the Option Closing Date, if any, of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company, as to the performance by the Company of their obligations hereunder or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Underwriters. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you. The Company will furnish you with such conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request. 21 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages or liabilities, joint or several (and actions in respect thereof), to which they, or any of them, may become subject under the Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement made by the Company in Section 3 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or Blue Sky laws thereof or filed with the Commission or any securities association or securities exchange (each, an "Application"), or (iii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or any Application a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse, as incurred, each Underwriter and each such other person for any legal or other expenses reasonably incurred by such Underwriter or such other person in connection with investigating, defending or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability is based solely upon an untrue statement or omission or alleged untrue statement or omission in any of such documents made in reliance upon and in conformity with information relating to any Underwriter furnished by such Underwriter in writing to the Company by the Representative on behalf of any Underwriter expressly for inclusion therein as set forth in Section 16 hereof; provided, further, that such indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter (or any such other person) from whom the person asserting any such loss, claim, damage, liability or action purchased Shares which are the subject thereof to the extent that any such loss, claim, damage or liability (i) results from the fact that such Underwriter failed to send or give a copy of the Prospectus (as amended or supplemented) to such person at or prior to the confirmation of the sale of such Shares to such person in any case where such delivery is required by the Act and (ii) arises out of or is based upon an untrue statement or omission of a material fact contained in such Preliminary Prospectus that was corrected in the Prospectus (or any amendment or supplement thereto), unless such failure to deliver the Prospectus (as amended or supplemented) was the result of noncompliance by the Company with Section 5(f). This indemnity agreement will be in addition to any liability that the Company might otherwise have. The Company will not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending of threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to each claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Underwriter and each such other person from all liability arising out of such claim, action, suit or proceeding. 22 (b) Each Underwriter will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signed the Registration Statement against any losses, claims, damages or liabilities (or actions in respect thereof) to which the Company and any such director, officer or controlling person may become subject under the Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or any Application, or (ii) the omission or the alleged omission to state in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representative specifically for use therein as set forth in Section 16 hereof; and, subject to the limitation set forth immediately preceding this clause, will reimburse, as incurred, any legal or other expenses reasonably incurred by the Company and any such director, officer or controlling person in connection with investigating, defending or appearing as a third party witness in connection with any such loss, claim, damage, liability or any action in respect thereof. The Company acknowledges that, for all purposes under this Agreement, the statements set forth under the heading "Underwriting" and the information set forth in the last paragraph on the front cover page and the last two paragraphs on the inside front cover of any Preliminary Prospectus and the Prospectus (insofar as such information relates to the Underwriters) constitute the only information relating to any Underwriter furnished in writing to the Company by the Representative on behalf of the Underwriters expressly for inclusion in the Registration Statement, any Preliminary Prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that each Underwriter might otherwise have. No Underwriter will, without the prior written consent of the Company settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Company or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to each claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company from all liability arising out of such claim, action, suit or proceeding. 23 (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party or parties under this Section 8, notify such indemnifying party or parties of the commencement thereof; but the omission so to notify the indemnifying party or parties will not relieve it or them from any liability which it or they may have to any indemnified party under the foregoing provisions of this Section 8 or otherwise unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against an indemnified party and it notifies an indemnifying party or parties of its commencement, the indemnifying party or parties against which a claim is made will be entitled to participate therein and, to the extent that it or they may wish, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party or parties and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party or parties, the indemnifying party or parties shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party or parties to such indemnified party of its or their election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party or parties will not be liable to such indemnified party under this Section 8 for any legal or other expenses other than reasonable costs of investigation subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party or parties shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representative in the case of paragraph (a) of this Section 8, representing the indemnified parties under such paragraph (a) who are parties to such action or actions), or (ii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party or parties. After such notice from the indemnifying party or parties to such indemnified party, the indemnifying party or parties will not be liable for the costs and expenses of any settlement of such action effected by such indemnified party without the consent of the indemnifying party or parties, unless such indemnified party waived its rights under this Section 8 in which case the indemnified party may effect such a settlement without such consent. 24 (d) If the indemnification provided for in the foregoing paragraphs of this Section 8 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties, on the one hand, and the indemnified party, on the other, from the offering of the Shares or (ii) if, but only if, the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party or parties on the one hand, and the indemnified party, on the other, in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total proceeds from the offering of the Shares (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. Relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Representative on behalf of the Underwriters, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities (or actions in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim. Notwithstanding the provisions of this Section 8(d), the Company shall not be required to contribute any amount in excess of the amount by which the total proceeds received by it from the sale of the Shares under this Agreement, before deducting expenses, exceeds the aggregate amount of any damages that the Company has otherwise been required to pay in respect of the same or any substantially similar claim. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 8(d), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act will have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, will have the same rights to contribution as the Company, subject in each case to the provisions of this Section 8(d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made under this Section 8(d), notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation(s) it or they may have hereunder or otherwise than under this Section 8(d) or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may otherwise have. No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). 25 9. Termination. The obligations of the several Underwriters under this Agreement may be terminated at any time prior to the Closing Date (or, with respect to the Option Shares, if any, on or prior to the Option Closing Date), by notice to the Company from the Representative, without liability on the part of any Underwriter to the Company, if, prior to delivery and payment for the Firm Shares (or the Option Shares, if any, as the case may be), (i) the Company shall have failed, refused or been unable, at or prior to such Closing Date, to perform all obligations on its part to be performed hereunder, (ii) trading in the Common Stock or securities generally shall have been suspended by the Commission or by The Nasdaq Stock Market, (iii) minimum or maximum prices shall have been established for the Common Stock or securities generally on either The Nasdaq Stock Market or the New York Stock Exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by any of such market or exchange or by order of the Commission or any court or other governmental authority, (iv) a general banking moratorium shall have been declared by the United States or New York State authorities, or (v) any material adverse change in the financial or securities markets in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall have occurred, the effect of any of which is such as to make it, in the sole judgment of the Representative, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. Any termination pursuant to Section 9 shall be without liability of any party to any other party except as provided in Sections 6 and 8. 10. Default of Underwriters. If one or more Underwriters default in their obligations to purchase Firm Shares or Option Shares hereunder and the aggregate number of such Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent (10%) or less of the aggregate number of Firm Shares or Option Shares, as the case may be, to be purchased by all of the Underwriters at such time hereunder, the other Underwriters may make arrangements satisfactory to the Representative for the purchase of such Shares by other persons (who may include one or more of the non-defaulting Underwriters, including the Representative), but if no such arrangements are made by the Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Shares or Option Shares that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Shares that is more than ten percent of the aggregate number of Firm Shares or Option Shares, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representative are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representative) of the Shares with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 11 hereof. In the event of any default by one or more Underwriters as described in this Section 10, the Representative shall have the right to postpone the Closing Date or the Option Closing Date, as the case may be, established as provided in Section 2 hereof for not more than seven (7) business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Shares or Option Shares, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 26 11. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, any Underwriter or any controlling person referred to in Section 8 hereof and (ii) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 5 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 12. Notices. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 440 Ninth Avenue, New York, New York 10001-1695, Attention: Mr. George V. Flagg, Telephone: (212) 629-1213 and Facsimile: (212) 563-0129, with a copy to Squadron, Ellenoff, Plesent & Sheinfeld, LLP, 551 Fifth Avenue, New York, New York 10176, Attention: Jeffrey W. Rubin, Esquire, Telephone: (212) 476-8224 and Facsimile: (212) 697-6686 or (b) if to the Underwriters, to the Representative at the offices of Brean Murray & Co., Inc., 570 Lexington Avenue, New York, New York 10022 Attention: Mr. A. Brean Murray, Telephone: (212) 476-0700 and Facsimile: (212) 476-0798, with a copy to Piper & Marbury L.L.P., 1251 Avenue of the Americas, New York, New York 10020-1104, Attention: Michael Hirschberg, Esq., Telephone: (212) 835-6270 and Facsimile: (212) 835-6001. Any such notice shall be effective only upon receipt. Any notice under Section 8 or 9 may be made by telephone or facsimile but if so made shall be subsequently confirmed in writing. 13. Successors. This Agreement shall inure to the benefit of and shall be binding upon the several Underwriters, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnities of the Company contained in Section 8 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in Section 8 of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares from any Underwriter shall be deemed a successor because of such purchase. This Agreement shall not be assignable by any party hereto without the prior written consent of the other parties. 27 14. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. 15. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 16. Information Provided by Underwriters. The Company and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page and the last two paragraphs on the inside front cover of the Prospectus (insofar as such information relates to the Underwriters) and under the caption "Underwriting" in the Prospectus. Please confirm that the foregoing correctly sets forth the agreement among the Company and the several Underwriters. Very truly yours, HOLMES PROTECTION GROUP, INC. By: ----------------------------------------- Name: George V. Flagg Title: President and Chief Executive Officer Confirmed as of the date first above mentioned: BREAN MURRAY & CO., INC. By: -------------------------------- Name: A. Brean Murray Title: Chairman Acting on its behalf and as the Representative of the other several Underwriters named in Schedule I hereof. 28 SCHEDULE I UNDERWRITERS Aggregate Number of Shares to be Purchased ---------- Brean Murray & Co., Inc. ...................................... ---------- Total ............................................. 1,000,000 ========== EX-4.5 3 EXHIBIT 4.5 EXHIBIT 4.5 THIS COMMON STOCK PURCHASE WARRANT (THIS "WARRANT") AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS WARRANT, THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS COMPANY, IS AVAILABLE. ------------------------------- HOLMES PROTECTION GROUP, INC. Common Stock Purchase Warrant ------------------------------- DATE OF ISSUANCE: August 30, 1996 This certifies that, for good and valuable consideration, HOLMES PROTECTION GROUP, INC., a Delaware corporation (the "Company"), grants to AMERICAN SCANDINAVIAN BANKING CORPORATION, a New York corporation (the "Warrantholder"), the right to subscribe for and purchase from the Company One Hundred Thousand (100,000) validly issued, fully paid and nonassessable shares (the "Warrant Shares") of Common Stock, par value $.01 per share, of the Company (the "Common Stock"), at the purchase price per share of $9.75 (the "Exercise Price"), at any time prior to 5:00 p.m., New York City time, on the Expiration Date, all subject to the terms, conditions and adjustments herein set forth. This Warrant was issued in connection with the Credit Agreement, dated August 30, 1996, among the Company, the Warrantholder and Bank of Boston Connecticut (the "Credit Agreement"). The Warrantholder is entitled to the rights and subject to the obligations contained in the Registration Rights Agreement, dated August 30, 1996, among the Company, Merita Bank Ltd. and Bank of Boston Connecticut. 1. Duration and Exercise of Warrant; Limitation on Exercise; Payment of Taxes 1.1 Duration and Exercise of Warrant. Subject to the terms and conditions set forth herein, this Warrant may be exercised, in whole or in part and at any time(s), by the Warrantholder by: (a) the surrender of this Warrant to the Company, with a duly executed Exercise Form specifying the number of Warrant Shares to be purchased, during normal business hours on any Business Day prior to the Expiration Date; and (b) the delivery of payment to the Company, for the account of the Company, by cash, wire transfer, certified or official bank check or any other means approved by the Company, of the Exercise Price for the number of Warrant Shares specified in the Exercise Form in lawful money of the United States of America and/or by surrender to the Company of shares of Common Stock then owned by the Warrantholder and valued for purposes hereof at their Current Market Value at the time of exercise. The Company agrees that such Warrant Shares shall be deemed to be issued to the Warrantholder as the record holder of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for the Warrant Shares as aforesaid (or as provided in Section 1.2 below. Notwithstanding the foregoing, no such surrender shall be effective to constitute the Person entitled to receive such shares as the record holder thereof while the transfer books of the Company for the Common Stock are closed for any purpose (but not for any period in excess of five days); but any such surrender of this Warrant for exercise during any period while such books are so closed shall become effective for exercise immediately upon the reopening of such books, as if the exercise had been made on the date this Warrant was surrendered and for the number of shares of Common Stock and at the Exercise Price in effect at the date of such surrender. 1.2 Conversion Right. (a) In lieu of the payment of the Exercise Price, the Warrantholder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 1.2. Upon exercise of the Conversion Right, the Company shall deliver to the Warrantholder (without payment by the Warrantholder of any of the Exercise Price) in accordance with Section 1.1 that number of shares of Common Stock equal to the quotient obtained by dividing (i) the value of the number of Warrant Shares being converted at the time the Conversion Right is exercised (determined by subtracting the aggregate Exercise Price for all such Warrant Shares in effect immediately prior to the exercise of the Conversion Right from the aggregate Current Market Value (as defined herein) for the shares of Common Stock issuable upon exercise of the Warrant immediately prior to the exercise of the Conversion Right) by (ii) the Current Market Value of one share of Common Stock immediately prior to the exercise of the Conversion Right. -2- (b) The Conversion Right may be exercised by the Warrantholder on any Business Day prior to the Expiration Date by delivering the Warrant Certificate, with a duly executed Exercise Form with the conversion section completed, to the Company, exercising the Conversion Right and specifying the total number of shares of Common Stock that the Warrantholder will be issued pursuant to such conversion. 1.3 Warrant Shares Certificate. A stock certificate or certificates for the Warrant Shares specified in the Exercise Form shall be delivered to the Warrantholder within ten Business Days after receipt of the Exercise Form by the Company and, if the Conversion Right is not exercised, payment of the purchase price. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the stock certificate or certificates, deliver to the Warrantholder a new Warrant evidencing the rights to purchase the remaining Warrant Shares, which new Warrant shall in all other respects be identical with this Warrant. 1.4 Payment of Taxes. The issuance of certificates for Warrant Shares shall be made without charge to the Warrantholder for any stock transfer or other issuance tax in respect thereto; provided, however, that the Warrantholder shall be required to pay any and all taxes that may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Warrantholder as reflected upon the books of the Company. 2. Restrictions on Transfer; Restrictive Legends. 2.1 Restrictions on Transfer. This Warrant may not be offered, sold, transferred, pledged or otherwise disposed of, in whole or in part, to any Person other than an Affiliate of the Warrantholder without the prior written consent of the Company, which shall not be unreasonably withheld or delayed. -3- 2.2 Restrictive Legends. Except as otherwise permitted by this Section 2, each Warrant (and each Warrant issued in substitution for any Warrant pursuant to Section 4) shall be stamped or otherwise imprinted with a legend in substantially the following form: THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS, AND NEITHER THE WARRANT NOR THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS COMPANY, IS AVAILABLE. Except as otherwise permitted by this Section 2, each stock certificate for Warrant Shares issued upon the exercise of any Warrant and each stock certificate issued upon the direct or indirect transfer of any such Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE STATE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS COMPANY, IS AVAILABLE. -4- Notwithstanding the foregoing, the Warrantholder may require the Company to issue a Warrant or a stock certificate for Warrant Shares, in each case without a legend, if either (i) such Warrant or such Warrant Shares, as the case may be, have been registered for resale under the Securities Act, (ii) the Warrantholder has delivered to the Company an opinion of legal counsel (from a firm reasonably satisfactory to the Company) which opinion shall be addressed to the Company and be reasonably satisfactory in form and substance to the Company's counsel, to the effect that such registration is not required with respect to such Warrant or such Warrant Shares, as the case may be or (iii) such Warrant or Warrant Shares may be sold pursuant to Rule 144 (or any successor provision then in effect) under the Securities Act. 3. Representations, Warranties and Covenants of the Company 3.1 Covenants of the Company The Company covenants and agrees as follows: (a) All Warrant Shares that are issued upon the exercise of this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable shares, not subject to any preemptive rights, and free from all taxes payable by the Company, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (b) During the period within which this Warrant may be exercised, the Company shall at all times have authorized and reserved, and keep available free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. (c) The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and shall at all times in good faith assist in performing and giving effect to the terms hereof and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrantholder against dilution or other impairment. In no event shall the Company transfer all or substantially all of its assets to any other person or consolidate with or merge into any other entity where the Company is not the surviving entity or person, unless the other entity or person acquiring such properties and assets or surviving after such consolidation or merger shall assume, by operation of law or otherwise, all the terms of this Warrant. -5- (d) The Company shall take no action which would cause any changes in the Common Stock as to which an appropriate adjustment in the number of Warrant Shares and the Exercise Price could not be readily made pursuant to the intention of Section 6 below. (e) At all times prior to the Expiration Date, the Company will promptly deliver to the Warrantholder all notices, reports and other communications delivered to the Company's shareholders, including all public notices, reports, filings and other information submitted to the Commission, such delivery to the Warrantholder to be made contemporaneously with such delivery to the Company's shareholders. (f) The Company will not permit the par value, if any, of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise. 3.2 Representations and Warranties of the Company The Company hereby represents and warrants to the Warrantholder as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, has the corporate power and authority to conduct its business as presently conducted, has the corporate power and authority to execute, issue and deliver this Warrant and to perform its obligations under this Warrant, has the corporate power and authority and legal right to own and lease its properties and is duly qualified and in good standing as a foreign corporation in each jurisdiction in which it owns or leases real property or in which the conduct of its business requires such qualification, except where failure to be so qualified could not be reasonably expected to have a material adverse effect on the Company and its subsidiaries taken as a whole. (b) The execution, delivery, issuance and performance by the Company of this Warrant and the issuance of the Warrant Shares upon exercise of this Warrant have been duly authorized by all necessary corporate action and do not and will not violate, or result in a breach of, or constitute a default under, or require any consent under, or result in the creation of any lien, charge or encumbrance upon the assets of the Company pursuant to any law, statute, ordinance, rule, regulation, order or decree of any court, governmental body or regulatory authority or administrative agency having jurisdiction over the Company or its subsidiaries or any contract, mortgage, loan agreement, note, lease or other instrument binding upon the Company or its subsidiaries or by which their properties are bound. -6- (c) This Warrant has been duly executed, issued and delivered by the Company and constitutes a legal, valid, binding and enforceable obligation of the Company. (d) The Company has authorized capital stock consisting of 12,000,000 shares of Common Stock, $.01 par value, of which 4,459,257 shares are issued and outstanding as of July 15, 1996. Except for the securities listed on Schedule 5.7(b) of the Credit Agreement, there are outstanding no options, warrants or other securities exercisable or exchangeable for or convertible into shares of capital stock of the Company. (e) No holder of securities of the Company has any right to the registration of such securities under the Securities Act and any applicable state securities laws, except as set forth in Schedule 5.7(b) of the Credit Agreement. 4. Loss or Destruction of Warrant. Subject to the terms and conditions hereof, upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of such bond or indemnification as the Company may reasonably require, and, in the case of such mutilation, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor. 5. Ownership of Warrant. The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer. -7- 6. Certain Adjustments. 6.1 Stock Dividends, Splits, Combinations of Stock If at any time while this Warrant is outstanding: (i) the Company shall pay a stock dividend payable in shares of Common Stock; (ii) the number of shares of Common Stock shall have been increased by a subdivision or split-up of shares of Common Stock; or (iii) the number of shares of Common Stock outstanding at any time after the date of the issuance of this Warrant shall have been decreased by a combination of the outstanding shares of Common Stock; then, on the date of the payment of such dividend, or immediately after the effective date of subdivision, split up, or combination, as the case may be, the number of shares to be delivered upon exercise of this Warrant will be increased or decreased, as the case may be, so that the Warrantholder will be entitled to receive the number of shares of Common Stock that such Warrantholder would have owned immediately following such action had this Warrant been exercised immediately prior thereto, and the Exercise Price will be adjusted as provided below in Section 6.8. 6.2 Liquidating Dividends, etc. If at any time while this Warrant is outstanding the Company makes a distribution of its property to the holders of its Common Stock as a dividend in liquidation or partial liquidation or by way of return of capital other than as a dividend payable out of funds legally available for dividends under the laws of the State of Delaware, the Warrantholder shall, upon exercise, be entitled to receive, in addition to the number of shares of Warrant Shares receivable thereupon, and without payment of any consideration therefor, a sum equal to the amount of such property as would have been payable to the Warrantholder as owner of that number of shares of Warrant Shares of the Company receivable by exercise of this Warrant, had the Warrantholder been the holder of record of such Warrant Shares on the record date for such distribution; and an appropriate provision therefor shall be made a part of any such distribution. 6.3 Issuance of Additional Shares of Common Stock If the Company, at any time while this Warrant is outstanding, shall issue any Additional Shares (otherwise than as provided elsewhere in this Section 6), at a price per share less than the Exercise Price then in effect or less than the Current Market Value then in effect or without consideration, then the Exercise Price upon each such issuance shall be adjusted to that price determined by multiplying the Exercise Price then in effect by a fraction: -8- (i) the numerator of which shall be equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares plus (b) the number of shares of Common Stock which the aggregate consideration for the total number of such Additional Shares so issued would purchase at a price per share equal to the Current Market Value then in effect or the Exercise Price then in effect (whichever is greater), and (ii) the denominator of which shall be equal to the number of shares of Common Stock outstanding immediately after the issuance of such Additional Shares. For the purposes of any adjustment of the Exercise Price pursuant to this Section 6.3, the following provisions shall be applicable: (a) In the case of the issuance of Common Stock by the Company to third parties for cash, the consideration shall be deemed to be the amount of cash paid therefor, without deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof; (b) In the case of the issuance of Common Stock by the Company to third parties for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors of the Company; provided, however, that the aggregate fair market value of such non-cash and cash consideration as so determined shall not exceed the aggregate Current Market Value of the shares of Common Stock being issued; and (c) In the case of the issuance after the date hereof of (i) warrants or options to purchase or rights to subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock, or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities: (i) The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections (a) and (b) above, if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or the rights for the Common Stock covered thereby; (ii) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversions or exchanges thereof shall be deemed to have been issued at the time such securities were issued or such options or rights were issued and for a -9- consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections (a) and (b) above); (iii) Upon any change in the exercise price of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Exercise Price shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (iv) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Exercise Price shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment made upon the issuance of such options, rights securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. The provisions of this Section 6.3 shall not apply under any of the circumstances for which an adjustment is provided in Sections 6.1, 6.2, 6.4 or 6.5. 6.4 Reorganization, etc. If any capital reorganization of the Company, or any reclassification of the Common Stock, or any consolidation of the Company with or merger of the Company with or into any other Person (other than a consolidation or merger in which the Company is the resulting or surviving Person and which does not result in any reclassification or change of outstanding Common Stock) or any sale, lease or other transfer of all or substantially all of the assets of the Company to any other Person, shall be effected in such a way that the holders of Common Stock shall be entitled to receive stock, other securities or assets (whether such stock, other securities or assets are issued or distributed by the Company or another Person) with respect to or in exchange for Common Stock, then, upon exercise of this Warrant, the Warrantholder shall have the right to receive the kind and amount of stock, -10- other securities or assets receivable upon such reorganization, reclassification, consolidation, merger or sale, lease or other transfer by a holder of the number of shares of Common Stock that such Warrantholder would have been entitled to receive upon exercise of this Warrant had this Warrant been exercised immediately before such reorganization, reclassification, consolidation, merger or sale, lease or other transfer, subject to adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. 6.5 Certain Distributions. In case the Company shall at any time or from time to time distribute to all holders of shares of its Common Stock (including any such distribution made in connection with a merger or consolidation in which the Company is the resulting or surviving Person and the Common Stock is not changed or exchanged) cash, evidences of indebtedness of the Company or another Person, securities of the Company or another Person or other assets (excluding dividends payable in shares of Common Stock for which adjustment is made under Section 6.1 above or rights or warrants to subscribe for or purchase securities of the Company), then, and in each such case, the Exercise Price then in effect shall be adjusted (and any other appropriate actions shall be taken by the Company) so that the Warrantholder shall be entitled to receive the amount of cash, evidences of indebtedness, securities, other assets, subscription or purchase rights or warrants so distributed that such Warrantholder would have owned or would have been entitled to receive upon or by reason of any such events, had this Warrant been exercised immediately prior to the occurrence of such event; provided, however, that no adjustment shall be made with respect to any distribution of rights to purchase securities of the Company if the Warrantholder would otherwise be entitled to receive such rights upon exercise at any time of this Warrant. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution. 6.6 Purchase of Common Stock by the Company. If the Company at any time while this Warrant is outstanding shall, directly or indirectly through an Affiliate or otherwise, purchase, redeem or otherwise acquire any of its Common Stock at a price per share greater than the Current Market Value then in effect, then the Exercise Price upon each such purchase, redemption or acquisition shall be adjusted to that price determined by multiplying such Exercise Price by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such purchase, redemption or acquisition minus the number of shares of Common Stock which the aggregate consideration for the total number of such shares of Common Stock so purchased, redeemed or acquired would purchase at the -11- Current Market Value; and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such purchase, redemption or acquisition. For the purposes of this Section 6.6, the date as of which the Current Market Value shall be computed shall be the earlier of (x) the date on which the Company shall enter into a firm contract for the purchase, redemption or acquisition of such Common Stock, or (y) the date of actual purchase, redemption or acquisition of such Common Stock. 6.7 Carryover. Notwithstanding any other provision of this Section 6, no adjustment shall be made to the number of shares of Common Stock to be delivered to the Warrantholder (or to the Exercise Price) if such adjustment represents less than 1% of the number of shares to be so delivered, but any lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment that together with any adjustments so carried forward shall amount to 1% or more of the number of shares to be so delivered. 6.8 Exercise Price Adjustment. Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant is adjusted as provided pursuant to this Section 6, the Exercise Price payable upon the exercise of this Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter; provided, however, that the Exercise Price for each Warrant Share shall in no event be less than the par value of such Warrant Share. 6.9 No Adjustment for Dividends. Except as provided in Section 6.1, no adjustment in respect of any dividends shall be made during the term of this Warrant or upon the exercise of this Warrant. Notwithstanding any other provision hereof, no adjustment shall be made on Warrant Shares issuable on the exercise of this Warrant for any cash dividends paid or payable to holders of record of Common Stock prior to the date as of which the Warrantholder shall be deemed to be the record holder of such Warrant Shares. -12- 6.10 Notice of Adjustment. Whenever the number of Warrant Shares or the Exercise Price of such Warrant Shares is adjusted, as herein provided, the Company shall promptly mail by first class, postage prepaid, to the Warrantholder, notice of such adjustment or adjustments and certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who shall be appointed at the Company's expense and who may be the independent public accountants regularly employed by the Company) setting forth the number of Warrant Shares and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 7. Amendments. Any provision of this Warrant may be amended and the observance thereof waived only with the written consent of the Company and the Warrantholder. 8. Notices of Corporate Action. In case at any time the Company proposes: (a) to pay any dividend payable in capital stock (of any class or classes) or in convertible securities upon Common Stock or make any distribution to the holders of Common Stock; (b) to make an offer for subscription to the holders of Common Stock of any Additional Shares or to grant to the holders of Common Stock generally any rights or options; (c) to effect any capital reorganization or reclassification of the capital stock of the Company or consolidation or merger of the Company with, or sale or transfer of all or substantially all of its assets to, another corporation; (d) to issue any shares of its capital stock as part or full consideration for the purchase of assets or stock; or (e) to effect a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more such cases, the Company shall give written notice to the Warrantholder of the date on which: (i) the transfer books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights or grant; and (ii) a record shall be taken to determine stockholders entitled to notice of and to vote at any meeting of stockholders at which any such proposed reorganization, reclassification, consolidation, merger, sale or transfer of assets, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to vote on or exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale or transfer of -13- assets, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given not less than thirty (30) days and not more than sixty (60) days prior to such date on which the transfer books of the Company shall close or a record shall be taken or the relevant event shall occur, as the case may be, and such notice may state that any action will be taken only if certain events specified in such notice (such as the clearing of proxy material by the Commission or an affirmative vote of stockholders) occur prior thereto. 9. Definitions. As used herein, unless the context otherwise required, the following terms have the following respective meanings: "Additional Shares" means (i) all shares of Common Stock issued by the Company after the date of this Warrant except (x) Warrant Shares and (y) shares of Common Stock issued after August 30, 1996 pursuant to the exercise of stock options granted prior to that date under the Company's employee stock option or other benefit plans or (2) shares of Common Stock issued after August 30, 1996 pursuant to the exercise of stock options granted after that date under the Company's employee stock option or other benefit plans, provided, however, that the number of shares issued as described in clause (2) shall not exceed 250,000 in the aggregate (as adjusted pursuant to Section 6 above); and (ii) any capital stock of the Company of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Company without limitation as to amount. "Affiliate" with respect to any Person shall mean any Person who is an "affiliate" as defined by Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Business Day" means any day other than a Saturday, Sunday or a day on which national banks are authorized by law to close in the State of New York. "Commission" means the United States Securities and Exchange Commission. -14- "Common Stock" has the meaning specified on the cover of this Warrant. "Company" has the meaning specified on the cover of this Warrant. "Credit Agreement" has the meaning specified on the cover of this Warrant. "Current Market Value" means, at any date and with respect to one share of Common Stock, the average of the daily closing prices for the 30 consecutive business days ending no more than 15 Business Days before the day in question (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 30 Business Day period). The closing price for each day shall be the last reported sales price regular way, or in case no such reported sales took place on such day, the average of the last reported bid and asked prices on regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading (or if the Common Stock is not listed or admitted for trading on any such exchange, on any day in question, then such price as shall be equal to the average on the last bid and asked prices, as reported by the NASDAQ on such day, or if, on any day in the question, the Common Stock shall not be quoted on the NASDAQ, then such price shall be equal to the last reported bid and asked prices on such day as reported by the National Quotation Bureau, Inc. or any similar reputable quotation and reporting service, if such quotation is not reported by the National Quotation Bureau, Inc.); provided, however, that if the Common Stock is not traded in such manner that the quotations referred to above are available for the period required hereunder, the Current Market Value shall be determined in good faith by the mutual agreement of the Board of Directors of the Company and the holder hereof or, if such determination cannot be agreed to, by a nationally recognized independent investment banking firm selected mutually by the holder of this Warrant and the Company (or if such selection cannot be made, by a nationally recognized independent investment banking firm selected by the American Arbitration Association in accordance with its rules). In connection with a determination of Current Market Value by an investment banking firm, Current Market Value shall be determined based on the value of the Company as a going-concern, without any discount for (a) control premiums which could be allocated to other shareholders or (b) any illiquidity in the Common Stock. "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor statute thereto), and the rules and regulations of the Commission promulgated thereunder. "Exercise Form" means an Exercise Form in the form annexed hereto as Exhibit A. -15- "Exercise Price" has the meaning specified on the cover of this Warrant. "Expiration Date" means the later of: (i) August 30, 2002; or (ii) one year after the date on which repayment is made in full on any indebtedness incurred pursuant to the Credit Agreement. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Securities Act" has the meaning specified on the cover of this Warrant, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such similar federal statute. "Warrantholder" has the meaning specified on the cover of this Warrant. "Warrant Shares" has the meaning specified on the cover of this Warrant. 10. Miscellaneous 10.1 Entire Agreement. This Warrant constitutes the entire agreement between the Company and the Warrantholder with respect to the Warrants. 10.2 Binding Effect; Benefits. This Warrant shall inure to the benefit of and shall be binding upon the Company and the Warrantholder and their respective permitted successors and assigns. Nothing in this Warrant, express or implied, is intended to or shall confer on any person other than the Company and the Warrantholder, or their respective permitted successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Warrant. -16- 10.3 Section and Other Headings. The section and other headings contained in this Warrant are for reference purposes only and shall not be deemed to be a part of this Warrant or to affect the meaning or interpretation of this Warrant. 10.4 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (a) if to the Company: Holmes Protection Group, Inc. 440 9th Avenue New York, New York 10001-1695 Attn: Lawrence Irving Telephone: (212) 760-0630 Telecopy: (212) 563-0129 with a copy (which shall not constitute notice) to: Buchanan Ingersoll College Centre 500 College Road Princeton, New Jersey 08540 Attn: Dennis M. Stern, Esq. Telephone: (609) 987-6800 Telecopy: (609) 520-0360 (b) if to American Scandinavian Banking Corporation: c/o Merita Bank Ltd. 437 Madison Avenue 21st Floor New York, New York 10022 Attn: Charles J. Lansdown Telephone: (212) 318-9562 Telecopy: (212) 421-4420 with copies (which shall not constitute notice) to: -17- Merita Bank Ltd. 437 Madison Avenue 21st Floor New York, New York 10022 Attn: Rossella Perna Telephone: (212) 318-9345 Telecopy: (212) 421-4420 and Hogan & Hartson L.L.P. Columbia Square 555 Thirteenth Street, N.W. Washington, D.C. 20004-1109 Attn: Claudette M. Christian Telephone: (202) 637-5650 Telecopy: (202) 637-5910 All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 10.4 designate another address or Person for receipt of notices hereunder. 10.5 Severability. Any term or provision of this Warrant which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the terms and provisions of this Warrant or affecting the validity or enforceability of any of the terms or provisions of this Warrant in any other jurisdiction. 10.6 Governing Law. This warrant shall be governed by and construed in accordance with the laws of the State of Delaware (excluding the choice of law rules thereof). -18- 10.7 No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be determined as conferring upon the Warrantholder any rights as a stockholder of the Company or as imposing any liabilities on the Warrantholder to purchase any securities whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. 10.8 Continued Validity. A holder of Common Stock received upon exercise of this Warrant ("Exercised Shares") shall continue to be entitled with respect to such Exercised Shares to all rights and subject to all obligations to which it would have been entitled or subject as a holder hereof under Sections 1.4, 3.1, 7, and 10.6 of this Warrant. The Company will, at the time of each exercise of this Warrant, in whole or in part, upon the request of the holder of the Exercised Shares issued upon such exercise, acknowledge in writing, in form reasonably satisfactory to such holder, its continuing obligation to afford to such holder all such rights; provided, however, that if such holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder all such rights. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. HOLMES PROTECTION GROUP, INC. By: /s/ Lawrence R. Irving ----------------------------- Name: Lawrence R. Irving Title: Vice President - Finance -19- Exhibit A --------- EXERCISE FORM ------------- (To be executed upon exercise of this Warrant) The undersigned hereby irrevocably elects to exercise the right represented by this Warrant to purchase _________ of the Warrant Shares and [herewith tenders payment for such Warrant Shares to the order of Holmes Protection Group, Inc.] [hereby exercises its Conversion Right] in accordance with the terms of this Warrant. The undersigned requests that a certificate for [such Warrant Shares] [that number of Warrant Shares to which the undersigned is entitled as calculated pursuant to Section 1.2] be registered in the name of the undersigned and that such certificates be delivered to the undersigned's address below. The undersigned represents that it is acquiring such Warrant Shares for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within its control). Dated: ---------------------------- Signature: ---------------------------------- ---------------------------------- (Print name) ---------------------------------- (Street address) ---------------------------------- (City) (State) (Zip code) Signed in the presence of: - ------------------------------ Schedule A ---------- THIS COMMON STOCK PURCHASE WARRANT (THIS "WARRANT") AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THIS WARRANT, THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS COMPANY, IS AVAILABLE. ------------------------- HOLMES PROTECTION GROUP, INC. Common Stock Purchase Warrant ------------------------- DATE OF ISSUANCE: August 30, 1996 This certifies that, for good and valuable consideration, HOLMES PROTECTION GROUP, INC., a Delaware corporation (the "Company"), grants to BANK OF BOSTON CONNECTICUT, a Connecticut State Savings Bank (the "Warrantholder"), the right to subscribe for and purchase from the Company Sixty-Six Thousand Six Hundred and Sixty Six (66,666) validly issued, fully paid and nonassessable shares (the "Warrant Shares") of Common Stock, par value $.01 per share, of the Company (the "Common Stock"), at the purchase price per share of $9.75 (the "Exercise Price"), at any time prior to 5:00 p.m., New York City time, on the Expiration Date, all subject to the terms, conditions and adjustments herein set forth. This Warrant was issued in connection with the Credit Agreement, dated August 30, 1996, among the Company, the Warrantholder and Merita Bank Ltd. (the "Credit Agreement"). The Warrantholder is entitled to the rights and subject to the obligations contained in the Registration Rights Agreement, dated August 30, 1996, among the Company, Merita Bank Ltd. and Bank of Boston Connecticut. 1. Duration and Exercise of Warrant; Limitation on Exercise; Payment of Taxes 1.1 Duration and Exercise of Warrant. Subject to the terms and conditions set forth herein, this Warrant may be exercised, in whole or in part and at any time(s), by the Warrantholder by: (a) the surrender of this Warrant to the Company, with a duly executed Exercise Form specifying the number of Warrant Shares to be purchased, during normal business hours on any Business Day prior to the Expiration Date; and (b) the delivery of payment to the Company, for the account of the Company, by cash, wire transfer, certified or official bank check or any other means approved by the Company, of the Exercise Price for the number of Warrant Shares specified in the Exercise Form in lawful money of the United States of America and/or by surrender to the Company of shares of Common Stock then owned by the Warrantholder and valued for purposes hereof at their Current Market Value at the time of exercise. The Company agrees that such Warrant Shares shall be deemed to be issued to the Warrantholder as the record holder of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for the Warrant Shares as aforesaid (or as provided in Section 1.2 below. Notwithstanding the foregoing, no such surrender shall be effective to constitute the Person entitled to receive such shares as the record holder thereof while the transfer books of the Company for the Common Stock are closed for any purpose (but not for any period in excess of five days); but any such surrender of this Warrant for exercise during any period while such books are so closed shall become effective for exercise immediately upon the reopening of such books, as if the exercise had been made on the date this Warrant was surrendered and for the number of shares of Common Stock and at the Exercise Price in effect at the date of such surrender. 1.2 Conversion Right. (a) In lieu of the payment of the Exercise Price, the Warrantholder shall have the right (but not the obligation), to require the Company to convert this Warrant, in whole or in part, into shares of Common Stock (the "Conversion Right") as provided for in this Section 1.2. Upon exercise of the Conversion Right, the Company shall deliver to the Warrantholder (without payment by the Warrantholder of any of the Exercise Price) in accordance with Section 1.1 that number of shares of Common Stock equal to the quotient obtained by dividing (i) the value of the number of Warrant Shares being converted at the time the Conversion Right is exercised (determined by subtracting the aggregate Exercise Price for all such Warrant Shares in effect immediately prior to the exercise of the Conversion Right from the aggregate Current Market Value (as defined herein) for the shares of Common Stock issuable upon exercise of the Warrant immediately prior to the exercise of the Conversion Right) by (ii) the Current Market Value of one share of Common Stock immediately prior to the exercise of the Conversion Right. -2- (b) The Conversion Right may be exercised by the Warrantholder on any Business Day prior to the Expiration Date by delivering the Warrant Certificate, with a duly executed Exercise Form with the conversion section completed, to the Company, exercising the Conversion Right and specifying the total number of shares of Common Stock that the Warrantholder will be issued pursuant to such conversion. 1.3 Warrant Shares Certificate. A stock certificate or certificates for the Warrant Shares specified in the Exercise Form shall be delivered to the Warrantholder within ten Business Days after receipt of the Exercise Form by the Company and, if the Conversion Right is not exercised, payment of the purchase price. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of the stock certificate or certificates, deliver to the Warrantholder a new Warrant evidencing the rights to purchase the remaining Warrant Shares, which new Warrant shall in all other respects be identical with this Warrant. 1.4 Payment of Taxes. The issuance of certificates for Warrant Shares shall be made without charge to the Warrantholder for any stock transfer or other issuance tax in respect thereto; provided, however, that the Warrantholder shall be required to pay any and all taxes that may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Warrantholder as reflected upon the books of the Company. 2. Restrictions on Transfer; Restrictive Legends. 2.1 Restrictions on Transfer. This Warrant may not be offered, sold, transferred, pledged or otherwise disposed of, in whole or in part, to any Person other than an Affiliate of the Warrantholder without the prior written consent of the Company, which shall not be unreasonably withheld or delayed. -3- 2.2 Restrictive Legends. Except as otherwise permitted by this Section 2, each Warrant (and each Warrant issued in substitution for any Warrant pursuant to Section 4) shall be stamped or otherwise imprinted with a legend in substantially the following form: THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS, AND NEITHER THE WARRANT NOR THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS COMPANY, IS AVAILABLE. Except as otherwise permitted by this Section 2, each stock certificate for Warrant Shares issued upon the exercise of any Warrant and each stock certificate issued upon the direct or indirect transfer of any such Warrant Shares shall be stamped or otherwise imprinted with a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE STATE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS THAT, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO COUNSEL FOR THIS COMPANY, IS AVAILABLE. -4- Notwithstanding the foregoing, the Warrantholder may require the Company to issue a Warrant or a stock certificate for Warrant Shares, in each case without a legend, if either (i) such Warrant or such Warrant Shares, as the case may be, have been registered for resale under the Securities Act, (ii) the Warrantholder has delivered to the Company an opinion of legal counsel (from a firm reasonably satisfactory to the Company) which opinion shall be addressed to the Company and be reasonably satisfactory in form and substance to the Company's counsel, to the effect that such registration is not required with respect to such Warrant or such Warrant Shares, as the case may be or (iii) such Warrant or Warrant Shares may be sold pursuant to Rule 144 (or any successor provision then in effect) under the Securities Act. 3. Representations, Warranties and Covenants of the Company 3.1 Covenants of the Company The Company covenants and agrees as follows: (a) All Warrant Shares that are issued upon the exercise of this Warrant shall, upon issuance, be duly authorized, validly issued, fully paid and nonassessable shares, not subject to any preemptive rights, and free from all taxes payable by the Company, liens, security interests, charges, and other encumbrances with respect to the issuance thereof, other than taxes in respect of any transfer occurring contemporaneously with such issue. (b) During the period within which this Warrant may be exercised, the Company shall at all times have authorized and reserved, and keep available free from preemptive rights, a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant. (c) The Company shall not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, and shall at all times in good faith assist in performing and giving effect to the terms hereof and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrantholder against dilution or other impairment. In no event shall the Company transfer all or substantially all of its assets to any other person or consolidate with or merge into any other entity where the Company is not the surviving entity or person, unless the other entity or person acquiring such properties and assets or surviving after such consolidation or merger shall assume, by operation of law or otherwise, all the terms of this Warrant. -5- (d) The Company shall take no action which would cause any changes in the Common Stock as to which an appropriate adjustment in the number of Warrant Shares and the Exercise Price could not be readily made pursuant to the intention of Section 6 below. (e) At all times prior to the Expiration Date, the Company will promptly deliver to the Warrantholder all notices, reports and other communications delivered to the Company's shareholders, including all public notices, reports, filings and other information submitted to the Commission, such delivery to the Warrantholder to be made contemporaneously with such delivery to the Company's shareholders. (f) The Company will not permit the par value, if any, of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise. 3.2 Representations and Warranties of the Company The Company hereby represents and warrants to the Warrantholder as follows: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, has the corporate power and authority to conduct its business as presently conducted, has the corporate power and authority to execute, issue and deliver this Warrant and to perform its obligations under this Warrant, has the corporate power and authority and legal right to own and lease its properties and is duly qualified and in good standing as a foreign corporation in each jurisdiction in which it owns or leases real property or in which the conduct of its business requires such qualification, except where failure to be so qualified could not be reasonably expected to have a material adverse effect on the Company and its subsidiaries taken as a whole. (b) The execution, delivery, issuance and performance by the Company of this Warrant and the issuance of the Warrant Shares upon exercise of this Warrant have been duly authorized by all necessary corporate action and do not and will not violate, or result in a breach of, or constitute a default under, or require any consent under, or result in the creation of any lien, charge or encumbrance upon the assets of the Company pursuant to any law, statute, ordinance, rule, regulation, order or decree of any court, governmental body or regulatory authority or administrative agency having jurisdiction over the Company or its subsidiaries or any contract, mortgage, loan agreement, note, lease or other instrument binding upon the Company or its subsidiaries or by which their properties are bound. -6- (c) This Warrant has been duly executed, issued and delivered by the Company and constitutes a legal, valid, binding and enforceable obligation of the Company. (d) The Company has authorized capital stock consisting of 12,000,000 shares of Common Stock, $.01 par value, of which 4,459,257 shares are issued and outstanding as of July 15, 1996. Except for the securities listed on Schedule 5.7(b) of the Credit Agreement, there are outstanding no options, warrants or other securities exercisable or exchangeable for or convertible into shares of capital stock of the Company. (e) No holder of securities of the Company has any right to the registration of such securities under the Securities Act and any applicable state securities laws, except as set forth in Schedule 5.7(b) of the Credit Agreement. 4. Loss or Destruction of Warrant. Subject to the terms and conditions hereof, upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, of such bond or indemnification as the Company may reasonably require, and, in the case of such mutilation, upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor. 5. Ownership of Warrant. The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration of transfer. -7- 6. Certain Adjustments. 6.1 Stock Dividends, Splits, Combinations of Stock If at any time while this Warrant is outstanding: (i) the Company shall pay a stock dividend payable in shares of Common Stock; (ii) the number of shares of Common Stock shall have been increased by a subdivision or split-up of shares of Common Stock; or (iii) the number of shares of Common Stock outstanding at any time after the date of the issuance of this Warrant shall have been decreased by a combination of the outstanding shares of Common Stock; then, on the date of the payment of such dividend, or immediately after the effective date of subdivision, split up, or combination, as the case may be, the number of shares to be delivered upon exercise of this Warrant will be increased or decreased, as the case may be, so that the Warrantholder will be entitled to receive the number of shares of Common Stock that such Warrantholder would have owned immediately following such action had this Warrant been exercised immediately prior thereto, and the Exercise Price will be adjusted as provided below in Section 6.8. 6.2 Liquidating Dividends, etc. If at any time while this Warrant is outstanding the Company makes a distribution of its property to the holders of its Common Stock as a dividend in liquidation or partial liquidation or by way of return of capital other than as a dividend payable out of funds legally available for dividends under the laws of the State of Delaware, the Warrantholder shall, upon exercise, be entitled to receive, in addition to the number of shares of Warrant Shares receivable thereupon, and without payment of any consideration therefor, a sum equal to the amount of such property as would have been payable to the Warrantholder as owner of that number of shares of Warrant Shares of the Company receivable by exercise of this Warrant, had the Warrantholder been the holder of record of such Warrant Shares on the record date for such distribution; and an appropriate provision therefor shall be made a part of any such distribution. 6.3 Issuance of Additional Shares of Common Stock If the Company, at any time while this Warrant is outstanding, shall issue any Additional Shares (otherwise than as provided elsewhere in this Section 6), at a price per share less than the Exercise Price then in effect or less than the Current Market Value then in effect or without consideration, then the Exercise Price upon each such issuance shall be adjusted to that price determined by multiplying the Exercise Price then in effect by a fraction: -8- (i) the numerator of which shall be equal to the sum of (a) the number of shares of Common Stock outstanding immediately prior to the issuance of such Additional Shares plus (b) the number of shares of Common Stock which the aggregate consideration for the total number of such Additional Shares so issued would purchase at a price per share equal to the Current Market Value then in effect or the Exercise Price then in effect (whichever is greater), and (ii) the denominator of which shall be equal to the number of shares of Common Stock outstanding immediately after the issuance of such Additional Shares. For the purposes of any adjustment of the Exercise Price pursuant to this Section 6.3, the following provisions shall be applicable: (a) In the case of the issuance of Common Stock by the Company to third parties for cash, the consideration shall be deemed to be the amount of cash paid therefor, without deducting therefrom any discounts, commissions or other expenses allowed, paid or incurred by the Company for any underwriting or otherwise in connection with the issuance and sale thereof; (b) In the case of the issuance of Common Stock by the Company to third parties for a consideration in whole or in part other than cash, the consideration other than cash shall be deemed to be the fair value thereof as determined in good faith by the Board of Directors of the Company; provided, however, that the aggregate fair market value of such non-cash and cash consideration as so determined shall not exceed the aggregate Current Market Value of the shares of Common Stock being issued; and (c) In the case of the issuance after the date hereof of (i) warrants or options to purchase or rights to subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock, or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities: (i) The aggregate maximum number of shares of Common Stock deliverable upon exercise of such options to purchase or rights to subscribe for Common Stock shall be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in subsections (a) and (b) above, if any, received by the Company upon the issuance of such options or rights plus the minimum purchase price provided in such options or the rights for the Common Stock covered thereby; (ii) The aggregate maximum number of shares of Common Stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for such convertible or exchangeable securities and subsequent conversions or exchanges thereof shall be deemed to have been issued at the time -9- such securities were issued or such options or rights were issued and for a consideration equal to the consideration received by the Company for any such securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Company upon the conversion or exchange of such securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in subsections (a) and (b) above); (iii) Upon any change in the exercise price of Common Stock deliverable upon exercise of any such options or rights or conversion of or exchange for such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Exercise Price shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment made upon the issuance of such options, rights or securities not converted prior to such change or options or rights related to such securities not converted prior to such change been made upon the basis of such change; and (iv) Upon the expiration of any such options or rights, the termination of any such rights to convert or exchange or the expiration of any options or rights related to such convertible or exchangeable securities, the Exercise Price shall forthwith be readjusted to such Exercise Price as would have obtained had the adjustment made upon the issuance of such options, rights securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of Common Stock actually issued upon the exercise of such options or rights, upon the conversion or exchange of such securities or upon the exercise of the options or rights related to such securities and subsequent conversion or exchange thereof. The provisions of this Section 6.3 shall not apply under any of the circumstances for which an adjustment is provided in Sections 6.1, 6.2, 6.4 or 6.5. 6.4 Reorganization, etc. If any capital reorganization of the Company, or any reclassification of the Common Stock, or any consolidation of the Company with or merger of the Company with or into any other Person (other than a consolidation or merger in which the Company is the resulting or surviving Person and which does not result in any reclassification or change of outstanding Common Stock) or any sale, lease or other transfer of all or substantially all of the assets of the Company to any other Person, shall be effected in such a way that the holders of Common Stock shall be entitled to receive stock, other securities or assets (whether such stock, other securities or assets are issued or distributed by the Company or another Person) with respect to or in exchange for Common Stock, then, upon exercise of this Warrant, -10- the Warrantholder shall have the right to receive the kind and amount of stock, other securities or assets receivable upon such reorganization, reclassification, consolidation, merger or sale, lease or other transfer by a holder of the number of shares of Common Stock that such Warrantholder would have been entitled to receive upon exercise of this Warrant had this Warrant been exercised immediately before such reorganization, reclassification, consolidation, merger or sale, lease or other transfer, subject to adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 6. 6.5 Certain Distributions. In case the Company shall at any time or from time to time distribute to all holders of shares of its Common Stock (including any such distribution made in connection with a merger or consolidation in which the Company is the resulting or surviving Person and the Common Stock is not changed or exchanged) cash, evidences of indebtedness of the Company or another Person, securities of the Company or another Person or other assets (excluding dividends payable in shares of Common Stock for which adjustment is made under Section 6.1 above or rights or warrants to subscribe for or purchase securities of the Company), then, and in each such case, the Exercise Price then in effect shall be adjusted (and any other appropriate actions shall be taken by the Company) so that the Warrantholder shall be entitled to receive the amount of cash, evidences of indebtedness, securities, other assets, subscription or purchase rights or warrants so distributed that such Warrantholder would have owned or would have been entitled to receive upon or by reason of any such events, had this Warrant been exercised immediately prior to the occurrence of such event; provided, however, that no adjustment shall be made with respect to any distribution of rights to purchase securities of the Company if the Warrantholder would otherwise be entitled to receive such rights upon exercise at any time of this Warrant. Such adjustment shall be made whenever any such distribution is made and shall become effective retroactively to a date immediately following the close of business on the record date for the determination of stockholders entitled to receive such distribution. 6.6 Purchase of Common Stock by the Company. If the Company at any time while this Warrant is outstanding shall, directly or indirectly through an Affiliate or otherwise, purchase, redeem or otherwise acquire any of its Common Stock at a price per share greater than the Current Market Value then in effect, then the Exercise Price upon each such purchase, redemption or acquisition shall be adjusted to that price determined by multiplying such Exercise Price by a fraction (i) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such purchase, redemption or acquisition minus the number of shares of Common Stock which the aggregate consideration for the total number of such shares of Common Stock so purchased, redeemed or acquired would purchase at the Current Market Value; and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such purchase, redemption -11- or acquisition. For the purposes of this Section 6.6, the date as of which the Current Market Value shall be computed shall be the earlier of (x) the date on which the Company shall enter into a firm contract for the purchase, redemption or acquisition of such Common Stock, or (y) the date of actual purchase, redemption or acquisition of such Common Stock. 6.7 Carryover. Notwithstanding any other provision of this Section 6, no adjustment shall be made to the number of shares of Common Stock to be delivered to the Warrantholder (or to the Exercise Price) if such adjustment represents less than 1% of the number of shares to be so delivered, but any lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment that together with any adjustments so carried forward shall amount to 1% or more of the number of shares to be so delivered. 6.8 Exercise Price Adjustment. Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant is adjusted as provided pursuant to this Section 6, the Exercise Price payable upon the exercise of this Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares purchasable immediately thereafter; provided, however, that the Exercise Price for each Warrant Share shall in no event be less than the par value of such Warrant Share. 6.9 No Adjustment for Dividends. Except as provided in Section 6.1, no adjustment in respect of any dividends shall be made during the term of this Warrant or upon the exercise of this Warrant. Notwithstanding any other provision hereof, no adjustment shall be made on Warrant Shares issuable on the exercise of this Warrant for any cash dividends paid or payable to holders of record of Common Stock prior to the date as of which the Warrantholder shall be deemed to be the record holder of such Warrant Shares. -12- 6.10 Notice of Adjustment. Whenever the number of Warrant Shares or the Exercise Price of such Warrant Shares is adjusted, as herein provided, the Company shall promptly mail by first class, postage prepaid, to the Warrantholder, notice of such adjustment or adjustments and certificate of a firm of independent public accountants of recognized national standing selected by the Board of Directors of the Company (who shall be appointed at the Company's expense and who may be the independent public accountants regularly employed by the Company) setting forth the number of Warrant Shares and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 7. Amendments. Any provision of this Warrant may be amended and the observance thereof waived only with the written consent of the Company and the Warrantholder. 8. Notices of Corporate Action. In case at any time the Company proposes: (a) to pay any dividend payable in capital stock (of any class or classes) or in convertible securities upon Common Stock or make any distribution to the holders of Common Stock; (b) to make an offer for subscription to the holders of Common Stock of any Additional Shares or to grant to the holders of Common Stock generally any rights or options; (c) to effect any capital reorganization or reclassification of the capital stock of the Company or consolidation or merger of the Company with, or sale or transfer of all or substantially all of its assets to, another corporation; (d) to issue any shares of its capital stock as part or full consideration for the purchase of assets or stock; or (e) to effect a voluntary or involuntary dissolution, liquidation or winding-up of the Company; then, in any one or more such cases, the Company shall give written notice to the Warrantholder of the date on which: (i) the transfer books of the Company shall close or a record shall be taken for such dividend, distribution, subscription rights or grant; and (ii) a record shall be taken to determine stockholders entitled to notice of and to vote at any meeting of stockholders at which any such proposed reorganization, reclassification, consolidation, merger, sale or transfer of assets, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which -13- the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to vote on or exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale or transfer of assets, dissolution, liquidation or winding up, as the case may be. Such written notice shall be given not less than thirty (30) days and not more than sixty (60) days prior to such date on which the transfer books of the Company shall close or a record shall be taken or the relevant event shall occur, as the case may be, and such notice may state that any action will be taken only if certain events specified in such notice (such as the clearing of proxy material by the Commission or an affirmative vote of stockholders) occur prior thereto. 9. Definitions. As used herein, unless the context otherwise required, the following terms have the following respective meanings: "Additional Shares" means (i) all shares of Common Stock issued by the Company after the date of this Warrant except (x) Warrant Shares and (y) shares of Common Stock issued after August 30, 1996 pursuant to the exercise of stock options granted prior to that date under the Company's employee stock option or other benefit plans or (2) shares of Common Stock issued after August 30, 1996 pursuant to the exercise of stock options granted after that date under the Company's employee stock option or other benefit plans, provided, however, that the number of shares issued as described in clause (2) shall not exceed 250,000 in the aggregate (as adjusted pursuant to Section 6 above); and (ii) any capital stock of the Company of any class which shall be authorized at any time after the date of this Warrant (other than Common Stock) and which shall have the right to participate in the distribution of earnings and assets of the Company without limitation as to amount. "Affiliate" with respect to any Person shall mean any Person who is an "affiliate" as defined by Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Business Day" means any day other than a Saturday, Sunday or a day on which national banks are authorized by law to close in the State of New York. "Commission" means the United States Securities and Exchange Commission. -14- "Common Stock" has the meaning specified on the cover of this Warrant. "Company" has the meaning specified on the cover of this Warrant. "Credit Agreement" has the meaning specified on the cover of this Warrant. "Current Market Value" means, at any date and with respect to one share of Common Stock, the average of the daily closing prices for the 30 consecutive business days ending no more than 15 Business Days before the day in question (as adjusted for any stock dividend, split, combination or reclassification that took effect during such 30 Business Day period). The closing price for each day shall be the last reported sales price regular way, or in case no such reported sales took place on such day, the average of the last reported bid and asked prices on regular way, in either case on the principal national securities exchange on which the Common Stock is listed or admitted to trading (or if the Common Stock is not listed or admitted for trading on any such exchange, on any day in question, then such price as shall be equal to the average on the last bid and asked prices, as reported by the NASDAQ on such day, or if, on any day in the question, the Common Stock shall not be quoted on the NASDAQ, then such price shall be equal to the last reported bid and asked prices on such day as reported by the National Quotation Bureau, Inc. or any similar reputable quotation and reporting service, if such quotation is not reported by the National Quotation Bureau, Inc.); provided, however, that if the Common Stock is not traded in such manner that the quotations referred to above are available for the period required hereunder, the Current Market Value shall be determined in good faith by the mutual agreement of the Board of Directors of the Company and the holder hereof or, if such determination cannot be agreed to, by a nationally recognized independent investment banking firm selected mutually by the holder of this Warrant and the Company (or if such selection cannot be made, by a nationally recognized independent investment banking firm selected by the American Arbitration Association in accordance with its rules). In connection with a determination of Current Market Value by an investment banking firm, Current Market Value shall be determined based on the value of the Company as a going-concern, without any discount for (a) control premiums which could be allocated to other shareholders or (b) any illiquidity in the Common Stock. "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor statute thereto), and the rules and regulations of the Commission promulgated thereunder. "Exercise Form" means an Exercise Form in the form annexed hereto as Exhibit A. -15- "Exercise Price" has the meaning specified on the cover of this Warrant. "Expiration Date" means the later of: (i) August 30, 2002; or (ii) one year after the date on which repayment is made in full on any indebtedness incurred pursuant to the Credit Agreement. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Securities Act" has the meaning specified on the cover of this Warrant, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Reference to a particular section of the Securities Act shall include a reference to the comparable section, if any, of any such similar federal statute. "Warrantholder" has the meaning specified on the cover of this Warrant. "Warrant Shares" has the meaning specified on the cover of this Warrant. 10. Miscellaneous 10.1 Entire Agreement. This Warrant constitutes the entire agreement between the Company and the Warrantholder with respect to the Warrants. 10.2 Binding Effect; Benefits. This Warrant shall inure to the benefit of and shall be binding upon the Company and the Warrantholder and their respective permitted successors and assigns. Nothing in this Warrant, express or implied, is intended to or shall confer on any person other than the Company and the Warrantholder, or their respective permitted successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Warrant. -16- 10.3 Section and Other Headings. The section and other headings contained in this Warrant are for reference purposes only and shall not be deemed to be a part of this Warrant or to affect the meaning or interpretation of this Warrant. 10.4 Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (a) if to the Company: Holmes Protection Group, Inc. 440 9th Avenue New York, New York 10001-1695 Attn: Lawrence Irving Telephone: (212) 760-0630 Telecopy: (212) 563-0129 with a copy (which shall not constitute notice) to: Buchanan Ingersoll College Centre 500 College Road Princeton, New Jersey 08540 Attn: Dennis M. Stern, Esq. Telephone: (609) 987-6800 Telecopy: (609) 520-0360 (b) if to Bank of Boston Connecticut: Bank of Boston Connecticut c/o BancBoston Capital, Inc. 100 Federal Street Boston, MA 02110 Mail Stop 01-31-08 Attn: Mary J. Reilly Telephone: (617) 434-7890 Telecopy: (617) 434-1153 -17- All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. Any party may by notice given in accordance with this Section 10.4 designate another address or Person for receipt of notices hereunder. 10.5 Severability. Any term or provision of this Warrant which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the terms and provisions of this Warrant or affecting the validity or enforceability of any of the terms or provisions of this Warrant in any other jurisdiction. 10.6 Governing Law. This warrant shall be governed by and construed in accordance with the laws of the State of Delaware (excluding the choice of law rules thereof). 10.7 No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be determined as conferring upon the Warrantholder any rights as a stockholder of the Company or as imposing any liabilities on the Warrantholder to purchase any securities whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise. 10.8 Continued Validity. A holder of Common Stock received upon exercise of this Warrant ("Exercised Shares") shall continue to be entitled with respect to such Exercised Shares to all rights and subject to all obligations to which it would have been entitled or subject as a holder hereof under Sections 1.4, 3.1, 7, and 10.6 of this Warrant. The Company will, at the time of each exercise of this Warrant, in whole or in part, upon the request of the holder of the Exercised Shares issued upon such exercise, acknowledge in writing, in form reasonably -18- satisfactory to such holder, its continuing obligation to afford to such holder all such rights; provided, however, that if such holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder all such rights. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer. HOLMES PROTECTION GROUP, INC. By: /s/ Lawrence R. Irving -------------------------------- Name: Lawrence R. Irving Title: Vice President - Finance -19- Exhibit A --------- EXERCISE FORM ------------- (To be executed upon exercise of this Warrant) The undersigned hereby irrevocably elects to exercise the right represented by this Warrant to purchase _________ of the Warrant Shares and [herewith tenders payment for such Warrant Shares to the order of Holmes Protection Group, Inc.] [hereby exercises its Conversion Right] in accordance with the terms of this Warrant. The undersigned requests that a certificate for [such Warrant Shares] [that number of Warrant Shares to which the undersigned is entitled as calculated pursuant to Section 1.2] be registered in the name of the undersigned and that such certificates be delivered to the undersigned's address below. The undersigned represents that it is acquiring such Warrant Shares for its own account for investment and not with a view to or for sale in connection with any distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within its control). Dated: ------------------------- Signature: ---------------------------------- ---------------------------------- (Print name) ---------------------------------- (Street address) ---------------------------------- (City) (State) (Zip code) Signed in the presence of: - ----------------------------- Schedule A ---------- EX-5.1 4 EXHIBIT 5.1 Exhibit 5.1 [SQUADRON, ELLENOFF LETTERHEAD] September 20, 1996 Holmes Protection Group, Inc. 440 Ninth Avenue New York, New York 10001 Re: Registration Statement of Form S-1 (Registration No. 333-9025) -------------------------------------------------------------- Ladies and Gentlemen: You have requested our opinion, as counsel for Holmes Protection Group, Inc., a Delaware corporation (the "Company"), in connection with the registration statement of the Company on Form S-1 (No. 333-9025), as amended (the "Registration Statement"), filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). The Registration Statement relates to the offering by the Company of 1,000,000 shares of common stock, par value $.01 per share, of the Company (the "Common Stock"), and up to 150,000 shares of Common Stock to be issued solely to cover over-allotments (collectively, the "Shares"). We have examined such records and documents and made such examinations of law as we have deemed relevant in connection with this opinion. Based upon such examinations, it is our opinion that, when there has been compliance with the Act and the applicable state securities laws, the Shares to be sold by the Company, when issued, delivered, and paid for in the manner described in the form of Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement, will be validly issued, and the Shares, when so issued, delivered and paid for will also be fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In so doing, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, /s/ Squadron, Ellenoff, Present & Sheinfeld, LLP EX-10.11(A) 5 EXHIBIT 10.11(A) [LOGO] Data General DATA GENERAL CORPORATION 4400 Computer Drive. Westboro, MA 01580 Telephone (508)366-8911 September 3, 1996 Mr. Larry Irving Holmes Protection Group 440 Ninth Avenue New York, NY 10001-1695 Dear Mr. Irving, This letter serves as an acknowlegement that the equipment list on your Lease Schedule 12223-006 has been changed, per the attached new configuration. Please sign both the letter and the revised configuration and return to me at the above address. As consideration for the configuration change in your lease, the payment amount on your lease will be reduced from $32,184.89 to $24,387.23 as of October 1, 1996. Per our previous assignment of your rental payments to Newcourt Financial, please acknowledge below that you will remit your new monthly payment of $24,387.23 per month for 45 months, beginning October 1, 1996 to: Newcourt Financial 201 Merritt Seven Norwalk, CT 06856 Thank you for your cooperation in this matter. DATA GENERAL CORPORATION /s/ Lee Kaemmerlen ---------------------------- Lee Kaemmerlen Leasing Account Coordinator Data General Leasing Acknowledged and Agreed /s/ Lawrence R. Irving - --------------------------------- Authorized Representative VP -- Finance 9/16/96 - --------------------------------- Title Date Holmes Protection Group, Inc. Enclosure: Revised Configuration for Lease 12223-006 Revised Configuration for Lease Agreement No. 12223-006 - ------------------------------------------------------------------------------- ITEM# QTY MODEL# DESCRIPTION - ------------------------------------------------------------------------------- SEE ATTACHED CONFIGURATIONS INVOICES PAID BY HOLMES PROTECTION TO BE RE-IMBURSED TO HOMES BY DATA GENERAL - ----------------------------------------------------------------------------- ACCUNETICS, INC. INVOICE #'S I2665, I2668 EGGHEAD SOFTWARE INVOICE #'S 16054550, 17204157, 17493956 GLASGAL COMMUNICATIONS, INC. INVOICE # 315852 INMAC INVOICE # 30780390 MANCHESTER EQUIPMENT CO. INC. INVOICE #'S 232192, 232605, 233101, 233104, 233423, 233660, 233661, 233808, 235844, 237308, 238040, 245367, 246244, 246666, 246786, 246887, 247351, 249282, 249283, 249979, 249980, 251167, 251173, 251347, 252872, MONITORING AUTOMATION SYSTEMS INVOICE #25789 MICRO INNOVATION COMPUTER CTR. INVOICE #'S 314263, 314416, 315205 SALES TAX (NEW JERSEY) ROLLOVER/REFINANCING OF LEASE SCHEDULES NOS. 12223-001,-002,-003,-004, & -005 (ASSUMES LAST PAYMENT TO BE MADE ON THOSE LEASES TO COVER THE PERIOD OF 7/l/95 THROUGH 7/31/95) LESSEE HAS SELECTED THE HARDWARE AND SOFTWARE ON THIS SCHEDULE BASED UPON ITS OWN JUDGEMENT AND EXPRESSLY DISCLAIMS ANY RELIANCE UPON STATEMENTS MADE BY LESSOR. LESSEE ACKNOWLEDGES THAT THE LEASE IMPOSES NO RESPONSIBILITY OR LIABILITY UPON LESSOR FOR PERFORMANCE OR OPERATION OF THE SCHEDULED PRODUCTS. THE LEASE GRANTS NO WARRANTIES, EXPRESS OR IMPLIED, BY OPERATION OF LAW OR OTHERWISE, WITH RESPECT TO THE SCHEDULED PRODUCTS AND LESSOR DISCLAIMS ALL APPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR PURPOSE. HOWEVER, THE LEASE PRESERVES LESSEE'S RIGHTS AGAINST THE VENDORS OF THE SCHEDULED PRODUCTS AND LESSEE SHALL LOOK TO THE VENDORS OF THE PRODUCTS CONCERNING PERFORMANCE AND OPERATION OF THEIR RESPECTIVE PRODUCTS. Data General Corporation Holmes Protection Group, Inc. - -------------------------------- --------------------------------- Lessor Lessee /s/ Lee Kaemmerlen /s/ Lawrence R. Irving - -------------------------------- --------------------------------- Authorized Representative Authorized Representative TITLE: TITLE:VP -- Finance -------------------------- --------------------------- DATE: 9/20/96 DATE: 9/15/96 --------------------------- --------------------------- EX-10.33 6 EXHIBIT 10.33 CREDIT AGREEMENT by and among MERITA BANK LTD, a Finnish banking corporation, acting through its New York branch and BANK OF BOSTON CONNECTICUT, a Connecticut savings bank Lenders - and - HOLMES HOLDING COMPANY, INC., a Delaware corporation Borrower - and - HOLMES PROTECTION GROUP, INC., a Delaware corporation Parent - and - MERITA BANK LTD, a Finnish banking corporation, acting through its New York branch Agent Bank August 30, 1996 SCHEDULES Schedule 1.2A Existing Indebtedness Schedule 1.2B Description of Restructuring Schedule 3.1 Indebtedness Permitted to be Repaid by Letter of Credit Proceeds Schedule 4.5(f) Form of Officer's Certificate Schedule 5.1(a) Foreign Qualifications of Borrower Schedule 5.1(b) Foreign Qualifications of Parent Schedule 5.2 Subsidiaries Information Schedule 5.7(a) Borrower Outstanding Options/Warrants or Other Rights Schedule 5.7(b) Parent Outstanding Options, Warrants or Other Rights Schedule 5.10 Taxes Schedule 5.12 Debt Instruments; Defaults Schedule 5.13 Bank Accounts Schedule 5.15(a) Pending Litigation Schedule 5.15(b) Threatened Litigation Schedule 5.16 Restrictive Agreements Schedule 5.17 Licenses Schedule 5.19 Location of Assets Schedule 5.21 Fictitious, Trade and Assumed Names Schedule 5.24 Pension and Benefit Plans Schedule 5.25 Compliance with Laws Schedule 5.26 Affiliate Transactions Schedule 5.30 Material Agreements Schedule 6.15 Leased Real Property Schedule 7.1(j) Indebtedness Remaining on the Closing Date Schedule 7.2 Liens of Record on the Closing Date Schedule 7.3 Investments and Loans Schedule 7.19 Attrition EXHIBITS Exhibit A-1 Form of Merita Note Exhibit A-2 Form of BKBCT Note Exhibit B Form of Loan Request Exhibit C Form of Blocked Account Agreement Exhibit D Form of Guaranty and Suretyship Agreement Exhibit E Form of Pledge Agreement Exhibit F Form of Security Agreement Exhibit G Legal Opinion Exhibit H Landlord's Waiver and Consent CREDIT AGREEMENT This Credit Agreement (this "Agreement") is entered into as of August 30, 1996, by and among (i) Merita Bank Ltd, a Finnish banking corporation, acting through its New York branch ("Merita"); (ii) Bank of Boston Connecticut, a Connecticut savings bank ("BKBCT" and together with Merita, the "Lenders"); (iii) Holmes Holding Company, Inc., a Delaware corporation (the "Borrower"); (iv) Holmes Protection Group, Inc., a Delaware corporation (the "Parent"); and (v) Merita, as the agent bank (the "Agent Bank"). RECITALS The Lenders have agreed, subject to the terms and conditions of this Agreement, to extend loans to the Borrower up to an aggregate principal amount of $25,000,000. NOW, THEREFORE, the parties, intending to be legally bound, acknowledge the receipt of sufficient consideration and agree as follows: SECTION 1. CONSTRUCTION AND DEFINITION OF TERMS 1.1 General Interpretive Principles. If the context requires, the use of any gender shall also refer to any other gender, and the use of the singular or plural shall also refer to the other. All terms which are defined by the New York Uniform Commercial Code (the "U.C.C.") have the same meanings assigned to them by the U.C.C., as amended from time to time. All accounting terms not specifically defined have the meanings determined by reference to United States generally accepted accounting principles consistently applied ("GAAP"). The word "including" is not exclusive; if exclusion is intended, the word "comprising" is used instead. The word "or" shall be construed to mean "and/or" unless the context clearly prohibits that construction. Defined terms shall also mean in the singular number the plural and in the plural the singular. 1.2 Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Additional Indebtedness: the categories of Indebtedness identified in Section 7.1(b), (c), (d) and (g). Additional Requirements: defined in Section 2.4(b)(ii)(6). Affiliate: a spouse or relative (by blood, adoption or marriage) of any Person within the second degree, any director or employee of any Person, any other Person with which any Person is a partner, member, director, officer or employee, and any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with any Person. "Control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract, or otherwise. Agent Bank: Merita Bank Ltd, and any other Person which becomes the Agent Bank, in such Person's capacity as the Agent Bank. Agreement: this Credit Agreement and the Exhibits and Schedules attached hereto (all of which Exhibits and Schedules are hereby incorporated by reference and made a part hereof), as amended, supplemented or modified. Annualized Interest Expense: as of the date of determination, Interest Expense for the most recent Quarter multiplied by four. Annualized Quarterly Consolidated EBITDA: as of the date of determination, Consolidated EBITDA for the most recent Quarter multiplied by four. Applicable Margin: defined in Section 2.4. Approved Debt: defined in Section 7.1(e). Assignments of Tenant's Interest Under Leases: the collateral assignments of the leases of the offices of the Borrower and the Subsidiaries required under Section 6.15, which assignments shall be in proper recordable form as required by the laws of the states in which such offices are located and otherwise in form and substance acceptable to the Agent Bank. Assignment and Acceptance: defined in Section 10.7(b). Attrition: defined in Section 7.19(d). Available Commitment: defined in Section 2.1(a). Availability Period: the twenty-four month period commencing on the Closing Date and ending on the second anniversary thereof. Base Rate: for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the higher of (a) the Prime Rate in -2- effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 0.5 of 1%. If for any reason the Agent Bank shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Agent Bank to obtain sufficient quotations in accordance with the terms thereof, the Base Rate shall be determined without regard to clause (b) of the preceding sentence until such time as the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. BKBCT: Bank of Boston Connecticut, a Connecticut savings bank, and its successors and assigns. BKBCT Commitment: defined in Section 2.1(a). BKBCT Note: defined in Section 2.1(d). Blocked Account Agreements: Blocked Account Agreements substantially in the form attached as Exhibit C. Borrower: Holmes Holding Company, Inc., a Delaware corporation, and its successors and permitted assigns. Borrowing Date: the date of any advance of funds to the Borrower pursuant to this Agreement. Business Day: a day other than a Saturday, Sunday or other day on which commercial banks are authorized or permitted to close in New York, New York. Capital Expenditures: an expenditure by a Person for property classified as a "fixed asset" under GAAP. Capital Lease: any lease of any property (whether real, personal or mixed) by such Person as lessee which would, in accordance with GAAP, be classified as a capital lease on a balance sheet. For purposes of this Agreement, any Person shall be deemed to be the owner of any property which it has acquired or holds subject to a Capital Lease or conditional sale agreement or other arrangement pursuant to which title to the property has been retained by or vested in some other person for security purposes. -3- Capital Lease Obligation: with respect to any Capital Lease, the amount of the obligation of the lessee which would, in accordance with GAAP, appear on the lessee's balance sheet. CERCLA: defined in Section 6.13(c). Change of Control: any Person or two or more Persons acting in concert which shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Parent (or other securities convertible into such securities) representing forty percent (40%) or more of the combined voting power of all securities of the Parent entitled to vote in the election of directors. Closing Date: the date on which all of the conditions specified in Section 4 have been met to the reasonable satisfaction of the Agent Bank and the Lenders have made the first advance of the Loans to the Borrower. Code: the Internal Revenue Code of 1986, as amended, or any successor(s) and any Treasury regulations, revenue rulings or technical information releases issued thereunder. Collateral: the property of the Borrower, the Parent and the Subsidiaries in which the Agent Bank, on behalf of the Lenders, is taking a security interest, as more fully defined in the Security Agreements, the Pledge Agreements, the Assignments of Tenant's Interest Under Leases and the Blocked Account Agreements. Commitment: the Merita Commitment or the BKBCT Commitment, as the context indicates. Commitment Fee: defined in Section 2.3(a). Commonly Controlled Entity: an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 414(c) of the Code. Consolidated Debt: consolidated Debt of the Parent, the Borrower and the Subsidiaries, computed in accordance with GAAP. Consolidated EBITDA: without duplication, net income for the period (excluding extraordinary items) before deductions for Interest Expense and taxes, minority interest, depreciation expense and amortization expense, all as determined in accordance with GAAP, on a consolidated basis. -4- Consolidated Net Worth: consolidated net worth of the Parent, the Borrower and the Subsidiaries, computed in accordance with GAAP. Conversion Date: September 30, 1998. Customer Lists: defined in Section 6.23. Debt: as applied to any Person and without duplication, all Indebtedness of a Person which is (a) an obligation for borrowed money or a direct or contingent reimbursement obligation arising on account of the issuance of a letter of credit (irrespective of whether a draw has been made thereunder), purchase money Indebtedness, and the Loans, whether evidenced by bonds, notes, debentures or other written obligations or evidenced by a loan agreement, reimbursement agreement, indenture or other agreement, (b) unfunded pension and retiree health care liabilities, (c) a Capital Lease Obligation, (d) Indebtedness secured by a Lien on any property or asset owned or held by such Person subject thereto, whether or not the Indebtedness secured thereby shall have been assumed by such Person, and (e) a Guaranty (regardless of the maturity of the underlying obligation, but not including any Guaranty that has terminated or expired). Environmental Laws: defined in Section 6.13(c). ERISA: the Employee Retirement Income Security Act of 1974, as the same from time to time may be amended, supplemented or modified. Eurocurrency Liabilities: defined in Section 2.4(b)(ii)(4). Eurodollar Business Day: any Business Day on which the relevant London international financial markets are open for the transaction of business contemplated in this Agreement. Eurodollar Loan: any Loan as to which the applicable rate of interest is based on the Eurodollar Rate. Eurodollar Rate: defined in Section 2.4(b)(ii)(3). Event of Default: any of the events specified in Section 8.1 hereof. Excess Cash Flow: for any fiscal year, Consolidated EBITDA minus the sum of (i) Capital Expenditures made during the period, (ii) scheduled amortization of Indebtedness paid during such period, (iii) income taxes paid in cash during the period, and (iv) interest paid in cash during the period. -5- Existing Indebtedness: the Indebtedness described on Schedule 1.2A. Federal Funds Effective Rate: for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Agent Bank from three federal funds brokers of recognized standing selected by it. Fees: the Commitment Fee and the Letter of Credit Fees. Financial Information: defined in Section 6.12(d). GAAP: defined in Section 1.1. Governmental Authority: any nation or government, any federal, state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to any government or any federal, state or other political subdivision thereof, and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing. Guarantors: the Parent, the Subsidiaries, and their respective successors and assigns. Guaranty: as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any indebtedness, lease, dividend or other obligation of another, including any such obligation directly or indirectly guaranteed, endorsed (otherwise than for collection or deposit in the ordinary course of business) or discounted or sold with recourse by such Person, or in respect of which such Person is otherwise directly or indirectly liable, including any such obligation in effect guaranteed by such Person through any agreement (contingent or otherwise) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain the solvency or any balance sheet or other financial condition of the obligor of such obligation, or to make payment for any products, materials or supplies or for any transportation or services regardless of the non-delivery or non-furnishing thereof, in any such case if the purpose or intent of such agreement is to provide assurance that such obligation will be paid or discharged, or that any agreements relating -6- thereto will be complied with, or that the holders of such obligation will be protected against loss in respect thereof. Guaranty Agreement: a Guaranty and Suretyship Agreement, substantially in the form attached as Exhibit D hereto. Indebtedness: as applied to any Person and without duplication, (a) all items (except items of (i) capital stock, capital or surplus or, (ii) reserves for deferred income taxes or (iii) reserves for losses incurred in connection with any occurrence which the Borrower is permitted to self-insure pursuant to Section 6.14(c)), which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of a Person as of the date on which Indebtedness is to be determined, (b) all Capital Lease Obligations, obligations to the holders of minority interests, if any, in the Borrower, the Parent or a Subsidiary for the purchase by such Person of such interests, unfunded pension liabilities and direct or contingent reimbursement obligations arising upon the issuance of a letter of credit, (c) all indebtedness secured by any consensual Lien on any property or asset owned or held by such Person subject thereto, whether or not the indebtedness secured thereby shall have been assumed by such Person, (d) all indebtedness of others with respect to which such Person has become liable by way of a Guaranty, (e) any obligation under any interest rate protection agreement, and (f) fifty percent (50%) of the amount in holdback or similar accounts established in connection with Permitted Acquisitions by such Person; provided, that "Indebtedness" shall not include the amounts of such Person's insurance premiums which are financed by a third party. Indemnified Liabilities: defined in Section 10.15. Indemnitees: defined in Section 10.15. Interest Expense: as of the date of determination, the aggregate amount of interest due on the Loans, Additional Indebtedness and Approved Debt, if any, as determined in accordance with GAAP. Interest Period: the elected period for any Loan as to which the Eurodollar Rate applies. Interest Rate Protection Agreement: any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement executed in connection with this Agreement, designed to protect the Borrower against fluctuations in interest rates. -7- Investment: as applied to any Person, any direct or indirect purchase or other acquisition by such Person of stock or other securities of any other Person, or any direct or indirect loan, advance (other than advances to employees for moving and travel expenses, drawing accounts and expenditures in the ordinary course of business) or capital contribution by such Person to any other Person, including all Indebtedness and accounts receivable from such other Person which are not current assets or did not arise from sales or the provision of services to such other Person in the ordinary course of business. Landlord's Waiver and Consent: a waiver and consent document respecting statutory liens on personalty, ingress and egress and related or incidental matters, substantially in the form attached as Exhibit H hereto, executed by the lessor of real estate to the Borrower or any Subsidiary. Leased Real Property: the locations identified on Schedule 6.15 hereto and all other real property in which the Borrower or a Subsidiary has a leasehold interest after Closing. Lenders: Merita, BKBCT and any other Person which becomes an assignee of any of the foregoing or a participant in the Loans; Lender means any one of the Lenders. Letter of Credit: defined in Section 3.1. Letter of Credit Fees: defined in Section 3.7. Letter of Credit Liability: defined in Section 3.11. Letter of Credit Request: defined in Section 3.2. Leverage Ratio: defined in Section 2.4(a). Lien: as to any Person, any mortgage, deed of trust, pledge, hypothecation, assignment, assigned deposit arrangement, encumbrance, lien (statutory or other), claim, option, reservation, right of way, easement, covenant, lease, condition, restriction, charge or defect of any kind, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the U.C.C. or comparable law of any jurisdiction). -8- Loan Documents: this Agreement, the Notes, the Guaranty Agreements, the Security Agreements, the Pledge Agreements, the Blocked Account Agreements, the Interest Rate Protection Agreement, the Assignment of Tenant's Interest Under Leases and all certificates, documents and instruments required by, referred to in or delivered pursuant to any of the foregoing documents. Loan Request: defined in Section 2.1(e). Loans: defined in Section 2.1(b). Majority Lenders: Lenders whose percentages of the Available Commitment or the Total Commitment, as the case may be, exceed sixty seven percent (67%). Material Adverse Effect: (a) a material adverse effect on the business, operations, affairs, condition (financial or otherwise), assets, properties or financial prospects of the Borrower, the Parent or any of the Subsidiaries, (b) a material adverse effect on the ability of the Borrower, the Parent or any of the Subsidiaries to perform its obligations under the Loan Documents, or (c) an adverse effect, material or otherwise, on the validity or enforceability of any Loan Document. Maturity Date: the earlier of (i) September 30, 2003 or (ii) such date on which the Loans become due and payable, whether by declaration, optional or mandatory prepayments or otherwise. Merita Commitment: defined in Section 2.1(a). Merita Note: defined in Section 2.1(d). Mortgagee's Waiver: an executed waiver document respecting certain rights as a mortgagee in real estate owned by the Borrower or a Subsidiary, in form and content satisfactory to the Agent Bank. Multiemployer Plan: a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. Non-U.S. Subsidiaries: Holmes Protection S.A., an entity organized under the laws of Switzerland, and Holmes Protection (UK) Limited, an entity organized under the laws of the United Kingdom. Notes: the Merita Note and the BKBCT Note, and all other notes, if any, executed in substitution for, or in connection with a Note; "Note" means one of the Notes. Officer: any executive officer of the Borrower or the Parent. -9- Officer's Certificate: a certificate executed on behalf of the Borrower or the Parent, as the case may be, by an Officer thereof. Operating Licenses: all licenses, permits, authorizations or approvals issued by a Governmental Authority having jurisdiction over the Borrower, the Parent or a Subsidiary required for the operation of any business of such Person. Owned Real Property: any real estate owned or to be acquired in fee by the Borrower or a Subsidiary at any time during the term of the Loans. PBGC: the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA, or any governmental agency or instrumentality succeeding to the functions thereof. Permitted Acquisitions: defined in Section 7.16. Permitted Indebtedness: defined in Section 7.1. Permitted Liens: defined in Section 7.2. Permitted Uses: defined in Section 2.1(c). Person: an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. PESA: defined in Section 6.13(a)(i). Plan: any plan of a type described in Section 3(3) of ERISA in respect of which the Borrower or a Commonly Controlled Entity is an "employer" as defined in Section 3(5) of ERISA. Pledge Agreement: a Pledge Agreement substantially in the form attached as Exhibit E hereto. Pledgors: the Parent, and each other Person executing and delivering a Pledge Agreement pursuant to the provisions of this Agreement or a Pledge Agreement. Potential Event of Default: any condition or event which, with notice or lapse of time or both, would constitute an Event of Default. Premises: defined in Section 6.13(a). -10- Prime Rate: the rate of interest from time to time established and publicly announced by the Agent Bank, in its sole discretion, as its Prime Rate of interest to be used as an index in determining actual interest rates to be charged to certain of its borrowers. The Prime Rate may not be the lowest rate charged by the Agent Bank to its borrowers. The Agent Bank shall certify the Prime Rate and such certification shall be conclusive in the absence of manifest error. Quarter: a calendar quarter of the Borrower, commencing with the first full calendar quarter following execution of this Agreement. Quarterly Payment Date: defined in Section 2.2. Records: defined in Section 6.12(b). Recurring Monthly Revenue: the total recurring monthly amount of alarm service revenue billed by or on behalf of the Borrower or a Subsidiary to customers for alarm services in connection with Recurring Security Services Contracts owned by the Borrower or such Subsidiary and which are in full force and effect. Monthly amounts shall include charges for monitoring services, maintenance, inspection services and leased equipment. Quarterly, semi-annual and annual billings shall be divided by three, six and twelve, respectively, to determine the monthly amount. Recurring Monthly Revenue shall not include any amounts derived from (i) reimbursement or prepayment of telephone lines, radio transmission facilities, and other utility company charges associated directly with the installation, monitoring, maintenance or furnishing of alarm services; (ii) reimbursement for or prepayment of any false alarm assessments; (iii) reimbursement for or prepayment of any amounts equal to taxes (other than income taxes), fees or other charges which may be payable to any governmental authority or public utility relative to the furnishing of alarm services; (iv) non-recurring non-regular services incurred by a customer; (v) monitoring services provided under any contract for which the Borrower's or Subsidiary's customer is in arrears in payment for a period in excess of ninety (90) days after the last date for which services were provided and billed; and (vi) contracts which have not yet been "cut in". For purposes of this Agreement, the term "cut in" shall mean the first date on which an alarm system at a customer's premises is on line to the central station or operational. Recurring Security Services Contracts: all contracts and agreements, whether now owned or held or hereinafter acquired or generated by the Borrower or any Subsidiary, under which the Borrower or such Subsidiary will provide any form of recurring Security Services for a fee, and all such other recurring revenue contracts or agreements entered into by the Borrower or a Subsidiary during the term of the Loans. -11- Reimbursement Obligation: as of any date of determination, the obligations of the Borrower then outstanding, or which may thereafter arise, in respect of Letters of Credit then outstanding, to reimburse the Agent Bank for the amount paid by the Agent Bank in respect of any drawing under Letters of Credit. Reportable Event: any of the events set forth in Section 4043(b) of ERISA, or the regulations thereunder. Reserve Percentage: defined in Section 2.4(b)(ii)(4). Restricted Payment: (a) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock or ownership interest of the Parent, the Borrower or any Subsidiary, now or hereafter outstanding, except (i) a dividend payable solely in shares of stock of the Parent, the Borrower or any Subsidiary and (ii) any other dividend payable by the Borrower or a Subsidiary to its parent corporation which owns all the issued and outstanding shares of capital stock of the Borrower or such Subsidiary; (b) any redemption, retirement, purchase or other acquisition, direct or indirect, of any shares of any class of stock or ownership interest of the Parent, the Borrower or any Subsidiary now or hereafter outstanding, or of any warrants, rights or options to acquire any such shares or interests, except to the extent that the consideration therefor consists of shares of stock or ownership interests, or any warrants, rights or options to acquire any such shares or interests, of the Parent, the Borrower or a Subsidiary; and (c) any sinking fund, other required prepayment or mandatory installment payment on account of any shares of stock of the Parent, the Borrower or a Subsidiary. Restructuring: the proposed restructuring of the Parent, the Borrower and the Subsidiaries described on Schedule 1.2B. Security Agreement: a Security Agreement substantially in the form attached as Exhibit F hereto. Security Services: burglar alarm services, fire alarm services, closed circuit television and electronic access control services, all central station monitoring services, maintenance services, leases, fire testing and all other similar security services provided to commercial, residential and other customers. Special Purpose Subsidiary: any Person acquired by the Parent, the Borrower or any Subsidiary after the Closing Date as permitted under Section 7.16. Stamped: the process by which the originals of all Recurring Security Services Contracts will be manually stamped by an authorized -12- representative of the Borrower, which stamp shall state that a security interest in each such Recurring Security Services Contract has been granted to the Agent Bank. Subsidiary: (a) a corporation of which at least a majority of the outstanding Voting Stock is owned, directly or indirectly, now or in the future, by the Parent or the Borrower and (b) a general or limited partnership of which at least a majority of the partnership interests are owned, directly or indirectly, now or in the future, by the Parent or the Borrower. A general partnership includes a joint venture for the purposes of this definition. Total Commitment: defined in Section 2.1(a). Total Consolidated Debt: as of the date of determination, the sum of (a) the outstanding principal amount of the Loans, (b) to the extent not included in (a), the face amount of all Letters of Credit, if any, then outstanding, (c) the outstanding principal amount of Additional Indebtedness, and (d) the outstanding principal amount of Approved Debt, if any. Total Projected Debt Service: for any period, all scheduled principal amortization and interest payments on Total Consolidated Debt. U.C.C.: defined in Section 1.1. U.C.P.: defined in Section 3.10. Variable Rate: the Base Rate, plus the Applicable Margin, as determined pursuant to Section 2.4(a). Voting Control: with respect to any Person which is a business entity acting alone, the power to elect a majority of the directors of such business entity or to effectuate and cause the direction of the management and policies of such business entity. Voting Stock: stock of any class or classes (or equivalent interests) of a Person which is a business entity, if the holders of the stock of such class or classes (or equivalent interests) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or persons performing similar functions) of such business entity, even though the right to so vote has been suspended by the happening of such a contingency. 1.3 Use of "Subsidiary". With respect to any representation or warranty set forth in this Agreement, the term -13- "Subsidiary" shall refer to each Subsidiary in existence at the time the representation or warranty is made or deemed to be made. Covenants and other provisions shall apply to Subsidiaries actually in existence from time to time. SECTION 2. LOANS 2.1 Loans. (a) Establishment. Subject to the terms and conditions of this Agreement, in reliance upon the representations, warranties and covenants of the Borrower contained herein and upon satisfaction of the conditions precedent set forth in Section 4, the Lenders severally agree to establish on a pro rata basis a credit in favor of the Borrower in the aggregate principal amount of $25,000,000 (the "Total Commitment"), consisting of an aggregate principal amount of $15,000,000 to be extended by Merita (the "Merita Commitment") and an aggregate principal amount of $10,000,000 to be extended by BKBCT (the "BKBCT Commitment"); provided, however, that the aggregate amount of the Total Commitment available to the Borrower shall be limited to $12,500,000 (the "Available Commitment"), unless by October 31, 1996 the Borrower has received an amount equal to at least $10,000,000 gross cash proceeds through the issuance by the Parent of newly issued shares of common stock, in which event the Available Commitment shall be increased and shall be equal to the Total Commitment. Until such time as the Available Commitment equals the Total Commitment, all references in this Agreement to the Merita Commitment shall mean $7,500,000 and all references to the BKBCT Commitment shall mean $5,000,000. Notwithstanding anything to the contrary contained herein, in no event shall any Lender be obligated to lend any amount in excess of its Commitment. (b) Availability. Subject to the satisfaction of the conditions set forth in Section 4, the Borrower may borrow during the Availability Period from time to time from each Lender, severally and not jointly, an aggregate principal amount at any time not in excess of such Lender's Commitment (each such borrowing, a "Loan", and collectively, the "Loans"). (c) Purpose. The proceeds of the Loans shall be used by the Borrower (i) to repay Existing Indebtedness, (ii) to finance Capital Expenditures, (iii) to finance Permitted Acquisitions, and (iv) for general corporate purposes ("Permitted Uses"). -14- (d) Notes. The Loan made by each Lender shall be evidenced by a promissory note of the Borrower in a principal amount equal to such Lender's Commitment and in the form attached hereto as Exhibit A-1 with respect to the Merita Commitment (the "Merita Note") and in the form attached hereto as Exhibit A-2 with respect to the BKBCT Commitment (the "BKBCT Note"). Each Note shall bear interest on the unpaid principal amount thereof at the applicable rate or rates set forth in Section 2.4. (e) Loan Requests. Each request by the Borrower for a Loan (a "Loan Request") shall be made in writing to the Agent Bank and to each Lender, in substantially the form attached hereto as Exhibit B. Each Loan Request shall be submitted at least three (3) Business Days before the requested Borrowing Date if the request is for a Eurodollar Rate Loan and two (2) Business Days before the requested Borrowing Date if the request is for a Base Rate Loan, unless and to the extent such Loan Request is in the form of a Letter of Credit Request, in which event the notice requirements set forth in Section 3.2 shall be applicable. Each Loan Request shall cover a requested Loan in the minimum principal amount of $1,000,000 (or less if the unused portion of the Available Commitment or the Total Commitment, as the case may be, is less) and shall be made pro rata between Merita and BKBCT. Each Loan Request shall contain the information and other evidence reasonably required by the Agent Bank and the Lenders to establish that all conditions precedent to the requested Loan have been satisfied. Each Loan Request shall include an express representation and warranty (and shall be deemed to include the representation and warranty if it is not expressly included) by the Borrower that (i) all of the representations and warranties made in Section 5 continue to be true and correct in all material respects as of the date of such Loan Request, (ii) all conditions precedent have been satisfied, as of the time the Loan Request is submitted, (iii) the business and financial ratios and covenants set out in Section 7.19 have been met as of the last test date, and (iv) no Event of Default or Potential Event of Default exists. 2.2 Repayment of Loans. The outstanding principal amount of the Notes shall be repaid in consecutive quarterly installments of principal due on the last Business Day of each Quarter (the "Quarterly Payment Dates"), commencing on September 30, 1998. The principal amount to be repaid on each Quarterly Payment Date shall be the following percentages of the principal amount of the Loans outstanding on the Conversion Date: -15- Percentage of Quarterly Payment Dates Principal Repaid ----------------------- ---------------- December 31, 1998 3.75% March 31, 1999 3.75% June 30, 1999 3.75% September 30, 1999 3.75% December 31, 1999 5.0% March 31, 2000 5.0% June 30, 2000 5.0% September 30, 2000 5.0% December 31, 2000 5.0% March 31, 2001 5.0% June 30, 2001 5.0% September 30, 2001 5.0% December 31, 2001 5.0% March 31, 2002 5.0% June 30, 2002 5.0% September 30, 2002 5.0% December 31, 2002 6.25% March 31, 2003 6.25% June 30, 2003 6.25% September 30, 2003 6.25% Notwithstanding anything herein to the contrary, the outstanding principal amount under the Notes and all accrued interest thereon and all other amounts due and owing by the Borrower hereunder shall become immediately due and payable on the Maturity Date. 2.3 Fees. (a) Commitment Fee. The Borrower shall pay the Lenders, on a pro rata basis, commitment fees (the "Commitment Fee") of one-half of one percent (1/2%) per annum (computed on the basis of the actual number of days elapsed over a 365 or 366 (as the case may be) day year) of the average daily unused portion of the Available Commitment, payable quarterly in arrears on each Quarterly Payment Date after the Closing Date, commencing September 30, 1996. (b) Letter of Credit Fees. The Borrower shall pay the Agent Bank and the Lenders the Letter of Credit Fees in accordance with the provisions of Section 3.7. -16- 2.4 Interest. The outstanding principal amount of the Notes shall bear interest on the unpaid principal amount thereof until paid in full at a rate or rates per annum as provided in this Section 2.4. The applicable interest rate shall, at the option of the Borrower, be the Base Rate or the Eurodollar Rate, plus the applicable margin specified herein -- the "Applicable Margin", and shall be determined in the following manner. (a) Base Rate Option. If the Borrower selects the Base Rate option, interest on the outstanding principal amount of the Notes shall be payable monthly in arrears on the last Business Day of each month, commencing on the last Business Day of the first full month following the Closing Date. Interest shall be computed on the basis of the actual number of days elapsed over a 365 or 366 (as the case may be) day year and shall be equal to the Base Rate, plus the Applicable Margin (the "Variable Rate"), determined quarterly based on the ratio (the "Leverage Ratio") of Total Consolidated Debt to Consolidated EBITDA for the preceding four Quarters minus Capital Expenditures as follows: Total Consolidated Debt/ Consolidated EBITDA (for the preceding four Applicable Margin Quarters) minus Capital Expenditures (per annum) - ------------------------------------------- ----------------- Greater than or equal to 2.00 1.50% Less than 2.00 but greater than or equal to 1.00 1.00% Less than 1.00 0.75% Quarterly changes, if any, in the Applicable Margin under this Section 2.4(a) shall become effective as follows: The Borrower shall provide the Agent Bank with Quarterly Financial Statements (duly certified by an Officer of the Borrower) and an Officer's Certificate within forty-five (45) days after the close of each Quarter other than the fourth Quarter of each year, and within ninety (90) days after the close of the fourth Quarter of each year, setting forth the computations and information as of the end of the preceding Quarter necessary to adjust the Applicable Margin. Any change to the Applicable Margin with respect to the Base Rate shall be effective as of the next succeeding Business Day following the day on which the Quarterly Financial Statements and applicable Officer's Certificate are delivered. Notwithstanding the foregoing, in the event that the Quarterly Financial Statements and applicable Officer's Certificate are not delivered within forty-five (45) days (or within ninety (90) days with respect to the fourth Quarter), the Variable Rate shall be the Base Rate plus one and one half percent (1.5%) per annum, effective on the -17- expiration of such forty-five (45) day or ninety (90) day period, as the case may be, and continuing until such Quarterly Financial Statements and applicable Officer's Certificate are delivered to the Agent Bank as aforesaid. (b) Eurodollar Rate Option. (i) Notwithstanding the foregoing, upon receipt by the Agent Bank of at least three (3) Eurodollar Business Days' written notice from the Borrower, the Borrower may elect with respect to a principal amount of the Loans designated in such notice and equal to at least $2,000,000 or an integral multiple thereof, for the Interest Period next ensuing, which period shall equal one (1), two (2), three (3) or six (6) months as designated by the Borrower, an interest rate based on the Eurodollar Rate (computed on the basis of a 360 day year). Interest on Eurodollar Loans shall be equal to the Eurodollar Rate, plus the Applicable Margin computed with reference to the Leverage Ratio as follows: Total Consolidated Debt/Consolidated EBITDA (for the preceding four Applicable Margin Quarters) minus Capital Expenditures ----------------- ------------------------------------ (per annum) Greater than or equal to 2.00 2.50% Less than 2.00 but greater than or equal to 1.00 2.00% Less than 1.00 1.75% Quarterly changes, if any, in the Applicable Margin under this Section 2.4(b) shall become effective as follows: The Borrower shall provide the Agent Bank with Quarterly Financial Statements (duly certified by an Officer of the Borrower) and an Officer's Certificate within forty-five (45) days after the close of each Quarter other than the fourth Quarter of each year, and within ninety (90) days after the close of the fourth Quarter of each year, setting forth the computations and information as of the end of the preceding Quarter necessary to adjust the Applicable Margin. Any change to the Applicable Margin with respect to the Eurodollar Rate shall be effective as of the next succeeding Business Day following the day on which the Quarterly Financial Statements and the applicable Officer's Certificate are delivered. Notwithstanding the foregoing, in the event that the Quarterly Financial Statements and applicable Officer's Certificate are not delivered within forty-five (45) days (or within ninety (90) days with respect to the fourth Quarter), interest on Eurodollar Loans shall be the Eurodollar Rate plus two and one-half percent (2.50%) per annum, effective on the expiration of such forty-five (45) or ninety (90) day period, as the case may be, and continuing until such Quarterly Financial Statements -18- and applicable Officer's Certificate are delivered to the Agent Bank as aforesaid. (ii) Provisions Applicable to Eurodollar Loans. (1) The Borrower may not convert any outstanding Loan to a borrowing based on the Eurodollar Rate or extend a Eurodollar Rate pricing option if either prior to or after giving effect to such conversion or extension there shall exist an Event of Default. The interest rate so designated shall remain in effect for the Interest Period. If an Interest Period would otherwise commence on a day which is not a Eurodollar Business Day, such Interest Period shall commence on the next Eurodollar Business Day. (The principal accruing interest pursuant to such election shall be deemed re-borrowed on the last day of the Interest Period, and shall bear interest in the manner designated in this Section 2.4(b)). Notwithstanding any provisions of this Agreement to the contrary, no more than four (4) Eurodollar Rate options may be elected by the Borrower and be outstanding at any time. (2) In the event that the Borrower elects a Eurodollar Rate pricing option, interest shall be payable on the last day of each relevant Interest Period, except that if the Borrower has selected an Interest Period equal to six (6) months, interest shall be payable on the 90th day and on the 180th day of such Interest Period. It is further agreed that (A) if an Interest Period with respect to a Eurodollar Loan would otherwise end on a day which is not a Eurodollar Business Day, such Interest Period shall be extended to the next Eurodollar Business Day, unless such next Eurodollar Business Day shall fall in the next calendar month in which event such Interest Period shall end on the immediately preceding Eurodollar Business Day, (B) the principal amount designated in the notice requesting a Eurodollar Rate pricing option, when added to the principal amount of all then outstanding Loans bearing interest at a Eurodollar Rate shall not exceed the outstanding principal amount of the Notes reduced by any installment of principal falling due within any Interest Period or Periods and (C) no Interest Period beginning prior to the Conversion Date or the Maturity Date shall end later than the Conversion Date or the Maturity Date, as the case may be. (3) As used herein, the term "Eurodollar Rate" shall mean the rate per annum (rounded upwards if necessary to the nearest 1/100 of 1%) determined by the Agent Bank to be equal to the quotient of (A) the offered rate for deposits in U.S. Dollars (having a term comparable to the Interest Period designated by the Borrower and in an amount comparable to the principal amount of the Loan to be borrowed at such alternate rate during such Interest Period) in the London interbank market which appears -19- on the Telerate Screen two (2) Eurodollar Business Days prior to the first day of the relevant Interest Period, divided by (B) 1.00 minus the Reserve Percentage for Loans to be borrowed at such alternate rate for the relevant Interest Period. "Telerate Screen" means the display designated as page 3750 on the Telerate Service (or such other page as may replace such page for the purpose of displaying Eurodollar Rates of major banks). (4) "Reserve Percentage" shall mean the maximum applicable percentage rate stated in Regulation D of the Board of Governors of the Federal Reserve System at which reserves are required to be maintained during such Interest Period against "Eurocurrency Liabilities" (or if more than one such percentage rate is applicable during such period, the maximum percentage rate for such period) or, if such regulations or the definition of "Eurocurrency Liabilities" is modified, and as long as a Lender may be required to maintain reserves against a category of liabilities which includes Eurodollar deposits or a category of assets which includes Eurodollar loans, the maximum percentage rate at which reserves are required or elected generally in respect of such liabilities or assets to be maintained on such category. As of the date of this Agreement, the Reserve Percentage is zero. The Borrower agrees to pay each Lender on demand such additional sums as will compensate such Lender for the effect of any change in such reserve requirements. The affected Lender shall certify the amount of such cost to the Borrower and such certification shall be conclusive in the absence of manifest error. (5) It is hereby acknowledged that the Borrower may call the Agent Bank on or before the date on which notice of an elective interest rate is to be delivered by the Borrower in order to receive an indication of the Eurodollar Rates then in effect but that such projection shall not be binding upon the Borrower, the Agent Bank or any Lender or affect the Eurodollar Rates actually in effect two (2) Eurodollar Business Days prior to the first day of said Interest Period. Unless subsequent notice is received by the Agent Bank, the interest rate shall return to the interest rate based on the Variable Rate applicable to such Loan after the end of any relevant Interest Period for which the Eurodollar Rate pricing option was elected by the Borrower. (6) The Borrower hereby agrees to pay each Lender or the Agent Bank on demand such additional sums as are necessary to reimburse each such Lender or the Agent Bank for such Lender's or Agent Bank's costs directly relating to the Loans or the Letters of Credit in complying during the term of this Agreement with all present and future laws, executive orders and regulations of the governments of the United States and the United Kingdom and of any regulatory or administrative agency thereof (including the Bank of England and the Board of Governors of -20- the Federal Reserve System) which after the date of this Agreement impose, modify or deem applicable any reserve, asset, special deposit, deposit insurance or assessment, capital or similar requirements relating to (A) any category of liabilities which includes deposits by reference to which a Eurodollar Rate is to be determined as provided in the definition of such term or (B) any category of extensions of credit or other assets which include any portion of the Loans as to which an alternate rate has been elected (hereinafter "Additional Requirements"), or which in the future subject a Lender or the Agent Bank to any tax with respect to the execution and delivery of this Agreement or change the basis of taxation of payments to a Lender or the Agent Bank of principal or interest or fees payable under this Agreement (except for changes in the rate of tax on the net income of such Lender or the Agent Bank imposed by the United States or any other government having jurisdiction or any political subdivision or taxing authority thereof) (hereinafter included in Additional Requirements). A Lender or the Agent Bank shall certify the amount of such cost to the Borrower and such certification shall be conclusive in the absence of manifest error. (7) In the event that the Borrower shall have requested Loans based on a Eurodollar Rate and the Agent Bank, or any Lender after consultation with the Agent Bank, shall have reasonably determined that quotations of interest rates for the relevant deposits referred to in the definition of Eurodollar Rate are not being provided in the relevant amounts or for the relevant Interest Periods for purposes of determining Eurodollar Rates, or that, by reason of circumstances affecting the London Inter-Bank Eurocurrency Market, adequate and reasonable means do not exist for ascertaining Eurodollar Rates applicable to such deposits for the specified Interest Period, the Agent Bank shall promptly give notice of such determination to the Borrower and no Loans based on Eurodollar Rates shall be available for the specified Interest Period. Such determination by the Agent Bank hereunder shall be conclusive and binding upon the Lenders and the Borrower in the absence of manifest error. (8) Further, in the event that by reason of any change in any law, regulation or official directive, or in the interpretation thereof by any governmental body charged with the administration thereof, a Lender becomes subject to restrictions on the amount of any category of deposits or other liabilities of such Lender which includes deposits by reference to which Eurodollar Rates are determined as provided herein or a category of extensions of credit or other assets of such Lender which includes any portion of the Loans as to which Eurodollar Rates have been elected, then, if such Lender so elects by notice to the Borrower setting out the basis of such election, the obligation of the Lenders to make additional Loans based on Eurodollar Rates shall be suspended until such change ceases to be -21- in effect, and during such suspension a Lender's portion of all Loans requested to be made based on Eurodollar Rates shall instead bear interest at the applicable Variable Rate. (9) Notwithstanding anything herein contained to the contrary, if, prior to or during any Interest Period with respect to which a Eurodollar Rate is in effect, any change in any law, regulation or official directive, or in the interpretation thereof, by any governmental body charged with the administration thereof, shall make it unlawful for a Lender to fund or maintain its funding in Eurodollars of any portion of the principal amount of a Note or otherwise to give effect to such Lender's obligations as contemplated hereby, (A) the Agent Bank may by written notice to the Borrower declare the Lenders' obligations in respect of the Eurodollar Rate pricing option to be terminated forthwith, (B) the Eurodollar Rate option with respect to the Lenders shall forthwith cease to be in effect, and interest shall from and after such date be calculated at the interest rate based on the Base Rate otherwise applicable and (C) the Borrower hereby agrees to indemnify each Lender against any loss or expense suffered by it in liquidating prior to maturity Eurodollar deposits which correspond, directly or indirectly, to its pro rata share of the principal amount of the Note to which a Eurodollar Rate was applicable. Each Lender shall certify the amount of such loss or expense to the Borrower and such certification shall be conclusive in the absence of manifest error. (10) The Lenders have indicated that if the Borrower elects a Eurodollar Rate, the Lenders may wish to purchase in the London Inter-Bank Eurocurrency Market one or more Eurodollar deposits in order to fund or maintain their funding of their pro rata shares of the principal amount of the Note to which a Eurodollar Rate pricing option is applicable during the Interest Period in question; it being understood that the provisions of this Agreement relating to such funding are included only for the purpose of determining the rate of interest to be paid under a Eurodollar Rate pricing option and any other amounts owing under this Section 2 with respect to Eurodollar Loans. (c) Default Rate. After (i) maturity of the Loans, whether scheduled, by acceleration or otherwise, and whether prior to or after a judgment against the Borrower or (ii) the occurrence of, and during the continuance of, an Event of Default under Section 8.1, the Borrower shall pay to the Lenders, on demand, an additional amount as a premium on all unpaid amounts from the due date until paid in full at a rate or rates per annum equal to two (2) percentage points above the rate or rates otherwise applicable in accordance with the terms of this Agreement. -22- 2.5 Reserve Requirements; Change in Circumstances. If, during the term of this Agreement, a Lender shall reasonably have determined that the adoption after the date hereof of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by a Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency has or would have the effect of reducing the rate of return on such Lender's capital as a consequence of its obligations hereunder to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Agent Bank) of a written request therefor (which shall be conclusive in the absence of manifest error), the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. 2.6 Voluntary and Mandatory Prepayments; Commitment Reductions (a) Voluntary Prepayments; Commitment Reductions. The Borrower shall be permitted to prepay the Loans from and after the Conversion Date in whole or in part, without penalty or premium, or reduce or terminate the Available Commitment or the Total Commitment, as the case may, be at any time, without penalty or premium except as otherwise stated herein, upon the following terms: (i) The Borrower shall provide the Agent Bank with at least one (1) Business Day's prior written notice of its intention to prepay. (ii) Each prepayment shall be made on a pro rata basis to the Lenders. (iii) The Available Commitment or the Total Commitment, as the case may be, may be reduced (pro rata between the Lenders) or terminated upon at least one (1) Business Day's notice; provided, however, that such Commitment may not be reduced below the outstanding principal amounts of the Loans on such date. -23- (b) Mandatory Prepayments. In addition to the Borrower's right of voluntary prepayment: (i) From and after the Conversion Date, the Borrower shall make mandatory prepayments of the Loans to the Lenders, on a pro rata basis, in an amount equal to fifty percent (50%) of Excess Cash Flow for the immediately preceding fiscal year. Such payments shall be made annually, no later than May 1 of each year in respect of the prior fiscal year, commencing on May 1, 2,000 in respect of fiscal year 1999. (ii) If at any time the outstanding principal amount of the Loans exceeds the Available Commitment or the Total Commitment, as the case may be, the Borrower shall make mandatory prepayments of the Loans to the Lenders, on a pro rata basis, within two (2) Business Days thereof, in such amounts as may be necessary to eliminate such excess. (iii) The Borrower shall make mandatory prepayments of the Loans to the Lenders, on a pro rata basis, in an amount equal to 100% of the net cash proceeds (after payment of related taxes and expenses) from the sale of its assets outside the ordinary course of business. (iv) From and after the Conversion Date, the Borrower shall make mandatory prepayments of the Loans to the Lenders, on a pro rata basis, in an amount equal to 100% of the net cash proceeds obtained by the Borrower through the issuance of Approved Debt. (c) Application of Prepayments. Voluntary and mandatory prepayments made to the Lenders pursuant to this Section 2.6 shall be made on a pro rata basis. All prepayments shall be applied by each Lender first to late charges and other costs, then to accrued but unpaid fees, then to accrued but unpaid interest and thereafter in reduction of outstanding principal amounts in the inverse order of maturity. (d) Prepayment of Eurodollar Loans. In the event that the Borrower makes a prepayment (whether voluntary or mandatory) of any portion of a Eurodollar Loan on a day other than the last day of an Interest Period with respect thereto, the Borrower will pay to the Lenders, upon demand, an amount or amounts equal to the amount, if any, by which the interest which would have been payable on the last day of the relevant Interest Period exceeds the amount of interest (as reasonably determined by each such Lender) that each such Lender would have obtained by placing its pro rata share of the amount so prepaid on deposit in the London Inter-Bank Eurocurrency market for a period commencing on the date following such prepayment and ending on the last day of such Interest Period. The -24- respective Lender's calculation of such amounts shall be conclusive in the absence of manifest error. (e) Permanent Reduction of Commitment. Any mandatory prepayment shall permanently reduce the Available Commitment or Total Commitment, as the case may be, on a pro rata basis, by the amount of such prepayment. 2.7 Reimbursement of Certain Expenses. In addition to amounts hereinabove set forth, the Borrower agrees to pay to the Lenders with respect to the Loans, on a pro rata basis, an amount certified by the Agent Bank to be sufficient to compensate the Lenders for all actual losses, reasonable out-of-pocket expenses, funding expenses or costs incurred in connection with the Borrower's (a) failure to borrow or prepay a Eurodollar Loan pursuant to a written notice given hereunder with respect thereto or (b) repayment upon acceleration or prepayment of principal bearing interest at a Eurodollar Rate. The certification by the Agent Bank hereunder shall be conclusive in the absence of manifest error. 2.8 Security. The Notes and other obligations of the Borrower shall be secured by and entitled to the benefits of (i) the Security Agreements, (ii) the Guaranty Agreements, (iii) the Pledge Agreements, (iv) the Blocked Account Agreements and (v) the Assignments of Tenant's Interest Under Leases. 2.9 Payments Among the Agent Bank and the Lenders. (a) Except as otherwise provided herein, the Borrower agrees that: (A) each Loan hereof will be made by the Lenders to the Agent Bank for the account of the Borrower and each payment of the Commitment Fee shall be made to the Agent Bank for the account of the Lenders pro rata in accordance with their respective percentages of the Available Commitment or the Total Commitment, as the case may be, (B) payments and prepayments of principal or interest will be made by the Borrower to the Agent Bank for the account of the Lenders pro rata in accordance with the unpaid principal amount of the Loans, as applicable, and (C) any reduction in the Available Commitment or the Total Commitment, as the case may be, shall reduce each Lender's Commitment pro rata in accordance with its percentage of the Available Commitment or the Total Commitment, as the case may be. In the event any payments to the Lenders by the Agent Bank described in Section 2.9(a)(B) is not received by any Lender from the Agent Bank on the Business Day immediately following the date the Agent Bank receives such payment from the Borrower, the Agent Bank shall owe such Lender the -25- amount of such payment, together with interest thereon, for each day from the date such amount is in possession of the Agent Bank on behalf of the Lenders until the date such amount is paid by the Agent Bank to the Lenders, at the rate computed by taking the Base Rate in effect from time to time and increasing it by 1.5%. The Agent Bank shall be deemed to be delinquent with respect to such payment until all payments to the Lenders have been paid in full. (b) The Agent Bank shall have no obligation to fund any amounts to the Borrower pursuant to a Loan Request unless such amounts are actually received from the Lenders. In the event funds are not received from a Lender on the Business Day immediately prior to a Borrowing Date, the Agent Bank may assume that such Lender will make such funds available to the Agent Bank on the Borrowing Date (if such Lender has not notified the Agent Bank that it will not make funds available to the Agent Bank) and the Agent Bank, in its sole discretion, may, but shall not be obligated to, in reliance upon such assumption, make available to the Borrower on the Borrowing Date a corresponding amount. If and to the extent such Lender shall not have so made such funds available to the Agent Bank and the Agent Bank has made a corresponding amount available to the Borrower, such Lender (a "Delinquent Lender") agrees to repay to the Agent Bank such corresponding amount within one (1) Business Day of such advance to the Borrower. Such amount shall be paid by the Delinquent Lender, together with interest thereon, for each day from the date such amount is advanced to the Borrower by the Agent Bank on behalf of such Delinquent Lender until the date such amount is repaid to the Agent Bank, at the rate computed by taking the Base Rate in effect from time to time and increasing it by 1.5%. If such Delinquent Lender shall repay to the Agent Bank such corresponding amount, such amount so repaid shall constitute a Loan under such Delinquent Lender's Commitment. If such Delinquent Lender does not pay such corresponding amount within one (1) Business Day, the Agent Bank shall be entitled to all interest earned thereon through the date of the payment of any such amount by such Delinquent Lender. A Delinquent Lender shall be deemed to have assigned any and all payments due to it from the Borrower, whether on account of outstanding principal, interest, fees or otherwise to the nondelinquent Lenders for application to, and reduction of, their respective pro rata share of all outstanding Loans to the extent of the delinquency. The Delinquent Lender hereby authorizes the Agent Bank to distribute such payments to the nondelinquent Lenders in proportion to their respective pro rata shares of all outstanding Loans. A Delinquent Lender shall be deemed to have satisfied in full a delinquency when and if, as a result of application of the assigned payment to all outstanding Loans of the nondelinquent Lenders, the Lenders' respective pro rata shares of all outstanding Loans have returned to those in effect -26- immediately prior to such delinquency and without giving effect to the nonpayment causing such delinquency. (c) Nothing contained in this Section 2.9 shall be construed to relieve any Lender of its obligation to make funds available to the Agent Bank under this Agreement except as otherwise expressly provided herein, nor to relieve the Borrower of its obligation to make any payment when due. SECTION 3. LETTERS OF CREDIT 3.1 Availability of Letters of Credit. In addition to cash advances under the Loans, the Borrower may draw on the Available Commitment or the Total Commitment, as the case may be, by requesting the issuance by the Agent Bank, for the account of the Borrower, of one or more letters of credit (individually, a "Letter of Credit" and collectively the "Letters of Credit") upon terms and in form reasonably satisfactory to the Agent Bank; provided that the Agent Bank shall have no obligation to issue a Letter of Credit if, after giving effect to such issuance the aggregate principal amount of all Reimbursement Obligations would, when added to the then outstanding principal amount of the Loans, exceed the Available Commitment or the Total Commitment, as the case may be. The Letters of Credit shall have terms which do not extend beyond the Maturity Date and shall not be issued or renewed for the purpose of supporting or permitting repayment of any Indebtedness for borrowed money or similar obligations of the Borrower (except for those set forth in Schedule 3.1 or those reasonably acceptable to the Agent Bank). At no time shall the aggregate principal amount of all Reimbursement Obligations in respect of all outstanding Letters of Credit exceed $4,000,000. 3.2 Letter of Credit Request. Each request by the Borrower for the issuance of a Letter of Credit (a "Letter of Credit Request") shall be made in writing, in a form prescribed by the Agent Bank from time to time. Each Letter of Credit Request shall be submitted at least five (5) Business Days before the day on which the Letter of Credit is to be issued. Each Letter of Credit Request shall contain the information and other evidence reasonably required by the Agent Bank to establish that all conditions precedent to the requested Letter of Credit have been satisfied. Each Letter of Credit Request shall include an express representation and warranty (and shall be deemed to include the representation and warranty if it is not expressly included) by the Borrower that (i) all of the representations and warranties set forth in Section 5 hereof continue to be true and correct in all material respects on the date of the Letter of Credit Request, (ii) all conditions precedent to the requested Letter of Credit have been satisfied as of the time the Letter of Credit Request is submitted to the Agent Bank and -27- (iii) the business and financial ratios and covenants set forth in Section 7.19 have been met and (iv) no Event of Default or Potential Event of Default exists. The Borrower shall attach to each Letter of Credit Request a form of the Letter of Credit, issuance of which is requested by the Borrower, which form shall have been substantially agreed upon by the intended beneficiary of such Letter of Credit. 3.3 Utilization of Commitment. Upon the issuance of any Letters of Credit, on each day during the period commencing with the issuance by the Agent Bank of any such Letters of Credit and until the time on which such Letters of Credit shall have expired or have been terminated or until all Reimbursement Obligations of the Borrower have been paid, whichever is earlier, the Available Commitment or the Total Commitment, as the case may be, shall be reduced by the amount of the face amount of the Letters of Credit for all purposes hereof. 3.4 Reimbursement Obligations. Amounts paid by the Agent Bank upon any drawing under a Letter of Credit shall be reimbursed by the Borrower on or before 1:00 p.m. New York City time on the date of honoring such drawing (the "Reimbursement Time") as provided in Section 3.5. The Borrower's obligation to reimburse the Agent Bank under this Section 3.4 for payments and disbursements made by the Agent Bank in respect of each drawing shall be absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which the Borrower may have or have had against the Agent Bank or the Lenders (other than any set-off, counterclaim or defense arising out of an act or acts of gross negligence or willful misconduct by the Agent Bank or the Lenders), including any defense based on (a) the failure of any presentation or demand for payment under any Letter of Credit to conform to the terms of any Letter of Credit if the Borrower has requested in writing that the Agent Bank honor such Letter of Credit despite the non-conformance; (b) any nonapplication or misapplication by any beneficiary of the proceeds of any Letter of Credit; (c) the legality, validity, regularity or enforceability of any Letter of Credit; (d) any amendment or waiver of or any consent to or departure from this Agreement; (e) any exchange, release or non-perfection of any Collateral, or any release, amendment or waiver of or consent to or departure from any guaranty; (f) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against the beneficiary or any transferee of any Letter of Credit (or any entities for whom such beneficiary or any such transferee may be acting), or any other Person, whether in connection with this Agreement, the transaction in respect of which such Letter of Credit was issued, or any unrelated transaction; (g) any presentation or demand under or transfer of any Letter of Credit or any statement or other document presented under any Letter of Credit proving to be unauthorized, forged, fraudulent, invalid or insufficient -28- in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; and (h) any law, order, regulation or custom in effect in the places of negotiation or payment of any Letter of Credit. 3.5 Fulfillment of Reimbursement Obligations. The Borrower's obligation to reimburse the Lenders under Section 3.4 for any amounts paid in respect of a drawing shall be fulfilled as follows: (a) Subject to fulfillment of each and every condition provided in Section 4 hereof by the Reimbursement Time, the amounts paid by the Agent Bank under such drawing shall be treated as a Loan under this Agreement and in such event the Lenders agree to fund such Loan pro rata. (b) If clause (a) above cannot apply because the conditions of Section 4 are not met, the Borrower shall make a payment in cash to the Agent Bank, to be applied pro rata among the Lenders in accordance with Section 3.11, on or before the Reimbursement Time, in an amount equal to the drawing under the Letters of Credit. 3.6 Interest on Amounts Advanced under Letter of Credit Drawings. On each day during the period commencing with the issuance by the Agent Bank of any Letter of Credit and until such Letter of Credit shall have expired or been terminated and until all Reimbursement Obligations have been paid, the Available Commitment or the Total Commitment, as the case may be, shall be deemed to be utilized for all purposes hereof, in an amount equal to each Lender's percentage of the Available Commitment or the Total Commitment, as the case may be, of the then undrawn face amount of each Letter of Credit and any unpaid Reimbursement Obligation. The interest rate applicable to such amounts shall be determined by reference to Section 2.4 hereof. 3.7 Letter of Credit Fees. Upon the issuance of each Letter of Credit, the Borrower shall pay to the Agent Bank a letter of credit issuance fee (the "Issuance Fee") of $500. The Borrower shall pay to the Agent Bank, for the benefit of the Lenders, on a pro rata basis, an additional Letter of Credit fee (the "Maintenance Fee", together with the Issuance Fee, the "Letter of Credit Fees") quarterly in advance, beginning with the last day of the first Quarter in which the Agent Bank has issued a Letter of Credit. The Letter of Credit Fee shall be paid to the Agent Bank on the daily undrawn face amount of each Letter of Credit outstanding for the period from and including the date of issuance of such Letter of Credit to and including the date of expiration or termination thereof, at a rate per annum based upon the Leverage Ratio as follows: -29- Total Consolidated Debt/ Fee as a % of Consolidated EBITDA Face Amount of (for the preceding four Quarters) minus Letter of Credit Capital Expenditures ---------------- - --------------------------------------- (per annum) Greater than or equal to 2.00 2.25% Less than 2.00 but greater than or equal to 1.00 1.75% Less than 1.00 1.50% 3.8 Additional Conditions to Issuance of Letters of Credit. The issuance by the Agent Bank of each Letter of Credit shall further be subject to the conditions precedent that (a) such Letter of Credit be in such form and contain such terms as reasonably required by the Agent Bank and be used only for Permitted Uses and (b) the Borrower shall have paid to the Agent Bank for its own account the Issuance Fee in connection with issuing each such Letter of Credit. 3.9 Additional Costs in Respect of Letters of Credit. If as a result of any new law, rule or regulation or any change in an existing law, rule or regulation there shall be imposed, modified or deemed applicable any tax (except for taxes imposed on a Lender's or Agent Bank's net income by the United States or any other government having jurisdiction or any political subdivision or taxing authority thereof), reserve, special deposit or similar requirement against or with respect to or measured by reference to any Letter of Credit issued or to be issued by the Agent Bank hereunder and the result shall be to increase the cost to the Agent Bank of issuing or maintaining such Letter of Credit or such participation, or reduce any amount receivable by the Agent Bank hereunder in respect of such Letter of Credit or such participation, then, upon demand by the Agent Bank, the Borrower agrees to pay immediately to the Agent Bank such additional amounts as the Agent Bank shall from time to time specify as necessary to compensate the Agent Bank for such increased costs or reductions in amounts. A statement as to such increased costs or reductions in amounts incurred by the Agent Bank, submitted to the Borrower, shall be conclusive, absent manifest error, provided that such costs or reductions are determined on a reasonable basis. 3.10 Commercial Practices in Respect of Letters of Credit. Notwithstanding anything to the contrary in this Agreement, the Agent Bank shall have no obligation to issue any Letter of Credit if, in its sole determination, such issuance would conflict with or violate any applicable law. All Letters of Credit shall be construed in accordance with -30- and shall be governed by the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce, Publication 500 (1993 revision) (the "UCP") and, to the extent not inconsistent with the UCP, the U.C.C. Without affecting any rights the Agent Bank or the Lenders may have under applicable law (including the UCP), the Borrower agrees that neither any Lender or the Agent Bank nor any of their respective officers or directors shall be liable or responsible for, and the obligations of the Borrower to the Agent Bank or the Lenders hereunder shall not in any manner be affected by: (a) the use which may be made of any Letter of Credit or the proceeds thereof by the beneficiary thereof or any other Person; (b) the validity, sufficiency or genuineness of documents other than the Letters of Credit, or of any endorsement(s) thereon, even if such documents should, in fact, prove to be in any or all respects, invalid, insufficient, fraudulent or forged; or (c) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit except that the Borrower shall have a claim against the Agent Bank, and the Agent Bank shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves are caused by the Agent Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit complied with the terms of such Letter of Credit or the Agent Bank's willful failure to pay under such Letter of Credit after the presentation to it of documents strictly complying with the terms and conditions of such Letter of Credit. In furtherance and not in limitation of the foregoing, the Agent Bank may accept documents that appear on their face to be in order without responsibility for further investigation, regardless of any notice or information to the contrary. 3.11 Lender's Participation in Liability. Each Lender hereby agrees that upon the issuance by the Agent Bank of any Letter of Credit, such Lender will automatically acquire a participation under such Letter of Credit in an amount equal to the product of the face amount of the Letter of Credit, multiplied by such Lender's percentage of the Available Commitment or the Total Commitment, as the case may be (the amount of liability of each Lender to the Agent Bank as calculated pursuant to this Section 3.11 being referred to herein as the "Letter of Credit Liability"). Each Lender hereby unconditionally agrees to pay to the Agent Bank at the address of the Agent Bank set forth in this Agreement in immediately available funds (not later than 4:00 p.m. New York City time on the Business Day on which the Agent Bank will send a notice to such Lender that the Agent Bank has paid amounts in respect of a drawing under any Letter of Credit) the amount of such Lender's Letter of Credit Liability specified in such notice, provided that such notice is received by such Lender by not later than 1:00 p.m. New York City time, on such Business Day. Simultaneously with the making of each payment by a Lender to the Agent Bank pursuant to -31- the preceding sentence, the Agent Bank will, automatically and without any further action on the part of the Agent Bank or such Lender, acquire a participation in an amount equal to such payment in the Reimbursement Obligation owing by the Borrower in respect of such drawing and a participation in a percentage equal to such Lender's percentage of the Available Commitment or the Total Commitment, as the case may be, in any interest payable by the Borrower in respect of such Reimbursement Obligation. Each payment received by the Agent Bank in respect of any Reimbursement Obligation (including by way of set-off or application of proceeds or any collateral security for such Reimbursement Obligation) will be promptly paid by the Agent Bank to the Lenders entitled thereto, pro rata, in accordance with the amounts of the Lenders' respective participation in such Reimbursement Obligation. SECTION 4. CONDITIONS PRECEDENT No Lender shall be required to make any Loan or to make any other advance in connection therewith and the Agent Bank shall not be required to issue any Letter of Credit to the Borrower unless the following conditions have been satisfied prior thereto: 4.1 Representations and Warranties; Compliance. All representations and warranties made by the Borrower and the Parent in this Agreement or in the other Loan Documents or otherwise made in writing in connection herewith or therewith shall be true and correct on and as of the Borrowing Date with the same force and effect as though such representations and warranties had been made on and as of the Borrowing Date. All of the agreements, terms, covenants and conditions required by this Agreement and the other Loan Documents to be complied with and performed by the Parent, the Borrower and the Subsidiaries shall have been complied with and performed. 4.2 No Default. No Event of Default shall have occurred and be continuing on and as of the Borrowing Date. 4.3 No Adverse Change; No Litigation. No adverse change in the business, operations, properties or condition (financial or otherwise) of the Borrower, the Parent and the Subsidiaries, taken as a whole, and no other event shall have occurred which creates a Material Adverse Effect. No actions, suits, claims, arbitrations, litigation, proceedings or investigations before or by any arbitrator or Governmental Authority shall have been instituted or threatened to restrain, prohibit, invalidate or otherwise affect the transactions contemplated by this Agreement or the other Loan Documents. -32- 4.4 Authorizations Obtained. All approvals, licenses, authorizations, consents, filings and registrations of or with all Governmental Authorities and other Persons which shall be necessary or which in the reasonable judgment of the Agent Bank or counsel to the Agent Bank shall be desirable in connection with the execution, delivery and performance of this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, shall have been obtained, shall be in form and substance reasonably satisfactory to the Agent Bank and counsel to the Agent Bank, shall have been delivered to the Agent Bank and shall be in full force and effect at and as of such Borrowing Date. 4.5 Documentation and Proceedings. All corporate and legal proceedings and all instruments delivered in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be in form and substance reasonably satisfactory to the Agent Bank and counsel to the Agent Bank, and the Agent Bank and such counsel shall have received all information and copies of all documents (including records of corporate proceedings) which the Agent Bank and such counsel may have reasonably requested in connection herewith or therewith, such documents where appropriate to be certified by proper corporate or Governmental Authorities, including, without limitation, the following: (a) Resolutions of Borrower. Certified copies of resolutions of the Board of Directors of the Borrower authorizing the borrowing contemplated hereby, the creation of a security interest in favor of the Agent Bank in the Collateral owned by the Borrower, and the execution and delivery by the Borrower of this Agreement, the Notes, its Security Agreement and of all other instruments and documents called for hereunder and thereunder to be executed and delivered by the Borrower. (b) Resolutions of Parent. Certified copies of resolutions of the Board of Directors of the Parent authorizing the creation of a security interest in favor of the Agent Bank in the Collateral owned by the Parent, and authorizing the execution and delivery by the Parent of this Agreement, its Guaranty Agreement and its Pledge Agreement, and of all other instruments and documents called for hereunder and thereunder to be executed and delivered by the Parent. (c) Resolutions of Subsidiaries. Certified copies of resolutions of the Board of Directors of each Subsidiary authorizing the creation of a security interest in favor of the Agent Bank in the Collateral owned by each such Subsidiary, and authorizing the execution and delivery by each Subsidiary of its Guaranty Agreement and Security Agreement, and of all other instruments and documents called for hereunder and thereunder to be executed and delivered by each such Subsidiary. -33- (d) Articles of Incorporation and Bylaws. Copies of the articles of incorporation and bylaws of each of the Borrower, the Parent and the Subsidiaries, certified by each such corporation's respective corporate secretary to be true and complete. (e) Certificates of Good Standing. Certificates of good standing of each of the Borrower, the Parent and the Subsidiaries in the state in which it is incorporated and in each of the states listed on Schedules 5.1(a), 5.1(b) and 5.2, respectively, dated as of a date within fifteen (15) days prior to the Closing Date. (f) Officer's Certificates of Borrower and Parent. An Officer's Certificate of each of the Borrower and the Parent, dated the Borrowing Date and substantially in the form attached hereto as Schedule 4.5(f), certifying in form and substance satisfactory to the Agent Bank that the conditions precedent specified in Sections 4.1 through 4.5 hereof have been satisfied, and that the representations and warranties specified in Sections 5.1 through 5.35 hereof are true and correct at and as of such Borrowing Date. (g) Incumbency Certificates. Certificates of incumbency showing the signatures and corporate authority of the persons executing Loan Documents on behalf of each of the Borrower, the Parent and any Subsidiary. (h) Opinions of Counsel. The opinions of counsel to the Borrower, the Parent, and the Subsidiaries dated the Closing Date and addressed to the Agent Bank, substantially in the forms of Exhibit G hereto. On subsequent Borrowing Dates, the Borrower shall deliver updates of such opinions in the event the funding on such Borrowing Date (i) is in an amount equal to or greater than $5,000,000, (ii) is in an amount greater than $2,000,000 and is for the purpose of making a Permitted Acquisition or (iii) is being made within one hundred and eighty (180) days after the occurrence of an Event of Default which has been cured in accordance with this Agreement. (i) Notes. The fully executed Notes. (j) Guaranty Agreements. The fully executed Guaranty Agreements from the Parent and each of the Subsidiaries. (k) Pledge Agreements. The fully executed Pledge Agreements (together with the original stock certificates and assignment powers required thereunder and any appropriate Federal Reserve Forms U-1) from the Parent and the Borrower. -34- (l) Security Agreements. The fully executed Security Agreements from the Parent, the Borrower and each of the Subsidiaries. (m) Blocked Account Agreements. The fully executed Blocked Account Agreements from the Parent, the Borrower and each of the Subsidiaries. (n) U.C.C Financing Statements. U.C.C.-1 financing statements required under the Security Agreements, all of which financing statements shall be filed in the appropriate jurisdictions. (o) U.C.C., Tax Lien and Judgment Searches. Such title reports and lien and judgment searches as are necessary to demonstrate that the title of each of the Borrower, the Parent and the Subsidiaries to the Collateral is free and clear of all Liens except Permitted Liens, that all U.C.C.-1 financing statements required to perfect the security interests of the Agent Bank have been duly filed in the appropriate offices, and that all pledges of uncertificated securities, if any, included in the Collateral have been duly registered, so that, when the Loans are advanced, the security interests of the Agent Bank in the Collateral will be valid, perfected and of first priority. (p) Insurance Policies or Certificates. Insurance binders evidencing that the insurance required by Sections 6.14 and 6.22 has been obtained. (q) Mortgage and Collateral Assignments of Leases. Assignments of Tenant's Interest under Leases with respect to the offices of the Borrower and the Subsidiaries. If the Agent Bank requests, any Assignment of Tenant's Interest Under Leases shall be recorded in the appropriate land record offices unless to do so would cause a breach of a lease subject to such Assignment of Tenant's Interest Under Leases. The Borrower shall have executed and delivered a mortgage in favor of the Agent Bank as the first mortgagee, covering each parcel of Owned Real Property, which such mortgage shall be recorded among the land records of the jurisdiction(s) in which the Owned Real Property is located. (r) Landlords'/Mortgagees' Waivers. A Landlord's Waiver and Consent, executed by each landlord of the offices of the Borrower and the Subsidiaries, subject to the provisions of Section 6.15. The waiver shall include a consent to the Assignment of the Tenant's Interest Under Leases and shall assure the Agent Bank of its ability to gain access to such premises and remove the Collateral without interference by the landlord, even if the Borrower is in default under any leases or mortgages (or deeds of trust) affecting such premises. -35- (s) Collateral Audit Report. An audit report prepared by an independent certified public accounting firm selected by the Agent Bank as to the existence and value of the Collateral, which audit report shall be reasonably satisfactory to the Agent Bank. (t) Repayment of Existing Indebtedness. Written evidence satisfactory to the Agent Bank that (i) all of the Existing Indebtedness, including, without limitation, all principal, interest, costs and expenses thereon, has been fully and finally paid, (ii) no obligations are due and owing by the Borrower to any holder of Existing Indebtedness and (iii) all liens in connection with the Existing Indebtedness have been fully released by appropriate UCC-3 termination statements. 4.6 Recurring Security Services Contracts. The Agent Bank shall be satisfied that all of the Recurring Security Services Contracts have been Stamped within sixty (60) days after the Closing Date. 4.7 Non-U.S. Subsidiaries. The Agent Bank shall be satisfied that the Non-U.S. Subsidiaries have been fully dissolved on or before December 31, 1996. SECTION 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lenders and the Agent Bank to enter into this Agreement and to make the Loans and issue the Letters of Credit as herein provided, the Borrower and the Parent, jointly and severally, hereby make the following representations and warranties, which representations and warranties shall survive the execution and delivery of this Agreement and of the Notes and shall not be affected or waived by any inspection or examination made by or on behalf of the Agent Bank or the Lenders: 5.1 Corporate Status. (a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the full power and authority, corporate and otherwise, to own, operate and lease its properties, to carry on its business as currently conducted, to execute and deliver this Agreement, the Notes, its Security Agreement and the other Loan Documents to which it is a party, and to perform all of its obligations under all such agreements and documents. The Borrower is duly qualified to conduct business as a foreign corporation and is in good standing in the states listed on Schedule 5.1(a) hereto. The Borrower is not qualified to conduct business in any other jurisdiction and there is no state, country or -36- territory wherein the absence of licensing or qualification as a foreign corporation has had or would result in a Material Adverse Effect. (b) The Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the full power and authority, corporate and otherwise, to own, operate and lease its properties, to carry on its business as currently conducted, to execute and deliver this Agreement, its Guaranty Agreement, its Pledge Agreement and the other Loan Documents to which it is a party, and to perform all of its obligations under all such agreements and documents. The Parent is duly qualified to conduct business as a foreign corporation and is in good standing in the states listed on Schedule 5.1(b) hereto. The Parent is not qualified to conduct business in any other jurisdiction, and there is no state, country or territory wherein the absence of licensing or qualification as a foreign corporation has had or would result in a Material Adverse Effect. 5.2 Subsidiaries. Neither the Parent nor the Borrower has any subsidiaries, any equity investment or other interest in, or has made advances to any corporation, association, partnership, joint venture or other entity, except as described on Schedule 5.2 hereto, which Schedule 5.2 sets forth (a) the authorized capital stock of each Subsidiary and the percentage of the outstanding capital stock of each Subsidiary owned by the Parent or the Borrower, as the case may be, (b) the nature and amount of any such equity investment, other interest or advance, and (c) the state of incorporation of each Subsidiary. All of such shares owned by the Parent or the Borrower, as the case may be, have been duly authorized and validly issued and are fully paid and nonassessable. Other than the Non-U.S. Subsidiaries, each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation, and has the full power and authority, corporate and otherwise, to own, operate and lease its properties, to carry on its business as currently conducted, to execute and deliver its Security Agreement and its Guaranty Agreement, and the other Loan Documents to which it is a party, and to perform all of its obligations under all such agreements and documents. Each Subsidiary is duly qualified to conduct business as a foreign corporation and is in good standing in the states listed on Schedule 5.2 hereto. The Subsidiaries are not qualified to conduct business in any other jurisdictions and there is no state, country or territory wherein the absence of licensing or qualification as a foreign corporation has had or would result in a Material Adverse Effect. The Parent or the Borrower, as the case may be, owns all of the outstanding capital stock of each Subsidiary, free and clear of any Liens, except for Permitted Liens. 5.3 Articles of Incorporation and Bylaws. The Borrower has furnished to the Agent Bank a complete and correct copy of the Articles -37- of Incorporation of each of the Borrower, the Parent and each Subsidiary (other than the Non-U.S. Subsidiaries), as presently in effect, certified as of a recent date by the Secretary of State of their respective states of incorporation, and a complete and correct copy of the bylaws of each of the Borrower, the Parent and each Subsidiary (other than the Non-U.S. Subsidiaries), as currently in effect, certified by their respective corporate secretaries. 5.4 Authorization; No Violations. The execution, delivery and performance of this Agreement, the Notes, and the other Loan Documents by the Borrower, the Parent and any Subsidiary party thereto, the fulfillment of and the compliance with the respective terms and provisions hereof and thereof, and the due consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of the Borrower, the Parent and such Subsidiary (none of which actions have been modified or rescinded, and all of which actions are in full force and effect), and do not and will not: (a) Require any consent or approval of any Person, other than the stockholders of the Borrower, the Parent or such Subsidiary; (b) Conflict with, or violate any provision of, any statute, law, ordinance, rule, regulation, order, writ, judgment, injunction, decree, determination or award of any arbitrator or Governmental Authority having applicability to the Borrower, the Parent or any Subsidiary or any of their respective properties, or any provision of the Articles of Incorporation or bylaws of the Borrower, the Parent or any Subsidiary; (c) Conflict with, or result in any breach of, or constitute a default under, any indenture loan credit agreement, deed of trust, mortgage, note or other instrument or any material agreement, commitment, lease or contract to which the Borrower, the Parent or any Subsidiary is a party or by which it or any of its properties may be bound or affected; provided, however, that the parties understand that certain agreements and leases to which the Borrower, the Parent or any Subsidiary may be a party, none of which agreements and leases is material to the respective businesses of the Parent, the Borrower or such Subsidiary prohibit assignment of such agreements and leases by the Borrower, the Parent or such Subsidiary; or (d) Result in or require the creation or imposition of or result in the acceleration of any Indebtedness or any Lien of any nature upon, or with respect to, the Borrower, the Parent or any Subsidiary or any of the properties now owned or hereafter acquired by the Borrower, the Parent or any Subsidiary. -38- 5.5 Governmental Approvals. No consent, approval or authorization of, or declaration or filing with, any Governmental Authority or any state, county, or municipal agency, authority, commission or council, and, if applicable, public utility commissions and other entities exercising jurisdiction over the sale, lease (or rental), installation, servicing or monitoring of Security Services, on the part of the Borrower, the Parent or any Subsidiary is required for the valid execution, delivery or performance of any of the Loan Documents. 5.6 Validity and Binding Nature. This Agreement constitutes, and each of the Notes and the other Loan Documents when executed and delivered hereunder will constitute, a legal, valid and binding obligation of the Borrower, the Parent and each Subsidiary party thereto, enforceable against the Borrower, the Parent and such Subsidiary, as the case may be, in accordance with its respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or affecting generally the enforcement of creditors' rights. 5.7 Capitalization. (a) The authorized capital stock of the Borrower consists solely of 2,000 shares of common stock, no par value, of which 2,000 shares have been duly authorized and validly issued and are outstanding, fully paid and nonassessable. No shares of capital stock have been reserved for any purpose. There are no outstanding securities convertible into or exchangeable for, and no outstanding options, warrants or other rights to purchase or to subscribe for, any shares of stock or other securities of the Borrower or of any of the Subsidiaries, other than as set forth on Schedule 5.7(a). There are no outstanding agreements, arrangements, commitments or understandings, of any kind affecting or relating to the voting, issuance, purchase, redemption, repurchase or transfer of the Borrower's common stock, any other securities of the Borrower, or any securities of any Subsidiary, other than as set forth on Schedule 5.7(a). (b) The authorized capital stock of the Parent consists solely of 12,000,000 shares of common stock, par value $0.1 per share, of which, as of July 15, 1996, 4,459,257 shares have been duly authorized and validly issued and are outstanding, fully paid and nonassessable. No shares of capital stock have been reserved for any purpose. There are no outstanding securities convertible into or exchangeable for, and no outstanding options, warrants or other rights to purchase or to subscribe for, any shares of stock or other securities of the Parent, other than as set forth on Schedule 5.7(b). There are no outstanding agreements, arrangements, commitments or understandings of any kind affecting or relating to the voting, issuance, -39- purchase, redemption, repurchase or transfer of the Parent's common stock or any other securities of the Parent, other than as set forth on Schedule 5.7(b). 5.8 Financial Statements. The Borrower has delivered to the Agent Bank complete and correct copies of audited financial statements for the year ending December 31, 1995 and unaudited financial statements for the Quarter ending June 30, 1996. All such financial statements delivered to the Agent Bank including the notes thereto, (i) are true, correct and complete, (ii) are in accordance with the books and records of the Borrower, the Parent and the Subsidiaries, (iii) present fairly the financial condition, assets, liabilities and stockholders' equity as of the respective dates indicated, and the results of operations and changes in financial position for the respective periods indicated, of the Borrower, the Parent and the Subsidiaries, and (iv) are prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved. Except as reflected in such balance sheets, there exist no liabilities of the Borrower, the Parent or any Subsidiary of a type customarily reflected in a balance sheet in accordance with generally accepted accounting principles, contingent or absolute, matured or unmatured, known or unknown. Officer's Certificates delivered to the Agent Bank after the date hereof which certify the truth and accuracy of the representations shall be deemed to apply to financial statements which the Borrower has most recently delivered to the Agent Bank as of the time of such certification. 5.9 Conduct of Business; Absence of Material Adverse Change. Since the date of the most recent balance sheet delivered hereto, there has been no material adverse change in the business, operations, affairs, condition (financial or otherwise), assets, properties or assets of the Borrower, the Parent and the Subsidiaries, taken as a whole, as shown on the balance sheet as of such date, other than changes which are disclosed in the other Schedules attached hereto, and no fact or condition exists or is contemplated or threatened which might cause such material adverse change in the future. 5.10 Taxes. The amounts reserved as a liability for income and other taxes payable in each balance sheet delivered pursuant to this Agreement will be sufficient for the payment of all unpaid federal, state, county and local income and other taxes, whether or not disputed, of the Borrower, the Parent and of each Subsidiary accrued for or applicable to the period ended on the dates of such balance sheet(s) and all years and periods prior thereto and for which the Borrower, the Parent or any Subsidiary may be liable in its own right or as transferee of the assets of, or as successor to, any other Person. Except as set forth on Schedule 5.10, the Borrower, the Parent and each Subsidiary has filed all federal, state, county and local -40- income, excise, property and other tax returns which are required to be filed by it and such returns are true and correct. Each of the Borrower, the Parent and each Subsidiary has paid all taxes, estimated taxes, interest, penalties, assessments and deficiencies which have become due pursuant to such returns or without returns or pursuant to any assessments received by it, and none of the Borrower, the Parent or any Subsidiary is required to pay any additional taxes or other governmental charges. Neither the Borrower nor the Parent nor any Subsidiary is a party to any pending action or proceeding, and there is no action or proceeding threatened by any Governmental Authority against the Borrower, the Parent or any Subsidiary for assessment or collection of taxes, and no unresolved claim for assessment or collection of taxes has been asserted against the Borrower, the Parent or any Subsidiary. There are no outstanding agreements or waivers with any Governmental Authority extending the statutory period of limitation applicable to any tax return for any period, other than those relating to the extension of time to file tax returns. 5.11 Accounts Receivable. The accounts receivable of the Borrower, the Parent and the Subsidiaries shown on the most recent balance sheet delivered hereto, or thereafter acquired by any of them, have been collected or are good and collectible in amounts not less than the amounts thereof carried on the books of the respective owners except to the extent of the allowance for doubtful accounts shown on such balance sheet. 5.12 Debt Instruments. Attached hereto as Schedule 5.12 is a list and brief description of the material terms, provisions and conditions of all mortgages, indentures, notes, guarantees and other obligations for or relating to any Indebtedness to which the Borrower, the Parent or any Subsidiary is a party or which have been assumed by the Borrower, the Parent or any Subsidiary or to which any properties or assets of the Borrower, the Parent or any Subsidiary are subject which equal or exceed $100,000 for any single item of Indebtedness or in the aggregate equal or exceed $100,000, including the principal amount, interest rate, original and maturity dates and any sinking fund installments, prepayment premiums, restrictive covenants and any other material provisions. Except as described on Schedule 5.12, each of the Borrower, the Parent and each Subsidiary has performed all the obligations required to be performed by it to the date hereof and is not in default in any respect under any of the foregoing, and there has not occurred any event which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute such a default. 5.13 Bank Accounts. Attached hereto as Schedule 5.13 is a complete list showing the name of each bank in which the Borrower has accounts (including a description of the account), certificates of deposit or -41- safe deposit boxes, and the names of all Persons authorized to draw thereon or to have access thereto. Such list also shows the name of any Person holding a power of attorney from the Borrower and a brief description thereof. 5.14 Books and Records. The books of account, stock records, minute books and other records of the Borrower, the Parent and of each Subsidiary are in all material respects complete and correct and have been maintained in accordance with good business practices, and the matters contained in the books of account are appropriately and accurately reflected in the financial statements described in Section 5.8. 5.15 Litigation. Except as set forth on Schedule 5.15(a), there are no actions, suits, protests, reconsiderations or proceedings pending, against or affecting the Borrower, the Parent or a Subsidiary before or by any arbitrator or Governmental Authority. Except as set forth on Schedule 5.15(b), there are no actions, suits, protests, reconsiderations or proceedings threatened against the Borrower, the Parent or a Subsidiary which would, if actually pursued and liability is determined against the Borrower, the Parent or such Subsidiary, result in a Material Adverse Effect. Neither the Borrower nor the Parent nor any Subsidiary (i) is operating under, subject to or in default with respect to any order, writ, injunction, decree or judgment of any arbitrator or Governmental Authority or (ii) is in default with respect to the requirements of any Operating License held by any such Person. 5.16 No Restrictive Agreements. Except as set forth on Schedule 5.16, neither the Borrower nor the Parent nor any Subsidiary is a party to any agreement or subject to any corporate, governmental, or other legal restrictions which could have a Material Adverse Effect. 5.17 Licenses. The Borrower, the Parent and each Subsidiary have duly secured all necessary Operating Licenses, and have filed all required registrations, applications, reports and other documents with the entities exercising jurisdiction over the sale, lease (or rental), installation, servicing and monitoring of Security Services, the absence of which Operating Licenses and filings would result in a Material Adverse Effect. All such Operating Licenses are listed on Schedule 5.17. Each Operating License is in full force and effect and the Borrower, the Parent and each Subsidiary have performed all of their respective obligations with respect thereto which are required to have been performed prior to the applicable date. No event has occurred which permits, or after notice or lapse of time (if not renewed within required time limits) or both would permit, revocation or termination of any such Operating License or which materially adversely affects or will materially adversely affect the rights of such holder or which has or will have a Material Adverse Effect. -42- 5.18 Fees. Each of the Borrower, the Parent and each Subsidiary has paid all franchise, license or other material fees and charges which it is obligated to pay and which have become due pursuant to any Operating License. 5.19 Title to Property. Each of the Borrower, the Parent and the Subsidiaries has good and marketable title to all of its properties and assets, and none of such properties or assets is subject to any Liens, other than Permitted Liens. As of the date hereof, only the Borrower, the Parent or a Subsidiary, as the case may be, has legal and beneficial title to, and is the only Person who operates, all of such properties and assets. Schedule 5.19 is a correct and complete listing of the locations of all the assets and properties of each of the Borrower, the Parent and the Subsidiaries. Each of the Borrower, the Parent and the Subsidiaries enjoys peaceful and undisturbed possession under all leases necessary for the operation of such properties and assets, and all such leases are valid and subsisting and are in full force and effect; none of such leases contains any provision restricting the incurrence of indebtedness by the lessee or any unusual or burdensome provision materially adversely affecting the current or proposed operations of such lessee. The Borrower has provided to each landlord of the Leased Real Property listed on Schedule 6.15, the form of Landlord's Waiver and Consent. 5.20 Patents, Trademarks, Licenses. Each of the Borrower, the Parent and the Subsidiaries has rights to or has agreed to purchase all material patents, trademarks, service marks, trade names, copyrights, and franchises, and all rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any known conflict with the rights of others and subject only to Permitted Liens. 5.21 Names. Other than as set forth on Schedule 5.21, none of the Borrower, the Parent or any Subsidiary nor any of their respective predecessors operates or does business or within the past five years, has operated or done business, under a fictitious, trade or assumed name or has had a corporate or partnership name other than its current name. 5.22 Federal Reserve Regulations. No part of the proceeds of the Loans will be used to purchase or carry any "margin stock" (as defined in Regulation U of the Board of Governors of the Federal Reserve System) or any "margin securities" (as defined in Regulation G of the Board of Governors of the Federal Reserve System), or to extend credit to others for the purpose of purchasing or carrying any such "margin stock" or "margin securities", or for the purpose of reducing or retiring any indebtedness which was originally incurred for the purpose of purchasing or carrying any such "margin securities" or "margin stock", or for any purpose which would cause this -43- Agreement to violate Regulation G, Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System. 5.23 Investment Company Act. Neither the Borrower nor the Parent nor any Subsidiary is an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.24 Pension and Benefit Plans. There are no Plans maintained by the Borrower, the Parent or any Subsidiary, or under which the Borrower, the Parent or any Subsidiary has any liability, other than those described on Schedule 5.24 attached hereto. No Plan or trust forming a part thereof has been terminated. All Plans and the trusts forming a part thereof have been administered and enforced in accordance with their terms, and no disputes are pending or threatened with respect thereto. All Plans and any trusts forming parts thereof which are subject to ERISA are and have been administered in compliance with ERISA and all applicable rules and regulations issued thereunder, and no Reportable Event has heretofore occurred with respect thereto. No person has participated in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) that could subject the Borrower, the Parent or any Subsidiary to any tax, penalty or liability. No accumulated funding deficiency (as defined in Section 302 of ERISA) and no liability to the PBGC has been or is expected to be incurred with respect to any Plan. All Plans which are "employee pension benefit plans" as defined in Section 312 of ERISA since their adoption have qualified and do qualify under Section 401 of the Code. All trusts established under any Plans are exempt from taxation pursuant to Section 501(a) of the Code. 5.25 Compliance with Applicable Laws. Except as set forth on Schedule 5.25, the Borrower, the Parent and each Subsidiary has complied and is in full compliance with all statutes, laws, ordinances, regulations, rules, determinations, orders, judgments and decrees applicable to them and to the assets, properties and business of the Borrower, the Parent, and each Subsidiary, including, without limitation, all applicable federal and state securities laws and regulations, and all federal, state and local statutes, laws, ordinances, regulations, rules, orders, judgments and decrees pertaining to the sale, leasing, ownership or management of real property, pertaining to employment and employment practices, terms and conditions of employment, and wages and hours, and pertaining to safety, health, fire prevention, environmental protection, building standards, zoning and other matters. The Borrower, the Parent, the Subsidiaries and all employees, agents, distributors, representatives or other persons acting on the express, implied or apparent authority of the Borrower, the Parent or of any Subsidiary have not paid or received any bribe or other unlawful, -44- questionable or unusual payment of money or other thing of value, granted or accepted any extraordinary discount, or furnished or been given any other unlawful and unusual inducement to or from any Person in the United States or elsewhere in connection with or in furtherance of the business of the Borrower, the Parent or of any Subsidiary. 5.26 Transactions with Related Parties. Except as set forth on Schedule 5.26 or any other Schedule attached hereto, no present or former officer or director of the Borrower, the Parent or any Subsidiary, and no Affiliate of such an officer or director is currently a party to any transaction with the Borrower, the Parent or with any Subsidiary, including, without limitation, any contract, agreement or other arrangement providing for the employment of, furnishing of services by, rental of real or personal property from or otherwise requiring payments to any such officer, director or Affiliate where the amount involved is in excess of $25,000 for each such transaction or in excess of $100,000 in the aggregate for any series of related transactions. 5.27 Public Utility Holding Company Act. Neither the Borrower nor the Parent nor any Subsidiary is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company," or a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 5.28 Capital Stock. Neither the Borrower nor the Parent nor any Subsidiary (i) is subject to any obligation (contingent or otherwise) to repurchase, redeem or otherwise acquire or retire any shares of its capital stock or (ii) is required to file a registration statement relating to its common stock. 5.29 No Limitations on Dividends. Except pursuant to this Agreement, neither the Borrower nor the Parent nor any Subsidiary is subject or party to any agreement, lien or encumbrance, charter or by-law, regulatory or other provision (except for applicable statutory corporate law) restricting, directly or indirectly, the payment of dividends or the making of advances or other cash payments. 5.30 Material Agreements. Except as set forth on Schedule 5.30, neither the Borrower nor the Parent nor any Subsidiary is a party to any material lease, contract, agreement, understanding or commitment of any kind (including employment agreements, collective bargaining agreements, powers of attorney, distribution agreements, patent license agreements, contracts for future purchase or delivery of goods or rendering of services, bonus, pension and retirement plans or accrued vacation pay, insurance and welfare agreements). To the best knowledge of -45- each of the Borrower and the Parent, all parties to such agreements have complied with all material provisions thereof, and, to the best knowledge of the Borrower and the Parent, no such party is in default thereunder. 5.31 Compliance with Environmental Laws. Each of the Borrower, the Parent and each Subsidiary is in material compliance with all applicable statutes, laws, rules, regulations and orders of all governmental authorities relating to environmental protection and pollution control with respect to the conduct of their respective businesses and the ownership of their respective properties. 5.32 Disclosure. All facts of material importance to the condition (financial or otherwise), assets, properties, liabilities, business, operations and financial prospects of the Borrower, the Parent and of each Subsidiary have been fully and truthfully disclosed to the Agent Bank and the Lenders in this Agreement and the other Loan Documents. No representation or warranty by the Borrower, the Parent or any Subsidiary in this Agreement or in the other Loan Documents, and no document, statement, certificate, opinion letter or exhibit to be furnished or delivered to the Agent Bank or a Lender pursuant to the Loan Documents, or in connection herewith or therewith or with the transactions contemplated hereby or thereby, contains or will contain any untrue or misleading statement of material fact or omits or will omit any material fact necessary to make the statements contained therein not misleading. 5.33 Solvency. (a) The fair saleable value of the assets of the Borrower, the Parent and the Subsidiaries, taken as a whole, will exceed the probable amount that will be required to be paid on or in respect of the existing debts and other liabilities (including liabilities under the Loan Documents) of the Borrower, the Parent and the Subsidiaries as they mature. (b) The capital of each of the Borrower, the Parent and each of the Subsidiaries does not constitute unreasonably small capital for such entity to carry out its business as now conducted and as proposed to be conducted including the capital needs of such entity, taking into account the particular capital requirements of the businesses conducted by such entity, and projected capital requirements and capital availability thereof. (c) Neither the Borrower nor the Parent intends to, or intends to permit any Subsidiary to, incur debts beyond such Person's ability to pay its probable liability in respect of its debts as they mature (taking into account the timing and amounts of cash to be received by such Person and the amounts to be payable on or in respect of debt of such Person). The cash -46- flow of the Borrower, the Parent and the Subsidiaries, after taking into account all anticipated uses of the cash of the Borrower, the Parent and the Subsidiaries, shall at all times be sufficient to pay all such probable amounts on or in respect of Indebtedness of the Borrower, the Parent or such Subsidiaries when such amounts are required to be paid. 5.34 Restructuring. The Restructuring shall be completed no later than December 31, 1996. 5.35 Non-U.S. Subsidiary. The Borrower has filed all documents with the appropriate governmental authorities, and has taken all such other necessary or appropriate action, to fully dissolve each of the Non-U.S. Subsidiaries. SECTION 6. AFFIRMATIVE COVENANTS The Borrower and the Parent covenant that from the date of this Agreement and thereafter until all of the Loans, and the Letters of Credit and all other amounts due and owing under the Loan Documents have been fully, finally and indefeasibly paid, discharged and retired (and the Commitments of the Lenders have expired or been terminated in full): 6.1 Payment of Notes. The Borrower shall punctually pay the principal of and interest on the Notes at the times and places and in the manner specified therein. 6.2 Corporate Existence. The Borrower and the Parent shall each preserve, maintain, and keep, and, except as otherwise contemplated by the Restructuring, cause each Subsidiary, to preserve, maintain, and keep, in full force and effect its corporate existence in the jurisdiction of its incorporation, and all rights, franchises, and privileges necessary or desirable in the normal conduct of its business, and shall qualify and remain qualified, and shall cause each Subsidiary to qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations and the ownership of its properties; provided, however, that the obligations set forth in this Section 6.2 shall not apply to any Special Purpose Subsidiary which is dissolved within one hundred and eighty (180) days after the date of its acquisition or to any Non-U.S. Subsidiary. 6.3 Payment of Taxes and Claims. The Borrower and the Parent shall each pay and discharge, and shall cause each Subsidiary to pay and to discharge, all taxes, assessments and governmental charges or levies imposed upon it or any Subsidiary or upon its income or profits or the income or profits of any Subsidiary, or upon any of its properties or any properties of any Subsidiary or any part thereof, prior to the date on which penalties -47- attach thereto, and all lawful claims, including, without limitation, claims for labor, materials or supplies, which, if unpaid, might become a Lien upon any properties of the Borrower, the Parent or of any Subsidiary, provided that neither the Borrower nor the Parent nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if the Borrower, the Parent or such Subsidiary, as the case may be, sets aside on its books reserves which are in conformity with GAAP. 6.4 Payment of Obligations. The Borrower and the Parent shall each pay, discharge or otherwise satisfy and shall cause each Subsidiary to pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all of the Indebtedness and other obligations of whatever nature of the Borrower, the Parent and the Subsidiaries, provided that neither the Borrower nor the Parent nor any Subsidiary shall be required to pay, discharge or otherwise satisfy any Indebtedness or other obligation when the amount or validity thereof is being contested in good faith and by proper proceedings if such Person sets aside on its books reserves which are in conformity with GAAP. 6.5 Conduct of Business. The Borrower and the Parent shall each continue to engage, and shall cause each Subsidiary to continue to engage, in business of the same general type as now conducted by it, and shall conduct, and shall cause each Subsidiary to conduct, such business in an orderly, efficient and regular manner consistent with the conduct of its business prior to the date of this Agreement. 6.6 Maintenance of Property. The Borrower and the Parent shall each keep all property used or useful in its business, and shall cause each Subsidiary to keep all property used or useful in its business, in good repair, working order and condition, and from time to time make all necessary or desirable repairs thereto and renewals and replacements thereof, taking into account normal obsolescence. 6.7 Performance of Contractual Obligations. The Borrower and the Parent shall each perform in accordance with its terms and conditions, and comply with all provisions of, and shall cause each Subsidiary to perform in accordance with its terms and conditions, and to comply with all provisions of, each and every security issued by the Borrower, the Parent or any Subsidiary, and each and every mortgage, deed of trust, indenture, note, lease, commitment, contract or other agreement, instrument or undertaking to which the Borrower, the Parent or any Subsidiary is or is purported to be a party or by which it or any of its property is or is purported to be bound, except to the extent that the Borrower, the Parent or any Subsidiary, as the case may be, is contesting the -48- provisions thereof in good faith and by proper proceedings if required (and such Person has set aside on its books reserves which are in conformity with GAAP) and the failure to comply therewith does not, and will not, in the aggregate, have a material adverse effect on the business, operations, prospects, assets, property or condition (financial or otherwise) of the Borrower, the Parent and the Subsidiaries, taken as a whole. 6.8 Compliance with Laws. The Borrower and the Parent shall each comply, and shall cause each Subsidiary to comply, with the requirements of all applicable statutes, laws, ordinances, rules, regulations, determinations, judgments, decrees and orders of any Governmental Authority, non-compliance with which could have a Material Adverse Effect. 6.9 ERISA. The Borrower and the Parent shall each maintain, and shall cause each Subsidiary to maintain, each of its and each Subsidiary's Plans in compliance with all applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code. 6.10 Books and Records. The Parent shall keep and maintain adequate and proper records and books of account for itself, the Borrower and the Subsidiaries on a consolidated basis, in which complete entries are made in accordance with GAAP consistently applied and in accordance with all applicable statutes, laws, rules, regulations, determinations, judgments, decrees and orders of any Governmental Authority, reflecting all financial and other transactions of the Borrower, the Parent and of each Subsidiary, as the case may be, normally or customarily included in records and books of account of companies engaged in the same or similar businesses and activities as the Borrower, the Parent or such Subsidiary, as the case may be. 6.11 Examination Rights. The Borrower and the Parent shall each, upon reasonable advance notice, permit the Agent Bank, the Lenders and any agents or representatives thereof to visit with reasonable frequency and to inspect the properties of the Borrower, the Parent and the Subsidiaries, including the Collateral wherever located, and to examine and make abstracts from any of their respective books and records at any reasonable time and as often as the Agent Bank or such Lenders or such agents or representatives may desire, and to discuss the business, operations, properties, Collateral and condition (financial or otherwise) of the Borrower, the Parent and the Subsidiaries with any of their respective officers, directors, and, upon supervision or direction of senior management, their respective employees, agents or representatives (including, without limitation, the independent certified public accountants). -49- 6.12 Financial Data. (a) Notice to the Agent Bank. The Borrower shall promptly advise the Agent Bank and each of the Lenders in writing of any condition, event or act which comes to its attention that (i) would, with notice or lapse of time, or both, become an Event of Default, (ii) constitutes an Event of Default or (iii) constitutes a material adverse change to the assets, business, properties, or financial prospects of the Borrower, the Parent or the Subsidiaries. (b) Books and Records. The Parent shall maintain true and complete books, records, and accounts in which true and correct entries shall be made of all transactions of the Parent, the Borrower and the Subsidiaries on a consolidated basis in accordance with GAAP (the "Records"), and permit access to and reproduction of such Records by the Agent Bank, the Lenders and their respective agents, as the Agent Bank or such Lenders shall request. The Borrower and the Parent shall maintain their Records in such detail, form and scope as the Agent Bank shall reasonably require and shall ensure that the Subsidiaries maintain their Records accordingly. Upon the occurrence and during continuance of an Event of Default, the Borrower shall mark all Records relating to accounts receivable with notations satisfactory to the Agent Bank disclosing that such accounts receivable have been pledged, assigned and transferred to the Agent Bank and that the Borrower has granted a security interest in such accounts receivable to the Agent Bank. (c) Financial Statements and Other Information. The Borrower shall furnish to the Lenders: (i) Annual Financial Statements. As soon as practicable and in any event within ninety (90) days after the close of each fiscal year: (1) consolidated balance sheets and consolidated statements of income and cash flows of the Parent, the Borrower and the Subsidiaries, as at the end of and for the fiscal year just closed, setting forth the corresponding figures for the previous fiscal year in comparative form, all in accordance with GAAP and certified (without any qualification deemed material by the Agent Bank) by independent certified public accountants selected by the Borrower and satisfactory to the Majority Lenders: (2) balance sheets and statements of income of each of the Parent and the Borrower and the Subsidiaries as at the end of and for the fiscal year just closed, setting forth the corresponding figures for the previous fiscal year in comparative form; -50- (3) concurrently with such financial statements, supplementary consolidating balance sheets and consolidating statements of income of the Parent and the Borrower and the Subsidiaries as at the end of and for the fiscal year just closed, setting forth the corresponding figures for the previous fiscal year in comparative form; and (4) concurrently with the financial statements described in sub-clause (1) above, a written statement signed by such accountants to the effect that, in performing the audit necessary for their certification of such financial statements, they have not obtained any knowledge of any Event of Default or the violation of any of the financial ratios and covenants set out in Section 7.19 or, if such accountants have obtained any such knowledge, they shall disclose in such written statement their observations with respect to such matters (in furnishing such written statement such accountants shall not be required to exceed the scope of the audit in accordance with generally accepted auditing standards). (ii) Quarterly Financial Statements. As soon as practicable and in any event within forty-five (45) days after the close of each of the first, second and third Quarters, quarterly financial statements including unaudited consolidated balance sheets and statements of income and cash flows of the Parent as of the end of and for the period commencing at the end of the previous fiscal year and ending with such Quarter, setting forth (A) the comparative figures for the appropriate periods of the preceding fiscal year and (B) the comparative figures for the appropriate periods as against the budget estimates for the current fiscal year, all in reasonable detail and certified by the chief financial officer of the Parent to be true and complete, subject to normal recurring year-end audit adjustments, it being understood that such statements may omit footnotes. (iii) Quarterly Certification. As soon as practicable and in any event within forty-five (45) days after the close of each Quarter an Officer's Certificate of the Borrower: (1) stating that there existed during such Quarter or fiscal year no Event of Default and no Potential Event of Default or if any such Event of Default or Potential Event of Default existed, specifying the nature thereof, the period of existence thereof and what action the Borrower proposes to take, or has taken, with respect thereto; (2) setting forth in reasonable detail the required information with respect to compliance by the Borrower with the provisions of Section 7.19 hereof and specifying the financial computations with respect thereto; -51- (3) stating that the representations and warranties continue to be true and correct in all material respects; (4) setting forth a general statement projecting the amounts and general categories of Capital Expenditures to be made during the remainder of the fiscal year; and (5) stating that all information required to have been delivered during such period has been so delivered. (iv) Monthly Financial Statements. As soon as practicable and in any event within thirty (30) days after each calendar month, the following: (1) except for those months at the end of each Quarter, a consolidated statement of income of the Parent, the Borrower and the Subsidiaries for the period commencing at the end of the previous fiscal year and ending with such month, setting forth with respect to the Parent, the Borrower and the Subsidiaries the comparative figures for the appropriate period of the preceding fiscal year and the variance as against the corresponding month of the prior year of each line item stated as a percentage, all in reasonable detail; and (2) a report showing the Attrition for such month. (v) Data Supplied by Auditors. To the extent not delivered pursuant to clause (ii) of this Section 6.12(c), promptly upon their becoming available (but in any event within fifteen (15) days of receipt), copies of all balance sheets, statements of income and cash flow, management letters and other material financial reports or material written recommendations, if any, submitted to the Parent or the Borrower by its auditors in connection with each annual or interim audit or examination by such auditors. (vi) Notice of Default. As soon as possible and in any event within five (5) days after the occurrence of any Potential Event of Default or Event of Default, a statement of the chief financial officer of the Borrower setting forth the details of such Potential Event of Default or Event of Default and the action which the Borrower proposes to take with respect thereto. (vii) Notice of Other Defaults. As soon as possible and in any event within five (5) days after the occurrence of any default or event of default under any security issued by the Parent or the Borrower or any Subsidiary or under any mortgage, indenture, lease, contract or other -52- agreement, instrument or undertaking to which the Parent or the Borrower or any Subsidiary is or is purported to be a party or by which it or any of its property is or is purported to be bound, which default or event of default could have a material adverse effect on the business, operations, prospects, assets, properties or condition (financial or otherwise) of the Parent or the Borrower or any Subsidiary, a statement of the chief financial officer of the Borrower setting forth the details thereof and the action which the Borrower proposes to take with respect thereto. (viii) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits and proceedings before any arbitrator or Governmental Authority affecting the Parent or the Borrower or any Subsidiary and involving the lesser of (A) $500,000 and (B) that amount which such Person is required to report to the U.S. Securities and Exchange Commission. (ix) Notice of ERISA Problems. As soon as possible and in any event within thirty (30) days after the Borrower knows (provided, however, that with respect to any Multiemployer Plan in which neither the Borrower nor any Commonly Controlled Entity is a "substantial employer," the Borrower shall be deemed to have knowledge only of facts concerning which it has actual knowledge) of (i) the occurrence or expected occurrence of any Reportable Event with respect to any Plan, or (ii) the institution of proceedings or the taking or expected taking of any other action by PBGC or the Borrower or any Commonly Controlled Entity to terminate or withdraw from any Plan, whichever of the following may be applicable: (A) a notice of the Reportable Event and a certificate of the chief financial officer of the Borrower setting forth the details of such Reportable Event and the action which the Borrower or Commonly Controlled Entity proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or (B) a notice with respect to any termination or withdrawal from any Plan and a copy of any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated or withdrawn from, as the case may be. (x) Notice of Adverse Developments. Immediately upon obtaining knowledge thereof notice of: (1) Any citation, petition to deny, order to show cause or other legal process or order, or protest, or reconsideration directly affecting an Operating License. (2) Any (A) refusal or failure by any issuer to renew or extend any Operating License, (B) proposed abandonment -53- or proposed or actual revocation, termination or materially adverse modification of any Operating License, (C) dispute or other action with respect to any Operating License, (D) denial or threatened denial or revocation or modification by applicable state regulatory authority of any operating permit or any other applicable state license and permit, (E) notice from the applicable state regulatory authority of the imposition of any fines or penalties or forfeitures or (F) written notices or written requests by private parties with respect to any of the foregoing. (3) Any dispute concerning, or any threatened non-renewal or modification of, any material lease for real or personal property to which the Parent, the Borrower or a Subsidiary is a party. (4) Any actions, proceedings or claims which are commenced or asserted against the Borrower, the Parent or a Subsidiary in which the amounts involved are in the aggregate $500,000 or more and which are not fully covered by insurance. Each notice pursuant to this Section 6.12(c)(x) may be given orally and shall immediately thereafter be confirmed by a written statement of an Officer of the Borrower setting forth details of the matter referred to therein and stating what action the affected Person has taken, is taking or proposes to take with respect thereto. (xi) Evidence of Insurance. Upon request, evidence of the insurance coverage described in Sections 6.14 and 6.22 hereof. (xii) Notice of Uninsured or Partially Insured Loss. Promptly upon the occurrence thereof, notice of any uninsured or partially insured loss affecting the Parent, the Borrower or any of the Subsidiaries through fire, theft, liability, property damage, or other cause, in excess of $250,000. (xiii) Reports. Promptly after the sending or filing thereof, copies of all financial statements and reports which the Parent and the Borrower send to their respective stockholders, and copies of all regular, periodic and special reports and all registration statements which the Borrower or the Parent files with the U.S. Securities and Exchange Commission or any Governmental Authority which may be substituted therefor, or with any national securities exchange. (xiv) Budget. No later than December 31 of each of the Borrower's fiscal years, a budget showing in reasonable detail the Borrower's good faith estimate of the projected income and expenses, Capital -54- Expenditures, Capital Lease Obligations and general and administrative expenses for the next succeeding fiscal year, allocated by Quarter. (xv) Other Information. Such other information respecting the business, operations, prospects, assets, properties or condition (financial or otherwise) of the Parent, the Borrower or any Subsidiary as the Agent Bank from time to time reasonably may request. (d) Authority to Provide Information. The Agent Bank and the Lenders are hereby authorized to provide a copy of any financial statement or any other information relating to the business, operations or financial condition of the Parent, the Borrower or any Subsidiary which may be furnished to the Agent Bank or a Lender or come to its attention pursuant to this Agreement or otherwise (the "Financial Information") (i) to any regulatory body or agency having supervisory jurisdiction over the Agent Bank or a Lender, (ii) to any person or entity which shall or shall have any right or obligation to succeed to all or any part of the Agent Bank's or a Lender's interest in any of the Loan Documents, (iii) upon the order of any court or administrative agency, (iv) in connection with any litigation to which the Agent Bank, a Lender, the Parent, the Borrower or a Subsidiary may be a party, (v) to the extent reasonably required in connection with the exercise of any remedy hereunder, (vi) to legal counsel for the Agent Bank or a Lender and independent auditors or to accountants retained by the Agent Bank or a Lender in connection with the transactions contemplated by the Loan Documents, (vii) to the extent it has already been publicly disclosed or (viii) to any person not identified herein with the prior written consent of the Borrower. Such information in the event that it is not public information shall be disclosed on a confidential basis, to the extent permitted by law. 6.13 Environmental Matters. (a) Prior to owning or leasing any material real property interest (the "Premises"), the Parent and the Borrower shall, and shall cause the Subsidiaries to, perform due diligence regarding environmental matters for the Premises as follows: (i) When the Borrower, the Parent or a Subsidiary plans to (x) own the Premises or (y) lease the Premises other than as provided in Section 6.13(a)(ii), the term "due diligence" shall mean that such Person shall hire an environmental consultant, subject to the approval of the Agent Bank, which shall not be unreasonably withheld or delayed, to perform a preliminary environmental site assessment ("PESA"). The scope of the PESA shall be determined by the Borrower, in consultation with the Agent Bank, taking into consideration, inter alia, the physical characteristics and historical uses of the Premises and the nature of the ownership or -55- leasehold interest therein, as applicable. The final specifications of the scope of the PESA shall be subject to the approval of the Agent Bank, which approval shall not be unreasonably withheld or delayed. The term "due diligence" shall also mean that the Borrower shall provide to the Agent Bank any information regarding any violation of Environmental Laws, as hereinafter defined, with respect to the Premises of which the Borrower, the Parent or a Subsidiary has actual knowledge or has actual information which would cause such Person to know, outside of the information contained in the PESA. (ii) When the Borrower, the Parent or a Subsidiary plans to lease space for administrative offices, central monitoring services or storage of inventory, the term "due diligence" shall mean that the Borrower shall provide to the Agent Bank any information regarding any violation of Environmental Laws with respect to the Premises of which the Borrower, the Parent or such Subsidiary has actual knowledge or has actual information which would cause such Person to know. "Due diligence" shall not require a PESA under this provision. (b) When a PESA is finalized, both the Borrower and the Agent Bank shall concurrently receive and review a copy of the PESA. The Borrower and the Agent Bank shall discuss the contents of the PESA. The decision to purchase or lease the Premises shall be subject to the Agent Bank's approval based on the results of the due diligence. If the Agent Bank fails to advance Loan funds based on the due diligence results, the Agent Bank reserves the right as a condition to any funding to require the Borrower to provide representations and warranties, in form and substance satisfactory to the Agent Bank, as to such environmental matters with respect to the Premises. (c) The Borrower and the Parent will not, and will cause the Subsidiaries and any Tenants of Owned Real Property not to, use any of the real property occupied by any of them for the purpose of treating, producing, handling, transferring, processing, transporting, disposing, storing or otherwise releasing "hazardous substances" (as the term "hazardous substances" is defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended ("CERCLA")), and by applicable state statutes and any regulations promulgated thereunder), in violation of any federal, state or local law or regulation relating to environmental or health and safety matters (the "Environmental Laws"). The Borrower and the Parent further covenant that they will not cause or permit to exist as the result of an intentional or unintentional action or omission on their part, or on the part of any of the Subsidiaries the releasing, spilling, leaking, pumping, pouring, emitting or dumping from, on or about any real property occupied by the Borrower, the Parent or a Subsidiary or on or about any Owned Real Property of any hazardous substance in violation of any federal, state or local law or regulation. Should there be any discharge, spill, injection, escape, emission, disposal, leak or other release of hazardous substances on any real property occupied by the Borrower, the -56- Parent, a Subsidiary or on or about any Owned Real Property, if required by applicable law, the Borrower shall promptly notify the Environmental Protection Agency National Response Center and any applicable local governmental authority, and shall take all steps necessary to promptly clean such discharge, spill, injection, escape, emission, disposal, leak or other release in accordance with the provisions of CERCLA, the Federal Clean Water Act, the Federal National Contingency Plan and any applicable local requirements, if required by applicable law, and shall apply for a certification from the Federal Environmental Protection Agency or from any applicable local governmental authority that said premises have been cleaned up to the satisfaction of those agencies. 6.14 Insurance. (a) The Borrower and the Parent shall maintain, and shall cause each Subsidiary to maintain with respect to their respective properties and businesses, insurance policies as required by the Agent Bank from time to time in accordance with the following general rules: (i) Loss or Casualty to Collateral. All tangible Collateral shall be fully insured against loss or damage by theft or casualty and such other risks as the Agent Bank may require. The amount of the insurance shall be at least equal to the replacement value of such Collateral, and in any case in amounts sufficient to prevent the Borrower, the Parent or a Subsidiary from becoming a co-insurer. The deductibles applicable to the insurance shall not exceed amounts reasonably acceptable to the Agent Bank. (ii) Loss or Casualty to Real Property. The Borrower, the Parent and the Subsidiaries shall maintain all risk property insurance covering any Owned Real Property in an amount not less than 100% of the full replacement cost of the improvements on the Owned Real Property. The full replacement cost of such improvements shall be determined from time to time as required by the Agent Bank, by appraisal or another method acceptable to the Agent Bank. The Borrower, the Parent and the Subsidiaries shall maintain all risk property insurance covering the Leased Real Property to the extent that such Person has any obligation to restore the improvements on such Leased Real Property if a casualty occurs. The amount of such insurance shall be at least equal to the amount for which such Person may be obligated, and in any case in amounts sufficient to prevent such Person from becoming a co-insurer. The deductibles applicable -57- to all insurance required by this paragraph (ii) shall not exceed amounts acceptable to the Agent Bank. (iii) Business Interruption Insurance. Subject to its availability at reasonable costs, the Borrower and the Parent shall, and shall cause the Subsidiaries to, maintain business income interruption insurance against loss of income by reason of any casualty which causes the temporary or permanent cessation of the business of each such Person. (iv) Other Insurance. The Borrower and the Parent shall, and shall cause the Subsidiaries to, maintain such other insurance as the Agent Bank may require from time to time so that such Persons are at all times adequately insured to the extent customary for companies in similar businesses and of similar size as such Person. (v) Form of Policies. Any insurance policies carried in accordance with this Section 6.14 shall be written by companies acceptable to the Agent Bank, and authorized to do business in each jurisdiction in which the Borrower, the Parent or a Subsidiary is located. (vi) Delivery of Policies, Certificates and Paid Receipts. The Borrower shall deliver to the Agent Bank original certificates of insurance for all insurance policies required to be maintained under this Section 6.14 (and, if the Agent Bank requests, original policies of insurance). If the Agent Bank so requests, such certificates (and policies, if applicable) shall list the Agent Bank as an additional insured. The Borrower shall deliver a current policy to the Agent Bank whenever any such policies are renewed, changed or replaced. If the Agent Bank requests, the Borrower shall deliver to the Agent Bank paid receipts (or other evidence of payment satisfactory to the Agent Bank) evidencing full and timely payment of all premiums on all insurance policies required to be maintained under this Section 6.14. (vii) Payment of Proceeds. Casualty insurance proceeds shall be payable directly to the insured party, who shall use such proceeds to repair the damage caused by the casualty; provided, however, upon the occurrence and during the continuance of, an Event of Default or Potential Event of Default, all proceeds payable shall be paid to the Agent Bank. (viii) Application of Insurance Proceeds. All insurance proceeds received by the Agent Bank under the provisions of this Section 6.14 shall be applied as follows: (i) if, at the time in question, there exists any Event of Default, or a Potential Event of Default, toward payment of the Loans, whether or not the Agent Bank accelerates or takes any other remedial action pursuant to Section 8 or (ii) otherwise, in accordance with -58- reasonable withdrawal procedures prescribed by the Agent Bank, to repair or replace the Collateral, Leased Real Property or Owned Real Property which has suffered a casualty. (b) The Borrower shall maintain or cause to be maintained all insurance available through the PBGC or insurers acceptable to the Agent Bank against all obligations to the PBGC. (c) Notwithstanding the foregoing, in the event that the Borrower delivers to the Agent Bank written evidence reasonably satisfactory to the Agent Bank that it has adequate reserves to cover insurable losses, the Borrower may self-insure with respect to its insurable properties, workers' compensation, medical claims, errors and omissions and general liability in an amount up to the amount of such reserves but in no event in an amount exceeding $1,000,000 per occurrence or $5,000,000 in the aggregate during any policy year. Insurance coverage for amounts over $1,000,000 per occurrence or $5,000,000 in the aggregate shall be provided by the companies referred to in Section 6.14 if the Borrower is obligated to maintain such higher coverage limits pursuant to any other provision of this Section 6.14. 6.15 Landlord's/ Mortgagee's Waivers. Within sixty (60) days of the Closing Date, for each lease of Leased Real Property identified on Schedule 6.15, the Borrower shall provide to the Agent Bank either (a) a Landlord's Waiver and Consent, executed by the landlord of such Leased Real Property or (b) a certificate duly executed by the chief executive officer and the chief financial officer of the Borrower stating that the Borrower and its officers and employees have taken and diligently pursued all appropriate actions in order to obtain a Landlord's Waiver and Consent. The Borrower shall provide to the Agent Bank, a Landlord's Waiver and Consent executed by each landlord of Leased Real Property leased after the Closing Date, and, if the Agent Bank requests, a waiver of all mortgagees of any premises (including the Owned Real Property) at which any Collateral is located. These waivers shall include a consent to each Assignment of Tenant's Interest Under Leases, in the case of Leased Real Property, and shall assure the Agent Bank of its ability to gain access to such premises and remove the Collateral without interference by the landlord, even if the Borrower or the Subsidiary party thereto is in default under any leases or mortgages (or deeds of trust) affecting such premises. 6.16 Exchange of Note. Upon receipt of a written notice of loss, theft, destruction or mutilation of a Note and of a bond or letter of indemnity from the Agent Bank, upon surrendering for cancellation a Note if mutilated (in which event no indemnity shall be required), the Borrower shall execute and deliver a new Note of like tenor in lieu of any such lost, -59- stolen, destroyed or mutilated Note, as the case may be. A Note issued pursuant to this Section 6.16 shall be dated so that neither gain nor loss of interest shall result therefrom. 6.17 Other Agreements. Each of the Borrower and the Parent will cause each Subsidiary, immediately upon its formation, to enter into and execute a Guaranty Agreement and a Security Agreement. Each of the Borrower and the Parent will, immediately upon formation of such new Subsidiary, execute a Pledge Agreement wherein it grants a security interest to the Agent Bank in all the outstanding capital stock of such Subsidiary or the Borrower's ownership interest in such Subsidiary, as appropriate. The Borrower and the Parent will, and will cause each such Subsidiary to, comply with all provisions of any other agreement between the Borrower or the Parent and the Agent Bank and the Lenders. Notwithstanding the foregoing, the obligations of this Section 6.17 shall not apply to any Non-U.S. Subsidiary nor any Special Purpose Subsidiary; provided, however, that the Borrower and the Parent shall cause any Non-U.S. Subsidiary which is not dissolved on or before December 31, 1996, and any Special Purpose Subsidiary which is not dissolved within one hundred and eighty (180) days after the date of its acquisition or formation, as applicable, to comply with the provisions of this Section 6.17 upon the earlier of (x) the date on which a determination has been made that such Non-U.S. Subsidiary or Special Purpose Subsidiary will not be dissolved or (y) ten (10) Business Days after the expiration of such time periods. 6.18 Further Assurances. At the Borrower's sole cost and expense, upon request of the Agent Bank, the Borrower and the Parent will duly execute and deliver, or cause to be duly executed and delivered, to the Agent Bank such further instruments and do or cause to be done such further acts as may be reasonably necessary or desirable in the opinion of the Lenders to carry out more effectively the provisions and purposes of this Agreement. 6.19 Consistent Action. The Borrower and the Parent shall, and shall cause the Subsidiaries to, exercise any and all voting or similar rights which they hold in any Person in a manner consistent with the provisions of this Agreement. 6.20 Control. The Borrower shall conduct, and shall cause the Subsidiaries to conduct, their respective businesses and acquire and operate monitoring assets and Recurring Security Services Contracts and related businesses directly and not through any other structure or entity. Neither the Borrower nor the Parent nor any Subsidiary shall enter into any agreement with any Person which shall confer upon such Person the right or authority to control or direct the Borrower, the Parent or such Subsidiary. -60- 6.21 Change in Documents. The Borrower and the Parent will give, and will cause each Subsidiary to give, the Agent Bank at least ten (10) Business Days' prior written notice of any proposed change of name or address or material amendment or supplement to its or their bylaws, articles of incorporation or partnership agreements, as appropriate. Except as consented to by the Majority Lenders, the Borrower and the Parent will not, and will not permit any Subsidiary to, amend or consent to any amendment or supplement to its partnership agreement, articles of incorporation or by-laws, as appropriate. 6.22 Key Man Life Insurance. Within thirty (30) days of the Closing Date, the Borrower shall obtain, and the Borrower shall thereafter maintain, key man life insurance for George Flagg in an amount no less than $2,000,000. The Borrower shall deliver to the Agent Bank, for the account of the Lenders, an original certificate of such insurance. The proceeds payable under such insurance shall be used by the Borrower to hire a replacement for George Flagg as chief executive officer of the Borrower; provided, however, that upon the occurrence and during the continuance of an Event of Default, all proceeds payable under such insurance shall be paid to the Agent Bank, for the account of the Lenders. 6.23 Updating of Customer Lists. The Borrower shall, and shall cause all Subsidiaries to, maintain complete and accurate lists of the parties to the Recurring Security Services Contracts ("Customer Lists"). No Customer List shall be sold or rented by the entity generating a Customer List except in accordance with the provisions of this Agreement. 6.24 Reserve for Accounts Receivable. The Borrower shall adopt a consistent policy for the treatment of reserves for its accounts receivable, and shall ensure that the Subsidiaries adopt and implement such policy. Neither the Borrower nor any Subsidiary shall vary from such treatment without prior written notice to the Agent Bank. 6.25 Interest Rate Protection Agreement. The Borrower shall maintain in effect an interest rate protection agreement which will cover at least fifty percent (50%) of the entire outstanding amount of the Loans. Each such agreement (a) shall be in a form reasonably satisfactory to the Majority Lenders, (b) shall be for a term not less than three (3) years, (c) shall provide for all-in-costs, including hedging costs, of not greater than such maximum rate as may be agreeable to the Majority Lenders, and (d) shall provide that the individual hedging transactions shall be completed within sixty (60) days of the respective Borrowing Date. 6.26 Stamping of Recurring Security Services Contracts. Within sixty (60) days after the date of this Agreement, the Borrower shall -61- have Stamped all of the Recurring Security Services Contracts, and shall have delivered to the Agent Bank a certificate of an officer of the Borrower stating that all of the Recurring Security Services Contracts have been so Stamped. The Borrower shall maintain as Stamped all originals and copies of the Recurring Security Services Contracts at the principal offices of the Borrower and the Subsidiaries located in New York, New York, Edison, New Jersey, Philadelphia, Pennsylvania and Central Islip, New York. The Borrower shall, and shall cause the Subsidiaries to Stamp all future Recurring Security Services Contracts purchased, acquired or generated by or on behalf of the Borrower or a Subsidiary within three (3) Business Days thereof. 6.27 Restructuring. Before the Parent or the Borrower enter into or permit the Restructuring, the Borrower and the Parent shall execute and deliver, and shall cause each of the Subsidiaries to execute and deliver, appropriate amendments to the Loan Documents and all other agreements, instruments, opinions and other documents the Agent Bank and the Lenders may request. SECTION 7. NEGATIVE COVENANTS. The Borrower and the Parent covenant that from the date of this Agreement and thereafter and until all of the Loans and the Letters of Credit and any other amounts due and owing under the Loan Documents have been fully, finally and indefeasibly paid, discharged and retired (and the Commitments of the Lenders have expired or been terminated in full): 7.1 Indebtedness.7.1 Indebtedness. The Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume, enter into a Guaranty or otherwise become or remain directly or indirectly liable with respect to any Indebtedness, except that the Borrower, the Parent and the Subsidiaries may become or remain liable with respect to the following ("Permitted Indebtedness"): (a) In the case of the Borrower only, the Loans. (b) In the case of the Borrower and the Subsidiaries, Capital Lease Obligations and purchase money Indebtedness in the aggregate amount of $2,500,000 incurred with respect to the lease, hire or use by the Borrower of operating office equipment in the ordinary course of business. (c) In the case of the Borrower and the Subsidiaries, purchase money obligations in the aggregate amount of $1,000,000 incurred with respect to the purchase of real property on which is situated all or any -62- part of the equipment or facilities of the Parent, the Borrower or a Subsidiary and for which a first mortgage in favor of the Agent Bank is executed and delivered. (d) In the case of the Parent, the Borrower and the Subsidiaries only, subordinated unsecured promissory notes in the aggregate amount of $10,000,000 which are issued in connection with Permitted Acquisitions; provided, however, that the terms of such notes shall include subordination provisions satisfactory to the Agent Bank and shall otherwise be on terms and conditions reasonably acceptable to the Agent Bank. (e) Such other Indebtedness as the Lenders, in their sole and absolute discretion, shall approve ("Approved Debt"). (f) In the case of the Parent and the Subsidiaries, the Guaranty Agreements. (g) In the case of Special Purpose Subsidiaries only, Indebtedness existing on the date of such Subsidiary's acquisition, which Indebtedness is (i) unsecured or secured only by real estate, fixed assets or equipment and (ii) in an aggregate amount which does not exceed $2,000,000; provided, however, that such Indebtedness must be repaid on the earlier of (A) the date on which such Special Purpose Subsidiary is dissolved or (B) sixty (60) days after such Special Purpose Subsidiary is acquired, unless the Majority Lenders otherwise consent in writing or such Indebtedness would otherwise be Permitted Indebtedness under a subsection of this Section 7.1 other than this Section 7.1(g). (h) Guaranties given by the Borrower, the Parent or any Subsidiary in favor of any of the Borrower, the Parent or any Subsidiary with respect to Indebtedness otherwise permitted by this Section 7.1. (i) In the case of the Borrower only, self-insurance subject to the provisions of Section 6.14(c). (j) Indebtedness existing on the Closing Date, as set forth on Schedule 7.1(j). 7.2 Liens. The Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property, asset or revenues (including any document or instrument in respect of goods or accounts receivable) of the Borrower, the Parent or any Subsidiary, whether now owned or hereafter acquired, except the following ("Permitted Liens"): (a) Liens in favor of the Agent Bank or the Lenders. -63- (b) In the case of the Borrower and the Subsidiaries, liens of carriers, warehousemen, mechanics and materialmen or other similar Liens incurred in the ordinary course of business which are not overdue for a period of more than thirty (30) days or which are being contested in good faith and by proper proceedings. (c) In the case of the Borrower and the Subsidiaries, leases or subleases granted to others, easements, rights-of-way, restrictions and other similar charges or encumbrances, in each case incidental to, and not interfering in a material respect with, the ordinary conduct of the business of the Borrower, the Parent or any Subsidiary. (d) In the case of the Borrower and the Subsidiaries, Liens incurred in connection with the Indebtedness relating to purchase money obligations permitted under Sections 7.1(b) and (c), provided that (i) such Liens shall be limited to any equipment financed thereby and (ii) no such lien may be spread to cover other or additional Indebtedness or property of the Borrower, the Parent or any Subsidiary. (e) Pledges or deposits in connection with workmen's compensation, unemployment insurance or other social security legislation. (f) Restrictions, easements and minor irregularities in title which do not and will not interfere in a material respect with the occupation, use and enjoyment by the Parent, the Borrower and the Subsidiaries of their properties and assets in the normal course of their businesses as presently conducted or materially impair the value of their properties and assets for the purpose of their businesses. (g) Liens arising pursuant to Section 412(n) of the Code or ERISA Section 4068(a) if (i) the delinquent payments to which the Lien relates are made within ten (10) days after a responsible officer of the Parent, the Borrower or any of the Subsidiaries learns of the failure to make payment or (ii) the obligation to make such payments is being contested in good faith and by appropriate proceedings, diligently conducted, if adequate reserves with respect thereto are maintained on the books of the Borrower or such Subsidiary, as the case may be, in accordance with GAAP. (h) Liens currently of record listed on Schedule 7.2. (i) Liens on real estate, fixed assets or equipment in connection with Indebtedness permitted under Section 7.1(g). (j) Liens for taxes or assessments and similar charges either (i) not delinquent or (ii) being contested in good faith by appropriate -64- proceedings, and as to which the Borrower, the Parent or such Subsidiary, as the case may be, shall have set aside on its books adequate reserves; provided, however, that any obligations giving rise to such Lien shall be paid immediately upon the commencement of proceedings to foreclose such Lien unless such proceedings shall have been stayed or adequate evidence of a surety bond satisfactory to the Lenders shall have been delivered to the Lenders. 7.3 Investments and Loans. The Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly, make or own any Investment in any Person, other than a Subsidiary (including without limitation the contribution or transfer of ownership or possession of any of its cash, property rights or other assets to any Subsidiary) without the prior written consent of the Agent Bank, except that the Borrower may make and own Investments (a) set forth on Schedule 7.3, (b) in marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing within one year from the date of acquisition thereof, (c) in open market commercial paper maturing within one year currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., (d) in certificates of deposit maturing within one year from the date of issuance thereof issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $500,000,000, (e) in repurchase agreements with commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits of not less than $500,000,000 and fully secured by securities of the types listed in (b) and (c), (f) in deposits, federal funds or commercial paper sold by the Agent Bank or its Affiliates, (g) in reputable money market funds with assets in excess of $500,000,000, (h) in deposits in accounts in the Borrower's local banks for payroll and accounts payable in the ordinary course of business; and (i) in Special Purpose Subsidiaries. 7.4 Fundamental Changes. Other than in connection with the Restructuring, the Borrower and the Parent will not, and will not permit any Subsidiary to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business or assets, or other than as permitted by Section 7.16, acquire by purchase or otherwise all or substantially all of the business or assets of, or stock or other evidence of beneficial ownership of, any Person, or make any material change in its present business or in its present method of conducting business, except that: -65- (a) any Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower; and (b) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving corporation). 7.5 Sale of Assets. The Borrower and the Parent will not, and will not permit any Subsidiary to, sell, lease, assign, pledge, transfer or otherwise dispose of any of their assets (including, without limitation, accounts receivable and leasehold interests), whether now owned or hereafter acquired, except that the Borrower may sell tangible assets if the total amount of the sale would be less than five (5%) of the Borrower's tangible assets in any one year and such sale would not impair the going concern value of the Borrower. 7.6 Compliance with ERISA. The Borrower and the Parent will not (a) terminate or withdraw from any Plan so as to result in any material liability to PBGC, (b) engage in or permit any Person to engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan which would subject the Parent, the Borrower or any of its Subsidiaries to any material tax, penalty or other liability, (c) incur or suffer to exist any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, involving any Plan, or (d) allow or suffer to exist any event or condition which presents a material risk of incurring a material liability to PBGC. 7.7 Lease Obligations. The Borrower and the Parent will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any lease, excluding any real property lease, or other obligation to pay rent with a term of one year or more if by reason thereof the aggregate of all rental payments payable by such parties during any fiscal year would exceed $2,000,000. 7.8 Transactions With Affiliates. Except as otherwise permitted by this Agreement and as set forth on Schedule 5.26, the Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly, (a) make any loan, advance, extension of credit or capital contribution to or other investment in any Affiliate, (b) transfer, sell, assign or otherwise dispose of any assets to any Affiliate (excluding payment to an Affiliate of dividends payable in capital stock and otherwise permitted by this Agreement), (c) merge or consolidate with or purchase or acquire assets from any Affiliate, or (d) enter into any other transaction with or for the benefit of any Affiliate. -66- 7.9 Retirement of Debt. The Borrower and the Parent will not purchase, acquire, redeem or retire, or make any payment on account of principal of, any Indebtedness of the Borrower, the Parent or of any Subsidiary except as expressly permitted by Section 7.1. 7.10 Use of Proceeds. The Borrower and the Parent will not use or permit any proceeds of the Loans to be used, either directly or indirectly, for any purpose, whether immediate, incidental or ultimate, which would be inconsistent with this Agreement. 7.11 Other Agreements. The Borrower and the Parent will not, and will not permit any Subsidiary to, enter into any agreement, contract or undertaking containing any provision which would be violated or breached by the performance by the Borrower, the Parent or such Subsidiary, as the case may be, of its obligations hereunder or under any other Loan Document. 7.12 Restricted Payments. Except for (a) Restricted Payments in the ordinary course of business to Subsidiaries that are 100% owned by the Parent, (b) Restricted Payments from the Borrower to the Parent for the ordinary operating needs of the Parent, and then only in the ordinary course of business, and (c) annual dividend payments by the Parent after the Conversion Date in an amount not to exceed the remaining Excess Cash Flow after mandatory prepayment of Excess Cash Flow has been made to the Lenders in accordance with Section 2.6(b), the Borrower and the Parent will not, and will cause the Subsidiaries not to, declare, order, pay, make or set apart any sum or property for any Restricted Payment. 7.13 Restricted Leases: Sharing of Facilities. (a) The Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly, become or remain liable as lessee or as guarantor or other surety with respect to any agreement for the lease, hire or use of any real estate or personal property other than as expressly permitted by Section 7.1 or for inter-company guarantees of lease obligations otherwise permitted by this Agreement; provided, however, that sublets of leased property in the ordinary course of business and on terms and conditions no less favorable than that imposed on the lessee/sublessor shall be permitted. (b) Anything herein to the contrary notwithstanding, the Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly, become or remain liable as lessee or as guarantor or other surety with respect to any material lease of any property (whether real, personal or mixed) (i) whether now owned or hereafter acquired which has -67- been or is to be sold or transferred (otherwise than by lease) by such Person to any other Person or (ii) which the Borrower, the Parent, or any Subsidiary intends to use for substantially the same purpose as any other property now owned or hereafter acquired by the Borrower, the Parent, or any Subsidiary which has been or is to be sold or transferred (otherwise than by lease) by such person to any other Person in connection with such lease. 7.14 Operating Licenses. The Borrower and the Parent will not and will not, permit any Subsidiary to, violate any material laws, ordinances or governmental rules and regulations to which any of them is subject or the provisions or conditions of any Operating Licenses which they hold, and will not fail to obtain any licenses (including Operating Licenses), permits, franchises or other governmental authorizations or approvals necessary to the ownership, construction, operation, acquisition or disposition of their respective properties or to the conduct of their respective businesses, the failure of which to obtain would result in a Material Adverse Effect. 7.15 Type of Business. The Borrower and the Parent will not, and will not permit any Subsidiary to, enter into any business which is substantially different from the sale and monitoring of alarm systems and the provision of security services or make any substantial change in the nature of its businesses or operations other than expansion to the extent not prohibited hereunder; provided, that the business of each such Person shall at all times primarily be the sale, lease (or rental), installation, maintenance and monitoring of alarm systems for residential, industrial, commercial or governmental customers, or in the case of Dictograph Franchise Corporation, the sale of franchises and/or dealerships of its Security Services business to independent dealers, for whom Dictograph Franchise Corporation agrees to provide for a fee all or a portion of the Security Services for such Person's customers. 7.16 Permitted Acquisitions. The Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly, through joint ventures or any other means, enter into or consummate the acquisition of assets or stock or other ownership interests of another Person after the date of this Agreement, except that the Borrower may enter into and consummate acquisitions in accordance with the following restrictions and limitations ("Permitted Acquisitions"): (a) Prior to making any such acquisition, the Borrower shall have delivered to the Lenders, and the Majority Lenders shall have approved, an Officer's Certificate representing that both before and after giving effect to such acquisition, the Borrower and the Parent remain in full compliance with the covenants set forth in Sections 6 and 7 hereof and there exists no Event of Default or Potential Event of Default. -68- (b) With respect to any acquisition of assets or of another Person whose purchase price exceeds (i) $4 million or (ii) 35 times the Recurring Monthly Revenue to be acquired, the Lenders shall have provided their prior written consent (which consent shall not be unreasonably withheld). (c) The Borrower shall have submitted to the Lenders a copy of the proposed purchase contract and the due diligence reports prepared by the Borrower for acquisitions falling under the requirements of clause (b) above and those acquisitions whose aggregate purchase price equals or exceeds $4 million, and the approval of the Majority Lenders shall have been received with respect thereto. For purposes of determining the "purchase price" hereunder, (i) payment solely in shares of capital stock of the Parent shall not be included in any such determination and (ii) the amount of cash paid and the amount of liabilities, if any, assumed in such acquisition shall be aggregated. 7.17 Ownership Interests and Indebtedness. (a) The Borrower and the Parent will not, and will not permit any Subsidiary to, directly or indirectly sell, assign, pledge or otherwise dispose of any Indebtedness or any shares of stock of (or warrants, rights or options to acquire stock of) or ownership interests in any Person other than the Parent. (b) The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, create, authorize or issue any additional capital stock or other equity security (or options to acquire such shares, stock or other equity security). 7.18 Fiscal Year. Neither the Borrower nor the Parent shall change its fiscal year without the prior written consent of the Agent Bank or change its method of accounting (other than immaterial changes in methods or changes permitted by GAAP in which such Person's auditors concur, or changes required by a change in GAAP). 7.19 Financial Covenants. (a) Ratio of Total Consolidated Debt/Annualized Quarterly Consolidated EBITDA. On the Closing Date and thereafter at the end of each Quarter set forth below, the ratio of Total Consolidated Debt to Annualized Quarterly Consolidated EBITDA shall not exceed: -69- Period Ratio ------ ----- Closing Date 1.95 All Quarters of 1996 1.95 Quarter ending March 31, 1997 1.95 Quarter ending June 30, 1997 through Quarter ending March 30, 1998 1.50 Quarter ending June 30, 1998 through Quarter ending March 30, 1999 1.30 Quarter ending June 30, 1999 and thereafter 1.00 (b) Ratio of Total Consolidated Debt/Annualized Quarterly Consolidated EBITDA Minus Capital Expenditures. At the end of each Quarter ending in the fiscal year set forth below, the ratio of (i) Total Consolidated Debt to (ii) Annualized Quarterly Consolidated EBITDA minus the cumulative Capital Expenditures for all completed Quarters of such fiscal year shall not exceed: Period Ratio ------ ----- 1996 -- Quarter ending March 31, 1997 -- All other Quarters of 1997 3.00 1998 2.50 1999 2.00 2000 1.50 2001 1.25 2002 1.25 2003 1.25 (c) Ratio of Total Consolidated Debt/Recurring Monthly Revenue. On the Closing Date and thereafter at the end of each Quarter, the ratio of Total Consolidated Debt to Recurring Monthly Revenue shall not exceed 20.0. For purposes of calculating the financial covenants set forth in Sections 7.19(a), (b) and (c) only, "Total Consolidated Debt" shall not include unfunded pension liabilities which existed as of December 31, 1995. (d) Maximum Attrition. On a monthly basis, Attrition shall not exceed twelve percent (12%) per annum, tested at the end of two consecutive Quarters, commencing with the Quarters ending December 31, -70- 1997. For purposes of this Section 7.19(d), "Attrition" shall be calculated in accordance with Schedule 7.19. (e) Minimum Interest Coverage. On the Closing Date and thereafter at the end of each Quarter, the ratio of Annualized Quarterly Consolidated EBITDA to Interest Expense shall not be less than 4.0. (f) Minimum Consolidated Net Worth. On the Closing Date and thereafter at the end of each Quarter, the Consolidated Net Worth of the Parent, the Borrower and the Subsidiaries shall be at least $45,000,000, plus the amount of net proceeds received through issuance of common stock of the Parent referred to in Section 2.1. (g) Minimum Debt Service. On the Conversion Date and thereafter at the end of each Quarter, the ratio of Annualized Quarterly Consolidated EBITDA to Total Projected Debt Service during the twelve month period following such date shall not fall below 1.15. (h) Maximum Capital Expenditures. On the Closing Date and thereafter at the end of each Quarter ending in the fiscal year set forth below, the aggregate maximum amount of Capital Expenditures for the Parent, the Borrower and the Subsidiaries shall not exceed: Fiscal Year Amount ----------- ------ 1996 $12,000,000 1997 $ 8,500,000 1998 $ 8,500,000 1999 $ 8,500,000 2000 $ 9,000,000 2001 $ 9,500,000 2002 $ 9,500,000 2003 $10,000,000 For purposes of determining compliance with the financial covenants set forth in this Section 7.19, (i) Consolidated EBITDA contributed to the Borrower through Permitted Acquisitions will be accounted for on a pro forma basis for the Quarter during which the Permitted Acquisitions were consummated and (ii) the terms "Debt" and "Indebtedness" shall not include any Guaranty of the Borrower, the Parent or any Subsidiary in favor of the Borrower, the Parent or any Subsidiary. -71- SECTION 8. EVENTS OF DEFAULT 8.1 Event of Default. "Event of Default" means any of the following events: (a) If the Borrower (i) fails to pay interest on the Notes when the same becomes due and payable or (ii) fails to pay the principal of or premium, if any, on the Notes when the same becomes due and payable, whether at the maturity thereof, on a date fixed for payment or for a prepayment, or otherwise. (b) If the Borrower, the Parent or a Subsidiary shall default (as payor or guarantor or other surety) in any payment of any principal or premium or interest on any Indebtedness in respect of borrowed money with an unpaid principal amount in excess of $1,000,000, or if any event shall occur or condition shall exist in respect of any such Indebtedness or under any evidence of any such Indebtedness or of any mortgage, indenture or other agreement relating thereto, and any such default shall continue for more than the period of grace, if any, specified therein and shall not have been waived pursuant thereto. (c) If the Borrower, the Parent or any Subsidiary shall default in payment or performance of any material obligation (except Indebtedness, which is covered in subsection (b) above), whether now or hereafter incurred, and such default shall continue for more than the period of grace, if any, specified in the agreement or other documents setting forth the terms of such obligation, or shall not have been waived pursuant thereto, and in the Agent Bank's sole and absolute discretion, either individually or together with any other defaults hereunder, materially jeopardizes or could reasonably be expected to materially jeopardize repayment of any of the Notes, consummation of the transactions contemplated by the Loan Documents, or could reasonably be expected to have a material adverse effect on the business, properties, operation or condition, financial or otherwise, of the Borrower or the Parent. (d) If any representation and warranty made by any of the Borrower, the Parent or a Subsidiary in any Loan Document to which it is a party or in any document, certificate or statement furnished to the Agent Bank or a Lender pursuant to this Agreement is false in any material respect when made or deemed to be made. (e) If there has been a breach of any term, covenant, or agreement contained in Section 6 or Section 7 hereof. -72- (f) If any defaults occur under any other Loan Documents and continue beyond any cure period provided therein. (g) If custody or control of any substantial part of the property of the Borrower, the Parent or a Subsidiary shall be assumed by any governmental agency or any court of competent jurisdiction at the instance of any governmental agency or if any governmental regulatory authority shall take any final action the effect of which would be to affect materially and adversely the operations of the Borrower, the Parent or such Subsidiary as now or then conducted. (h) If the Borrower, the Parent or any Subsidiary shall suspend or discontinue its business, shall make an assignment for the benefit of creditors or a composition with creditors, shall generally not pay its debts as they mature, shall institute a case or proceeding in bankruptcy, shall become insolvent (however such insolvency may be evidenced), shall be adjudicated insolvent or bankrupt, shall petition or apply to any tribunal for the appointment of any receiver, liquidator or trustee of or for it or any substantial part of its property or assets, shall commence any proceeding relating to it under any bankruptcy, reorganization, arrangement, readjustment of debt, receivership, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or if there shall be commenced against the Borrower, the Parent or any Subsidiary any such case or proceeding and the same shall not be dismissed within ninety (90) days or if the Borrower, the Parent or any Subsidiary shall by any act or failure to act indicate its consent to, approval of or acquiescence in, any such case or proceeding or any appointment of any receiver, liquidator or trustee of or for it or for any substantial part of its property or assets, or shall suffer the appointment of any receiver, liquidator or trustee, or shall take any corporate action for the purpose of effecting any of the foregoing; or if any court of competent jurisdiction shall assume jurisdiction with respect to any such case or proceeding and the same shall not be dismissed within ninety (90) days or if a receiver or a trustee or other officer or representative of a court or of creditors, or if any court, governmental office or agency shall, under color of legal authority, take and hold possession of any substantial part of the property or assets of the Borrower, the Parent or any Subsidiary or if the Borrower, the Parent or any Subsidiary shall have concealed, removed or permitted to be concealed or removed any part of its property with intent to hinder, delay or defraud its creditors, or any of them, or shall have knowingly made or knowingly suffered a transfer of any of its property which is fraudulent under any bankruptcy, fraudulent conveyance or similar law or if the Borrower, the Parent or any Subsidiary, while insolvent, shall have made any transfer of its property to or for the benefit of a creditor at a time when other creditors similarly situated have not been paid, or if the -73- Borrower, the Parent or any Subsidiary shall have suffered or permitted, any creditor to obtain a lien upon any of its property through legal proceedings. (i) If there has been a denial, forfeiture, revocation, or nonrenewal by the pertinent Governmental Authority of any Operating License or other authorization required by law of the Borrower, the Parent or any Subsidiary (or the expiration without renewal of any such authorization) and such denial, forfeiture, revocation, non-renewal or expiration has a material adverse effect on the financial condition, operations or business of the Parent, the Borrower and the Subsidiaries, taken as a whole. (j) The Borrower, the Parent or any Subsidiary shall be dissolved (except (A) Persons dissolved in connection with the Restructuring, (B) Special Purpose Subsidiaries dissolved within one hundred and eighty (180) days of their acquisition and (C) Non-U.S. Subsidiaries dissolved by December 31, 1996) or shall lose its corporate or legal status by forfeiture or by any judicial or administrative proceeding or otherwise; or (k) A Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed to administer or to terminate, any Plan under which there are unfunded vested benefits that are material in relation to the business, operations, prospects, assets, properties or condition (financial or otherwise) of the Borrower, the Parent or any Subsidiary, which Reportable Event or institution of proceedings is, in the opinion of the Agent Bank, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for a period of ten (10) days after notice of such Reportable Event pursuant to Section 4043(a), (c) or (d) of ERISA is given or the continuance of such proceedings for a period of ten (10) days after commencement thereof, as the case may be; a trustee shall be appointed by PBGC or any Federal Court to administer any such Plan; or any such Plan shall terminate for purposes of Title IV of ERISA. (l) If judgments for the payment of money in an aggregate amount not to exceed $100,000 shall be rendered against the Borrower, the Parent or a Subsidiary and such judgments remain either unstayed or unsatisfied for a period of thirty (30) days. (m) If any property of the Borrower, the Parent or a Subsidiary is attached, levied upon, seized under authority of a court, or otherwise taken in satisfaction of judgments in an aggregate amount not to exceed $50,000 against the Borrower, the Parent or such Subsidiary. (n) If a Change of Control shall have occurred. -74- (o) If, at any time before the Conversion Date, the employment of George Flagg shall have been involuntarily terminated without cause, unless such termination had been previously disclosed to the Agent Bank and the Agent Bank had not objected thereto. (p) Other than as specified in Sections 8.1(a) through 8.1(o), the occurrence of any other default in the due performance or observance of any term, covenant or agreement to be performed or observed pursuant to the provisions of this Agreement and such default continues for thirty (30) days after notice of such default by the Borrower. The grace period described in this Section 8.1(p) is not applicable to any default referred to in Sections 8.1(a) through 8.1(o). 8.2 Acceleration; Remedies. (a) Acceleration. Upon the occurrence and during the continuation of any Event of Default, the entire unpaid principal balance of the Notes and interest accrued thereon, all Reimbursement Obligations and any unpaid expenses payable under this Agreement shall be immediately due and payable by the Borrower and the Commitment of the Lenders to fund and to issue Letters of Credit shall immediately terminate. Such principal and interest and all Reimbursement Obligations shall become and be immediately due and payable, without presentation, demand, protest, notice of protest or other notice of dishonor of any kind, all of which are hereby expressly waived by the Borrower. (b) Remedies. Upon the occurrence of an Event of Default, the Lenders and the Agent Bank may protect and enforce their rights hereunder or realize on any or all security granted pursuant hereto or pursuant to the other Loan Documents in any manner or order they deem expedient without regard to any equitable principles of marshalling or otherwise. In addition to all other rights hereunder or under law, the Lenders and the Agent Bank shall have the right to institute proceedings in equity or other appropriate proceedings for the specific performance of any covenant or agreement made herein or in any document executed in connection herewith or for an injunction against the violation of any of the terms hereof or thereof or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. Further, upon the occurrence of any Event of Default, the Lenders and the Agent Bank shall be entitled, to the extent not prohibited by applicable law, to the appointment of a trustee or receiver for all or any part of the business of the Borrower or the Parent, which trustee or receiver shall have such powers as may be conferred by the appointing authority, and the Borrower and the Parent, on behalf of themselves and the Subsidiaries, hereby consent to such appointment. All rights and remedies given by this Agreement and the other Loan Documents -75- are cumulative and not exclusive of any other rights or remedies available to the Lenders and the Agent Bank, and no course of dealing between the Borrower, the Parent, the Agent Bank or a Lender or any delay or omission in exercising any right or remedy shall operate as a waiver of any right or remedy, and every right and remedy may be exercised from time to time and as often as shall be deemed appropriate by the Lenders and the Agent Bank. (c) Waiver. The Lenders may, by notice to the Borrower, at any time and from time to time waive, in whole or in part, any Event of Default. Any such waiver shall be for such period and subject to such conditions or limitations as may be specified in any such notice. In the case of any such waiver, the rights of the Agent Bank and the Lenders shall be otherwise unaffected and any Event of Default so waived shall be deemed to be cured and not continuing only to the extent and on the conditions or limitations, if any, set forth in such waiver (unless such waiver shall state to the contrary), but no such waiver shall extend to any subsequent or other Event of Default. (d) Governmental Consent. If counsel to the Agent Bank reasonably determines that the consent of any Governmental Authority is required in connection with any of the actions which may be taken by the Agent Bank in the exercise of its rights under the Loan Documents, each of the Borrower and the Parent, at its sole cost and expense, agrees to use its best efforts to secure such consent and to cooperate with the Agent Bank in any action commenced by the Agent Bank to secure such consent. Upon the occurrence and during the continuation of an Event of Default, the Borrower and the Parent, subject to the provisions of applicable law, shall promptly execute or cause the execution of all applications, certificates, instruments and other documents and papers that the Agent Bank may be required to file in order to obtain any necessary governmental consent, approval or authorization, and if the Borrower or the Parent refuses to execute such documents, the clerk of the court with jurisdiction may execute such documents on behalf of the Borrower or the Parent, as the case may be. The Borrower agrees to assist the Agent Bank to obtain any required Operating Licenses. The Borrower and the Parent further recognize that a violation of this covenant would result in irreparable harm to the Agent Bank for which monetary damages are not readily ascertainable. Therefore, in addition to any other remedy which may be available to the Agent Bank, at law or in equity, the Agent Bank shall have the remedy of specific performance of the provisions of this subsection. -76- SECTION 9. AGENCY 9.1 Authority. In order to expedite the transactions contemplated by this Agreement, Merita is hereby appointed to act as Agent Bank on behalf of the Lenders. Each of the Lenders and any subsequent holder of any Note by its acceptance thereof, irrevocably authorizes the Agent Bank to execute and take such action on its behalf under the provisions of the Loan Documents and to exercise such powers hereunder and thereunder as are specifically delegated to the Agent Bank by the terms hereof and thereof and such powers as are reasonably incidental thereto. The Agent Bank is hereby expressly authorized on behalf of the Lenders, without limiting any implied authority, (i) to receive on behalf of each of the Lenders any payment of principal or interest on the Notes outstanding hereunder and all other amounts, including fees, payable hereunder, and to promptly distribute to each Lender its proper share of all payments so received, (ii) to distribute to each Lender copies of all notices, agreements and other material as provided for in this Agreements or in the Security Agreement and (iii) to take all actions with respect to the Loan Documents as are specifically delegated to the Agent Bank. 9.2 Expenses. Each Lender agrees (a) to reimburse the Agent Bank in the amount of such Lender's pro rata share (based on its percentage of the Total Commitment hereunder) for any expenses incurred by the Agent Bank for the benefit of the Lenders, including counsel fees and compensation of agents and employees, and all other amounts paid by the Agent Bank respectively, for services rendered on behalf of the Lenders, to the extent not reimbursed by the Borrower and (b) to indemnify and hold harmless the Agent Bank and any of its directors, officers, employees or agents, on demand, in the amount of its pro rata share, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against it in its capacity as the Agent Bank or any of its directors, officers, employees or agents in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Agent Bank or any of its directors, officers, employees or agents under the Loan Documents, to the extent not reimbursed by the Borrower; provided, however, that no Lender shall be liable to the Agent Bank for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgment, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Agent Bank, or any of its directors, officers, employees or agents. 9.3 Exculpatory Provisions. Neither the Agent Bank nor any of its officers, directors, employees or agents will be liable to the Lenders for any action taken or omitted hereunder or in connection herewith or in -77- connection with any document or instrument now or hereafter executed in connection herewith unless caused by its gross negligence or willful misconduct. The Agent Bank will not be responsible for any recitals, warranties or representations herein or in any such other document or instrument. The Lenders acknowledge that they have reviewed this Agreement, the Notes, the Security Agreements, the Pledge Agreements, the Guaranty Agreements and all of the other Loan Documents and are fully aware of the terms hereof and thereof. The Agent Bank may execute any of its duties by or through agents or employees and will be entitled to advice of counsel, accountants or other professionals of its selection concerning all matters pertaining to the Loan Documents or such other documents and instruments and its duties hereunder and thereunder. The Agent Bank will be entitled to rely upon any writing or other document, telegram or telephone conversation believed by it to have been signed, sent or made by the proper person or persons and, in respect of legal matters, upon the advice of counsel selected by the Agent Bank. The Agent Bank shall be fully justified in failing or refusing to take any action under this Agreement and the other Loan Documents unless it shall first receive such advice or concurrence of the Majority Lenders (or, when expressly required hereby or by the relevant other Loan Document, all the Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action except for its own gross negligence or willful misconduct. The Agent Bank shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Majority Lenders (or, when expressly required hereby, all the Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes. 9.4 Investigation by Lender. Each Lender acknowledges that the Agent Bank has not made any representation or warranty to it and that no act taken by the Agent Bank will be deemed to constitute a representation or warranty by the Agent Bank to any Lender. Each Lender further acknowledges that it has taken and will continue to take such action and to make such investigation as it deems necessary to inform itself of the affairs of the Parent or the Borrower and that it has made and will continue to make its own independent investigation of the creditworthiness and the business and operations of the Borrower and the Parent. In making an advance hereunder, each Lender represents that it has not relied and will not rely upon any information or representations furnished or given by the Agent Bank. The Agent Bank will be under no duty or responsibility to the Lenders to ascertain or to inquire into the performance or observance by the Borrower or the Parent of any of the provisions of this Agreement or any document or instrument now or hereafter executed in connection herewith. The Agent -78- Bank will not have any duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Borrower, the Parent or any Subsidiary which may come into the possession of the Agent Bank. The Lenders understand and agree that the Agent Bank will not be deemed to have knowledge of the existence, occurrence or continuance of an Event of Default, unless the officers of the Agent Bank immediately responsible for matters concerning this Agreement will have actual knowledge of such occurrence or will have been notified in writing by any Lender or Borrower that the Lender or the Borrower, as applicable, considers that an Event of Default has occurred and is continuing and specifying the nature thereof. 9.5 Action Upon Default. (a) Anything in Section 8 of this Agreement to the contrary notwithstanding upon the occurrence and during the continuation of an Event of Default hereunder, the Agent Bank upon (i) the request of the Majority Lenders, and (ii) the providing by the Majority Lenders of an indemnity in form and substance satisfactory to the Agent Bank (in proportion to their respective portions of the Loans) of all expenses to the extent not reimbursed by the Borrower (including attorneys' fees of the Agent Bank's counsel) and disbursements, will declare the Notes to be due and payable and will proceed to enforce the rights of the holders of the Notes by such proceedings as the Agent Bank may deem appropriate, whether at law or in equity. Upon any request aforesaid, the Agent Bank will declare the Notes to be due and payable, but the Agent Bank will be justified in failing or refusing to take any further action unless it will be indemnified to its satisfaction as aforesaid. It is agreed that if the Agent Bank, having been so indemnified, or not having been indemnified to its satisfaction, will fail to so proceed, any Lender will be entitled to take such action as it will deem appropriate to enforce its rights. (b) The Agent Bank, on behalf of all the Lenders, will hold in accordance with the Security Agreements and the Pledge Agreements all items of collateral or interest therein received or held by the Agent Bank. Subject to the Agent Bank's and the Lenders' rights to reimbursement for their costs and expenses hereunder and subject to the application of payments in accordance with the terms of this Agreement, each Lender will have an interest in any collateral or interests therein in the same proportions that the aggregate outstanding principal obligations owed such Lender bear to the aggregate outstanding principal obligations owed to all the Lenders, without priority or preference among the Lenders. 9.6 Instructions. The Agent Bank will in all cases be fully protected in acting, or in refraining from acting, hereunder or in connection -79- with any other documents or instruments now or hereafter executed in connection herewith in accordance with written instructions of the Lenders. 9.7 Resignation as Agent. Subject to the appointment and acceptance of a successor Agent Bank as provided below, the Agent Bank may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Lenders will have the right to appoint a successor Agent Bank. If no successor Agent Bank will have been so appointed by the Lenders and will have accepted such appointment within thirty (30) days after the retiring Agent Bank gives notice of its resignation, then the retiring Agent Bank may, on behalf of the Lenders, appoint a successor Agent Bank which will be a bank with an office (or an affiliate with an office) in New York, New York, having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent Bank hereunder by a successor bank, such successor will thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent Bank and the retiring Agent Bank will be discharged from its duties and obligations hereunder and under the Security Agreements and the Pledge Agreements. After any Agent Bank's resignation hereunder, the provisions of this Section 9 will continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent Bank. SECTION 10. MISCELLANEOUS 10.1 Notices. All notices and other communications hereunder shall be given in writing and shall be deemed to have been delivered when delivered personally (including by means of telex, telecopier or telefax systems), or the day following delivery to a reputable overnight courier service which guarantees delivery within 24 hours, charges prepaid (or upon the date mailed, if sent certified mail, postage prepaid, return receipt requested, and delivery is refused or returned as undeliverable), to the respective parties to this Agreement as follows: (a) If to the Borrower: Holmes Holding Company, Inc. 440 9th Avenue New York, New York 10001-1695 Attention: Lawrence R. Irving Telephone: (212) 760-0630 Telecopy: (212) 563-0129 -80- with a copy (which shall not constitute notice) to: Buchanan Ingersoll 500 College Road East Princeton, New Jersey 08540 Attention: Dennis M. Stern, Esq. Telephone: (609) 987-6800 Telecopy: (609) 520-0360 (b) If to the Guarantor: Holmes Protection Group, Inc. 440 9th Avenue New York, New York 10001-1695 Attention: Lawrence R. Irving Telephone: (212) 760-0630 Telecopy: (212) 563-0129 with a copy (which shall not constitute notice) to: Buchanan Ingersoll 500 College Road East Princeton, New Jersey 08540 Attention: Dennis M. Stern, Esq. Telephone: (609) 987-6800 Telecopy: (609) 520-0360 (c) If to Merita or the Agent Bank: Merita Bank Ltd 437 Madison Avenue 21st Floor New York, New York 10022 Attention: Charles J. Lansdown Telephone: (212) 318-9562 Telecopy: (212) 421-4420 -81- with copies (which shall not constitute notice) to: Merita Bank Ltd 437 Madison Avenue 21st Floor New York, New York 10022 Attention: Rossella Perna Telephone: (212) 318-9345 Telecopy: (212) 421-4420 and Hogan & Hartson L.L.P. Columbia Square 555 Thirteenth Street, N.W. Washington, D.C. 20004-1109 Attention: Claudette M. Christian, Esq. Telephone: (202) 637-5650 Telecopy: (202) 637-5910 (d) If to BKBCT: Bank of Boston Connecticut 100 Pearl Street Hartford, Connecticut 06103 Attention: Roger J. Roche, Jr., Director Telephone: (860) 727-6568 Telecopy: (860) 727-6975 with a copy (which shall not constitute notice) to: Updike, Kelly & Spellacy, P.C. One State Street P.O. Box 231277 Hartford, Connecticut 06123-1277 Attention: John F. Wolter, Esq. Telephone: (860) 548-2628 Telecopy: (860) 548-2680 The designation of the person to be so notified or the address of such person for the purposes of such notice may be changed from time to time by similar notice in writing. 10.2 Payment of Expenses. The Borrower shall pay and save the Agent Bank and the Lenders harmless against liability for the payment of all expenses arising in connection with the administration of the -82- Loan Documents (including any insurance premiums relating to insurance required to be maintained hereunder paid by the Agent Bank and the Lenders on behalf of the Borrower in case the Borrower fails to maintain such insurance, any modification of, or any consent or waiver under, the Loan Documents, all expenses, if any, in connection with the Borrower's failure to make any repayment when due, and any enforcement of, or the preservation of any rights under, the Loan Documents, including, without limitation, the fees of counsel to the Agent Bank and the Lenders) and against liability for the payment of all expenses arising in connection, with the preparation, execution and delivery of the Loan Documents, the transactions contemplated under the Loan Documents, and expenses of the Agent Bank and the Lenders (including reasonable fees of counsel to the Agent Bank and the Lenders). The obligations of the Borrower under this Section 10.2 shall survive the termination of the Loan Documents and the payment of the Notes. 10.3 Stamp or Other Tax. Should any stamp or excise tax be payable in respect of any of the Loan Documents or any modification hereof or thereof, the Borrower agrees to pay the same (including interest and penalties, if any) and to hold the Agent Bank and the Lenders harmless with respect thereto. 10.4 Fees and Commissions. The Borrower agrees to indemnify and hold harmless the Agent Bank and the Lenders in respect of any commissions, fees, judgments or expenses of any nature and kind which they may become liable to pay by reason of any claims by or on behalf of brokers, finders or agents in connection with the transactions contemplated by this Agreement or any litigation or similar proceeding arising from such claims. The Borrower represents and warrants that there are no valid bases for any such claims against the Agent Bank and the Lenders. 10.5 No Waiver. No failure or delay on the part of the Agent Bank or a Lender or the holder of the Notes in exercising any right, power or privilege hereunder, and no course of dealing between the Borrower and the Agent Bank or a Lender or the holder of any of the Notes, will operate as a waiver thereof; nor will any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Agent Bank or a Lender or any subsequent holder of any of the Notes would otherwise have. No notice to or demand on the Borrower or the Parent in any case will entitle the Borrower or the Parent to any other or further notice or demand in similar or other circumstances or will constitute a waiver of the right of the Agent Bank or a Lender to take any other or further action in any circumstances without notice or demand. -83- 10.6 Entire Agreement and Amendments. The Loan Documents represent the entire agreement between the parties hereto with respect to the Loans, the Letters of Credit and the transactions contemplated hereunder and, except as expressly provided herein, will not be affected by reference to any other documents. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but such may be accomplished only by an instrument in writing signed by the Borrower, the Majority Lenders and the Agent Bank; provided, however, that any amendment which would have the effect of (a) changing the nature of or releasing any or all of the Collateral, as defined in the Security Agreements or the Pledge Agreements, (b) extending the time of any payment of any amounts which are payable by the Borrower hereunder, (c) increasing the amount of the Merita Commitment or the BKBCT Commitment, or increasing the permitted aggregate amount of Reimbursement Obligations in respect of outstanding Letters of Credit above $4,000,000, (d) changing the amount of interest, fees, or other payments payable to any of the Lenders or the Agent Bank or (e) amending the term "Majority Lenders" or this Section 10.6, must be signed by the Borrower, the Parent, the Agent Bank and each of the Lenders. 10.7 Benefit of Agreement; Assignments and Participations. (a) This Agreement will be binding upon and inure to the benefit of the Borrower, the Parent, the Agent Bank and the Lenders and their respective successors and assigns and all subsequent holders of any of the Notes or any portion thereof. (b) Each Lender may assign its rights and interests and delegate its obligations hereunder in whole, but not in part, to any financial institution or institution with capital and surplus in excess of $500,000,000 reasonably acceptable to the Agent Bank and the Borrower. Any such assignment will be pursuant to an assignment and acceptance which conforms in substance with this Section 10.7 (the "Assignment and Acceptance"). The parties to each such assignment will execute and deliver the Assignment and Acceptance together with any Note or Notes subject to such assignment. Upon such execution and delivery, from and after the effective date specified in each Assignment and Acceptance, which effective date will be at least five (5) Business Days after the execution thereof, (i) the assignee thereunder will be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of the assigning Lender hereunder and (ii) the assigning Lender will, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement. -84- (c) By executing and delivering the Assignment and Acceptance, each Lender and the assignee thereunder confirm to and agree as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, the assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document; (ii) the assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under any of the Loan Documents; (iii) such assignee confirms that it has received a copy of this Agreement together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into the Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the assigning Lender, and based on such documents and information as it will deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; and (v) such assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by the assigning Lender, to the extent provided in such Assignment and Acceptance. (d) Upon execution of the Assignment and Acceptance by the assigning Lender and the assignee, together with any Note or Notes subject to such assignment, the Agent Bank will give prompt notice thereof to the Borrower. Within five (5) Business Days after receipt of such notice, the Borrower will execute and deliver to the assigning Lender (at the cost and expense of the assigning Lender) in exchange for the surrendered Note or Notes a new Note or Notes to the order of such assignee in an amount equal to that portion of the principal amount outstanding under the Note being surrendered and being assumed by it pursuant to such Assignment and Acceptance and, a new Note or Notes to the order of the assigning Lender in an amount, if any, equal to that portion of the principal amount of the Note being surrendered which is being retained by such assigning Lender hereunder. Such new Note or Notes will be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, will be dated the effective date of such Assignment and Acceptance and will otherwise be in substantially the form of Exhibit A-1 or A-2, as the case may be. Canceled Notes will be promptly returned to the Borrower simultaneously with the execution of such new Notes. (e) Notwithstanding the foregoing, each Lender may sell participations to one or more commercial banks, each of which have capital and surplus in excess of $500,000,000, in all or a portion of its rights -85- and obligations under this Agreement. Each such Lender shall provide written notice to the other Lenders, the Agent Bank and the Borrower of any such participation. (f) Without the prior written consent of the Majority Lenders, neither the Borrower nor the Parent may assign any of its rights or delegate any of its duties or obligations hereunder. (g) Any party hereto which assigns its rights and obligations hereunder shall pay to the Agent Bank an administrative fee of $5,000. 10.8 Descriptive Headings. The descriptive headings of this Agreement are inserted for convenience only and shall not affect the meaning or construction of any of the provisions hereof. 10.9 Governing Law. This Agreement and the rights and obligations of the parties hereunder and under the Notes shall be construed in accordance with and shall be governed by the laws of the State of New York (without regard to the laws as to conflict of law). 10.10 Consent to Jurisdiction, Service and Venue; Waiver of Jury Trial. For the purpose of enforcing this Agreement, payment of the Notes and performance of the obligations hereunder and thereunder or otherwise in connection herewith, the Borrower and the Parent hereby consent to the jurisdiction and venue of the courts of the State of New York or of any federal court located in such state. In the event either the Borrower or the Parent changes its principal office to an address which is not located in the State of New York, within five (5) days of such change, such Person shall appoint and maintain an agent for service of process. If an agent is so appointed, such Person agrees to accept such agent for all service of process in connection with any such matter (provided that at the same time a copy of such service is also sent to the Borrower and the Parent at the address and in the manner set forth in Section 10.1 hereof). The Borrower and the Parent hereby waive the right to contest the jurisdiction and venue of the courts located in the State of New York on the ground of inconvenience or otherwise. The provisions of this Section 10.10 shall not limit or otherwise affect the right of the Borrower or the Parent to institute and conduct action in any other appropriate manner, jurisdiction or court. Neither the Borrower nor the Parent nor any other Person liable for the Indebtedness to the Agent Bank or the Lenders referred to herein, nor any assignee, successor, heir or personal representative of the Borrower or the Parent or any such other Person shall seek a jury trial in any proceeding based upon or arising out of this Agreement, any Note, any other document executed in connection herewith, any collateral for the payment hereof or the dealings or the -86- relationship between or among such Persons, or any of them. Neither the Borrower nor the Parent nor any such Person will seek to consolidate any such action with any action in which a jury trial cannot be or has not been waived. Except as prohibited by law, each party hereto waives any rights it may have to claim or recover in any litigation referred to in this Section 10.10 any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, direct damages. Each party hereto (a) certifies that no representative, agent or attorney of the Agent Bank or a Lender has represented, expressly or otherwise, that the Agent Bank or a Lender would not, in the event of litigation, seek to enforce the foregoing waivers and (b) acknowledges that it has been induced to enter into this Agreement or any other document executed in connection herewith, as applicable, by, among other things, the mutual waivers and certifications herein. The provisions of this Section 10.10 have been fully disclosed by the parties hereto and the provisions hereof shall be subject to no exceptions. No party has in any way agreed with or represented to any other party that the provisions of this Section 10.10 will not be fully enforced in all instances. 10.11 Holidays. Whenever any payment of interest or principal to be made hereunder or pursuant to the Notes shall become due and payable on a day which is not a Business Day (or, in the case of a Eurodollar Loan, Eurodollar Business Day), such payment may be made on the next succeeding Business Day (or, in the case of a Eurodollar Loan, the next succeeding Eurodollar Business Day unless the result of the extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Eurodollar Business Day) and such extension of time for a principal payment shall in such case be included in computing interest on such payment. 10.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument. 10.13 Maximum Lawful Interest Rate. Notwithstanding any provision contained herein, liability of the Borrower for payment of interest pursuant hereto, including late charges, shall not exceed the maximum amount of such interest permitted by law to be charged, collected or received from the Borrower, and if any payments by the Borrower include interest in excess of such a maximum amount, the Lenders shall apply such excess to the reduction of the unpaid principal amount due pursuant hereto, or if none is due, such excess shall be refunded to the Borrower. 10.14 Severability. Every provision of this Agreement and the Notes is intended to be severable and, if any term or provision hereof or thereof shall be invalid, illegal or unenforceable for any reason, the validity, -87- legality and enforceability of the remaining provisions hereof or thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction. In the event that any provisions affecting the Agent Bank's or a Lender's remedies or their security interests shall be held illegal, invalid or unenforceable in a final judgment of a court having competent jurisdiction, the Agent Bank and the Lenders shall be entitled, among other things, to reduce the Available Commitment or the Total Commitment, as the case may be, to the lesser of (a) the outstanding aggregate principal amount of the Loans, as of the date of the rendering of such decision as to illegality, invalidity or unenforceability or (b) the amount of such outstanding principal as of the date on which such reduction is made. Such Lender or the Agent Bank, as the case may be, shall provide notice to the other Lenders and to the Borrower of any such event. 10.15 Indemnity. In addition to the payments contemplated by Section 10.2 and 10.4, whether or not the transactions contemplated hereby shall be consummated, the Borrower agrees to defend, indemnify, pay and hold the Agent Bank and each of the Lenders and any holder of the Notes, and the shareholders, officers, directors, employees and agents of the Agent Bank and each of the Lenders and such holders (collectively called the "Indemnitees") harmless from and against, any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative, judicial proceeding or other proceedings, whether commenced or threatened and whether or not such Indemnitee shall be designated a party thereto) (collectively, "Claims"), which may be imposed on, incurred by, or asserted against that Indemnitee, in any manner relating to or arising out of (a) the use or intended use of the proceeds of the Loans, or (b) any funding or proposed funding, or arrangements to obtain funding, made available, or proposed to have been made available, under and as contemplated by this Agreement to the Borrower (collectively, the "Indemnified Liabilities"); provided that the Borrower shall have no obligation to an Indemnitee hereunder with respect to Indemnified Liabilities arising from the gross negligence or willful misconduct of that Indemnitee in connection with its responsibilities hereunder. The Agent Bank and the Lenders agree to provide the Borrower with notice of any such Claims. To the extent that the undertaking to defend, indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees. -88- 10.16 Application of and Modifications to GAAP. Whenever this Agreement requires disclosure of Financial Information in accordance with GAAP, the Borrower and each other Person in making such disclosure shall include any notes required by GAAP to be made on statements included in such Financial Information, except that notes shall not be provided in connection with quarterly or monthly financial statements. In the event that any change in GAAP has the effect of changing the result of any financial calculations required to be made under this Agreement other than as expressly permitted in this Agreement, the Agent Bank and the Borrower shall negotiate in good faith concerning an appropriate amendment to the provisions of this Agreement requiring such calculation; if the Agent Bank and the Borrower are unable to agree on such amendment, the affected Person shall continue to make such financial calculation based upon GAAP as applicable prior to such change. If there is more than one permissible treatment of any financial calculation under GAAP, the affected Person shall seek the advice of its auditors and use the treatment so recommended. -89- IN WITNESS WHEREOF, the Borrower, the Parent, the Lenders and the Agent Bank have caused this Agreement to be duly executed by their respective, duly authorized officers as of the date first above written. BORROWER Holmes Holding Company, Inc. By: /s/ Lawrence R. Irving ------------------------------------- Its: Vice President and Treasurer ------------------------------------- PARENT Holmes Protection Group, Inc. By: /s/ Lawrence R. Irving ------------------------------------- Its: Vice President - Finance ------------------------------------- LENDERS Merita Bank Ltd, a Finnish banking corporation acting through its New York branch By: /s/ Eric Mann ------------------------------------- Its: Vice President ------------------------------------- By: /s/ Charles J. Lansdown ------------------------------------- Its: Vice President ------------------------------------- Bank of Boston Connecticut By: /s/ Roger J. Roche, Jr. ------------------------------------- Its: Director ------------------------------------- -90- AGENT BANK Merita Bank Ltd, a Finnish banking corporation acting through its New York branch By: /s/ Eric Mann ------------------------------------- Its: Vice President ------------------------------------- By: /s/ Charles J. Lansdown ------------------------------------- Its: Vice President ------------------------------------- -91- EX-10.34 7 EXHIBIT 10.34 EX 10.34 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of August 30, 1996, among Holmes Protection Group, Inc., a Delaware corporation (the "Company"), American Scandinavian Banking Corporation, a New York corporation (the "Bank") and Bank of Boston Connecticut, a Connecticut State Savings Bank ("Bank of Boston"). The execution and delivery of this Agreement by the parties hereto is partial consideration for the extension of loans from the Bank and Bank of Boston to the Company pursuant to that certain Credit Agreement dated as of even date herewith among the Company, Merita Bank Ltd. and Bank of Boston (the "Credit Agreement") and in connection with Common Stock Purchase Warrants dated as of even date herewith (the "Warrants") pursuant to which the Company has agreed, subject to the terms and conditions of the Warrants, to issue and sell to the Bank and Bank of Boston shares, par value $.01 per share, of common stock of the Company. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereby agree as follows: 1. Definitions. As used in this Agreement the following terms have the meanings indicated: "Affiliate" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Approved Underwriter" has the meaning set forth in Section 3(f) of this Agreement. "Bank" has the meaning assigned to such term in the recital to this Agreement. "Bank of Boston" has the meaning assigned to such term in the recital to this Agreement. "Common Stock" means the Common Stock, par value $.01 per share, of the Company or any other equity securities of the Company into which such securities are converted, reclassified, reconstituted or exchanged. "Company" has the meaning assigned to such term in the recital to this Agreement. "Company Underwriter" has the meaning set forth in Section 4(a) of this Agreement. "Demand Registration" has the meaning set forth in Section 3(a) of this Agreement. "Designated Holder" means each of the Bank and Bank of Boston and any transferee of either of them to whom Registrable Securities have been transferred in accordance with the provisions of Section 9(f) of this Agreement, other than a transferee to whom such securities have been transferred pursuant to a registration statement under the Securities Act or Rule 144 or Regulation S under the Securities Act. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "Holders' Counsel" has the meaning set forth in Section 6(a)(i) of this Agreement. "Incidental Registration" has the meaning set forth in Section 4(a) of this Agreement. "Indemnified Party" has the meaning set forth in Section 7(c) of this Agreement. "Indemnifying Party" has the meaning set forth in Section 7(c) of this Agreement. "Initiating Holder" has the meaning set forth in Section 3(a) of this Agreement. "Inspector" has the meaning set forth in Section 6(a)(viii) of this Agreement. "NASD" has the meaning set forth in Section 6(a)(xiv) of this Agreement. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Public Offering" means any offer for sale of shares of Common Stock pursuant to an effective registration statement filed under the Securities Act. "Records" has the meaning set forth in Section 6(a)(viii) of this Agreement. "Registrable Securities" means each of the following: (a) any and all shares of Common Stock issued or issuable upon exercise of any of the Warrants and (b) any securities issued or issuable by the Company with respect to shares of Common Stock referred to in the foregoing clause (a) by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise and shares of Common Stock issuable upon conversion, exercise or exchange thereof. "Registration Expenses" has the meaning set forth in Section 6(d) of this Agreement. "Registration Statement" means a registration statement filed pursuant to the Securities Act. "SEC" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Warrants" has the meaning assigned to such term in the recital to this Agreement. 2. General: Securities Subject to this Agreement. (a) Grant of Rights. The Company hereby grants registration rights to the Bank and Bank of Boston upon the terms and conditions set forth in this Agreement. 2 (b) Registrable Securities. For the purposes of this Agreement, Registrable Securities will cease to be Registrable Securities when (i) a registration statement covering such Registrable Securities has been declared effective under the Securities Act by the SEC and such Registrable Securities have been disposed of pursuant to such effective registration statement, (ii) the entire amount of Registrable Securities proposed to be sold in a single sale, in the opinion of counsel satisfactory to the Company and the Designated Holder, each in their reasonable judgment, may be distributed to the public without any limitation as to volume pursuant to Rule 144 (or any successor provision then in effect) under the Securities Act or (iii) the Registrable Securities are proposed to be sold or distributed by a Person not entitled to the registration rights granted by this Agreement. (c) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns of record Registrable Securities, or holds an option to purchase, or a security convertible into or exercisable or exchangeable for, Registrable Securities whether or not such acquisition or conversion has actually been effected and disregarding any legal restrictions upon the exercise of such rights. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company may act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. Registrable Securities issuable upon exercise of an option or upon conversion of another security shall be deemed outstanding for the purposes of this Agreement. 3. Demand Registration. (a) Request for Demand Registration. Commencing on the date hereof, each of the Bank or Bank of Boston (the "Initiating Holder") may make one written request to the Company to register, under the Securities Act (other than pursuant to a registration statement on Form S-4 or S-8 or any successor thereto) and under the securities or "blue sky" laws of any jurisdiction designated by such holder or holders (a "Demand Registration"), the number of Registrable Securities stated in such request; provided, however, that neither the Bank nor the Bank of Boston shall exercise the right to a Demand Registration until the earlier of (i) June 30, 1997; or (ii) 180 days after the effective date of the registration statement on Form S-1 currently contemplated by the Company and disclosed to the Bank and Bank of Boston by the Company (the "Holdback Date"). If at the time of any request to register Registrable Securities pursuant to this Section 3(a), the Company is engaged in, or has fixed plans to engage in within forty-five (45) days of the time of such request, a registered public offering or is engaged in any other activity which, in the good faith determination of the Board of Directors of the Company, would be materially adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a reasonable period not in excess of ninety (90) days from the effective date of such offering or the date of completion of such other material activity, as the case may be, such right to delay a request to be exercised by the Company not more than once in any one-year period. In addition, the Company shall not be required to effect any registration within sixty (60) days after the effective date of any other Registration Statement of the Company. A request for a Demand Registration shall state the amount of the Registrable Securities proposed to be sold and the intended method of disposition thereof. Upon a request for a Demand Registration, the Company shall promptly take such steps as are necessary or appropriate to prepare for the registration of the Registrable Securities to be registered. (b) Incidental or "Piggy-Back" Rights with Respect to a Demand Registration. Any Designated Holder (other than the Initiating Holder) may offer its Registrable Securities under any Demand Registration pursuant to this Section 3; provided, however, that neither the Bank nor Bank of Boston shall 3 have any right to registration under this Section 3(b) unless the Incidental Registration rights granted to the Bank and Bank of Boston under Section 4 below have become effective as provided in Section 4(c), or the Bank or Bank of Boston participates in such registration pursuant to the rights granted to the Bank or Bank of Boston under Section 4(g) below. If such incidental registration rights are available under this Section 3(b), the Company shall, within ten (10) days after the receipt of a request for a Demand Registration, (i) give written notice thereof to all of the Designated Holders and (ii) subject to Section 3(e), include in such registration all of the Registrable Securities held by such Designated Holders from whom the Company has received a written request for inclusion therein within ten (10) days of the receipt by such Designated Holders of such written notice referred to clause (i) above. Each such request by such Designated Holders shall specify the number of Registrable Securities proposed to be registered and the intended method of disposition thereof. (c) Effective Demand Registration. A registration shall not constitute a Demand Registration until it has become effective and remains continuously effective for the lesser of (i) the period during which all Registrable Securities registered in the Demand Registration are sold and (ii) 120 days; provided, however, that a registration shall not constitute a Demand Registration if (x) after such Demand Registration has become effective, such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the SEC or other governmental agency or court for any reason not attributable to the Bank or Bank of Boston and such interference is not thereafter eliminated or (y) the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived other than by reason of a failure by the Initiating Holder or (z) the Company sells for its account at least one half of the shares included in the registration. (d) Expenses. In any registration initiated as a Demand Registration, the Company shall pay all Registration Expenses (other than underwriting discounts and commissions) in connection therewith, whether or not such Demand Registration becomes effective. (e) Underwriting Procedures. If the Initiating Holder so elects, the offering of Registrable Securities pursuant to a Demand Registration shall be in the form of a firm commitment underwritten offering and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter (as hereinafter defined) selected in accordance with Section 3(f). In connection with any Demand Registration under this Section 3 involving an underwriting, none of the Registrable Securities held by any Designated Holder making a request for inclusion of such Registrable Securities pursuant to Section 3(b) hereof shall be included in such underwriting unless such Designated Holder accepts the terms of the underwriting as agreed upon by the Company, the Initiating Holder and the Approved Underwriter, and then only in such quantity as will not, in the opinion of the Approved Underwriter, jeopardize the success of such offering by the Initiating Holder. If the Approved Underwriter advises the Company in writing that in its opinion the aggregate amount of such Registrable Securities requested to be included in such offering is sufficiently large to have a material adverse effect on the success of such offering, then the Company shall include in such registration only the aggregate amount of Registrable Securities that in the opinion of the Approved Underwriter may be sold without any such material adverse effect and shall reduce, first as to the Designated Holders ( who requested to participate in such registration pursuant to Section 3(b) hereof) as a group, if any; and second as to the Initiating Holder, pro rata based on the number of Registrable Securities included in the request for Demand Registration, the amount of Registrable Securities to be included in such registration. 4 (f) Selection of Underwriters. If any Demand Registration of Registrable Securities is in the form of an underwritten offering, the Initiating Holder shall be authorized to select and obtain an investment banking firm of national reputation to act as the managing underwriter of the offering (the "Approved Underwriter"); provided, however, that the Approved Underwriter shall be acceptable to the Company in its reasonable judgment. (g) Temporary Additional Demand Registration Rights. Until such time as the rights to Incidental Registration under Section 4 become effective, each of the Bank and Bank of Boston shall be granted three (3) additional Demand Registrations, exercisable in the manner set forth in Section 3(a) above. The Bank and Bank of Boston shall be co-participants with respect to three of the four of such Demand Registrations. If either the Bank or Bank of Boston chooses not to participate in a Demand Registration initiated by the other party, the non-initiating party shall be deemed to have waived one of the additional Demand Registrations available to such party under this Section 3(g). In no event shall either the Bank or Bank of Boston be deemed to have waived more than two (2) Demand Registrations under this Section 3(g). The registration rights under this Section 3(g) shall terminate upon effectiveness of the Incidental Registration rights under Section 4. 4. Incidental or "Piggy-Back" Registration. (a) Request for Incidental Registration. Subject to Section 4(c) below, at any time after the Holdback Date the Company proposes to file a Registration Statement under the Securities Act with respect to an offering by the Company for its own account or for another selling shareholder (other than a registration statement on Form S-4 or S-8 or any successor thereto), then the Company shall give written notice of such proposed filing to each of the Designated Holders of Registrable Securities at least thirty (30) days before the anticipated filing date, and such notice shall describe the proposed registration and distribution and offer such Designated Holders the opportunity to register the number of Registrable Securities as each such holder may request (an "Incidental Registration"). The Company shall use its best efforts (within ten (10) days of the notice provided for in the preceding sentence) to cause the managing underwriter or underwriters of a proposed underwritten offering (the "Company Underwriter") to permit each of the Designated Holders who have requested in writing to participate in the Incidental Registration to include its Registrable Securities in such offering on the same terms and conditions as the securities of the Company included therein. In connection with any Incidental Registration under this Section 4(a) involving an underwriting, the Company shall not be required to include any Registrable Securities in such underwriting unless the holders thereof accept the terms of the underwriting as agreed upon between the Company and the Company Underwriter, and then only in such quantity as will not, in the opinion of the Company Underwriter, jeopardize the success of the offering by the Company. If in the written opinion of the Company Underwriter the registration of all or part of the Registrable Securities which the Designated Holders have requested to be included would materially adversely affect such offering, then the Company shall be required to include in such Incidental Registration, to the extent of the amount that the Company Underwriter believes may be sold without causing such adverse effect, first, all of the securities to be offered for the account of the Company; second, the Registrable Securities to be offered for the account of the Designated Holders pursuant to this Section 4, pro rata based on the amount recommended by the Company Underwriter (and as between the Designated Holders pro rata based on the amounts requested to be included in the registration); and third, any other securities requested to be included in such underwriting. (b) Expenses. The Company shall bear all Registration Expenses (other than underwriting discounts and commissions) in connection with any Incidental Registration pursuant to this Section 4, whether or not such Incidental Registration becomes effective; provided, however, that each Designated Holder participating in such registration shall bear the costs of its own legal counsel. 5 (c) Effectiveness of Incidental Registration Rights. The incidental registration rights granted in Section 4(a) above shall not be effective until such time as the Company has obtained consent to the grant of such Incidental Registration rights from other shareholders (other than the Designated Holders) who have been granted registration rights by the Company with respect to the Company's securities. The Company shall use its reasonable best efforts to obtain such consent as soon as is reasonably practicable after the execution of this Agreement. 5. Restrictions on Public Sale by the Company. The Company agrees not to effect any public sale or distribution of any of its securities, or any securities convertible into or exchangeable or exercisable for such securities (except pursuant to registrations on Form S-4 or S-8 or any successor thereto), during the period beginning on the effective date of any Demand Registration and ending on the earlier of (i) the date on which all Registrable Securities registered on such registration statement are sold and (ii) 120 days after the effective date of such registration statement pursuant to a Demand Registration. 6. Registration Procedures. (a) Obligations of the Company. Whenever registration of Registrable Securities has been requested pursuant to Section 3 or Section 4 of this Agreement, the Company shall use its best efforts to effect the registration and sale of such Registrable Securities in accordance with the intended method of distribution thereof as quickly as practicable, and in connection with any such request, the Company shall, as expeditiously as possible: (i) use its best efforts to prepare and file with the SEC a registration statement on any form for which the Company then qualifies or which counsel for the Company shall deem appropriate and which form shall be available for the sale of such Registrable Securities in accordance with the intended method of distribution thereof, and use its best efforts to cause such registration statement to become effective; provided, however, that (x) before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall provide counsel selected by the Designated Holders holding a majority of the Registrable Securities being registered in such registration ("Holders' Counsel") and any other Inspector (as hereinafter defined) with an adequate and appropriate opportunity to participate in the preparation of such registration statement and each prospectus included therein (and each amendment or supplement thereto) to be filed with the SEC, which documents shall be subject to the review of Holders' Counsel, and (y) the Company shall notify the Holders' Counsel and each seller of Registrable Securities of any stop order issued or threatened by the SEC and take all reasonable action required to prevent the entry of such stop order or to remove it if entered; (ii) prepare and file with the SEC such amendments and supplement to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the lesser of (x) twelve (12) months and (y) such shorter period which will terminate when all Registrable Securities covered by such registration statement have been sold, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (iii) as soon as reasonably possible, furnish to each seller of Registrable Securities, prior to filing a registration statement, copies of such registration statement as is proposed to be filed, and thereafter such number of copies of such registration statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as each such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; 6 (iv) use its best efforts to register or qualify such Registrable Securities under such other securities or "blue sky" laws of such jurisdictions as any seller of Registrable Securities may request, and to continue such qualification in effect in such jurisdiction for as long as permissible pursuant to the laws of such jurisdiction, or for as long as any such seller requests or until all of such Registrable Securities are sold, whichever is shortest, and do any and all other acts and things which may be reasonably necessary or advisable to enable any such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller; provided, however, that the Company shall not be required to (w) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 6(a)(iv), (x) subject itself to taxation in any such jurisdiction, (y) consent to general service of process in any such jurisdiction, or (z) if the registration statement covers less than 50% of the Registrable Securities, qualify such Registrable Securities in more than ten jurisdictions under the securities or "blue sky" laws of those jurisdictions. (v) use its best efforts to cause the Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the seller or sellers of Registrable Securities to consummate the disposition of such Registrable Securities; (vi) notify each seller of Registrable Securities at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made, and the Company shall promptly prepare a supplement or amendment to such prospectus and furnish to each seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, after delivery to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; (vii) enter into and perform customary agreements (including an underwriting agreement in customary form with the Approved Underwriter or Company Underwriter, if any, selected as provided in Section 3 or Section 4, as the case may be) and take such other actions as are prudent and reasonably required in order to expedite or facilitate the disposition of such Registrable Securities; (viii) make available for inspection by any seller of Registrable Securities, any managing underwriter participating in any disposition pursuant to such registration statement, Holders' Counsel and any attorney, accountant or other agent retained by any such seller or any managing underwriter (each, an "Inspector" and collectively, the "Inspectors"), all financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's and its subsidiaries' officers, directors and employees, and the independent public accountants of the Company, to supply all information reasonably requested by any such Inspector in connection with such registration statement. Records that the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors unless (x) the disclosure of such Records is necessary to avoid or correct a misstatement 7 or omission in the registration statement, (y) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (z) the information in such Records was known to the Inspectors on a non-confidential basis prior to its disclosure by the Company or has been made generally available to the public. Each seller of Registrable Securities agrees that it shall, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential; (ix) if such sale is pursuant to an underwritten offering, use its best efforts to obtain a "cold comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by "cold comfort" letters as Holders' Counsel or the managing underwriter reasonably request; (x) use its best efforts to furnish, at the request of any seller of Registrable Securities on the date such securities are delivered to the underwriters for sale pursuant to such registration or, if such securities are not being sold through underwriters, on the date the registration statement with respect to such securities becomes effective, an opinion, dated such date, of counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the seller making such request, covering such legal matters with respect to the registration in respect of which such opinion is being given as such seller may reasonably request and are customarily included in such opinions; (xi) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make available to its security holders, as soon as reasonably practicable but no later than fifteen (15) months after the effective date of the registration statement, an earnings statement covering a period of twelve (12) months beginning after the effective date of the registration statement, in a manner which satisfies the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (xii) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed, provided that the applicable listing requirements are satisfied; (xiii) keep Holders' Counsel advised in writing as to the initiation and progress of any registration under Section 3 or Section 4 hereunder; (xiv) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. (the "NASD"); and (xv) use best efforts to take all other steps necessary to effect the registration of the Registrable Securities contemplated hereby. (b) Seller Information. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. 8 (c) Notice to Discontinue. Each Designated Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(a)(vi), such Designated Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Designated Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 6(a)(vi) and, if so directed by the Company, such Designated Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Designated Holder's possession, of the prospectus covering such Registrable Securities which is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such registration statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period referred to in Section 6(a)(ii)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(a)(vi) to and including the date when the Designated Holder shall have received the copies of the supplemented or amended prospectus contemplated by and meeting the requirements of Section 6(a)(vi). (d) Registration Expenses. The Company shall pay all expenses (other than as set forth in Sections 3(d) and 4(b)) arising from or incident to the performance of, or compliance with, this Agreement, including, without limitation, (i) SEC, stock exchange and NASD registration and filing fees, (ii) all fees and expenses incurred in complying with securities or "blue sky" laws (including reasonable fees, charges and disbursements of counsel in connection with "blue sky" qualifications of the Registrable Securities), (iii) all printing, messenger and delivery expenses, (iv) the fees, charges and disbursements of counsel to the Company and of its independent public accountants and any other accounting fees, charges and expenses incurred by the Company (including, without limitation, any expenses arising from any special audits incident to or required by any registration or qualification) and any legal fees, charges and expenses incurred by the Company and, in the case of a Demand Registration, the Initiating Holder (provided, however, that the Company shall not be liable for payment of legal fees incurred by the Initiating Holder in excess of $25,000) and (v) any liability insurance or other premiums for insurance obtained by the Designated Holders in connection with any Demand Registration or Incidental Registration pursuant to the terms of this Agreement, regardless of whether such registration statement is declared effective. All of the expenses-described in this Section 6(d) are referred to herein as "Registration Expenses." 7. Indemnification: Contribution. (a) Indemnification by the Company. The Company agrees to indemnify and hold harmless, to the fullest extent permitted by law, each Designated Holder, its officers, directors, trustees, partners, employees, advisors and agents and each Person who controls (within the meaning of the Securities Act or the Exchange Act) such Designated Holder from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue, or allegedly untrue, statement of a material fact contained in any registration statement, prospectus or preliminary prospectus or notification or offering circular (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information concerning such Designated Holder furnished in writing to the Company by such Designated Holder expressly for use therein. The Company shall also provide customary indemnities to any underwriters of the Registrable Securities, their officers, directors and employees and each Person who controls such underwriters (within the meaning of the Securities Act and the Exchange Act) to the same extent as provided above with respect to the indemnification of the Designated Holders of Registrable Securities. 9 (b) Indemnification by Designated Holders. In connection with any registration statement in which a Designated Holder is participating pursuant to Section 3 or Section 4 hereof, each such Designated Holder shall furnish to the Company in writing such information with respect to such Designated Holder as the Company may reasonably request or as may be required by law for use in connection with any such registration statement or prospectus and each Designated Holder agrees to indemnify and hold harmless, to the fullest extent permitted by law, the Company, any underwriter retained by the Company and their respective directors, officers, employees and each Person who controls the Company or such (within the meaning of the Securities Act and the Exchange Act) to the same extent as the foregoing indemnity from the Company to the Designated Holders, but only with respect to (i) any such information with respect to such Designated Holder furnished in writing to the Company by such Designated Holder expressly for use therein or (ii) a breach of any covenant herein made by the Designated Holder; provided, however, that the total amount to be indemnified by such Designated Holder pursuant to this Section 7(b) shall be limited to the net proceeds received by such Designated Holder in the offering to which the registration statement or prospectus relates. (c) Conduct of Indemnification Proceedings. Any Person entitled to indemnification hereunder (the "Indemnified Party") agrees to give prompt written notice to the indemnifying party (the "Indemnifying Party") after the receipt by the Indemnified Party of any written notice of the commencement of any action, suit, proceeding or investigation or threat thereof made in writing for which the Indemnified Party intends to claim indemnification or contribution pursuant to this Agreement; provided, however, that the failure so to notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability that it may have to the Indemnified Party hereunder. If notice of commencement of any such action is given to the Indemnifying Party as above provided, the Indemnifying Party shall be entitled to participate in and, to the extent it may wish, jointly with any other Indemnifying Party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and satisfactory to such Indemnified Party. The Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the Indemnified Party unless (i) the Indemnifying Party agrees to pay the same, (ii) the Indemnifying Party fails to assume the defense of such action with counsel satisfactory to the Indemnified Party in its reasonable judgment or (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel that either (x) representation of such Indemnified Party and the Indemnifying Party by the same counsel would be inappropriate under applicable standards of professional conduct or (y) there may be one or more legal defenses available to it which are different from or additional to those available to the Indemnifying Party. In either of such cases, the Indemnifying Party shall not have the right to assume the defense of such action on behalf of such Indemnified Party. No Indemnifying Party shall be liable for any settlement entered into without its written consent, which consent shall not be unreasonably withheld. (d) Contribution. If the indemnification provided for in this Section 7 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 Party 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 faults of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. 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, subject to the limitations set forth in Sections 7(a), 7(b) and 7(c), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding, provided that the total amount to be indemnified by such Designated Holder shall be limited to the net proceeds received by such Designated Holder in the offering. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation which does not take account of 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. 10 8. Rule 144. The Company covenants that it shall file (a) any reports required to be filed by it under the Exchange Act and (b) take such further action as each Designated Holder of Registrable Securities may reasonably request (including providing any information necessary to comply with Rules 144 and 144A under the Securities Act), all to the extent required from time to time to enable such Designated Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (ii) any similar rules or regulations hereafter adopted by the SEC. The Company shall, upon the request of any Designated Holder of Registrable Securities, deliver to such Designated Holder a written statement as to whether it has complied with such requirements. 9. Miscellaneous. (a) Recapitalizations, Exchanges, etc. The provisions of this Agreement shall apply, to the full extent set forth herein with respect to (i) the shares of Common Stock and (ii) any and all equity securities of the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in conversion of, in exchange for or in substitution of, the shares of Common Stock and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. The Company shall cause any successor or assign (whether by merger, consolidation or otherwise) to enter into a new registration rights agreement with the Designated Holders on terms substantially similar to this Agreement as a condition of any such transaction. (b) No Inconsistent Agreements. Except as set forth in Schedule 5.7(b) of the Credit Agreement, the Company has not and shall not enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Designated Holders in this Agreement or grant any additional registration rights to any Person or with respect to any securities which are not Registrable Securities which are prior in right to or inconsistent with the rights granted in this Agreement. The Bank and Bank of Boston acknowledge that the Company is at the date hereof a party to registration rights agreements with other shareholders of the Company. (c) Remedies. The Designated Holders, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of their rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive in any action for specific performance the defense that a remedy at law would be adequate. (d) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless consented to in writing by the parties hereto. (e) Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be made by registered or certified first-class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: 11 (i) if to the Company: Holmes Protection Group, Inc. 440 9th Avenue New York, New York 10001-1695 Attn: Lawrence Irving Telephone: (212) 760-0630 Telecopy: (212) 563-0129 with a copy (which shall not constitute notice) to: Buchanan Ingersoll College Centre 500 College Road Princeton, New Jersey 08540 Attn: Dennis M. Stern, Esq. Telephone: (609) 987-6800 Telecopy: (609) 520-0360 (ii) if to the Bank: American Scandinavian Banking Corporation c/o Merita Bank Ltd. 437 Madison Avenue 21st Floor New York, New York 10022 Attention: Charles J. Lansdown Telephone: (212) 318-9562 Telecopy: (212) 421-4420 with copies (which shall not constitute notice) to: Merita Bank Ltd. 437 Madison Avenue 21st Floor New York, New York 10022 Attn: Rossella Perna Telephone: (212) 318-9345 Telecopy: (212) 421-4420 and Hogan & Hartson L.L.P. Columbia Square 555 Thirteenth Street, N.W. Washington, D.C. 20004-1109 Attn: Claudette M. Christian, Esq. Telephone: (202) 637-5650 Telecopy: (202) 637-5910 (iii) If to Bank of Boston: Bank of Boston Connecticut c/o BancBoston Capital, Inc. 100 Federal Street Boston, Massachusetts 02110 Mail Stop 01-31-08 Attn: Mary J. Reilly Telephone: (617) 434-7890 Telecopy: (617) 434-1153 (iv) if to any other Designated Holder, at its address as it appears on the record books of the Company. 12 All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. (f) Successors and Assigns: Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. The Demand Registration rights of the Bank and Bank of Boston contained in Section 3 hereof and the other rights of the Bank and Bank of Boston with respect thereto shall be, with respect to any Registrable Security, (i) automatically transferable to any Affiliate of the Bank or Bank of Boston, respectively, and (ii) in all other cases, transferred only with the consent of the Company. The incidental or "piggy-back" registration rights of the Designated Holders contained in Sections 3(b) and 4 hereof and the other rights of each of the Designated Holders with respect thereto shall be, with respect to any Registrable Security, automatically transferred by such Designated Holder to any Person who is the transferee of such Registrable Security. All of the obligations of the Company hereunder shall survive any such transfer. No Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of any of the rights granted hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. (j) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, it being intended that all of the rights and privileges of the Designated Holders shall be enforceable to the fullest extent permitted by law. (k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein, in the Credit Agreement and in the Warrants. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. (l) Further Assurances. Each of the parties shall execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. 13 IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Agreement on the date first written above. HOLMES PROTECTION GROUP, INC. By: /s/ Lawrence R. Irving ---------------------- Name: Lawrence R. Irving Title: Vice President - Finance AMERICAN SCANDINAVIAN BANKING CORPORATION By: /s/ Gerard S. Murphy -------------------- Name: Gerard S. Murphy Title: Senior Vice President By: /s/ Leonard O'Dea ----------------- Name: Leonard O'Dea Title: Vice President BANK OF BOSTON CONNECTICUT By: /s/ Roger J. Roche, Jr. ----------------------- Name: Roger J. Roche, Jr. Title: Director 14 EX-23.1 8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement (File No. 333-9025). /s/ Arthur Andersen LLP New York, New York September 23, 1996 -----END PRIVACY-ENHANCED MESSAGE-----