-----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, S7WYLwaMoh0bO5N9vcP3SiwDDj67wErPAq0+UV97u7l+o8jKNg5TuoRK14WQ6O6A SzIpeaOkEQzNaZ4jQ5WI7g== 0000310056-96-000002.txt : 19960117 0000310056-96-000002.hdr.sgml : 19960117 ACCESSION NUMBER: 0000310056-96-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19960116 SROS: AMEX 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07939 FILM NUMBER: 96503780 BUSINESS ADDRESS: STREET 1: 525 BROAD HOLLOW RD CITY: MELVILLE STATE: NY ZIP: 11747 BUSINESS PHONE: 5162932200 MAIL ADDRESS: STREET 1: 525 BROAD HOLLOW ROAD CITY: MELVILLE STATE: NY ZIP: 11747 10-K 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: September 30, 1995 Commission File No. 1-7939 - ---------------------------------------------- ------- VICON INDUSTRIES, INC. (Exact name of registrant as specified in its charter) NEW YORK 11-2160665 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 525 Broad Hollow Road, Melville, New York 11747 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 293-2200 - ----------------------------------------------------------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, Par Value $.01 (Title of class) American Stock Exchange (Name of each exchange on which registered) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of Common Stock held by non-affiliates of the registrant as of December 22, 1995 was approximately $3,500,000. The number of shares outstanding of the registrant's Common Stock as of December 22, 1995 was 2,762,828. PART I ITEM 1 - BUSINESS General Vicon Industries, Inc. (the "Company"), incorporated in New York in October, 1967, designs, manufactures, assembles and markets a wide range of closed circuit television ("CCTV") components and CCTV systems for security, surveillance, safety, process and control applications by end users. The Company sells CCTV components and systems directly to distributors, dealers and original equipment manufacturers, principally within the security industry. The U.S. security industry is a multi-billion dollar industry which includes guard services, armored carrier, electronic alarms and sensing equipment, safes, locking devices and access systems, as well as CCTV. The nature of the Company's business and the general security market it serves has not changed materially in the past five years. Users of the Company's products typically utilize them as a visual crime deterrent, for visual documentation, observing inaccessible or hazardous areas, enhancing safety, obtaining cost savings (such as lower insurance premiums), managing control systems, and improving the efficiency and effectiveness of personnel. The Company's products are marketed under its own brand names and registered trademarks. In fiscal 1995, no customer represented more than 10% of consolidated revenues. Products The Company's product line consists of approximately 600 products, of which about a third represent model variations. The Company's product line consists of various elements of a video surveillance system, including video cameras, display units (monitors), cassette recorders, switching equipment for video distribution, digital video and signal processing units (which perform character generation, multi screen display, video insertion, intrusion detection, source identification and alarm processing), motorized zoom lenses, remote camera positioning devices, manual and computer based system controls, environmental camera enclosures and consoles for system assembly. In 1995, the Company introduced a new product called ProTech which is a Windows based command and control software package. ProTech allows personal computers (p.c.) users to graphically program and operate from a P.C. all of the Company's digital control and video processing systems. The Company expects to further enhance the capabilities of ProTech. The Company maintains a large line of products due to the many varied climatic and operational environments under which the products are expected to perform. In addition to selling from a standard catalog line, for significant orders, the Company will produce to specification or modify an existing product to meet a customer's requirements. The Company's products range in price from $10 for a simple camera mounting bracket to approximately one hundred thousand dollars (depending upon configuration) for a large digital control and video switching system. - 2 - Marketing The Company's products are sold worldwide, principally to independent distributors, dealers and integrators of various types of security-related systems. Sales are made by in-house customer service representatives, field sales engineers and by independent sales representatives in certain areas of the United States. The sales effort is supported by several in-house application engineers. Although the Company does not sell directly to end users, much of its sales promotion and advertising is directed at end user markets. The Company's products are employed in video system installations by: (1) commercial and industrial users, such as office buildings, manufacturing plants, warehouses, apartment complexes, shopping malls and retail stores; (2) federal, state, and local governments for national security purposes, municipal facilities, prisons, and military installations; (3) financial institutions, such as banks, clearing houses, brokerage firms and depositories, for security purposes; (4) transportation departments for highway traffic control, bridge and tunnel monitoring, and airport, subway, bus and seaport surveillance; (5) gaming casinos, where video security is often mandated by local statute; and (6) health care facilities, such as hospitals, particularly psychiatric wards and intensive care units. The Company estimates that approximately 50 percent of its total revenues are sales for commercial and industrial uses. The Company's principal sales offices are located in Melville, New York; Atlanta, Georgia and Segensworth, England. International Sales The Company sells internationally by direct export to dealers and distributors, and, in Europe through the Company's United Kingdom (U.K.) subsidiary. In fiscal 1995, the operating profit and identifiable assets for the Company's U.K. subsidiary amounted to approximately $573,000 and $5.2 million, respectively. For more information regarding foreign operations, see Note 7 of Notes to Consolidated Financial Statements included elsewhere herein. Direct export sales and sales from the Company's U.K. subsidiary amounted to $17.5 million, $16.7 million and $16.1 million or 40%, 35% and 35% of consolidated revenues in fiscal years 1995, 1994, and 1993, respectively. Export sales are made through a wholly-owned subsidiary, Vicon Industries Foreign Sales Corporation, a tax advantaged foreign sales corporation. The Company's principal foreign markets are Europe and the Far East, which together accounted for approximately 83 percent of international sales in fiscal 1995. Additional information is contained in the discussion of foreign currency activity included in Item 7. - 3 - Competition The Company competes in areas of price, service, product performance and availability with several large and small public and privately-owned companies in the manufacture and distribution of CCTV systems and components (excluding cameras, monitors and video cassette recorders "Video Products") within the security industry. The Company's Video Products compete with many large companies whose financial resources and scope of operations are substantially greater than the Company's. The Company is one of a few domestic market suppliers that design, assemble, manufacture, market and support an extensive line of products offering a comprehensive system capability in a wide range of applications. Many competitors, including manufacturers of cameras, monitors and recorders, typically produce a limited product line since components and accessories are low volume items. The Company believes a broad product line is desirable since many customers prefer to obtain a complete video system from one supplier with the assurance of product compatibility and reliability. In recent years, price competition has intensified limiting the amount of cost increases the Company can pass on to customers and in some instances requiring price reductions. Research and Development The Company is engaged in ongoing research and development activities in connection with new or existing products. Changes in CCTV technology have incorporated the use of advanced electronic components and new materials which add to product life and performance. Twenty-one professional employees devote full time to the development of new products and to improving the qualities and capabilities of existing products. Further, the Company engages the services of others to assist in the development of new products. Expenditures for research and development amounted to approximately $1,900,000 in 1995, $1,600,000 in 1994, and $1,600,000 in 1993 or approximately 4.2% of revenues in 1995, 3.4% of revenues 1994, and 3.5% of revenues in 1993. Source and Availability of Raw Materials The Company has not experienced shortages or significant difficulty in obtaining its raw materials, components or purchased finished products. Raw materials are principally aluminum, steel and plastics, while components are mainly motors, video lenses and standard electronic parts. In 1995, the Company procured directly and indirectly approximately 19% of its product purchases from Chun Shin Electronics, Inc., its Korean joint venture (see Item 13 for further discussion of the Korean joint venture). The Company is not dependent upon any other single source for a significant amount of its raw materials, components or purchased finished products. Patents and Trademarks The Company owns a limited number of design and utility patents expiring at various times and has several patent applications pending with respect to the design and/or mechanical function of its products. The Company has certain trademarks registered and several other trademark applications pending both in the United States and in Europe. The Company has no licenses, franchises or concessions with respect to any of its products or business dealings. The Company does not deem its patents and trademarks, or the lack of licenses, franchises and concessions, to be of substantial significance or to have a material effect on its business. - 4 - Inventories The Company maintains an inventory of finished products sufficient to accommodate its customers' requirements, since most sales are to dealer/contractors who do not carry large stock inventories. Parts and components inventories are also carried in sufficient quantities to permit prompt delivery of certain items. The Company would rather carry adequate inventory quantities than experience shortages which detract from the production process and sales effort. The Company's business is not seasonal. Backlog The backlog of orders believed to be firm as of September 30, 1995 and 1994 was approximately $2.7 million and $3.0 million, respectively. All orders are cancelable without penalty at the option of the customer. The Company prefers that its backlog of orders not exceed its ability to fulfill such orders on a timely basis, since experience shows that long delivery schedules only encourage the Company's customers to look elsewhere for product availability. Employees At September 30, 1995, the Company employed 175 full-time employees, of whom five are officers, 50 administrative personnel, 65 employed in sales capacities, 25 in engineering, and 30 production employees. At September 30, 1994, the Company employed 185 persons categorized in similar proportions to those of 1995. There are no collective bargaining agreements with any of the Company's employees and the Company considers its relations with its employees to be good. ITEM 2 - PROPERTIES In January 1988, the Company sold and subsequently leased back its 108,000 square foot headquarters facility in Melville, New York, which accommodates the Company's sales, distribution, administration, product development and limited assembly and manufacturing operations. Currently, the Company subleases 28,000 sq. ft. of its facility under an agreement which expires on February 28, 1997. In November 1994, the Company entered into a sublease agreement dated as of January 1, 1993, which gives a company affiliated with its landlord the right to occupy approximately 25,000 sq. ft. of its primary operating facility with two months notice in exchange for specified rent payments through the expiration of the primary lease in 1998. In connection with such agreement, the landlord and the subtenant were each granted an option to ask the Company to vacate the entire premises with six months notice and the landlord agreed to release the Company from all future obligations under its lease in exchange for a lease termination payment by the Company. (See Notes 3 and 10 of Notes to Consolidated Financial Statements included elsewhere herein for further information). The Company believes that this facility is adequate to support its near term operating plans. The Company also operates, under lease, a regional sales office in Atlanta, Georgia. In addition, the Company owns a 14,000 square foot sales, service and warehouse facility in southern England which services the U.K. and European Community markets. ITEM 3 - LEGAL PROCEEDINGS None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None - 5 - PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's stock is traded on the American Stock Exchange under the symbol (VII). The following table sets forth for the periods indicated, the range of high and low prices for the Company's Common Stock on the American Stock Exchange:
Quarter Ended High Low Fiscal 1995 December 2-1/16 1-1/2 March 2-15/16 1-1/2 June 2-1/2 1-3/8 September 2-1/8 1-9/16 Fiscal 1994 December 2-1/8 1- 3/4 March 2-3/16 1- 7/8 June 2-3/16 1-11/16 September 2 1-11/16
The Company has not declared or paid cash dividends on its Common Stock for any of the foregoing periods. Additionally, under the current loan agreement, the Company may not declare dividends. The approximate number of holders of Common Stock at December 22, 1995 was 1,500. - 6 -
ITEM 6 - SELECTED FINANCIAL DATA FISCAL YEAR 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands, except per share data) Net sales $ 43,847 $ 47,714 $ 45,923 $ 45,041 $ 42,055 Gross profit 9,546 10,714 9,274 8,150* 10,505 Pretax income (loss) (1,267) 74 (1,858) (3,317) (478) Net income (loss) (1,347) 45 (1,875) (3,906) (377) Income (loss) per share (.49) .02 (.68) (1.42) (.14) Total assets 26,423 28,857 26,069 26,701 30,325 Long-term debt 5,339 6,059 5,621 6,273 6,648 Working capital 10,721 13,359 13,420 15,741 18,957 Property, plant and equipment (net) 3,262 3,180 3,245 3,913 4,251 Cash dividends - - - - -
* Includes a provision of $2.7 million for discontinuance of certain products and product lines. - 7 - ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal Year 1995 Compared with 1994 Net sales for 1995 were $43.8 million, a decrease of 8.1%, compared with $47.7 million in 1994. The sales decline was the result of lower domestic shipments, while foreign sales increased $.8 million to $17.5 million. Domestic sales were affected by several factors such as direct end user selling by competition; lack of competitiveness of certain products whose cost is denominated in yen; and shortened product life cycles which made certain of the Company's key control systems less competitive. The backlog of orders was $2.7 million at September 30, 1995 compared with $3.0 million at September 30, 1994. Gross profit margins were 21.8% of net sales in 1995, compared with 22.5% in 1994. The margin decline was due principally to the impact of lower sales in relation to a substantially fixed overhead structure. In addition, the value of the dollar declined significantly against the Japanese yen for most of the year which lowered margins of those products sourced in Japan. Operating expenses in 1995 totaled $9.8 million compared with $9.9 million in 1994. Operating expenses, as a percent of sales, amounted to 22.4% and 20.7% in 1995 and 1994, respectively. The increase in expenses as a percent of sales is due in part to higher bad debt expense, severance pay, bank and professional fees. During 1994, the Company incurred an unrealized foreign exchange gain of $45,000. This gain resulted from the Company's revaluation of its yen denominated mortgage obligation into U.S. dollars as the value of the British pound sterling gained against the Japanese yen during the year. Interest expense increased $230,000 as a result of higher interest rates. The net loss of $1.3 million compared with a profit of $45,000 was the result of lower sales and gross margins and higher interest expenses as discussed above. - 8 - MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Fiscal Year 1994 Compared with 1993 Net sales for 1994 were $47.7 million, an increase of 3.9%, compared with $45.9 million in 1993. The sales growth resulted primarily from increased sales in Europe. The backlog of orders was $3.0 million at September 30, 1994 compared with $4.1 million at September 30, 1993. This decline is the result of lower domestic and export sales bookings in 1994. Gross profit margins were 22.5% of net sales in 1994, compared with 20.2% in 1993. In 1993, the Company's cost of products sourced in Japan increased significantly as a result of a severe decline in the value of the U.S. dollar compared with the Japanese yen. Also, a decline in the value of the British pound versus the U.S. dollar further reduced margins on U.S. sourced product sales in Europe. In 1994, the value of the dollar continued to weaken against the Japanese yen but to a lesser extent than in 1993. The Company was able to substantially offset the effects of this further decline by securing U.S. dollar based purchase agreements to cover most of the year's yen based product purchase commitments. During 1994, the Company began shifting product sourcing to suppliers transacting in more stable and favorable currencies. Further, the value of the British pound increased against the U.S. dollar in 1994 which increased margins on U.S. sourced product sales in Europe. The Company was also able to reduce its indirect manufacturing expenses in 1994 while increasing product production, thus increasing product margins. Finally, prior year margins were adversely impacted by the recognition of a $450,000 provision to the estimated realizable value of certain discontinued product parts and components. Such provision accounted for approximately 1% of the 1994 increase in gross profit margins. Operating expenses in 1994 totaled $9.9 million compared with $10.3 million in 1993. Operating expenses, as a percent of sales, amounted to 20.7% and 22.5% in 1994 and 1993, respectively. The decline in expenses was principally the result of an ongoing cost control program. During 1994, the Company incurred an unrealized foreign exchange gain of $45,000 compared with a loss of $262,000 in 1993. This gain or loss results from the Company's revaluation of its yen denominated mortgage obligation into U.S. dollars. The decrease in the loss was due to the relative stability of the British pound sterling against the Japanese yen during the year. Interest expense increased by $224,000 in 1994 as a result of higher interest rates and higher borrowing levels. Pretax income improved approximately $1.9 million as a result of increased sales, higher gross margins and lower operating expenses as discussed above. - 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND FINANCIAL CONDITION September 30, 1995 Compared with 1994 Total shareholders' equity was approximately $8.6 million at September 30, 1995, despite a net loss of $1.3 million in fiscal 1995. Working capital declined by approximately $2.6 million to $10.7 million at September 30, 1995. The decline was principally due to the operating loss and accelerated paydown of $.9 million of long term bank debt. Accounts receivable decreased approximately $1.4 million to $8.4 million at September 30, 1995. The decrease was the result of lower fourth quarter sales and improved receivable turnover. Inventories declined $1.4 million to $12.1 million at September 30, 1995. Finished products at the Company's U.K. subsidiary decreased $.8 million while raw material and component inventories accounted for the remaining inventory decline as the Company moved production to its off-shore plant and domestic contract manufacturers. Accounts payable to a related party, Chugai Boyeki Co., Ltd., increased approximately $1.2 million to $6.9 million at September 30, 1995 in support of the Company's repayment of bank debt. The Company has a revolving line of credit of 700,000 pounds sterling (approx. $1.1 million) in the U.K. to support local cash requirements. At September 30, 1995, borrowings under this agreement were approximately $907,000, which was used for general working capital purposes. In December 1994, the Company extended its bank revolving credit agreement to October 1995. Borrowings under such agreements amounted to approximately $2.8 million and $4.5 million, respectively, at September 30, 1995 and 1994, which was used principally for U.S. working capital purposes. At September 30, 1995, the Company was in default of certain covenants under the agreement and on December 28, 1995 repaid the entire loan with the proceeds of a new bank loan. The new two year loan agreement provides for maximum borrowings of $3,250,000 through June 30, 1996 and $4,000,000 thereafter, subject to an availability formula based on accounts receivable and inventories. Concurrent with the new loan agreement, the Company amended its $2,000,000 secured promissory note with Chugai Boyeki Co., Ltd., a related party, to defer all scheduled installments to July 1998. The Company believes that the new loan agreement and its other sources of credit provide adequate funding to meet its near term cash requirements. - 10 - Foreign Currency Activity The Company's foreign exchange exposure is principally limited to the relationship of the U.S. dollar to the Japanese yen and the British pound sterling. Japan sourced products denominated in Japanese yen accounted for approximately 19 percent of product purchases in fiscal 1995. In recent years the dollar has weakened dramatically in relation to the yen, resulting in increased costs for such products. When market conditions permit, cost increases due to currency fluctuations are passed on to customers through price increases. The Company also attempts to reduce the impact of an unfavorable exchange rate condition through cost reductions from its suppliers, lowering production cost through product redesign, and shifting product sourcing to suppliers transacting in more stable and favorable currencies. During the period from the second half of 1993 through July 1994, the Company was granted dollar based pricing through Chugai Boyeki Co., Ltd., its Japanese supplier. Subsequent to this period, the Company's purchases have been denominated in Japanese yen. However, this supplier, at the Company's direction, has entered into foreign exchange contracts on behalf of the Company to hedge the currency risk on these product purchases. Sales to the Company's U.K. subsidiary, which approximated $4.3 million in fiscal 1995, are made in pounds sterling and include products sourced from the Far East. In the years when the pound has weakened significantly against the U.S. dollar and Japanese yen, the cost of U.S. and Japanese sourced product sold by the Company's U.K. subsidiary has increased. When market conditions permitted, such cost increases were passed on to the customer through price increases. The Company attempts to minimize its currency exposure on intercompany sales through the purchase of forward exchange contracts to cover unpaid receivables. The Company intends to increase prices and seek lower prices from suppliers to mitigate exchange rate exposures, however, there can be no assurance that such steps will be effective in limiting foreign currency exposure. Inflation The impact of inflation on the Company has lessened in recent years as the rate of inflation declined. However, inflation continues to increase costs to the Company. As operating expenses and production costs increase, the Company, to the extent permitted by competition, recovers these increased costs by increasing prices to its customers. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 14, for an index to consolidated financial statements and financial statement schedules. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None - 11 - PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Directors and Executive Officers of the Company are as follows: Directors and Executive Officers Donald N. Horn, age 66 Chairman of the Board (since 1967); term ends April 1996 Kenneth M. Darby, age 49 President, Chief Executive Officer, Assistant Secretary, and Director (since 1987); term ends April, 1997 Arthur D. Roche, age 57 Executive Vice President, Chief Financial Officer, Secretary, Member of the Office of the President and Director (since 1992); term ends April 1996 Peter F. Barry, age 66 Director since 1984; term ends April 1996 Milton F. Gidge, age 66 Director since 1987; term ends April 1998 Michael D. Katz, age 57 Director since 1993; term ends April 1998 Peter F. Neumann, age 61 Director since 1987; term ends April 1997 W. Gregory Robertson, age 51 Director since 1991; term ends April 1998 Kazuyoshi Sudo, age 53 Director since 1987; term ends April 1997 Arthur V. Wallace, age 70 Director since 1974; term ends April 1998 Peter A. Horn, age 40 Vice President, Compliance and Quality Assurance Yacov A. Pshtissky, age 44 Vice President, Engineering Kevin D. Whitley, age 39 Vice President, U.S. Sales Mr. D. Horn founded the Company in 1967 and has served as Chairman of the Board since its inception. He also served as Chief Executive Officer from the Company's inception until April 1992 and as President to September, 1991. Mr. Darby has served as Chief Executive Officer since April, 1992 and as President since October, 1991. Mr. Darby also served as Chief Operating Officer and as Executive Vice President, Vice President, Finance and Treasurer of the Company. He first joined the Company in 1978 as Controller after more than nine years at KPMG Peat Marwick, a major public accounting firm. Mr. Roche joined the Company as Executive Vice President and co-participant in the Office of the President in August 1993. For the six months earlier, Mr. Roche provided consulting services to the Company. In October, 1991 Mr. Roche retired as a partner of Arthur Andersen & Co., an international accounting firm whom he joined in 1960. Mr. Barry is a retired executive of Grumman Corp., an aerospace manufacturer, for whom he served from August 1988 to March 1991 as Senior Vice President of Washington D.C. operations. Previously, he served since 1974 as President of Hartman Systems, Inc., a manufacturer of electronic controls and display devices for military applications. Mr. Barry currently acts as a consultant to private industry on government relations. - 12 - Mr. Gidge is a retired executive officer of Lincoln Savings Bank (1976-1994) and served as its Chairman, Credit Policy. He has also served as a director since 1980 of Interboro Mutual Indemnity Insurance Co., a general insurance mutual company and since 1988 as a director of Intervest Corporation of New York, a mortgage banking company. Mr. Katz is a physician practicing in New York. He is the President of Katz, Rosenthal, Ganz, Snyder & PDC. He has served in that capacity for 25 years. Mr. Neumann has been President of Flynn-Neumann Agency, Inc. an insurance brokerage firm, since 1971. He has also served since 1978 as a director of Reliance Federal Savings Bank. Mr. Robertson is President of TM Capital Corporation, a financial services company, an organization he founded in 1989. From 1985 to 1989, he was employed by Thomson McKinnon Securities, Inc. as head of investment banking and public finance. Mr. Sudo has been Treasurer of Chugai Boyeki (America) Corp., a distributor of electronic, chemical and optical products, for the past ten years. Mr. Wallace, who joined the Company in 1970, was Executive Vice President from 1979 until he retired in September, 1990. Mr. P. Horn joined the Company in January, 1974 and has been employed in various technical capacities. In 1986 he was appointed as Vice President, Engineering; in May, 1990 as Vice President, New Products and Technical Support Services; in September 1993, he was appointed Vice President, Marketing; in 1994 as Vice President, Product Management; and in 1995 as Vice President, Compliance and Quality Assurance. Mr. Pshtissky, who joined the Company in September 1979, as an Electrical Design Engineer, was promoted to Director of Electrical Product Development in March, 1988 and to Vice President, Engineering in May, 1990. Mr. Whitley joined the Company in March, 1987 as a Sales Engineer. He was promoted to Midwest Regional Manager in 1989 and Vice President, U.S. Sales in August, 1993. There are no family relationships between any director, executive officer or person nominated or chosen by the Company to become a director or officer except for the relationship between Peter A. Horn, an officer of the Company, and Donald N. Horn, Chairman of the Board. Peter A. Horn is the son of Donald N. Horn. - 13 - Compliance with Section 16(a) of the Exchange Act Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended September 30, 1995 and Form 5 and amendments thereto furnished to the Company with respect to the year ended and certain written representations, no person, who, at any time during the year ended September 30, 1995, was a director, officer or beneficial owner of more than 10 percent of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act failed to file on a timely basis, as disclosed in the above forms, reports required by Section 16 of the Exchange Act during the year ended September 30, 1995. ITEM 11 - EXECUTIVE COMPENSATION The following information is set forth with respect to all compensation paid by the Company to its Chief Executive Officer and its most highly compensated executive officers other than the CEO whose annual compensation exceeded $100,000, for each of the past three fiscal years.
Annual Long Term Compensation Compensation Fiscal Name and Year Ended Options All Other Principal Position September 30, Salary No. of Shares Compensation Kenneth M. Darby 1995 $195,000 - $ 3,000 (1) Chief Executive Officer 1994 $195,000 59,194 $ 3,000 (1) 1993 $192,000 19,838 $31,000 (2) Arthur D. Roche 1995 $150,000 - - Executive Vice President 1994 $150,000 50,000 - 1993 $ 25,000 - -
No listed officer received other non-cash compensation amounting to more than 10% of salary. (1) Represents life insurance policy payment. (2) Includes a $28,000 cash distribution pursuant to the cancellation of a deferred compensation agreement and a $3,000 life insurance policy payment. - 14 -
Stock Options OPTION GRANTS IN LAST FISCAL YEAR Potential Realizable Individual Grants Value at Assumed Annual Rates of Stock % of Total Price Appreciation No. of Granted to Exercise For Option Term Options Employees In Price Expiration Name Granted Fiscal Year Per Share Date 5% 10% - ----------------- ---------- ------------- --------- ---------- ------- ------ None
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Value of Unexercised In- Number of Unexercised Options the-Money Options at As of September 30, 1995 September 30, 1995 (1) ----------------------------- ------------------------ Name Exercisable Unexercisable Exercisable Unexercisable Kenneth M. Darby 112,214 23,678 - - Arthur D. Roche 30,000 20,000 - -
No options were exercised by any of the above-named officers during the year ended September 30, 1995. (1) Calculated based on $1.875 per share closing market value at September 30, 1995. - 15 - Mr. Darby has entered into an employment contract with the Company that entitles him to receive an annual salary of $195,000 through fiscal year 2000. Additionally, Mr. Darby's agreement provides for payment in an amount up to three times his average annual compensation for the previous five years if there is a change in control (as defined in the agreement). Mr. Roche, who joined the Company on August 1, 1993, has an agreement with the Company that provides an annual salary of $150,000 through September 30, 1997. The agreement also provides for a payment, at Mr. Roche's option, if there is a change in control, as defined, equal to the unpaid salary under his agreement. Messrs. D. Horn and Wallace (a former executive and a current director) each have insured deferred compensation agreements with the Company which provide that upon reaching retirement age total payments of $917,000 and $631,000, respectively, will be made in monthly installments over a ten year period. The full deferred compensation payment is subject to such individuals' adherence to certain non-compete covenants. Mr. Wallace, who retired in September 1990, began receiving payments under the agreement in October, 1990 and Mr. Horn began receiving payments under the agreement in January, 1994. Directors, except the Chairman of the Board and employee directors, are each compensated at the rate of $600 per Board meeting and $300 per committee meeting attended in person. The Chairman of the Board is compensated at the rate of $1,000 per Board meeting and $300 per committee meeting attended in person. - 16 - COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors consists of Messrs. Neumann, Robertson and Wallace, none of whom are or ever have been officers of the Company, except Mr. Wallace who retired in 1990 as Executive Vice President. See the section entitled "Certain Relationships and Related Transactions" included elsewhere herein, for a discussion of certain other relationships maintained by Mr. Neumann and Mr. Robertson with the Company. BOARD COMPENSATION COMMITTEE REPORT The Compensation Committee's compensation policies applicable to the Company's executive officers for the last completed fiscal year were to pay a competitive market price for the services of such officers, taking into account the overall performance and financial capabilities of the Company and the officer's individual level of performance. Mr. Darby makes recommendations to the Compensation Committee as to the base salary and incentive compensation of all executive officers other than Mr. Darby. The Committee reviews these recommendations with Mr. Darby, and after such review, determines compensation. In the case of Mr. Darby, the Compensation Committee makes its determination after direct negotiation with such officer. For each executive officer, the Committee's determinations are based on the committee's conclusions concerning each officer's performance and comparable compensation levels in the CCTV Industry and the Long Island area for similarly situated officers at other companies. The overall level of performance of the Company is taken into account but is not specifically related to the base salary of these executive officers. Also, the Company has established an incentive compensation plan for all of its executive officers, which provides a specified bonus to each officer upon the Company's achievement of certain annual profitability targets. The Compensation Committee grants options to executive officers to connect compensation to the performance of the Company. Options are exercisable in the future at the fair market value at the time of grant, so that an officer granted an option is rewarded by the increase in the price of the Company's stock. The Committee grants options based on significant contributions of an executive officer to the performance of the Company. In addition, in determining the salary compensation of Mr. Darby as CEO, the Committee considered the responsibility assumed by him in formulating and implementing a management and operating restructuring plan. Compensation Committee Peter F. Neumann, Chairman, W. Gregory Robertson and Arthur V. Wallace - 17 - This graph compares the return of $100 invested in the Company's stock on October 1, 1990, with the return on the same investment in the AMEX Market Value Index and the AMEX High Technology Index.
(The following table was represented by a chart in the printed material) AMEX High Vicon AMEX Market Technology Date Industries, Inc. Value Index Index 10/01/90 100 100 100 10/01/91 82 122 160 10/01/92 109 122 150 10/01/93 64 150 178 10/01/94 66 149 186 10/01/95 68 177 247
- 18 - ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following sets forth information as to each person, known to the Company to be a "beneficial owner" (as defined in regulations of the Securities and Exchange Commission) of more than five percent of the Company's Common Stock outstanding as of December 1, 1995 and the shares beneficially owned by the Company's Directors and by all Officers and Directors as a group.
Name and Address Amount of of Beneficial Owner Beneficial Ownership (1) % of Class ------------------- ------------------------ ---------- Chugai Boyeki (America) Corp. 55 Mall Drive Commack, NY 11725 and Chugai Boyeki Company, Ltd. 2-15-13 Tsukishima Chuo-ku Tokyo, Japan 104 548,715 18.0% Chu Chun C/O I.I.I. Companies, Inc. 915 Hartford Turnpike Shrewsbury, MA 01545 168,957 5.5% Hanshin Securities Co., Ltd. 34-7, Yoido-Dong Youngdungpo-Gu Seoul 150-010, Korea 143,000 4.7% ******************************************************************************* C/O Vicon Industries, Inc. Michael D. Katz 279,400 (2) 9.2% Kenneth M. Darby 203,988 (3) 6.7% Donald N. Horn 156,003 (2) 5.1% Arthur V. Wallace 66,238 (4) 2.2% Arthur D. Roche 47,500 (5) 1.6% Kazuyoshi Sudo 12,000 (2) .4% Peter F. Barry 5,600 (2) .2% Milton F. Gidge 5,000 (2) .2% Peter F. Neumann 3,000 .1% W. Gregory Robertson -- -- Total all officers and directors as a group (13 persons) 823,024 (6) 27.0%
(1) The nature of beneficial ownership of all shares is sole voting and investment power. (2) Includes currently exercisable options to purchase 5,000 shares. (3) Includes currently exercisable options to purchase 140,714 shares. - 19 - (4) Includes currently exercisable options to purchase 4,543 shares. (5) Includes currently exercisable options to purchase 37,500 shares. (6) Includes currently exercisable options to purchase 250,302 shares. - 20 - ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company and Chugai Boyeki Company, Ltd. (Chugai), a Japanese corporation, which owns 19.9% of the outstanding shares of the Company, have been conducting business with each other for approximately sixteen years whereby the Company imports certain video products and lenses through Chugai and also sells its products to Chugai who resells the products in certain Asian and European markets. In fiscal 1995, the Company purchased approximately $11.6 million of products through Chugai and sold products to Chugai for resale totaling approximately $3.4 million. Kazuyoshi Sudo, a director, is Treasurer of Chugai Boyeki (America) Corp., a U.S. subsidiary of Chugai. Chu S. Chun, who controls 6.1% of the outstanding shares of the Company, also owns Chun Shin Industries, Inc. (CSI). CSI is a 50% partner with the Company in Chun Shin Electronics, Inc. (CSE), a joint venture company which manufactures and assembles certain Vicon products in South Korea. In fiscal 1995, CSE sold approximately $5.1 million of product to the Company through I.I.I. Companies, Inc. (I.I.I.), a U.S. based company controlled by Mr. Chun. The Company entered into a supplier agreement with I.I.I. during 1994 whereby I.I.I. arranges the importation and provides short term financing on all the Company's product purchases from CSE. CSE also sold approximately $1.2 million of product to CSI which sells Vicon product exclusively in Korea. In addition, I.I.I. purchased approximately $900,000 of products directly from the Company during fiscal 1995 for resale to CSI. Peter F. Neumann, a director of the Company, is President and the principal shareholder of Flynn-Neumann Agency, Inc., an insurance brokerage firm, which is the agent for a majority of the Company's commercial insurance. The premium paid for such insurance amounted to approximately $94,000 in fiscal 1995. W. Gregory Robertson, a director of the Company, is President of TM Capital Corporation, an investment banking firm which provides investment banking services to the Company on a periodic basis. Services rendered to the Company during fiscal 1995 but paid subsequent to year end amounted to $25,000. During 1995, the Company purchased approximately $50,000 of products from Pro/Four Video Products, Inc., in which Donald N. Horn and Arthur V. Wallace, directors of the Company, have an ownership interest. - 21 - PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements Included in Part IV, Item 14: Independent Auditors' Report Financial Statements: Consolidated Statements of Operations, fiscal years ended September 30, 1995, 1994, and 1993 Consolidated Balance Sheets at September 30, 1995 and 1994 Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 1995, 1994, and 1993 Consolidated Statements of Cash Flows, fiscal years ended September 30, 1995, 1994, and 1993 Notes to Consolidated Financial Statements, fiscal years ended September 30, 1995, 1994, and 1993 (a) (2) Financial Statement Schedule Included in Part IV, Item 14: Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 1995, 1994, and 1993 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. - 22 - 14(a)(3) Exhibits Exhibit Number or Exhibit Incorporation by Numbers Description Reference to 3 Articles of Incorporation and Incorporated by reference By-Laws, as amended to the 1985 Annual Report on Form 10-K; Form S-2 filed in Registration Statement No. 33-10435 and Exhibit A, B and C of the 1987 Proxy Statement 10 Material Contracts (.1) Credit and Security Agreement 10.1 dated December 27, 1995 between the Registrant and IBJ Schroder Bank and Trust Company (.2) Promissory Note dated 10.2 October 5, 1993 as amended between Registrant and Chugai Boyeki Company, Ltd. (.3) Mortgage Loan Agreement dated Incorporated by June 2, 1989 between the reference to the 1989 Registrant and Chugai Boyeki Annual Report on Company, Ltd. Form 10-K (.4) Employment contract dated 10.4 October 1, 1995 between the Registrant and Kenneth M. Darby (.5) Letter Agreement dated October 10.5 1, 1995 between Registrant and Arthur D. Roche (.6) Employment Agreement dated June 10.6 1, 1995 between Registrant and Peter Horn (.7) Employment Agreement dated June 10.7 1, 1995 betwen Registrant and Yacov Pshtissky (.8) Deferred Compensation Agreements Incorporated by dated November 1, 1986 between the reference to the 1992 Registrant and Donald N. Horn and Annual Report on Arthur V. Wallace Form 10K (.9) Agreement of lease dated Incorporated by January 18, 1988 between the reference to the 1988 Registrant and Allan V. Rose Annual Report on Form 10-K - 23 - (.10) Sublease Agreement dated Incorporated by reference as of January 1, 1993 between to the 1994 Annual Report the Registrant and AVR on Form 10-K Mart Inc. (.11) Consent of Overlandlord and Incorporated by reference Release Agreement (undated) to the 1994 Annual Report between the Registrant and on Form 10-K Allan V. Rose (.12) Sublease Agreement dated 10.12 as of September 1, 1995 between the Registrant and New York Blood Center (.13) Amended and restated 1986 Incorporated by Incentive Stock Option Plan reference to the 1990 Annual Report on Form 10-K (.14) 1994 Incentive Stock Incorporated by reference Option Plan to the 1994 Annual Report on Form 10-K (.15) 1994 Non-Qualified Stock Option Incorporated by reference Plan for Outside Directors to the 1994 Annual Report on Form 10-K 22 Subsidiaries of the Registrant Incorporated by reference to the Notes to the Consolidated Financial Statements 24 Independent Auditors' Consent 24 No other exhibits are required to be filed. 14(b) - REPORTS ON FORM 8-K No reports on Form 8-K were required to be filed during the last quarter of the period covered by this report. - 24 - Other Matters - Form S-8 Undertaking For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892 (filed June 30, 1986), 33-34349 (filed April 1, 1990) and 33-90038 (filed February 24, 1995): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. - 25 - KPMG PEAT MARWICK LLP Independent Auditors' Report The Board of Directors and Shareholders Vicon Industries, Inc.: We have audited the consolidated financial statements of Vicon Industries, Inc. and subsidiaries as listed in Part IV, item 14(a)(1). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Part IV, item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vicon Industries, Inc. and subsidiaries at September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Jericho, New York November 16, 1995, except as to note 6, which is as of December 28, 1995 - 26 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended September 30, 1995, 1994 and 1993 1995 1994 1993 ---- ---- ---- Net sales $43,846,571 $47,713,892 $45,922,832 Cost of sales 34,300,638 37,000,055 36,648,513 ----------- ----------- ----------- Gross profit 9,545,933 10,713,837 9,274,319 Operating expenses: General and administrative expense 3,366,662 3,188,183 3,487,616 Selling expense 6,433,483 6,712,436 6,827,256 ----------- ----------- ----------- 9,800,145 9,900,619 10,314,872 ----------- ----------- ----------- Operating (loss) profit (254,212) 813,218 (1,040,553) Unrealized foreign exchange (gain) loss (550) (44,748) 261,804 Interest expense 1,013,383 783,731 555,453 ----------- ----------- ----------- (Loss) income before income taxes (1,267,045) 74,235 (1,857,810) Income tax expense 80,000 29,000 17,547 ----------- ----------- ----------- Net (loss) income $(1,347,045) $ 45,235 $(1,875,357) =========== =========== =========== (Loss) income per share $(.49) $.02 $(.68) ===== ===== ======
See accompanying notes to consolidated financial statements. - 27 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1995 and 1994 ASSETS 1995 1994 - ------ ---- ---- Current Cash $ 1,151,850 $ 910,400 Accounts receivable (less allowance of $542,000 in 1995 and $309,000 in 1994) 8,352,845 9,733,383 Other receivables 261,864 301,548 Inventories: Parts, components, and materials 1,594,462 2,458,840 Work-in-process 1,686,287 1,267,344 Finished products 8,831,852 9,739,832 ----------- ----------- 12,112,601 13,466,016 Prepaid expenses 309,288 322,953 ----------- ----------- Total current assets 22,188,448 24,734,300 Property, plant and equipment: Land 292,298 292,298 Building and improvements 1,512,601 1,512,601 Machinery, equipment, and vehicles 11,417,598 10,671,340 ----------- ---------- 13,222,497 12,476,239 Less accumulated depreciation and amortization 9,960,558 9,296,420 ----------- ----------- 3,261,939 3,179,819 Other assets 973,107 943,107 ----------- ----------- $26,423,494 $28,857,226 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Borrowings under revolving credit agreement 906,955 936,466 Current maturities of long-term debt 220,739 1,260,158 Accounts payable: Related party 6,895,073 5,711,951 Other 1,335,935 1,812,756 Accrued wages and expenses 1,697,732 1,289,511 Income taxes payable 78,583 32,270 Deferred gain on sale and leaseback 332,100 332,100 ----------- ----------- 11,467,117 11,375,212 Total current liabilities Long-term debt: Related party 2,437,259 2,332,632 Other 2,901,490 3,726,270 Deferred gain on sale and leaseback 433,993 766,093 Other long-term liabilities 550,609 614,487 Commitments and contingencies - Note 10 Shareholders' equity Common Stock, par value $.01 per share Authorized - 10,000,000 shares Issued 2,788,228 shares 27,882 27,882 Capital in excess of par value 9,396,890 9,396,890 Retained (deficit) earnings (583,789) 763,256 ----------- ----------- 8,840,983 10,188,028 Less treasury stock at cost, 25,400 shares (82,901) (82,901) Foreign currency translation adjustment (125,056) (62,595) ----------- ----------- Total shareholders' equity 8,633,026 10,042,532 ----------- ----------- $26,423,494 $28,857,226 =========== ===========
See accompanying notes to consolidated financial statements - 28 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Fiscal Years Ended September 30, 1995, 1994, and 1993 Earnings Foreign Total Capital in retained currency share- Common excess of in the Treasury translation holders' Shares Stock par value business Stock adjustment equity Balance September 30, 1992 2,788,228 $27,882 $9,396,890 $2,593,378 $(82,901) $(23,714) $11,911,535 Foreign currency translation adjustment - - - - - (155,908) (155,908) Net loss - - - (1,875,357) - - (1,875,357) --------- ------- ---------- ---------- --------- --------- ---------- Balance September 30, 1993 2,788,228 $27,882 $9,396,890 $ 718,021 $(82,901) $(179,622) $ 9,880,270 --------- -------- ---------- ---------- -------- --------- ----------- Foreign currency translation adjustment - - - - - 82,267 82,267 Net loss - - - 45,235 - - 45,235 --------- ------- ---------- ---------- --------- -------- ---------- Balance September 30, 1994 2,788,228 $27,882 $9,396,890 $ 763,256 $(82,901) $ (62,595) $10,042,532 --------- ------- ---------- ---------- -------- --------- ----------- Foreign currency translation adjustment - - - - - (62,461) (62,461) Net loss - - - (1,347,045) - - (1,347,045) --------- ------- ---------- ---------- --------- --------- ---------- Balance September 30, 1995 2,788,228 $27,882 $9,396,890 $ (583,789) $(82,901) $(125,056) $8,633,026 ========= ======= ========== ========== ======== ========= ==========
See accompanying notes to consolidated financial statements. - 29 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended September 30, 1995, 1994 and 1993 1995 1994 1993 ---- ---- ---- Cash flows from operating activities: Net income (loss) $(1,347,045) $ 45,235 $(1,875,357) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 704,900 722,488 907,572 Amortization of deferred gain on sale and leaseback (332,100) (332,100) (332,100) Unrealized foreign exchange (gain) loss (550) (44,748) 261,804 Change in assets and liabilities: Accounts receivable 1,377,405 (422,815) 565,474 Other receivables 39,684 230,259 262,587 Inventories 1,358,533 (2,201,508) (402,703) Prepaid expenses 13,513 (17,618) 116,407 Other assets (30,000) (359,547) (53,826) Accounts payable 708,591 572,724 2,301,289 Accrued wages and expenses 409,285 (22,020) 22,583 Income taxes payable 48,077 8,220 (1,540) Other liabilities (63,878) (35,277) 180,764 ---------- ---------- ---------- Net cash (used in) provided by operating activities 2,886,415 (1,856,707) 1,952,954 ---------- ----------- ---------- Cash flows from investing activities: Capital expenditures, net of minor disposals (608,808) (573,100) (514,934) ----------- ---------- ---------- Net cash used in investing activities (608,808) (573,100) (514,934) ----------- ---------- ---------- Cash flows from financing activities: Increase (decrease) in borrowings under U.K. revolving credit agreement (29,511) 941,365 (14,615) Issuance of promissory note to related party - 2,000,000 - Repayments of debt (1,937,723) (625,506) (730,873) ---------- ---------- ----------- Net cash provided by (used in) financing activities (1,967,234) 2,315,859 (745,488) ---------- ---------- ----------- Effect of exchange rate changes on cash (68,923) (14,765) (85,103) ---------- ---------- ----------- Net increase (decrease) in cash 241,450 (128,713) 607,429 Cash at beginning of year 910,400 1,039,113 431,684 ---------- ---------- ----------- Cash at end of year $1,151,850 $ 910,400 $ 1,039,113 ========== ========== =========== Non-cash investing and financing activities: Capital lease obligations entered into $ 178,151 - - Cash paid during the fiscal year for: Income taxes, net $ 32,097 $ 17,431 $ 20,727 Interest $ 974,640 $ 707,357 $ 519,223
See accompanying notes to consolidated financial statements. - 30 - VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years ended September 30, 1995, 1994, and 1993 NOTE 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Vicon Industries, Inc. (the Company) and its wholly owned subsidiaries, Vicon Industries Foreign Sales Corp., a Foreign Sales Corporation (FSC) and Vicon Industries (U.K.), Ltd. after elimination of intercompany accounts and transactions. Revenue Recognition Revenues are recognized when products are sold and title is passed to a third party, generally at the time of shipment. Inventories Inventories are valued at the lower of cost (on a moving average basis which approximates a first-in, first-out method) or market. When it is determined that a product or product line will be sold below carrying cost, affected on hand inventories are written down to their estimated net realizable values. Property, Plant and Equipment Property, plant, and equipment are recorded at cost and include expenditures for replacements or major improvements. Depreciation, which includes amortization of assets under capital leases, is computed by the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and on an accelerated basis for income tax purposes. Machinery, equipment and vehicles are being depreciated over periods ranging from 2 to 10 years. The Company's building is being depreciated over a period of 40 years and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term. Research and Development Product research and development costs are charged to cost of sales as incurred, and amounted to approximately $1,900,000, $1,600,000 and $1,600,000 in fiscal 1995, 1994, and 1993, respectively. Earnings Per Share Earnings per share are computed based on the weighted average number of shares outstanding and equivalent shares from dilutive stock options, if any, of 2,763,000 in 1995, 1994, and 1993, respectively. Foreign Currency Translation Foreign currency translation is performed utilizing the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, while revenues, costs, and expenses are translated at the average exchange rate for the reporting period. The resulting translation adjustment of $(125,056) and $(62,595) at September 30, 1995 and 1994, respectively, is recorded as a component of shareholders' equity. Intercompany balances not deemed long-term in nature at the balance sheet date resulted in a translation gain of $46,893, $46,216, and $43,527 in 1995, 1994, and 1993, respectively, which is reflected in cost of sales. - 31 - Income Taxes In fiscal 1992, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled (see Note 5). Reclassification Certain prior year amounts have been reclassified to conform with current year presentation. NOTE 2. Investment in Affiliate The Company's 50 percent ownership in Chun Shin Electronics, Inc., a joint venture company which assembles certain Vicon products in South Korea, is accounted for using the equity method which reflects the cost of the Company's investment adjusted for the Company's proportionate share of earnings or losses. Such earnings or losses have been insignificant during each of the three years ended September 30, 1995. Assets and sales of the joint venture were approximately $2.6 million and $6.6 million, respectively, for the fiscal year ended September 30, 1995. The significant portion of joint venture product sales were to related parties including approximately $19,000 directly to the Company; approximately $5.1 million indirectly to the Company through I.I.I. Companies, Inc., a related party; and approximately $1.2 million to Chun Shin Industries, Inc., also a related party (see Note 11). NOTE 3. Deferred Gain on Sale and Leaseback In fiscal 1988, under a sale and leaseback agreement, the Company sold its principal operating facility in Melville, New York for approximately $11 million and leased it back under a ten-year lease agreement. The transaction resulted in a net gain of $3,321,000 which was deferred and is being amortized over the ten-year lease period. NOTE 4. Short-Term Borrowings Borrowings under the Company's revolving credit agreement represent short term borrowings by the Company's U.K. subsidiary. Maximum borrowings during 1995, 1994 and 1993 amounted to approximately $1,083,000, $1,123,000, and $494,000, respectively. The weighted-average interest rate on borrowings during these years was 8 1/2% in 1995, 7 1/4% in 1994, and 8 1/4% in 1993. At September 30, 1995 and 1994, Accounts Payable - related party included approximately $4.5 million and $4.3 million, respectively, of extended accounts payable balances due Chugai Boyeki Company, Ltd. The extended accounts payable balance at September 30, 1995 includes approximately $4.0 million of purchases denominated in Japanese yen which bear interest at the related party's internal lending rate (4.25% at September 30, 1995). The remaining balances are denominated in U.S. dollars and bear interest at their U.S. bank's prime rate (8.75% at September 30,1995). - 32 - NOTE 5. Income Taxes
The components of income tax expense (recovery) for the fiscal years indicated are as follows: Current Deferred Total 1995 Federal $ - $ - $ - State - - Foreign 80,000 - 80,000 ------------- ------------ ------------- $ 80,000 $ - $ 80,000 ============= ============ ============= 1994 Federal $ - $ - $ - State - - - Foreign 29,000 - 29,000 ------------- ------------ ------------- $ 29,000 $ - $ 29,000 ============= ============ ============= 1993 Federal $ - $ - $ - State - - - Foreign 17,547 - 17,547 ------------- ------------ ------------- $ 17,547 $ - $ 17,547 ============= ============ =============
A reconciliation of the U.S. statutory tax rate to the Company's effective tax rate follows: 1995 1994 1993 ---- ---- ---- Amount Percent Amount Percent Amount Percent U.S. statutory tax rate $(431,000) 34.0% $ 25,000 34.0 % $(632,000) (34.0)% U.S. net operating loss carryforward 532,000 42.0 (21,000) (28.3) 549,000 29.6 Foreign subsidiary operations (42,000) (3.3) 6,000 8.0 81,547 4.4 Officers' life insurance 17,000 1.3 17,000 22.8 17,000 0.9 Other 4,000 0.3 2,000 2.6 $ 2,000 - -------- ------ -------- ----- --------- --- Effective Tax Rate $ 80,000 6.3% $ 29,000 39.1% $ 17,547 0.9 % ======== ====== ======== ===== ========== ======
- 33-
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 1995 and 1994 are presented below: 1995 1994 ---- ---- Deferred tax assets: Deferred gain on sale and leaseback $ 259,000 $ 371,000 Inventory obsolescence and disposition reserves 328,000 337,000 Deferred compensation accruals 221,000 243,000 Allowance for doubtful accounts receivable 177,000 95,000 Net operating loss carryforwards 1,943,000 1,352,000 General business credit carryforwards 186,000 186,000 Other 8,000 9,000 ---------- ---------- Total deferred tax assets 3,122,000 2,593,000 Less valuation allowance (3,034,000) (2,501,000) ---------- ---------- Net deferred tax assets 88,000 92,000 ---------- ---------- Deferred tax liabilities: Cash surrender value of officers' life insurance 65,000 54,000 Rental income on sublease - 12,000 Other 23,000 26,000 ---------- ----------- Total deferred tax liabilities 88,000 92,000 ---------- ----------- Net deferred tax assets and liabilities $ -0- $ -0- ---------- -----------
At September 30, 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $5,700,000 which are available to offset future federal taxable income, if any, through 2010. The Company also had general business tax credit carryforwards for federal income tax purposes of approximately $186,000 which are available to reduce future federal income taxes, if any, through 2003. Pretax domestic and foreign (loss) income in fiscal 1995 amounted to approximately $(1,626,000) and $291,000, respectively. - 34 - NOTE 6. Long-Term Debt
Long-term debt is comprised of the following: 1995 1994 ---- ---- Related party: Mortgage loan denominated in Japanese yen at a formula interest rate (6.1% and 7.4% at September 30, 1995 and 1994) with annual installments of 14,400,000 yen to December 1998 $ 583,010 $ 728,290 Term loan with interest rate of 1% above the prevailing prime rate (10.0% and 8.75% at September 30, 1995 and 1994) due July 1998 2,000,000 2,000,000 ---------- ---------- 2,583,010 2,728,290 Less installments due within one year 145,751 395,658 ---------- ---------- $2,437,259 $2,332,632 Banks and other: Revolving credit loan (see below) $2,800,000 $4,500,000 Capital lease obligations 146,048 - Other 30,430 90,770 ---------- ---------- 2,976,478 4,590,770 Less installments due within one year 74,988 864,500 ---------- ---------- $2,901,490 $3,726,270 ========== ==========
In October 1993, the Company issued a $2,000,000 secured promissory note to Chugai Boyeki Co., Ltd., a related party. The note is subordinated to senior bank debt with regard to liens and interest under certain conditions. Subsequent to year end, the Company amended the note to defer all scheduled installments to July 1998. Accordingly, such amounts have been classified as long-term in the accompanying Consolidated Balance Sheets. At September 30, 1995, the Company was a party to a secured Revolving Credit Agreement with two banks which provided for aggregate maximum borrowings of $2,800,000 subject to an availability formula based on accounts receivable. Borrowings under the Credit Agreement were due in October, 1995, with interest at 3% above the banks' prime rate (11.75% at September 30, 1995), and required no compensating balances. At September 30, 1995, the Company was in default of certain financial covenants under this agreement. Such debt was repaid on December 28, 1995 with the proceeds received under a new two year credit agreement with another bank which provides for maximum borrowings of $3,250,000 through June 30, 1996 and $4,000,000 thereafter, subject to an availability formula based on accounts receivable and inventory balances. Borrowings under the agreement bear interest at the bank's prime rate plus 1.25% (9.75% at December 27, 1995). The bank debt contains restrictive covenants which, among other things, require the Company to maintain certain levels of net worth, earnings and ratios of interest coverage and debt to net worth. Borrowings under these agreements are secured by substantially all assets of the Company. Long-term debt maturing in each of the four years subsequent to September 30, 1995 approximates $221,000 in 1996, $220,000 in 1997, $4,973,000 in 1998 and $145,000 in 1999, respectively. - 35 - At September 30, 1995, future minimum annual rental commitments under the non-cancellable capital lease obligations were as follows: $68,556 in 1996, $68,556 in 1997, and $28,308 in 1998, which includes imputed interest of $12,235 in 1996, $6,355 in 1997 and $782 in 1998. NOTE 7. Foreign Operations The Company operates one foreign entity, Vicon Industries (U.K.), Ltd., a wholly owned subsidiary which markets and distributes the Company's products principally within the United Kingdom and Europe.
The following summarizes certain information covering the Company's operations in the U.S. and U.K. for fiscal years 1995, 1994, and 1993: 1995 1994 1993 ---- ---- ---- Net sales U.S. $34,294,000 $39,342,000 $38,960,000 U.K. 9,553,000 8,372,000 6,963,000 ----------- ----------- ----------- Total $43,847,000 $47,714,000 $45,923,000 Operating profit (loss) U.S. $ (827,000) $ 542,000 $(1,176,000) U.K. 573,000 271,000 135,000 ----------- ----------- ----------- Total $ (254,000) $ 813,000 $(1,041,000) Identifiable assets U.S. $21,213,000 $23,388,000 $22,365,000 U.K. 5,210,000 5,469,000 3,704,000 ----------- ----------- ----------- Total $26,423,000 $28,857,000 $26,069,000 Net assets-- U.K. $ 711,000 $ 499,000 $ 418,000
U.S. sales include $7,987,000, $8,358,000, and $9,144,000 for export in fiscal years 1995, 1994, and 1993, respectively. Operating profit (loss) excludes unrealized foreign exchange gain/loss, interest expense and income taxes. U.S. assets include $1,127,000, $888,000, and $826,000 in fiscal years 1995, 1994, and 1993, respectively, of cash for general corporate use. NOTE 8. Stock Options and Stock Purchase Rights Stock option plans include both incentive and non-qualified options covering a total of 554,174 shares of common stock reserved for issuance to key employees, including officers and directors. Such amount includes a total of 200,000 options reserved for issuance in 1994 under an Incentive Stock Option Plan, as well as a total of 50,000 options reserved for issuance in 1994 under a Non-Qualified Stock Option Plan for Outside Directors. Both of these plans were approved by the Company's shareholders in April 1994. All options are issued at fair market value at the grant date and are exercisable in varying installments according to the plans. There were 254,513 and 123,000 shares available for grant at September 30, 1995 and 1994, respectively. As of September 30, 1995, 1994, and 1993, options exercisable pursuant to the plans amounted to 198,783, 268,054 and 291,738, respectively. - 36 -
Changes in outstanding stock options for the three years ended September 30, 1995, are presented below: Shares Price Range Per Share Balance-September 30, 1992 312,256 $ 2.12 -- 4.88 Granted 23,482 $ 2.25 -- 2.875 Cancelled (22,564) $ 2.12 -- 2.875 ------- Balance-September 30, 1993 313,174 $ 2.12 -- 4.88 ------- Granted 221,694 $ 1.88 -- -- Cancelled (103,694) $ 2.12 -- 4.88 ------- Balance-September 30, 1994 431,174 $ 1.88 -- 2.38 ------- Granted 25,000 $ 1.94 -- -- Cancelled (156,513) $ 1.88 -- 2.25 ------- Balance-September 30, 1995 299,661 $ 1.88 -- 2.38 -------
In November 1986, the Board of Directors declared a dividend of one Stock Purchase Right for each share of common stock outstanding on December 1, 1986. In addition, 385,715 Rights were distributed with certain new shares subsequently issued by the Company. The Rights entitle the holder to purchase for $15 one share of common stock subject to adjustment under certain conditions. The Rights are redeemable by the Company until the occurrence of certain events at $.05 per Right. NOTE 9. Industry Segment and Major Customer The Company operates in one industry and is engaged in the design, manufacture, assembly, and marketing of closed-circuit television (CCTV) equipment and systems for the CCTV segment of the security products industry. The Company's products include all components of a video surveillance system such as remote positioning devices, cameras, monitors, video switchers, housings, mounting accessories, recording devices, manual and motorized lenses, controls, video signal equipment, and consoles for system assembly. No customer represented sales in excess of ten percent of consolidated revenues during any of the three fiscal years presented. NOTE 10. Commitments In January 1988, the Company entered into a sale and leaseback agreement involving its principal operating facility (see Note 3). The ten-year lease provides for rent of $1,128,000 in the first year, increasing 4 percent annually through 1998. In November 1994, the Company entered into a sublease agreement, dated January 1, 1993, with an affiliated company of the landlord which provides for minimum sublease payments to the Company of $120,000 in calendar year 1993; $180,000 in 1994; $240,000 in 1995 and $300,000 per year from January 1, 1996 through January 19, 1998, in exchange for the right to occupy a total of approximately 25,000 sq. ft. of office and warehouse space in the Company's primary operating facility. At the same time, the Company entered into an agreement with its landlord and subtenant whereby the Company has agreed to vacate its principal operating facility at anytime after January 1995, at the landlord's or subtenant's option, and the landlord has agreed to release the Company from its future lease obligations in consideration of a lease termination payment by the Company to the landlord of $1,000,000. Such option, if exercised, would also require the landlord to provide the Company with at least six months notice prior to the required vacate date. The lease termination payment will be reduced by $27,778 for each month after January 31, 1995 that the Company remains obligated under the primary lease. Should the landlord or subtenant exercise its option, the potential charge to earnings will consist of relocation costs and the write-off of abandoned leasehold improvements. The lease termination payment will be substantially offset by the then remaining carrying value of the deferred sale and leaseback gain. - 37 - Additionally, the Company occupies certain other facilities, or is contingently liable, under long-term operating leases which expire at various dates through 1998. The leases, which cover periods from one to four years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment (net of sublease rental) at September 30, 1995 was $2,406,000 with minimum rentals for the fiscal years shown as follows: 1996--$900,000; 1997--$1,121,000; 1998--$385,000. The Company is a party to employment agreements with four executives which provide for, among other things, the payment of compensation if there is a change in control (as defined in the agreements). The contingent liability under these change in control provisions at September 30, 1995 was approximately $1,485,000. The total compensation payable under these agreements aggregated $1,675,000 at September 30, 1995. The Company is also a party to insured deferred compensation agreements with two retired officers. The aggregate remaining compensation payments of approximately $1,114,000 as of September 30, 1995 are subject to the individuals adherence to certain non-compete convenants, and are payable over a ten year period commencing upon retirement. Sales to the Company's U.K. subsidiary are denominated in British pounds sterling. The Company attempts to minimize its currency exposure on these intercompany sales through the purchase of forward exchange contracts to cover unpaid receivables. These contracts generally involve the exchange of one currency for another at a future date and specified exchange rate. At September 30, 1995, the Company had approximately $872,000 of outstanding forward exchange contracts to sell British pounds. Such contracts expire at varying dates and exchange rates through December 27, 1995. The Company's purchases of Japanese sourced products through Chugai Boyeki Co., Ltd., a related party, are denominated in Japanese yen. At September 30, 1995, Chugai had purchased, on the Company's behalf, forward exchange contracts to purchase approximately 380 million Japanese yen to hedge the currency risk on accounts payables denominated in Japanese yen. Such contracts expire at varying dates and exchange rates through June 1996. - 38 - NOTE 11: Related Party Transactions As of September 30, 1995 and 1994, Chugai Boyeki Company, Ltd. ("Chugai") owned 548,715 shares of the Company's common stock (19.9% of the total outstanding shares). The Company, which has been conducting business with Chugai for approximately 16 years, imports certain finished products and components through Chugai and also sells its products to Chugai who resells the products in certain Asian and European markets. The Company purchased approximately $11.6, $14.1, and $14.6 million of products and components from Chugai in fiscal years 1995, 1994, and 1993, respectively, and the Company sold $3.4, $3.5, and $4.5 million of product to Chugai for distribution in fiscal years 1995, 1994, and 1993, respectively. At September 30, 1995 and 1994, the Company owed $6.9 million and $5.8 million, respectively, to Chugai and Chugai owed $92,000 and $157,000, respectively, to the Company resulting from purchases of products. The amounts owed to Chugai are secured by a subordinated lien on substantially all the Company's assets. During fiscal 1989, Chugai made a mortgage loan to the Company in the amount of $1,026,000 to partially finance the construction of a new sales/distribution facility in the U.K. In October 1993, the Company borrowed $2 million from Chugai under a promissory note agreement. See Note 6 for a further discussion of this transaction. As of September 30, 1995, Mr. Chu S. Chun controlled 168,957 shares of the Company's common stock (6.1% of the total outstanding shares). Mr. Chun owns Chun Shin Industries, Inc., the Company's 50% Korean joint venture partner, and Chun Shin Electronics. (CSE) which purchases product from the joint venture (see Note 2). During 1994, the Company entered into a supplier agreement with I.I.I. Companies, Inc. (I.I.I.), a U.S. based company controlled by Mr. Chun, whereby I.I.I. arranges the importation and provides short term financing on all the Company's product purchases from Chun Shin Electronics, Inc. During fiscal years 1995 and 1994, the Company purchased approximately $5.1 million and $3.1 million of products from I.I.I. under this agreement. Further, the Company sold approximately $900,000 and $1.1 million of its products to I.I.I. during fiscal years 1995 and 1994, respectively. At September 30, 1995 and 1994, I.I.I. owed the Company approximately $422,000 and $289,000, respectively. - 39 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited) Net Earnings Quarter Net Gross Net (Loss) Ended Sales Profit Profit (Loss) Per Share Fiscal 1995 December $11,828,000 $2,698,000 $ 16,000 $ .01 March 10,952,000 2,351,000 (467,000) (.17) June 10,287,000 2,247,000 (540,000) (.20) September 10,780,000 2,250,000 (356,000) (.13) ----------- ---------- ----------- ------- Total $43,847,000 $9,546,000 $(1,347,000) $ (.49) =========== ========== =========== ======= Fiscal 1994 December $11,617,000 $2,529,000 $ (92,000) $ (.03) March 12,326,000 2,694,000 34,000 .01 June 12,005,000 2,742,000 31,000 .01 September 11,766,000 2,749,000 72,000 .03 ----------- ----------- ----------- ------- Total $47,714,000 $10,714,000 $ 45,000 $ .02 =========== =========== =========== =======
The Company has not declared or paid cash dividends on its common stock for any of the foregoing periods. Additionally, certain loan agreements restrict the payment of any cash dividends in future periods. Because of changes in the number of common shares outstanding and market price fluctuations affecting outstanding stock options, the sum of quarterly earnings per share may not equal the earnings per share for the full year. - 40 -
SCHEDULE II VICON INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years ended September 30, 1995, 1994, and 1993 Balance at Charged to Balance beginning costs and at end Description of period expenses Deductions of period Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts: September 30, 1995 $309,000 $381,000 $148,000 $542,000 ======== ======== ======== ======== September 30, 1994 $295,000 $180,000 $166,000 $309,000 ======== ======== ======== ======== September 30, 1993 $303,000 $181,000 $189,000 $295,000 ======== ======== ======== ========
- 41 - SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities 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. By Kenneth M. Darby By Arthur D. Roche By John M. Badke ------------------------- ------------------------- ------------------- Kenneth M. Darby Arthur D. Roche John M. Badke President Executive Vice President Controller (Chief Executive Officer) (Chief Financial Officer) (Chief Acctg.Offr.) January 12, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: VICON INDUSTRIES, INC. Donald N. Horn January 12, 1996 - --------------------- ---------------- Donald N. Horn Chairman of the Board Date Kenneth M. Darby Director January 12, 1996 - --------------------- ---------------- Kenneth M. Darby Date Arthur D. Roche Director January 12, 1996 - --------------------- ---------------- Arthur D. Roche Date Arthur V. Wallace Director January 12, 1996 - --------------------- ---------------- Arthur V. Wallace Date Peter F. Barry January 12, 1996 - --------------------- ---------------- Peter F. Barry Director Date Milton F. Gidge January 12, 1996 - --------------------- ---------------- Milton F. Gidge Director Date Michael D. Katz January 12, 1996 - --------------------- ---------------- Michael D. Katz Director Date Peter F. Neumann January 12, 1996 - --------------------- ---------------- Peter F. Neumann Director Date W. Gregory Robertson January 12, 1996 W. Gregory Robertson Director Date Kazuyoshi Sudo January 12, 1996 Kazuyoshi Sudo Director Date - 42 - SIGNATURES Pursuant to the requirements of the Section 13 or 15(d) of the Securities 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. By ------------------------ By ------------------------ By --------------------- Kenneth M. Darby Arthur D. Roche John M. Badke President Executive Vice President Controller (Chief Executive Officer) (Chief Financial Officer) (Chief Acctg. Officer) January 12, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: VICON INDUSTRIES, INC. January 12, 1996 Donald N. Horn Chairman of the Board Date Director January 12, 1996 Kenneth M. Darby Date Director January 12, 1996 Arthur D. Roche Date Director January 12, 1996 Arthur V. Wallace Date January 12, 1996 Peter F. Barry Director Date January 12, 1996 Milton F. Gidge Director Date January 12, 1996 Michael D. Katz Director Date January 12, 1996 Peter F. Neumann Director Date January 12, 1996 W. Gregory Robertson Director Date January 12, 1996 Kazuyoshi Sudo Director Date - 42 - EX-10 2 CREDIT AND SECURITY AGREEMENT EXHIBIT 10.1 CREDIT AND SECURITY AGREEMENT between VICON INDUSTRIES, INC. and IBJ SCHRODER BANK & TRUST COMPANY Dated as of December 27, 1995 TABLE OF CONTENTS Preamble................................................... 1 ARTICLE 1. DEFINITIONS Section 1.01 Certain Defined Terms.................. 1 Section 1.02 Accounting Terms....................... 15 ARTICLE 2. THE CREDIT FACILITIES Section 2.01 The Credit Facilities.................. 15 Section 2.02 Loans.................................. 16 Section 2.03 Procedure for Borrowing................ 16 Section 2.04 Interest............................... 17 Section 2.05 Indemnity.............................. 17 Section 2.06 Mandatory Prepayments.................. 18 Section 2.07 Optional Prepayments................... 18 Section 2.08 Payments; Debiting Accounts............ 19 Section 2.09 Loans Made By Bank..................... 19 Section 2.10 Use of Loan Proceeds................... 19 Section 2.11 Fees................................... 19 Section 2.12 Increased Costs........................ 20 ARTICLE 2A. LETTER OF CREDIT FACILITY Section 2.01A Letters of Credit...................... 21 Section 2.02A Reimbursement Obligation............... 21 Section 2.03A Letter of Credit Fees.................. 22 Section 2.04A General Instructions; Limitation on Responsibility.................... 22 Section 2.05A Reimbursement Obligation Absolute...... 22 Section 2.06A Non-Conforming Documents............... 24 ARTICLE 3. SECURITY INTERESTS Section 3.01. Grant of Security Interest............. 24 Section 3.02. Security for Obligations............... 26 Section 3.03. Borrower Remains Liable................ 27 ARTICLE 4. REPRESENTATIONS AND WARRANTIES General Section 4.01 Organization and Powers................ 27 Section 4.02 Power and Authorization................ 28 Section 4.03 No Legal Bar........................... 28 i Section 4.04 Litigation............................. 29 Section 4.05 Solvency............................... 29 Section 4.06 Assets and Properties.................. 29 Section 4.07 The Collateral......................... 29 Section 4.08 Capitalization and Corporate Structure............................ 30 Section 4.09 No Default............................. 30 Section 4.10 No Secondary Liabilities............... 30 Section 4.11 Taxes.................................. 30 Section 4.12 Financial Statements and Conditions........................... 31 Section 4.13 Compliance with ERISA.................. 31 Section 4.14 Retiree Health and Life Insurance Benefits................... 32 Section 4.15 Patents and Trademarks................. 32 Section 4.16 Environmental Matters.................. 32 Section 4.17 Investment Company Act................. 33 Section 4.18 Margin Regulations..................... 33 Section 4.19 Subsequent Funding Representations and Warranties....................... 33 Section 4.20 Labor Relations........................ 33 Concerning the Collateral Section 4.21 Collateral: Instruments, etc........... 33 Section 4.22 Receivables............................ 34 Section 4.23 Name................................... 34 ARTICLE 5. CONDITIONS PRECEDENT Section 5.01 Conditions Precedent to Initial Funding.............................. 34 Section 5.02 Conditions Precedent to Initial and Subsequent Funding .............. 37 ARTICLE 6. AFFIRMATIVE COVENANTS Section 6.01 Maintenance of Corporate Existence and Properties............. 37 Section 6.02 Insurance.............................. 38 Section 6.03 Punctual Payment....................... 39 Section 6.04 Payment of Liabilities................. 39 Section 6.05 Compliance with Laws................... 39 Section 6.06 Payment of Taxes, Etc.................. 39 Section 6.07 Financial Statements and Certificates......................... 39 ii Section 6.08 Accounts and Reports................... 41 Section 6.09 Inspection; Audit...................... 41 Section 6.10 Auditors............................... 41 Section 6.11 ERISA.................................. 42 Section 6.12 Notice of Default, Litigation.......... 42 Section 6.13 Bank Accounts.......................... 42 Section 6.14 UCC Filings............................ 42 ARTICLE 7. NEGATIVE COVENANTS Section 7.01 Indebtedness........................... 43 Section 7.02 Liens.................................. 43 Section 7.03 Investments............................ 43 Section 7.04 Contingent Obligations................. 44 Section 7.05 Fundamental Changes.................... 44 Section 7.06 Disposition of Assets.................. 44 Section 7.07 Sale and Leaseback..................... 44 Section 7.08 Issuances and Disposition of Securities........................... 45 Section 7.09 Dividends and Redemptions.............. 45 Section 7.10 Amendment of Charter................... 45 Section 7.11 Transactions with Affiliates and Certain Other Persons................ 45 Section 7.12 Compensation........................... 45 Section 7.13 Certain Other Transactions............. 46 Section 7.14 Fiscal Year............................ 46 Section 7.15 Formula Amount......................... 46 Section 7.16 ERISA.................................. 46 Section 7.17 Regulations G, T, U and X.............. 46 Section 7.18 Subsidiaries........................... 46 Section 7.19 Supplier Contracts..................... 46 Section 7.20 Minimum Payables to Subordinated Lenders 46 Section 7.21 Minimum Availability................. 46 ARTICLE 8. COVENANTS CONCERNING COLLATERAL Section 8.01 Maintenance of Collateral............. 47 Section 8.02 Taxes................................. 47 Section 8.03 Collections and Verifications......... 47 Section 8.04 Power of Attorney..................... 48 Section 8.05 Further Assurances.................... 49 iii ARTICLE 9. FINANCIAL COVENANTS Section 9.01 Interest Coverage Ratio................ 50 Section 9.02 Maximum Indebtedness to Net Worth Ratio...................... 50 Section 9.03 Net Income............................. 50 Section 9.04 Minimum Net Worth...................... 50 Section 9.05 Maximum Capital Expenditures........... 51 ARTICLE 10. EVENTS OF DEFAULT Section 10.01 Events of Default...................... 51 Section 10.02 Remedies Upon an Event of Default.............................. 53 ARTICLE 11. MISCELLANEOUS Section 11.01 Notices................................ 56 Section 11.02 Survival of this Agreement............. 56 Section 11.03 Indemnity.............................. 57 Section 11.04 Costs, Expenses and Taxes.............. 57 Section 11.05 Further Assurances..................... 59 Section 11.06 Amendment and Waiver................... 59 Section 11.07 Marshalling; Recourse to Security; Payments Set Aside................... 59 Section 11.08 Dominion Over Cash; Setoff............. 60 Section 11.09 Binding Effect......................... 60 Section 11.10 Applicable Law......................... 60 Section 11.11 Consent to Jurisdiction and Service of Process; Waiver of Jury Trial..... 60 Section 11.12 Performance of Obligations............. 61 Section 11.13 Assignments, Participations............ 61 Section 11.14 Entire Agreement....................... 61 Section 11.15 Severability........................... 61 Section 11.16 Execution of Counterparts.............. 61 TESTIMONIUM 62 EXHIBITS: Exhibit A Form of Lock-Box Agreement Exhibit B Form of Notice of Revolving Loan Borrowing Exhibit C Form of Note Exhibit D Form of Pledge Agreement iv Exhibit E Form of Landlord Waiver Exhibit F Form of Opinion of counsel SCHEDULES: Schedule 4.04 Litigation Schedule 4.06 Liens and Security Interests Schedule 4.07 Name of Borrower and Location of Collateral Schedule 4.14 Health and Life Insurance Benefits Schedule 4.15 Patents and Trademarks Schedule 4.16 Environmental Matters Schedule 6.02(a) Insurance Policies Schedule 7.01(g) Schedule 7.08 Securities v CREDIT AND SECURITY AGREEMENT THIS CREDIT AND SECURITY AGREEMENT dated as of December 27, 1995 between Vicon Industries, Inc., a New York corporation (the "Borrower"), as borrower, and IBJ SCHRODER BANK & TRUST COMPANY, a New York corporation (the "Bank"), having its principal office at One State Street, New York, New York 10004, as lender, W I T N E S S E T H: WHEREAS, the Borrower and Chemical Bank and National Westminster Bank USA (collectively, the "Existing Lenders") have entered into a certain loan facility (the "Existing Facility") evidencing loans extended by the Existing Lenders to the Borrower (the "Existing Loans"); WHEREAS, the Borrower has requested that the Bank extend certain financial accommodations to the Borrower in connection with the pay off and termination of the Existing Loans and the financing of the working capital needs of the Borrower; and WHEREAS, the Bank is willing to extend the financial accom modations contemplated hereby to the Borrower on the terms and conditions of this Agreement; NOW, THEREFORE, in consideration of the mutual premises and covenants herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE 1. DEFINITIONS Section 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "Accounts Receivable" or "Accounts" or "Receivables" shall have the meaning given in Section 3.01(a) hereof. "Affiliate" shall mean any person that, directly or indirectly, owns or controls, on an aggregate basis, including all beneficial ownership and ownership or control as a trustee, guardian or other fiduciary, at least 5% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of any other person (including, without limitation, the Borrower) or that is controlled by or is under common control with such other person or any 5% stockholder of such other person. In no event shall the Bank be deemed to be an Affiliate of the Borrower. 1 "Agreement" and "Credit Agreement" shall mean this Credit and Security Agreement, as the same from time to time may be amended, modified, supplemented or extended. "Applicable Margin" shall mean, with respect to any Loan, one and one-quarter of one percent (1.25%) per annum. "Available Commitment" shall mean, as at any date at which the same is to be determined, the excess, if any, of (a) the lesser of the Commitment and the amount of the Formula Amount then in effect (disregarding for purposes of such determination the actual aggregate principal amount of any Loans then outstanding), over (b) the sum of (i) the aggregate principal amount of the Loans then outstanding plus (ii) the face amount of any Letters of Credit then outstanding. "Bank" shall have the meaning given to it in the preamble of this Agreement, and its successors, participants and assigns. "Bankruptcy Code" shall mean Title 11 of the United States Code (11 U.S.C. 101 et seq.), as amended from time to time, and any successor statute. "Base Rate" shall mean the per annum fluctuating rate of interest announced by the Bank as its Dollar base rate from time to time in New York, New York. "Beneficiary" shall have the meaning given in Section 2.01A. "Borrower" shall mean Vicon Industries, Inc., a New York corporation, and its successors and assigns. "Borrowing Date" shall mean with respect to any Loan, the Business Day on which the Bank makes such Loan. "Business Day" shall mean any day on which dealings in currencies and exchange between banks may be carried on in New York, New York, other than a Saturday or Sunday or any other day on which banks in New York, New York are authorized or required by law to close. "Capital Asset" shall mean any asset of the Borrower that is intended by the Borrower to be used or usable in subsequent Fiscal Years and is properly classifiable as property, plant or equipment, the cost of which may not be deducted in its entirety from income in the year of acquisition, in accordance with GAAP. "Capital Expenditures" shall mean, for any period for which the same is to be determined, the aggregate amount of any expend itures made by the Borrower for Capital Assets, plus the aggre gate amount of Capitalized Lease Obligations first incurred for such period, determined in accordance with GAAP. 2 "Capitalized Lease" shall mean a lease of, or other agreement conveying the right to use, real or personal property, or both, which obligation is, or in accordance with GAAP is required to be, classified and accounted for as a capital lease on a balance sheet of the Borrower. "Capitalized Lease Obligations" shall mean the obligations of the Borrower, as lessee, under all Capitalized Leases and, for purposes of this Agreement, the amount of such obligations shall be the aggregate capitalized amount thereof determined in accordance with GAAP. "Cash Equivalents" shall mean (a) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof), and (b) time deposits, certificates of deposit and bankers' acceptances of the Bank, in each case with maturities of not more than twelve months from the date of acquisition. "Change in Control" shall mean (a) the occurrence of any event (whether in one or more transactions) which results in a transfer of control of Borrower or (b) any merger or consolidation of or with Borrower other than a merger with a Subsidiary in which Borrower is the surviving entity or sale of all or substantially all of the property or assets of Borrower. For purposes of this definition, "control of Borrower" shall mean the power, direct or indirect, as determined in the reasonable discretion of the Bank, to control the election of directors of Borrower or to direct or cause the direction of the management and policies of Borrower by contract or otherwise. "Collateral" shall mean all property and interest in property in or against which the owner thereof shall have granted, or purported to have granted, a security interest or Lien in favor of the Bank as security for the obligations of the Borrower to the Bank and, if such owner is a Person other than the Borrower, for such owner's obligations to the Bank. "Commitment" shall mean the Bank's commitment to make Loans prior to the Commitment Expiration Date up to the maximum aggregate principal amount equal to $4,000,000 at any time outstanding, as referred to in Section 2.01(a). "Commitment Expiration Date" shall mean December 31, 1997. "Commitment Period" shall mean the period from and including the date hereof to but not including the Commitment Expiration Date. 3 "Commitment Reduction Fee" shall have the meaning given in Section 2.07(b) hereof. "Common Stock" shall mean the common stock of the Borrower,$.01 par value. "Customary Permitted Liens" shall mean: (a) Liens (other than any Lien imposed under Environ mental Laws or ERISA) arising as a matter of law to secure payment of taxes, assessments or charges owing to any governmental authority but which are not yet due or which are being contested in good faith by appropriate proceedings or other appropriate actions and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (b) non-material statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens (other than any Lien imposed under Environmental Laws or ERISA) imposed by law or created in the ordinary course of business; (c) Liens incurred or deposits made in the ordinary course of business (including, without limitation, security deposits for leases, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, contracts (other than for the repayment or guarantee of borrowed money or purchase money obligations), statutory obligations and other similar obligations; (d) easements (including, without limitation, recipro cal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, minor defects or irregularities in title, variations and other restrictions, charges or encumbrances (whether or not recorded) affecting the use of real property, which individually or in the aggregate are not material; and (e) extensions, renewals or replacements of any Lien referred to in clauses (a) through (d) above; provided, however, that (i) in the case of paragraphs (a) through (d) above, the principal amount of the obligation secured thereby is not increased, except as otherwise permitted by such paragraphs in the first instance, and (ii) any such extension, renewal or replacement is limited to the property originally encumbered thereby. 4 "Default" shall mean any event which is, or with the lapse of time or giving of notice, or both, would be, an Event of Default. "Dollars" and "$" shall mean lawful money of the United States of America. Any reference in this Agreement to payment in "Dollars" or "$" shall mean payment in Dollar funds immediately available for use by the Bank in New York, New York. "Eligible Accounts Receivable" shall mean, with respect to the Borrower, as at any date on which the same is to be deter mined, all Accounts Receivable of the Borrower created in the ordinary course of business arising out of the sale of goods or rendition of services by the Borrower which are, and at all times shall continue to be, acceptable to the Bank in all respects. Standards of eligibility may be fixed and revised from time to time by the Bank in the Bank's sole discretion without limiting the generality of the foregoing. Without limitation of the immediately preceding sentence, an Account Receivable shall in no event be deemed to be an Eligible Account Receivable unless such Account Receivable: (a) is an Account Receivable to which the Borrower has lawful and absolute title and the full and unqualified right to assign and grant a security interest therein to the Bank, (b) is covered by the security interest granted hereby and in which the Bank has a perfected first security interest, (c) is payable to the Borrower at any principal office identified in Schedule 4.07 hereto, (d) arises in the normal course of the business of the Borrower, (e) is evidenced by invoices or other documentation in form acceptable to the Bank, and (f) is due and payable according to invoice terms providing for payment no more than ninety (90) days after the date of the invoice; But shall not mean any Account Receivable of the Borrower: (a) which is subject to any offset or other defense on the part of the account debtor thereon or to any claim on the part of such account debtor denying liability thereunder, (b) which is collectible on a cash-on-delivery basis, (c) which is subject to any Lien except for (A) the security interest granted in favor of the Bank pursuant hereto and (B) 5 security interests in favor of the Subordinated Lenders which security interests are subject to the terms of the Subordination Agreement, (d) which has remained unpaid for a period of ninety (90) days after the date of the relevant invoice, (e) which, if arising in connection with the sale of goods, the subject goods shall not have been shipped or delivered to the account debtor, or with respect to bill and hold sales only for which a bill and hold agreement is existing (which agreement will be made available to the Bank upon request), the subject goods shall not be deliverable, or shall not have been shipped or delivered, to the account debtor within 90 days after the date of the relevant invoice, and, in all cases, when shipped or delivered, the subject goods shall not have been shipped or delivered to the account debtor thereon (A) on consignment, (B) on a sale-on-approval or sale-or-return basis, or (C) subject to any other repurchase or return agreement (not including any ordinary product warranties) and no material part of the subject goods shall have been repossessed, returned, rejected, lost or damaged, (f) which has arisen out of any transaction with an employee, officer, director, stockholder, Subsidiary (including, without limitation, Vicon Industries (UK) Limited), or Affiliate of the Borrower or with Chun Shin Electronics, Inc., (g) which is not denominated in Dollars, (h) which is an Account Receivable on which the account debtor is insolvent or the subject of any bankruptcy or insolvency proceeding of any kind, (i) which is an Account Receivable on which the account debtor is located outside of the United States of America, other than any such Account Receivable backed by an irrevocable commercial letter of credit issued to the Borrower by a bank or other financial institution acceptable to the Bank, (j) which is an Account Receivable on which the account debtor is the United States of America, or any department, body, agency, subdivision or instrumentality thereof; provided, however, that such Account Receivable will become an Eligible Accounts Receivable so long as (i) the Bank has provided written consent to the Borrower, given in the Bank's sole discretion, that it will deem such Account Receivable an Eligible Account Receivable, and (ii) all requirements and provisions of the Assignment of Claims Act of 1940, as amended, have been complied with so that the Bank has a perfected, first priority security interest in such Accounts Receivable, 6 (k) if more than 50 per cent of the aggregate of all Accounts Receivable owed by the account debtor would be disqualified as "Eligible Accounts Receivable", for any reason, including without limitation aging, or (l) any Account Receivable specified to the Borrower by the Bank as ineligible because of the unsatisfactory credit worthiness of the account debtor thereon or another circumstance that would materially adversely affect the collectability of such Account Receivable. For all purposes of this Agreement, the amount of each Eligible Account Receivable shall be deemed to be the invoice amount thereof, less unearned customer deposits, taxes charged thereon and cash, trade and other discounts and allowances, and less any reserves with respect thereto which may from time to time be established by the Bank. "Eligible Inventory" shall mean, with respect to the Bor rower, as at any date on which the same is to be determined, all Inventory of the Borrower in good saleable condition which is not, in the commercially reasonable opinion of the Bank, obsolete or unmerchantable and is, and at all times shall continue to be, acceptable to the Bank in all respects. Standards of eligibility may be fixed and revised from time to time by the Bank in the Bank's commercially reasonable discretion. Without limiting the generality of the foregoing, Inventory shall in no event be deemed to be Eligible Inventory unless such Inventory: (a) is covered by the security interest granted hereby and in which the Bank has a perfected first security interest, (b) is a completed product, in good condition, meets all material applicable standards imposed by any governmental authority and is either currently useable or currently saleable in the normal course of the business of the Borrower, (c) is subject to no Lien, other than the security interest granted in favor of the Bank pursuant to this Agreement, the security interests granted in favor of the Subordinated Lenders which security interests are subject to the terms of the Subordination Agreement, or materialmen's, warehousemen's or similar liens imposed by law and incurred in the ordinary course of business with respect to obligations not yet due (or which are being contested in good faith by appropriate proceedings or other appropriate actions and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP), and (d) is located at a manufacturing facility or other facility owned, leased or used by the Borrower and identified in Schedule 4.07 hereto at which there exists at least $1,000 of Eligible 7 Inventory of the Borrower in the aggregate, or otherwise at any facility consented to in writing by the Bank; But shall not include: (a) raw materials in the custody of the Borrower or third parties for processing or manufacture, (b) items that have been consigned to the Borrower or are otherwise in the Borrower's custody or possession, (c) any Inventory consisting of work-in-process or is otherwise unfinished, or (d) any Inventory which otherwise meets the standards of eligibility set forth in this definition but which is not likely to be sold within one year of the date of its manufacture. In each case, the value of Inventory shall be calculated on the basis of the lower of such Person's cost utilizing the average which approximates the FIFO (first-in-first-out) method or market value, less any reserves which may from time to time be established by the Bank. "Environmental Laws" shall mean any federal, state, local and foreign laws or regulations, codes, plans, orders, decrees, judgments, injunctions, notices or demand letters issued, promulgated or entered thereunder by any governmental authority or subdivision thereof relating to pollution or protection of the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemical or industrial, toxic or hazardous substances or wastes, or otherwise relating to worker health and safety or public health and safety. "Equipment" shall have the meaning given in Section 3.01(c) hereof. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" shall mean each Person (as defined in Sec tion 3(9) of ERISA) that is a member of any "controlled group" (as defined in Section 4001(14) of ERISA) that includes the Borrower. "ERISA Termination Event" means (a) any Reportable Event, (b) the withdrawal of the Borrower or any of its ERISA Affiliates from a Plan during a Plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, (c) the filing of a notice of intent to terminate a Plan or to treat any 8 Plan amendment as a termination under Section 4041 of ERISA, (d) any Plan amendment or the occurrence of any event that consti tutes a "partial termination" (within the meaning of Section 411(d)(3) of the IRC) with respect to any Plan, (e) the institu tion of proceedings to terminate a Plan or the appointment of a trustee by the PBGC pursuant to Section 4044 of ERISA or (f) any event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Event of Default" shall mean any event specified as such in Section 10.01. "Existing Facility" shall have the meaning given to it in the preamble. "Existing Lenders" shall have the meaning given to it in the preamble. "Existing Loans" shall have the meaning given to it in the preamble. "Fiscal Quarter" shall mean each of the four consecutive periods of three months of each year, ending on December 31, March 31, June 30 and September 30, which in the aggregate constitute a Fiscal Year. "Fiscal Year" shall mean each 12 month calendar year ending on September 30. "Formula Amount" shall mean, as at any date at which the same is to be determined, an amount equal to the sum of (a) 80 per cent of the amount of Eligible Accounts Receivable as at such date, plus (b) 25 per cent of the value of Eligible Inventory consisting of finished goods of the Borrower, provided, however, that the amount calculated pursuant to (b) shall not exceed $1,000,000; and minus such reserve as deemed necessary or appropriate by the Bank to reflect any contingencies, or the consequences of any breach or contravention of laws, including without limitation, Environmental Laws and laws related to OSHA, by the Borrower. The Bank may, in its sole discretion, at any time or times upon three Business Days' prior notice to the Borrower, increase or decrease the ratio of its advances against Eligible Accounts Receivable or Eligible Inventory, or both, and, in the event that any such ratio shall be decreased for any reason, such decrease shall become effective immediately for purposes of calculating the maximum amount of new Loans hereunder and the maximum amount of Loans which may be outstanding hereunder. The Borrower acknowledges that such changes in the ratio of advances against Eligible Accounts Receivable and Eligible Inventory may require the immediate prepayment of Loans by the Borrower. 9 "F/X Commitments" shall mean foreign exchange hedging instruments, purchased solely through the Bank, in connection with the Borrower's foreign exchange exposure. "GAAP" shall mean generally accepted accounting principles (i) in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of the Certified Public Accountants and the statements and pronounce ments of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination, (ii) which are consistently applied in form and substance. "General Intangibles" shall have the meaning given in Section 3.01(d) hereof. "Indebtedness" shall mean, with respect to the Borrower, all obligations, contingent and otherwise, which, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet of the Borrower as at any date at which the amount thereof is to be determined, but in any event and as well including, the Note, any contingent obligations arising due to the Letters of Credit, all other amounts due under this Agreement, all guarantees, endorsements (other than endorsements for collection or deposits in the ordinary course of business) and all other contingent obligations whether or not in respect of any Indebtedness of others, deferred taxes and accrued obligations, all liabilities secured by any mortgage, pledge or lien existing on property owned or acquired subject to such mortgage, pledge or lien, whether or not the liability secured thereby shall have been assumed, and all lease obligations, including, without limitation, Capitalized Lease Obligations. For the purposes of calculating the financial covenants set forth in Section 9 hereof, Indebtedness shall not include the liabilities of the Borrower as set forth on Schedule 7.01(g) hereto; provided; however; that (i) with respect to item 1 on Schedule 7.01(g), when a demand is made on the Borrower with respect to such Guaranty of the Mortgage, such liability of the Borrower under this Guaranty of the Mortgage will immediately be included as part of the definition of Indebtedness for all purposes hereunder including the calculation of the financial covenants set forth in Section 9 hereof, (ii) with respect to the Borrower receiving the Vacate Notice and the demand for the Release Fee as noted in item 2 on Schedule 7.01(g), such liability of the Borrower with respect to such release fee will immediately be included as part of the definition of Indebtedness for all purposes hereunder including the calculation of the financial covenants set forth in Section 9 hereof, and (iii) with respect to item 3 on Schedule 7.01(g) hereto, when a demand is made on the Borrower with respect to such Guaranty of the Loan 10 Agreement, such liability of the Borrower under this Guaranty of the Loan Agreement will immediately be included as part of the definition of Indebtedness for all purposes hereunder including the calculation of the financial covenants set forth in Section 9 hereof. "Indebtedness to Net Worth Ratio" shall mean, on any date for which the same is to be determined, the ratio of (a) Indebtedness of the Borrower less the amount of (i) contingent liabilities incurred due to the Letters of Credit and (ii) operating leases permitted by this Agreement to (b) Net Worth determined as at such date. "Initial Borrowing Date" shall mean the first Borrowing Date on which any Loan is made hereunder. "Interest Coverage Ratio" shall mean, for any period for which the same is to be determined, the ratio of (a) earnings from continuing operations of the Borrower before interest, taxes, depreciation and amortization (excluding amortization of gain on sale and leaseback transactions) for such period, to (b) the interest expense of the Borrower for such period net of all intercompany items, determined in accordance with GAAP. "Inventory" shall have the meaning given in Section 3.01(b) hereof. "IRC" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. "Landlords" shall mean, collectively: T. Rowe Price Realty Income Fund I, a No-Load Limited Partnership Allan V. Rose "Landlord Waiver" shall mean each Landlord Waiver delivered to the Bank by each Landlord, each dated as of the date hereof and in the form of Exhibit E hereto, as the same may from time to time be amended, modified, supplemented or extended. "Leased Property" shall mean, collectively, the office, plant and showroom properties located at: 3030 Business Park Drive, Suite G Norcross, Georgia 525 Broad Hollow Road Melville, New York 11747 11 "Lending Office" shall mean the office of the Bank located at One State Street, New York, New York 10004, or, such other office as the Bank may hereafter specify to the Borrower. "Letters of Credit" shall have the meaning given in Section 2.01A of this Agreement. "Lien" shall mean, with respect to any Person, (a) any lien (including, without limitation, any statutory lien), mortgage, hypothecation, privilege, security interest, pledge, encumbrance, charge (general or special, floating or fixed) or conditional sale or other title retention arrangement (including, without limitation, the rights of a lessor under a capital lease to the property leased thereunder) or other security interest of any kind upon any property or assets of any character of such Person, whether now owned or hereafter acquired by such Person, or upon the income or profits therefrom, (b) the transfer, pledge or assignment by such Person of any of its property or assets for the purpose of subjecting the same to the payment of any indebtedness of such Person or others in priority to the payment by such Person of its general creditors, (c) any sale, assignment, pledge or other transfer by such Person of its accounts receivable, contract rights, general intangibles or chattel paper with recourse, and (d) any agreement to give or do any of the foregoing. "LOC Reimbursement Obligation" shall have the meaning given in Section 2.02A of this Agreement. "LOC Utilization Fee" shall have the meaning given in Section 2.03A of this Agreement. "Loans" shall mean the loans made pursuant to Section 2.02. "Lock-Box Agreement" shall mean the Lock-Box Agreement between the Borrower and the Bank, substantially in the form of Exhibit A to be delivered pursuant to Section 5.01(a)(iii), as the same may from time to time be amended, modified, supplemented or extended. "Maximum F/X Commitment" shall mean $1,000,000. "Maximum Letter of Credit Commitment" shall mean $1,000,000. "Net Assets" shall mean, as at any date at which the same is to be determined, all of the assets as carried on the balance sheet of the Borrower and after appropriate deduction for any minority interests of any Subsidiaries, all as determined in accordance with GAAP. "Net Cash Flow" shall be determined at the end of each Fiscal Year, commencing with the Fiscal Year ending September 30, 12 1995, on the basis of the Borrower's audited financial statements for such Fiscal Year and shall mean, for any Fiscal Year for which the same is to be determined, an amount equal to (i) its Net Income, plus (ii) consolidated depreciation and amortization expense for such Fiscal Year and other non-cash items of the Borrower and its Subsidiaries, in each case to the extent deducted in determining consolidated net income, plus (iii) any net increase in consolidated deferred tax liabilities of the Borrower and its Subsidiaries as measured it the end of such Fiscal Year in comparison to the end of the preceding Fiscal Year, less (iv) aggregate payments of principal of the Loan made during such Fiscal Year, less (v) all Capital Expenditures made in cash during such Fiscal Year (but excluding any interest paid with respect to any Capital Expenditure which has been capitalized on the financial statements of the Borrower and its Subsidiaries, plus (the amount of any decreases) or less (the amount of any increases) in (vii) the "change in net working assets" during such Fiscal Year. For such purposes, "change in net working assets" shall mean the change, as determined at the end of such Fiscal Year, in the amount by which (a) the sum of Accounts Receivable and Inventory of the Borrower and its Subsidiaries exceeds (b) the sum of accounts payable and accruals of the Borrower and its Subsidiaries. "Net Income" shall mean, for any period for which the same is to be determined, the consolidated net income of the Borrower and its Subsidiaries, calculated in accordance with GAAP. "Net Worth" shall mean, as at any date at which the same is to be determined, the amount by which (a) Net Assets exceeds (b) all Indebtedness of the Borrower less the amount of (i) contingent liabilities incurred due to the Letters of Credit and (ii) operating leases permitted by this Agreement. "Note" shall mean the revolving promissory note of the Borrower delivered pursuant to Section 2.03(b), as the same from time to time may be amended, modified, supplemented or extended. "Obligations" shall have the meaning given in Section 3.02 hereof. "Permitted Affiliates" shall mean collectively the Subordinated Lenders, International Industries, Inc. and Pro Four Video Products, Inc. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor thereto. "Person" shall mean an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. 13 "Plan" shall mean any "Employee Benefit Plan" (as defined in Section 3(3) of ERISA) as covered by any provision of ERISA and as maintained, or otherwise contributed to, or at any time during the five calendar year period immediately preceding the date of this Agreement was maintained or otherwise contributed to, by the Borrower, or any ERISA Affiliate of the Borrower for the benefit of the employees of the Borrower, or an ERISA Affiliate of the Borrower. "Pledge Agreement" shall mean the Pledge Agreement dated as of the date hereof between the Borrower and the Bank, in the form of Exhibit D hereto, as the same may from time to time be amended, modified, supplemented, restated or extended, wherein the Borrower secures the Obligations to the Bank. "Prohibited Transaction" shall mean any "prohibited trans action" (within the meaning of Section 406 of ERISA or Section 4975 of the IRC) with respect to any Plan for which transaction no statutory exemption is not available. "Regulations D, G, T, U and/or X" shall mean Regulations D, G, T, U and/or X of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Regulatory Change" shall mean the introduction of, or any change in, United States federal, state or local laws or regula tions (including Regulation D) or treaties or foreign laws or regulations after the date of this Agreement or the adoption or making after such date of any interpretations, directives, guide lines or requests applying generally to a class of banks includ ing the Bank of or under any United States federal, state, or local rules or regulations or any treaties or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Related Documents" shall mean, collectively, the Note, the Pledge Agreement, the Landlord Waiver, the Subordination Agreement, the Lock-Box Agreement and the Letters of Credit, and all documents entered into in connection therewith. "Reportable Event" shall mean any "reportable event" des cribed in Section 4043(b) of ERISA with respect to which the thirty-day notice requirement set forth in Section 4043(a) of ERISA has not been waived by the PBGC that occurs or has occurred in connection with any Plan. "Securities" shall mean all shares, options, interests, par ticipations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting, including, without limitation, common stock, pre ferred stock, warrants, convertible debentures and all agree ments, instruments and documents convertible, in whole or in part, into any one or more of or all of the foregoing. "Subordinated Indebtedness" shall mean the indebtedness as defined in the Subordination Agreement. "Subordinated Lenders" shall mean collectively, Chugai Boyeki Company Limited, Chugai Boyeki (America) Corp., and their successors and assigns. "Subordinated Note" shall mean the $2,000,000 Secured Promissory Note, dated as of October 5, 1993 from the Borrower to Chugai Boyeki Company Limited. "Subordination Agreement" shall mean the Subordination Agreement dated as of the date hereof, among the Bank, the Borrower and the Subordinated Lenders, as the same from time to time may be amended, modified, supplemented, restated or extended. "Subsidiary" shall mean, with respect to any Person, any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation is at the time directly or indirectly owned by such Person, or by one or more other Subsidiaries of such Person. "Subsidiary Guaranty" shall mean the guaranty of each Subsidiary to which the Bank consents, delivered pursuant to Section 7.19, as the same may from time to time be extended, amended, modified or supplemented. "Transaction Costs" shall mean the fees, costs and expenses payable by the Borrower pursuant to this Agreement or in connec tion herewith, including, without limitation, attorney's fees and expenses. Section 1.02. Accounting and Banking Terms. All accounting and banking terms not specifically defined herein shall be con strued in the case of accounting terms, in accordance with GAAP and, in the case of banking terms, in accordance with general practice among commercial banks in New York, New York. ARTICLE 2. THE CREDIT FACILITIES Section 2.01. The Credit Facilities. At all times prior to the Commitment Expiration Date (or earlier termination of the Commitment Period hereunder), subject to the terms and conditions hereinafter set forth, the Bank agrees to make the following credit facilities available to the Borrower: 14 (a) Facility. Subject to Section 2.02 hereof, a revolving credit facility under which the Borrower may request Loans from time to time on any Business Day during the Commitment Period in an aggregate principal amount which, together with the then outstanding aggregate principal amount of Loans to the Borrower and the aggregate face amount of all Letters of Credit then outstanding, would not exceed at any time outstanding the Commitment. The amount available for Loans at any time shall be determined in accordance with Section 2.02 hereof. (b) Letter of Credit Facility. A letter of credit facility in accordance with the terms of Article 2A hereof. Section 2.02. Loans. Subject to the terms and conditions hereof, the Bank agrees to make Loans to the Borrower from its Lending Office from time to time during the Commitment Period as provided in this Agreement in an aggregate principal amount at any one time outstanding, together with the then outstanding aggregate principal amount of all Letters of Credit, not to exceed (i) the Commitment, or (ii) if less, the Formula Amount. The Borrower may use the Commitment during the Commitment Period by borrowing, repaying Loans in whole or in part and reborrowing Loans; provided, however, that the aggregate principal amount of the Loans at any one time outstanding together with the then outstanding aggregate principal amount of all Letters of Credit, shall not exceed the amount permitted under the first sentence of this Section 2.02. The Loans shall mature on the Commitment Expiration Date and bear interest for the period from the respective Borrowing Dates thereof to the date of payment in full thereof on the unpaid principal amount thereof from time to time outstanding at the applicable interest rates per annum determined and payable as specified in Section 2.04 hereof. Section 2.03. Procedure for Borrowings. (a) Each Loan shall be made on the request made by the Borrower to the Bank. Each such request shall be, should the Bank request, confirmed immediately in writing, by delivery of a Notice of Revolving Loan Borrowing, in the form of Exhibit B hereto, specifying therein (i) the requested Borrowing Date and (ii) the aggregate amount of the Loans therein requested to be made. Upon receipt of the request for borrowing, the Bank shall make the proceeds of the requested Loan available to the Borrower by crediting the account of the Borrower on the books of its Lending Office with the requested amount. The Bank shall render to the Borrower monthly a loan account statement. Each statement shall be considered correct and binding upon Borrower, except to the extent that the Bank receives, within thirty (30) days after the mailing of such statement, written notice from Borrower of any specific exceptions by Borrower to that statement. (b) The obligations of the Borrower to pay the principal of and interest on all Loans shall be evidenced by the Note duly 15 executed and delivered by the Borrower substantially in the form of Exhibit C hereto. At the time of each Loan, and upon each payment of principal of each Loan, the Bank shall, and is hereby authorized to, make a notation on the schedule annexed to and constituting a part of the Note of the Borrower to which such Loan is being made, and any such notation shall be conclusive and binding for all purposes absent manifest error; provided, however, that failure by the Bank to make any such notation shall not affect the obligations of the Borrower under the Note or this Agreement. Section 2.04. Interest. (a) Rate of Interest. Each Loan shall bear interest on the unpaid principal amount thereof from the date such Loan is extended to the Borrower until such principal amount is paid in full at a rate or rates per annum determined in accordance with this Section 2.04. Each Loan shall bear interest at a rate per annum equal to the sum of (A) the Base Rate in effect from time to time, plus (B) the Applicable Margin, payable monthly, in arrears, on the last Business Day of each such month, commencing with the first of such dates to occur after the date of such Base Rate Loan and on the date the principal amount of such Loan shall be paid or prepaid, to the extent of the interest accrued on the principal amount of such Base Rate Loan so paid or prepaid. From and after the occurrence of any Event of Default under Section 10.01(a) hereof, and for so long as such Event of Default shall continue, the unpaid principal amount of each Loan and any other amount then due and payable but not yet paid hereunder shall bear interest at a rate per annum equal to the rate per annum in effect from time to time with respect to the Loan, plus two percent (2%) per annum, payable on demand. (b) Calculation of Interest. Interest shall be calculated on the daily outstanding amount of the Loans on the basis of a 360-day year for the actual number of days elapsed. Any change in the interest rate on the Loans shall become effective as of the opening of business on the day on which such change in the Base Rate becomes effective. The Bank shall, as soon as practicable, notify the Borrower of the effective date and the amount of each such change in the Base Rate; provided, however, that any failure by the Bank to give the Borrower any such notice shall not affect the application of such change in the Base Rate. Each determination of an interest rate by the Bank pursuant to any provision of this Agreement shall be, absent manifest error, presumed to be correct. Section 2.05 Indemnity. The Borrower agrees to indemnify the Bank and to reimburse and hold the Bank harmless from any loss, liability, cost or expense (including, without limitation, reasonable in-house and outside attorney's fees and expenses incurred in connection with any action or proceeding between the 16 Borrower and the Bank or between the Bank and any third party or otherwise), that the Bank may sustain or incur as a consequence of (a) default by the Borrower in the payment of principal of, or interest on, any Loan, (b) default by the Borrower in borrowing (or in fulfilling on or before the request Borrowing Date the applicable conditions set forth in Article 5 hereof with respect to such borrowing), or (c) default by the Borrower in making any prepayment after notice thereof has been given in accordance with Section 2.06 or 2.07 hereof; including, but not limited to, all losses, costs and expenses incurred by reason of liquidation or reemployment of deposits or other funds acquired by the Bank in connection with such matters (including loss of anticipated profits caused by such liquidation or redeployment of such deposits or funds); provided; however; that the Borrower shall not have any obligation to the Bank under this Section 2.05 for any losses, costs or expenses directly caused by or resulting solely form the willful misconduct or gross negligence of the Bank. The Bank shall deliver to the Borrower a certificate as to the amount of such loss, liability, cost or expense, which certificate shall be conclusive in absence of manifest error. This covenant shall survive payment of the Loans and termination of this Agreement. Section 2.06. Mandatory Prepayments of Loans. If at any time the aggregate unpaid principal amount of the Loans outstanding plus the aggregate face amount of any Letters of Credit outstanding exceeds the lessor of the Commitment or the Formula Amount, the Borrower shall immediately repay such Loans, without premium or penalty, in a principal amount at least equal to such excess, together with accrued interest on the amount prepaid to the date of repayment. Prepayments of Loans may be reborrowed as Loans in accordance with the terms hereof. If at any time following the repayment in full of the Loans pursuant to this paragraph 2.06 the aggregate face amount of any Letters of Credit outstanding exceeds the Formula Amount, the Borrower shall immediately pay to the Bank a principal amount equal to such excess as cash collateral for such Letters of Credit. Section 2.07. Optional Prepayments of the Loans. (a) The Borrower may voluntarily prepay any Loan in whole at any time or in part from time to time, without premium or penalty. (b) The Borrower may, upon at least ten Business Days' prior written notice to the Bank, elect to terminate or permanently reduce the Commitment not more than once during any Fiscal Quarter in an amount not less than $250,000 with such additional increments in integral multiples of $100,000; provided, however, that (i) any reduction of the Commitment shall be accompanied by prepayment of Loans, together with accrued interest on the amount prepaid to the date of such prepayment, to 17 the extent (if any) that the aggregate principal amount of the Loans then outstanding exceeds the amount of the Commitment as then reduced, (ii) any such termination of the Commitment shall be accompanied by prepayment in full of all Loans then outstanding; together with accrued interest thereon to the date of such prepayment and any unpaid commitment fee then accrued under Section 2.11(b) hereof, and by payment of a fee ("Commitment Reduction Fee") equal to two per cent of the amount so reduced or terminated in the first twelve months following the date of execution and delivery of this Agreement, and equal to one-half of one per cent of the amount so reduced or terminated in the second twelve months following the date of execution and delivery of this Agreement. Section 2.08. Payment; Debiting Accounts. All payments (including prepayments) to be made by any Borrower under this Agreement shall be made to the Bank at its Lending Office in New York, New York, in Dollars and in immediately available funds. All payments to be made hereunder by the Borrower shall be made without setoff, counterclaim or defense. If any payment hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the applicable rate during such extension; provided, however, that no such payments shall extend beyond the Commitment Expiration Date. The Borrower hereby authorizes the Bank to charge any account of the Borrower maintained at any office of the Bank with the amount of any principal, interest, fee, expense or other monetary obligation of the Borrower hereunder, including without limitation attorney's fees and expenses, and including principal and interest payable under the Note when it becomes due and payable under the terms hereof or thereof. Section 2.09. Loans Made By Bank. The Borrower hereby authorizes the Bank to make Loans to the Borrower and to use the proceeds thereof to pay any amount owed by the Borrower under this Article 2, or to pay the Borrower's debits to any accounts of the Borrower at the Bank. Section 2.10. Use of Loan Proceeds. The Borrower shall use the proceeds of the Loans to (i) refinance the Existing Loans; (ii) to fund the continuing working capital requirements of the Borrower and (iii) to purchase F/X Commitments, in an amount not to exceed any one time outstanding, the Maximum F/X Commitment. Section 2.11. Fees. (a) Commitment Fee. The Borrower agrees to pay the Bank a commitment fee from and including the date hereof to the Commitment Expiration Date, computed at the rate of one-half of one per cent (1/2%) per annum on the average daily amount by 18 which the Commitment exceeds the aggregate amount of Loans outstanding, payable quarterly, in arrears, on the last Business Day of each month, commencing with the first such day following the date hereof, and on the Commitment Expiration Date; provided; however; that for purposes of this section 2.11(a), from the date hereof until June 30, 1996 only, the Commitment shall be deemed to be $3,250,000. Such fee shall be calculated on the basis of a 360-day year and actual days elapsed. (b) Collateral Maintenance Fee. The Borrower shall pay the Bank (i) a collateral maintenance fee of $1,000 per month, payable in advance on the Initial Borrowing Date and on each month thereafter, plus (ii) $600 per man-day and all expenses for any audits conducted by the Bank at its discretion; provided, however, that prior to the occurrence of an Event of Default, the Bank may only conduct four audits per Fiscal Year at the Borrower's expense. (c) Closing Fees The Borrower and the Bank hereby acknowledge that the Borrower (A) has paid the Bank a deposit fee of $25,000 and (B)the Borrower will pay the Bank a non-refundable closing fee of $40,000, payable on the date hereof. Section 2.12. Increased Costs. If any Regulatory Change: (a) subjects the Bank to any tax of any kind whatsoever with respect to this Agreement, the Note, the Letters of Credit or any Loan or changes the basis of taxation of payments to the Bank of principal, interest, commitment fees, or any other amount payable hereunder in any of the foregoing (except for changes in the rate of tax on the overall net income of the Bank); (b) imposes, modifies or holds applicable to the Bank (or any corporation controlling the Bank) any reserve or capital adequacy requirements or liquidity ratios or requires the Bank or any corporation controlling the Bank) to make special deposits against or in respect of assets or liabilities of, deposits with or for the account of, or credit extended by, the Bank; or (c) imposes on the Bank any other condition affecting this Agreement, the Note, the Letters of Credit or the Loans; and the result of any of the foregoing is (i) to increase the cost to the Bank of making or maintaining Loans or the Letters of Credit therein or to reduce any amount received or receivable by the Bank hereunder, (ii) to require the Bank (or any corporation controlling the Bank) to make any payment to any fiscal, mone tary, regulatory or other authority calculated on or by reference to any amount received or receivable by the Bank under this agreement, the Letters of Credit or the Note, or (iii) to reduce the rate of return on the Bank's capital as a consequence of its 19 obligations hereunder to a level below that which the Bank could have achieved but for such adoption, change or compliance (taking into consideration the Bank's policies with respect to capital adequacy), in any case by an amount deemed by the Bank to be material, then, in any such case, the Borrower shall promptly pay the Bank (or such corporation controlling the Bank), on its written demand, any additional amount necessary to compensate the Bank (or such corporation) for such additional cost, reduced amount receivable or reduction in rate of return with respect to this Agreement, the Note, the Letters of Credit or the Loans, to gether with interest on such amount from the date demanded until payment in full thereof at the rate per annum applicable to Loans, calculated on the basis of a 360-day year for the actual days elapsed. ARTICLE 2A. LETTERS OF CREDIT FACILITY Section 2.01A. Letters of Credit. At all times prior to the Commitment Expiration Date (or earlier termination of the Commitment Period hereunder), subject to the terms and conditions hereinafter set forth, the Bank agrees to issue for the account of the Borrower, (i) irrevocable documentary and/or standby letters of credit in the aggregate face amount not to exceed the Maximum Letter of Credit Commitment (such letters of credit individually being a "Letter of Credit" and collectively being the "Letters of Credit"; the beneficiaries under the Letters of Credit being the "Beneficiaries"). Payment under a Letter of Credit shall be available by drafts or demands for payment when accompanied by the documents specified by such Letter of Credit. Drawings under the Letters of Credit shall be payable solely in accordance with the terms thereof. The Letters of Credit shall provide that drawings thereunder must be presented to the Bank on or before the expiration date thereof and that the Bank may defer for three Business Days payment of any drawing made thereunder. Section 2.02A. Reimbursement Obligation. The Borrower agrees to reimburse the Bank for any amount paid by the Bank on drafts or demands for payment drawn or made or purporting to be drawn or made under the Letters of Credit (the Borrower's obligation so to reimburse the Bank hereinafter called the "LOC Reimbursement Obligation"). Each LOC Reimbursement Obligation owing to the Bank shall automatically be converted into, and shall be deemed to have been paid with the proceeds of a Loan made by the Bank on the date such LOC Reimbursement Obligation arises, whether or not an Event of Default or Default then exists or would be caused thereby, which Loan shall be subject to the prepayment provisions of this Agreement; provided, however, that upon the occurrence of an Event of Default the Bank may require by a notice to the Borrower immediate payment to the Bank of the amount of the LOC Reimbursement Obligation which would then exist if all outstanding Letters of Credit were drawn upon at that 20 time. Any LOC Reimbursement Obligation which is not paid when due or converted into a Loan in accordance with the terms hereof shall bear interest, payable on demand, for each day on which said LOC Reimbursement Obligation remains unpaid, at a rate per annum equal to the interest rate borne by Loans, or if the Borrower is in default under the provisions of this sentence of Section 2.02A at the default rate stated in Section 2.04(a)(ii). The Borrower's obligation to reimburse the Bank in accordance with the terms hereof for all payments made by the Bank under each Letter of Credit and to pay interest on the unpaid amount of each LOC Reimbursement Obligation shall be absolute, irrevocable and unconditional under any and all circumstances whatsoever and shall not be terminated for any reason whatsoever. Section 2.03A. Letter of Credit Fees. As consideration for the issuance of the Letters of Credit, the Borrower shall pay to the Bank a fee (the "LOC Utilization Fee") on the face amount of all Letters of Credit at a rate per annum equal to one-eighth of one percent (1/8%) for each thirty day period or any portion thereof in which the LOC Reimbursement Obligation is outstanding. The LOC Utilization Fee shall be calculated on the basis of a year of 360 days for the actual number of days from the issuance of the Letters of Credit to the expiration date of each in arrears on the last Business Day of each month and shall be payable in arrears on the last Business Day of each month. Section 2.04A. General Instructions: Limitation on Responsibility. The Borrower hereby agrees that: (a) The Bank may accept or pay, as complying with the terms of a Letter of Credit, any drafts or other documents otherwise in order which may be signed or issued by a trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver, successor or other legal representative of the party who is authorized under such Letter of Credit to draw or issue any drafts or other documents; and (b) The Bank may, without limiting any other provisions of this Agreement, accept documents of any character which comply with the provisions, definitions, interpretations and practices contained in The Uniform Customs and Practice for Documentary Credits (1983 Revision), International Chamber of Commerce Publication No. 400, and accept or pay any draft dated on or before the expiration of any time limit expressed in a Letter of Credit, regardless of when drawn and when or whether negotiated, provided the other required documents are dated prior to the expiration date of such Letter of Credit. Section 2.05A. Reimbursement Obligation Absolute. The Borrower's obligation to pay the full amount of each LOC Reimbursement Obligation, or to discharge the same with the 21 proceeds of a Borrowing hereunder, is absolute and unconditional, under all circumstances whatsoever, and shall not be affected by: (a) any lack of validity or enforceability of any Letter of Credit; or (b) any lack of validity or enforceability of this Agreement, the Note or any Related Document; or (c) any amendment or waiver of, or any consent to departure from this Agreement, the Note or any Related Document; or (d) any exchange, release or non-perfection of any col lateral or any release of any guarantor; or (e) the existence of any claim, set-off, defense or other right which the Borrower may have at any time against a Beneficiary, any transferee of a Letter of Credit (or any person for whom any such transferee may be acting), the Bank or any other Person, whether in connection with such Letter of Credit, this Agreement, the transactions contemplated herein or any unrelated transaction; or (f) any statement or any other document (including insurance), or endorsements thereof, presented under a Letter of Credit proving to be forged, fraudulent, invalid or uncollectible in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; or (g) any irregularity in the transactions with respect to which a Letter of Credit is issued, including, without limitation, any fraud by a Beneficiary; or (h) breach of contract between the Bank or the Borrower and a Beneficiary or any other third party; or (i) consequences of compliance with laws, orders, regulations or customs in effect in places of negotiation or payment of drafts under a Letter of Credit; or (j) failure of drafts to bear reference or adequate references to a Letter of Credit, or failure of any person to surrender a Letter of Credit or failure of any person to note the amount of any draft of a Letter of Credit, or forward documents as may be required by the terms of a Letter of Credit (each of which requirements the Borrower hereby waives even if included in such Letter of Credit); or (k) errors, omissions, interruptions or delays in trans mission or delivery of any messages, however sent and whether plain or in code or cipher, or errors in translation or in inter pretation of technical or other terms; or 22 (l) any failure by any the Bank to honor its obligation to make Loans; or (m) without limiting the foregoing, any act or omission not done or omitted in bad faith. Section 2.06A. Non-Conforming Documents. In case of any variation between the documents called for by a Letter of Credit or the Borrower's instructions and documents accepted by the Bank, the Borrower shall be conclusively deemed to have waived any right to object to such variation with respect to any action of the Bank relating to such documents, and to have ratified and approved such action as having been taken at the Borrower's direction, unless the Bank has acted in bad faith or with gross negligence. ARTICLE 3. SECURITY INTERESTS Section 3.01. Grant of Security Interest. The Borrower, to secure the Obligations (as said term is defined in Section 3.02 hereof), hereby assigns, pledges and grants to the Bank a continuing first and prior security interest in all of its rights, title and interests in and to all of the following property of the Borrower whether now owned or existing or hereafter acquired or arising and regardless of where located and all proceeds, products and substitutions thereof (all of the same being herein collectively referred to as the "Collateral"): (a) ACCOUNTS: All present and future accounts, receivables, contract rights, including, but not limited to, the Borrower's rights (including, without limitation, any and all rights to receive any payments) under any and all leases and/or agreements to which the Borrower is a party, chattel paper, instruments, documents, general intangibles and other rights to payment of any kind now or hereafter existing arising out of or in connection with the sale or lease of goods, merchandise or inventory or the rendering of services, including, without limitation, those which are not evidenced by instruments or chattel paper and whether or not they have been earned by performance; all proceeds of any letters of credit or insurance policies on which the Borrower is now (or may hereafter be) named as beneficiary; all claims against any third parties for advances or other financial accommodations or any other obligations whatsoever owing to the Borrower; all rights now or hereafter existing in and to all security agreements, leases, documents of title and other contracts securing, evidencing or otherwise relating to any such accounts, contract rights, chattel paper, instruments, documents, general intangibles, other rights of payment or proceeds or to any such claims against third parties, together with all rights in any returned or repossessed goods, merchandise and inventory and all right, title, security and 23 guaranties with respect to each of the foregoing, including, without limitation, any right of stoppage in transit (any and all such accounts, contract rights, chattel paper, instruments, documents, rights of payment, proceeds, claims and rights being hereinafter referred to as the "Accounts") (b) INVENTORY: All goods, merchandise and other personal property furnished or to be furnished under any contract of service or intended for sale or lease, including, without limitation whole goods, spare parts, components, supplies, mate rials and consigned goods; all raw materials, work-in-process, finished goods or materials or supplies of any kind, nature or description, used or consumed in the Borrower's businesses or which might be used in connection with the manufacture, assembling, packing, shipping, advertising, selling or finishing of such goods, merchandise and personal property; all returned or repossessed goods; and all documents of title or documents evidencing the same; in each instance whether now owned or hereafter acquired by the Borrower and wherever located, whether in the possession of the Borrower or of a bailee or other person for sale, storage, transit, processing, use or otherwise (all of the foregoing, collectively, being the "Inventory"); (c) EQUIPMENT: All machinery, equipment and fixtures, including, without limitation, all manufacturing, assembling, packaging, distribution, selling, data processing and office equipment, all furniture, furnishings, appliances, trade fix tures, tools, tooling, molds, vehicles, vessels and all other goods of every type and description (other than Inventory), and all parts thereof and all accessions thereto, and all substitutions therefor and replacements thereof, in each instance whether now owned or hereafter acquired by the Borrower and wherever located (all of the foregoing, collectively, being the "Equipment"); (d) GENERAL INTANGIBLES: All rights, interests, choses in action, causes of actions, claims and all other intangible property of the Borrower of every kind and nature (other than Accounts) in each instance whether now owned or hereafter acquired by the Borrower, including, without limitation, all corporate and other business records; all loans, royalties, and other obligations receivable; all trademarks, non-compete agreements, service marks, trademark applications, patents, patent applications, tradenames, fictitious names, inventions, designs, trade secrets, computer programs, software, printouts and other computer materials, goodwill, registrations, copyrights, copyright applications, permits, licenses, franchises, customer lists, credit files, correspondence, and advertising materials; all customer and supplier contracts, firm sale orders, rights under license and franchise agreements, and other contracts and contract rights ; all interests in partnerships and joint ventures; all tax refunds and tax refund 24 claims; all right, title and interest under leases, subleases, licenses and concessions and other agreements relating to real or personal property; all payments due or made to the Borrower in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any property by any person or governmental authority; all deposit accounts (general or special) with any bank or other financial institution; all credits with and other claims against third parties (including carriers and shippers); all rights to indemnification; all reversionary interests in pension and profit sharing plans and reversionary, beneficial and residual interest in trusts; all proceeds of insurance of which the Borrower is a beneficiary; and all letters of credit, guaranties, liens, security interests and other security held by or granted to the Borrower; and all other intangible property, whether or not similar to the foregoing; in each instance, whether now or hereafter existing and however and wherever arising and all renewals thereof (all of the foregoing, collectively, being the "General Intangibles"); (e) CHATTEL PAPER, INSTRUMENTS AND DOCUMENTS: All chattel paper, all instruments, all bills of lading, warehouse receipts and other documents of title and documents, in each instance whether now owned or hereafter acquired by the Borrower; and (f) OTHER PROPERTY: All property or interests in property now owned or hereafter acquired by the Borrower which now may be owned or hereafter may come into the possession, custody or control of the Bank, or any agent or affiliate of the Bank, in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise); and all rights and interests of the Borrower, now existing or hereafter arising and however and wherever arising, in respect of any and all (i) notes, drafts, letters of credit, stocks, bonds, and debt and equity securities, whether or not certificated (other than the capital stock of the Borrower), and warrants, options, puts and calls and other rights to acquire or otherwise relating to the same; (ii) money; (iii) proceeds of loans, advances and other financial accommodations, including, without limitation, loans, advances and other financial accommodations, made or extended under the Credit Agreement; and (iv) insurance proceeds and books and records relating to any of the Collateral covered by this Agreement; together, in each instance, with all accessions and additions thereto, substitutions therefor, and replacements, proceeds and products thereof. Section 3.02. Security for Obligations. This Agreement secures the full and prompt payment and performance of (a) all obligations and liabilities of the Borrower to the Bank now or hereafter existing under this Agreement, the Note and any other Related Document to which it is a party, and any other future loan, advance or financial accommodation made by the Bank in 25 favor of the Borrower or any other person whose indebtedness to the Bank is guaranteed by the Borrower, whether for principal, interest, LOC Reimbursement Obligations, fees, indemnification, expenses or otherwise, and (c) all other obligations, liabilities, covenants and duties owing to the Bank from or by the Borrower of any kind or nature, present or future, whether or not evidenced by any note, guaranty or other instrument, whether arising under the Credit Agreement or any of the other Related Documents or under any other agreement, instrument or document, whether or not for the payment of money, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired (all such obligations and liabilities described in the foregoing clauses (a), (b), (c) and (d) above being hereinafter collectively referred to as the "Obligations"). The Borrower and the Bank agree that they intend the security interest hereby granted to attach upon the execution of this Agreement. Section 3.03. Borrower Remains Liable. Anything herein to the contrary notwithstanding, (a) the Borrower shall remain liable under any contracts and agreements included in the Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Bank of any of the rights hereunder shall not release the Borrower from any of its duties or obligations under any contracts and agreements included in the Collateral, and (c) the Bank shall have no obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Bank be obligated to perform any of the obligations or duties of the Borrower thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. ARTICLE 4. REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Agreement and to extend the financial accommodations hereunder, the Borrower represents and warrants to the Bank on the Initial Borrowing Date, unless otherwise specified, that: Section 4.01. Organization and Powers. (a) The Borrower is a corporation, duly organized and validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Borrower is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction (other than the state of its incorporation) in which the conduct of its business or the ownership or operation of its properties or assets makes such qualification necessary and in which the 26 failure to be so qualified would have a material adverse effect on its management, business, assets, properties, operations, prospects or condition (financial or other) or on the ability of the Borrower to perform its obligations under this Agreement or any of the Related Documents to which it is a party. The Borrower has full power and authority to own its properties and assets and carry on its business as now conducted. Section 4.02. Power and Authorization. (a) The Borrower has full power, right and legal authority to execute, deliver and perform its obligations under this Agreement, the Note and such of the other Related Documents to which it is a party. The Borrower has taken all corporate action necessary to authorize the execution and delivery of, and the performance of its respective obligations under such documents and to make Borrowings under this Agreement. This Agreement, the Note and such of the other Related Documents to which it is a party, constitute legal, valid and binding obligations of the Borrower enforceable against it in accordance with their respective terms subject to the effect of any applicable bankruptcy, insolvency, reorganization or moratorium or similar laws affecting the rights of creditors generally. No consent of any person, and no consent, license, approval or authorization, or registration or declaration with, any governmental authority, bureau or agency, which is material to the ability of the Borrower to perform its obligations under this Agreement, the Note or any of the Related Documents to which it is a party, is required in connection with the execution, delivery or performance by the Borrower of this Agreement, the Note or the other Related Documents to which it is a party, or the making of borrowings by the Borrower under this Agreement. Section 4.03. No Legal Bar. The execution, delivery and performance by the Borrower of this Agreement, the Note and such of the other Related Documents to which it is a party, and the making of borrowings hereunder by the Borrower, do not and will not (i) violate or contravene any provisions of any existing law, statute, rule, regulation or ordinance or of the Articles of Incorporation or By-Laws of the Borrower, (ii) violate or contravene any provision of any order or decree of any court, governmental authority, bureau or agency to which the Borrower or any of its properties or assets is subject, or of any mortgage, indenture, security agreement, contract, undertaking or other agreement or instrument to which the Borrower is a party or which purports to be binding upon it or any of its properties or assets, the violation or contravention of which would have a material adverse effect on the management, business, assets, properties, operations, prospects or condition (financial or other) of the Borrower or (iii) result in the creation or imposition of any Lien, charge or encumbrance on, or security interest in, any of the properties of the Borrower (other than as created pursuant to the Related Documents) pursuant to the 27 provisions of any mortgage, indenture, security agreement, contract, undertaking or other agreement or instrument. Section 4.04. Litigation. Except as disclosed in Schedule 4.04 hereto, no litigation or administrative proceeding of or before any court or governmental body or agency is now pending, nor, to the best knowledge of the Borrower following reasonable inquiry, is any such litigation or proceeding now threatened, against the Borrower or any of its properties, involving an individual claim in excess of $50,000 or claims in the aggregate in excess of $100,000, nor, to the best knowledge, upon due inquiry, of the Borrower is there a valid basis for the initiation of any such litigation or proceeding. Section 4.05. Solvency. Immediately after giving effect to the financing transactions contemplated hereby, the Borrower is solvent. For purposes of this Section 4.05, the term "solvent" shall mean that, at the time of said determination, (i) the fair value of the Borrower's assets exceeds the aggregate sum of its liabilities (including, without limitation, contingent liabilities), (ii) the Borrower is able to pay its debts as they mature, (iii) the property owned by the Borrower has a value in excess of the total aggregate sum required to pay its debts, and (iv) the Borrower has capital sufficient to carry on its business. Section 4.06. Assets and Properties. The Borrower has good title to all of its assets (tangible and intangible) owned by it, including without limitation the Collateral, and all such assets are free and clear of all Liens other than (i) Customary Permitted Liens, (ii) Liens in favor of the Bank and (iii) Liens disclosed in Schedule 4.06 hereto. Substantially all of the assets and properties owned by, leased to or used by the Borrower are in adequate operating condition and repair, ordinary wear and tear excepted, are free and clear of any known defects except such defects as do not substantially interfere with the continued use thereof in the conduct of normal operations, and are able to serve the function for which they are currently being used, except in each case where the failure of such asset to meet such requirements would not have or is not reasonably likely to have a material adverse effect on the management, business, properties, assets, operations or condition (financial or other) of the Borrower. Section 4.07. The Collateral. The chief place of business and chief executive office of the Borrower, and the office where the Borrower keeps its records concerning its Accounts Receiv able, and each location where the Borrower keeps any of the Collateral is located at the addresses specified on Schedule 4.07 hereto. The Borrower owns the Collateral in which it has granted a security interest in favor of the Bank pursuant to the Related Documents, free and clear of any lien, security interest charge 28 or encumbrance, except as otherwise expressly permitted by this Agreement or the Related Documents or as otherwise disclosed in Schedule 4.06 hereto. All financing statements and filings required to be filed, and all other steps required to be taken, pursuant to this Agreement and the Related Documents, have been filed in the proper offices or have been taken, as the case may be, in all jurisdictions and offices where such filings or other steps are necessary to have been filed or taken, in order to cause the Bank to have, and the Bank has a valid, perfected, continuing and enforceable security interest in and Lien on the Collateral and such security interest and Lien ranks prior to any other security interest in or Lien upon the Collateral, except as set forth on Schedule 4.06 hereto and pursuant to this Agreement or the Related Documents or as otherwise permitted hereunder. Section 4.08. Capitalization and Corporate Structure. The authorized capital stock of (i) the Borrower consists of 10,000,000 shares of Common Stock, and 2,788,228 shares of Common Stock are validly issued, fully paid and nonassessable, (ii) Vicon Industries (UK) Limited consists of 75,000 shares of ordinary stock and 25,000 shares of non-voting stock, of which 75,000 shares of ordinary stock are validly issued, fully paid and nonassessable, and 100% of such common stock is owned of record and beneficially by the Borrower, and (iii) Vicon Industries Foreign Sales Corporation consists of 1,000 shares of Common Stock of which 100 shares of common stock are validly issued, fully paid and nonassessable. There are no outstanding subscriptions, warrants, options, convertible securities or other rights (contingent or other), or commitments therefor, to subscribe for, purchase or acquire any shares of Common Stock or to pay any dividends on any shares of Common Stock, except in accordance with Section 7.08 and 7.09, or to distribute to any holders of Common Stock any properties or assets of the Borrower. The Borrower has no Subsidiaries other than Vicon Industries (UK) Limited and Vicon Industries Foreign Sales Corporation. Section 4.09. No Default. The Borrower is not in default in any material respect in the payment or performance of any of its respective material obligations for the payment of money or under any franchise, license or leasehold interest and no Default has occurred and is continuing with respect to the Borrower, the effect of any of which would have a material adverse effect on the management, business, properties, assets, operations, prospects or condition (financial or other) of the Borrower. Section 4.10. No Secondary Liabilities. There are no out standing contracts of guaranty or suretyship made by the Bor rower, nor is the Borrower subject to any other material contingent liability or obligation required to be shown on the financial statements of the Borrower, except (a) as shown on such financial statements previously furnished to the Bank, (b) the endorsement of negotiable instruments for deposit or collection 29 or similar transactions in the ordinary course of business and (c) as set forth on Schedule 7.01(g) hereto. Section 4.11. Taxes. The Borrower has filed, or caused to be filed, all federal, state, local and foreign tax returns that are required to be filed by it and has paid, or caused to be paid, all taxes, and interest and penalties thereon, on or before the due dates thereof. Except to the extent that reserves, determined in accordance with GAAP, therefor are reflected in the most recent audited financial statements of the Borrower: (a) there are no material federal, state or local tax liabilities of the Borrower due or to become due for any tax year ended on or prior to the date of the balance sheet included in the most recent financial statements of the Borrower, whether incurred in respect of or measured by the income of such entity, which are not properly reflected in the such balance sheet, and (b) there are no material claims pending or, to the best knowledge of the Borrower, proposed or threatened against the Borrower for past federal, state or local taxes, except those, if any, as to which proper reserves, determined in accordance with GAAP, are reflected in the most recent audited financial statements. Section 4.12. Financial Statements and Condition. The audited financial statements of the Borrower as of September 30, 1993, September 30, 1994 and September 30, 1995 present fairly the financial position of the Borrower as of the dates of said statements, and the results of operations of the Borrower for the periods covered by said statements of earnings are in accordance with GAAP, except as disclosed therein. As of September 30, 1995, there are no material obligations or liabilities, direct or indirect, fixed or contingent, which are not reflected in such financial statements and that are required to be so reflected thereon under GAAP. No material adverse change in the manage ment, business, assets, properties, operations, prospects or condition (financial or otherwise) of the Borrower has occurred since September 30, 1995. Section 4.13. Compliance with ERISA. Each Plan that is intended to be "qualified" within the meaning of Section 401(a) of the IRC either (i) has been determined by the Internal Revenue Service to be so qualified and each trust created thereunder has been determined by the Internal Revenue Service to be tax-exempt under Section 501(a) of the IRC or (ii) has been or will be timely submitted to the Internal Revenue Service for such determinations, and the Borrower knows of any fact that would indicate that the qualified status of any such Plan, or the tax-exempt status of any trust created thereunder, has been materially adversely affected. No material "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the IRC) or "waived funding deficiency" (within the meaning of Section 303 of ERISA or Section 412 of the IRC) has been incurred by any Plan. No material Reportable Event or 30 material Prohibited Transaction has occurred with respect to any Plan. There are no "multiemployer plans" (within the meaning of Section 3(37) of ERISA) which are "pension plans" (within the meaning of Section 3(2) of ERISA) that are maintained, or otherwise contributed to, or have ever been maintained or otherwise contributed to, by the Borrower. The Borrower has neither incurred any material liability under Title IV of ERISA arising in connection with the termination of, or withdrawal from, any Plan covered or previously covered by Title IV of ERISA nor has any outstanding liability or obligation to the PBGC (other than for premiums). No Plan is currently under investigation, audit or review by the Internal Revenue Service or any other federal or state agency. Section 4.14. Retiree Health and Life Insurance Benefits. Except as described in Schedule 4.14, no retiree health or retiree life insurance benefits are provided under the terms of any Plan that is maintained, or otherwise contributed to, by the Borrower for the benefit of employees (including, without limi tation, any retired employees), except as may be required by law. Section 4.15. Patents and trademarks. The Borrower possesses sufficient valid patents, patent rights or licenses, trademark rights or trade name and trade rights to conduct its business as now operated, with no known conflict with valid patent rights or licenses, trademarks, trademark rights and trade names or trade rights of others which may reasonably be expected to have a material adverse effect on the management, business, properties, assets, operations or condition (financial or other) of the Borrower. Each such patent, patent right, license, trademark right, trade name and trade right is listed in Schedule 4.15 hereto. Section 4.16. Environmental Matters. Except as disclosed in Schedule 4.16 hereto, the Borrower and each parcel of real property owned or leased by it are in material compliance with all Environmental Laws; there are no conditions existing currently or likely to exist that would subject the Borrower to damages, penalties, injunctive relief or cleanup costs in an aggregate amount exceeding $50,000 under any Environmental Laws or assertions thereof, or which require or are likely to require cleanup, removal, remedial action or other response pursuant to Environmental Laws by the Borrower; the Borrower is not a party to any litigation, governmental, regulatory or administrative proceedings involving an individual claim in excess of $50,000 or claims in the aggregate in excess of $50,000, nor so far as is known by it, is any such litigation or administrative proceeding threatened against it, which asserts or alleges that the Borrower has violated or is violating Environmental Laws or that the Borrower is required to clean up, remove or take remedial or other responsive action due to the disposal, depositing, storage, discharge, leaking or other release of any hazardous substances 31 or materials; the Borrower has obtained all applicable permits, licenses or authorizations from governmental authorities required under Environmental Laws relative to each parcel of real property owned or leased by it; the Borrower is in compliance with all terms and conditions of such permits, licenses and authoriza tions; and there are not now, nor to the best knowledge of the Borrower have there ever been, materials stored, spilled, deposited, treated, recycled or disposed of on, under or at any parcel of real property owned or leased by the Borrower, or stored, spilled, deposited, treated, recycled or disposed of at the direction of the Borrower, present in soils or ground water, that would require cleanup, removal or some other remedial action under Environmental Laws. Section 4.17. Investment Company Act. The Borrower is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or subject to any other statute that regulates the incurring of indebtedness for borrowed money. Section 4.18. Margin Regulations. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying "margin stock" or "margin securities" (within the meaning of Regulation U), none of the obligations or liabilities of the Borrower are secured, directly or indirectly, by "margin stock" or "margin securities", and no part of the pro ceeds of any extension of credit hereunder will be used for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any margin stock" or "margin securities", or in a manner which would breach of contravene any of Regulations G, T, U, or X. Section 4.19. Subsequent Funding Representations and Warranties. In order to induce the Bank to make any Loans after the Initial Borrowing Date, the Borrower hereby represents and warrants that, on and as of the date of the making of each Loan (a) the representations and warranties set forth in this Article 4 are true and correct as if made on and as of such date, except for changes which occur and which are not prohibited by the terms of this Agreement. Section 4.20. Labor Relations. There are no material controversies pending between the Borrower and any of its employees, which in the aggregate, might have a material adverse effect on the management, business, assets, properties, operations, prospects or conditions (financial or other) of the Borrower. Representations Concerning the Collateral 32 Section 4.21. Collateral: Instruments, Etc. (a) None of the Collateral is evidenced by a promissory note or other instrument, except such promissory notes or other instruments as have been delivered to the Bank hereunder or will be delivered to the Bank prior to the initial borrowing date under the Credit Agreement. Section 4.22. Receivables. All Receivables (i) represent complete bona fide transactions (except for minimal training and installation) which require no further act under any circumstances on Borrower's part to make such Receivables payable by the account debtors, (ii) to the best of Borrower's knowledge, are not subject to any present, future or contingent offsets or counterclaims, and (iii) do rot represent consignment sales, guaranteed sales, sale or return or other similar understanding or obligations of any Affiliate or Subsidiary of Borrower. Section 4.23. Name. The correct corporate name of the Borrower is Vicon Industries, Inc. and, except as set forth on Schedule 4.07 attached hereto and made a part hereof, the Borrower has no other corporate name or fictitious name and has not, during the immediately preceding five (5) years, been known under or used any other corporate or fictitious name. ARTICLE 5. CONDITIONS PRECEDENT Section 5.01. Conditions Precedent to Initial Funding. The obligation of the Bank to make any Loan to the Borrower on the Initial Borrowing Date is subject to the fulfillment of the following conditions precedent: (a) The Bank shall have received on or before the Ini tial Borrowing Date each of the following documents and instru ments, each dated such date, in form and substance reasonably satisfactory to the Bank: (i) (a) a certificate of the Secretary of the Borrower dated the Initial Borrowing Date, certifying that (I) attached thereto are true and complete copies of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance by the Borrower of this Agreement, the borrowings hereunder by the Borrower and the execution, delivery and performance by the Borrower of the Note and such of the Related Documents to which it is a party, and (II) said resolutions are all the resolutions adopted by the Board of Directors of the Borrower in connection with the transactions contemplated thereby and are in full force and effect without modification as of such date; 33 (ii) (a) a copy of the Certificate of Incorporation of the Borrower certified as of a recent date by the Secretary of State of the jurisdiction of its incorporation; (b) a certificate of said Secretary of State as to the due organization, corporate existence and good standing of the Borrower as of a recent date; (c) certificates of good standing of the Secretary of State of each jurisdiction in which the Borrower is qualified to do business; and (d) a certificate of the Secretary or Assistant Secretary of the Borrower dated the Initial Borrowing Date, certifying (I) that attached thereto is a true and complete copy of its By-laws as in effect on the date of such certification, (II) that its Certificate of Incorporation has not been amended since the date of the last amendment thereto indicated in the certificate of the Secretary of State furnished pursuant to clause (a) above, and (III) as to the incumbency and signatures of each of its officers executing this Agreement, the Note and such of the other Related Documents to which it is a party; (iii) this Agreement, the Note, the Letters of Credit, if any, the Pledge Agreement, the Landlord Waivers, the Subordination Agreement and the Lock-Box Agreement, duly executed by all the parties thereto (other than the Bank) and the Borrower shall have established a lock-box account at the Bank and all steps shall have been taken to commence operation thereof; (iv) evidence that all actions necessary or, in the opinion of the Bank and its counsel, desirable, to create and perfect the security interests and other Liens granted under the Related Documents, have been duly taken and that there are no security interests senior to the security interests granted in favor of the Bank; (v) an opinion of Schoeman, Marsh & Updike, LLP, counsel to the Borrower, or other counsel satisfactory to the Bank, substantially in the form of Exhibit G hereto; (vi) such consents, approvals or acknowledgments with respect to such of the transactions hereunder as may be necessary or as the Bank or its counsel may deem appropriate; (vii) a certificate of the Borrower signed on its behalf by its president or chief financial officer that (A) each of the Financial Covenants contained in Article VII is complied with by the Borrower, and calculating such covenants, (B) no material adverse change in the business, assets, properties, operations, prospects or the condition (financial or otherwise) of the Borrower has occurred since September 30, 1995, (C) no material litigation or 34 administrative proceeding of or before any court or governmental body or agency is pending or threatened against the Borrower or any of its properties other than as disclosed in Schedule 4.04 hereto, and (D) the Borrower is in compliance with all pertinent federal, state and local laws, rules and regulations, including, without limitation, those with respect to ERISA, OSHA and all Environmental Laws; (viii) the completed field audit of the Borrower by the Bank or a Person designated by the Bank of the Accounts Receivable, Inventory and accounting systems of the Borrower; (ix) a certificate showing that, (A) after giving effect to (I) the issuance of the Letters of Credit, if any, requested by the Borrower (II) the consummation of all other transactions contemplated by this Agreement, and (III) all Transaction Costs, and (B) after subtracting trade payables (excluding trade payables to the Subordinated Lenders) 60 days or more past due and any uncovered book overdrafts, the Available Commitment is not less than $1,000,000; (x) satisfactory review, in the Bank's sole sole discretion, of the books and records of the Borrower, all material contracts of the Borrower, including, but not limited to, vendor supply agreement, and all trade references of the Borrower; (xii) evidence that the Existing Credit Facility has been satisfied in full (and all UCC termination statements signed by the appropriate Existing Lender which terminate all financing statement filed in favor of the Existing Lenders have been delivered to the Bank); (xii) evidence that, as of the date hereof, the Borrower has paid all past and current premiums due and payable on its existing insurance policies, together with copies of insurance policies required hereby and all loss payee/additional insured endorsements, duly executed, required under the terms of this Agreement, to be delivered no later than the Initial Borrowing Date; and (xiii) such other and further documents as the Bank and its counsel may have reasonably requested and all legal matters, incident to this Agreement, the transactions contemplated hereby, the Letters of Credit and the Loans shall be reasonably satisfactory to the Bank and its counsel; (b) At the time of the Initial Borrowing Date, the following statements shall be true and correct and the Bank shall 35 have received a certificate of the Borrower signed on its behalf by a duly authorized officer of the Borrower, dated such date, stating that (i) the representations and warranties contained in this Agreement and in the Related Documents are true and correct on and as of such date before and after giving effect to the initial funding hereunder and to the application of the proceeds therefrom, as though made on or as of such date; and (ii) before and after giving effect to the initial funding hereunder, no Event of Default or Default shall have occurred or would result in such Event of Default. (c) The Bank shall have received, concurrently with the making of any Loan hereunder on the Initial Borrowing Date, payment in full of all amounts then due and payable under the terms of this Agreement, including, without limitation, (i) all of the fees payable to the Bank pursuant to Section 2.11 hereof, and (ii) all of the Bank's out-of-pocket expenses (including, without limitation, the reasonable fees and disbursements of the Bank's in-house and outside counsel). Section 5.02. Conditions Precedent to Initial and Subsequent Fundings. The obligation of the Bank to make or convert any Loan (including any Loans to be made on the Initial Borrowing Date) shall be subject to the fulfillment of the following conditions precedent on or before the relevant Borrowing Date: (a) (i) the representations and warranties set forth in Section 4.21 of this Agreement and in the Related Documents shall be true and correct on and as of such Borrowing Date or Conversion Date as though made on and as of such date, (ii) the Borrower shall then be in compliance with all the terms and provisions of this Agreement and the Note and the other Related Documents to which it is a party, (iii) no Event of Default or Default shall have occurred and be continuing, and (iv) the Bank, if the Bank requests the same, shall have received a certificate of the Borrower signed on its behalf by its president or its chief financial officer to such effect; (b) the Bank shall have received, if it so requests, the legal opinion of counsel to the Borrower, in form and substance satisfactory to the Bank, as to the continuing accuracy of prior opinions, and as to any other matters on which the Bank may reasonably request a legal opinion; (c) the Bank shall have received such other and further documents, certificates, reports and other information and assurances with respect to the Borrower as the Bank may reasonably request; and 36 (d) the Bank shall have received all fees payable pursuant to Section 2.11 hereof and all other amounts due hereunder. ARTICLE 6. AFFIRMATIVE COVENANTS The Borrower hereby covenants and agrees that, from and after the date of execution of this Agreement and so long as any amount may be borrowed hereunder or remains unpaid on account of the Note, or is otherwise due to the Bank under this Agreement or any Related Document, and for a period of 91 days thereafter, the Borrower shall comply with each of the following covenants: Section 6.01. Maintenance of Corporate Existence and Prop erties. The Borrower shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and all of its other rights and franchises and comply with all laws applicable to it in all material re spects; continue to conduct its business substantially as now and proposed to be conducted; and, in all material respects, at all times, maintain, preserve and protect all franchises and trade names and preserve all the remainder of its property in use or useful in the conduct of its business and keep the same in good repair, working order and condition and from time to time make, or cause to be made, all necessary and proper repairs, renewals and replacements, betterments and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times. Section 6.02. Insurance. (a) The Borrower shall maintain or cause to be maintained with financially sound reputable insurers reasonably acceptable to the Bank, the insurance policies and programs listed on Schedule 6.02(a) hereto (including liability insurance) (which Schedule shall contain the information in clauses (i)-(iv) below) or substantially similar programs or policies and amounts or other programs, policies and amounts reasonably acceptable to the Bank. Such policies shall provide for 30 days prior notice to the Bank of any amendment, modification, cancellation or termination thereof. Not later than thirty (30) days prior the renewal, replacement or material modification of any policy or program, the Borrower shall deliver or cause to be delivered to the Bank a detailed schedule setting forth for each such policy or program: (i) the amount of such policy, (ii) the risks and amounts (with deductibles) insured against by such policy, (iii) the name of the insurer and each insured party under such policy, (iv) the policy number of such policy and (v) a comparison of such policy with the policy so renewed, replaced or modified. Not later than the Initial Bor rowing Date, the Borrower shall cause the Bank to be named as beneficiary or loss payee on any such property insurance. 37 (b) Within one Business Day after receipt by the Bor rower of any insurance proceeds or a condemnation award in excess of $100,000, the Borrower shall provide to the Bank written notice (or telephone notice promptly confirmed in writing) thereof and a description of the property damaged, lost or taken. Such notice shall specify whether or not the property damaged, lost or taken will be restored or replaced, and if so, such notice shall also include a description of the plans, if any, to restore or replace such property; provided, however, that in the event that the amount of any such insurance proceeds or condemnation award exceeds $250,000, and if the Bank in its commercially reasonable discretion deems the subject property unrestorable or irreplaceable, the Borrower shall not restore or replace such property without the prior written consent of the Bank, and absent such consent, such insurance proceeds or condemnation award shall forthwith be paid to the Bank and applied to the Obligations of the Borrower then outstanding in such order as the Bank shall determine. Section 6.03. Punctual Payment. The Borrower shall duly and punctually pay the principal of and interest on the Note and any other amount due under this Agreement or any of the Related Documents to which it is a party. Section 6.04. Payment of Liabilities. The Borrower shall pay and discharge in the ordinary course of business, all of its obligations and liabilities (including, without limitation, tax liabilities and other governmental charges), except where the same may be contested in good faith by appropriate proceedings, and maintain in accordance with GAAP appropriate reserves for any of the same. Section 6.05. Compliance with Laws. The Borrower shall observe and comply with all applicable laws, statutes, rules, regulations or other requirements having the force of law, including, without limitation, all Environmental Laws, except where the failure to comply therewith will not have, and is not reasonably likely to have, a material adverse effect upon its management, business, assets, properties, operations, prospects or condition (financial or other) of such Person. Section 6.06. Payment of Taxes, Etc. The Borrower shall pay and discharge all lawful taxes, assessments, and governmental charges or levies imposed upon it, or upon its income or profits, or upon any of its property (including the Collateral), before the same shall become in default, as well as all lawful claims for labor, materials, and supplies which, if unpaid, might become a Lien or charge upon such property or any part thereof; provided, however, that no such tax, assessment, charge, levy, claim need be paid and discharged so long as the validity thereof shall be contested in good faith by appropriate proceedings and there shall have been set aside on the books of such Person 38 adequate reserves in accordance with GAAP applied with respect thereto, but such tax, assessment, charge, levy, or claim shall be paid before the property subject thereto shall be sold to satisfy any Lien which had attached as security therefor. Section 6.07. Financial Statements and Certificates. The Borrower shall furnish to the Bank: (a) within 90 days after the end of each Fiscal Year, audited consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at the end of such Fiscal Year and the related audited consolidated and consolidating statements of income and changes in financial position of the Borrower and its Subsidiaries for such Fiscal Year, prepared in accordance with GAAP, including consolidated and consolidating financial reports with all related schedules and notes attached thereto, including comparative statements from the prior Fiscal Year, and prepared by, and with an unqualified certification of, independent public accountants satisfactory to the Bank, together with a (i) statement (A) stating whether or not such accountants have any knowledge that the Borrower and its Subsidiaries is then or has been in violation of any covenants pertaining to this Agreement or pertaining to any other debt covenant of the Borrower or its Subsidiaries and that, to the best of their knowledge, no event has occurred which, with the passage of time or the giving of notice or both, would constitute any such violation, and (B) certifying the amount of Net Cash Flow for such Fiscal Year, and (ii) accompanied by a certificate signed by the chief financial officer of the Borrower calculating and stating each of the financial covenants contained in Article 9 and commenting upon the financial statements to an extent reasonably satisfactory to the Bank, as requested by the Bank; (b) within 45 days after the end of each Fiscal Quarter (other than the Fiscal Quarter ending on the last day of the Fiscal Year), quarterly unaudited consolidated and consolidating financial statements of the Borrower and its Subsidiaries, each certified by the chief financial officer of the Borrower and prepared in accordance with GAAP (but without footnotes) subject to normal year-end adjustments, including comparative statements from the prior Fiscal Year, and accompanied by a certificate signed by the chief financial officer of the Borrower calculating and stating each or the financial covenants contained in Article 9 and commenting upon the financial statements to an extent reasonably satisfactory to the Bank, as requested by the Bank; (c) within 45 days after the end of each Fiscal Quarter, a certificate signed by the chief financial officer of the Borrower to the effect that, to the best of his knowledge, no Event of Default or Default has occurred and is continuing, or, if the Borrower or any Subsidiary shall be so in default or any 39 such condition, event or act shall have occurred and be continuing, specifying each such default, condition, event or act and the nature and status thereof; (d) within 45 days after the end of each month, monthly unaudited consolidated and consolidating balance sheets and income statements of the Borrower and its Subsidiaries; (e) within 45 days prior to the end of each Fiscal Year, an annual updated long-range business and strategic plan, including cash flow and other financial projections (setting forth in detail the assumptions therefor) on a month-to-month basis for the Borrower and its Subsidiaries for the immediately following Fiscal Year; (f) as soon as available, a true copy of any "management letter" or other communication to the Borrower (or any of its Subsidiaries), its officers or its Board of Directors by its accountants regarding matters which arose or were ascertained during the course of the audit and which said accountants determined ought to be brought to management's attention; (g) appraisals of any of the assets of the Borrower as the Bank from time to time may reasonably request; and (h) as soon as practicable, such other information concerning the financial affairs and condition of the Borrower as the Bank may from time to time reasonably request. Section 6.08. Accounts and Reports. The Borrower shall keep accurate records and books of account in which full, accurate and correct entries will be made of all dealings or transactions in relation to its business and affairs. Section 6.09. Inspection; Audit. (A) The Borrower shall permit any authorized representative or agent designated by the Bank, to visit, inspect, audit and make extracts and/or copies of the properties and condition of the Borrower, including its books of account and accounts receivable, and the other Collateral, including, but not limited to, management letters prepared by independent accountants; and to discuss its affairs, finances and accounts with its officers and independent accountants at such times and as often as may be requested by the Bank, and to make and obtain such confirmations and examinations of the books and records of the Borrower as the Bank deems appropriate (including without limitation by means of verifications from the Borrower's account debtors). Borrower will deliver to the Bank any instrument necessary for the Bank to obtain records from any service bureau maintaining records for Borrower. 40 (B) The Borrower shall provide to the Bank, at the request of the Bank made from time to time, environmental audit reports in form and substance satisfactory to the Bank. Section 6.10. Auditors. The Borrower shall at all times retain a firm of independent public accountants satisfactory to the Bank to act as the auditors of the Borrower, including, without limitation, to perform the auditing functions required under the terms of this Article 6. Section 6.11. ERISA. The Borrower shall (a) maintain each Plan so as to satisfy the qualification requirements of Section 401(a) of the IRC in all material respects, (b) contribute in a timely manner to each Plan amounts sufficient to satisfy in all material respects, the minimum funding requirements of Section 302 of ERISA and Section 412 of the IRC without any application for a waiver from any such funding requirements, (c) cause each Plan to comply in all material respects with applicable law (d) pay in a timely manner all required premiums to the PBGC, and (e) furnish to the Bank (i) as soon as possible and in any event within 30 days after the Borrower knows thereof, notice of the occurrence or expected occurrence of any ERISA Termination Event, waiver of the minimum funding requirement for any Plan or any material Prohibited Transaction with respect to any Plan. Section 6.12. Notice of Default, Litigation. The Borrower shall promptly give notice in writing to the Bank of (a) the occurrence of any Event of Default or any Default, or (b) the occurrence of any material litigation or proceedings affecting the Borrower or of any dispute between the Borrower or any Affiliate and any governmental regulatory body or any other person involving an individual claim in excess of $50,000 or claims in the aggregate in excess of $100,000. Section 6.13. Bank Accounts; Lockbox. The Borrower shall maintain at all times all corporate operating demand deposit and checking accounts with the Bank. The Lockbox Agreement will remain continuously in effect and will provide that all remittances from account debtors of the Borrower shall be credited to the Borrower's account one (1) Business Day after the Business Day that the Bank receives such remittances by wire transfer, electronic depository check or otherwise in immediately available funds Section 6.14. UCC Filings. Within 30 days of the Initial Borrowing Date, the Borrower shall deliver to the Bank UCC search reports evidencing (i) UCC filings made in each jurisdiction required pursuant to the terms of this Agreement on behalf of the Bank, and (ii) that such filings were made within 10 days of the Initial Borrowing Date. 41 ARTICLE 7. NEGATIVE COVENANTS The Borrower hereby covenants and agrees that, from and after the date of execution of this Agreement and so long as any amount may be borrowed hereunder or remains unpaid on account of the Note, or is otherwise due to the Bank under this Agreement or any Related Document, the Borrower shall comply with each of the following covenants: Section 7.01. Indebtedness. The Borrower shall not, directly or indirectly, create, incur, assume or otherwise become or remain liable with respect to any Indebtedness other than: (a) Indebtedness of the Borrower to the Bank incurred pursuant to this Agreement or the Related Documents; (b) Indebtedness of the Borrower to the Subordinated Lenders incurred secured by liens which are subject to the terms of the Subordination Agreement; (c) Indebtedness of the Borrower which is unsecured (or secured by the Liens referred to in Section 7.02(c) and (d)) and incurred in the normal course of business in connection with installment purchases or Capitalized Leases of equipment or fixed assets, in an aggregate amount not exceeding $100,000 at any time outstanding; (d) taxes, assessments, and governmental charges with respect to the Borrower to the extent that payment thereof shall not at the time be required to be made pursuant to the provisions of Section 6.06 hereof; (e) current trade accounts payable or accrued, operating lease obligations and deferred liabilities other than for borrowed money, all incurred and continuing in the ordinary course of business, exclusive of trade accounts payable and operating lease obligations which shall remain unpaid for a period longer than six months after the same shall have become due and payable, unless they shall be contested in good faith and, where appropriate, by appropriate proceedings; (f) Indebtedness expressly permitted by Section 7.04; and (g) Indebtedness set forth on Schedule 7.01(g); provided; however; that (i) such Indebtedness shall be reduced, as scheduled on the date hereof, as set forth in the agreements evidencing such Indebtedness as noted in Schedule 7.01(g) and (ii) with respect to item 3 on Schedule 7.01(g), the Loan Agreement shall never exceed $700,000 pounds sterling without the prior written consent of the Bank. 42 Section 7.02. Liens. The Borrower shall not, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any of its property or assets, whether now owned or hereafter acquired (including the Collateral), except Liens arising under the Related Documents, and (a) Liens in favor of the Bank; (b) Customary Permitted Liens; (c) Liens in favor of the Subordinated Lenders which is subject to the terms of the Subordination Agreement; (d) Liens incurred in connection with the purchase or acquisition of equipment or fixed assets, as security for the deferred purchase or acquisition price of such equipment or assets, each of which Liens shall extend only to the equipment or fixed assets so purchased or acquired and shall secure only up to 100% of the deferred purchase or acquisition price thereof; provided, however, that the aggregate amount of all Indebtedness (excluding all Indebtedness owed by the Borrower to the Subordinated Lenders secured by liens which are subject to the terms of the Subordination Agreement) secured by such Liens shall not exceed at any time $250,000; and (e) Liens disclosed on Schedule 4.06. Section 7.03. Investments. The Borrower shall not, directly or indirectly, except as otherwise expressly permitted by Section 7.11, purchase or otherwise acquire any Securities of any Person, or make any direct or indirect loan, advance or other financial accommodation or any capital contribution to any Person, or make any investment in any Person, except investments in Cash Equivalents. Section 7.04. Contingent Obligations. The Borrower shall not, directly or indirectly, create, incur, assume or otherwise become or remain liable with respect to any Indebtedness or other obligation or liability of any Person other than, (a) guaranties resulting from endorsement of negotiable instruments for collection in the ordinary course of business; (b) warranties with respect to performance, and not relating to Indebtedness of any Person, which have been or are made in the ordinary course of business of such Person to its customers; and (c) such contingent obligations as set forth on Schedule 7.01(g); provided; however; that (i) such Indebtedness set forth on Schedule 7.01(g) shall be reduced, as scheduled on the date hereof, as set forth in the agreements evidencing such Indebtedness as noted in Schedule 7.01(g) and (ii) with respect to item 3 on Schedule 7.01(g), the Loan Agreement shall never exceed $700,000 pounds sterling without the prior written consent of the Bank.. Section 7.05. Fundamental Changes. (a) The Borrower shall not enter into any merger or consolidation, or liquidate, wind-up or dissolve, or convey, lease, sell, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of its business, property or assets, whether now or hereafter acquired. 43 (b) The Borrower shall not purchase or acquire all or substantially all of the business, properties, assets or Securities of any Person, or create or form any Subsidiary. (c) The Borrower shall not change the nature of its business as currently conducted or engage in any new business which is not an integral part of its business as currently conducted. (d) The Borrower shall not undergo any Change in Control. Section 7.06. Dispositions of Assets. The Borrower shall not assign, sell, lease or otherwise dispose of, whether by sale, merger, consolidation, liquidation, dissolution or otherwise, any of its assets, without the prior written consent of the Bank, except dispositions of (a) Inventory in the ordinary course of business; and (b) obsolete or replaced Equipment in an aggregate amount not to exceed $50,000 during each Fiscal Year. Section 7.07. Sales and Leasebacks. The Borrower shall not become liable directly or indirectly, with respect to any lease, whether a Capital Lease or any other lease, of any property (whether real or personal or mixed), whether now owned or here after acquired, which the Borrower has sold or transferred or is to sell or transfer to any other Person. Section 7.08. Issuances and Dispositions of Securities. The Borrower shall not make any change in its capital structure or issue any Securities, excluding any Securities issued pursuant to stock options set forth on Schedule 7.08 hereto, without the prior written consent of the Bank, which consent shall not be unreasonably withheld. Section 7.09. Dividends and Redemptions. (a) The Borrower shall not declare, pay or make any dividend or other distribution of assets, properties, cash, rights, obligations or Securities on account of any shares of its Securities. (b) The Borrower shall not, directly or indirectly, purchase, redeem or retire or otherwise acquire any shares of its Securities, without the prior written consent of the Bank, which consent shall not be unreasonably withheld. Section 7.10. Amendment of Charter. The Borrower shall not make any amendment to its charter documents. Section 7.11. Transactions with Affiliates and Certain Other Persons. The Borrower shall not, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease, or exchange of any property and guarantees and assumptions of obligations of an 44 Affiliate) with any stockholder, officer, director, employee or Affiliate of the Borrower, other than (a) as otherwise expressly permitted by Sections 7.08, 7.09 and 7.12; (b) with the Permitted Affiliates provided such transactions are on an arm's-length, third-party basis; and (c) loans or advances to employees of the Borrower in an aggregate amount not exceeding $25,000 at any time outstanding. Section 7.12. Compensation. The Borrower shall not make any loans or other advances of money (other than salary to its officers and employees) to any stockholder, officer, director, employee or Affiliate of the Borrower, except as expressly permitted by Section 7.09 and 7.11. Section 7.13. Certain other Transactions. The Borrower shall not enter into any transaction that materially adversely affects the Collateral. Section 7.14. Fiscal Year. The Borrower shall not change its Fiscal Year. Section 7.15. Formula Amount. (A) The Borrower shall not request any Loan hereunder, which after giving effect to the making of such Loan, would cause at any time the aggregate principal amount outstanding under the Note to exceed the lesser of the Commitment or the Formula Amount, (B) the Borrower shall not purchase any F/X Commitment such that the principal amount of F/X Commitments outstanding at any one time shall exceed the Maximum F/X Commitment. Section 7.16. ERISA. The Borrower shall not be or become obligated to PBGC in excess of $50,000 or be or become obligated to the Internal Revenue Service with respect to excise or other penalty taxes provided for in Section 4975 of the Code in excess of $50,000. The Borrower shall not seek any waiver from the minimum funding standard set forth under Section 302 of ERISA or Section 412 of the IRC or engage in any material Prohibited Transaction with respect to any Plan. Section 7.17. Regulations G, T, U and X. The Borrower shall not apply, directly or indirectly, any part of the proceeds of the Loans for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin security" as defined in Regulation U or for the purpose of reducing or retiring any Indebtedness which was originally incurred for any such purpose, or in violation of Regulation G, T, U or X. Section 7.18. Subsidiaries. The Borrower shall not form any new Subsidiary without the prior written consent of the Bank, and any such Subsidiary shall execute and deliver a Subsidiary Guaranty in form and substance satisfactory to the Bank. 45 Section 7.19. Supplier Contracts. No change shall occur in any of material supplier contracts and arrangements of the Borrower which would have a material adverse effect on the financial condition of the Borrower. Section 7.20. Minimum Payables to Subordinated Lenders. The Borrower shall not permit its accounts payable to the Subordinated Lenders to be less than $5,000,000. Section 7.21. Minimum Availability. From the date hereof through and including June 30, 1996, the Borrower shall not permit, after subtracting trade payables (excluding trade payables to the Subordinated Lenders) 60 days or more past due and any uncovered book overdrafts, the Available Commitment to be less than $750,000. ARTICLE 8. COVENANTS CONCERNING COLLATERAL Section 8.01. Maintenance of Collateral. (a) The -------------------------- Borrower shall preserve and maintain the security interest created by this Agreement and will protect and defend its title to the Collateral so that the security interest so granted shall be and remain a continuing first and prior perfected security interest in the Collateral. The Borrower will not create, assume or suffer to exist any security interest or other lien or encumbrance in the Collateral except Permitted Liens. (b) The Borrower shall maintain books and records pertaining to the Collateral in such detail, form and scope as the Bank may reasonably require. Section 8.02. Taxes, Etc. The Borrower shall pay all taxes, assessments and other charges lawfully levied or assessed upon its properties or upon any of the Collateral when due as and to the extent required by the Credit Agreement. If any such tax or other charge or assessment remains unpaid after the date fixed for its payment (except where the same may be contested in good faith by appropriate proceeding and the Borrower maintains in accordance with generally accepted accounting principles appropriate reserves for any of the same), or if any lien shall be claimed which in the Bank's opinion may possibly create a valid obligation having priority over the security interest granted hereby, the Bank may pay such taxes, assessments, charges or claims, without notice to the Borrower, and the amount of such payment shall be charged to the Borrower and the Borrower shall repay the entire amount of such payment within five business days of its receipt of a notice to do so given by the Bank. The amount of any payment made pursuant to this Section shall become an obligation of the Borrower secured by the security interest granted hereby. 46 Section 8.03. Collection and Verifications of Collateral and Records. The Bank may at any time verify Borrower's Receivables utilizing an audit control company or any other agent of the Bank, which verification may include direct requests for verifications from the Borrower's customers and account debtors. At any time following the occurrence and continuance of an Event of Default, the Bank or the Bank's designee may notify customers or account debtors of the Bank's security interest in Receivables, collect them directly and charge the collection costs and expenses to Borrower's account, but, unless and until the Bank does so or gives Borrower other instructions, Borrower shall collect all Receivables for the Bank, receive all payments thereon for the Bank's benefit in trust as the Bank's trustee and immediately deliver them to the Bank in the original form with all necessary endorsements or, as directed by the Bank, deposit such payments as directed by the Bank. Promptly after the creation of any Receivables, Borrower shall provide the Bank with schedules describing all Receivables created or acquired by Borrower and shall execute and deliver confirmatory written assignments of such Receivables to the Bank, Borrower's failure to execute and deliver such schedules or written confirmatory assignments of such Receivables shall not affect or limit the Bank's security interest or other rights in and to the Receivables. Borrower shall furnish, at the Bank's request, copies of contracts, invoices or the equivalent, and any original shipping and delivery receipts for all merchandise sold or services rendered and such other documents and information as the Bank may require. Borrower shall also provide the Bank on a monthly (within thirty (30) days after the end of each month) or more frequent basis, as requested by the Bank, a detailed or aged trial balance of all of Borrower's existing Receivables specifying the names and balances due for each account debtor and such other information pertaining to the Receivables as the Bank may request. Borrower shall provide the Bank on a monthly (within thirty (30) days after the end of each month), or more frequent basis, as requested by the Bank, a summary report of Borrower's current Inventory, certified as true and accurate by Borrower's President or Chief Financial Officer, as well as an aged trial balance of Borrower's existing accounts payable. Borrower shall provide the Bank, as requested by the Bank, such other schedules, documents and/or information regarding the Collateral as the Bank may require. Section 8.04. Power of Attorney. Borrower hereby appoints the Bank or any other Person whom the Bank may designate as Borrower's attorney, with power to: (i) endorse Borrower's name on any checks, notes, acceptances, money orders, drafts or other forms of payment or security that may come into the Bank's possession; (ii) sign Borrower's name on any invoice or bill of lading relating to any Receivables, drafts against customers, schedules and assignments of Receivables, notices of assignment, financing statements and other public records, verifications of 47 account and notices to or from customers; (iii) verify the validity, amount or any other matter relating to any Receivable by mail, telephone, telegraph or otherwise with account debtors; (iv) on or after the occurrence of an Event of Default, execute customs declarations and such other documents as may be required to clear Inventory through Customs; (v) do all things necessary to carry out this Agreement and any Related Document; and (vi) on or after the occurrence and during the continuation of an Event of Default, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by the Bank, and to receive, open and dispose of all mail addressed to Borrower. Borrower hereby ratifies and approves all acts of the attorney. Neither the Bank nor the attorney will be liable for any acts or omissions or for any error of judgment or mistake of fact or law. This power, being coupled with an interest, is irrevocable so long as any Receivable which is assigned to the Bank or in which the Bank has a security interest remains unpaid and until the Obligations have been fully satisfied. Section 8.05. Further Assurances. (a) The Borrower agrees that from time to time, at the expense of the Borrower, the Borrower will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or appropriate, or that the Bank may request, in order to create, evidence, perfect or preserve any security interest granted or purported to be granted hereby or to enable the Bank to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Borrower will: (i) at the request of the Bank, mark conspicuously each chattel paper included in the Collateral and each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to the Bank, indicating that such chattel paper is subject to the security interest granted hereby; (ii) if any account shall be evidenced by a promissory note or other instrument or chattel paper, deliver and pledge to the Bank hereunder such note, instrument or chattel paper duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Bank; (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Bank may request, in order to create, evidence, perfect or preserve the security interests granted or purported to be granted hereby; and (iv) immediately deliver to the Bank, duly endorsed over to the Bank, all payments received from the City of New York, or any agency, instrumentality, department or branch thereof, whether they are in the form of checks, money orders, drafts, notes, bills of exchange, commercial paper or otherwise. 48 (b) The Borrower hereby authorizes the Bank to file one or more financing or continuation statements, and amendments thereto, (including, without limitation, any filings with the United States Copyright Office and/or United States Patent and Trademark Office or in any similar office or agency of the United States thereof or in any other appropriate jurisdiction) relative to all or any part of the Collateral without the signature of the Borrower where permitted by law. The Borrower hereby agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement where permitted by law. (c) The Borrower will furnish to the Bank from time to time, in addition to the information required to be delivered to the Bank by the other provisions of this Agreement, such statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Bank may reasonably request, all in reasonable detail. ARTICLE 9. FINANCIAL COVENANTS The Borrower covenants and agrees that, from and after the date of execution of this Agreement and so long as any amount may be borrowed hereunder or remains unpaid on account of the Note or is otherwise due to the Bank under this Agreement or any Related Document, it shall comply with each of the following covenants which shall be calculated for the Borrower based on a non- consolidating, stand alone basis: Section 9.01. Interest Coverage Ratio. The Interest Coverage Ratio shall be equal to or exceed as at the end of each Fiscal Quarter commencing with the Fiscal Quarter ending June 30, 1996, for such Fiscal Quarter, 1.0 to 1.0. Section 9.02. Maximum Indebtedness to Net Worth Ratio. As of the end of each Fiscal Quarter commencing March 31, 1996, the Indebtedness to Net Worth Ratio shall not exceed 2.25 to 1.0. Section 9.03. Net Income. Net Income shall not be less than the following amounts (which represent losses), for the following periods: (A) Period: Amount: 1/1/96 - 3/31/96 [$220,000] 4/1/96 - 6/30/96 [$60,000] 7/1/96 - 9/30/96 [$60,000] 10/1/96 - 12/31/96 $0 1/1/97 - 3/31/97 $0 4/1/97 - 6/30/97 $0 7/1/97 - 9/30/97 $0 49 For each Fiscal $0 Quarter thereafter (B) In addition, for the Fiscal Year ending September 30, 1996, the Net Income shall not be less than, in the aggregate, a loss of $200,000. Section 9.04. Minimum Net Worth. Net Worth shall not be less than, the following amount for the following periods: Period: Amount: 1/1/96 - 3/31/96 $8,100,000 4/1/96 - 6/30/96 $8,100,000 7/1/96 - 9/30/96 $8,200,000 10/1/96 - 12/31/96 $8,200,000 1/1/97 - 3/31/97 $8,200,000 4/1/97 - 6/30/97 $8,300,000 7/1/97 - 9/30/97 $8,400,000 For each Fiscal $8,450,000 Quarter thereafter Section 9.05. Maximum Capital Expenditures. During each of the Fiscal Years specified below, Capital Expenditures shall not exceed $500,000 per Fiscal Year. ARTICLE 10. EVENTS OF DEFAULT Section 10.01. Events of Default. Each of the following events or conditions shall constitute an Event of Default under this Agreement: (a) the Borrower shall fail to pay (i) when due any principal of any Loan (including mandatory prepayments), (ii) any interest on any Loan or any LOC Reimbursement Obligation within two Business Days after its due date, (iii) any Loans in excess of the lesser of the Commitment or the Formula Amount within two Business Days, or (iv) any other amount due and payable hereunder or with respect to any Loan within five Business Days after its due date, in each case in the manner provided herein; (b) any representation, warranty or statement given in this Agreement or in any Related Document by any party thereto or in any certificate, opinion, report, financial statement or other written statement furnished at any time pursuant to this Agreement shall prove to be or have been untrue or misleading in any material respect as of the date on which it is made or deemed to be made; (c) the Borrower shall fail to perform, keep or observe in any respect any covenant or condition contained in Articles 5, 6 50 or 7 of this Agreement or in the Lock-Box Agreement or Pledge Agreement, or the Bank shall not have at any time a prior, sole, first perfected lien and security interest (subject to Customary Permitted Liens) in all of the Collateral; (d) (i) the Borrower or any other party to a Related Document shall fail to perform, keep or observe in any respect any other term, provision, condition, covenant, waiver, warranty or representation contained in this Agreement or in any Related Document to which it is a party that is required to be performed, kept or observed by the Borrower, or any party to a Related Document other than the Bank, and such failure shall continue for a period of 30 days; (e) any of the Related Documents shall at any time for any reason cease to be in full force and effect or shall be declared to be null and void, or the validity or enforceability thereof shall be contested by any of the parties thereto (other than the Bank) or any of such parties shall deny that it has any or further liability or obligation thereunder; (f) a default shall occur and be continuing and not be waived in writing upon the expiration of any applicable grace period under any debt or lease agreement, document, or instrument (other than this Agreement or any Related Document) to which the Borrower is a party or by which the Borrower is bound, and such default has, or if continued would have, a material adverse effect on the management, business, assets, properties, operations, prospects or condition (financial or other) of the Borrower; (g) the Borrower permits one or more judgments against it in excess of $250,000 in the aggregate (to the extent that such amount is not covered by insurance) to remain unstayed, unbonded or not discharged for a period of more than 60 days, unless such judgment is being contested in good faith and the Borrower has established reserves in accordance with GAAP that are satisfactory to the Bank; (h) a substantial part of any of the operations or business of the Borrower is suspended other than in the ordinary course of its business, which suspension has a material adverse effect on the management, business, assets, properties, operations, prospects or condition (financial or other) of the Borrower; (i) the Borrower commences any case, proceeding or other action relating to it in bankruptcy or seeking reorganization, liquidation, dissolution, winding-up, arrangement, composition, compromise, readjustment of its debts or any other relief under any bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement, 51 composition, compromise, readjustment of debt or similar act or law of any jurisdiction, now or hereafter existing, or consents to; approves of, or acquiesces in, any such case, proceeding or other action, or applies for a receiver, trustee or custodian for itself or for all or a substantial part of its properties or assets, or makes an assignment for the benefit of creditors, or fails generally to pay its debts as they mature or admits in writing its inability to pay its debts as they mature, or is adjudicated insolvent or bankrupt; or (j) there is commenced against the Borrower any case or proceeding or any other action is taken against the Borrower in bankruptcy or seeking reorganization, liquidation, dissolution, winding-up, arrangement, composition, compromise, readjustment of its debts or any other relief under any bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement, composition, compromise, readjustment of debt or similar act or law of any jurisdiction, now or hereafter exist ing; or there is appointed a receiver, trustee or custodian for the Borrower or for all or a substantial part of its properties or assets; or there is issued a warrant of attachment, execution or similar process against any substantial part of the properties or assets of the Borrower; and any such event continues for 60 days undismissed, unbonded or undischarged; or (k) the occurrence of any Change in Control An Event of Default shall be deemed "continuing" until cured (if curable) or waived in writing in accordance with Section 11.06. For purposes of this Section 10.01 and Section 10.02, any Event of Default under Section 10.01(c) and (j) shall not be curable. Section 10.02. Remedies upon an Event of Default. (a) If any Event of Default shall have occurred and be continuing, the Bank may by notice to the Borrower (i) declare the commitment of the Bank to make Loans hereunder to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the Loans, all interest thereon, any accrued and unpaid fees and all other amounts payable hereunder or in respect of the Loans to be forthwith due and payable, whereupon they shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Borrower. Notwithstanding the foregoing, upon the occurrence of any of the events or conditions described in Section 10.01(i) or (j) above, the commitment of the Bank to make Loans shall automatically be terminated and the Loans, all interest thereon and all accrued and unpaid fees and all other amounts payable hereunder or in respect of the Loans shall im mediately become due and payable, without any requirement on the part of the Bank to give notice, or make declaration, of any kind regarding such Event of Default and without presentment, demand, 52 protest or any other requirement on the part of the Bank, all of which are hereby expressly waived by the Borrower. (b) The Bank may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under applicable law and also may do any or all of the following: (i) In the name of the Bank or in the name of the Borrower or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for, or make any compromise or settlement deemed desirable with respect to, any of the Collateral, but the Bank shall be under no obligation so to do, and the Bank may extend the time of payment, arrange for payment in installments, or otherwise modify the terms of, or release, any of the Collateral without thereby incurring responsibility to, or discharging or otherwise affecting any liability of, the Borrower. (ii) Enter upon the premises, or wherever the Collateral may be, and take possession thereof, and maintain such possession on the Borrower's premises, or demand and receive such possession from any person who has possession thereof, or remove the Collateral or any part thereof, to such other places as the Bank may desire, without any obli gation to pay the Borrower for any use and occupancy of such premises. (iii) Without notice except as specified below and with or without taking the possession thereof, sell, lease, assign, grant an option or options to purchase or otherwise dispose of the Collateral or any part thereof in one or more parcels at public or private sale, at any location chosen by the Bank, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as the Bank may deem commercially reasonable. The Borrower agrees that, to the extent notice of sale shall be required by law, at least five days' notice to the Borrower of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification, but notice given in any other reasonable manner or at any other reasonable time shall constitute reasonable notification. The Bank shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Bank may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. The Borrower agrees that the Bank shall have no obligation to preserve rights in the 53 Collateral against prior parties or to marshal any Col lateral for the benefit of any Person. The Bank is hereby granted a license or other right to use, without charge, the Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing advertising for the sale of, and the selling of any Collateral, and the Borrower's rights under all licenses and franchise agreements shall inure to the Bank's benefit. (iv) The Bank may, in addition to any other rights it may have under this Agreement or otherwise, appoint by instrument in writing a receiver or receiver and manager (both of which are herein called a "Receiver") of all or any part of the Collateral or may institute proceedings in any court of competent jurisdiction for the appointment of such a Receiver. Any such Receiver is hereby given and shall have the same powers and rights as the Bank has under this Agreement, at law or in equity. In exercising any such powers, any such Receiver shall act as and for all purposes shall be deemed to be the agent of the Borrower and the Bank shall not be responsible for any act or default of any such Receiver absent the gross negligence or wilful misconduct of the Bank or the Receiver. The Bank may appoint one or more Receivers hereunder and may remove any such Receiver or Receivers and appoint another or other in his or their stead from time to time. Any Receiver so appointed may be an officer or employee of the Bank. The Borrower agrees that any Receiver appointed by the Bank need not be appointed by, nor is his appointment required to be ratified by nor his actions in any way supervised by, a court. (v) Apply, without notice, any cash or cash items constituting Collateral in the possession of the Bank (constructive or otherwise) to payment of any of the obligations. (vi) The Bank may carry on or concur in the carrying on of, all or any part of the business or under takings of the Borrower and may, to the exclusion of all others, including the Borrower, enter upon, occupy and use all or any of the premises, buildings, plants and undertakings of or occupied or used by the Borrower and may use all or any of the Collateral of the Borrower for such time as the Bank sees fit, free of charge, to carry on the business of the Borrower and, if applicable, to manufacture or complete the manufacture of any Inventory and to pack and ship any Inventory. The Bank shall not be liable to the Borrower for any negligence in so doing or in respect of any 54 rent, charges, depreciation or damages incurred in connection with such actions. The Borrower waives, to the extent permitted by applicable law, all rights of the Borrower to prior notice and hearing under any other applicable statute or constitution. (c) All cash proceeds received by the Bank in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Bank, be held by the Bank as Collateral for, and/or then or at any time thereafter applied in whole or in part by the Bank against all or any part of the Obligations in such order as the Bank shall elect. Any surplus of such cash or cash proceeds held by the Bank and remaining after payment in full of all the Obligations shall be paid over to the Borrower or to whomsoever may be lawfully entitled to receive such surplus. ARTICLE 11. MISCELLANEOUS Section 11.01. Notices. All notices hereunder shall be in writing and shall be conclusively deemed to have been received and shall be effective except as explicitly noted hereinabove (a) on the day on which delivered if delivered personally, or transmitted by telex or telegram or telecopier, or (b) three business days after the date on which the same is mailed, and shall be addressed: (a) in the case of the Borrower, to: Vicon Industries, Inc. 525 Broad Hollow Road Melville, New York 11747 Attention: Arthur D. Roche With a copy: Schoeman, Marsh & Updike, LLP 60 East 42nd Street, Suite 3906 New York, New York 10165 Attention: Michael Schoeman, Esq. (b) in the case of the Bank, to: IBJ Schroder Bank & Trust Company One State Street New York, New York 10004 Attention: Kevin M. Madigan With a copy: Pryor, Cashman, Sherman & Flynn 55 410 Park Avenue New York, New York 10022 Attention: Lawrence Remmel or at such other address as the party giving such notice shall have been advised of in writing for such purpose by the party to which the same is directed. Section 11.02. Survival of this Agreement. All covenants, agreements, representations and warranties made herein, or in the Related Documents or in any certificate delivered pursuant hereto or thereto shall survive the execution by the Borrower and deliv ery to the Bank of this Agreement, the Note and the other Related Documents and the making and repayment of the Loans hereunder, and shall continue in full force and effect so long as any Obligations of any Borrower remain outstanding and unpaid or this Agreement remains in effect. Section 11.03. Indemnity. The Borrower agrees to defend, protect, indemnify and hold harmless the Bank and each of its Affiliates, officers, directors, employees, agents, attorneys and consultants (collectively called the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel for such indemnities whether or not such Indemnitees shall be designated a party thereto), imposed on, incurred by, or asserted against such Indemnitees (whether direct, indirect or consequential and whether based on any Federal, state or local, or foreign, laws or other statutory regulations, including, without limitation, Environmental Laws, securities and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise) in any manner relating to or arising out of this Agreement or any of the Related Documents, or any act, event or transaction related or attendant thereto or contemplated hereby, or any action or inaction by any Indemnitee under or in connection therewith, any commitment of the Bank hereunder, or the making of the Loans, or the management of such Loans, or the use or intended use of the proceeds of any Loan, advance or other financial accommodation provided hereunder including, in each such case, any allegation of any such matters, whether meritorious or not (collectively, the "Indemnified Matters"); provided, however, that the Borrower shall have any obligation to any Indemnitee hereunder with respect to Indemnified Matters directly caused by or resulting primarily from the willful misconduct or gross negligence of such Indemnitee. The covenants of the Borrower contained in this Section 11.03 shall survive the payment in full of all amounts due and payable under this Agreement or any of the Related 56 Documents and the full satisfaction of all other Obligations of the Borrower. Section 11.04. Costs, Expenses and Taxes. (a) The Borrower agrees to pay on demand (i) all reasonable costs and expenses in connection with the preparation, execution, delivery, filing, recording, and administration of this Agreement, each of the Related Documents, and any other documents, instruments or agreements which may be delivered in connection with this Agreement, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Bank, and local counsel who may be retained by said counsel, with respect thereto and with respect to advising the Bank as to its rights and responsibilities under this Agreement; provided; that the costs, fees and expenses in this clause (i) shall be limited to $15,000 excluding disbursements, (ii) all costs and expenses in connection with the audit, appraisal, valuation, investigation, and the creation, perfection, priority or protection of the Bank's Liens against the Collateral, including, without limitation, all costs and expenses (A) to pay or discharge taxes, liens, security interests or other encumbrances levied, placed or threatened against the Collateral and (B) for title and lien searches, filing and recording fees and taxes, duplication costs and corporate search fees, and (iii) all costs and expenses (including reasonable counsel fees and expenses) in connection with the enforcement and administration of this Agreement and each of the Related Documents and such other documents, instruments or agreements which may be delivered in connection with this Agreement. (b) Any and all payments by the Borrower under this Agreement or the Note shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Bank, taxes imposed on or in respect of its income (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Bank, (i) the sum payable shall be increased as may be necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section 11.04), the Bank receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (c) The Borrower further agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise in connection with 57 the execution and delivery of this Agreement, any of the Related Documents or any of the other instruments, documents or agreements executed and/or delivered in connection herewith or therewith, or any payment made hereunder or in connection herewith (hereinafter collectively referred to as "Other Taxes"). (d) The Borrower shall indemnify the Bank for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable by the Borrower under this Section 11.04) paid by the Bank and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. (e) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 11.04 shall survive the payment in full of all amounts due and payable under this Agreement or any of the Related Documents and the full satisfaction of all other Obligations of the Borrower. Section 11.05. Further Assurances. (a) At any time and from time to time, upon the request of the Bank, the Borrower shall execute, deliver and acknowledge, or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and things as the Bank may reasonably request in order to effect fully the intent and purposes of this Agreement and the Related Documents, and any other agreements, instruments and documents delivered pursuant hereto or in connection with the making of the Loans, in proper form for recording and otherwise in form and substance reasonably satisfactory to the Bank and its counsel. (b) The Borrower agrees that from time to time, at its expense, it shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or appropriate, or that the Bank may request, in order to create, evidence, perfect or preserve any security interest granted or purported to be granted hereby or by any Related Document or to enable the Bank to exercise and enforce its rights and remedies hereunder or under any Related Document with respect to any Collateral. Section 11.06. Amendment and Waiver. No amendment or waiver of any provision of this Agreement or any of the Related Documents, or any consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Neither any failure nor any delay on the part of the Bank in exercising any right, power or privilege hereunder or under any of the Related Documents shall 58 operate as a waiver thereof, nor shall a single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in the same, similar or other circumstances. Section 11.07. Marshalling, Recourse to Security: Payments Set Aside. The Bank shall not be under any obligation to marshal any assets in favor of the Borrower or any other party or against or in payment of any or all of the Obligations of the Borrower to the Bank hereunder or under the Related Documents or otherwise. Recourse to security shall not be required at any time. To the extent that the Borrower makes a payment or payments to the Bank, or the Bank enforces its security interests or exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor, shall be revised and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Section 11.08. Dominion Over Cash; Setoff. (A) The Bank shall, at all times, have sole dominion and control over all bank accounts of the Borrower established pursuant to the Lock-Box Agreement pursuant to the terms thereof. The Borrower shall take all action requested from time to time by the Bank as necessary or appropriate to carry out the provisions of this Section (A). (B) In addition to any rights and remedies of the Bank now or hereafter provided by law, the Bank shall have the right, without prior notice to the Borrower, any such notice being ex pressly waived by the Borrower to the extent permitted by applicable law, on the occurrence and during the continuation of any Event of Default to set off and apply against any Obligation, whether matured or unmatured, of the Borrower, any amount owing from the Bank to the Borrower, at or at any time after the hap pening of any such Event of Default, and such right of setoff may be exercised by the Bank against the Borrower or against any trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, receiver or execution, judgment or attach ment creditor, notwithstanding the fact that such right of setoff shall not have been exercised by the Bank before the making, fil ing or issuance, or service on the Bank of, or of notice of, any such event or proceeding. Section 11.09. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and 59 the Bank, and thereafter shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns; provided, however, that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Bank. Section 11.10. Applicable Law. This Agreement and the rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with, the substantive law of the State of New York, without regard to its choice of law provisions. Section 11.11. Consent to Jurisdiction and Service of Process; Waiver of Jury Trial. All judicial proceedings brought against the Borrower with respect to this Agreement or any Related Document may be brought in any state or federal court of competent jurisdiction in the State of New York and, by its execution and delivery of this Agreement, the Borrower accepts, for itself and in connection with its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts. The Borrower irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to its notice address specified in Section 11.01 hereof, such service to become effective five (5) days after such mailing. The Borrower irrevocably waives (a) trial by jury in any action or proceeding with respect to this Agreement or any Related Document, and (b) any objection (including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens) which it may now or hereafter have to the bringing of any such action or proceeding with respect to this Agreement or any Related Document in any jurisdiction set forth above. Section 11.12. Performance of Obligations. The Borrower acknowledges and agrees that the Bank may, but shall have no obligation to, make any payment or perform any act required of the Borrower under this Agreement or any Related Document or take any other action which the Bank in its discretion deems necessary or desirable to protect or preserve the Collateral, including, without liquidation, any action to pay or discharge taxes, Liens, security interests or other encumbrances levied or placed on or threaten any Collateral. Section 11.13. Assignment, Participations. The Bank may, at any time or times, assign (by novation), participate or syndicate its interests in the Loans and/or Letters of Credit without restriction. The Borrower agrees to cooperate with the Bank to effect assignments and/or participations made with respect hereto. 60 Section 11.14. Entire Agreement. This Agreement, taken together with all of the Related Documents and all certificates and other documents delivered by the Borrower to the Bank, embodies the entire agreement and supersedes all prior agreements, written and oral, relating to the subject matter hereof. Section 11.15. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction. Section 11.16. Execution of Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. 61 VICON INDUSTRIES, INC. By: Name: Kenneth M. Darby Title: President IBJ SCHRODER BANK & TRUST COMPANY By: Name: Kevin M. Madigan Title: Vice President 62 Schedule 7.01(g) (Indebtedness) 1. Borrower's Guaranty of the Mortgage of Vicon Industries (UK) Limited to Chugai Boyeki Company Limited, dated , which as of December 27, 1995, approximately $369,000 pounds sterling remains outstanding under the Mortgage. 2. $1,000,000 Release Fee, which has been reduced to approximately $666,000 as of December 27, 1995, payable by the Borrower, pursuant to Paragraph 9 of the Consent of Overlandlord/Release Agreement between the Borrower and Allan V. Rose, dated January 1, 1993 which Release Fee becomes due pursuant to the Borrower's receipt of a Vacate Notice in connection with AVR Mart, Inc.'s option under paragraph 5 of the sublease dated as of January 1, 1993 between the Borrower and AVR Mart, Inc. or Allan V. Rose's right of termination under paragraph 8 of such Consent of Overlandlord/Release Agreement. 3. Borrower's Guaranty of the $700,000 pounds sterling Loan Agreement between Vicon Industries (UK) Limited and National Westminster Bank, PLC, to National Westminster Bank, PLC, dated . 63 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT dated as of December 27, 1995 made by VICON INDUSTRIES, INC. (the "Pledgor"), in favor of IBJ SCHRODER BANK & TRUST COMPANY, a New York banking corporation (the "Pledgee"), W I T N E S S E T H: WHEREAS, the Pledgor is the beneficial and record owner of all of the issued and outstanding shares (the "Shares") of Vicon Industries (UK) Limited ("Vicon UK") and Vicon Industries Foreign Sales Corporation ("Vicon Foreign", and together with Vicon UK, the "Companies"), which Shares are set forth on Schedule 1 hereto (the "Pledged Shares"); and WHEREAS, the Pledgor has entered into a Credit and Security Agreement dated as of the date hereof (as it may hereafter be amended, extended, supplemented, modified or restated form time to time, the "Credit Agreement"; with the capitalized terms used herein, and not otherwise defined herein, having the meanings ascribed to them in the Credit Agreement) between the Pledgor and the Pledgee, pursuant to which the Pledgor has executed a $4,000,000 Note dated as of the date hereof in favor of the Pledgee (collectively, the "Note"); and WHEREAS, as a condition precedent to the Pledgee entering into the Credit Agreement, the Pledgee has required the Pledgor to grant, assign and pledge, and the Pledgor has agreed to grant, assign and pledge, to the Pledgee, a continuing first priority security interest in and to all its rights, title and interests in the Pledged Collateral (as hereinafter defined) to secure all of the obligations of the Pledgor to the Pledgee under the Credit Agreement, the Note and the other Related Documents; NOW, THEREFORE, the Pledgor, intending to be bound hereby, in consideration of the premises hereof, in order to induce the Pledgee to provide the Loans under and in accordance with the terms of the Credit Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby agrees with, and for the benefit of, the Pledgee as follows: SECTION 1. Pledge. The Pledgor hereby pledges and assigns to the Pledgee and grants to the Pledgee a continuing first and prior security interest in all of its rights, title and interests in and to the Pledged Shares of the Companies, whether now owned or existing or hereafter acquired or arising, including, without limitation, all income, cash, dividends or other distributions received therefrom, and all proceeds thereof, including, without 64 limitation, proceeds received from any sale, financing or refinancing above the existing amount of debt so refinanced, and all products, substitutions, additions, changes and replacements thereof (all of the same being herein referred to as the "Pledged Collateral"). SECTION 2. Security for Obligations. This Agreement secures (a) the indefeasible payment of all liabilities, obligations and indebtedness of any and every kind and nature heretofore, now or hereafter owing, arising, due or payable from the Pledgor to the Pledgee pursuant to the Credit Agreement, the Note and all other Related Documents to which the Pledgor is a party, however evidenced, created, incurred, acquired or owing, whether for principal, interest, fees, indemnification, expenses or otherwise, whether primary or secondary, direct or indirect, joint or several, contingent or fixed, or otherwise, including, without limitation, obligations of performance, now or hereafter given by the Pledgor to the Pledgee and whether arising by book entry, oral agreement or operation of law (all such obligations and liabilities described in the foregoing clauses (a) and (b) above being hereinafter collectively referred to as the "Obligations"). The Pledgor and the Pledgee hereby agree that they intend the security interest hereby granted to attach upon the execution of this Agreement. SECTION 3. Delivery of Pledged Collateral. (A) All certificates or instruments representing or evidencing the Pledged Collateral as of the date hereof or should the Pledged Collateral at any time be represented or evidenced by a certificate or instrument, such certificates or instruments shall be delivered to and held by or on behalf of the Pledgee pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Pledgee. Upon the maturity of the Loans or upon the occurrence and continuation of an Event of Default under the Credit Agreement and/or the other Related Documents (any such event being an "Acceleration Default"), the Pledgee shall have the right, at any time in its discretion and without notice to the Pledgor, to transfer to or to register in the name of the Pledgee or any of its nominees any or all of the Pledged Collateral. In addition, the Pledgee shall have the right at any time to exchange certificates or instruments representing or evidencing the Pledged Collateral for certificates or instruments of smaller or larger denominations. (B) Should the Pledged Collateral at any time not be represented or evidenced by a certificate or instrument, the books and records of the Companies shall be marked to reflect the pledge and security interests granted to the Pledgee under this Agreement. 65 SECTION 4. Representations and Warranties. The Pledgor hereby represents and warrants to the Pledgee as follows: (a) The Pledged Shares have been duly authorized and validly issued, are fully paid and non-assessable and represent, as of the date hereof, 100% of the issued and outstanding capital stock of the Companies; and the Companies have no other outstanding securities, and no warrants, subscription rights or options are outstanding with respect thereto. (b) The Pledgor is the legal and beneficial owner of the Pledged Collateral, free and clear of any Liens, adverse claims, security interests, options or other charges or encumbrances, except for the security interests created by this Agreement and security interests permitted pursuant to the terms of the Credit Agreement. (c) The pledge of the Pledged Collateral pursuant to this Agreement creates a valid and perfected continuing first priority security interest in the Pledged Collateral, securing the indefeasible payment and performance of the Obligations. (d) No authorization, consent, approval or other action by, and no notice to or filing with, any governmental authority, regulatory body or other Persons is required to be obtained or made by the Pledgor either (i) for the pledge by the Pledgor of the Pledged Collateral pursuant to this Agreement or for the execution, delivery or performance of this Agreement by the Pledgor, or (ii) for the exercise by the Pledgee of the voting or other rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement, subject to applicable state and federal securities laws. (e) There are no restrictions on the transfer of the Pledged Collateral, except such, if any, as are imposed by operation of law or court order, and there are no options, warrants or rights pertaining thereto. The Pledgor has the right to transfer the Pledged Collateral free of any encumbrances and without the consent of the creditors of the Pledgor (other than the Pledgee), any persons or any governmental agency whatsoever. (f) Neither the execution or delivery of this Agree ment, nor the consummation of the transactions contemplated here by, nor the compliance with or performance of the terms and con ditions of this Agreement by the Pledgor is prevented by, limited by, conflicts with or will result in the breach or violation of or a default under the terms, conditions or provisions of (i) the by-laws or the certificate of incorporation (or an equivalent organizational document) of the Pledgor or the Companies or any agreement among the shareholders of the Pledgor or the Companies, (ii) any mortgage, security agreement, indenture, evidence of 66 indebtedness, loan or financing agreement, trust agreement or other agreement or instrument to which the Pledgor is a party or by which it is bound, or (iii) any provision of law, any order of any court or administrative agency or any rule or regulation applicable to the Pledgor, subject to applicable state and federal securities laws. (g) This Agreement constitutes the legal, valid and binding obligation of the Pledgor, enforceable in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, reorganization or moratorium or similar laws affecting the rights of creditors generally. (h) Any assignee of all or any portion of the Pledged Collateral is entitled to receive payments with respect thereto without any defense, counterclaim, setoff, abatement, reduction, recoupment or other claim arising out of the actions of the Pledgor. (i) There are no actions, suits or proceedings (whether or not purportedly on behalf of the Pledgor) pending or, to the best knowledge of the Pledgor, threatened affecting the Pledgor that involve the Pledged Collateral, this Agreement, the Credit Agreement, the Note or any of the other Related Documents. (j) All consents or approvals, if any, required as a condition precedent to or in connection with the due and valid execution, delivery and performance by the Pledgor of this Agreement have been obtained, subject to applicable state and federal securities laws. SECTION 5. Further Assurances. The Pledgor hereby agrees that at any time and from time to time, at its expense, the Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be reasonably necessary or desirable, or that the Pledgee may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Pledgee to exercise and enforce its rights and remedies hereunder, subject to applicable state and federal securities laws, with respect to any Pledged Collateral. SECTION 6. Voting Rights; Distributions, Etc. (a) So long as no Acceleration Default shall have occurred and be continuing: (i) The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement, the Credit Agreement or any other Related Document to which the Pledgor is a party; provided, however, that the Pledgor shall give the Pledgee prior written notice whenever the Pledgor shall 67 exercise or refrain from exercising any such voting or other consensual right if such action would have a material adverse effect on the value of the Pledged Collateral or any part thereof. (ii) The Pledgor shall be entitled to receive and retain any and all income, dividends and interest paid in respect of the Pledged Collateral; provided, however, that any and all: (A) income, dividends and distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral; (B) income, dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of contributed capital, capital surplus or paid-in-surplus; and (C) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Pledged Collateral, shall be forthwith delivered to the Pledgee to hold as, Pledged Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Pledgee, be segregated from the other property or funds of the Pledgor, and be forthwith delivered to the Pledgee as Pledged Collateral in the same form as so received (with all necessary endorsements). (iii) The Pledgee shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the voting and other rights which it is entitled to exercise pursuant to clause (i) above and to receive the income, dividends or interest payments which it is authorized to receive and retain pursuant to clause (ii) above. (b) Upon the occurrence and during the continuance of an Acceleration Default: (i) All rights of the Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 6(a)(i) hereof and to receive the income, dividends and interest payments which they would otherwise be authorized to receive and retain 68 pursuant to Section 6(a)(ii) hereof shall cease, and all such rights shall thereupon become vested in the Pledgee who shall thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Pledged Collateral such income, dividends and interest payments. (ii) All income, dividends and interest payments which are received by the Pledgor contrary to the provisions of clause (i) of this Section 6(b) shall be received in trust for the benefit of the Pledgee, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Pledgee as Pledged Collateral in the same form as so received (with all necessary endorsements). SECTION 7. Transfers and Other Liens; Additional Interests. The Pledgor hereby agrees that it will not (i) sell or otherwise transfer or dispose of, or grant any interest in or option with respect to, any of the Pledged Collateral, or (ii) create or permit to exist any Lien, security interest, or other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for the security interests under this Agreement and if allowed pursuant to the terms of the Credit Agreement. SECTION 8. Litigation Respecting the Pledged Collateral. In the event any action, suit or other proceeding at law, in equity, in arbitration or before any other authority involving or affecting the Pledged Collateral becomes known to or is contemplated by the Pledgor, the Pledgor shall give the Pledgee immediate notice thereof and if the Pledgor is contemplating such action, suit or other proceeding, the Pledgor shall be required to receive the written consent of the Pledgee prior to commencing any such action, suit or other proceeding, which consent shall not be unreasonably withheld or delayed. SECTION 9. Pledgee Appointed Attorney-in-Fact. (a) The Pledgor hereby appoints the Pledgee (and any officer or agent of the Pledgee with full power of substitution and revocation) the Pledgor's true and lawful attorney-in-fact, coupled with an interest, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Pledgee's discretion to (i) if an Acceleration Default is continuing, take any action and to execute any instrument which the Pledgee may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, (I) to receive, endorse and collect all instruments made payable to the Pledgor representing any income, dividend or other distribution in respect of the Pledged Collateral or any part or proceeds thereof and to give full discharge for the same; and (II) to transfer the Pledged Collateral, in whole or in part, to the name of the Pledgee or such other Person or Persons as the 69 Pledgee may designate; take possession of and endorse any one or more checks, drafts, bills of exchange, money orders or any other documents received on account of the Pledged Collateral; collect, sue for and give acquittances for moneys due on account of the foregoing; withdraw any claims, suits, or proceedings pertaining to or arising out of the foregoing; take any other action contemplated by this Agreement; and sign, execute, acknowledge, swear to, verify, deliver, file, record and publish any one or more of the foregoing, and (ii) at any time execute and record or file on behalf of the Pledgor any evidence of a security interest contemplated by this Agreement and any refilings, continuations or extensions thereof. (b) The powers of attorney which shall be granted pur suant to Section 9(a) hereof and all authority thereby conferred shall be granted and conferred solely to protect the Pledgee's interests in the Pledged Collateral and shall not impose any duty upon the attorney-in-fact to exercise such powers. Such powers of attorney shall be irrevocable prior to the indefeasible payment and performance in full of the Obligations and shall not be terminated prior thereto or affected by any act of the Pledgor or by operation of law, including, but not limited to, dissolution, death, disability or incompetency of any Person, the termination of any trust, or the occurrence of any other event, and if the Pledgor should become bankrupt, insolvent, or come under the direct regulation of similar laws which affect the rights of creditors generally or any other event should occur before the indefeasible payment and performance in full of the Obligations and termination of the Credit Agreement, the Note and the other Related Documents, such attorney-in-fact shall nevertheless be fully authorized to act under such powers of attorney as if such event had not occurred and regardless of notice thereof. SECTION 10. Pledgee May Perform. If the Pledgor fails to perform any agreement contained herein, the Pledgee may itself perform, or cause performance of, such agreement, and the expenses of the Pledgee incurred in connection therewith shall be payable by the Pledgor under Section 13 hereof. SECTION 11. Reasonable Care. The Pledgee shall be deemed to have exercised reasonable care in the custody and preservation of the Pledged Collateral in its possession if the Pledged Col lateral is accorded treatment substantially equal to that which the Pledgee accords its own property, it being understood that the Pledgee shall not have any responsibility for (i) ascertain ing or taking action with respect to calls, conversions, ex changes, maturities, tenders or other matters relative to any Pledged Collateral, whether or not the Pledgee has or is deemed to have knowledge of such matters, or (ii) taking any necessary steps to preserve rights against any parties with respect to any Pledged Collateral. 70 SECTION 12. Remedies Upon Acceleration Default. (a) If any Acceleration Default shall have occurred and be continuing: (i) The Pledgee may notify the obligors or other parties, if any, interested in any items of Pledged Col lateral of the interests of the Pledgee therein and of any action proposed to be taken with respect thereto, and inform any of those parties that all payments otherwise payable to the Pledgor with respect thereto shall be made by the Pledgee until all amounts due under the Credit Agreement, the Note and the other Related Documents have been indefeasibly paid in full; (ii) The Pledgee may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code (the "Code") in effect in the State of New York at that time, and the Pledgee may also, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Pledgee's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Pledgee may deem commercially reasonable. The Pledgor hereby agrees that, to the extent notice of sale shall be required by law, at least five days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Pledgee shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. The Pledgee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned; (iii) Any cash held by the Pledgee as Pledged Collateral and all cash proceeds received by the Pledgee in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral may, in the discretion of the Pledgee, be held by the Pledgee as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Pledgee pursuant to Section 13 hereof) in whole or in part by the Pledgee against, all or any part of the Obligations in such order as the Pledgee shall elect. Any surplus of such cash or cash proceeds held by the Pledgee and remaining after the indefeasible payment in full of all the Obligations shall be paid over to the Pledgor or to 71 whomsoever may lawfully entitled to receive such surplus; and (iv) The Pledgee may otherwise use or deal from time to time with the Pledged Collateral, in whole or in part, in all respects as if the Pledgee were the outright owner thereof. (b) Except as set forth in Section 12(a)(iii) hereof, the Pledgee shall have the sole right to determine the order in which Obligations shall be deemed discharged by the application of the Pledged Collateral or any other property or money held hereunder or any amount realized thereon. Any requirement of reasonable notice imposed by law shall be deemed met if such notice is in writing and is mailed, teletransmitted or hand delivered to the Pledgor at least five days prior to the sale, disposition or other event giving rise to such notice requirement. (c) The Pledgee shall collect the cash proceeds received from any sale or other disposition or from any other source contemplated by and in accordance with Subsection (a) above and shall apply the full proceeds in accordance with the provisions of this Agreement. (d) Notwithstanding the foregoing, none of the provi sions of this Section 12 shall confer on the Pledgee any rights or privileges that are not permissible under applicable law. (e) In connection with the provisions of this Agree ment, the Pledgor from time to time shall promptly execute and deliver, or cause to be executed and delivered, to the Pledgee such documents and instruments, shall join in such notices and shall take, or cause to be taken, such other lawful actions as the Pledgee shall deem necessary or desirable to enable it to exercise any of the rights with respect to the Pledged Collateral granted to it pursuant to this Agreement. SECTION 13. Expenses. The Pledgor will, upon demand, pay to the Pledgee the amount of all expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Pledgee may incur in connection with (i) the perfection, custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (ii) the exercise or enforcement of any of the rights of the Pledgee hereunder, (iii) the failure by the Pledgor to perform or observe any of the provisions hereof, or (v) any actual or attempted sale, assignment of rights or interests, or exchange of, or any enforcement, collection, compromise or settlement respecting the Pledged Collateral or any other property or money held hereunder, or any other action taken by the Pledgee hereunder whether directly or as attorney-in-fact 72 pursuant to the power of attorney herein conferred, and all such expenses shall be deemed a part of the Obligations for all purposes of this Agreement and the Pledgee may apply the Pledged Collateral or any other property or money held hereunder to payment of or reimbursement of itself for such expenses. The Pledgor shall pay all such expenses on demand, together with interest thereon from the date the expense is paid or incurred by the Pledgee at an interest rate equal to that under the Note (computed on the basis of the actual number of days elapsed over a 360-day year). SECTION 14. Waivers and Amendments, Etc. The rights and remedies given hereby are in addition to all others however arising, but it is not intended that any right or remedy be exer cised in any jurisdiction in which such exercise would be pro hibited by law. No action, failure to act or knowledge of the Pledgee shall be deemed to constitute a waiver of any power, right or remedy hereunder, nor shall any single or partial exer cise thereof preclude any further exercise thereof or the exer cise of any other power, right or remedy. Any waiver or consent respecting any covenant, representation, warranty or other term or provision of this Agreement shall be effective only in the specified instance and for the specific purpose for which given and shall not be deemed, regardless of frequency given, to be a further or continuing waiver or consent. The failure or delay of the Pledgee at any time or times to require performance of, or to exercise its rights with respect to, any representation, war ranty, covenant or other term or provision of this Agreement in no manner shall affect its rights at a later time to enforce any such provision. No notice to or demand on a party in any case shall entitle such party to any other or further notice or demand in the same, similar or other circumstances. Any right or power of the Pledgee hereunder respecting the Pledged Collateral and any other property or money held hereunder may at the option of the Pledgee be exercised as to all or any part of the same and the term the "Pledged Collateral" wherever used herein, unless the context clearly requires otherwise, shall be deemed to mean (and shall be read as) the "Pledged Collateral and any other property or money held hereunder or any part thereof". This Agreement shall not be amended nor shall any right hereunder be deemed waived except by a written agreement expressly setting forth the amendment or waiver and signed by the party against whom or which such amendment or waiver is sought to be charged. SECTION 15. Notices. Any notice or other communication to be given or made to the Pledgee hereunder shall be sent or otherwise communicated to the Pledgee at: IBJ Schroder Bank & Trust Company, One State Street, New York, New York 10004, attention: Kevin M. Madigan, with a copy to Messrs. Pryor, Cashman, Sherman & Flynn, 410 Park Avenue, New York, New York 10022, attention: Lawrence Remmel, or such other address and/or for such other attention as may be notified to the Pledgor in 73 accordance with this Section 15. Any notice or other communication to be given to the Pledgor shall be sent or otherwise communicated to the Pledgor at: Vicon Industries, Inc., 525 Broad Hollow Road, Melville, New York 11747, attention: Arthur D. Roche, with a copy to Schoeman, Marsh & Updike, LLP, 60 East 42nd Street, Suite 3906, New York, New York 10165 attention: Michael Schoeman, Esq., or such other address and/or for such other attention as may be notified to the Pledgee in accordance with this Section 15. Any notice or other communication to be given or made pursuant to this Agreement may be given or made by personal delivery, or by overnight courier, or by postage prepaid, registered or certified first class mail, return receipt requested, or by telecopy. All notices or other communications to be given or made pursuant to this Agreement shall be deemed to have been given or made when received as established, in the case of delivery by overnight courier, on the next Business Day and, in the case of delivery by mail, five Business Days after mailing. SECTION 16. Continuing Security Interest. This Agreement shall create a continuing first priority security interest in the Pledged Collateral and shall (i) remain in full force and effect until the indefeasible payment in full or performance of the Obligations, (ii) be binding upon the Pledgor, its successors and assigns and (iii) inure to the benefit of the Pledgee and its successors, transferees and assigns. Upon the indefeasible payment in full or performance of the Obligations, the Pledgor shall be entitled to the return, upon its request and at its expense, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms of this Agreement. SECTION 17. Severability. In the event that any provision of this Agreement shall be determined to be superseded, invalid or otherwise unenforceable pursuant to applicable law, such determination shall not affect the validity of the remaining provisions of this Agreement, and the remaining provisions of this Agreement shall be enforced as if the invalid provision were deleted. SECTION 18. Survival of Representations, etc. All representations, warranties, covenants and other agreements made herein shall survive the execution and delivery of this Agreement and shall continue in full force and effect until all amounts due under the Credit Agreement, the Note and the other Related Documents have been indefeasibly paid in full. This Agreement shall remain and continue in full force and effect without regard to any modification, execution, renewal, amendment or waiver of any provision of any of the Credit Agreement, the Note and the other Related Documents. 74 SECTION 19. Termination and Miscellaneous Provisions. This Agreement shall continue in full force and effect until all of the Obligations shall have been indefeasibly paid and satisfied. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, and assigns. Section headings used herein are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. This Agreement may be executed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 20. Entire Agreement. This Agreement, the Credit Agreement and the other Related Documents contain the entire agreement of the parties and supersedes all other agreements, understandings and representations, oral or otherwise, between the parties with respect to the matters contained herein. SECTION 21. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to its conflict of laws provisions. Unless otherwise defined herein or in the Credit Agreement, terms defined in Article 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. 75 IN WITNESS WHEREOF, the Pledgor, and the Pledgee have each caused this Agreement to be duly executed and delivered as of the date first above written. VICON INDUSTRIES, INC. By: Name: Kenneth M. Darby Title: President IBJ SCHRODER BANK & TRUST COMPANY By: Name: Kevin M. Madigan Title: Vice President The undersigned hereby acknowledges receiving notice of, and consents to, the foregoing Pledge Agreement and agrees to recognize all of the rights granted to the Pledgee therein and, to the full extent of its ability, to take all actions reasonably necessary to effectuate said rights and the purposes of the Pledge Agreement, as requested by the Pledgee pursuant to the terms thereof. Date: December 27, 1995 VICON INDUSTRIES (UK) LIMITED By: Name: Kenneth M. Darby Title: Secretary VICON INDUSTRIES FOREIGN SALES CORPORATION By: Name: Kenneth M. Darby Title: President 76 SCHEDULE 1 PLEDGED SHARES I. VICON INDUSTRIES (UK) LIMITED Name of Holder: No. of Shares: Certificate No.: Issue Date: Vicon Industries, Inc. 750 1 June 24, 1981 Vicon Industries, Inc. 74,250 2 October 10, 1981 II. VICON INDUSTRIES FOREIGN SALES CORPORATION Name of Holder: No. of Shares: Certificate No.: Issue Date: Vicon Industries, Inc. 100 1 January 1, 1985 77 VICON INDUSTRIES, INC. OFFICER'S CERTIFICATE Pursuant to the terms of the Credit and Security Agreement dated as of December 27, 1995, between Vicon Industries, Inc. (the "Borrower") and IBJ Schroder Bank & Trust Company (the "Agreement"), the undersigned officer of the Borrower hereby certifies, in his capacity as Executive Vice President of the Borrower, as set forth below. Terms used herein which are defined in the Agreement have the respective meanings specified in the Agreement. 1. The representations and warranties of the Borrower contained in the Agreement and in each of the other Related Documents are true and correct on and as of the date hereof. 2. The Borrower has duly performed and complied with all the terms, provisions and conditions set forth in the Agreement , including, without limitation, each of the financial covenants contained in Article IX, or in any other Related Document to which it is a party on its part to be observed or performed. 3. No Default or Event of Default has occurred and is continuing, or would result from the execution, delivery and performance by the Borrower of the Agreement or any of the other Related Documents to which they are a party. 4. Neither the Borrower nor any of its Subsidiaries are in default in the payment or performance of any of their respective obligations under any mortgage, indenture, security agreement, contract, undertaking or other agreement or instrument to which they are a party or which purports to be binding upon them or any of their respective properties or assets, which default would have a material adverse effect on the management, business, operations, properties, assets or condition (financial or otherwise) of the Borrower or such Subsidiary, as applicable. 5. The Borrower and each of its Subsidiaries are in compliance with all applicable statutes, laws, rules, regulations, orders and judgements, the contravention or violation of which would have a material adverse effect on the management, business, operations, properties, assets or condition (financial or otherwise) of the Borrower or such, as applicable. 6. There has occurred no material adverse change in the business or assets, or in the condition (financial or otherwise) of the Borrower since November 24, 1995, the date of the last financial statements previously delivered to the Bank. 7. There are no litigation or administrative proceedings, of or before any court or governmental body or agency now pending, nor, to 78 the best knowledge of the undersigned upon reasonable inquiry, now threatened against the Borrower or any of its respective properties, nor, to the best knowledge of the undersigned upon reasonable inquiry, is there a valid basis for the initiation of any such litigation or proceeding, which if adversely determined would have a material adverse effect on the business, assets or condition (financial or otherwise) of the Borrower. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 27th day of December, 1995. VICON INDUSTRIES, INC. By: Name: Arthur D. Roche Title: E.V.P. 79 VICON INDUSTRIES, INC. RESOLUTIONS OF THE BOARD OF DIRECTORS The undersigned, being the sole members of the Directors of Vicon Industries, Inc., a New York corporation (the "Corporation") do hereby adopt the following resolutions: RESOLVED, that (i) the Credit and Security Agreement dated as of the date hereof (the "Credit Agreement") between the Corporation and IBJ Schroder Bank & Trust Company (the "Bank"), (ii) the $4,000,000 Promissory Note (the "Note") from the Corporation to the Bank, (iii) the Pledge Agreement dated as of the date hereof (the "Pledge Agreement") between the Corporation and the Bank, (iv) the Lock-Box Agreement dated as of the date hereof (the "Lock-Box Agreement") between the Corporation and the Bank, and (v) any other documents or certificates required pursuant to the terms and conditions of the Credit Agreement, each in a substantially final form previously delivered to the Directors of the Corporation, are hereby approved; and further RESOLVED, that the appropriate officers of the Corporation be, and they hereby are, authorized and directed to execute and deliver for and on behalf of the Corporation the Credit Agreement, the Note, the Pledge Agreement, the Lock-Box Agreement and other documents and certificates required pursuant to the terms and conditions of the Credit Agreement, with such further changes therein and modifications thereof as the officers executing the same shall, in their sole discretion, approve, and all instruments, documents, agreements or financing statements which such officers determine are necessary or desirable to effectuate the performance of such Credit Agreement, Note, Pledge Agreement, Lock-Box Agreement and other documents and certificates required pursuant to the terms and conditions of the Credit Agreement, such approval to be conclusively evidenced by their execution and deliver thereof, and to affix the corporate seal of the Corporation thereto, where applicable; and further RESOLVED, that this Resolution be filed with the minutes of proceedings of the Board of Directors of the Corporation. 80 Dated: December 27, 1995 81 REVOLVING CREDIT NOTE $4,000,000 DECEMBER 27, 1995 NEW YORK, NEW YORK FOR VALUE RECEIVED, VICON INDUSTRIES, INC., A NEW YORK CORPORATION (THE "BORROWER"), PROMISES TO PAY TO THE ORDER OF IBJ SCHRODER BANK & TRUST COMPANY (THE "BANK") ON THE COMMITMENT EXPIRATION DATE SPECIFIED IN THE AGREEMENT HEREINAFTER REFERRED TO, AT THE OFFICE OF THE BANK LOCATED AT ONE STATE STREET, NEW YORK, NEW YORK, OR AT SUCH OTHER PLACE AS THE BANK MAY SPECIFY FROM TIME TO TIME, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA AND IN IMMEDIATELY AVAILABLE FUNDS, THE PRINCIPAL SUM OF THE LESSER OF (A) FOUR MILLION DOLLARS ($4,000,000), AND (B) THE AGGREGATE UNPAID PRINCIPAL AMOUNT OF ALL LOANS MADE BY THE BANK TO THE BORROWER PUR SUANT TO SECTION 2.02 OF THE AGREEMENT. THE BORROWER FURTHER PROMISES TO PAY INTEREST IN LIKE MONEY AND FUNDS TO THE BANK AT ITS OFFICE SPECIFIED ABOVE ON THE UNPAID PRINCIPAL AMOUNT OF THE LOANS FROM AND INCLUDING THE DATE THEREOF UNTIL PAYMENT IN FULL AT THE RATE OR RATES AND ON THE DATES DETERMINED IN ACCORDANCE WITH THE TERMS OF THE AGREEMENT. THE BANK IS HEREBY AUTHORIZED TO RECORD THE DATE, AMOUNT AND INTEREST RATE OF EACH LOAN EVIDENCED BY THIS NOTE AND THE DATE AND AMOUNT OF EACH PAYMENT OR PREPAYMENT OF PRINCIPAL HEREOF ON THE SCHEDULE ANNEXED HERETO AND MADE A PART HEREOF, OR ON A CONTINUATION THEREOF WHICH SHALL BE ATTACHED HERETO AND MADE A PART HEREOF, AND ANY SUCH NOTATION SHALL BE CONCLUSIVE AND BINDING FOR ALL PURPOSES ABSENT MANIFEST ERROR; PROVIDED, HOWEVER, THAT FAILURE BY THE BANK TO MAKE ANY SUCH NOTATION SHALL NOT AFFECT THE OBLIGATIONS OF THE BORROWER HEREUNDER OR UNDER THE AGREEMENT. IF ANY PAYMENT ON THIS NOTE BECOMES DUE AND PAYABLE ON A DAY OTHER THAN A BUSINESS DAY (AS DEFINED IN THE AGREEMENT), THE PAYMENT THEREOF SHALL BE EXTENDED TO THE NEXT SUCCEEDING BUSINESS DAY, AND, WITH RESPECT TO PAYMENTS OF PRINCIPAL, INTEREST THEREON SHALL BE PAYABLE AT THE THEN APPLICABLE RATE DURING SUCH EXTENSION. THIS NOTE IS THE NOTE REFERRED TO IN THE CREDIT AND SECURITY AGREEMENT, DATED AS OF THE DATE HEREOF, BETWEEN THE BORROWER AND THE BANK (AS THE SAME MAY BE AMENDED, SUPPLEMENTED OR OTHERWISE MODIFIED, THE "AGREEMENT"), AND IS ENTITLED TO THE BENEFITS THEREOF AND IS SUBJECT TO OPTIONAL AND MANDATORY PREPAYMENT IN WHOLE OR IN PART AS PROVIDED THEREIN. TERMS USED BUT NOT DEFINED IN THIS NOTE HAVE THE RESPECTIVE MEANINGS ASSIGNED TO THEM IN THE AGREEMENT. THE BORROWER SHALL USE ALL OF THE PROCEEDS OF THE LOANS IN ACCORDANCE WITH SECTION 2.10 OF THE AGREEMENT. UPON THE OCCURRENCE OF ANY ONE OR MORE OF THE EVENTS OF DEFAULT SPECIFIED IN THE AGREEMENT, ALL AMOUNTS THEN REMAINING 82 UNPAID ON THIS NOTE MAY BE DECLARED TO BE OR MAY AUTOMATICALLY BECOME IMMEDIATELY DUE AND PAYABLE AS PROVIDED IN THE AGREEMENT. PRESENTMENT FOR PAYMENT, DEMAND, NOTICE OF DISHONOR, PROTEST, NOTICE OF PROTEST AND ALL OTHER DEMANDS AND NOTICES IN CONNECTION WITH THE DELIVERY, PERFORMANCE AND ENFORCEMENT OF THIS NOTE ARE HEREBY WAIVED, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THE AGREEMENT. NOTWITHSTANDING ANY PROVISIONS CONTAINED HEREIN OR IN THE AGREEMENT TO THE CONTRARY, THE INDEBTEDNESS EVIDENCED BY THIS NOTE SHALL NOT (I) BE SUBORDINATED TO CLAIMS OF ANY TRADE CREDITORS OF THE BORROWER OR (II) BE SUBORDINATED IN RIGHT OF PAYMENT TO THE PAYMENT OF ANY EXISTING OR FUTURE UNSECURED INDEBTEDNESS OF THE BORROWER. THE OBLIGATIONS OF THE BORROWER TO MAKE PAYMENTS WHEN DUE OF ANY MOUNT OWING UNDER THIS NOTE ARE ENTITLED TO THE BENEFITS OF THE COLLATERAL SECURITY PROVIDED FOR IN THE AGREEMENT AND THE PLEDGE AGREEMENT. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTER PRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS CONTAINED IN THE AGREEMENT. THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES (TO THE EXTENT PERMITTED BY APPLICABLE LAW) ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE ARISING UNDER OR RELATING TO THIS NOTE AND AGREES THAT ANY SUCH DISPUTE SHALL, AT THE OPTION OF THE BANK, BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. VICON INDUSTRIES, INC. BY: NAME: KENNETH M. DARBY TITLE: PRESIDENT 83 SCHEDULE TO NOTE DATED DECEMBER 27, 1995 OF VICON INDUSTRIES, INC. TO IBJ SCHRODER BANK & TRUST COMPANY AMOUNT OF UNPAID AMOUNT PRINCIPAL PRINCIPAL NOTATION DATE OF LOAN PAID BALANCE MADE BY 84 VICON INDUSTRIES, INC. SECRETARY'S CERTIFICATE I, ARTHUR D. ROCHE, THE DULY ELECTED SECRETARY OF VICON INDUSTRIES, INC., A NEW YORK CORPORATION (THE "COMPANY"), DO HEREBY CERTIFY THAT: 1. ATTACHED HERETO AS EXHIBIT A IS A TRUE, CORRECT, AND COMPLETE COPY OF THE CERTIFICATE OF INCORPORATION OF THE COMPANY, DULY CERTIFIED BY THE SECRETARY OF STATE, WHICH CERTIFICATE OF INCORPORATION HAS NOT BEEN AMENDED SINCE THE DATE OF THE LAST AMENDMENT THERETO INDICATED IN SUCH CERTIFICATE ISSUED BY THE SECRETARY OF STATE. THE CERTIFICATE OF INCORPORATION IS IN EFFECT ON THE DATE HEREOF AND HAS NOT BEEN SUBSEQUENTLY AMENDED. 2. ATTACHED HERETO AS EXHIBIT B IS A TRUE, CORRECT, AND COMPLETE COPY OF THE BY-LAWS OF THE COMPANY AS IN EFFECT ON THE DATE HEREOF, TOGETHER WITH ALL AMENDMENTS THERETO. 3. ATTACHED HERETO AS EXHIBIT C IS A CERTIFICATE, DULY CERTIFIED BY THE SECRETARY OF STATE, AS TO THE DUE ORGANIZATION, CORPORATE EXISTENCE AND GOOD STANDING OF THE COMPANY, AND CERTIFICATES OF GOOD STANDING FOR THE COMPANY, DULY CERTIFIED WITHIN 10 DAYS PRIOR TO THE DATE HEREOF BY THE SECRETARY OF STATE OF EACH JURISDICTION IN WHICH THE COMPANY IS QUALIFIED TO DO BUSINESS. 4. ATTACHED HERETO AS EXHIBIT D IS A TRUE, CORRECT, AND COMPLETE COPY OF THE RESOLUTIONS DULY ADOPTED BY THE BOARD OF DIRECTORS OF THE COMPANY DATED AS OF THE DATE HEREOF APPROVING, AMONG OTHER THINGS, THE EXECUTION, DELIVERY AND PERFORMANCE BY THE COMPANY OF THE CREDIT AND SECURITY AGREEMENT DATED AS OF THE DATE HEREOF AMONG THE COMPANY AND IBJ SCHRODER BANK & TRUST COMPANY (THE "CREDIT AGREEMENT"), THE BORROWINGS THEREUNDER, THE NOTE, THE RELATED DOCUMENTS AND ANY OTHER DOCUMENTS CONTEMPLATED IN CONNECTION THEREWITH TO WHICH THE COMPANY IS A PARTY. SUCH RESOLUTIONS HAVE NOT BEEN RESCINDED OR MODIFIED AND ARE IN FULL FORCE AND EFFECT ON THE DATE HEREOF, AND SUCH RESOLUTIONS CONSTITUTE ALL THE RESOLUTIONS ADOPTED IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED THEREBY. 5. EACH OF THE INDIVIDUALS NAMED BELOW IS A DULY ELECTED, QUALIFIED AND ACTING OFFICER OF THE COMPANY, HOLDING THE OFFICE SET FORTH OPPOSITE HIS/HER NAME AND HAS BEEN AUTHORIZED IN THE RESOLUTIONS ATTACHED HERETO AS EXHIBIT D TO EXECUTE ALL DOCUMENTS MENTIONED IN OR CONTEMPLATED BY SAID RESOLUTIONS, INCLUDING, WITHOUT LIMITATION, THE CREDIT AGREEMENT, THE NOTE, THE RELATED DOCUMENTS AND SUCH OTHER DOCUMENTS CONTEMPLATED IN CONNECTION THEREWITH; AND THE SIGNATURES SET FORTH OPPOSITE THEIR NAMES AS FOLLOWS ARE THEIR GENUINE SIGNATURES: NAME: OFFICE: SIGNATURE: ARTHUR D. ROCHE SECRETARY/ E.V.P. KENNETH M. DARBY PRESIDENT/C.E.O. CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN ARE DEFINED IN THE CREDIT AGREEMENT AND ARE USED HEREIN WITH THE SAME MEANINGS AS ASCRIBED TO THEM THEREIN. IN WITNESS WHEREOF, THE UNDERSIGNED HAS EXECUTED THIS CERTIFICATE AS OF THE 27TH DAY OF DECEMBER, 1995. ------------------------------ NAME: ARTHUR D. ROCHE TITLE: SECRETARY THE UNDERSIGNED, THE DULY ELECTED PRESIDENT OF THE COMPANY, DOES HEREBY CERTIFY THE OFFICE, AUTHORIZATION AND SIGNATURE OF ARTHUR D. ROCHE, REFERRED TO IN SECTION 5 ABOVE. ------------------------------ NAME: KENNETH M. DARBY TITLE: PRESIDENT EXHIBIT A CERTIFICATE OF INCORPORATION EXHIBIT B BY-LAWS EXHIBIT C GOOD STANDING CERTIFICATE(S) EXHIBIT D CORPORATE RESOLUTIONS SUBORDINATION AGREEMENT WHEREAS, VICON INDUSTRIES, INC., A CORPORATION ORGANIZED UNDER THE LAWS OF NEW YORK HAVING ITS USUAL PLACE OF BUSINESS AT 525 BROAD HOLLOW ROAD, MELVILLE, NEW YORK 11747 (HEREINAFTER CALLED THE "BORROWER"), IS INDEBTED TO THE UNDERSIGNED LENDER (HEREINAFTER CALLED THE "SUBORDINATED LENDER") IN THE AGGREGATE PRINCIPAL AMOUNT OF TWO MILLION DOLLARS ($2,000,000) EVIDENCED BY A PROMISSORY NOTE DATED OCTOBER 5, 1993 (THE "SUBORDINATED NOTE"); WHEREAS, THE BORROWER AND THE SUBORDINATED LENDER HAVE REQUESTED IBJ SCHRODER BANK & TRUST COMPANY (HEREINAFTER CALLED THE "BANK") TO EXTEND CREDIT TO THE BORROWER BUT THE BANK IS UNWILLING TO GRANT SUCH REQUEST UNLESS THE SUBORDINATED LENDER SHALL (I) SUBORDINATE IN THE MANNER AND TO THE EXTENT HEREINAFTER PROVIDED ALL INTEREST PAYMENTS, ON THE ABOVE MENTIONED INDEBTEDNESS EVIDENCED BY THE SUBORDINATED NOTE OF THE BORROWER TO THE SUBORDINATED LENDER (ALL OF WHICH INTEREST PAYMENTS ON SUCH INDEBTEDNESS ARE HEREINAFTER CALLED THE "SUBORDINATED INDEBTEDNESS", IT BEING UNDERSTOOD THAT THE PRINCIPAL OF THE SUBORDINATED NOTE SHALL NOT BE DEEMED TO BE SUBORDINATED INDEBTEDNESS), AND (II) TO THE EXTENT THE SUBORDINATED LENDER HAS A SECURITY INTEREST IN ANY PROPERTY IN WHICH THE BANK HAS A SECURITY INTEREST, THE SUBORDINATED LENDER SHALL SUBORDINATE SUCH SECURITY INTERESTS IN SUCH PROPERTY TO THE SECURITY INTERESTS OF THE BANK: NOW, THEREFORE, IN CONSIDERATION OF THE PREMISES AND AS AN INDUCEMENT TO THE BANK TO CONTINUE TO EXTEND CREDIT TO THE BORROWER, AND IN CONSIDERATION THEREOF, THE SUBORDINATED LENDER HEREBY AGREES WITH THE BANK TO SUBORDINATE, AND DOES HEREBY SUBORDINATE, THE SUBORDINATED INDEBTEDNESS TO ANY AND ALL INDEBTEDNESS AND OTHER LIABILITIES OF THE BORROWER TO THE BANK ARISING UNDER THAT CERTAIN CREDIT AND SECURITY AGREEMENT DATED AS OF THE DATED HEREOF AND EXECUTED BY THE BORROWER AND THE BANK (THE "CREDIT AGREEMENT") AND ALL DOCUMENTS EXECUTED IN CONNECTION THEREWITH, AND ANY AND ALL EXTENSIONS, MODIFICATIONS, AMENDMENTS, RENEWALS OR SUBSTITUTIONS THEREOF, INCLUDING PRINCIPAL, INTEREST AND EXPENSES OF COLLECTION AND ALL OTHER INDEBTEDNESS OF ANY NATURE NOW OR HEREAFTER OWING FROM THE BORROWER TO THE BANK (ALL OF THE FOREGOING BEING REFERRED TO AS THE "SENIOR INDEBTEDNESS"), AND, FOR THE CONSIDERATION AFORESAID, THE SUBORDINATED LENDER FOR ITSELF, ITS EXECUTORS, ADMINISTRATORS, SUCCESSORS AND ASSIGNS, AGREES WITH THE BANK THAT : 1. NOTWITHSTANDING THE TERMS OF THE INSTRUMENTS AND AGREEMENTS GIVING RISE TO THE SUBORDINATED INDEBTEDNESS, IT WILL NOT AT ANY TIME UNTIL ALL SENIOR INDEBTEDNESS SHALL HAVE BEEN PAID IN FULL, DEMAND, ACCEPT OR RECEIVE ANY COLLATERAL FOR THE SUBORDINATED INDEBTEDNESS, NOR WILL IT ASSERT AGAINST THE BORROWER ANY RIGHT OF SETOFF OR OF SUBROGATION WITH RESPECT TO THE SUBORDINATED INDEBTEDNESS, NOR WILL IT TRANSFER OR ASSIGN ANY OR ALL OF THE SUBORDINATED INDEBTEDNESS UNLESS THE TRANSFEREE OR ASSIGNEE AGREES TO BE BOUND BY THE TERMS OF THIS SUBORDINATION AGREEMENT; PROVIDED; HOWEVER; THAT THE SUBORDINATED INDEBTEDNESS MAY BE SECURED BY COLLATERAL PURSUANT TO LIENS WHICH ARE JUNIOR AND SUBORDINATED TO THE LIENS OF THE BANK IN ACCORDANCE WITH THE TERMS HEREOF. EXCEPT AS PROVIDED IN THE NEXT SENTENCE, IN NO EVENT SHALL THE PRINCIPAL OF THE SUBORDINATED NOTE BE DUE AND PAYABLE (WHETHER BY ITS TERMS, ACCELERATION OR OTHERWISE) BEFORE JULY 1, 1998. NOTWITHSTANDING THE FOREGOING, PRINCIPAL OF THE SUBORDINATED NOTE SHALL BE PERMITTED TO BECOME DUE AND PAYABLE (WHETHER BY ITS TERMS, BY ACCELERATION OR OTHERWISE) UPON THE FILING OF ANY PETITION IN BANKRUPTCY BY OR AGAINST THE BORROWER. 2. THE SUBORDINATED LENDER MAY RECEIVE PAYMENTS ON THE SUBORDINATED INDEBTEDNESS IN ACCORDANCE WITH THE TERMS OF THE SUBORDINATED NOTE AS IN EFFECT ON THE DATE HEREOF IF AND SO LONG AS NO EVENT OF DEFAULT (AS DEFINED IN THE CREDIT AGREEMENT), OTHER THAN AN EVENT OF DEFAULT DERIVED FROM THE BREACH OF THE FINANCIAL COVENANTS SET FORTH IN SECTIONS 9.01, 9.02, 9.03, 9.04 AND 9.05 OF THE CREDIT AGREEMENT, SHALL HAVE OCCURRED AND BE CONTINUING AND SHALL NOT HAVE BEEN WAIVED BY THE BANK IN WRITING IN RESPECT OF THE SENIOR INDEBTEDNESS. NOTWITHSTANDING THE TERMS OF ANY INSTRUMENT OR AGREEMENT GIVING RISE TO THE SUBORDINATED INDEBTEDNESS, THE SUBORDINATED LENDER WILL NOT DEMAND, ACCEPT OR RECEIVE ANY PRINCIPAL PREPAYMENT IN RESPECT OF THE SUBORDINATED NOTE, AND IN THE EVENT IT RECEIVES ANY SUCH PAYMENT, THE SUBORDINATED LENDER SHALL FORTHWITH DELIVER THE SAME TO THE BANK IN PRECISELY THE FORM RECEIVED (EXCEPT FOR THE SUBORDINATED LENDER'S ENDORSEMENT WHERE NECESSARY) FOR APPLICATION ON ACCOUNT OF THE BORROWER'S OBLIGATIONS TO THE BANK, AND THE SUBORDINATED LENDER AGREES THAT, UNTIL SO DELIVERED, SUCH PAYMENTS SHALL BE DEEMED RECEIVED BY THE SUBORDINATED LENDER AS AGENT FOR THE BANK AND SHALL BE HELD IN TRUST BY THE SUBORDINATED LENDER AS PROPERTY OF THE BANK. IN THE EVENT OF A FAILURE OF THE SUBORDINATED LENDER TO ENDORSE ANY INSTRUMENT FOR THE PAYMENT OF MONEY SO RECEIVED BY THE SUBORDINATED LENDER, PAYABLE TO THE SUBORDINATED LENDER'S ORDER, THE BANK, OR ANY OFFICER OR EMPLOYEE THEREOF, IS HEREBY IRREVOCABLY CONSTITUTED AND APPOINTED ATTORNEY- IN-FACT FOR THE SUBORDINATED LENDER WITH FULL POWER TO MAKE ANY SUCH ENDORSEMENT AND WITH FULL POWER OF SUBSTITUTION. THE SUBORDINATED LENDER WILL NOT DEMAND OR CONSENT TO ANY AMENDMENT OF THE TERMS OF THE SUBORDINATED NOTE WITH RESPECT TO THE INTEREST PAYABLE THEREUNDER AND THE SCHEDULED AMORTIZATION OF THE PRINCIPAL AMOUNT THEREOF WITHOUT THE PRIOR WRITTEN CONSENT OF THE BANK. THE BANK AGREES TO PROVIDE THE SUBORDINATED LENDER WITH NOTICE OF EACH EVENT OF DEFAULT, OTHER THAN FOR AN EVENT OF DEFAULT DERIVED FROM THE BREACH OF THE FINANCIAL COVENANTS SET FORTH IN SECTIONS 9.01, 9.02, 9.03, 9.04 AND 9.05 OF THE CREDIT AGREEMENT. 3. IF AN EVENT OF DEFAULT, OTHER THAN AN EVENT OF DEFAULT DERIVED FROM THE BREACH OF THE FINANCIAL COVENANTS SET FORTH IN SECTIONS 9.01, 9.02, 9.03, 9.04 AND 9.05 OF THE CREDIT AGREEMENT, SHALL OCCUR AND BE CONTINUING AND SHALL NOT HAVE BEEN WAIVED BY THE BANK IN WRITING WITH RESPECT TO THE SENIOR INDEBTEDNESS, THE SUBORDINATED LENDER WILL NOT RECEIVE FROM OR FOR THE ACCOUNT OF THE BORROWER ANY PAYMENT OF THE SUBORDINATED INDEBTEDNESS AND, IN THE EVENT IT RECEIVES ANY SUCH PAYMENT, THE SUBORDINATED LENDER SHALL FORTHWITH DELIVER THE SAME TO THE BANK IN PRECISELY THE FORM RECEIVED (EXCEPT FOR THE SUBORDINATED LENDER'S ENDORSEMENT WHERE NECESSARY) FOR APPLICATION ON ACCOUNT OF THE BORROWER'S OBLIGATIONS TO THE BANK, AND THE SUBORDINATED LENDER AGREES THAT, UNTIL SO DELIVERED, SUCH PAYMENTS SHALL BE DEEMED RECEIVED BY THE SUBORDINATED LENDER AS AGENT FOR THE BANK AND SHALL BE HELD IN TRUST BY THE SUBORDINATED LENDER AS PROPERTY OF THE BANK. IN THE EVENT OF A FAILURE OF THE SUBORDINATED LENDER TO ENDORSE ANY INSTRUMENT FOR THE PAYMENT OF MONEY SO RECEIVED BY THE SUBORDINATED LENDER, PAYABLE TO THE SUBORDINATED LENDER'S ORDER, THE BANK, OR ANY OFFICER OR EMPLOYEE THEREOF, IS HEREBY IRREVOCABLY CONSTITUTED AND APPOINTED ATTORNEY-IN-FACT FOR THE SUBORDINATED LENDER WITH FULL POWER TO MAKE ANY SUCH ENDORSEMENT AND WITH FULL POWER OF SUBSTITUTION. 4. IN THE EVENT THE BORROWER SHALL BECOME INSOLVENT, THE SUBORDINATED LENDER WILL, IN ANY SUCH CASE, ASSIGN AND PAY OVER OR DELIVER TO THE BANK, TO THE EXTENT NECESSARY TO SATISFY THE SENIOR INDEBTEDNESS IN FULL WITH INTEREST (PLUS REASONABLE EXPENSES OF COLLECTION), ANY AND ALL DIVIDENDS, PAYMENTS AND OTHER DISTRIBUTIONS WITH RESPECT TO THE SUBORDINATED INDEBTEDNESS TO WHICH IT WOULD BE ENTITLED, OF ANY KIND OR CHARACTER, EITHER IN CASH, PROPERTY OR SECURITIES TO THE EXTENT SUCH DIVIDENDS, PAYMENTS OR OTHER DISTRIBUTIONS ARE PAID TO THE SUBORDINATED LENDER, TO BE HELD BY THE BANK AND APPLIED BY THE BANK FOR ITS OWN ACCOUNT TO THE EXTENT OF ITS RIGHTS HEREUNDER. FOR PURPOSES HEREOF, THE BORROWER SHALL BE CONSIDERED TO BE "INSOLVENT" WHEN ANY OF THE FOLLOWING EVENTS SHALL HAVE OCCURRED WITH RESPECT TO THE BORROWER: ADMISSION IN WRITING OF ITS INABILITY, OR BE GENERALLY UNABLE, TO PAY ITS DEBTS AS THEY BECOME DUE, DISSOLUTION, TERMINATION OF EXISTENCE, CESSATION OF NORMAL BUSINESS OPERATIONS, INSOLVENCY, APPOINTMENT OF A RECEIVER OF ANY PARTY OF, LEGAL OR EQUITABLE ASSIGNMENT, CONVEYANCE OR TRANSFER OF PROPERTY FOR THE BENEFIT OF CREDITORS BY THE BORROWER; OR THE COMMENCEMENT OF ANY PROCEEDINGS UNDER ANY BANKRUPTCY OR INSOLVENCY LAWS BY THE BORROWER OR SUCH A PROCEEDING SHALL HAVE BEEN COMMENCED AGAINST THE BORROWER, IN WHICH AN ADJUDICATION OR APPOINTMENT IS MADE OR ORDER FOR RELIEF IS ENTERED OR WHICH PROCEEDING REMAINS UNDISMISSED OR UNSTAYED FOR A PERIOD OF 30 DAYS OR MORE. 5. IN ORDER TO CARRY OUT THE TERMS AND INTENT OF THIS UNDERTAKING MORE EFFECTIVELY, THE SUBORDINATED LENDER WILL DO ALL ACTS NECESSARY OR CONVENIENT IN THE REASONABLE JUDGMENT OF THE BANK TO PRESERVE FOR THE BANK THE BENEFITS OF THIS SUBORDINATION AGREEMENT AND WILL EXECUTE ALL AGREEMENTS WHICH THE BANK MAY REASONABLY REQUEST FOR THAT PURPOSE, AND IT HEREBY ASSIGNS, TRANSFERS AND SETS OVER TO THE BANK ITS CLAIMS AGAINST THE BORROWER ARISING ON ACCOUNT OF THE SUBORDINATED INDEBTEDNESS AND, WITHOUT IMPOSING UPON THE BANK ANY DUTY WITH RESPECT TO PRESERVATION, PROTECTION OR ENFORCEMENT OF THE CLAIMS ARISING ON ACCOUNT OF THE SUBORDINATED INDEBTEDNESS, CONSTITUTES AND APPOINTS THE BANK ITS TRUE AND LAWFUL ATTORNEY FOR THE FOLLOWING PURPOSES BUT ONLY WITH RESPECT TO THE SUBORDINATED INDEBTEDNESS: (A) TO COLLECT ANY DIVIDENDS, PAYMENTS OR OTHER DISTRIBUTIONS WHICH WOULD OTHERWISE BE PAYABLE TO, OR RECEIVABLE BY, IT ON ANY LIQUIDATION, DISSOLUTION OR OTHER WINDING UP OF THE BORROWER OR ANY LIQUIDATION OR DISTRIBUTION OF ANY PART OF THE ASSETS OF THE BORROWER (OTHER THAN DISTRIBUTIONS MADE IN THE ORDINARY COURSE OF THE BORROWER'S BUSINESS) OR IN ANY PROCEEDINGS AFFECTING HE BORROWER UNDER ANY BANKRUPTCY OR INSOLVENCY LAWS OR ANY LAWS RELATING TO THE RELIEF OF DEBTORS, READJUSTMENT, COMPOSITION OR EXTENSION OF INDEBTEDNESS, OR REORGANIZATION OR DISSOLUTION OF THE BORROWER, OR EXECUTION SALE ON, OR MARSHALING OF, ASSETS OF THE BORROWER. (B) TO PROVE ITS CLAIM IN ANY SUCH PROCEEDINGS. (C) TO ACCEPT OR REJECT, TO THE EXTENT TO WHICH IT SHOULD BE ENTITLED TO ACCEPT OR REJECT, ANY PLAN OF REORGANIZATION OR ARRANGEMENT IN ANY SUCH PROCEEDINGS. (D) TO ACCEPT ANY NEW SECURITIES OR OTHER PROPERTY TO WHICH IT WOULD BE ENTITLED UNDER ANY SUCH PLAN OR REORGANIZATION OR ARRANGEMENT OR OTHER PROCEEDINGS. (E) AND IN GENERAL TO DO ANY ACT IN CONNECTION WITH ANY SUCH PROCEEDINGS WHICH IT MIGHT OTHERWISE DO, IT BEING UNDERSTOOD THAT THE BANK SHALL ACCOUNT TO IT FOR ANY DIVIDENDS OR PAYMENTS RECEIVED IN EXCESS OF THE AMOUNT TO SATISFY THE CLAIMS OF THE BANK IN FULL WITH INTEREST AND EXPENSES OF COLLECTION. 6. THE SUBORDINATED LENDER AGREES THAT THE SUBORDINATED NOTE LISTED ABOVE EVIDENCING SUBORDINATED INDEBTEDNESS SHALL BE CONSPICUOUSLY MARKED WITH A LEGEND PROVIDING AS FOLLOWS: "THIS NOTE IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT, DATED DECEMBER 27, 1995 EXECUTED BY CHUGAI BOYEKI COMPANY LIMITED, CHUGAI BOYEKI (AMERICA) CORP. AND VICON INDUSTRIES, INC. IN FAVOR OF IBJ SCHRODER BANK & TRUST COMPANY. 7. NO ACTION WHICH THE BANK, OR THE BORROWER WITH OR WITHOUT THE CONSENT OF THE BANK, MAY TAKE, OR REFRAIN FROM TAKING WITH RESPECT TO THE SENIOR INDEBTEDNESS, OR ANY NOTE OR AGREEMENT REPRESENTING THE SAME, OR ANY COLLATERAL THEREFOR, OR ANY AGREEMENT OR AGREEMENTS (INCLUDING GUARANTIES) IN CONNECTION THEREWITH, SHALL AFFECT THIS SUBORDINATION AGREEMENT OR THE OBLIGATIONS OF THE SUBORDINATED LENDER HEREUNDER; PROVIDED, THAT OBLIGATIONS CONSISTING OF PRINCIPAL OF THE BORROWER TO THE BANK SHALL NOT CONSTITUTE SENIOR INDEBTEDNESS TO THE EXTENT IN EXCESS OF $6,000,000 UNLESS THE SUBORDINATED LENDER HAS CONSENTED IN WRITING THERETO. 8. IN THE EVENT THAT THE BANK SHALL TRANSFER SENIOR INDEBTEDNESS TO WHICH THE SUBORDINATED INDEBTEDNESS IS HEREBY SUBORDINATED THE TRANSFEREE THEREOF AND SUCCESSIVE TRANSFEREES THEREAFTER SHALL HAVE THE SAME RIGHTS HEREUNDER AS THE BANK, IT BEING INTENDED THAT THE BENEFITS OF THIS SUBORDINATION AGREEMENT SHALL ATTACH TO AND FOLLOW SAID SENIOR INDEBTEDNESS IRRESPECTIVE OF CHANGES IN THE OWNERSHIP THEREOF. 9. TO THE EXTENT THAT THE SUBORDINATED LENDER HAS A SECURITY INTEREST IN ANY PROPERTY IN WHICH THE BANK HAS A SECURITY INTEREST, THE SUBORDINATED LENDER AGREES THAT ITS INTEREST IN SUCH PROPERTY SHALL BE, IN ALL RESPECTS, SUBORDINATED TO THE FULLEST EXTENT PERMITTED BY LAW TO THE SECURITY INTEREST OF THE BANK AND THAT, UNTIL ALL SENIOR INDEBTEDNESS OF THE BORROWER TO THE BANK ARE PAID IN FULL, IT SHALL NOT TAKE ANY ACTION TO ENFORCE ITS SECURITY INTEREST IN SUCH PROPERTY OR TO REALIZE VALUE ON SUCH PROPERTY. IN FURTHERANCE OF THE FOREGOING, WHERE BOTH THE BANK AND THE SUBORDINATED LENDER HOLD A SECURITY INTEREST IN THE SAME COLLATERAL, THEN REGARDLESS OF THE ORDER OF FILING FINANCING STATEMENTS UNDER THE UNIFORM COMMERCIAL CODE, OR THE TAKING OF POSSESSION OF COLLATERAL AND REGARDLESS OF ANY OTHER PROVISION OF LAW, THE LIENS OF THE BANK SHALL BE PRIOR LIENS, SENIOR TO THE LIENS OF THE SUBORDINATED LENDER. IN THE EVENT OF THE DECLARATION OF A DEFAULT BY THE BANK AND AN EXERCISE OF THEIR REMEDIES, THE BANK SHALL NOT HAVE ANY RESPONSIBILITY, FIDUCIARY OR OTHERWISE, TO THE SUBORDINATED LENDERS TO REALIZE MAXIMUM VALUE ON THE COLLATERAL. 10. IN ADDITION TO THE SUBORDINATED NOTE, THE SUBORDINATED LENDER AND CERTAIN OF ITS AFFILIATES WHOSE SIGNATURES APPEAR BELOW, HAVE, OR MAY IN THE FUTURE EXTEND CREDIT, HAVE OUTSTANDING TRADE PAYABLES, AND PROVIDED OTHER FINANCIAL ACCOMMODATIONS (AS NOW OR HEREAFTER INCURRED, AMENDED, INCREASED, EXTENDED, SUPPLEMENTED OR MODIFIED, "ADDITIONAL INDEBTEDNESS") TO THE BORROWER AND HAVE TAKEN SECURITY INTERESTS IN SOME OR ALL OF THE BORROWER'S ASSETS. WITH RESPECT TO THE LIENS SECURING SUCH ADDITIONAL INDEBTEDNESS THE SUBORDINATED LENDER AND SUCH AFFILIATES AGREE, NOTWITHSTANDING ANY AGREEMENT OR ARRANGEMENT WHICH THEY MAY NOW HAVE WITH THE BORROWER, OR ANY RULE OF LAW, AND NOTWITHSTANDING THE TIME, ORDER OR METHOD OF ATTACHMENT, PERFECTION, FILING OR RECORDING, TO SUBORDINATE TO THE PRIOR LIEN OF THE BANK ANY LIEN, RIGHT, TITLE, INTEREST AND CLAIMS WHICH THEY MAY NOW OR HEREINAFTER HAVE TO ANY OF THE ASSETS OF THE BORROWER, WHETHER NOW OR HEREAFTER OWNED BY THE BORROWER, THE CASH AND NON-CASH PROCEEDS THEREOF AND ANY RETURNED OR REPOSSESSED GOODS RELATING THERETO (HEREIN COLLECTIVELY CALLED THE "COLLATERAL"). THE SUBORDINATED LENDER AGREES TO TAKE SUCH ACTIONS AS REQUESTED BY THE BANK TO CAUSE THE BANK TO HAVE A FIRST LIEN ON ALL THE ASSETS OF THE BORROWER. EACH OF THE SUBORDINATED LENDER AND SUCH AFFILIATES AGREES THAT, SO LONG AS THE BORROWER MAY BE INDEBTED OR OBLIGATED TO IT IN ANY MANNER WHATSOEVER, INCLUDING ANY OBLIGATIONS OR INDEBTEDNESS ARISING FROM THE SALE OF ANY GOODS TO THE BORROWER, IT WILL NOT EXERCISE ANY RIGHTS, ASSERT ANY CLAIM OR INTEREST, OR TAKE ANY ACTION OR INSTITUTE ANY PROCEEDING WITH RESPECT TO THE COLLATERAL WITHOUT PRIOR WRITTEN NOTICE TO AND THE CONSENT OF THE BANK. EXCEPT AS PROVIDED HEREIN, NOTHING CONTAINED IN THIS AGREEMENT SHALL PROHIBIT THE SUBORDINATED LENDER AND ITS AFFILIATES FROM COLLECTING AND RETAINING VOLUNTARY PAYMENTS (PRIOR TO THEIR EXERCISE OF ANY REMEDIES OR NOTIFICATION TO THE BORROWER OF THEIR INTENTION TO EXERCISE SUCH REMEDIES) OF THE ADDITIONAL INDEBTEDNESS TO THEM OR ANY PAYMENT OR DISTRIBUTION IN ANY BANKRUPTCY, INSOLVENCY, RECEIVERSHIP OR SIMILAR PROCEEDING WITH RESPECT TO THE BORROWER OR ITS ASSETS. SUBJECT TO THE PAYMENT IN FULL OF THE INDEBTEDNESS DUE TO THE BANK, THE SUBORDINATED LENDER AND ITS AFFILIATES SHALL BE SUBROGATED TO THE BANK'S RIGHTS TO RECEIVE PAYMENTS OR DISTRIBUTIONS OF ASSETS OF THE BORROWER APPLICABLE TO THE INDEBTEDNESS DUE TO THE BANK UNTIL THE INDEBTEDNESS DUE TO THE BANK SHALL BE PAID IN FULL, AND, FOR THE PURPOSES OF SUCH SUBROGATION, (A) NO PAYMENTS OR DISTRIBUTIONS TO THE BANK OF ANY CASH, PROPERTIES OR SECURITIES TO WHICH THE SUBORDINATED LENDER AND ITS AFFILIATES WOULD BE ENTITLED EXCEPT FOR THIS AGREEMENT AND NO PAYMENT BY THE SUBORDINATED LENDER AND ITS AFFILIATES TO THE BANK OF ANY AMOUNT PURSUANT TO THIS AGREEMENT SHALL AS BETWEEN THE BORROWER, ITS CREDITORS OTHER THAN THE BANK AND THE SUBORDINATED LENDER AND ITS AFFILIATES, BE DEEMED TO BE A PAYMENT BY THE BORROWER TO OR ON ACCOUNT OF THE INDEBTEDNESS DUE TO THE BANK AND (B) NO PAYMENT OR DISTRIBUTION TO THE SUBORDINATED LENDER OR ITS AFFILIATES PURSUANT TO THIS SUBROGATION PROVISION WHICH WOULD OTHERWISE HAVE BEEN PAID TO THE BANK SHALL BE DEEMED TO BE A PAYMENT BY THE BORROWER TO THE SUBORDINATED LENDER AND ITS AFFILIATES OR ON ACCOUNT OF THE INDEBTEDNESS DUE TO THE SUBORDINATED LENDER AND ITS AFFILIATES. THIS SECTION 10 SUPERSEDES ALL PRIOR AGREEMENTS BETWEEN THE SUBORDINATED LENDER AND ITS AFFILIATES OR ANY OF THEM WITH THE BANK WITH RESPECT TO THE SUBJECT MATTER HEREOF. 11. NO AMENDMENT, MODIFICATION, TERMINATION, OR WAIVER OF ANY PROVISION OF THIS SUBORDINATION AGREEMENT, NOR CONSENT TO ANY DEPARTURE BY THE BORROWER FROM ANY PROVISION OF THIS SUBORDINATION AGREEMENT, SHALL IN ANY EVENT BE EFFECTIVE UNLESS THE SAME SHALL BE IN WRITING AND SIGNED BY THE BANK, AND THEN SUCH WAIVER SHALL BE EFFECTIVE ONLY IN THE SPECIFIC INSTANCE AND FOR THE SPECIFIC PURPOSE FOR WHICH GIVEN. 12. NO FAILURE ON THE PART OF THE BANK TO EXERCISE, NO DELAY IN EXERCISING ANY RIGHT, POWER, OR REMEDY HEREUNDER, OR ANY SINGLE OR PARTIAL EXERCISE OF ANY RIGHT SHALL OPERATE AS A WAIVER THEREOF. 13. THIS SUBORDINATION AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, THE UNDERSIGNED, INTENDING THE SAME TO TAKE EFFECT AS A SEALED INSTRUMENT, HAS EXECUTED THIS INSTRUMENT AS OF THE 27TH DAY OF DECEMBER, 1995. CHUGAI BOYEKI COMPANY LIMITED BY: NAME: KAZUYOHSI SUDO TITLE: ATTORNEY-IN-FACT THE UNDERSIGNED AFFILIATES OF THE SUBORDINATED LENDER HEREBY AGREE TO BE BOUND BY THE PROVISIONS OF PARAGRAPH 10 HEREOF. CHUGAI BOYEKI (AMERICA) CORP. BY: NAME: KAZUYOSHI SUDO TITLE: TREASURER AND SECRETARY THE UNDERSIGNED, DESIGNATED AS THE BORROWER IN THE ABOVE SUBORDINATION AGREEMENT, HEREBY AGREES NOT TO MAKE ANY PAYMENTS OR TAKE ANY OTHER ACTION CONTRARY TO THE PROVISIONS OF SAID AGREEMENT. VICON INDUSTRIES, INC. BY: NAME: KENNETH M. DARBY TITLE: PRESIDENT ACKNOWLEDGED AND ACCEPTED: IBJ SCHRODER BANK & TRUST COMPANY BY: NAME: KEVIN M. MADIGAN TITLE: VICE PRESIDENT EXHIBIT B FORM OF NOTICE OF REVOLVING CREDIT BORROWING DATE: IBJ SCHRODER BANK & TRUST COMPANY ONE STATE STREET NEW YORK, NEW YORK 10004 ATTENTION: KEVIN M. MADIGAN RE: VICON INDUSTRIES, INC. GENTLEMEN: THE UNDERSIGNED, VICON INDUSTRIES, INC. (THE "BORROWER"), REFERS TO THE CREDIT AND SECURITY AGREEMENT DATED AS OF DECEMBER 27, 1995 BETWEEN THE BORROWER AND IBJ SCHRODER BANK & TRUST COMPANY (THE "BANK"), (SAID AGREEMENT, AS IT MAY BE AMENDED OR OTHERWISE MODIFIED FROM TIME TO TIME, BEING THE "CREDIT AGREEMENT" AND CAPITALIZED TERMS USED HEREIN BUT NOT OTHERWISE DEFINED HEREIN BEING DEFINED THEREIN), AND HEREBY GIVE YOU IRREVOCABLE NOTICE PURSUANT TO SECTION 2.03(A) OF THE CREDIT AGREEMENT THAT THE BORROWER HEREBY REQUESTS A LOAN UNDER THE CREDIT AGREEMENT, AND IN THAT CONNECTION SET FORTH BELOW THE INFORMATION RELATING TO SUCH LOAN (THE "PROPOSED LOAN") AS REQUIRED BY SECTION 2.03(A) OF THE CREDIT AGREEMENT: (I) THE REQUESTED BORROWING DATE OF THE PROPOSED LOAN IS ____________. (II) THE AGGREGATE AMOUNT OF THE PROPOSED LOAN IS $ . (III) AS OF THE DATE HEREOF, THE FORMULA AMOUNT UNDER THE CREDIT AGREEMENT IS $ . ------------- (IV) AS OF THE DATE HEREOF, THE AVAILABLE COMMITMENT UNDER THE CREDIT AGREEMENT IS $ . (IV) THE GENERAL PURPOSES FOR WHICH THE PROCEEDS OF THE PROPOSED LOAN WILL BE USED ARE FOR CONTINUED WORKING CAPITAL REQUIREMENTS OF THE BORROWER OR TO REFINANCE THE EXISTING LOANS. THE BORROWER HEREBY CERTIFIES THAT THE FOLLOWING STATEMENTS ARE TRUE ON THE DATE HEREOF, AND WILL BE TRUE ON THE DATE OF THE PROPOSED LOAN, BEFORE AND AFTER GIVING EFFECT THERETO AND TO THE APPLICATION OF THE PROCEEDS THEREFROM: (A) ALL OF THE REPRESENTATIONS AND WARRANTIES CONTAINED IN ARTICLE 4 OF THE CREDIT AGREEMENT AND IN EACH OF THE RELATED DOCUMENTS AND THE INFORMATION SET FORTH IN THE SCHEDULES RELATED THERETO ARE TRUE AND CORRECT AS OF THE DATE HEREOF (EXCEPT (I) TO THE EXTENT THAT SUCH REPRESENTATIONS AND WARRANTIES RELATE TO AN EARLIER DATE OR (II) AS ARE AFFECTED BY TRANSACTIONS SPECIFICALLY CONTEMPLATED BY THE CREDIT AGREEMENT), WITH THE SAME EFFECT AS THOUGH SUCH REPRESENTATIONS AND WARRANTIES HAD BEEN MADE ON AND AS OF SUCH DATE; (B) NO DEFAULT OR EVENT OF DEFAULT EXISTS AS OF THE DATE HEREOF OR WILL RESULT FROM THE PROPOSED LOAN; AND (C) BORROWER IS IN COMPLIANCE WITH ALL OF THE TERMS AND CONDITIONS OF THE CREDIT AGREEMENT, THE NOTE AND EACH OTHER RELATED DOCUMENT TO WHICH IT IS A PARTY. VERY TRULY YOURS, VICON INDUSTRIES, INC. BY: NAME: TITLE: EX-10 3 PROMISSORY NOTE EXHIBIT 10.2 THIS NOTE IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED DECEMBER 27, 1995 EXECUTED BY CHUGAI BOYEKI COMPANY LIMITED, CHUGAI BOYEKI (AMERICA) CORP. AND VICON INDUSTRIES, INC. IN FAVOR OF IBJ SCHRODER BANK & TRUST COMPANY SECURED PROMISSORY NOTE $2,000,000 Melville, New York As of October 5, 1993 FOR VALUE RECEIVED, VICON INDUSTRIES, INC., a New York corporation (the "Maker") promises to pay to the order of CHUGAI BOYEKI COMPANY LIMITED, a Japanese corporation (together with its successors and assigns, the "Payee"), on July 1, 1998 at its office located at 2-15-13 Tsukishima, Chuoku, Tokyo, Japan, or such other place as the Payee may specify, in lawful money of the United States of America and in immediately available funds the principal amount of TWO MILLION U.S. DOLLARS ($2,000,000) or, if less than such principal amount, the aggregate unpaid principal balance then outstanding of the Note; without setoff or counterclaim and free and clear of, and without deduction for or on account of, any present or future stamp or other taxes, withholdings, restrictions or conditions of any nature. The Maker further promises to pay interest in like money on the unpaid principal balance of this Note from time to time outstanding until paid in full at a rate (computed on the basis of a 360 day year for actual days elapsed) equal to one percent (1%) in excess of the rate of interest adopted by Sanwa Bank from time to time as its "prime rate" for loans in U.S. Dollars to U.S. borrowers, which rate is not intended to be the lowest rate of interest charged by Sanwa Bank. Interest shall be payable quarterly on the first day of each calendar quarter commencing the first of such days to occur after the date hereof, upon prepayment hereof (to the extent accrued on the amount to be prepaid) and upon payment in full of the unpaid principal balance hereof. The records of the holder shall constitute prima facie evidence of amounts paid hereunder and the unpaid principal hereof and accrued interest hereunder. Whenever any date for payment shall fall on a day that is not a business day in New York City and Tokyo, such payment shall be made on the next succeeding business day. Upon the occurrence of any of the following events (each, an "Event of Default"): (a) Failure of the Maker to make any payment of principal or interest in respect of this Note when due, which shall remain unpaid for a period of 3 days after notice thereof shall have been given by the Payee to the #20127399.1 Maker; or failure of the Maker to make payment of any other sum arising under any other obligation incurred under this Note when due, which shall remain unpaid for a period of 5 days after notice thereof shall have been given by the Payee to the Maker; or (b) Failure by the Maker to perform any other term, condition or covenant of this Note or any other agreement (including, without limitation, the Security Agreement referred to below), instrument or document delivered pursuant hereto or in connection herewith or therewith, which shall remain unremedied for a period of 15 days after notice thereof shall have been given by the Payee to the Maker; or (c) (i) Failure of the Maker or any corporation of which the Maker, alone, or the Maker and/or one or more of its Subsidiaries (as defined below), owns, directly or indirectly, at least a majority of the securities having ordinary voting power for the election of directors (each, a "Subsidiary") to perform any term, condition or covenant of any bond, note, debenture, loan agreement, indenture, guaranty, trust agreement, mortgage or other instrument or agreement in connection with the borrowing of money or the deferred purchase price of a fixed asset to which the Maker or any Subsidiary is a party or by which it is bound, or by which any of its properties or assets may be affected (each, a "Debt Instrument"), so that, as a result of any such failure to perform (regardless of the satisfaction of any requirement for the giving of appropriate notice thereof or the lapse of time), such obligation for the payment of borrowed money ("Indebtedness") included therein or secured or covered thereby may be declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or (ii) Any event or condition referred to in any Debt Instrument shall occur or fail to occur, so that, as a result thereof (regardless of the satisfaction of any requirement for the giving of appropriate notice thereof or the lapse of time), the Indebtedness or the deferred purchase price of a fixed asset included therein or secured or covered thereby may be declared due and payable prior to the date on which such Indebtedness would otherwise become due and payable; or (iii) Any such Indebtedness included in any Debt Instrument or secured or covered thereby is not paid when due; or (d) Any representation or warranty made in writing to the Payee in the Security Agreement or in connection with this Note or in any certificate, statement or report made in #20127399.1 -2- compliance with this Note or the Security Agreement, shall have been false in any material respect when made; or (e) An order for relief under the Federal Bankruptcy Code as now or hereafter in effect, shall be entered against the Maker or any Subsidiary; or the Maker or any Subsidiary shall become insolvent, generally fail to pay its debts as they become due, make an assignment for the benefit of creditors, file a petition in bankruptcy, be adjudicated insolvent or bankrupt, petition or apply to any tribunal for the appointment of a receiver or any trustee for it or a substantial part of its assets, or shall commence any proceeding under any bankruptcy, reorganization, arrangement, readjustment or debt, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or if there shall have been filed any such petition or application, or any such proceeding shall have been commenced against it, which remains undismissed for a period of 30 days or more; or the Maker or any Subsidiary or endorser or guarantor hereof by any act or omission shall indicate its consent to approval of or acquiescence in any such petition, application or proceeding or the appointment of a receiver of or any trustee for it or any substantial part of any of its properties, or shall suffer any such receivership or trusteeship to continue undischarged for a period of 30 days or more; or (f) Any judgment against the Maker or any Subsidiary or any attachment, levy or execution against any of its properties for any amount shall remain unpaid, unstayed on appeal, undischarged, unbonded or undismissed for a period of 60 days or more; or (g) Any action or proceeding affecting the Maker shall have been commenced before any court, governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which may result in the seizure or forfeiture of any of its property which would cause a material adverse effect upon the operations, business, properties or financial condition of the Maker or on the ability of the Maker to perform its obligations hereunder; or (h) The Security Agreement shall at any time after its execution and delivery and for any reason cease: (A) to create a valid and perfected security interest in and to the property purported to be subject to the Security Agreement; or (B) to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Maker or the Maker shall deny that it has any further liability or obligation under the Security Agreement, or the Maker shall fail to perform any of its obligations under the Security Agreement; or #20127399.1 -3- (i) The Payee shall have determined, in its sole discretion, that one or more conditions exist or events have occurred which may result in a material adverse change in the business, properties or financial condition of the Borrower; then, in any such event, the Payee may, by notice of default to the Maker, declare the principal amount then outstanding hereunder (with accrued interest thereon) to be immediately due and payable; provided, however, that no such notice shall be required upon the occurrence of any Event of Default described in paragraph (e) hereof and upon the occurrence of such an Event of Default the then outstanding principal amount hereunder shall automatically and, without notice, become immediately due and payable. After the stated or any accelerated maturity hereof, the aggregate unpaid principal balance of this Note shall bear interest at a rate of two percent (2%) per annum in excess of the rate in effect at such maturity; provided, however, that no such post-maturity rate so payable hereunder shall be in excess of the maximum permitted under any applicable law. The Maker may prepay the full principal amount of this Note or any portion hereof at any time upon three business days' prior notice to the Payee. The obligations of the Maker under this Note are secured by a Security Agreement of even date herewith between the Maker and the Payee (as the same may be amended from time to time, the "Security Agreement") to which Security Agreement reference is hereby made for a description of the nature and extent of the security provided therein and the rights in respect of such security of any holder of this Note. The rights of the Payee under this Note are subject to a Subordination Agreement (the "Subordination Agreement") dated as of December 27, 1995 among the Maker, the Payee, and IBJ Schroder Bank & Trust Company to which Subordination Agreement reference is hereby made for a description of the nature and extent of the subordination of the rights of any holder of this Note. Except as expressly provided herein, notice, demand, presentment, protest, notice of protest, dishonor, notice of dishonor or notice of any other kind are hereby expressly waived by the Maker. The Maker further waives its right to interpose any setoff or counterclaim of any nature or description in, or to plead any statute of limitations as a defense to, any action commenced by the Payee to enforce its rights hereunder. No failure by the Payee or any assignee thereof to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single #20127399.1 -4- or partial exercise by the Payee or such assignee of any right, remedy or power hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The Maker agrees (i) to pay on demand all legal and other fees, costs and expenses of the Payee incurred in connection with the collection of this Note, the Security Agreement and any other instruments and documents to be delivered hereunder and thereunder, (ii) to pay on demand all legal and other fees, costs and expenses of the Payee incurred in connection with the enforcement of this Note, the Security Agreement and any other instruments and documents to be delivered hereunder and thereunder, and (iii) to pay, indemnify and hold the Payee harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including any reasonable expense incurred by the Payee in employing legal counsel in connection therewith) which may be imposed on, incurred by or asserted against the Payee in any way relating to or arising out of, or any action taken or omitted by the Payee under (including, but not limited to, the administration and/or enforcement thereof), this Note, the Security Agreement or any other instrument or document to be delivered hereunder or thereunder. The obligations of the Maker pursuant to this paragraph shall survive the repayment by the Maker of all or a portion of the principal amount of this Note and the payment by the Maker of accrued interest thereon and all other amounts payable hereunder. The Maker may not assign or otherwise transfer its obligations hereunder. The Payee may assign, grant participations in or otherwise transfer all or any portion of its rights hereunder, and any such assignee, participant or transferee shall have all of the rights of the Payee hereunder to the extent of the interest conveyed. This Note shall be construed in accordance with and governed by the laws of the State of New York. VICON INDUSTRIES, INC. By______________________ Title: By_______________________ Title: #20127399.1 -5- EX-10 4 EMPLOYMENT AGREEMENT EXHIBIT 10.4 EMPLOYMENT AGREEMENT AGREEMENT, dated as of October 1, 1995, between KENNETH M. DARBY (hereinafter called "Darby"), and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 525 Broad Hollow Road, Melville, New York 11747 (hereinafter called the "Company"). WHEREAS, Darby has previously been employed by the Company, and WHEREAS, the Company and Darby mutually desire to assure the continuation of Darby's services to the Company, NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties covenant and agree as follows: 1. Employment. The Company shall employ Darby as its Chief Executive Officer and President throughout the term of this Agreement, and Darby hereby accepts such employment. 2. Term. The term of this Agreement shall commence as of the date of this Agreement and end on September 30, 2000. 3. Compensation. A. The Company shall pay Darby a base salary of $195,000 per annum, subject to adjustment as provided in subsection B. B. Prior to September 15 of each succeeding year, Darby's base salary shall be reviewed by the Compensation Committee of the Board of Directors and shall be fixed for the year commencing October 1 of such year by agreement between Darby and the Board of Directors, but in any event shall not be less than the base salary for the one year period then ending. C. Darby's base salary shall be payable monthly or bi- weekly. D. Darby shall also be entitled to participate in any pension, profit sharing, life insurance, medical, dental, hospital, disability or other benefit plans as may from time to time be available to officers of the Company. 4. Extent and Places of Services; Vacation A. Darby shall establish operating policy and direct, supervise and oversee the operations of the Company. He shall advise and report to the Board of Directors. Darby shall also assume and perform such additional reasonable responsibilities and duties as the Board of Directors and he may from time to time agree upon. B. Darby shall devote his full time, attention, and energies to the business of the Company. C. Darby shall not be required to perform his services outside the Melville, New York area or such other area on Long Island, New York as shall contain the location of the Company's headquarters. D. The Company shall provide Darby with office space, secretary, telephones and other office facilities appropriate to his duties. E. Darby shall be entitled to one month's vacation per annum. 5. Covenant not to Compete. Darby agrees that during the term of this Agreement and for a period of three years thereafter, he shall not directly or indirectly within the United States or Europe engage in, or enter the employment of or render any services to any other entity engaged in, any business of a similar nature to or in competition with the Company's business of designing, manufacturing, and selling security equipment and protection devices within the United States or Europe. Darby further acknowledges that the services to be rendered under this Agreement by him are special, unique, and of extraordinary character and that a material breach by him of this section will cause the Company to suffer irreparable damage; and Darby agrees that in addition to any other remedy, this section shall be enforceable by negative or affirmative preliminary or permanent injunction in any Court of competent jurisdiction. - 2 - 6. Termination Payment on Change of Control. A. Notwithstanding any provision of this Agreement, if a "Change of Control" occurs without the prior written consent of the Board of Directors, Darby, at his option, may elect to terminate his obligations under this Agreement and to receive a termination payment, without reduction for any offset or mitigation, in an amount equal to three times his average annual base salary for five years preceding the Change of Control, in either lump sum or extended payments over three years as Darby shall elect. B. A "Change of Control" shall be deemed to have occurred if (i) any other entity shall directly or indirectly acquire a beneficial ownership of 20%, or any further amount in excess of 20%, of the outstanding shares of capital stock of the Company or (ii) a majority of the members of the Board of Directors of the Company or any successor by merger or assignment of assets or otherwise, shall be persons other than Directors on the date of this Agreement. C. Darby's option to elect to terminate his obligations and to receive a termination payment and to elect to receive a lump sum or extended payments may be exercised only by written notice delivered to the Company within 90 days following the date on which Darby receives actual notice of Change of Control. D. If Darby elects to receive lump sum payment, such payment shall be made within 30 days of the Company's receipt of Darby's notice of election. 7. Severance Payment on Certain Terminations. A. If either (i) this Agreement expires, or (ii) the Company terminates Darby's employment under this Agreement for reasons other than "Gross Misconduct" or (iii) with the consent of the Board of Directors a Change of Control as defined in paragraph 6 B. shall occur, or (iv) the Company executes a "Company Sale Agreement" then Darby, at his option, may elect to receive a severance payment, without reduction for any offset or mitigation, in an amount equal to (a) one-twelfth his annual base salary at the time of such termination - 3 - multiplied by (b) the number of full years of his employment to the end of this Agreement by the Company up to a maximum of 24 years, payable in either lump sum or extended payments as Darby shall elect. B. "Company Sale Agreement" means an agreement to which the Company is a party that contemplates that more than half of the assets of the Company are transferred to another entity or that upon consummation of the transactions contemplated by such agreement, a Change of Control as defined in paragraph 6 shall occur or have occurred. C. In the event of an election under paragraph 7, payment of such severance payment shall be in lieu of any obligation of the Company for termination payment or other post-termination compensation under this Agreement, if any. D. "Gross Misconduct" shall mean (a) a wilful, substantial and unjustifiable refusal to perform substantially the services required by this Agreement to be performed; (b) fraud, misappropriation or embezzlement involving the Company or its assets; or (c) conviction of a felony involving moral turpitude. E. Darby's option to elect to receive a severance payment and to elect to receive lump sum or extended payments may be exercised only by written notice delivered to the Company within 90 days following the date on which this Agreement expires or on which Darby receives actual notice of the existence of any other condition referred to in paragraph 7A, except that, in the case of the Company's execution of a Company Sale Agreement, Darby's option may be exercised at any time prior to the closing under such agreement and such termination shall be effective as of such closing. F. If Darby elects to receive lump sum payment, such payment shall be made within 30 days of the Company's receipt of Darby's notice of such election, except that, in the case of the Company's execution of a Company Sale Agreement, the payment shall be made no later than the time of closing under such agreement. - 4 - G. Payment of termination or severance payment shall not affect the Company's obligations under any other agreement with Darby. 8. Death or Disability. The Company may terminate this Agreement if during the term of this Agreement (a) Darby dies or (b) Darby becomes so disabled for a period of six months that he is substantially unable to perform his duties under this Agreement for such period. Such a termination shall not release the Company from any liability to Darby for compensation earned, or for termination or severance payment elected, prior to such termination; nor shall it be deemed a termination of employment for Gross Misconduct. 9. Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York in accordance with the rules of the American Arbitration then in effect, and judgement upon the award rendered be entered and enforced in any court having jurisdiction thereof. 10. Miscellaneous. A. Except for any deferred compensation agreement, retirement plan or stock options previously granted, this Agreement contains the entire agreement between the parties and supersedes all prior agreements by the parties relating to the term of Darby's employment by the Company, however, it does not restrict or limit such other benefits as the Board of Directors may determine to provide or make available to Darby. B. This agreement may not be waived, changed, modified or discharged orally, but only by agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, or discharge is sought. C. This Agreement shall be governed by the laws of New York applicable to contracts between New York residents and made and to be entirely performed in New York. D. If any part of this Agreement is held to be unenforceable by any court of competent jurisdiction, the remaining provisions of this Agreement shall continue in full force and effect. - 5 - E. This Agreement shall inure to the benefit of, and be binding upon, the Company, its successor, and assigns. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. VICON INDUSTRIES, INC. By Kenneth M. Darby Peter F. Neumann Chairman Compensation Committee - 6 - EX-10 5 LETTER AGREEMENT EXHIBIT 10.5 Mr. Arthur D. Roche Vicon Industries, Inc. 525 Broad Hollow Road Melville, NY 11747 October 1, 1995 Dear Arthur: After the recent discussions between you and the Compensation Committee, it is mutually agreed that you will be employed by the Company as its Executive Vice President for a period of no less than two years at an annual salary of $150,000. plus benefits as previously outlined in the minutes of the Board of Directors. This agreement will be reviewed by the Compensation Committee of the Board of Directors at the end of one year, and can be extended for an additional year at that time. Should a change of control of the Company occur, you may elect to terminate your employment and receive a lump sum severance payment. Such severance payment shall mean the amount that is equal to two times your annual salary reduced by the salary amounts paid to you from the date of this agreement. A "Change of Control" shall be deemed to have occurred at such time as (i) any other entity or "person" (as defined in sections 13 (d) and 14 (d) of the Securities Exchange Act of 1934) shall become directly or indirectly a beneficial owner (as defined in Rule 13D-3 under such Act) of securities of the Company representing 20% or more (or in the case of Chugai Boyeki Co., Ltd., and its affiliates, 35% more) of the outstanding shares of capital stock of the Company or (ii) a majority of the members of the Board of Directors of the Company or any successor by merger or assignment of assets or otherwise, shall be persons other Mr. Arthur D. Roche Page 2 than members of the Board of Directors of the Company on the date of this agreement or (iii) the Company executes a "Company Sale Agreement". "Company Sale Agreement" means an agreement to which the Company is a party that contemplates that more than half of the assets of the Company are transferred to another entity or that upon consummation of the transaction contemplated by such agreement, a Change of Control as defined in clauses (i) or (ii) of the preceding paragraph shall occur or have occurred. If you elect to receive lump sum payment, such payment shall be made within 30 days of the Company's receipt of your notice of such election, except that, in the case of the Company's execution of a Company Sale Agreement, the payment shall be made no later than the time of closing under such agreement. I trust this is your understanding of our discussions, and, if so, please sign where indicated. Cordially, Arthur D. Roche Peter F. Neumann Executive Vice President Chairman, Compensation Committee PFN/jlw EX-10 6 EMPLOYMENT AGREEMENT EXHIBIT 10.6 EMPLOYMENT AGREEMENT AGREEMENT, dated as of June 1, 1995, between PETER HORN (hereinafter called "Horn") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 525 Broad Hollow Road, Melville, New York 11747 (hereinafter called the "Company"). WHEREAS, Horn has previously been employed by the Company, and WHEREAS, the Company and Horn mutually desire to assure the continuation of Horn's services to the Company, NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties covenant and agree as follows: 1. Employment. The Company shall employ Horn as its Vice President of Quality Assurance and Compliance throughout the term of this Agreement, and Horn hereby accepts such employment. 2. Term. The term of this Agreement shall commence as of the date of this Agreement and end on September 30, 1997. 3. Compensation. A. The Company shall pay Horn a base salary of $100,000 per annum, subject to periodic adjustment as determined by the President of the Company with Board of Directors approval, but in any event shall not be less than the base salary so indicated. Beginning October 1, 1996 to the end of this agreement, the base salary shall be adjusted upward by an amount at least equal to the Consumer Price Index - All Urban Consumers factor for the previous twelve months. B. Horn's base salary shall be payable monthly or bi-weekly. C. Horn shall also be entitled to participate in any pension, profit sharing, life insurance, medical, dental, hospital, disability or other benefit plans as may from time to time be available to officers of the Company, subject to the general eligibility requirements of such plans. 4. Covenant not to Compete. Horn agrees that during the term of this Agreement and for a period thereafter equal to the length of severance as calculated in paragraph 5A, he shall not directly or indirectly within the United States or Europe engage in, or enter the employment of or render any services to any other entity engaged in, any business of a similar nature to or in competition with the Company's business of designing, manufacturing, and selling security equipment and protection devices anywhere in the United States and Europe. Horn further acknowledges that the services to be rendered under this Agreement by him are special, unique, and of extraordinary character and that a material breach by him of this section will cause the Company to suffer irreparable damage; and Horn agrees that in addition to any other remedy, this section shall be enforceable by negative or affirmative preliminary or permanent injunction in any Court of competent jurisdiction. Horn acknowledges that he may only be released from this covenant if the Company materially breech's this agreement or provides to Horn a written release of this provision. 5. Severance Payment on Certain Terminations. A. If either this Agreement expires, or the Company terminates Horn's employment under this Agreement for reasons other than "Gross Misconduct", then Horn, at his option, may elect to receive severance payments, without reduction for any offset or mitigation, in an amount equal to (a) one-twelfth Horn's annual base salary at the time of such termination multiplied by (b) the number of full years of Horn's employment by the Company up to a maximum of 24 years. B. "Gross Misconduct" shall mean (a) a wilful, substantial and unjustifiable refusal to perform substantially the duties and services required of his position; (b) fraud, misappropriation or embezzlement involving the Company or its assets; or (c) conviction of a felony involving moral turpitude. Horn's option to elect to receive severance payments may be exercised only by written notice delivered to the Company within 90 days following the date on which Horn's receives actual notice of termination or this Agreement expires, as the case may be. In the event of an election under this section, payment of such severance shall be in lieu of any other obligation of the Company for severance payment or other post-termination compensation under this Agreement if any. The severance amount shall be paid in equal monthly payments over a 12 month period. - 2 - 6. Termination Payment on Change of Control. A. Notwithstanding any other provision of this Agreement, if a "Change of Control" occurs without the prior written consent of the Board of Directors, Horn, at his option, may elect to terminate his obligations under this Agreement and to receive a termination payment, without reduction for any offset or mitigation, in an amount equal to three times his average annual base salary for five years preceding the Change of Control, in either lump sum or extended payments over three years as Horn shall elect. B. A "Change of Control" shall be deemed to have occurred if (i) any other entity shall directly or indirectly acquire beneficial ownership of 20%, or any further amount in excess of 20%, of the outstanding shares of capital stock of the Company or (ii) a majority of the members of the Board of Directors of the Company or any successor by merger or assignment of assets or otherwise, shall be persons other than Directors on the date of this Agreement. C. Horn's option to elect to terminate his obligations and to receive a termination payment and to elect to receive a lump sum or extended payments may be exercised only by written notice delivered to the Company within 90 days following the date on which Horn receives actual notice of Change of Control. 7. Death or Disability. The Company may terminate this Agreement if during the term of this Agreement (a) Horn dies or (b) Horn becomes so disabled for a period of six months that he is substantially unable to perform his duties under this Agreement for such period. 8. Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York in accordance with the rules of the American Arbitration then in effect, and judgement upon the award rendered be entered and enforced in any court having jurisdiction thereof. 9. Miscellaneous. A. Except for stock options previously granted, this Agreement contains the entire agreement between the parties and supersedes all prior - 3 - agreements by the parties relating to payments by the Company upon involuntary employment termination with or without cause, however, it does not restrict or limit such other benefits as the President or Board of Directors may determine to provide or make available to Horn. B. This agreement may not be waived, changed, modified or discharged orally, but only by agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, or discharge is sought. C. This Agreement shall be governed by the laws of New York applicable to contracts between New York residents and made and to be entirely performed in New York. D. If any part of this Agreement is held to be unenforceable by any court of competent jurisdiction, the remaining provisions of this Agreement shall continue in full force and effect. E. This Agreement shall inure to the benefit of, and be binding upon, the Company, its successor, and assigns. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. VICON INDUSTRIES, INC. By Peter Horn Kenneth M. Darby Vice President - Compliance President and Quality Assurance Vicon Industries, Inc. - 4 - EX-10 7 EMPLOYMENT AGREEMENT EXHIBIT 10.7 EMPLOYMENT AGREEMENT AGREEMENT, dated as of June 1, 1995, between YACOV PSHTISSKY (hereinafter called "Pshtissky") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 525 Broad Hollow Road, Melville, New York 11747 (hereinafter called the "Company"). WHEREAS, Pshtissky has previously been employed by the Company, and WHEREAS, the Company and Pshtissky mutually desire to assure the continuation of Pshtissky's services to the Company, NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties covenant and agree as follows: 1. Employment. The Company shall employ Pshtissky as its Vice President of Technology and Development throughout the term of this Agreement, and Pshtissky hereby accepts such employment. 2. Term. The term of this Agreement shall commence as of the date of this Agreement and end on September 30, 1997. 3. Compensation. A. The Company shall pay Pshtissky a base salary of $100,000 per annum, subject to periodic adjustment as determined by the President of the Company with Board of Directors approval, but in any event shall not be less than the base salary so indicated. Beginning October 1, 1996 to the end of this agreement, the base salary shall be adjusted upward by an amount at least equal to the Consumer Price Index - All Urban Consumers factor for the previous twelve months. B. Pshtissky's base salary shall be payable monthly or bi- weekly. C. Pshtissky shall also be entitled to participate in any pension, profit sharing, life insurance, medical, dental, hospital, disability or other benefit plans as may from time to time be available to officers of the Company, subject to the general eligibility requirements of such plans. 4. Covenant not to Compete. Pshtissky agrees that during the term of this Agreement and for a period thereafter equal to the length of severance as calculated in paragraph 5A, he shall not directly or indirectly within the United States or Europe, or enter the employment of or render any services to any other entity engaged in, any business of a similar nature to or in competition with the Company's business of designing, manufacturing, and selling security equipment and protection devices in the United States and Europe. Pshtissky further acknowledges that the services to be rendered under this Agreement by him are special, unique, and of extraordinary character and that a material breach by him of this section will cause the Company to suffer irreparable damage; and Pshtissky agrees that in addition to any other remedy, this section shall be enforceable by negative or affirmative preliminary or permanent injunction in any Court of competent jurisdiction. Pshtissky acknowledges that he may only be released from this covenant if the Company materially breech's this agreement to Pshtissky or provides a written release of this provision. 5. Severance Payment on Certain Terminations. A. If either this Agreement expires, or the Company terminates Pshtissky's employment under this Agreement for reasons other than "Gross Misconduct", then Pshtissky, at his option, may elect to receive severance payments, without reduction for any offset or mitigation, in an amount equal to (a) one-twelfth Pshtissky's annual base salary at the time of such termination multiplied by (b) the number of full years of Pshtissky's employment by the Company up to a maximum of 24 years. B. "Gross Misconduct" shall mean (a) a wilful, substantial and unjustifiable refusal to perform substantially the duties and services required of his position; (b) fraud, misappropriation or embezzlement involving the Company or its assets; or (c) conviction of a felony involving moral turpitude. Pshtissky's option to elect to receive a severance payment may be exercised only by written notice delivered to the Company within 90 days following the date on which Pshtissky receives actual notice of termination or this Agreement expires, as the case may be. In the event of an election under this section, payment of such severance shall be in lieu of any other obligation of the Company for severance payment or other post-termination compensation under this Agreement if any. - 2 - The severance amount shall be paid in equal monthly payments over a 12 month period. 6. Termination Payment on Change of Control. A. Notwithstanding any other provision of this Agreement, if a "Change of Control" occurs without the prior written consent of the Board of Directors, Pshtissky, at his option, may elect to terminate his obligations under this Agreement and to receive a termination payment, without reduction for any offset or mitigation, in an amount equal to three times his average annual base salary for five years preceding the Change of Control, in either lump sum or extended payments over three years as Pshtissky shall elect. B. A "Change of Control" shall be deemed to have occurred if (i) any other entity shall directly or indirectly acquire beneficial ownership of 20%, or any further amount in excess of 20%, of the outstanding shares of capital stock of the Company or (ii) a majority of the members of the Board of Directors of the Company or any successor by merger or assignment of assets or otherwise, shall be persons other than Directors on the date of this Agreement. C. Pshtissky's option to elect to terminate his obligations and to receive a termination payment and to elect to receive a lump sum or extended payments may be exercised only by written notice delivered to the Company within 90 days following the date on which Pshtissky receives actual notice of Change of Control. 7. Death or Disability. The Company may terminate this Agreement if during the term of this Agreement (a) Pshtissky dies or (b) Pshtissky becomes so disabled for a period of six months that he is substantially unable to perform his duties under this Agreement for such period. 8. Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York in accordance with the rules of the American Arbitration then in effect, and judgement upon the award rendered be entered and enforced in any court having jurisdiction thereof. 9. Miscellaneous. A. Except for stock options previously granted, this Agreement contains the entire agreement between the parties and supersedes all prior - 3 - agreements by the parties relating to payments by the Company upon involuntary employment termination with or without cause, however, it does not restrict or limit such other benefits as the President or Board of Directors may determine to provide or make available to Pshtissky. B. This agreement may not be waived, changed, modified or discharged orally, but only by agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, or discharge is sought. C. This Agreement shall be governed by the laws of New York applicable to contracts between New York residents and made and to be entirely performed in New York. D. If any part of this Agreement is held to be unenforceable by any court of competent jurisdiction, the remaining provisions of this Agreement shall continue in full force and effect. E. This Agreement shall inure to the benefit of, and be binding upon, the Company, its successor, and assigns. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. VICON INDUSTRIES, INC. By Yacov Pshtissky Kenneth M. Darby Vice President - Technology President and Development Vicon Industries, Inc. - 4 - EX-10 8 SUBLEASE AGREEMENT EXHIBIT 10.12 SUBLEASE, MADE AS OF SEPTEMBER 1, 1995 BETWEEN VICON INDUSTRIES, INC., AS SUBLESSOR, AND NEW YORK BLOOD CENTER, INC., AS SUBLESSEE 007326/13000/180.6 TABLE OF CONTENTS Page 1. Demise of Subleased Premises; Term; etc........................ 1 2. Cafeteria...................................................... 2 3. Rent; Rent-Concession; etc..................................... 2 4. Real Estate Tax and Utility Cost Escalations................... 4 5. [Intentionally Omitted]........................................ 6 6. Use of Subleased Premises/Parking.............................. 6 7. Services Provided By Sublessor................................. 7 8. Subordination to Overlease, etc................................ 8 9. Sublessor's Rights, etc........................................ 9 10. One Time Renewal Option........................................ 9 11. [Intentionally Omitted]........................................ 10 12. Broker......................................................... 10 13. [Intentionally Omitted]........................................ 10 14. Indemnification................................................ 10 15. Insurance...................................................... 11 16. Casualty....................................................... 11 17. Condemnation................................................... 12 18. Notice, etc.................................................... 12 19. Attornment With Respect to Overlease........................... 13 20. Quiet Enjoyment................................................ 14 007326/13000/180.6 Page 21. Assignment and Subletting...................................... 14 22. [Intentionally Omitted]........................................ 16 23. Additional Covenants Required by Overlease..................... 16 24. Signs.......................................................... 17 25. Alterations.................................................... 17 26. [Intentionally Omitted]........................................ 18 27. Care of the Premises........................................... 18 28. Environmental Hazards.......................................... 19 29. Miscellaneous.................................................. 19 30. Early Termination.............................................. 21 31. [Intentionally omitted]........................................ 22 32. The Americans With Disabilities Act............................ 22 33. Counterparts......................................................... 23 EXHIBIT A Diagram of Subleased Premises............................ 24 EXHIBIT B Diagram of Corridor to Cafeteria......................... 25 EXHIBIT C Overlease (Including Amendments)......................... 26 EXHIBIT D Driveway Construction by Sublessee....................... 27 007326/13000/180.6 SUBLEASE, MADE AS OF SEPTEMBER 1, 1995 BETWEEN VICON INDUSTRIES, INC., AS SUBLESSOR, AND NEW YORK BLOOD CENTER, INC., AS SUBLESSEE SUBLEASE, made as of September 1, 1995, by and between Vicon Industries, Inc. ("Sublessor"), a New York corporation with offices at 525 Broad Hollow Road, Melville, New York 11747, and New York Blood Center, Inc. ("Sublessee"), a New York not-for-profit corporation with offices at 310 East 67th Street, New York, New York 10021. WITNESSETH: WHEREAS, Sublessor is the tenant under an agreement of lease, dated January 19, 1988, between Allan V. Rose and Suffolk County Industrial Development Agency, as landlord, the landlord's interest in which is now held by Allan V. Rose (hereinafter referred to as "Landlord"), and Sublessor as tenant, for the land and building known as 525 Broad Hollow Road, Melville, New York 11747 (collectively the "Premises") and amendments dated as of July 18, 1990, July 18, 1990 (letter agreement) and January 1, 1993 (the "Overlease"); and WHEREAS, Sublessor desires to sublease a portion of the Premises to Sublessee; and WHEREAS, Sublessee desires to sublease a portion of the Premises from Sublessor; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and conditions hereinafter set forth, the parties agree as follows: 1. Demise of Subleased Premises; Term; etc. Sublessor hereby sublets to Sublessee and Sublessee subleases from Sublessor that portion of the Premises (hereinafter referred to as the "Subleased Premises") consisting of approximately 28,239.4 square feet in the building (the "Building") known as 525 Broad Hollow Road, Melville, New York, as shown on the diagrams annexed hereto as Exhibit A, for a term of 1 year and 6 months, which term shall commence on September 1, 1995 (the "Commencement Date") and terminate on February 28, 1997 (subject to Sublessee's one-time option to extend set forth in Par. 10). In addition, to the extent that Sublessee has previously installed or is permitted to install HVAC or other equipment or facilities that service the Subleased Premises, but are located outside of the Subleased Premises, Sublessee shall also , during the term of this Sublease, have the right to maintain such equipment or facilities and shall have a right of access over and through the Premises outside of the Subleased Premises 1 to the extent reasonably required for the maintenance, servicing and repair of such equipment or facilities. Sublessee shall, upon Sublessor's request, give Sublessor a letter acknowledging that Sublessee has accepted possession of the Subleased Premises. 2. Cafeteria. (a) So long as Sublessee is not in default under this Lease, it may utilize the cafeteria maintained by Sublessor at the Premises, as a lunch area for Sublessee's employees employed at the Subleased Premises, in common with the employees of the Sublessor and of any other subtenant, subject to such reasonable restrictions as Sublessor may impose. If Sublessor shall discontinue maintenance of a cafeteria at the Premises, all rights and obligations of Sublessor and Sublessee under this subparagraph shall terminate as of the date of such discontinuance. (b) Sublessee has constructed a corridor (the "Corridor") within the Building, connecting the Subleased Premises to the cafeteria, in the location shown on Exhibit B annexed hereto. The Corridor is not included in the Subleased Premises and may be used both by Sublessee's employees and by Sublessor's employees and invitees, subject to Sublessor's right to inspect and show as provided herein (through incorporation of the Overlease). Sublessee shall be responsible for maintaining the Corridor in good repair and condition and in compliance with all laws, orders, and regulations of all governmental bodies. 3. Rent; Rent-Concession; etc. (a) Sublessee shall pay to Sublessor the base rent as hereinafter provided. Commencing September 1, 1995 and ending February 28, 1997 the annual base rent for the Subleased Premises shall be $416,531.15 per annum ($34,710.93 per month), subject to adjustment as hereinafter provided. Such base rent was computed by multiplying the Leasable Area (hereinafter defined) by $14.75 per square foot. The "Leasable Area" means the gross square footage of the Subleased Premises measured to a point halfway through each of the perimeter walls of the Subleased Premises. Sublessee may, on or before September 1, 1995, at Sublessee's expense, review Sublessor's measurements of the Subleased Premises and, if Sublessor's determination that the Leasable Area is 28,239.4 square feet is wrong, the base rent shall be appropriately adjusted. In the event Sublessee fails to object to Sublessor's measurements by September 1, 1995, Sublessor's measurements shall be deemed binding. (b) Such base rent shall be paid in equal monthly installments on the first day of each month during the term of this Lease, in legal tender of the United States at the office of Sublessor at the Premises, without any setoff, abatement, or 007326/13000/180.6 2 deduction whatsoever (except as set forth in Paragraphs 16 and 17 hereof); provided that the foregoing shall not be deemed a waiver by Sublessee of any claim against Sublessor based on Sublessor's breach of this Sublease, which claim(s) may be asserted by Sublessee in any separate action or proceeding. Sublessee shall pay the first month's base rent upon the Commencement Date of this Sublease. (c) [Intentionally omitted] (d) If Sublessee shall fail to pay (by delivery to and receipt by Sublessor of a good check for the requisite amount) all or any part of any installment of rent or additional rent for more than ten days after the same shall have become due and payable hereunder, Sublessee shall pay as additional rent hereunder to Sublessor (1) a one-time late charge with respect to such default equal to four cents for each dollar of the amount of such rent and additional rent which shall not have been paid to Sublessor within such ten days and (ii) in the event such default shall continue for a period in excess of one month, then, in addition to such late charge, interest on such overdue amount at the prime rate, currently denominated as the "base rate", of Citibank, N.A. in New York, New York from that date one month after the due date thereof until the date Sublessor is paid in full. If Sublessee pays any rent or other charge with a check that is, for any reason, refused for payment by the bank on which it is drawn, Sublessee shall pay Sublessor a $50 service charge. The late charge, interest, and service charge described above shall be payable (A) within 10 days after demand and (B) without prejudice to any of Sublessor's rights and remedies hereunder, at law or in equity, for nonpayment of rent or other sums, but shall be in addition to any such rights and remedies. No failure by Sublessor to insist upon the strict performance by Sublessee of Sublessee's obligations to pay late charges, interest, and service charges as provided in this subparagraph shall constitute a waiver by Sublessor of its right to enforce the provisions of this subparagraph in any such instance or in any instance thereafter occurring. (e) Any costs or expenses incurred by Sublessor to cure any default by Sublessee under this Lease which was not cured within the applicable cure period (except that in an emergency Sublessor shall not be required to wait for the expiration of the cure period), excluding attorneys' fees, shall be paid by Sublessee to Sublessor within 10 days after Sublessor makes demand therefor and shall be treated in all respects as rent. Any default by Sublessee in the payment of such damages, costs or expenses shall be treated as a default in the payment of rent, and Sublessor shall have the same remedies with respect thereto as it has with respect to any default in payment of rent. (f) Sublessee's obligations to make payments of additional rent allocable to the term of this Sublease which are billed after the expiration of the term of this Sublease, shall survive the expiration or sooner termination of this Sublease. 007326/13000/180.6 3 4. Real Estate Tax and Utility Cost Escalations. (a) For the purposes of this Sublease the following terms shall have the following meanings: (i) "Real Estate Taxes" shall mean all "Impositions" (as defined in section 4.1(A) of the Overlease). (ii) "Tax Year" shall mean each 12-month fiscal period commencing December 1 and ending November 30, any portion of which occurs during the term of this Sublease. (iii) "Base Tax Year" shall mean the Tax Year commencing December 1, 1994 and expiring November 30, 1995. (iv) "Subsequent Year" shall mean (A) with respect to Real Estate Taxes, each Tax Year (or any portion thereof) commencing within the term of this Lease which shall be subsequent to the Base Tax Year; and (B) with respect to Utility Cost (hereinafter defined), the 1995 calendar year and each subsequent calendar year which commences during the term of this Sublease. (v) "Sublessee's Proportionate Share" shall mean 26.148%, the percentage obtained by dividing the Leasable Area by 108,000 (the Leasable Area of the Building). Sublessee may, on or before September 1, 1995, at Sublessee's expense, review such measurements and give Sublessor notice of any discrepancy between Sublessor's and Sublessee's measurements. (vi) "Utility Cost" shall mean Sublessor's cost for all fuel (including, but not limited to, oil, gas, steam and coal but excluding electricity) delivered to the Building. (vii) "Base Utility Cost" shall mean Sublessor's Utility Cost for the 1995 calendar year. (b) If in any Subsequent Year, Real Estate Taxes payable during such Subsequent Year shall be greater than Real Estate Taxes payable during the Base Tax Year for any reason whatsoever (including but not limited to increases in the tax rates and/or the assessed valuation of the Building, and increases in assessed valuation by reason of improvements made to the Premises or any part thereof), foreseen or unforeseen, then Sublessee shall pay Sublessor as additional rent, an amount (hereinafter called "Sublessee's Tax Payment") equal to Sublessee's Proportionate Share of such increase. Such additional rent shall be paid by Sublessee notwithstanding the fact that Sublessee may be exempt, in whole or in part, from the 007326/13000/180.6 4 payment of any Real Estate Taxes by reason of Sublessee's diplomatic charitable, or otherwise tax exempt status, or for any other reason whatsoever. Sublessor shall furnish Sublessee with a statement setting forth the amount of Real Estate Taxes and Sublessee's Tax Payment payable for such Subsequent Year, and Sublessee shall pay Sublessee's Tax Payment in one lump sum within fifteen (15) days of the furnishing of such statement, but shall not in any event be required to pay Sublessee's Tax Payment more than five (5) days before the commencement of the Tax Year. (c) If the Utility Cost payable for any Subsequent Year (any part or all of which falls within the term of this Sublease) shall represent an increase above the Base Utility Cost, then Sublessee shall pay Sublessor as additional rent for such Subsequent Year Sublessee's Proportionate Share of such increase in one lump sum within 15 days after Sublessor furnishes to Sublessee a statement of the amount due. (d) (i) Any statement sent to Sublessee with respect to Real Estate Taxes shall be binding upon Sublessee unless, within thirty (30) days after such statement is sent, Sublessee shall send a written notice to Sublessor objecting to such statement and specifying the respects in which such statement is claimed to be incorrect. Any statement sent to Sublessee with respect to Utility Cost shall be binding upon Sublessee unless, within 30 days after such statement is sent, Sublessee shall request copies of the fuel bills supporting the Utility Cost computation (to the extent not previously furnished) and unless, within 30 days after delivery of copies of such bills, Sublessee shall send written notice to Sublessor objecting to such statement and specifying the respects in which such statement is claimed to be incorrect. Pending the determination of any such dispute Sublessee shall pay all additional rent shown on such statement, and such payment and acceptance shall be without prejudice to Sublessee's position. (ii) Real Estate Tax and Utility Cost escalations shall be appropriately prorated for any partial Subsequent Year. Any additional rent due under this Paragraph 4 shall be collectible by Sublessor in the same manner as the base rent, and Sublessor shall have all rights with respect thereto as it has with respect to the base rent. (iii) If, after Sublessee shall have paid Sublessee's Proportionate Share of any increase in Real Estate Taxes with respect to any Subsequent Year, Sublessor shall receive a refund of any portion of the Real Estate Taxes paid with respect to such Subsequent Year as a result of a reduction in such Real Estate Taxes by final determination of legal proceedings, settlement or otherwise, Sublessor shall promptly, after receiving such refund, pay Sublessee its Proportionate Share of such refund after deducting from such refund the expenses (including but not limited to attorneys' fees, expert's fees and disbursements) incurred by Sublessor in 007326/13000/180.6 5 connection with any application or proceeding to reduce the assessed valuation of the Premises for such Subsequent Year. (e) Notwithstanding the foregoing or any other provision of this Sublease, Sublessor specifically waives its right to collect the Real Estate Tax escalation for the tax year commencing December 1, 1994 and ending November 30, 1995 and to collect the Utility Cost escalation for the 1995 calendar year. The parties confirm that Sublessee's Proportional Share is 26.148%. 5. [Intentionally Omitted] 6. Use of Subleased Premises/Parking. (a) Sublessee shall use and occupy the Subleased Premises for (i) office use and (ii) incidental to such office use, for storage of supplies (but not for storage of blood or blood products or medical waste except as hereinafter specifically provided) and for telephone solicitations and (iii) to collect blood from donors provided that no more than 13.5% of the Leasable Area shall be used for blood collection; and for no other purpose. Without limiting the foregoing, except as provided below, Sublessee agrees that it shall not use the Subleased Premises as a laboratory to process blood or blood products or to store blood or blood products or medical waste (hereinafter defined) or for any pornographic purposes or any sort of commercial sex establishment. (b) Notwithstanding the provisions of Par. 6(a) or any other provision of this Sublease, Sublessee shall have the right to use an area of 3,964 square feet, as identified on Exhibit A (the "Option Area"), for: (i) the purposes described in subpar. (a) above and (ii) in addition, as a laboratory to process blood or blood products or to store blood or blood products and, further, as a "stat" lab for emergency testing of blood, it being agreed that the uses listed in this clause (ii) may not be operated in any portion of the Subleased Premises outside of the Option Area. (c) Sublessor shall assign 155 parking spaces in the parking lot around the Building for Sublessee's use, and Sublessee shall clearly mark such spaces for its use. Sublessee's employees and invitees shall not use other parking spaces on the Premises. In the event that the volume of traffic through the parking lot on the Premises or the streets or intersections bordering the Premises is increased (or claimed to be increased by any government authority) by reason of Sublessee's use of the Subleased Premises (for example, if the volume of the traffic increases by reason of Sublessee's donor collection activities) and if the Town of Huntington or any other federal, state, municipal, county, or local government, department, commission, board or agency, makes any objection or issues any direction with respect to such condition, then Sublessee, at its own cost and expense, shall comply with any such direction and shall be responsible for removing any such objection and shall be 007326/13000/180.6 6 responsible for any costs or penalties that are imposed on the Building, the Premises, Landlord, Sublessor or Sublessee with respect to such matters, which payment(s) shall be deemed additional rent hereunder. 7. Services Provided By Sublessor. (a) As long as Sublessee is not in default, Sublessor will provide (i) heat to the Subleased Premises when and as required by law on business days,from 7 a.m. to 7 p.m. and on Saturdays from 8 a.m. to 1 p.m. (collectively, "Business Hours"); (ii) parking lot snow removal; and (iii) water as required up to the amount that would be required for executive lavatory purposes but, if Sublessee uses or consumes water beyond executive lavatory use, Sublessor may install a water meter at Sublessee's expense which Sublessee shall thereafter maintain at Sublessee's expense in good working order and repair for the purpose of measuring such water consumption and Sublessee shall pay for water consumed as shown on said meter as additional rent as and when bills are rendered; and (iv) groundskeeping. Sublessor may interrupt such services when necessary by reason of accident or for repairs, alterations, replacements or improvements necessary or desirable in Sublessor's judgment so long as reasonably required therefor or by reason of strike or labor troubles or any cause whatsoever beyond Sublessor's sole control. (b) Sublessor shall service the HVAC system serving the Subleased Premises on a routine basis by starting the equipment in the spring, providing regular service and maintenance inspections, installing filters as needed, and shutting down the system for the winter. Sublessor shall make routine, minor repairs to the system as part of such service. Sublessee, however, shall be responsible for making all other necessary repairs and replacements. (c) (i) Sublessee shall obtain electric service, at its own cost and expense, directly from the utility servicing the Building. (ii) [Intentionally Omitted] (iii) Sublessee's use of electric current in the Subleased Premises shall not at any time exceed the capacity of any of the electrical conductors and equipment in or otherwise serving the Subleased Premises. In order to ensure that such capacity is not exceeded and to avert possible adverse effect upon the Building's electric service, Sublessee shall not without Sublessor's prior written consent, which consent shall not be unreasonably withheld, in each instance, connect any additional electrical fixtures, appliances or equipment (other than lamps, typewriters, and other electrical equipment with electric consumption equivalent to that of standard office machines) to the Building's electric distribution system or make any alteration or addition to the electrical system of the Subleased Premises. Should 007326/13000/180.6 7 Sublessor grant such consent and if additional risers or equipment shall be required therefor, same shall be installed by the Sublessor, and the cost thereof shall be paid by Sublessee. Sublessor shall not be liable in any way to Sublessee for any failure or defect in supply or character of electric current furnished to the Subleased Premises (other than such as may result from Sublessor's gross negligence or wrongful act or wrongful omission), including but not limited to any failure or defect in the supply or character of electric service furnished to the Subleased Premises by reason of any requirement, act or omission of the utility serving the Building. (iv) [Intentionally Omitted] 8. Subordination to Overlease, etc. (a) Except as hereinafter otherwise provided, this Sublease is expressly subject and subordinate to the covenants, terms and conditions of the Overlease and the rights of the landlord thereunder and to the lien of any mortgages which may now or hereafter encumber or otherwise affect the real estate of which the Subleased Premises form a part. Sublessee hereby acknowledges and represents that it has read the Overlease and is familiar with all of the provisions thereof. A copy of the Overlease, with certain provisions deleted, is annexed hereto as Exhibit C. (b) Except as set forth in subparagraph (d) below and except to the extent that such terms are inconsistent with the terms of this Sublease, Sublessee shall be bound by and comply with all of the terms, covenants and conditions to be observed and performed by the tenant under the Overlease, as they relate to the Subleased Premises and to the term of this Sublease, and Sublessee shall not do or permit to be done any act or thing, or create or permit to be created any condition, which may constitute a breach, default or violation of any of the terms, covenants or conditions of the Overlease, or which may render Sublessor liable for any charge or expense thereunder. (c) Sublessor shall have the same rights and remedies with respect to this Sublease and Sublessee as the Landlord has with respect to the Overlease and the tenant thereunder as though such rights and remedies set forth in the Overlease in favor of Landlord were set forth in this Sublease in favor of Sublessor, including without limiting the foregoing all of the rights and remedies provided in the Overlease for non-payment of rent and the right to cure defaults of Sublessee. Except as herein provided, all of the terms, covenants and conditions of the Overlease are incorporated herein with the same force and effect as if herein set forth in full and the rights and obligations contained in the Overlease are hereby imposed on the respective parties hereto. References in the Overlease to "Landlord" or "Sublessor", to "Tenant", to "Lease", and to "premises" or "demised premises" are deemed to refer to Sublessor, Sublessee, this Sublease and the Subleased Premises, respectively; any references to 007326/13000/180.6 8 Base Rent or Fixed Net Rent in the Overlease shall be deemed to be to the rent payable hereunder, and references to the expiration date of the Overlease shall be deemed made to the expiration date of this Sublease; and where the sense of the text requires it, references to specific paragraphs and terms in the Overlease shall be deemed made to the corresponding paragraph and terms hereunder. Without limiting the foregoing, Article 16 (Default Provisions) of the Overlease, including the cure periods set forth therein, shall become a part of this Sublease as provided above, with the following modifications: (i) Section 16.1(d) is modified to delete the words "for five days after written notice thereof from Landlord" and to substitute therefor the following language: "for ten days after the due date thereof"; and (ii) all references in the last paragraph of Section 16.1 to "three (3) days" shall be changed to "five (5) days" unless such extension of time would cause Sublessor to be in breach of the Overlease. (d) The following Articles and sections contained in the Overlease shall not be deemed incorporated in this Sublease (except as herein specifically provided): 1; 2; 4 (except to the extent such Impositions are payable by Sublessee as part of Real Estate Tax escalation); 5; the first sentence of 6.1; 6.2; 6.4; 7; 8; the first sentence of 11.1; 11.2; 11.3; 12.1(b), (d) and (e) (except to the extent payable as part of escalations and additional rent hereunder); the second sentence of 12.3; 13; 14; 19.3; 20 (except to the extent noted in Par. 21 of this Sublease); 22; 23; 24; 28; 32; 37 and 40; Amendment dated July 18, 1990; Amendment dated July 18, 1990 (letter agreement); and Amendment dated as of January 1, 1993. Notwithstanding anything to the contrary contained in Article 10 of the Overlease, Sublessee shall not be required to discharge any lien, encumbrance or charge against the Premises created by or imposed on account of Sublessor or Overlandlord. 9. Sublessor's Rights, etc. Except with respect to those obligations of Sublessor specifically set forth in this Sublease, Sublessor does not undertake any obligation to perform the terms, covenants and conditions contained in the Overlease on the Landlord's part to be performed thereunder. 10. One Time Renewal Option. If Sublessee is not then in default beyond any notice and grace period provided for in this Sublease, Sublessee may renew this Sublease upon all of the terms, covenants and conditions set forth herein for an additional term of 11 months commencing March 1, 1997 and ending on January 30, 1998, by written notice of such renewal delivered to Sublessor no later than October 31, 1996. In the event this Sublease is timely renewed as provided in this Paragraph, the base rent payable during the first year of the renewal term shall be $416,531.15 per annum ($34,710.93 per month). During such extended term Sublessee shall, among other things, continue to pay Real Estate/Tax and Utility Cost escalations utilizing the same Base Tax Year and Base Utility Cost set forth in Paragraph 4. This 007326/13000/180.6 9 Paragraph 10 shall be deemed void and of no further force or effect if Sublessee or Sublessor exercises any right to cancel this Sublease, including under Paragraphs 16, 17 and 30. Time is of the essence with respect to the date by which Sublessee is to give Sublessor notice hereunder. 11. [Intentionally Omitted] 12. Broker. Sublessee represents and warrants to Sublessor that it has had no dealings or communications with any broker or agent in connection with this Sublease. Sublessee dealt with Cooperman Associates in connection with a prior sublease between the parties for a portion of the Subleased Premises. Sublessee agrees to indemnify and hold Sublessor harmless from and against any and all costs, expenses (including reasonable attorneys' fees and disbursements) and liabilities for any compensation, commissions or charges claimed by any broker or agent with whom Sublessee has dealt with respect to this Sublease. The foregoing indemnity does not extend to Cooperman Associates, except to the extent Cooperman Associates may make a claim based on dealings or communications Sublessee has had with Cooperman Associates with respect to this Sublease. Sublessor agrees to indemnify and hold Sublessee harmless from and against any and all costs, expenses (including reasonable attorneys' fees and disbursements) and liabilities for any compensation, commissions or charges claimed by (a) any broker or agent with whom Sublessor, but not Sublessee, has dealt with respect to this Sublease, and (b) Cooperman Associates (except to the extent Cooperman Associates may make a claim based on dealings or communications Sublessee has had with Cooperman Associates with respect to this Sublease). 13. [Intentionally Omitted] 14. Indemnification. Sublessee hereby agrees to indemnify and hold Sublessor harmless from and against any and all losses, liabilities, damages and expenses (including reasonable attorneys' fees and disbursements) for which Sublessor shall not be reimbursed by insurance, which Sublessor may suffer or incur (i) in connection with Sublessee's breach of this Sublease and/or failure to comply with the applicable terms and conditions of the Overlease, or (ii) arising out of damage or injury to persons or property in the Subleased Premises or on the driveway constructed by Sublessee pursuant to Par. 25(b) during the term of this Sublease, unless injury or damage is caused by the negligence of Sublessor, its agents, servants, employees or invitees. Sublessor hereby agrees to indemnify and hold Sublessee harmless from and against any and all losses, liabilities, damages and expenses (including reasonable attorneys' fees and disbursements) for which Sublessee shall not be reimbursed by insurance, which Sublessee may suffer or incur (i) in connection with Sublessor's breach of this Sublease or (ii) arising out of damage or injury to persons or property occurring on the Premises, but outside of the Subleased Premises or such driveway unless such injury or 007326/13000/180.6 10 damage is caused by the negligence of Sublessee, its agents, servants, employees or invitees. The provisions of this Paragraph and Sublessee's and Sublessor's obligations hereunder shall survive the expiration or other termination of this Sublease. 15. Insurance. During the term of this Sublease, Sublessee shall maintain in full force and effect the comprehensive public liability insurance required by the Overlease, except that such policy shall be in a combined single limit of $2,000,000. Sublessor and Landlord shall be named as additional insured on such policy, in addition to those persons and entities required to be named as insured and additional insured under the Overlease. Such policy shall not be cancelable with respect to Sublessor or Landlord, except upon at least ten days prior written notice to Sublessor and the Landlord under the Overlease. Two duplicate originals or certificates of such policies shall be delivered to Sublessor, together with proof of payment of the premiums thereon, upon the commencement date of this Sublease and, thereafter, at least thirty days before each expiration thereof, two duplicate originals or certificates of the renewals or replacements of such policies shall be delivered to Sublessor. Nothing contained in this paragraph shall be deemed to limit in any way the indemnification provisions of Paragraph 14. 16. Casualty. (a) If the Subleased Premises shall be partially damaged by fire or other insured casualty, the damages shall be repaired by and at the expense of Sublessor and the base rent shall be abated from the day following the casualty until the date such repairs are substantially completed according to the part of the Subleased Premises which are untenantable. Notwithstanding the foregoing, Sublessor may terminate this Sublease upon notice to Sublessee given within ninety (90) days following the date of such casualty and upon the date specified in such notice, which date shall be not less than one hundred twenty (120) days nor more than one hundred fifty (150) days following the giving of such notice, this Sublease shall terminate and Sublessee shall vacate and surrender the Subleased Premises to Sublessor. (b) If this Sublease shall not be terminated as provided above in subparagraph (a), Sublessor shall proceed with the restoration of the Subleased Premises, provided that Sublessor's restoration obligations shall be subject to building and zoning laws then in effect. Sublessor shall make such repairs with reasonable expedition, subject to delays due to adjustment of insurance claims, availability of materials, labor troubles and other causes beyond Sublessor's reasonable control. Sublessee shall cooperate with Sublessor's restoration by removing from the Subleased Premises, as promptly as reasonably possible, all of Sublessee's salvageable and movable equipment, furniture and other property. If Sublessor shall restore the Subleased Premises, Sublessee shall diligently repair, restore and redecorate the Subleased Premises and re-open for business from the Subleased Premises, promptly 007326/13000/180.6 11 following notice of restoration, in a manner and to the condition existing prior to the occurrence of such casualty, except to the extent that Sublessor is obligated to make such repairs as provided above. (c) In the event of a casualty not caused by Sublessee, Sublessee's agents, employees, servants, invitees or contractors, Sublessee may, if Sublessor fails to substantially complete restoration of the Subleased Premise within 5 months of the date of the casualty, give Sublessor 30 days' notice of intent to terminate and, if substantial restoration of the Subleased Premises has not been effected within such 30- day period, then this Sublease shall terminate effective 30 days after such notice of termination is given to Sublessor. 17. Condemnation. If "materially all" (as such term is defined in Article 14 of the Overlease) of the Premises or if any portion of the Subleased Premises such that Sublessee shall no longer be able to operate its business at the Subleased Premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then and in such event, the term of this Sublease shall cease and terminate from the date of title vesting in such proceeding. If a portion of the Subleased Premises is so acquired or condemned and Sublessee shall notify Sublessor within 30 days of having learned of such event that Sublessee is able to continue to operate its business in the remaining portion of the Subleased Premises, then, this Sublease shall continue as to such portion and the base rent shall be proportionately abated. Sublessee shall be entitled to any portion of an award made to Sublessee for the value of Sublessee's trade fixtures and moving expenses provided such award does not diminish Sublessor's or Overlandlord's award. As between Sublessor and Sublessee, all compensation awarded for the taking of the Building, the Premises, the fee and the leasehold shall belong to and be the property of the Sublessor, and Sublessee shall not be entitled to any damages for the unexpired portion of the term of this Sublease or injury to its subleasehold interest. 18. Notice, etc. Any notice, demand, consent or other communication which, under the terms of this Sublease, must or may be given or made by the parties hereto, shall be in writing to be effective and shall be given or made by mailing the same by registered or certified mail, return receipt requested, addressed to the party for whom intended at its address as set forth on the first page of this Sublease. Either party may designate such new or other addresses to which such communications thereafter shall be given, made or mailed by notice given to the other party in the manner prescribed herein. Any such communication shall be deemed given or served, as the case may be, on the date of the posting thereof. Notwithstanding the foregoing, Sublessor may deliver any bill to Sublessee by leaving such bill at the Subleased Premises and such bill shall be deemed given on the date of delivery. 007326/13000/180.6 12 19. Attornment With Respect to Overlease. Sublessee recognizes and acknowledges that the Sublessor hereunder is the tenant under the Overlease. The Sublessee covenants and agrees that if the leasehold estate of the Sublessor (as tenant under the Overlease) is terminated or surrendered for any reason whatsoever including, without limitation pursuant to Article 30, it will attorn to the Landlord under the Overlease, upon the request of the Landlord, or any successor thereto, as the case may be, and will recognize such landlord or such successor, as the case may be, as the Sublessee's landlord under this Sublease. The Sublessee agrees to execute and deliver at any time and from time to time, upon the request of the Sublessor or of the landlord under the Overlease or any successor thereto, as the case may be, any instrument which may be necessary or appropriate to evidence such attornment. If the leasehold estate of the Sublessor as tenant under the Overlease is terminated or surrendered, the Sublessee covenants and agrees upon request of the landlord under the Overlease or any successor thereto to enter into a lease with such landlord under the Overlease or any successor thereto on the same terms and conditions as this Sublease, except as hereinafter set forth. The Sublessee further waives the provision of any statute or rule of law now or hereafter in effect which may give or purport to give the Sublessee any right of election to terminate this Sublease or to surrender possession of the Subleased Premises in the event of the termination or surrender of the Overlease and agrees that this Sublease shall not be affected in any way whatsoever thereby. If the Overlease terminates for any reason and Sublessee becomes the direct tenant of the landlord under the Overlease, such landlord shall not be (i) liable for any previous act or omission of Sublessor under this Sublease, (ii) subject to any credit, offset, claim, counterclaim, demand or defense which Sublessee may have against Sublessor, (iii) bound by any previous modification of this Sublease that was not consented to by Landlord or that is inconsistent with this Sublease or the Consent to Sublease, among Landlord, Sublessor and Sublessee, dated as of the date hereof (the "Consent"), or by any previous prepayment of more than one month's rent, (iv) bound by any covenant of Sublessor to undertake or complete any construction of the Subleased Premises or any portion thereof, (v) required to account for any security deposit of the Sublessee other than any security deposit actually delivered to Landlord by Sublessor, (vi) bound by any obligation to make any payment to Sublessee or grant any credits, except for services, repairs, maintenance and restoration provided for under this Sublease to be performed after the date of Sublessee's attornment to Landlord, (vii) responsible for any monies owing by Landlord to the credit of Sublessor, (viii) required to remove any person occupying the Subleased Premises or any part thereof, (ix) required to afford Sublessee any cafeteria rights or access rights through the corridor as defined in Paragraph 2 of this Sublease (and such Paragraph shall be deemed deleted and Landlord shall have the right to eliminate such Cafeteria and corridor), and (x) required to provide any parking for Sublessee's use, except for providing the spaces set forth in the Consent. Further, if the Overlease is terminated for any reason and this Sublease becomes a direct lease pursuant to the terms of this Sublease or the Consent, this Sublease shall be deemed modified from the date of such termination as provided in the Consent, which modifications shall include Landlord's right to terminate the direct lease upon 120 days notice. 007326/13000/180.6 13 20. Quiet Enjoyment. Sublessor covenants and agrees with Sublessee that upon Sublessee paying the rent and additional rent and observing and performing all the terms, covenants and conditions on Sublessee's part to be observed and performed, giving regard to any cure periods provided herein, Sublessee may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms, and conditions of this Sublease. 21. Assignment and Subletting. (a) Sublessee shall not assign this Sublease or sublet all or any part of the Subleased Premises or grant any concessions or licenses in respect thereof or in any way encumber Sublessee's interest in this Sublease or the Subleased Premises without the written consent of Sublessor and Landlord, subject to the provisions of this Par. 21. (b) Sublessor covenants and agrees that it will not unreasonably withhold its consent to Sublessee's assignment of this Sublease or subletting of all or part of the Subleased Premises to any other person, firm, or corporation, provided such assignee or subtenant shall use and occupy the Subleased Premises for offices and not for storage of blood or blood products or medical wastes, or to collect blood from donors, or as a laboratory to process blood or blood products or as a "stat" lab for emergency testing of blood. Notwithstanding the foregoing, if such assignment or sublet is proposed to be made to an affiliate of New York Blood Center, Inc, (an affiliate being any person or entity controlling, controlled by or under common control with New York Blood Center, Inc.), such assignee or subtenant may use the Subleased Premises for the uses described in Paragraph 6 of this Sublease. At the time of such assignment and/or sublet, this Sublease must be in full force and effect without any breach or default thereunder on the part of the Sublessee which is not cured in the applicable time period. A copy of the assignment and the original assumption agreement or sublease (both in form and content satisfactory to Sublessor), fully executed and acknowledged by the assignee and/or sublessee shall be delivered to Sublessor within ten (10) days from the date of execution of such assignment or sublease. In the event of an assignment or sublet, Sublessee shall remain liable for the performance of all of the terms, covenants and conditions of this Sublease, including the payment of base rent and additional rent. Any such sublet or assignment shall be subject to consent of Landlord, subject to the provisions of the Consent. (c) Notwithstanding anything contained in this Sublease to the contrary and notwithstanding any consent by Sublessor to any assignment or sublease of the Subleased Premises, no assignee or subtenant who enters into such an assignment or sublease, shall further assign this Sublease or further sublet all or part of the Subleased Premises or assign any subsublease of the Subleased Premises 007326/13000/180.6 14 without the prior written consent of Sublessor in each such case, which consent Sublessor in its sole discretion may withhold. (d) Notwithstanding anything to the contrary set forth in this Paragraph 21, or elsewhere in this Sublease, in the event Sublessee requests Sublessor's consent to a sublease of all of the Subleased Premises or to an assignment of the Sublease as set forth in subparagraph (b), then Sublessor shall have the right to cancel and terminate the Sublease, as of a date chosen by Sublessor, no earlier than two (2) months and no later than four (4) months after the date of Sublessee's notification to Sublessor of Sublessee's request to sublease or assign. If Sublessor exercises its option to terminate this Sublease, then this Sublease shall cease and terminate on the date set forth by Sublessor in its notice without any further liability on the part of either party to the other, except for accrued obligations to the date of termination. Sublessor's right to cancel shall not apply to a request to sublet or assign to an affiliate of Sublessee, provided that the permitted uses under the Sublease shall remain the same. (e) In the event of an assignment of this Sublease or sublet of more than 30% of the Subleased Premises consented to by Sublessor, 75% of any Net Profit for each calendar year shall be paid quarterly to Sublessor. "Net Profit" for any calendar year shall mean the amount by which "Gross Receipts" actually paid to Sublessee in connection with any and all sublettings or assignments exceed "Gross Expenses" of Sublessee with respect to the portion of the Subleased Premises so sublet (or the entire Subleased Premises if the Sublease is assigned) for such calendar year, such apportionment to be made on the basis of the percentage of the actual net usable square footage of the Subleased Premises. "Gross Receipts" of Sublessee shall mean all rentals and any other sums paid to Sublessee including, without limitation of the foregoing, rent and additional rent, sums paid to acquire the Sublease or subsublease, fixture fees, electricity charges, "key money", and any other consideration paid by any subtenant or assignee to Sublessee during the calendar year in question. "Gross Expenses" of Sublessee with respect to the Subleased Premises for any calendar year shall mean all rent, additional rent, and other sums payable by Sublessee to Sublessor under the Sublease for such calendar year and shall not include any other expenditures paid or incurred by Sublessee except customary brokerage fees and reasonable attorneys' fees actually paid by Sublessee in connection with such subletting or assignment. Within thirty (30) days after the end of each quarter of each calendar year of the Sublease, Sublessee shall deliver to Sublessor a statement sworn to by an officer of Sublessee setting forth the Gross Receipts and Gross Expenses for such quarter and the computation of the Net Profit, if any, for such quarter, together with any payment for any Net Profit which may be due hereunder. In the event any such statement intentionally contains an untrue statement or intentionally fails to include a complete statement of Gross Receipts, Sublessee shall be deemed to be in 007326/13000/180.6 15 material default of this Sublease and Sublessor shall be entitled to terminate this Sublease in addition to exercising any other remedy available to it in law or in equity. For the period of two (2) years after any statement required by this Paragraph 21 has been sent by Sublessee to Sublessor, Sublessor shall have the opportunity to examine the books of Sublessee in order to determine the accuracy of such statements). (f) A form of transfer or conveyance that would be deemed an assignment or sublease under the Overlease shall be deemed an assignment or sublet hereunder and subject to the terms hereof. In addition, any transfer, by operation of law or otherwise, of Sublessee's (or any subtenant's or assignee's) interest in this Sublease or the Subleased Premises (in whole or in part) or of a 50% or greater interest in Sublessee (whether stock, partnership interest, or otherwise) shall be deemed an assignment of this Sublease and subject to the provisions hereof. It is understood and agreed that if Sublessee is a corporation, a transfer by the corporation or any shareholders) thereof of a majority of the issued or outstanding capital stock of Sublessee, however accomplished (including a transfer accomplished by the corporation's issuance of shares in an amount greater than 50% of the outstanding shares), and whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Sublease requiring Sublessor's consent. 22. [Intentionally Omitted] 23. Additional Covenants Required by Overlease. (a) Sublessee shall remove reasonably promptly after notice all liens which might affect the landlord under the Overlease's fee estate in the Premises or any portion thereof as a result of any changes, alterations, new construction, renovation, demolition or remodeling of the Building or any portion thereof made, or claimed to have been made, at the request of Sublessee. (b) The landlord under the Overlease shall be permitted entry to the Subleased Premises for the purposes and at the times set forth in Article 9 of the Overlease. (c) Sublessor shall remove or otherwise discharge any mechanics liens placed against the Premises by reason of a claim against Sublessor in accordance with its obligations as tenant under the Overlease. The foregoing Subpar. (c) shall not be deemed to eliminate any obligation of Sublessee to Sublessor under this Sublease (including by reason of the incorporation of the terms of the Overlease) to remove any mechanics liens. 007326/13000/180.6 16 24. Signs. Sublessee may continue to maintain the existing sign on the exterior of the Building by the entrance to the Subleased Premises and may install one additional sign on the monument located in front of the Building and one sign on the west wall of the Building (in the southwest corner). Sublessor shall cooperate with Sublessee and, if necessary, join in any application for a sign permit, at Sublessee's expense. Such signs shall only contain the name of the Sublessee (and/or any permitted assignees or sub-sublessee). Sublessee shall obtain all permits, certificates and licenses required for the installation of each sign installed by Sublessee; shall comply with all present and future laws, orders and regulations of all state, federal, municipal, county, and local governments, departments, commissions and boards and any direction of any public officer pursuant to law with respect to such sign(s); and shall pay all fees, including but not limited to any annual permit fees, required to be paid in connection with such sign(s). 25. Alterations. (a) Sublessee shall make no changes in or to the Subleased Premises of any nature without the prior consent of Landlord and Sublessor. Sublessee shall furnish Sublessor and Landlord with detailed plans and specifications covering all proposed changes. Sublessor agrees not to unreasonably withhold its consent to any such changes to the Subleased Premises which are non-structural and which do not affect utility services or plumbing and electrical lines in or to the interior of the Subleased Premises; provided Sublessee complies with the provisions of Section 11.1(a)-(h) and 11.3 of Article 11 of the Overlease. Sublessor's consent shall be granted or denied within 5 working days of receipt of such plans and specifications. Sublessee shall use contractors and mechanics first approved by Sublessor, and Sublessor shall grant or deny such approval within 3 working days after receipt of Sublessee's request. If any mechanic's lien is filed against the Subleased Premises or the Building for work claimed to have been done for or materials furnished to Sublessee, whether or not done pursuant to this Paragraph, the same shall be discharged by Sublessee within ten days thereafter at Sublessee's expense by filing the bond required by law or otherwise. All improvements, alterations and additions to the Subleased Premises and all fixtures, panelling, partitions, railings and like installations, installed in the Subleased Premises at any time, either by Sublessee or by Sublessor on Sublessee's behalf, shall, upon installation, become the property of Sublessor and shall remain upon and be surrendered with the Subleased Premises. Nothing in this Paragraph shall be construed to give Sublessor title to or to prevent Sublessee's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the Subleased Premises or upon removal of such other installations as may be required by Sublessor, Sublessee shall immediately and at its expense, repair and restore the Subleased Premises to the condition existing prior to installation and repair any damage to the Subleased Premises or the Building due to such removal. All property permitted or required to be removed by Sublessee 007326/13000/180.6 17 at the end of the term remaining in the Subleased Premises after Sublessee's removal shall be deemed abandoned and may, at the election of Sublessor, either be retained as Sublessor's property or removed from the Subleased Premises by Sublessor, at Sublessee's expense. (b) Sublessee has built, at Sublessee's sole cost and expense, a driveway from the property owned by Sublessee adjacent to the Premises (the "Adjacent Building") to the parking lot on the Premises in the location indicated on Exhibit D annexed hereto. Sublessee shall remove such driveway and shall restore the Premises to their original condition existing prior to the construction of such driveway upon the earlier to occur of the following: (a) the expiration or sooner termination of the term of this Sublease (as such term may be extended or shortened pursuant to the terms of this Sublease), or (b) the date Sublessee discontinues conducting its blood bank operations from the Adjacent Building. Sublessee shall be solely responsible for and shall maintain and keep such driveway in good order and repair, shall be responsible for snow and ice removal, and shall comply with all present and future laws, orders and regulations of all state, federal, municipal, county, and local governments, departments, commissions and boards and any direction of any public officer pursuant to law with respect to such driveway and shall discharge any violation, order or duty upon Sublessor, Landlord or Sublessee with respect to the driveway. 26. [Intentionally Omitted] 27. Care of the Premises. Sublessor shall maintain and repair the exterior of, grounds and the public portions of the Building. Sublessee shall throughout the term of this Sublease take good care of the Subleased Premises, including the bathrooms and lavatory facilities and the windows and window frames and the fixtures and appurtenances therein; and shall at Sublessee's sole cost and expenses promptly make all repairs thereto and to the Building, whether structural or non-structural in nature, caused by or resulting from the negligence or improper conduct of Sublessee, Sublessee's servants, employees, invitees, or licensees. Further, Sublessee shall, at Sublessee's sole cost and expense, promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters or the Insurance Services Office or any similar body which shall impose any order, violation or duty upon Sublessor, Landlord or Sublessee with respect to the Subleased Premises, or with respect to the Building if arising out of Sublessee's use or manner of use of the Building; provided that nothing herein shall require Sublessee to make structural repairs or alterations unless Sublessee has by its manner of use of the Subleased Premises or method of operation therein violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. 007326/13000/180.6 18 28. Environmental Hazards. (a) Sublessee shall not store, use, sell, or bring onto, the Premises any Ultra Hazardous Material (hereinafter defined) in violation of any environmental laws or regulations imposed by any competent Governmental Authority. As used herein, the term "Ultra Hazardous Material" shall be as defined in 42 U.S.C. 9601 et seq., as amended from time to time, and any hazardous material or toxic waste the use, sale or storage of which may make Sublessor, Landlord, or Sublessee liable to remove same from the Premises in accordance with any applicable environmental clean-up law. In the event any Ultra Hazardous Material is used, sold or stored by Sublessee on the Premises, Sublessee shall remove same and make the Premises clean of same within twenty (20) days after notice from Sublessor or if such removal and clean-up shall require more than twenty (20) days, Sublessee shall commence such work within twenty (20) days and thereafter expeditiously and without interruption complete same. Failure to remove and/or clean up same within said twenty (20) day period (as same may be extended pursuant to the preceding sentence) shall be deemed a default of this Sublease giving Sublessor the same remedies as for nonpayment of Rent. In the event Sublessee fails to comply with the obligations of this Paragraph 28, Sublessor shall have the right, in accordance with the provisions of this Sublease, to remove same and clean up the Premises at Sublessee's cost and expense, and Sublessee shall, upon demand, reimburse Sublessor for such cost, together with interest at the Interest Rate (as such term is defined in Section 2.7 of the Overlease). Sublessee's obligation to reimburse Sublessor pursuant to this Paragraph 28 shall survive the expiration or sooner termination of this Sublease. (b) A provision identical with the provisions of this Paragraph 28 running for the benefit of Sublessor and Landlord shall be included in each subsublease by Sublessee, and the failure of Sublessee to include such a provision shall be deemed a default of this Sublease. 29. Miscellaneous. (a) This Sublease may not be changed or terminated orally, but only by an agreement in writing signed by both parties hereto. (b) This Sublease constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and all other representations and understandings have been merged herein. (c) The covenants, conditions and terms of this Sublease shall bind and inure to the benefit of both parties hereto, their successors and permitted assigns. 007326/13000/180.6 19 (d) In case of any conflict or inconsistency between the provisions of the Overlease and those of this Sublease, the provisions hereof, as between Sublessor and Sublessee, shall control. (e) This Sublease shall be governed by and construed in accordance with the laws of the State of New York. If any provision of this Sublease or the application thereof to any person or circumstances, shall to any extent be invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the extent possible; and, in any event, all other provisions of this Sublease shall be deemed valid and enforceable to their full extent. (f) Whenever provision is made in this Sublease for the consent or approval of the Sublessor, the Sublessor shall not capriciously or without reasonable cause refuse to grant such consent or approval and failure to disapprove within thirty (30) days after receipt of a written request for approval or consent shall be deemed an approval or consent, as the case may be. The foregoing provision shall not apply to requests for the approval of Sublessor with respect to proposed structural improvements, alterations, additions or repairs. (g) Except as provided in the next sentence, Sublessee shall not permit any medical waste to be stored or disposed of at the Subleased Premises. Sublessee may store blood in the Subleased Premises in cold storage units occupying no more than 1000 square feet within the Option Area, provided Sublessee complies with all applicable governmental laws, ordinances, rules and regulations. Sublessee shall furnish all equipment, labor, utilities and supplies required for the generation, custody, and disposal of medical waste at the Subleased Premises, including boxes, labels and manifests and shall promptly remove from the Subleased Premises and the Premises all medical wastes generated at the Subleased Premises. Sublessee shall comply with all applicable governmental laws, ordinances, rules, regulations and orders of any federal, state, county or local government, governmental agency, department, board or authority imposed with respect to any medical waste generated at the Subleased Premises (the "Medical Waste Regulations") and shall pay any fines, penalties or other charges levied against Sublessee, Landlord, Sublessor, the Building or the Premises as a result of Sublessee's failure to handle, remove, transport or dispose of medical waste in compliance with the Medical Waste Regulations. Sublessee shall initiate, maintain and supervise all appropriate safety precautions and programs in connection with the custody, transport and proper disposal of medical wastes; and shall take all reasonable precautions to prevent damage, injury or loss to any persons or property in connection with its generation of, custody, transport and disposal of medical wastes. The term "medical wastes" shall mean blood, blood products, and any wastes or other substance which may cause an infectious disease or reasonably be suspected of harboring pathogenic organisms, including any wastes described as medical wastes by any appropriate federal, state, or local statutory or 007326/13000/180.6 20 regulatory authorities. Sublessee agrees to indemnify and hold harmless Sublessor and Landlord against and from all liabilities, claims, damages, loss, costs and expenses, including reasonable attorneys' fees, arising out of any breach by Sublessee of its obligations under this Subparagraph (g). (h) In any action or proceeding for breach of this Sublease or for holdover or dispossess proceedings, the party which does not prevail shall pay the other party's reasonable attorneys' fees. Sublessor shall provide up to two persons designated by Sublessee with keys and security codes to Sublessor's phone room so that Sublessee shall have telephone use after Sublessor's normal business hours. Sublessee shall be responsible for the security of the Building when using the phone room after normal business hours. Sublessee shall indemnify, defend and hold Sublessor and Landlord harmless from and against all claims, loss, damages, cost and expense Sublessor may incur by reason of such after-hours access, including, but not limited to (a) any loss or damage to property and (b) any injury or death occurring in or about the Building in connection with such after-hours use of the phone room. 30. Early Termination. Sublessee has been advised that Sublessor has granted the Landlord and Landlord's affiliate the right, upon 180 days prior notice, to require Sublessor to terminate and/or vacate the Premises, pursuant to a sublease with AVR Mart, Inc. and/or a consent and release agreement, dated as of January 1, 1993 (collectively and individually, the "Release Agreement"). In the event Sublessor receives such notice under the Release Agreement and such notice to Sublessor requires by its terms that Sublessor give notice to Sublessee that Sublessee is required to vacate the Subleased Premises, than Sublessor shall give such notice to Sublessee (accompanied by a copy of the AVR Mart, Inc.'s or Landlord's notice to Sublessor) and, upon receipt of such notice, Sublessee shall vacate the Subleased Premises, leaving the Subleased Premises vacant, broom clean, with all personal property and trade fixtures removed and otherwise complying with its obligations under this Sublease (including but not limited to Art. 25(b)) as of the end of the term of this Sublease or earlier termination, upon the earlier of: (a) that date 150 days after a copy of such notice is given to Sublessee, or (b) the end of the term of this Sublease (or the end of the renewal term, if Sublessee has exercised its renewal option prior to the date such notice is given to Sublessee). The renewal option contained in Article 10 of this Sublease shall be deemed void and of no further force and effect if this Sublease is so terminated prior to exercise of the renewal option. If Sublessee fails to timely vacate the Subleased Premises as set forth above, Sublessor may be exposed to substantial damages, including but not limited to liability to Landlord for the payment of rent for the balance of the term of the Overlease (as if the Overlease had not been terminated). Accordingly, Sublessee agrees to indemnify and hold Sublessor harmless from and against all claims, loss, damages, liability, and costs Sublessor may incur, including but not limited to reasonable attorneys' fees and consequential damages, by reason of Sublessee's failure to timely vacate. Such indemnity shall not apply and 007326/13000/180.6 21 Sublessee shall not be liable to Sublessor to the extent Sublessor's damages are caused by its own failure to timely vacate. Notwithstanding the foregoing, Sublessee acknowledges that Sublessor shall have the right to negotiate with the Landlord under the Overlease to shorten the 180 day period for vacating the Premises. Sublessee agrees that if Sublessor and Landlord enter into an agreement to shorten such period, the 150 day period provided in this Paragraph shall be correspondingly shortened on a day for day basis, to the extent that it is applicable; provided that, in no event shall Sublessee have less than 120 days after notice to vacate the Subleased Premises. Sublessor shall promptly and continually advise Sublessee of any discussions between Sublessor and the Landlord regarding any such proposed agreement, provided that the failure of Sublessor to do so shall not invalidate any notice that complies with the foregoing requirements. If Sublessor receives any consideration from Landlord in connection with such a shortening of the period for vacating including, without limitation, any payment, rebate or credit, Sublessor shall share such consideration with Sublessee based on Sublessee's Proportionate Share. If the notice to Sublessor under the Release Agreement (described in the second sentence of this paragraph 30) is given and does not require Sublessor to give such notice to Sublessee, then, upon termination of the Overlease, the Sublease shall become a direct lease pursuant to Article 19 of the Sublease and the Consent and subject to Landlord's right to terminate the lease upon 120 days notice. 31. [Intentionally omitted] 32. The Americans With Disabilities Act. The Americans with Disabilities Act of 1990, together with the rules and regulations promulgated thereunder, as such law, rules and regulations may now or hereafter be amended or restated, are hereinafter referred to as the "ADA". If the Subleased Premises or any portion thereof are used by Sublessee, its subtenants, successors and/or assigns as a "place of public accommodation," as such term is defined in the ADA, Sublessee shall (a) comply with all present and future requirements of the ADA as they relate to the Subleased Premises, whether or not such compliance requires structural or non-structural alterations to be made; and (b) reimburse Sublessor for all costs Sublessor may incur to bring the common areas of the Premises into compliance with all present and future requirements of the ADA; and (c) indemnify and hold harmless Sublessor from and against all claims, actions, costs, damages, penalties, losses and liabilities Sublessor may incur by reason of any action or proceeding instituted against Sublessor and/or Sublessee by reason of the use of all or part of the Subleased Premises as a place of public accommodation. If, at the time any claim or demand is made by Sublessor upon Sublessee under this Paragraph, other space in the Building is also used as a place of public accommodation, Sublessee shall, with respect to its liability under clause (b), be responsible only for its share of such costs. Such share shall equal a fraction, the numerator of which is the leasable area of the Subleased Premises and the denominator of which is the sum of the leasable areas of the Subleased Premises and of the other space used as a place of public accommodation. All changes, alterations, additions, improvements, and repairs made by Sublessee to the Subleased Premises shall be performed in compliance with all applicable requirements of the ADA. 007326/13000/180.6 22 33. Counterparts. This Sublease may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and year first above written. VICON INDUSTRIES, INC. By:_________________________________ NEW YORK BLOOD CENTER, INC. By:_________________________________ 007326/13000/180.6 23 EXHIBIT A Diagram of Subleased Premises 007326/13000/180.6 24 EXHIBIT B Diagram of Corridor to Cafeteria 007326/13000/180.6 25 EXHIBIT C Overlease (Including Amendments) 007326/13000/180.6 26 EXHIBIT D Driveway Construction by Sublessee 007326/13000/180.6 27 EX-24 9 INDEPENDENT AUDITOR CONSENT EXHIBIT 24 KPMG PEAT MARWICK LLP Independent Auditors' Consent The Board of Directors Vicon Industries, Inc.: We consent to incorporation by reference in the Registration Statements (No. 33- 7892, 33-34349 and 33-90038) on Form S-8 and No. 33-10435 on Form S-2 of Vicon Industries, Inc. of our report dated November 16, 1995, except as to note 6, which is as of December 28, 1995, relating to the consolidated balance sheets of Vicon Industries, Inc. and subsidiaries as of September 30, 1995 and 1994 and the related consolidated statements of operations, shareholders' equity and cash flows and related schedules for each of the years in the three-year period ended September 30, 1995, which report appears in the September 30, 1995 annual report on Form 10-K of Vicon Industries, Inc. KPMG PEAT MARWICK LLP Jericho, New York January 12, 1996 EX-27 10 FDS --
5 YEAR SEP-30-1995 SEP-30-1995 1,151,850 0 9,466,462 (542,465) 12,112,601 22,188,448 14,195,604 (9,960,558) 26,423,494 11,467,117 6,323,351 0 0 27,882 8,605,144 26,423,494 43,846,571 0 34,300,638 0 9,424,595 375,000 1,013,383 (1,267,045) 80,000 (1,347,045) 0 0 0 (1,347,045) (.49) (.49)
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