-----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, M09W4UU07ZPKda6Z/jWn35SQ8/qi8fpPGNwWgFnJ18PvykYv0d12TCnCo4aAeNoJ jFnQgiKgMqk/y9fPQqxBBw== 0000310056-02-000001.txt : 20020414 0000310056-02-000001.hdr.sgml : 20020414 ACCESSION NUMBER: 0000310056-02-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VICON INDUSTRIES INC /NY/ CENTRAL INDEX KEY: 0000310056 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112160665 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07939 FILM NUMBER: 02548878 BUSINESS ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5169522288 MAIL ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-Q 1 f10q_123101.txt VICON QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended December 31, 2001 Commission File No. 1-7939 ---------------------------- ------- VICON INDUSTRIES, INC. - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) NEW YORK STATE 11-2160665 - ----------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 89 Arkay Drive, Hauppauge, New York 11788 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 952-2288 ------------------------- (Former name, address, and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- ------ At December 31, 2001, the registrant had outstanding 4,652,712 shares of Common Stock, $.01 par value. PART I - FINANCIAL INFORMATION VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended 12/31/01 12/31/00 Net sales............................. $13,550,833 $17,376,279 Cost of sales......................... 9,078,363 11,475,557 ----------- ----------- Gross profit........................ 4,472,470 5,900,722 Operating expenses: Selling expense................... 2,958,130 3,164,609 General & administrative expense.. 998,270 1,338,213 Engineering & development expense. 997,087 970,208 ----------- ----------- 4,953,487 5,473,030 ----------- ----------- Operating (loss) income............. (481,017) 427,692 Gain on sale of securities............ - (2,404,233) Interest expense...................... 97,933 160,116 Interest income....................... (62,009) (32,661) ----------- ----------- (Loss) income before income taxes. (516,941) 2,704,470 Income tax (benefit) expense.......... (170,000) 982,000 ----------- ----------- Net (loss) income................. $ (346,941) $ 1,722,470 =========== ----------- (Loss) earnings per share: Basic $ (.07) $ .37 === === Diluted $ (.07) $ .37 === === Shares used in computing (loss) earnings per share: Basic 4,648,471 4,638,415 Diluted 4,648,471 4,645,027 See Accompanying Notes to Condensed Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS 12/31/01 9/30/01 - ------ -------- ------- CURRENT ASSETS Cash and cash equivalents....................... $10,354,454 $ 9,795,148 Accounts receivable (less allowance of $1,088,000 at December 31, 2001 and $1,115,000 at September 30, 2001)............. 11,608,786 11,438,334 Inventories: Parts, components, and materials.............. 2,127,377 2,518,782 Work-in-process............................... 2,694,352 2,777,211 Finished products............................. 10,768,070 11,800,197 ----------- ----------- 15,589,799 17,096,190 Deferred income taxes........................... 1,478,404 1,420,372 Prepaid expenses................................ 436,276 566,861 ----------- ----------- TOTAL CURRENT ASSETS............................ 39,467,719 40,316,905 - -------------------- Property, plant and equipment................... 16,481,609 16,371,853 Less accumulated depreciation and amortization.. (8,510,256) (8,232,536) ----------- ----------- 7,971,353 8,139,317 Goodwill, net of accumulated amortization....... 1,521,445 1,571,058 Deferred income taxes........................... 1,601,789 1,366,625 Other assets.................................... 488,573 531,660 ----------- ----------- TOTAL ASSETS.................................... $51,050,879 $51,925,565 - ------------ =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Borrowings under revolving credit agreement..... $ 916,896 $ - Current maturities of long-term debt............ 1,285,396 2,144,727 Accounts payable................................ 2,448,082 2,375,825 Accrued compensation and employee benefits...... 1,437,117 1,789,401 Accrued expenses................................ 1,850,884 2,227,825 Unearned service revenue........................ 1,321,875 1,294,576 Income taxes payable............................ 282,604 479,361 ---------- ---------- TOTAL CURRENT LIABILITIES 9,542,854 10,311,715 - ------------------------- Long-term debt.................................. 4,003,420 3,498,099 Unearned service revenue........................ 2,090,847 2,334,348 Other long-term liabilities..................... 806,296 883,356 SHAREHOLDERS' EQUITY Common stock, par value $.01.................... 47,765 47,565 Capital in excess of par value.................. 21,647,787 21,542,541 Retained earnings............................... 13,962,501 14,309,442 ------------ ----------- 35,658,053 35,899,548 Less treasury stock, at cost.................... (658,422) (633,422) Accumulated other comprehensive loss............ (392,169) (368,079) ------------ ----------- TOTAL SHAREHOLDERS' EQUITY 34,607,462 34,898,047 - -------------------------- ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $51,050,879 $51,925,565 - ------------------------------------------ ============ =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended 12/31/01 12/31/00 Cash flows from operating activities: Net (loss) income.............................. $ (346,941) $ 1,722,470 Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: Gain on sale of securities................... - (2,404,233) Depreciation and amortization................ 287,883 258,287 Goodwill amortization........................ 49,613 45,973 Stock compensation expense................... 56,696 - Deferred income taxes........................ (318,445) (37,418) Change in assets and liabilities: Accounts receivable........................ (218,888) 503,563 Inventories................................ 1,472,574 (266,781) Prepaid expenses........................... 127,471 125,971 Other assets............................... 43,087 31,613 Accounts payable........................... 77,730 (641,631) Accrued compensation and employee benefits. (349,289) (674,309) Accrued expenses........................... (370,253) 65,551 Unearned service revenue................... (216,202) 267,999 Income taxes payable....................... (189,509) 866,606 Other liabilities.......................... (2,795) 12,454 ------------ ------------ Net cash provided by (used in) operating activities................... 102,732 (123,885) ------------ ------------ Cash flows from investing activities: Proceeds from sale of securities............. - 2,624,858 Capital expenditures, net of disposals....... (138,757) (209,441) ------------ ------------ Net cash (used in) provided by investing activities................... (138,757) 2,415,417 ------------ ------------ Cash flows from financing activities: Repayments of borrowings under U.S. bank credit agreement........................... - (1,500,000) Increase in borrowings under U.K. revolving credit agreement................. 910,572 71,736 Proceeds from exercise of stock options...... 23,750 28,677 Repayments of U.S. term loan................. (225,000) (225,000) Repayments of other debt..................... (123,302) (61,086) ------------ ------------ Net cash provided by (used in) financing activities................... 586,020 (1,685,673) ------------ ------------ Effect of exchange rate changes on cash.......... 9,311 12,884 ------------ ------------ Net increase in cash............................. 559,306 618,743 Cash at beginning of year........................ 9,795,148 2,115,118 ------------ ------------ Cash at end of period............................ $10,354,454 $ 2,733,861 ============ ------------ See Accompanying Notes to Condensed Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- December 31, 2001 Note 1: Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 30, 2001. Certain prior year amounts have been reclassified to conform to current year presentation. Note 2: Earnings per Share Basic earnings (loss) per share (EPS) is computed based on the weighted average number of common shares outstanding for the period. Diluted EPS reflects the maximum dilution that would have resulted from the exercise of stock options and incremental common shares issuable under a deferred compensation agreement. The following table provides the components of the basic and diluted EPS computations for the three months ended December 31, 2001 and 2000: 2001 2000 ---------- --------- Basic EPS Computation Net (loss) income....................... $ (346,941) $1,722,470 Weighted average shares outstanding..... 4,648,471 4,638,415 Basic (loss) earnings per share......... $ (.07) $ .37 ========== ========== Diluted EPS Computation Net (loss) income....................... $ (346,941) $1,722,470 Weighted average shares outstanding... 4,648,471 4,638,415 Stock options......................... - 6,612 ---------- ---------- Diluted shares outstanding.............. 4,648,471 4,645,027 Diluted (loss) earnings per share....... $ (.07) $ .37 ========== ========== For the three months ended December 31, 2001, 44,167 shares have been omitted from the calculation of diluted EPS, as their effect would have been antidilutive. -5- Note 3: Comprehensive Income The Company's total comprehensive income for the three months ended December 31, 2001 and 2000 was as follows: 2001 2000 ---------- ---------- Net (loss) income........................... $ (346,941) $1,722,470 Other comprehensive income (loss), net of tax: Unrealized gain on securities............. - (1,356,820) Unrealized gain on derivatives............ 49,015 - Foreign currency translation adjustment... (73,105) 51,086 ---------- ---------- Comprehensive (loss) income................. $ (371,031) $ 416,736 ========== ========== Note 4: Segment and Related Information The Company operates in one industry which encompasses the design, manufacture, assembly and marketing of video surveillance systems and system components for the electronic protection segment of the security industry. The Company manages its business segments primarily on a geographic basis. The Company's principal reportable segments are comprised of its United States (U.S.) and United Kingdom (Europe) based operations. Its U.S. based operations consists of Vicon Industries, Inc., the Company's corporate headquarters and principal operating entity. Its Europe based operations consist of Vicon Industries Limited, a wholly owned subsidiary which markets and distributes the Company's products principally within Europe and the Middle East. Other segments include the operations of Vicon Industries (H.K.) Ltd., a Hong Kong based majority owned subsidiary which markets and distributes the Company's products principally within Hong Kong and mainland China, and TeleSite U.S.A., Inc. and subsidiary, a U.S. and Israeli based manufacturer and distributor of remote video surveillance systems. The Company evaluates performance and allocates resources based on, among other things, the net profit or loss for each segment, excluding intersegment sales and profits. Segment information for the three months ended December 31, 2001 and 2000 was as follows: Three Months Ended December 31, 2001 U.S. Europe Other Consolid. Totals - ------------------ ---------- ---------- --------- ---------- ------- Net sales to external customers $ 9,129,000 $3,482,000 $ 940,000 $ - $13,551,000 Intersegment net sales 2,101,000 - 144,000 (2,245,000) - Net income (loss) (433,000) 236,000 (91,000) (59,000) (347,000) Total assets 43,933,000 8,216,000 3,479,000 (4,577,000) 51,051,000 -6- Three Months Ended December 31, 2000 U.S. Europe Other Consolid. Totals - ------------------- ---------- ---------- --------- ---------- ------- Net sales to external customers $13,408,000 $3,140,000 $ 828,000 $ - $17,376,000 Intersegment net sales 1,815,000 - 343,000 (2,158,000) - Net income (loss) 2,002,000 171,000 (406,000) (45,000) 1,722,000 Total assets 46,390,000 6,550,000 3,797,000 (4,180,000) 52,557,000 The consolidating segment above includes the elimination and consolidation of intersegment transactions. Note 5: Gain on Sale of Securities During the three months ended December 31, 2000, the Company realized a $2.4 million gain ($1.6 million net of tax effect) on the sale of a majority of its equity interest in Chun Shin Electronics, Inc. (CSE), a South Korean company which manufactures certain of the Company's proprietary products. Note 6: Derivative Instruments At December 31, 2001, the Company had interest rate swaps and forward exchange contracts outstanding with notional amounts aggregating $3.8 million and $766,000, respectively, whose aggregate fair value was a liability of approximately $192,000. The change in the amount of the liability for these instruments is shown as a component of accumulated other comprehensive loss, net of tax. Note 7: Impact of Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized but, instead, tested for impairment at least annually in accordance with the provisions of the Statement. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Upon adoption, the Company will be required to assign its goodwill ($1.5 million at December 31, 2001, which relates to its acquisition of TeleSite U.S.A., Inc. in 1999) to "reporting units" as defined under SFAS No. 142. The Company's reporting units are anticipated to be equivalent to its current operating segments. Goodwill assigned to each of the reporting units will be tested for impairment as of October 1, 2002 by comparing the carrying amount of the reporting units' net assets (including goodwill) to its fair value. The Company has six months from October 1, 2002 to complete this "first step" of this transitional goodwill impairment test. If the carrying amount of the net assets of a reporting unit (including goodwill) exceeds the fair value of that reporting unit, a "second step" of the transitional goodwill impairment test must be completed as soon as possible, but not later than September 30, 2003. Due to the complexities involved with the transitional provisions of SFAS No. 142, the Company has not yet completed its evaluation of the possible effects of its adoption of SFAS No. 142 on the Company's financial condition or results of operations. -7- Until the Company's adoption of SFAS No. 142, the Company is continuing to amortize goodwill over its original 10-year period, and continuing to evaluate impairment. The Company believes that its ability to recover the carrying amount of its goodwill is dependent upon, among other things, its ability to successfully complete the development and marketing of certain new products. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which supersedes SFAS No. 121. SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill will be evaluated for impairment under SFAS No. 142, as discussed above. The Company is required to adopt SFAS No. 144 on October 1, 2003. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. Note 8: Amendment to U.S. Bank Revolving Credit and Term Loan Agreement - -------------------------------------------------------------------------- On February 12, 2002, the Company executed an amendment agreement that modified its unsecured revolving credit and term loan agreement with its bank to provide for a $5 million secured revolving credit facility through July 2004. Borrowings under such facility bear interest at the bank's prime rate or, at the Company's option, LIBOR plus 190 basis points. The amendment agreement grants the bank a security interest in all the assets of the Company and, among other things, effectively modified the financial covenants contained in all the existing loan and mortgage agreements with this bank. Current and long-term debt maturing in the nine months ended September 30, 2002 and in each of the subsequent fiscal years approximates $966,000 for the nine months ended September 30, 2002, $1,300,000 in 2003, $316,000 in 2004, $324,000 in 2005, $330,000 in 2006 and $2,053,000 thereafter. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Three Months Ended December 31, 2001 Compared with December 31, 2000 - -------------------------------------------------------------------- Net sales for the quarter ended December 31, 2001 decreased $3.8 million or 22% to $13.6 million compared with $17.4 million in the year ago period. Domestic sales decreased $3.9 million or 32% to $8.6 million principally as a result of a $3.7 million decline in indirect sales to the United States Postal Service (USPS) under a former national supply contract. Indirect sales to the USPS for the quarter ended December 31, 2001 decreased 77% to $1.1 million compared with $4.8 million in the year ago period. In March 2001, the USPS announced a freeze on all its capital spending due to a severe projected budget deficit. As a result, the Company has since experienced a material reduction in its USPS order rate. In addition, the USPS supply contract had expired on June 30, 2001 with no new contract being awarded. The Company has since been named as one of three pre-approved suppliers in the latest USPS published specification for video systems. International sales for the quarter ended December 31, 2001 increased 2% to $5.0 million compared with $4.9 million in the year ago period. Gross profit margins for the first quarter of fiscal 2002 decreased to 33.0% compared with 34.0% in the year ago period. The margin decline was principally due to the effect of fixed production costs relative to the quarter's lower sales. Operating expenses for the first quarter of fiscal 2002 were $5.0 million or 36.6% of net sales compared with $5.5 million or 31.5% of net sales in the year ago period. The decrease in operating expenses principally resulted from a decline in sales related costs. Despite decreased sales in the quarter, the Company continued its investment in new product development incurring $1.0 million of engineering and development expenses. The Company incurred an operating loss of $481,000 for the first fiscal quarter of 2002 compared with operating income of $428,000 in the year ago period principally as a result of lower sales. In the prior year quarter, the Company realized a $2.4 million gain ($1.6 million net of tax effect) on the sale of a majority of its equity interest in Chun Shin Electronics, Inc., a South Korean company which, among other things, manufactures certain of the Company's proprietary products. Interest expense decreased to $98,000 for the first quarter of fiscal 2002 compared with $160,000 in the year ago period principally as a result of the paydown of bank borrowings. The Company recorded an income tax benefit of $170,000 for the first quarter of fiscal 2002 compared with income tax expense of $982,000 in the year ago period. As a result of the foregoing, the Company incurred a net loss of $347,000 for the first quarter of fiscal 2002 compared with net income of $1.7 million in the year ago period. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS Liquidity and Financial Condition Net cash provided by operating activities was $103,000 for the first quarter of fiscal 2002. Net cash used in investing activities was $139,000 for the first quarter of fiscal 2002 relating to general capital expenditures. Net cash provided by financing activities was $586,000, which included $911,000 of borrowings under the Company's U.K. bank overdraft facility offset by $348,000 of scheduled repayments under U.S. bank mortgage and term loans. As a result of the foregoing, cash increased by $559,000 for the first quarter of fiscal 2002 after the nominal effect of exchange rate changes on the cash position of the Company. At December 31, 2001, the Company had a $9.5 million unsecured revolving credit facility in the U.S. with a bank that was scheduled to expire in July 2002. Borrowings under that facility bore interest at the bank's prime rate minus 2% or, at the Company's option, LIBOR plus 90 basis points (2.75% and 2.78%, respectively, at December 31, 2001). At December 31, 2001, there were no outstanding borrowings under this facility. The agreement contained restrictive covenants which, among other things, required the Company to maintain certain levels of earnings and ratios of debt service coverage and debt to tangible net worth. On February 12, 2002, the Company executed an amendment agreement that modified its unsecured revolving credit and term loan agreement referred to above to provide for a $5 million secured revolving credit facility through July 2004. Borrowings under such facility bear interest at the bank's prime rate or, at the Company's option, LIBOR plus 190 basis points. The amendment agreement grants the bank a security interest in all the assets of the Company and, among other things, effectively modified the financial covenants contained in all the existing loan and mortgage agreements with this bank. The Company also maintains a bank overdraft facility of 600,000 Pounds Sterling (approximately $870,000) in the U.K. to support local working capital requirements of Vicon Industries Limited. At December 31, 2001, outstanding borrowings under this facility amounted to $917,000. The Company believes that it has sufficient cash and funds available under its credit agreements to meet its anticipated operating, capital expenditures and debt service requirements for at least the next twelve months. -10- "Safe" Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements in this Report on Form 10-Q and other statements made by the Company or its representatives that are not strictly historical facts including, without limitation, statements included herein under the captions "Results of Operations" and "Liquidity and Financial Condition" are "forward- looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company also assumes no obligation to update its forward- looking statements or to advise of changes in the assumptions and factors on which they are based. -11- PART II ITEM 1 - LEGAL PROCEEDINGS - ------ ----------------- The Company has no material outstanding litigation. ITEM 2 - CHANGES IN SECURITIES - ------ --------------------- None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - ------ ------------------------------- None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- None ITEM 5 - OTHER INFORMATION - ------ ----------------- None ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ------ -------------------------------- Exhibit Number Description 10 Material Contracts (.1) Amendment No. 1 to the Credit Agreement between the Registrant and Washington Mutual Bank, FA dated February 12, 2002 (.2) Security Agreement between the Registrant and Washington Mutual Bank, FA dated February 12, 2002 No Form 8-K was required to be filed during the current quarter. -12- Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VICON INDUSTRIES, INC. February 14, 2002 By:/s/ Kenneth M. Darby By:/s/ John M. Badke - ----------------------- ----------------------- Kenneth M. Darby John M. Badke Chairman and Vice President, Finance Chief Executive Officer Chief Financial Officer -13- EX-10 3 f10q_ex101-1201.txt AMENDMENT NO.1 TO THE REDIT AGREEMENT AMENDMENT NO. 1 TO THE CREDIT AGREEMENT Amendment No. 1 to the Credit Agreement ("Amendment") between Vicon Industries, Inc., 89 Arkay Drive, Hauppauge, New York 11788 ("Borrower") and KeyBank National Association, ("KeyBank"). This Amendment is between Borrower and Washington Mutual Bank, FA, 1377 Motor Parkway, Islandia, New York 11749 (the "Bank"), the successor to KeyBank and to The Dime Savings Bank of New York, FSB. RECITALS: Borrower and KeyBank entered in a Credit Agreement, dated July 20, 1998, (the "Credit Agreement"). Borrower desires to extend the maturity date of the Revolving Credit Loans and to amend certain financial covenants set forth in the Credit Agreement. The Bank has agreed to do so, but only on the condition that the Credit Agreement is amended as set forth herein, and that Borrower and the Subsidiaries enter into the other agreements provided for herein. Accordingly, parties hereby amend the Credit Agreement on the terms and conditions set forth and agree as follows: ARTICLE 1 AMENDMENTS TO CREDIT AGREEMENT. Section 1.1. General. Capitalized words and phrases used herein which are not defined in this Amendment shall have the meanings given to them in the Credit Agreement. This Amendment constitutes an amendment to the Credit Agreement and shall not be construed in any way as a replacement or substitution therefor. All of the terms and provisions of this Amendment are hereby incorporated by reference into the Credit Agreement as if such terms were set forth in full therein. Section 1.2. Amendments to Definitions. (a) Section 1.01 of the --------------------------- Credit Agreement is amended by adding the following definitions: "Current Assets" means all amounts that would, in accordance with GAAP, be included under current assets on the combined consolidated balance sheets of Borrower and each of its Subsidiaries. "Guaranty Confirmation" means the Guaranty confirmation in the form annexed to this Amendment No. 1 as Exhibit B. "Security Agreement" means the Security Agreement in the form annexed to this Amendment No. 1 as Exhibit C. (b) Section 1.01 of the Credit Agreement is hereby amended by deleting the existing definitions for the terms set forth below and replacing them with the following: "Bank" means Washington Mutual Bank, FA and its successors and assigns. "Current Debt" means, on the date of determination with respect to any Person, that portion of such Person's long term debt, including Capital Leases and the outstanding principal balance of the Term Loan, that is due and payable within the next 12 months. For purposes of the financial covenants contained in Section 10.05 of the Credit Agreement, as amended hereby, Current Debt shall include all Revolving Credit Loans. "Guarantors" mean Vicon Industries International Sales Corp., Vicon Industries Foreign Sales Corp., Telesite USA, Inc., Q. S. R. Ltd., Vicon Industries Limited. and Vicon Industries (H.K.), Ltd., and each future Subsidiary which is required to become a party to the Guaranty in accordance with Section 9.10 of the Credit Agreement. "Loan Documents" means the Credit Agreement, the Notes, the Guaranty, the Guaranty Confirmation, the Security Agreement, and all other documents or instruments executed in connection herewith or therewith. "Net Income" means, with respect to any Person for any period, such Person's net income after taxes for such period as reflected on such Person's financial statements, excluding income from capital gain, and in Borrower's case, excluding expense associated with a consulting payment involving Q. S. R. Ltd.. not exceeding $710,000 in the aggregate (the Q.S.R. Consulting Expense"). "Revolving Credit Commitment" means the obligation of the Bank to extend revolving credit to Borrower in accordance with the terms of the Credit Agreement in the aggregate principal amount not to exceed $5,000,000. "Revolving Credit Note" means a promissory note of Borrower in the form annexed to this Amendment No. 1 as Exhibit A, evidencing the Revolving Credit Loans made by the Bank to Borrower pursuant to the Credit Agreement. "Revolving Credit Termination Date" means July 31, 2004. ARTICLE 2 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to the Bank as follows: Section 2.1. Confirm Warranties and Representations. Borrower confirms that each of the representations and warranties set forth in Article 7 of the Credit Agreement is true in all material respects as of the date hereof with respect to Borrower and, to the extent applicable, the Guarantors, with the same effect as though made on the date hereof (except when such representation or warranty by its terms relates to a specific date other than the date hereof), except that Schedules I, II, III and V to the Credit Agreement are updated as of the date hereof and annexed hereto. Each such warranty and representation is hereby incorporated herein in full by reference as if fully restated in its entirety. Since September 30, 2001, there has been no material adverse change in the business, operations, assets or financial or other condition of Borrower, or of Borrower and the Guarantors, except as disclosed in Borrower's projections delivered to the Bank in connection with its approval of this Amendment. Section 2.2. No Default. No Default or Event of Default now exists under the Credit Agreement, as amended hereby. Section 2.3. Corporate Power. Borrower and each Guarantor has the requisite corporate power and authority to enter into, perform and deliver this Amendment and any other documents, instruments, agreements or other writings to be delivered in connection herewith. This Amendment, and all documents contemplated hereby or delivered in connection herewith, have each been duly authorized, executed and delivered and the transactions contemplated herein have been duly authorized by all necessary action. Section 2.4. Enforceability. This Amendment and any other documents, agreements or instruments now or hereafter executed and delivered to the Bank by Borrower in connection herewith constitute (or shall, when delivered, constitute) valid and legally binding obligations of Borrower, each of which is and shall be enforceable against Borrower in accordance with their respective terms. Section 2.5. Consents. No consent, waiver or approval of any entity is or will be required in connection with the execution, delivery, performance, validity or enforcement or priority of this Amendment, or any other agreements, instruments or documents to be executed or delivered in connection herewith. Section 2.6. No Omission. No representation, warranty or statement by Borrower contained herein or in any other document to be furnished by Borrower in connection herewith contains, or at the time of delivery shall contain, any untrue statement of material fact, or omits or at the time of delivery shall omit to state a material fact necessary to make such representation, warranty or statement not misleading. ARTICLE 3 CONDITIONS Section 3.1. Conditions to Effectiveness. This Amendment shall ---------------------------- become effective only upon satisfaction of the following conditions precedent: (a) The Bank shall have received each of the following documents, in form and substance reasonably satisfactory to the Bank and its counsel: (i) this Amendment, duly executed by Borrower; (ii) copies of resolutions of Borrower's Board of Directors authorizing the execution, delivery and performance of this Amendment, the Security Agreement, and each other document to be delivered pursuant to this Amendment, together with a certificate of Borrower's secretary certifying as to the accuracy of articles of incorporation and the by-laws of Borrower; (iii) copies of resolutions of Guarantors' Board of Directors authorizing the execution, delivery and performance of this Amendment, and where applicable, the Guaranty, the Guaranty Confirmation and the Security Agreement, and each other document to be delivered pursuant to this Amendment, together with a certificate and officer of such Guarantor certifying as the accuracy of the articles of incorporation and the by-laws of each such Guarantor; (iv) The Security Agreement duly executed by Borrower and each Domestic Subsidiary; (v) the Guaranty Confirmation or the Guaranty, as applicable, duly executed by the Guarantors, as required; (vi) the Revolving Credit Note, duly executed by Borrower; (vii) the legal opinion of counsel for Borrower and the Guarantors; (viii) satisfactory evidence that Borrower and the Guarantors are duly organized, validly existing and in good standing under the laws of their respective jurisdictions of incorporation and each other jurisdiction where qualification is necessary; (ix) evidence that Borrower has obtained the insurance required under the Security Agreement; and (x) such other documents, instruments, approvals, opinions and evidence as the Bank may reasonably require. (b) Borrower shall have paid the Bank a fee of $10,000 and the fees and expenses of the Bank's counsel in connection with the preparation, execution and delivery of this Amendment and the other documents referred to herein. (c) Borrower and the Guarantors shall obtain all consents, permits and approvals required in connection with the execution, delivery and performance by Borrower and the Guarantors of their obligations hereunder and such consents, permits and approvals shall continue in full force and effect. (d) All legal matters in connection with this Amendment and financing shall be reasonably satisfactory to the Bank and their counsel. ARTICLE 4 SPECIFIC AMENDMENTS Section 4.1. Use of Proceeds. Sections 2.03(a) and 2.08(a) of the Credit Agree-ment are deleted. Section 2.03(a) is replaced with the following: "Borrower shall use the proceeds of the Revolving Credit Loans for general working capital purposes and letters of credit and no other purpose. Borrower may not advance any proceeds from a Revolving Credit Loan to any Subsidiary or Affiliate unless it is a Guarantor." Section 4.2. Interest on Revolving Credit Loans. The first sentence of Section 2.05(a) of the Credit Agreement is amended to delete the words "minus a margin of 200 basis points" and the comma proceeding them. The first sentence of Section 2.05(b) of the Credit Agreement is amended and the words "a margin of 90 basis points" are replaced with the phrase "a margin of 190 basis points." Section 4.3. Changes of Commitment. Section 2.06(a) of the Credit Agreement is deleted and now reads as follows in its entirety: "The Revolving Credit Commitment is limited to a maximum of $5,000,000." Section 4.4. Facility Fee. The words "Facility Fee equal to ten basis points" in the second sentence of Section 2.11 of the Credit Agreement are replaced with the phrase "Facility Fee equal to 15 basis points." Section 4.5. Security Agreement. The following provisions are added as new Sections 8.12, 8.13 and 8.14 to the Credit Agreement: Section 8.12 Collateral Audit. Furnish to the Bank, (a) on demand after the occurrence of an Event of Default or (b) within 30 days following a request therefor, no more than once a year so long as no Event of Default shall have occurred, an annual audit of the Collateral (as defined in the Security Agreement), in each case paid for by Borrower and conducted by an auditor selected by the Bank, the results of which shall be satisfactory in all respects to the Bank. Section 8.13 Notice of Changes. Borrower will furnish the Bank prompt written notice of any change in (a) the legal name of Borrower or of any Guarantor, or any trade name used to identify it in the conduct of its business or in the ownership of its properties, (b) the jurisdiction of organization or the location of the chief executive office of Borrower or of any Guarantor, its principal place of business, any office in which it maintains its books or records or records relating to Collateral owned or held by it or on its behalf or any office or facility at which Collateral owned or held by it or on its behalf is located (including the establishment of any such new office or facility), (c) the identity or organizational structure of Borrower or of any Guarantor or (d) the organizational identification number or the Federal Taxpayer Identification Number of Borrower or of any Guarantor. Borrower shall not effect or permit any change referred to in the foregoing sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Bank to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. Borrower shall promptly notify the Bank if any material portion of the Collateral is damaged or destroyed. Section 8.14 Further Assurances. (a) At Borrower's expense, Borrower shall and cause each Subsidiary to execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings and other documents), that may be required under any applicable law, or which the Bank may reasonably request, to effectuate the transactions contemplated by the Loan Documents or to grant, preserve, protect or perfect the validity or priority of the Liens created or intended to be created by the Security Documents. (b) If any material assets are acquired by Borrower or any Subsidiary after the date hereof (other than assets constituting Collateral under the Security Agreement that become subject to the Lien of the Security Agreement upon acquisition thereof), Borrower shall notify the Bank, and, if requested, Borrower at its expense will cause such assets to be subjected to a perfected Lien in favor of the Bank. Section 4.6. Re-Purchases of Borrower's Common Stock. Subsection (j) which was added to Section 9.03 by letter amendment dated June 19, 2000, is hereby deleted and replaced with the following: "(j) Purchases of Borrower's common stock, in open market transactions executed between February 15, 2002 and the Revolving Credit Termination Date, having an aggregate value not to exceed $500,000. Section 4.7. Acquisitions. Existing Section 9.07 of the Credit Agreement is deleted, and replaced with the following: "Make any Acquisition, unless the Person to be acquired is primarily in the business of manufacturing or selling security, surveillance, safety control or protection systems or system components, and the Bank has been furnished with (a) such documents as are necessary in the Bank's discretion to provide the Bank with a Guaranty of the Person to be acquired, (b) satisfactory evidence that, the consideration paid or to be paid by Borrower or any Subsidiary in connection with the proposed Acquisition, when aggregated with the consideration paid or to be paid in connection with all other Acquisitions consummated in any 12 month period, does not exceed $500,000 (c) satisfactory evidence that the Acquisition involves a Person that has its principal business operations in the United States and, if an entity, was formed under the laws of a United States jurisdiction, (d) a certificate of the President or Chief Financial Officer of Borrower certifying that no Default would occur as a result of Borrower's making such Acquisition and (e) prior to completing such Acquisition, financial statements of Borrower demonstrating compliance with the covenants contained in Article 10, (i) on a pro forma basis at the time immediately after the Acquisition and (ii) on a projected basis, for the four fiscal quarters immediately following such Acquisition. Section 4.8. Financial Covenants. ------------------- (a) Sections 10.01 through 10.03 are hereby deleted from the Credit Agreement and replaced with the following, effective as of December 31, 2001: Section 10.01. Net Income and Loss. Borrower shall on a consolidated basis (i) maintain a positive Net Income on a fiscal year basis for all fiscal years after the year ending September 30, 2002, (ii) commencing with the two fiscal quarters ending March 31, 2003, not have two consecutive fiscal quarters in which it has net losses that total in excess of $500,000 and (iii) commencing with the four fiscal quarters ending September 30, 2003, not have four consecutive fiscal quarters in which it has net losses that total in excess of $800,000. In addition, the maximum quarterly loss, before taxes, without giving effect to any tax benefits and excluding the Q.S.R. Consulting Expense, shall not exceed $1,200,000, and the maximum loss, before taxes, without giving effect to any tax benefit and excluding the Q.S.R. Consulting Expense, shall not exceed $2,100,000 at any time during year ending September 30, 2002. Section 10.02 Maximum Liabilities to Worth Ratio. Borrower shall maintain on a consolidated basis at all times a ratio of Total Liabilities (other than Liabilities which are subordinated on terms satisfactory to the Bank) to Tangible Net Worth of not more than 1.50:1.0. Section 10.03 Capital Expenditures. The annual combined Capital Expenditures of Borrower and its Subsidiaries shall not exceed $1,000,000 during the fiscal year ending September 30, 2002 or $1,200,000 for all fiscal years thereafter. Section 10.04 Debt Coverage Ratio. For periods after the fiscal year ending September 30, 2002, Borrower shall maintain on a consolidated basis a Debt Coverage Ratio, to be tested quarterly on a year to date basis through September 30, 2003, and thereafter on a rolling four quarter basis, of (a) not less than 1.10:1.0 through March 31, 2003 and (b) not less than 1.25:1.0 thereafter. Section 10.05 Working Capital. During each fiscal quarter Borrower's Current Assets, minus its Current Debt, on a consolidated basis, shall be not less than $25,000,000. (b) The last sentence of existing Section 10.04 is deleted, and the Section is redesignated as Section 10.06. Section 4.9. Events of Default. Existing Section 11.01(d) of the Credit Agreement is deleted and replaced with the following: (d) Borrower or any Guarantor shall fail to perform or observe any term, covenant or agreement on its part to be performed or observed in any Loan Document or the loan documents relating to the Mortgage Debt (as defined in the Security Agreement) and such failure shall continue for 15 consecutive days. ARTICLE 5 MISCELLANEOUS Section 5.1. Counterparts. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Amendment by signing any such counterpart. Section 5.2. Credit Agreement. Except as specifically amended hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms, unaffected by this Amendment. IN WITNESS WHEREOF, the parties hereto have executed this Amendment. Washington Mutual Bank, FA Vicon Industries, Inc. By:_________________________ By: --------------------------- Name: Sean M. Umhafer Name: John Badke Title: Vice President Title: Vice President, Finance Date signed: February 12, 2002 Date signed: February 12, 2002 Exhibit B Guarantor Confirmation Agreement Guarantor Confirmation Agreement dated effective February 12, 2002 in favor of Washington Mutual Bank, FA, successor to The Dime Savings Bank of New York, FSB and to KeyBank National Association (the "Bank"), given by Vicon Industries International Sales Corp., Vicon Industries Foreign Sales Corp. and TeleSite U.S.A., Inc. (the "Guarantors"). A. Vicon Industries, Inc. (the "Borrower") has on the date hereof, executed and delivered to the Bank Amendment No. 1 to the Credit Agreement dated July 20, 1998 between Borrower and the Bank (the "Credit Agreement. B. Pursuant to the Credit Agreement and in connection therewith, each of the Guarantors executed and delivered to the Bank their respective guaranties (the "Guaranties") under which each Guarantor guaranteed the indebtedness, liabilities and obligations of the Borrower to the Bank under the Credit Agreement and the Loan Documents referred to therein. C. The Bank has asked each Guarantor to confirm to the Bank that its respective guaranty applies to all of the Borrower's indebtedness, liabilities and obligations to the Bank under the Credit Agreement, as amended. Accordingly, each of the Guarantors jointly and severally confirms, acknowledges and represents to the Bank as follows: The Guaranties of each of the Guarantors are in full force and effect in accordance with the terms thereof, and the Guaranties constitute a legal, binding and unconditional guaranty by each of the Guarantors of the due payment and performance by the Borrower of all the indebtedness, liabilities and obligations of the Borrower to the Bank, whether now existing or hereafter arising, including, without limitation, the indebtedness, liabilities and obligations of the Borrower to the Bank under the Credit Agreement and the other Loan Documents. All warranties and representations set forth in the Guaranties respecting the Guarantors are true and correct and all covenants of Guarantors described therein have been performed as of the date hereof. IN WITNESS WHEREOF, each of the Guarantors has executed this Guarantor Confirmation Agreement. TeleSite U.S.A., Inc. Vicon Industries Foreign Sales Corp. By:____________________________ By:______________________________ Name: John M. Badke Name: John M. Badke Title: Treasurer Title: Treasurer Vicon Industries International Sales Corp. By:______________________________ Name: John M. Badke Title: Treasurer Revolving Credit Note $5,000,000 February 12, 2002 For value received, Vicon Industries, Inc. ("Borrower") promises to pay to the order of Washington Mutual Bank, FA (the "Bank"), at the Bank's office at 1377 Motor Parkway, Islandia, New York 11788, on or before July, 31 2004 ("Maturity Date"), the principal amount of $5,000,000, or the actual amount advanced by the Bank to Borrower pursuant to this Revolving Credit Note, in lawful money of the United States of America and in immediately available funds, on the date and in the manner provided in the Credit Agreement (as defined below). Borrower also promises to pay interest on the unpaid principal balance hereof at the rate or rates of interest as provided in the Credit Agreement, on the dates and in the manner provided therein. The holder of this Note shall record the date and amount of each Loan made by the Bank, and the date and amount of each payment of principal or interest, either on the schedule attached hereto, or on such computer, magnetic disk, tape or other such electronic data storage and retrieval system as the Bank considers adequate for such purpose, in its sole and absolute discretion. Any such record shall constitute prima facie evidence of the accuracy of the information so recorded, but no failure of or any error in so recording, shall affect Borrower's obligation to repay any amount borrowed pursuant to the Credit Agreement, with interest thereon. This Revolving Credit Note is subject to and governed by all the terms, conditions, covenants, representations and warranties made by Borrower in that certain Credit Agreement dated as of July 20, 1998 between Borrower and Lender's predecessor, KeyBank National Association, as amended on February 12, 2002, and as further amended, supplemented or otherwise modified from time to time ("Credit Agreement"). Any and all amounts borrowed and loaned hereunder shall be treated for all purposes as Revolving Credit Loans made by the Bank thereunder, except for the requirement of paying this Revolving Credit Note in full at Maturity Date. All terms not defined herein shall have the meanings given to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note and the Revolving Credit Loans if certain Events of Default occur, for a Default Rate of interest and for prepayments on the terms and conditions specified therein, and the same shall apply to this Revolving Credit Note. Borrower waives presentment, notice of dishonor, protest and any other notice or formality with respect to this Revolving Credit Note, except as is set forth in the Credit Agreement. The terms of this Revolving Credit Note may not be changed orally, but only by an instrument duly executed by Borrower and the Bank. This Revolving Credit Note shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York. Vicon Industries, Inc. By:____________________________ Name: John M. Badke Title: Vice President, Finance SCHEDULE OF REVOLVING CREDIT LOANS ---------------------------------- Date Type Principal Principal of of Interest Amount of Maturity Paid or Loan Loan Rate Loan of Loan Unpaid - ---- ---- -------- ----------- -------- ----------- Schedule I - Description of Liens - --------------------------------- - - First, second and third mortgage liens held by the Bank, as successor to KeyBank National Association ("KeyBank") on Borrower's real property, fixtures and other property attached thereto located at 89 Arkay Drive, Hauppauge, New York . - - Mortgage debenture on all assets of Vicon Industries Limited and first legal mortgage on real property located at Site P3, Brunel Way, Segensworth Industrial Estate, Fareham, UK. - - See list of Liens on Borrower's personal property set forth on Annex 1 hereto. ANNEX 1 -------
Debtor Creditor Place of Filing Date Filing No. Collateral - --------------------------------------------------------------------------------------------------------------------------- Vicon Industries, Inc. Tokai Financial Services, Inc. New York State 4/2/97 065756 Specified personal property Vicon Industries, Inc. Copelco Capital Inc. New York State 5/21/97 104391 Canon copier pursuant to lease Vicon Industries, Inc. KeyBank National Association New York State 2/11/98 030487 All fixtures & equip. re: real property Vicon Industries, Inc. MCS Business Solutions Inc. New York State 3/27/98 0649664 Canon copiers pursuant to lease Vicon Industries, Inc. MCS Business Solutions Inc. New York State 7/2/98 141599 1 Canon copier pursuant to lease Vicon Industries, Inc. MCS Business Solutions Inc. New York State 7/9/98 147362 1 Canon copier pursuant to lease Vicon Industries, Inc. KeyBank National Association New York State 11/29/99 240651 Condemnation awards, insurance proceeds, fixtures, etc. re: real property Vicon Industries, Inc. Copelco Capital Inc. Suffolk County 5/12/97 97-08204 (Same as 104391) Vicon Industries, Inc. KeyBank National Association Suffolk County 2/10/98 98-02407 (Same as 030487) Vicon Industries, Inc. MCS Business Solutions Inc. Suffolk County 4/2/98 98-05825 (Same as 064966) Vicon Industries, Inc. MCS Business Solutions Inc. Suffolk County 7/10/98 98-12405 (Same as 141559) Vicon Industries, Inc. MCS Business Solutions Inc. Suffolk County 7/17/98 98-13110 (Same as 147362) Vicon Industries, Inc. KeyBank National Association Suffolk County 11/29/99 99-21854 (Same as 240651)
Schedule II - List of Subsidiaries of Borrower - ---------------------------------------------- Name of Subsidiary Jurisdiction Ownership - ----------------- ------------ -------- Vicon Industries Limted United Kingdom 100% Vicon Industries International Sales Corp. New York 100% Vicon Industries Foreign Sales Corp. Virgin Islands 100% Vicon Industries (HK) Limited Hong Kong 60% Telesite USA, Inc. New Jersey 100% Q. S. R. Ltd. Israel 100% Schedule III - List of Credit Agreements - ---------------------------------------- - - Loan, mortgage and security agreements dated January 29, 1998, originally in the aggregate principal amount of $2,900,000, between Borrower and Keybank. - - Advice of Borrowing Terms dated March 13, 2001 between Vicon Industries Limited and National Westminster Bank PLC, including a 600,000 Pounds Sterling (PS) Overdraft, 300,000 PS Forward Exchange Liability, 250,000 PS Terminable Indemnities and 20,000 PS Inward Collections facilities. - - Commercial fixed rate loan dated March 24, 1997 originally in the amount of 500,000 PS between Vicon Industries Limited, and National Westminster Bank PLC - - Master lease agreement dated March 18, 1997 between Borrower and Tokai Financial Services, Inc. for the financial lease of office furniture in the amount of $256,000. - - Loan, mortgage and security agreements dated October 12, 1999, originally in the principal amount of $1,200,000, between Borrower and KeyBank. Schedule V - List of Guaranties - ------------------------------- - - Vicon Industries, Inc. guarantee dated July 6, 1989 of 1,000,000 Pounds Sterling to National Westminster Bank PLC as security for Vicon Industries Limited credit facilities under the Advice of Borrowing Terms agreement dated March 24, 1998. EX-10 4 f10q_ex102-1201.txt SECURITY AGREEMENT SECURITY AGREEMENT ------------------ SECURITY AGREEMENT, dated as of February 12, 2002, among Vicon Industries, Inc, a New York corporation (the "Borrower"), 89 Arkay Drive, Hauppauge, New York 11788, each of the Domestic Subsidiaries of Borrower from time to time party hereto (each, a "Guarantor" and collectively the "Guarantors") and Washington Mutual Bank, FA (the "Lender"), 1377 Motor Parkway, Islandia, New York 11749. Reference is made to the Credit Agreement dated as of July 20, 1998 between Borrower and Lender's predecessor, KeyBank National Association, as amended on February 12, 2002, and as further amended, supplemented or otherwise modified from time to time (the "Credit Agreement"). The Lender has agreed to make Loans, and otherwise extend credit to Borrower pursuant to the Credit Agreement. Each of the Guarantors has guaranteed, among other things, all the obligations of Borrower under the Loan Documents. The obligations of Lender to make Loans and otherwise extend credit are conditioned upon, among other things, the execution and delivery of this agreement in the form hereof to secure the Obligations. Accordingly, Borrower, the Guarantors and Lender hereby agree as follows: Section 1. Definitions ------------ Unless the context otherwise requires, capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Credit Agreement. As used herein, the following terms shall have the following meanings: "Account Debtor": as defined in the NYUCC. "Accounts": as defined in the NYUCC. "Accounts Receivable": all Accounts and all right, title and interest in any returned goods, together with all rights, titles, securities and guarantees with respect thereto, including any rights to stoppage in transit, replevin, reclamation and resales, and all related security interests, liens and pledges, whether voluntary or involuntary, in each case whether now existing or owned or hereafter arising or acquired. "Chattel Paper": as defined in the NYUCC. "Collateral": with respect to any Grantor, all personal property of every kind and nature, wherever located, whether now owned or hereafter acquired or arising, and all Proceeds and products thereof, including, without limitation, all (i) Accounts Receivable, (ii) Equipment, (iii) General Intangibles, (iv) Inventory, (v) Instruments, (vi) Pledged Equity, (vii) Documents, (xiii) Chattel Paper (whether tangible or electronic), (ix) Deposit Accounts, (x) Letter of Credit Rights (whether or not the letter of credit is evidenced in writing), (xi) Commercial Tort Claims, (xii) Supporting Obligations, (xiii) any other contract rights or rights to the payment of money, (xiv) insurance claims and proceeds, (xv) tort claims and (xvi) unless otherwise agreed upon in writing by such Grantor and Lender, other property owned or held by or on behalf of such Grantor that may be delivered to and held by Lender pursuant to the terms hereof. Notwithstanding anything to the contrary in any Loan Document, for purposes hereof, the term "Collateral" shall not include any right under any General Intangible if the granting of a security interest therein or an assignment thereof would violate any enforceable provision of such General Intangible. "Commercial Tort Claims": as defined in the NYUCC. "Deposit Accounts": as defined in the NYUCC. "Documents": as defined in the NYUCC. "Equipment": as defined in the NYUCC, and shall include, without limitation, all equipment, furniture and furnishings, and all tangible personal property similar to any of the foregoing, including tools, parts and supplies of every kind and description, and all improvements, accessions or appurtenances thereto, that are now or hereafter owned by any Grantor. "Equity Interests": with respect to (i) a corporation, the capital stock thereof, (ii) a partnership, any partnership interest therein, including all rights of a partner in such partnership, whether arising under the partnership agreement of such partnership or otherwise, (iii) a limited liability company, any membership interest therein, including all rights of a member of such limited liability company, whether arising under the limited liability company agreement of such limited liability company or otherwise or (iv) any other firm, association, trust, business enterprise or other entity, any equity interest therein or any other interest therein that entitles the holder thereof to share in the net assets, revenue, income, earnings or losses thereof or to vote or otherwise participate in any election of one or more members of the managing body thereof, and all warrants and options in respect of any of the foregoing and all other securities that are convertible or exchangeable therefor. "General Intangibles": as defined in the NYUCC, and shall include, without limitation, all corporate or other business records, indemnification claims, contract rights (including rights under leases, whether entered into as lessor or lessee, interest rate protection agreements and other agreements), goodwill, registrations, franchises, tax refund claims, guarantee, claim, security interest or other security held by or granted to any Grantor to secure payment by an Account Debtor of any of the Accounts Receivable. "Grantor" or "Grantors" means individually Borrower and each Domestic Subsidiary, each Subsidiary which becomes a party hereto, and collectively all of them. "Inventory": as defined in the NYUCC, and shall include, without limitation, all goods of any Grantor, whether now owned or hereafter acquired, held for sale or lease, or furnished or to be furnished by any Grantor under contracts of service, or consumed in any Grantor's business, including raw materials, intermediates, work in process, packaging materials, finished goods, semi-finished inventory, scrap inventory, manufacturing supplies and spare parts, and all such goods that have been returned to or repossessed by or on behalf of any Grantor. "Letter of Credit Rights": as defined in the NYUCC. "NYUCC": the UCC as in effect from time to time in the State of New York. "Obligations": (i) the due and punctual payment of (x) principal of and premium, if any, and interest (including interest accruing during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding) on the Loans, under the Credit Agreement or the other Loan Documents, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, and (y) all other monetary obligations, including specifically but without limitation loans to Borrower secured by mortgages on its real property located at 89 Arkay Drive, Hauppauge, New York ("Mortgage Debt"), all other fees, commissions, costs, expenses and indemnities, whether primary, secondary, direct, contingent, fixed or otherwise (including monetary obligations incurred during the pendency of any bankruptcy, insolvency, receivership or other similar proceeding, regardless of whether allowed or allowable in such proceeding), of Borrower or any Guarantor to Lender and (ii) the due and punctual performance of all covenants, agreements, obligations and liabilities of Borrower or any Guarantor to Lender under or pursuant to the Credit Agreement and the other Loan Documents, the Mortgage Debt or otherwise. "Pledged Equity" means, with respect to any Grantor, all right, title and interest of such Grantor in any Equity Interests, whether now or hereafter acquired or arising in the future, including specifically and with limitation Borrower's ownership of Equity in the other Grantors. "Proceeds": as defined in the NYUCC, and shall include, without limitation, any consideration received from the sale, exchange, license, lease or other disposition of any asset or property that constitutes Collateral, any value received as a consequence of the possession of Collateral and any payment received from any insurer or other person or entity as a result of the destruction, loss, theft, damage or other involuntary conversion of whatever nature of any asset or property that constitutes Collateral, including (i) subject to Section 6, all rights and privileges with respect to, and all payments of principal or interest, dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of, in exchange for or upon the conversion of, any of the Pledged Equity and (ii) any and all other amounts from time to time paid or payable under or in connection with the Collateral. "Security Interest": as defined in Section 2(a). "Supporting Obligations": as defined in the NYUCC. "UCC": with respect to any jurisdiction, the Uniform Commercial Code as from time to time in effect in such jurisdiction. Section 2. Grant of Security Interest; No Assumption of Liability ------------------------------------------------------ (a) As security for the payment or performance, as applicable, in full of the Obligations, each of the Grantors hereby bargains, sells, conveys, assigns, sets over, pledges, hypothecates and transfers to Lender, and hereby grants to Lender a security interest in, all of the right, title and interest of such Grantor in, to and under the Collateral (the "Security Interest"). Without limiting the foregoing, Lender is hereby authorized to file one or more financing statements, continuation statements, recordation filings or other documents for the purpose of perfecting, confirming, continuing, enforcing or protecting the Security Interest granted by each of the Grantors, without the signature of any Grantor, and naming any Grantor or the Grantors, as applicable, as debtors and Lender as secured party. (b) The Security Interest is granted as security only and shall not subject Lender to, or in any way alter or modify, any obligation or liability of any Grantor with respect to or arising out of the Collateral. Section 3. Delivery of the Collateral -------------------------- Each of the Grantors agrees promptly to deliver or cause to be delivered to Lender any and all certificates, ledger sheets and documents covering, evidencing, representing or relating to any of the Pledged Equity, or any other amount that becomes payable under or in connection with any other Collateral owned or held by or on behalf of such Grantor, in each case accompanied by (i) in the case of any chattel paper, instruments or stock certificates, stock powers duly executed in blank or other instruments of transfer satisfactory to Lender and such other instruments and documents as Lender may reasonably request and (ii) in all other cases, proper instruments of assignment duly executed by such Grantor and such other instruments or documents as Lender may reasonably request. Section 4. Representations and Warranties ------------------------------ Each of the Grantors, jointly with the others and severally, represents and warrants to Lender that: (a) Such Grantor has good and valid rights in and title to the Collateral and has full power and authority to grant to Lender the Security Interest in the Collateral pursuant hereto and to execute, deliver and perform its obligations in accordance with the terms of this Security Agreement, without the consent or approval of any other person other than any consent or approval which has been obtained. (b) The information set forth on Exhibit A is correct and complete. (c) The Security Interest constitutes (i) a legal and valid Lien on and security interest in all of the Collateral securing the payment and performance of the Obligations, (ii) subject to (A) filing Uniform Commercial Code financing statements, or other appropriate filings, recordings or registrations containing a description of the Collateral owned or held by or on behalf of such Grantor (including, without limitation, a counterpart or copy of this Security Agreement) in each applicable governmental, municipal or other office and (B) the delivery to Lender of any instruments or certificated securities included in such Collateral, a perfected security interest in such Collateral to the extent that a security interest may be perfected by filing, recording or registering a financing statement or analogous document, or by Lender's taking possession, in the United States (or any political subdivision thereof) and its territories and possessions pursuant to the UCC or other applicable law in such jurisdictions. (d) The Security Interest is and shall be prior to any other Lien on any of the Collateral owned or held by or on behalf of such Grantor other than Liens expressly permitted pursuant to the Loan Documents. The Collateral owned or held by or on behalf of such Grantor is so owned or held by it free and clear of any Lien, except for Liens expressly permitted pursuant to the Loan Documents. (e) With respect to each Account Receivable: (i) no transaction giving rise to such Account Receivable violated or will violate any applicable federal, state or local law, rule or ordinance, (ii) each such Account Receivable is not subject to terms prohibiting the assignment thereof or requiring notice or consent to such assignment, except for notices and consents that have been obtained and (iii) each such Account Receivable represents a bona fide transaction which requires no further act on such Grantor's part to make such Account Receivable payable by the Account Debtor with respect thereto, and, to the Grantor's knowledge, such Account Receivable is not subject to any offsets or deductions other than credits to customers in the ordinary course of business and does not represent any consignment sales, guaranteed sale, sale or return or other similar understanding or any obligation of any Affiliate of such Grantor. (f) With respect to all Inventory: (i) such Inventory is located on the premises identified in Exhibit A, or is Inventory in transit for sale in the ordinary course of business, (ii) no such Inventory is subject to any Lien other than Liens permitted by Section 9.02 of the Credit Agreement, and (iii) except as permitted hereby or by the Credit Agreement, no such Inventory is on consignment or is now stored or shall be stored any time after the Effective Date with a bailee, warehouseman or similar Person. Section 5. Covenants ---------- (a) Each of the Grantors shall provide Lender with not less than 15 Banking Days prior written notice of any change (i) in its legal name, (ii) in its jurisdiction of organization or formation, (iii) in the location of its chief executive office or principal place of business, (iv) in its identity or legal or organizational structure or (v) in its organization identification number or its Federal Taxpayer Identification Number and shall execute and deliver to Lender such instruments, agreements and documents as Lender shall reasonably request so that Lender may make all filings under the UCC or otherwise that are required in order for Lender to continue at all times following such change to have a valid, legal and perfected first priority security interest in all the Collateral (subject only to Liens expressly permitted to be prior to the Security Interest pursuant to the Loan Documents). Each Grantor shall promptly notify Lender if any material portion of the Collateral owned or held by or on behalf of such Grantor is damaged or destroyed. (b) Each of the Grantors shall maintain, at its own cost and expense, such complete and accurate records with respect to the Collateral owned or held by it or on its behalf as is consistent with its current practices and in accordance with such prudent and standard practices used in industries that are the same as or similar to those in which it is engaged, but in any event to include complete accounting records indicating all payments and proceeds received with respect to any part of such Collateral, and, at such time or times as Lender may reasonably request, promptly to prepare and deliver to Lender copies of such records a duly certified by an officer of such Grantor. (c) Each year, at the time of delivery of annual financial statements with respect to the preceding fiscal year pursuant to Section 8.08 of the Credit Agreement, Borrower shall deliver to Lender a certificate or confirming that there has been no change in the information set forth on Exhibit A since the date hereof or the date of the most recent certificate delivered pursuant to this paragraph and (ii) certifying that Borrower and the Guarantors are in compliance with all of the terms of this Security Agreement. (d) Each of the Grantors shall, at its own cost and expense, take any and all actions reasonably necessary to defend title to the Collateral owned or held by it or on its behalf against all persons and to defend the Security Interest of Lender in such Collateral and the priority thereof against any Lien not expressly permitted pursuant to the Loan Documents. (e) Each of the Grantors shall, at its own expense, execute, acknowledge, deliver and cause to be duly filed all such further instruments and documents and take all such actions as Lender may from time to time reasonably request to preserve, protect and perfect the Security Interest granted by it and the rights and remedies created hereby, including the payment of any fees and taxes required in connection with its execution and delivery of this Security Agreement, the granting by it of the Security Interest and the filing of any financing statements or other documents in connection herewith or therewith. (f) The Lender and such persons as Lender may reasonably designate shall have the right, at the cost and expense of the Grantors, and upon reasonable prior notice, at reasonable times and during normal business hours, to inspect all of its records (and to make extracts and copies from such records), to discuss its affairs with its officers and independent accountants and to verify under reasonable procedures the validity, amount, quality, quantity, value, condition and status of, or any other matter relating to, the Collateral owned or held by it or on its behalf, including, in the case of Accounts or Collateral in the possession of any third person, by contacting Account Debtors, obligors or the third person possessing such Collateral for the purpose of making such a verification. (g) Each of the Grantors shall remain liable to observe and perform all the conditions and obligations to be observed and performed by it under each contract, agreement or instrument relating to the Collateral, all in accordance with the terms and conditions thereof, and such Grantor shall, jointly with the others and severally, indemnify and hold harmless the from and against any and all liability for such performance. (h) None of the Grantors shall make or permit to be made an assignment, pledge or hypothecation of the Collateral owned or held by it or on its behalf, or shall grant any other Lien in respect of such Collateral, except as expressly permitted by the Loan Documents. Except for the Security Interest, no Grantor shall make or permit to be made any transfer of such Collateral, and each Grantor shall remain at all times in possession of such Collateral and shall remain the direct owner, beneficially and of record, of the Pledged Equity included in such Collateral, except that prior to the occurrence and during the continuance of an Event of Default, the Grantors may use and dispose of the Collateral in any lawful manner not inconsistent with the provisions of this Security Agreement, the Credit Agreement or any other Loan Document, including the sale of Inventory or the disposition of Equipment in the ordinary course of business. Without limiting the generality of the foregoing, each Grantor shall not permit any Inventory to be in the possession or control of any warehouseman, bailee, agent or processor at any time unless such warehouseman, bailee, agent or processor shall have been notified of the Security Interest and shall have agreed in writing to hold such Inventory subject to the Security Interest and the instructions of Lender and to waive and release any Lien held by it with respect to such Inventory, whether arising by operation of law or otherwise. (i) None of the Grantors will, without Lender's prior written consent, grant any extension of the time of payment of any Accounts Receivable, compromise, compound or settle the same for less than the full amount thereof or allow any credit or discount whatsoever thereon, other than extensions, credits, discounts, compromises or settlements granted or made in the ordinary course of business and consistent with its current practices. (j) The Grantors, at their own expense, shall maintain or cause to be maintained insurance covering physical loss or damage to the Inventory and Equipment in accordance with Section 8.05 of the Credit Agreement, which insurance shall be against all risks. The Grantors shall not modify any such insurance or reduce amounts payable thereunder without the consent of Lender. All policies covering such insurance (i) shall contain a standard loss payable clause and shall name Lender as sole loss payee in respect of each claim relating to the Collateral and resulting in a payment thereunder and (ii) shall be indorsed to provide, in respect of the interests of Lender, that (A) Lender shall be an additional insured, (B) 30 days' prior written notice of any cancellation thereof shall be given to Lender and (C) if any Grantor at any time or times shall fail to pay any premium in whole or part relating thereto, Lender may, in its sole discretion, pay such premium. Each Grantor irrevocably makes, constitutes and appoints Lender (and all officers, employees or agents designated by Lender) as such Grantor's true and lawful agent (and attorney-in-fact) for the purpose, during the continuance of an Event of Default, of making, settling and adjusting claims in respect of Collateral under policies of insurance, endorsing the name of such Grantor on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect thereto. If any Grantor at any time or times shall fail to obtain or maintain any of the policies of insurance required hereby or to pay any premium in whole or part relating thereto, Lender may, without waiving or releasing any obligation or liability of the Grantors hereunder or any Event of Default, in its sole discretion, obtain and maintain such policies of insurance and pay such premium and take any other actions with respect thereto as Lender deems advisable. All sums disbursed by Lender in connection with this paragraph, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be payable, upon demand, by the Grantors to Lender and shall be additional Obligations secured hereby. (k) Each Grantor shall legend its Accounts Receivable and its books, records and documents evidencing or pertaining thereto with an appropriate reference to the fact that such Accounts Receivable have been assigned to Lender and that Lender has a security interest therein. (l) Each Grantor shall: (i) not (and shall cause each of its licensees not to) do any act, or omit to do any act, whereby any patent that is material to the conduct of such Grantor's business may become invalidated or dedicated to the public; (ii) (and shall cause each of its licensees to) continue to mark any products covered by a patent with the relevant patent number as necessary and sufficient to establish and preserve its maximum rights under applicable patent laws; (iii) for each trademark material to the conduct of such Grantor's business, (A) maintain (and shall cause each of its licensees to maintain) such trademark in full force free from any claim of abandonment or invalidity for non-use, (B) maintain (and shall cause each of its licensees to maintain) the quality of products and services offered under such trademark, (C) display (and shall cause each of its licensees to display) such trademark with notice of federal or foreign registration to the extent necessary and sufficient to establish and preserve its rights under applicable law and (D) not knowingly use or knowingly permit the use of such trademark in violation of any third party valid and legal rights; (iv) for each work covered by a copyright material to the conduct of such Grantor's business, continue to publish, reproduce, display, adopt and distribute the work with appropriate copyright notice as necessary and sufficient to establish and preserve its maximum rights under applicable copyright laws; (v) notify Lender promptly if it knows or has reason to know that any patent, trademark or copyright material to the conduct of its business may become abandoned, lost or dedicated to the public, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, United States Copyright Office or any court or similar office of any country) regarding such Grantor's ownership of same, its right to register the same, or to keep and maintain the same; and (vi) take all necessary steps that are consistent with the practice in any proceeding before the United States Patent and Trademark Office, United States Copyright Office or any office or agency in any political subdivision of the United States or in any other country or any political subdivision thereof, to maintain and pursue each material application relating to its patents, trademarks or copyrights (and to obtain the relevant grant or registration) and to maintain each issued patent and each registration of the trademarks and copyrights that is material to the conduct of such Grantor's business, including timely filings of applications for renewal, affidavits of use, affidavits of incontestability and payment of maintenance fees, and, if consistent with good business judgment, to initiate opposition, interference and cancellation proceedings against third parties. Section 6. Certain Rights as to the Collateral; Attorney-In-Fact ----------------------------------------------------- (a) So long as no Event of Default shall have occurred and be continuing: (i) Each Grantor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Security Agreement and the other Loan Documents, provided, that such Grantor shall not exercise or refrain from exercising any such right without the prior written consent of Lender if such action or inaction would have a material adverse effect on the value of the Collateral, or any part thereof, or the validity, priority or perfection of the security interests granted hereby or the remedies of Lender hereunder. (ii)Each Grantor shall be entitled to receive and retain any and all dividends, principal, interest and other distributions paid in respect of the Collateral to the extent not prohibited by this Security Agreement or the other Loan Documents, provided, that any and all (A) dividends, principal, interest and other distributions paid or payable other than in cash in respect of, and instruments (other than checks in payment of cash dividends) and other Property received, receivable or otherwise distributed in respect of, or in exchange for, Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in redemption of, or in exchange for, any Collateral, shall be, and shall forthwith be delivered to Lender to be held as, Collateral and shall, if received by such Grantor, be received in trust for the benefit of Lender, be segregated from the other property of such Grantor, and be forthwith delivered to Lender as Collateral in the same form as so received (with any necessary indorsement or assignment). (iii) The Lender shall execute and deliver (or cause to be executed and delivered) to the Grantors, at the Grantors' expense) all such proxies and other instruments as the Grantors may reasonably request for the purpose of enabling the Grantors to exercise the voting and other rights which it is entitled to exercise pursuant to clause (i) above and to receive the dividends, principal or interest payments, or other distributions which it is authorized to receive and retain pursuant to clause (ii) above. (b) Upon the occurrence and during the continuance of an Event of Default: (i) All rights of each Grantor to (A) exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 6(a)(i) shall, upon notice to such Grantor by Lender, cease and (B) receive the dividends, principal and interest payments and other distributions which it would otherwise be authorized to receive and retain pursuant to Section 6(a)(ii) shall automatically cease, and all such rights shall thereupon become vested in Lender, which shall thereupon have the right, but not the obligation, to exercise such voting and other consensual rights and to receive and hold as Collateral such dividends, principal or interest payments and distributions. (ii)All dividends, principal and interest payments and other distributions which are received by any Grantor contrary to the provisions of Section 6(b)(i) shall be received in trust for the benefit of Lender, shall be segregated from other funds of such Grantor and shall be forthwith paid over to Lender as Collateral in the same form as so received (with any necessary indorsement). (c) If all or any part of the securities or instruments constituting the Collateral are lost, destroyed or wrongfully taken while such securities or instruments are in the possession of Lender, the Grantors shall cause the delivery of new securities or instruments in place of the lost, destroyed or wrongfully taken securities or instruments upon request therefor by Lender without the necessity of any indemnity bond or other security other than Lender's agreement or indemnity therefor customary for security agreements similar to this Security Agreement. (d) Each Grantor hereby irrevocably appoints Lender such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time at any time when an Event of Default exists, in Lender's discretion, to take any action and to execute any instrument which Lender may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation: (i) to ask for, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral, and to receive, indorse, and collect any drafts or other chattel paper, instruments and documents in connection therewith, (ii)to file any claims or take any action or institute any proceedings which Lender may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Lender with respect to any of the Collateral, and (iii) to receive, indorse and collect all instruments made payable to such Grantor representing any dividend, principal payment, interest payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. The powers granted to Lender under this Section constitute a power coupled with an interest which shall be irrevocable by such Grantor and shall survive until all of the Obligations have been indefeasibly paid in full in cash. (e) If any Grantor fails to perform any agreement contained herein, Lender, ten days after notice to such Grantor (except that no notice will be required upon and during the continuance of an Event of Default), may itself perform, or cause performance of, such agreement, and the reasonable expenses of Lender incurred in connection therewith shall be payable by the Grantors under Section 9. (f) The powers conferred on Lender hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Lender shall have no duty as to any Collateral. The Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral in its possession if the Collateral is accorded treatment substantially equal to that which Lender accords its own property. Section 7. Remedies upon Default --------------------- (a) Upon the occurrence and during the continuance of an Event of Default, each of the Grantors shall deliver each item of Collateral to Lender on demand, and Lender shall have in any jurisdiction in which enforcement hereof is sought, in addition to any other rights and remedies, the rights and remedies of a secured party under the NYUCC or the UCC of any jurisdiction in which the Collateral is located, including, without limitation, the right, with or without legal process (to the extent permitted by law) and with or without prior notice or demand for performance, to take possession of the Collateral and without liability for trespass (to the extent permitted by law) to enter any premises where the Collateral may be located for the purpose of taking possession of or removing the Collateral (and for that purpose Lender may, so far as the Grantors can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the Collateral therefrom) and, generally, to exercise any and all rights afforded to a secured party under the UCC or other applicable law. Without limiting the generality of the foregoing, each of the Grantors agrees that Lender shall have the right, subject to the mandatory requirements of applicable law, to sell or otherwise dispose of all or any part of the Collateral, at public or private sale or at any broker's board or on any securities exchange, for cash, upon credit or for future delivery as Lender shall deem appropriate. Each such purchaser at any such sale shall hold the property sold absolutely, free from any claim or right on the part of any Grantor, and each of the Grantors hereby waives (to the extent permitted by law) all rights of redemption, stay, valuation and appraisal which such Grantor or now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. (b) Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender shall give to Borrower at least five Business Days prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. Each Grantor hereby acknowledges that five Business Days prior written notice of such sale or sales shall be reasonable notice. Each Grantor hereby waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of Lender's rights hereunder, including, without limitation, the right of Lender following an Event of Default to take immediate possession of the Collateral and to exercise Lender's rights with respect thereto. (c) Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as Lender may fix and state in the notice (if any) of such sale. At any such sale, the Collateral, or portion thereof, to be sold may be sold in one lot as an entirety or in separate parcels, as Lender may (in its sole and absolute discretion) determine. The Lender shall not be obligated to make any sale of any Collateral if it shall determine not to do so, regardless of the fact that notice of sale of such Collateral shall have been given. The Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for sale, and such sale may, without further notice, be made at the time and place to which the same was so adjourned. In case any sale of all or any part of the Collateral is made on credit or for future delivery, the Collateral so sold may be retained by Lender until the sale price is paid by the purchaser or purchasers thereof, but Lender shall not incur any liability in case any such purchaser or purchasers shall fail to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may be sold again upon like notice. At any public (or, to the extent permitted by applicable law, private) sale made pursuant to this Section, Lender may bid for or purchase, free from any right of redemption, stay, valuation or appraisal on the part of any Grantor (all said rights being also hereby waived and released), the Collateral or any part thereof offered for sale and may make payment on account thereof by using any claim then due and payable to Lender from any Grantor as a credit against the purchase price, and Lender may, upon compliance with the terms of sale, hold, retain and dispose of such property without further accountability to any Grantor therefor. For purposes hereof, (i) a written agreement to purchase the Collateral or any portion thereof shall be treated as a sale thereof, (ii) Lender shall be free to carry out such sale pursuant to such agreement and (iii) none of the Grantors shall be entitled to the return of the Collateral or any portion thereof subject thereto, notwithstanding the fact that after Lender shall have entered into such an agreement all Events of Default shall have been remedied and the Obligations paid in full. As an alternative to exercising the power of sale herein conferred upon it, Lender may proceed by a suit or suits at law or in equity to foreclose upon the Collateral and to sell the Collateral or any portion thereof pursuant to a judgment or decree of a court or courts having competent jurisdiction or pursuant to a proceeding by a court-appointed receiver. (d) Any sale pursuant to the provisions of this Section 7 shall be deemed to conform to commercially reasonable standards as provided in Section 9-610 of the NYUCC or the UCC of any other jurisdiction in which Collateral is located or any other requirement of applicable law. Without limiting the foregoing, each Grantor agrees and acknowledges that, to the extent that applicable law imposes duties on Lender to exercise remedies in a commercially reasonable manner, it shall be commercially reasonable for Lender to do any or all of the following: (i) fail to incur expenses deemed significant by Lender to prepare Collateral for disposition or otherwise to complete raw materials or work in process into finished goods or other finished products for disposition; (ii) fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (iii) fail to exercise collection remedies against Account Debtors or other persons obligated on Collateral or to remove Liens on any Collateral, (iv) exercise collection remedies against Account Debtors and other persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (v) advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (vi) contact other Persons, whether or not in the same business as the Grantors, for expressions of interest in acquiring all or any portion of the Collateral, (vii) hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the Collateral is of a specialized nature, (viii) dispose of Collateral utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have reasonable capability of doing so, or that match buyers and sellers of assets, (ix) disclaim dispositions of warranties, (x) purchase (or fail to purchase) insurance or credit enhancements to insure Lender against risk of loss, collection or disposition of Collateral or to provide to Lender a guaranteed return from the collection or disposition of Collateral, or (xi) to the extent deemed appropriate by Lender, obtain the services of other brokers, investment bankers, consultants and other professionals to assist Lender in the collection or disposition of any of the Collateral. Nothing in this Section 7 shall be construed to grant any rights to the Grantors or to impose any duties on Lender that would not have been granted or imposed by this Security Agreement or applicable law in the absence of this Section 7 and the parties hereto acknowledge that the purpose of this Section 7 is to provide non-exhaustive indications of what actions or omissions by Lender would be deemed commercially reasonable in the exercise by Lender of remedies against the Collateral and that other actions or omissions by Lender shall not be deemed commercially unreasonable solely on account of not being set forth in this Section 7. Section 8. Application of Proceeds of Sale ------------------------------- The Lender shall apply the proceeds of any collection or sale of the Collateral, as well as any Collateral consisting of cash, first, to the payment of all costs and expenses incurred by Lender in connection with such collection or sale or otherwise in connection with this Security Agreement, any other Loan Document or any of the Obligations, including all court costs and the reasonable fees and expenses of their respective agents and legal counsel, the repayment of all advances made by Lender hereunder or under any other Loan Document on behalf of any Grantor and any other costs or expenses incurred in connection with the exercise of any right or remedy hereunder or under any other Loan Document, second, to the payment in full of the Obligations, and third, to the Grantors, their respective successors or assigns, or as a court of competent jurisdiction may otherwise direct. Lender shall have absolute discretion as to the time of application of any such proceeds, moneys or balances in accordance with this Security Agreement. Upon any sale of the Collateral by Lender (including pursuant to a power of sale granted by statute or under a judicial proceeding), the receipt of the purchase money by Lender or of the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to Lender or such officer or be answerable in any way for the misapplication thereof. Section 9. Reimbursement of Lender ----------------------- (a) Each of the Grantors shall, jointly with the other Grantors and severally, pay upon demand to Lender the amount of any and all reasonable expenses, including the reasonable fees, other charges and disbursements of counsel and of any experts or agents, that Lender may incur in connection with (i) the administration of this Security Agreement relating to such Grantor or any of its property, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral owned or held by or on behalf of such Grantor, (iii) the exercise, enforcement or protection of any of Lender's the rights hereunder relating to such Grantor or any of its property or (iv) the failure by such Grantor to perform or observe any of the provisions hereof. (b) Without limitation of its indemnification obligations under the other Loan Documents, each of the Grantors shall, jointly with the other Grantors and severally, indemnify Lender and its directors, officers, employees, advisors, agents, successors and assigns (each an "Indemnitees") against, and hold each Indemnitee harmless from, any and all losses, damages, liabilities and related expenses, including reasonable counsel fees, other charges and disbursements, incurred by any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery by such Grantor of this Security Agreement or any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by such Grantor of its obligations under the Loan Documents and the other transactions contemplated thereby or (ii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) Any amounts payable as provided hereunder shall be additional Obligations secured hereby and by the other Security Documents. The provisions of this Section shall remain operative and in full force and effect regardless of the termination of this Security Agreement or any other Loan Document, the consummation of the transactions contemplated hereby, the repayment of any of the Obligations, the invalidity or unenforceability of any term or provision of this Security Agreement or any other Loan Document or any investigation made by or on behalf of Lender. All amounts due under this Section shall be payable on written demand therefor and shall bear interest at the Default Rate. Section 10. Waivers; Amendment ------------------ (a) No failure or delay of Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of Lender hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Security Agreement or any other Loan Document or consent to any departure by any Grantor therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any Grantor in any case shall entitle such Grantor to any other or further notice or demand in similar or other circumstances. (b) Neither this Security Agreement nor any provision hereof may be waived, amended or modified except pursuant to a written agreement entered into by, between or among Lender and the other parties hereto with respect to which such waiver, amendment or modification is to apply. Section 11. Securities Laws; Registration Rights ------------------------------------ (a) In view of the position of the Grantors in relation to the Pledged Equity, or because of other current or future circumstances, a question may arise under the Securities Act of 1933, as now or hereafter in effect, or any similar statute hereafter enacted analogous in purpose or effect (such Act and any such similar statute as from time to time in effect being called the "Federal securities laws") with respect to any disposition of the Pledged Equity permitted hereunder. Each of the Grantors understands that compliance with the Federal securities laws might very strictly limit the course of conduct of Lender if Lender were to attempt to dispose of all or any part of the Pledged Equity, and might also limit the extent to which or the manner in which any subsequent transferee of any Pledged Equity could dispose of the same. Similarly, there may be other legal restrictions or limitations affecting Lender in any attempt to dispose of all or part of the Pledged Equity under applicable Blue Sky or other state securities laws or similar laws analogous in purpose or effect. Each of the Grantors recognizes that in light of such restrictions and limitations, Lender may, with respect to any sale of the Pledged Equity, limit the purchasers to those who will agree, among other things, to acquire such Pledged Equity for their own account, for investment, and not with a view to the distribution or resale thereof. Each of the Grantors acknowledges and agrees that in light of such restrictions and limitations, Lender, in its sole and absolute discretion, (i) may proceed to make such a sale whether or not a registration statement for the purpose of registering such Pledged Equity, or any part thereof, shall have been filed under the Federal securities laws and (ii) may approach and negotiate with a single potential purchaser to effect such sale. Each of the Grantors acknowledges and agrees that any such sale might result in prices and other terms less favorable to the seller than if such sale were a public sale without such restrictions. In the event of any such sale, Lender shall incur no responsibility or liability for selling all or any part of the Pledged Equity at a price that Lender, in its sole and absolute discretion, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might have been realized if the sale were deferred until after registration as aforesaid or if more than a single purchaser were approached. The provisions of this Section will apply notwithstanding the existence of a public or private market upon which the quotations or sales prices may exceed substantially the price at which Lender sells. (b) Each of the Grantors agrees that, upon the occurrence and during the continuance of an Event of Default, if for any reason Lender desires to sell any of the Pledged Equity owned or held by or on behalf of such Grantor at a public sale, it will, at any time and from time to time, upon the written request of Lender, use its best efforts to take or to cause the issuer of such Pledged Equity to take such action and prepare, distribute or file such documents, as are required or advisable in the reasonable opinion of counsel for Lender to permit the public sale of such Pledged Equity. Each of the Grantors further agrees, jointly with the other Grantors and severally, to indemnify, defend and hold harmless Lender, any underwriter and their respective officers, directors, affiliates and controlling persons from and against all loss, liability, expenses, costs of counsel (including reasonable fees and expenses of legal counsel), and claims (including the costs of investigation) that they may incur, insofar as such loss, liability, expense or claim, as applicable, relates to such Grantor or any of its property, and arises out of or is based upon any alleged untrue statement of a material fact contained in any prospectus (or any amendment or supplement thereto) or in any notification or offering circular, or arises out of or is based upon any alleged omission to state a material fact required to be stated therein or necessary to make the statements in any thereof not misleading, except insofar as the same may have been caused by any untrue statement or omission based upon information furnished in writing to such Grantor or the issuer of such Pledged Equity, as applicable, by Lender expressly for use therein. Each of the Grantors further agrees, upon such written request referred to above, to use its best efforts to qualify, file or register, or cause the issuer of such Pledged Equity to qualify, file or register, any of the Pledged Equity owned or held by or on behalf of such Grantor under the Blue Sky or other securities laws of such states as may be requested by Lender and keep effective, or cause to be kept effective, all such qualifications, filings or registrations. Each of the Grantors will bear all costs and expenses of carrying out its obligations under this Section. Each of the Grantors acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. Section 12. Security Interest Absolute -------------------------- All rights of Lender hereunder, the Security Interest and all obligations of each of the Grantors hereunder shall be absolute and unconditional irrespective of (a) any lack of validity or enforceability of the Credit Agreement, any other Loan Document, any agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Credit Agreement, any other Loan Document or any other agreement or instrument relating to any of the foregoing, (c) any exchange, release or non-perfection of any Lien on any other collateral, or any release or amendment or waiver of, or consent under, or departure from, any guaranty, securing or guaranteeing all or any of the Obligations or (d) any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Grantor in respect of the Obligations or in respect of this Security Agreement or any other Loan Document other than the indefeasible payment of the Obligations in full in cash. Section 13. Notices ------- All communications and notices hereunder shall be in writing and given as provided in the Credit Agreement. All communications and notices hereunder to Borrower and any other Grantor shall be given to it at Borrower's address. Section 14. Binding Effect; Several Agreement; Assignments ---------------------------------------------- Whenever in this Security Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of any Grantor that are contained in this Security Agreement shall bind and inure to the benefit of each party hereto and its successors and assigns. This Security Agreement shall become effective as to any Grantor when a counterpart hereof executed on behalf of such Grantor shall have been delivered to Lender and a counterpart hereof shall have been executed on behalf of Lender, and thereafter shall be binding upon such Grantor and Lender and their respective successors and assigns, and shall inure to the benefit of such Grantor and Lender and their respective successors and assigns, except that none of the Grantors shall have the right to assign its rights or obligations hereunder or any interest herein or in the Collateral (and any such attempted assignment shall be void), except as expressly contemplated by this Security Agreement or the other Loan Documents. This Security Agreement shall be construed as a separate agreement with respect to each of the Grantors and may be amended, modified, supplemented, waived or released with respect to any Grantor without the approval of any other Grantor and without affecting the obligations of any other Grantor hereunder. Section 15. Survival of Agreement; Severability ----------------------------------- (a) All covenants, agreements, representations and warranties made by the Grantors herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Security Agreement or any other Loan Document shall be considered to have been relied upon by Lender and shall survive the execution and delivery of any Loan Documents and the making of any Loan or other extension of credit, regardless of any investigation made by Lender or on their behalf and notwithstanding that Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended under the Credit Agreement, and shall continue in full force and effect until this Security Agreement shall terminate. (b) In the event any one or more of the provisions contained in this Security Agreement or any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 16. Governing Law ------------- This Security Agreement shall be governed by and construed in accordance with New York laws. Section 17. Counterparts ------------ This Security Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one contract (subject to Section 14), and shall become effective as provided in Section 14. Delivery of an executed counterpart of this Security Agreement by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Security Agreement. Section 18. Headings -------- Section headings used herein are for convenience of reference only, are not part of this Security Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Security Agreement. Section 19. Jurisdiction; Consent to Service of Process ------------------------------------------- (a) Each party hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in the New York counties of Nassau or Suffolk, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Security Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that, to the extent permitted by applicable law, all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by applicable law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Security Agreement shall affect any right that any party hereto may otherwise have to bring any action or proceeding relating to this Security Agreement or the other Loan Documents in the courts of any jurisdiction. (b) Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Security Agreement or the other Loan Documents in any court referred to in paragraph (a) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Security Agreement irrevocably consents to service of process in the manner provided for notices in Section 13. Nothing in this Security Agreement will affect the right of any party to this Security Agreement to serve process in any other manner permitted by law. Section 20. WAIVER OF JURY TRIAL -------------------- EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS SECURITY AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS SECURITY AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. Section 21. Additional Subsidiaries ------------------------ (a) Each new Domestic Subsidiary of Borrower shall execute a counterpart hereof, whereupon it shall become a Grantor hereunder with the same force and effect as if originally named as a Grantor herein. The execution and delivery of any such instrument shall not require the consent of any Grantor hereunder. The rights and obligations of each of the Grantors hereunder shall remain in full force and effect notwithstanding the addition of any new Grantor as a party to this Security Agreement. (b) To the extent that any Grantor form or acquires any Subsidiary, whether or not a Domestic Subsidiary, such Grantor shall pledge the Equity Interests in such Subsidiary to Lender in accordance with the terms hereof and any such Equity Interests shall become Pledged Equity hereunder. Section 22. Covenants of Lender -------------------- The security interest granted to Lender hereunder shall terminate when the Grantors shall have indefeasibly paid and discharged all of the Obligations in full in cash. Upon such indefeasible payment and discharge of the Obligations, Lender shall reassign, release, or deliver to the Grantors all Collateral then held by or at the direction of Lender, and shall execute and deliver to the Grantors (at the Grantors' sole expense) such termination statements, satisfactions, releases, reconveyances, or reassignments as the Grantors may reasonably request to evidence such termination. [remainder of page intentionally left blank] IN WITNESS WHEREOF, the parties hereto have duly executed this Security Agreement as of the day and year first above written. Vicon Industries, Inc. By: ------------------------- Name: John M. Badke Title: Vice President, Finance TeleSite USA, Inc. By: -------------------------- Name: John M. Badke Title: Vice President, Finance Vicon Industries International Sales Corp. By: -------------------------- Name: John M. Badke Title: Vice President, Finance Washington Mutual Bank, FA By: --------------------------- Name: Sean M. Umhafer Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----