-----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, VLP8fqVZ/oetiNdxYRLQjmYNbCulHg6SG45NVXK3BnvLTh9VUudWeRMEajgA2MR9 PF7eTIILGxnjYHd21EhnpQ== 0000310056-99-000012.txt : 19991230 0000310056-99-000012.hdr.sgml : 19991230 ACCESSION NUMBER: 0000310056-99-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 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: SEC FILE NUMBER: 001-07939 FILM NUMBER: 99783260 BUSINESS ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5169522288 MAIL ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 VICON 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, 1999 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.) 89 Arkay Drive, Hauppauge, New York 11788 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 952-2288 - ------------------------------------------------------------------------------- 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 15, 1999 was approximately $24,700,000. The number of shares outstanding of the registrant's Common Stock as of December 15, 1999 was 4,586,512. PART I ITEM 1 - BUSINESS General Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs, manufactures, assembles and markets a wide range of closed circuit video systems ("CCVS") and system components used for security, surveillance, safety and control purposes by a broad group of end users. A CCVS system is a private video system that can transmit and receive video, audio and data signals in accordance with the operational needs of the user. The Company's primary focus is the design of software-based engineered CCVS and components that it sells worldwide, primarily to installing dealers, system integrators, government entities and distributors. The Company operates within the electronic protection segment of the security industry that includes, among others: fire and burglar alarm systems, access control, CCVS and article surveillance. The U.S. security industry consists of thousands of individuals and businesses (exclusive of public sector law enforcement) that provide products and services for the protection and monitoring of life, property and information. The security industry includes fire and burglar alarm systems, access control, CCVS, article surveillance, guard services and equipment, locks, safes, armored vehicles, security fencing, private investigations and others. The Company's products are typically used for crime deterrence, visual documentation, observation of 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 used in office buildings, manufacturing plants, apartment complexes, large retail stores, government facilities, transportation operations, prisons, casinos, sports arenas, health care facilities and financial institutions. 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 system, including video cameras, display units (monitors), video recorders, switching equipment for video distribution, digital video and signal processing units (which perform character generation, video encoding, multi screen display, video insertion, intrusion detection, source identification and alarm processing), motorized zoom lenses, remote robotic cameras, system controls, environmental camera enclosures and consoles for system assembly. In August 1999, the Company acquired TeleSite U.S.A., Inc. ("TeleSite"), which designs, produces and sells remote video surveillance systems. The Company intends to substantially increase the product development efforts of TeleSite in order to maximize the potential of its core digital video compression technology. The Company provides a full 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, the Company at times produces to specification or will 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 marketing emphasizes engineered CCVS solutions which incorporate system design, project management and technical training and support. The Company markets its products through industry trade shows worldwide, product brochures and catalogues, direct mailings to existing and prospective customers, product videos, in-house training seminars for customers and end users, road shows which preview new systems and system components, and advertising through trade and end user magazines and the Company's internet web site. The Company's products are sold principally to approximately 2,000 independent dealers, system integrators and distributors. Sales are made principally by field sales engineers, independent sales representatives and customer service representatives. The Company's sales effort is supported by in-house customer service and technical support groups which provide product information, application engineering, design detail, field project management, and hardware and software technical support. 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 surveillance is often mandated by local regulation; and (6) health care facilities, such as hospitals, particularly psychiatric wards and intensive care units. In fiscal 1999 and 1998, indirect sales to the United States Postal Service under a national supply contract approximated $22.7 million and $12.0 million, respectively. The Company's principal sales offices are located in Hauppauge, New York; Atlanta, Georgia; Fareham, England; Zaventem, Belgium; New Territories, Hong Kong; and Shanghai, China. International Sales The Company sells its products in Europe through its U.K. based subsidiary, in China through its Hong Kong subsidiary and elsewhere outside the U.S. by direct export. Sales are made to installing dealers or independent distributors which, outside of Europe and China, typically assume the responsibility for warranty repair as well as sales and marketing costs to promote the Company's product line. The Company has a few territorial exclusivity agreements with customers but primarily uses a wide range of installation companies and distributors in international markets. In Australia, Japan, Norway and South Korea, the Company permits independent sales representatives to use the Company's name for marketing purposes. - 3 - Direct export sales and sales from the Company's foreign subsidiaries amounted to $15.4 million, $19.0 million and $18.7 million or 21%, 30% and 36% of consolidated net sales in fiscal years 1999, 1998, and 1997, respectively. Export sales are generally 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 Pacific Rim, which together accounted for approximately 85 percent of international sales in fiscal 1999. Since fiscal 1998, the Company has experienced a decrease in demand for its products in certain Asian and European countries, due principally to the deterioration of local economies. For more information regarding foreign operations, see Note 8 of Notes to Consolidated Financial Statements included in Item 14. Competition The Company operates in a highly competitive marketplace both domestically and internationally. The Company competes by providing engineered systems and system components that incorporate broad capability together with high levels of customer service and technical support. Generally, the Company does not compete based on price alone. The Company's principal engineered CCVS competitors include the following companies or their affiliates: Checkpoint Systems, Inc., Matsushita (Panasonic), Pelco Sales Company, Philips Communications and Security Systems, Inc., Sensormatic Electronics Corporation, and Ultrak, Inc. Many additional companies, both domestic and international, produce products that compete against one or more of the Company's product lines. In addition, some consumer video electronic companies or their affiliates, including Matsushita (Panasonic), Mitsubishi Electric Corporation, Sanyo Electric Co., Ltd. and Sony Corporation, compete with the Company for the sale of video products and systems. Most of the Company's competitors are larger companies whose financial resources and scope of operations are substantially greater than the Company's. Research and Development The Company's research and development ("R&D") is focused on new and improved CCVS and system components. In recent years, a trend of product development and demand within the video security and surveillance market has been toward the application of digital technology, specifically toward the compression, storage and display of digitized video signals. As the demands of the Company's target market segment requires the Company to keep pace with changes in technology, the Company intends to focus its R&D effort in these developing areas. R&D projects are chosen and prioritized based on direct customer feedback, the Company's analysis as to the needs of the marketplace and technological advances and marketing research. The Company employs a total of 43 engineers in the following areas: 12 in software development, 10 in mechanical design, 9 in manufacturing/testing and 12 in electrical and circuit design. R&D expenditures have averaged approximately 4% of net sales for each of the past three years. - 4 - Source and Availability of Raw Materials The Company is substantially dependent upon outside manufacturers and suppliers to manufacture and assemble its products and will continue to be dependent on such entities in the future. In fiscal 1999, approximately 13% of the Company's purchases of components and finished products were from Chun Shin Electronics, Inc. ("CSE"), a 34% owned South Korean company (see Item 13). Additionally, in 1999, the Company purchased approximately 13% of its components and finished products from CBC Company, Ltd., a supplier and sourcing agent for the Company (see Item 13). The Company's relationships with outside manufacturers, assemblers and suppliers are generally not covered by formal contractual agreements. Raw materials and components purchased by the Company and its suppliers are generally readily available in the market, subject to market lead times at the time of order. The Company is not dependent upon any single source for a significant amount of its raw materials and components. Intellectual Property The Company owns, and has pending, a limited number of design and utility patents expiring at various times. The Company has certain trademarks registered and several other trademark applications pending both in the United States and in Europe. Many of the Company's products employ proprietary software which is protected by copyright. However, the laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as the laws of the U.S. The Company has no licenses, franchises or concessions with respect to any of its products or business dealings. The Company does not deem its lack of patents, licenses, franchises and concessions, to be of substantial significance or to have a material effect on its business. The Company does, however, consider its proprietary software to be unique and valuable and is a principal element in the differentiation of the Company's products from its competition. Inventories The Company carries substantial finished goods inventory levels to respond to unanticipated customer demand, since most sales are to installing dealers and contractors who normally do not carry large inventory stocks. The Company principally builds inventory to known and anticipated customer demand. In addition to normal safety stock levels, certain additional inventory levels are maintained for products with long purchase and manufacturing lead times. The Company has also increased its raw material and work-in-process inventory as it has shifted certain of its production from contract manufacturers to labor subcontractors. The Company believes that it is important to carry adequate inventory levels of parts, components and products to avoid production and delivery delays that detract from its sales effort. - 5 - Backlog The backlog of orders believed to be firm as of September 30, 1999 and 1998 was approximately $11.3 million and $12.4 million, respectively. Orders are generally 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, 1999, the Company employed 252 full-time employees, of whom 7 are officers, 61 administrative, 101 in sales and technical service capacities, 42 in engineering, and 41 production employees. At September 30, 1998, the Company employed 217 persons. 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 The Company owns and operates an 80,000 square-foot facility located at 89 Arkay Drive, Hauppauge, New York, which it purchased in January 1998. The Company also owns and operates a 14,000 square-foot sales, service and warehouse facility in southern England which services the U.K. and Europe. In addition, the Company operates, under short-term leases, sales offices in Atlanta, Georgia and Zaventem, Belgium. The Company also leases sales, service and warehouse facilities in Tenafly, New Jersey; Yavne, Israel; Hong Kong and Shanghai, China. ITEM 3 - LEGAL PROCEEDINGS None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None - 6 - 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 (AMEX) 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 AMEX: Quarter Ended High Low Fiscal 1999 December 8-13/16 4-5/8 March 9-9/16 6-3/4 June 10-3/8 6-1/2 September 9-7/16 6-3/4 Fiscal 1998 December 8-11/16 5-9/16 March 13-15/16 6-3/16 June 12-1/8 6-3/16 September 9-1/4 6 The last sale price of the Company's Common Stock on December 15, 1999 as reported on AMEX was $5-3/8 per share. As of December 15, 1999, there were approximately 300 shareholders of record. The Company has never declared or paid cash dividends on its Common Stock and anticipates that any earnings in the foreseeable future will be retained to finance the growth and development of its business. In addition, the Company's bank credit agreements prohibit the payment of cash dividends on its Common Stock. - 7 - ITEM 6 - SELECTED FINANCIAL DATA FISCAL YEAR 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (in thousands, except per share data) Net sales $73,414 $63,310 $51,519 $43,191 $43,847 Gross profit 24,699 20,832 14,475 10,957 9,546 Income (loss) before income taxes 7,442 5,810 1,647 385 (1,267) Net income (loss) 4,760 5,810 1,565 300 (1,347) Earnings (loss) per share: Basic 1.05 1.61 .56 .11 (.49) Diluted 1.01 1.50 .52 .11 (.49) Total assets 49,899 44,386 31,200 28,085 26,423 Long-term debt 5,799 7,002 8,344 6,429 5,339 Working capital 29,049 27,642 15,351 12,064 10,721 Property, plant and equipment (net) 8,053 7,137 3,492 3,034 3,262 - 8 - ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal Year 1999 Compared with 1998 Net sales for 1999 increased $10.1 million or 16% to $73.4 million compared with $63.3 million in 1998. The sales growth was experienced principally in the U.S. as domestic sales increased $13.7 million or 31% to $58.0 million principally as a result of increased system sales supplied under a contract with the U.S. Postal Service. International sales decreased 19% to $15.4 million principally as a result of the discontinuation of sales to a private label European reseller and lower sales in Asia. The backlog of unfilled orders was $11.3 million at September 30, 1999 compared with $12.4 million at September 30, 1998. Gross profit margins for 1999 increased to 33.6% compared with 32.9% in 1998. The margin improvement was primarily the result of a favorable sales mix of higher margin products, lower procurement costs and greater fixed cost absorption associated with the sales growth. Operating expenses for 1999 were $16.8 million or 22.9% of net sales compared with $14.0 million or 22.1% of net sales in 1998. The increase in operating expenses was principally the result of higher selling expenses associated with the sales growth. Operating income increased to $7.9 million for 1999 compared with $6.9 million for 1998 principally as a result of increased sales. Interest expense decreased $515,000 to $592,000 for 1999 compared with $1.1 million in 1998 as $9.3 million of interest-bearing debt was repaid in May 1998 with the net proceeds from a secondary stock offering. Income tax expense for 1999 was $2.7 million, or a 36% effective tax rate. There was no income tax expense for 1998 due to the utilization of available U.S. federal and state net operating tax loss carryforwards and the reinstatement of previously reserved deferred income tax assets. As a result of the foregoing, net income decreased to $4.8 million for 1999 compared with net income of $5.8 million for 1998. However, results for 1998 benefitted from the utilization of net operating tax loss carryforwards which affect the comparability of operating results. Assuming that income taxes had been incurred in 1998 at the same effective tax rate as in 1999, net income for 1998 would have been $3.7 million ($.96 per share diluted) compared with $4.8 million ($1.01 per share diluted) reported for 1999. - 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Fiscal Year 1998 Compared with 1997 Net sales for 1998 increased $11.8 million or 23% to $63.3 million compared with $51.5 million in 1997. The sales growth was experienced principally in the U.S. as domestic sales increased $11.5 million or 35% to $44.3 million principally as a result of system sales supplied under a contract with the U.S. Postal Service entered into in July 1997 and sales from a new line of dome cameras introduced in February 1997. International sales increased 2% to $19.0 million. International growth was limited as a result of lower sales in Asia offset by higher sales in Europe, including sales to a private label reseller. The backlog of unfilled orders was $12.4 million at September 30, 1998 compared with $7.0 million at September 30, 1997. Gross profit margins for 1998 increased to 32.9% compared with 28.1% in 1997. The margin improvement was primarily the result of a favorable sales mix of higher margin products, lower procurement costs and greater fixed cost absorption associated with the sales growth. Operating expenses for 1998 were $14.0 million or 22.1% of net sales compared with $11.7 million or 22.8% of net sales in 1997. The increase in operating expenses was principally the result of higher selling expenses associated with the sales growth and profit related bonus expense. Operating income rose to $6.9 million for 1998 compared with $2.8 million for 1997 as a result of increased sales, higher gross margins and greater absorption of fixed operating expenses. Interest expense decreased slightly to $1.1 million in 1998. Such decrease occurred subsequent to the public offering as $9.3 million of interest bearing debt was repaid. There was no income tax expense for 1998 due to the full utilization of a U.S. net operating loss carryforward (NOL) and the reinstatement of previously reserved deferred income tax assets. Beginning with the first quarter of 1999, the Company will incur income taxes at a normal effective rate. In 1997, income tax expense was $82,000 relating primarily to foreign subsidiary income. As a result of the foregoing, net income increased to $5.8 million for 1998 compared with net income of $1.6 million for 1997. - 10 - MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND FINANCIAL CONDITION Net cash provided by operating activities was $2.2 million for 1999 due primarily to the $4.8 million net income reported for the year, offset in part by an increase in inventories to support higher sales activity. Net cash used in investing activities was $3.8 million for 1999 due primarily to the Company's acquisition of TeleSite U.S.A., Inc. for $2.1 million, the expenditure of $1.0 million for expansion of the Company's principal operating facility and other general capital expenditures. Net cash used in financing activities was $1.2 million due primarily to the scheduled repayments of U.S. bank term and mortgage loans and a decrease in borrowings under the Company's short-term revolving credit agreement. As a result of the foregoing, the net decrease in cash was $2.9 million for 1999 after the nominal effect of exchange rate changes on the cash position of the Company. In July 1998, the Company entered into a $14 million unsecured revolving credit and term loan agreement with a bank. Such agreement includes a $7.5 million revolving credit facility that expires in July 2002, with an option to increase the facility to $9.5 million at any time through July 2000. Borrowings under the facility bear interest at the bank's prime rate minus 2% or, at the Company's option, LIBOR plus 90 basis points (6.25% and 6.30%, respectively, at September 30, 1999). At September 30, 1999, there were no revolving credit borrowings outstanding under this agreement. The agreement also provides for a $4.5 million five-year term loan payable in equal monthly installments through July 2003 with interest at 6.74%. The Company maintains a bank overdraft facility of 600,000 Pounds Sterling (approximately $990,000) in the U.K. to support local working capital requirements of Vicon Industries Limited. At September 30, 1999, borrowings under this facility amounted to approximately $375,000. In October 1999, the Company entered into a $1.2 million mortgage loan agreement with its bank to finance the expansion of its principal operating facility. The loan is payable in equal monthly principal installments through January 2008, with a $460,000 payment due at the end of the term. The loan bears interest at the bank's prime rate minus 160 basis points or, at the Company's option, LIBOR plus 100 basis points and contains the same covenants as included in the existing mortgage loans. The Company believes that cash flow from operations and funds available under its credit agreements will be sufficient to meet its anticipated operating, capital expenditures and debt service requirements for at least the next twelve months. Year 2000 The Company's software-based products have been tested for year 2000 compliance and the Company believes that such products are year 2000 compatible. With respect to its own computer operating systems, the Company has completed the upgrade of its principal operating computer software to the most recent available revisions sold by its software suppliers, which the suppliers have represented to be year 2000 compliant. The Company believes that such upgrades - 11 - will solve those year 2000 problems that could affect its operating software. The costs for such upgrades were not material. It is possible that certain computer systems or software products of the Company's customers or suppliers may experience year 2000 problems and that such problems could adversely affect the Company. The Company continues to assess the status of its principal suppliers' year 2000 readiness and their plans to address problems that their computer systems may face in correctly processing date information as the year 2000 approaches. However, since the ultimate success of the Company's customers and suppliers to become compliant is largely outside of the Company's control, no assurances can be made that the Company will be unaffected by the year 2000. Should the Company's suppliers fail to achieve year 2000 compliance, the supply of product to the Company may be interrupted resulting in possible lost revenue to the Company due to its inability to supply finished product to its customers. If such interruptions are prolonged, the Company will seek alternative suppliers. However, delays may occur which could have a material adverse effect on the Company. New Accounting Standard Not Yet Adopted In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity." This statement establishes comprehensive accounting and reporting standards for derivative instruments and hedging activities. In June 1999, the FASB issued SFAS No. 137, deferring the required implementation of SFAS No. 133. This SFAS will be adopted by the Company in the first quarter of fiscal 2001. Implementation of this statement is not expected to affect the Company's financial position or results of operations. 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. Japanese sourced products denominated in Japanese yen accounted for approximately 9% and 11% of product purchases in fiscal 1999 and 1998, respectively. In 1999, the U.S. dollar had significantly weakened in relation to the yen, resulting in increased costs for such products. The Company attempts to minimize its currency exposure on these purchases through the purchase of foreign exchange contracts. 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. Sales by the Company's U.K. based subsidiary to customers in Europe are made in pounds sterling and euros. In fiscal 1999, approximately $4.0 million of products were sold by the Company to its U.K. based subsidiary for resale. The U.S. dollar was relatively stable against the pound sterling in 1999. In years when the pound weakened significantly against the U.S. dollar, the cost of U.S. sourced product sold by this subsidiary increased. The Company attempts to minimize its currency exposure on intercompany sales through the purchase of forward exchange contracts. - 12 - In general, the Company seeks lower costs from suppliers and enters into forward exchange contracts to mitigate exchange rate exposures. However, there can be no assurance that such steps will be effective in limiting foreign currency exposure. Market Risk Factors The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. The Company has a policy that prohibits the use of currency derivatives or other financial instruments for trading or speculative purposes. The Company enters into forward exchange contracts to hedge certain foreign currency exposures and minimize the effect of such fluctuations on reported earnings and cash flow (see "Foreign Currency Activity" and Note 1 "Derivative Instruments" and "Fair Value of Financial Instruments" to the accompanying financial statements). At September 30, 1999, the Company's foreign currency exchange risks included a $1.8 million intercompany accounts receivable balance due from the Company's U.K. based subsidiary and a $534,000 Japanese Yen denominated trade accounts payable liability due to inventory suppliers. Such assets and liabilities are short term and will be settled in fiscal 2000. The following sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant. At September 30, 1999, a 10% strengthening or weakening of the U.S. dollar versus the British Pound would result in a $179,000 decrease or increase, respectively, in the intercompany accounts receivable balance. Such foreign currency exchange risk at September 30, 1999 has been substantially hedged by forward exchange contracts. A 10% strengthening of the U.S. dollar versus the Japanese Yen would result in a $49,000 decrease in the trade accounts payable liability, while a 10% weakening of the dollar would result in a $59,000 increase in such liability. At September 30, 1999, the Company had $6.2 million of outstanding floating rate bank debt and corresponding interest rate swap agreements which effectively convert the foregoing floating rate debt to stated fixed rates (see "Note 7. Long-Term Debt" to the accompanying financial statements). Thus, the Company has substantially no net interest rate exposures on these instruments. Inflation The impact of inflation on the Company has lessened in recent years as the rate of inflation remains low. However, inflation continues to increase costs to the Company. As operating expenses and production costs increase, the Company seeks price increases to its customers to the extent permitted by market conditions. - 13 - "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995 Statements in this Report on Form 10-K and other statements made by the Company or its representatives that are not strictly historical facts including, without limitation, statements included herein under the captions "Liquidity and Financial Condition" and "Year 2000" are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company also assumes no obligation to update its forward-looking statements or to advise of changes in the assumptions and factors on which they are based. 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 - 14 - PART III ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT The Directors and Officers of the Company are as follows: Name Age Position Kenneth M. Darby 53 Chairman of the Board, President and Chief Executive Officer John M. Badke 40 Vice President, Finance and Chief Financial Officer John L. Eckman 50 Vice President, Sales Robert D. Grossman 39 Vice President, Customer and Technical Services Peter A. Horn 44 Vice President, Operations Yacov A. Pshtissky 48 Vice President, Technology and Development Chu S. Chun 64 Director Milton F. Gidge 70 Director Peter F. Neumann 65 Director W. Gregory Robertson 55 Director Arthur D. Roche 61 Director Kazuyoshi Sudo 57 Director The business experience, principal occupations and employment, as well as period of service, of each of the directors and officers of the Company during at least the last five years are set forth below. Kenneth M. Darby - Chairman of the Board, President and Chief Executive Officer. Mr. Darby has served as Chairman of the Board since April 1999, as Chief Executive Officer since April 1992 and as President since October 1991. He has served as a director since 1987. Mr. Darby also served as Chief Operating Officer and as Executive Vice President, Vice President, Finance and Treasurer of the Company. He joined the Company in 1978 as Controller after more than nine years at Peat Marwick Mitchell & Co., a public accounting firm. Mr. Darby's current term on the Board ends in April 2002. John M. Badke - Vice President, Finance and Chief Financial Officer. Mr. Badke has been Chief Financial Officer since December 1999 and Vice President, Finance since October 1998. Previously, he served as Controller since joining the Company in 1992. Prior to joining the Company, Mr. Badke was Controller for NEK Cable, Inc. and an audit manager with the international accounting firms of Arthur Andersen & Co. and Peat Marwick Main & Co. John L. Eckman - Vice President, Sales. Mr. Eckman has been Vice President, Sales since April 1999. He joined the Company in August 1995 as Eastern Regional Manager and was promoted to Vice President, U.S. Sales in July 1996. Prior to joining the Company, he was Director of Field Operations for Cardkey Systems, Inc., an access control security products manufacturer for which he was employed for 12 years. - 15 - Robert D. Grossman - Vice President, Customer and Technical Services. Mr. Grossman has been Vice President, Customer and Technical Services since June 1999. He joined the Company in 1996 as Director of Technical Services. Prior to joining the Company, he was Senior Project Manager for Sensormatic Electronics Corporation, a CCTV and electronic article surveillance products manufacturer, for which he was employed for 6 years. Peter A. Horn - Vice President, Operations. Mr. Horn has been Vice President, Operations since June 1999. From 1995 to 1999, he was Vice President, Compliance and Quality Assurance. Prior to that time, he served as Vice President in various capacities since his promotion in May 1990. Yacov A. Pshtissky - Vice President, Technology and Development. Mr. Pshtissky has been Vice President, Technology and Development since May 1990. Mr. Pshtissky was Director of Electrical Product Development from March 1988 through April 1990. Prior to that time he was an Electrical Design Engineer. Chu S. Chun - Director. Mr. Chun has been a director of the Company since April 1998. He has been the President of CSI, Chairman of the Board and Chief Executive Officer of International Industries, Inc. ("I.I.I.") and President of Chun Shin Electronics, Inc. since at least 1988 (see Item 13). Mr. Chun's current term on the Board ends in April 2001. Milton F. Gidge - Director. Mr. Gidge has been a director of the Company since 1987. He is a retired director and executive officer of Lincoln Savings Bank for which he served from 1976 to 1994 as Chairman, Credit Policy. He has also been a director since 1980 of Interboro Mutual Indemnity Insurance Co., a general insurance mutual company, and a director of Intervest Bancshares Corporation of New York, a mortgage banking holding company, and another affiliated company of Intervest since 1988. His current term on the Board ends in April 2001. Peter F. Neumann - Director. Mr. Neumann has been a director of the Company since 1987. He is the retired President of Flynn-Neumann Agency, Inc., an insurance brokerage firm. Since 1978, Mr. Neumann has been serving as a director of Reliance Federal Savings Bank. Mr. Neumann's current term on the Board ends in April 2000. W. Gregory Robertson - Director. Mr. Robertson has been a director of the Company since 1991. He is President of TM Capital Corporation, a financial services company which he founded in 1989. From 1985 to 1989, he was employed by Thomas McKinnon Securities, Inc. as head of investment banking and public finance. Mr. Robertson's current term on the Board ends in April 2001. - 16 - Arthur D. Roche - Director. Mr. Roche has been a director of the Company since 1992. He served as Executive Vice President and co-participant in the Office of the President of the Company from August 1993 until his retirement in November 1999. For the six months prior to that time, 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 which he joined in 1960. His current term on the Board ends in April 2002. Kazuyoshi Sudo - Director. Mr. Sudo has been a director of the Company since 1987. Mr. Sudo is Chief Executive Officer of CBC (America) Corp., a distributor of electronic, chemical and optical products. From 1981 to 1996, he was Treasurer of such company. He has also been a director of CBC Company, Ltd. since 1997. Mr. Sudo's current term on the Board ends in April 2000. There are no family relationships between any director, executive officer, officer or person nominated or chosen by the Company to become a director or officer. 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, 1999 and certain written representations, no person, who, at any time during the year ended September 30, 1999 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(a) of the Exchange Act during the year ended September 30, 1999. - 17 - ITEM 11 - EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by, or paid for all services rendered to the Company during 1999, 1998 and 1997 by the Chief Executive Officer and the Company's most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 during any such year. SUMMARY COMPENSATION TABLE
Long-Term Compensation Awards Payouts ------------------------ ------- Annual Compensation Restricted Securities Name and All Other Stock Underlying LTIP Principal Position Year Salary ($) Bonus ($) Compensation Award Options (#) Payouts - ------------------ ---- ---------- ----------- ------------ ----------- ----------- ------- Kenneth M. Darby 1999 $275,000 $261,690 (1) $ 3,000 (3) $111,814 (4) - - Chief Executive 1998 225,000 297,525 (2) 3,000 (3) $344,640 (5) - - Officer 1997 225,000 84,017 (2) 3,000 (3) - 58,000 - Arthur D. Roche 1999 180,000 140,910 (1) - - - - Executive 1998 170,000 160,206 (2) - - - - Vice President 1997 170,000 45,240 (2) - - 35,000 - (1) Represents cash bonus equal to 3.25% and 1.75% of the sum of consolidated pre-tax income and provision for officers' bonuses for Mr. Darby and Mr. Roche, respectively, which bonus formula was adopted for 1999 by the Board of Directors upon the recommendation of its Compensation Committee. (2) Represents cash bonus equal to 4.55% and 2.45% of the sum of consolidated pre-tax income and provision for officers' bonuses for Mr. Darby and Mr. Roche, respectively, which bonus formula was adopted for years 1998 and 1997 by the Board of Directors upon the recommendation of its Compensation Committee. (3) Represents life insurance policy payment. (4) Represents deferred compensation benefit of 16,565 shares of Common Stock held by the Company in Treasury which vests upon the expiration of Mr. Darby's employment agreement in October 2004, or earlier upon certain occurrences including his death, involuntary termination or a change in control of the Company. The value of such stock is based on the fair market value on the date of grant. At September 30, 1999, the quoted market value of such shares approximated $116,000. No dividends can be paid on such shares. (5) Represents deferred compensation benefit of 45,952 shares of Common Stock held by the Company in Treasury which vests upon the expiration of Mr. Darby's employment agreement in October 2004, or earlier upon certain occurrences including his death, involuntary termination or a change in control of the Company. The value of such stock is based on the fair market value on the date of grant. At September 30, 1999, the quoted market value of such shares approximated $322,000. No dividends can be paid on such shares.
- 18 - 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% - ------------- ------- ------------- ---------- ----------- -------- --------- Kenneth M. Darby 25,000 17% 6.7500 4/05 $57,400 $130,200 25,000 17% 8.1875 6/05 $69,600 $157,900 Arthur D. Roche 5,000 3% 8.1875 6/05 $13,900 $ 31,600
Options granted in the year ended September 30, 1999 were issued under the 1999 Incentive Stock Option Plan and the 1999 Non-Qualified Stock Option Plan. The options granted above are exercisable as follows: up to 30% of the shares on the second anniversary of the grant date, an additional 30% of the shares on the third anniversary of the grant date, and the balance of the shares on the fourth anniversary of the grant date, except that no option is exercisable after the expiration of six years from the date of grant. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES At September 30, 1999 Number of Securities Value of Underlying Unexercised Unexercised In-the-money Options (2) Options (2) Shares Acquired Value Exercisable/ Exercisable/ Name On Exercise Realized (1) Unexercisable Unexercisable - ---------------- ----------- ------------- ------------- ------------- Kenneth M. Darby 23,200 $115,850 -0- /50,000 -0-/$6,250 Arthur D. Roche - - 14,000/5,000 $60,750/-0- (1) Calculated based on the difference between the closing quoted market prices per share at the dates of exercise and the exercise prices. (2) Calculated based on the difference between the closing quoted market price ($7.00) and the exercise price. - 19 - Employment Agreements Mr. Darby has entered into an employment agreement with the Company that provides for an annual salary of $285,000 through fiscal 2004. This 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 of the Company without Board of Director approval (as defined in the agreement). In addition, Mr. Darby is eligible to receive cash bonuses based on performance of the Company. In 2000, his bonus arrangement provides for a cash bonus equal to 3.25% of the sum of consolidated pre-tax income and provision for officers' bonuses, which bonus formula was adopted by the Board of Directors upon the recommendation of its Compensation Committee. Mr. Darby's agreement also provides for an additional deferred compensation benefit of 8,130 shares of Common Stock held by the Company in treasury. Such benefit vests upon the expiration of his employment agreement in October 2004, or earlier upon certain occurrences including his death, involuntary termination or a change in control of the Company. The market value of such benefit approximated $51,000 at the date of grant. Donald N. Horn and Arthur V. Wallace, both retired directors, each have deferred compensation agreements with the Company which provide retirement benefits totaling $917,000 and $631,000, respectively, and are payable in monthly installments over a 10-year period from date of retirement. These payments are subject to their adherence to certain noncompete covenants. Mr. Wallace and Mr. Horn began receiving payments under these agreements in October 1990 and January 1994, respectively. Directors' Compensation and Term Non-employee directors are compensated at an annual rate of $6,000 for regular meetings, and for committee membership, receive $500 per meeting attended in person. Employee directors are not compensated for Board or committee meetings. Directors may not stand for reelection after age 70. - 20 - Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Board of Directors consists of Messrs. Neumann, Gidge and Robertson, none of whom has ever been an officer of the Company. Board Compensation Committee Report The Compensation Committee's compensation policies applicable to the Company's officers for 1999 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 officers other than himself. 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 him. For each officer, the committee's determinations are based on its conclusions concerning each officer's performance and comparable compensation levels in the CCTV industry and the Long Island area for similarly situated officers at comparable companies. The overall level of performance of the Company is taken into account but is not specifically related to the base salary of these officers. Also, the Company has established an incentive compensation plan for all of the 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 officers to link 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 to officers based on significant contributions of such officer to the performance of the Company. In addition, in determining Mr. Darby's salary for service as Chief Executive Officer, the committee considered the responsibility assumed by him in formulating and implementing a management and long-term strategic plan. - 21 - This graph compares the return of $100 invested in the Company's stock on October 1, 1993, with the return on the same investment in the AMEX Market Value Index. (The following table was represented by a chart in the printed material) Vicon AMEX Market Date Industries, Inc. Value Index 10/01/94 100 100 10/01/95 103 119 10/01/96 138 125 10/01/97 462 152 10/01/98 393 135 10/01/99 386 172 - 22 - 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 15, 1999 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 ------------------- ------------------------ ---------- CBC Company, Ltd. and affiliates 2-15-13 Tsukishima Chuo-ku Tokyo, Japan 104 543,715 11.4% ****************************************************************************** C/O Vicon Industries, Inc. Kenneth M. Darby 250,092 5.2% Chu S. Chun 204,507 (2) 4.3% Arthur D. Roche 153,967 (3) 3.2% W. Gregory Robertson 19,025 (4) * Kazuyoshi Sudo 16,125 (5) * Milton F. Gidge 15,825 (5) * Peter F. Neumann 15,125 (4) * Total all Officers and Directors as a group (12 persons) 801,115 (6) 16.7% * Less than 1%. (1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power over the shares of stock owned. (2) Mr. Chun has voting and dispositive power over 204,507 shares but disclaims beneficial ownership as to all but 48,400 shares. 100,707 shares are owned by the International Industries, Inc. Profit Sharing Plan and 55,400 shares are owned by immediate family members. (3) Includes currently exercisable options to purchase 14,000 shares. (4) Includes currently exercisable options to purchase 12,125 shares. (5) Includes currently exercisable options to purchase 7,125 shares. (6) Includes currently exercisable options to purchase 141,500 shares. - 23 - ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company and CBC Company, Ltd.(CBC), a Japanese corporation which beneficially owns 11.4% of the outstanding shares of the Company, have been conducting business with each other for approximately twenty years. During this period, CBC has served as a lender, a product supplier and sourcing agent, and a private label reseller of the Company's products. Historically, CBC has provided a significant amount of funding to the Company in the form of extended accounts payable related to product purchases. CBC has also acted as the Company's sourcing agent for the purchase of certain video products. In 1999, the Company purchased approximately $5.4 million of video products from or through CBC. CBC has the exclusive right to sell Vicon brand products in Japan and competes with the Company in various markets, principally in the sale of video products and systems. Additionally, the Company sells certain finished products to CBC under private label for resale in Europe and Russia. Sales of all products to CBC were $1.3 million in 1999. Kazuyoshi Sudo, a director of the Company and of CBC, is Chief Executive Officer of CBC (America) Corp., a U.S. subsidiary of CBC. Mr. Chu S. Chun, a director who has beneficial voting control over 4.3% of the Common Stock of the Company, also beneficially owns a controlling interest in Chun Shin Electronics, Inc., (CSE), a 34% owned South Korean company that manufactures and assembles certain Vicon products. CSE also sells various security products, including the Company's products, principally within the South Korean market. Mr. Chun is the President and has operating control of CSE. In 1999, CSE sold approximately $5.7 million of products to the Company through International Industries, Inc. (I.I.I.), a U.S. based company controlled by Mr. Chun. I.I.I. arranges the importation of all the Company's product purchases from CSE. In addition, I.I.I. purchased approximately $535,000 of products directly from the Company during 1999 for resale to CSE. - 24 - 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, 1999, 1998, and 1997 Consolidated Balance Sheets at September 30, 1999 and 1998 Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 1999, 1998, and 1997 Consolidated Statements of Cash Flows, fiscal years ended September 30, 1999, 1998, and 1997 Notes to Consolidated Financial Statements, fiscal years ended September 30, 1999, 1998, and 1997 (a) (2) Financial Statement Schedule Included in Part IV, Item 14: Schedule I - Valuation and Qualifying Accounts for the years ended September 30, 1999, 1998, and 1997 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. - 25 - 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) Employment Contract dated 10.1 October 1, 1999 between the Registrant and Kenneth M. Darby (.2) Employment Contract dated October Incorporated by reference 1, 1996 between Registrant to the 1996 Annual Report and Arthur D. Roche on Form 10-K (.3) Employment Agreement dated October 10.3 1, 1999 between Registrant and John L. Eckman (.4) Employment Agreement dated October 10.4 1, 1999 between Registrant and Peter Horn (.5) Employment Agreement dated October 10.5 1, 1999 between Registrant and Yacov Pshtissky (.6) 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 (.7) Amended and restated 1986 Incorporated by Incentive Stock Option Plan reference to the 1990 Annual Report on Form 10-K (.8) 1994 Incentive Stock Option Plan Incorporated by reference to the 1994 Annual Report on Form 10-K (.9) 1994 Non-Qualified Stock Option Incorporated by Plan for Outside Directors reference to the 1994 Annual Report on Form 10-K - 26 - Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ---------------- (.10) 1996 Incentive Stock Option Plan Incorporated by reference to the 1997 Annual Report on Form 10-K (.11) 1996 Non-Qualified Stock Option Incorporated by Plan for Outside Directors reference to the 1997 Annual Report on Form 10-K (.12) Commercial fixed rate loan Incorporated by agreement between the Registrant reference to the and National Westminster Bank PLC June 30, 1997 filing dated April 8, 1997 on Form 10-Q (.13) Loan Agreement between the Incorporated by Registrant and KeyBank National reference to the Association dated January 29, 1998 December 31, 1997 filing on Form 10-Q (.14) Mortgage Note between the Incorporated by Registrant and KeyBank National reference to the Association dated January 29, 1998 December 31, 1997 filing on Form 10-Q (.15) Term Loan Note between the Incorporated by Registrant and KeyBank National reference to the Association dated January 29, 1998 December 31, 1997 filing on Form 10-Q (.16) Mortgage and Security Agreement Incorporated by in the amount of $2,512,000 between reference to the the Registrant and KeyBank National December 31, 1997 Association dated January 29, 1998 filing on Form 10-Q (.17) Mortgage and Security Agreement Incorporated by in the amount of $388,000 between reference to the the Registrant and KeyBank National December 31, 1997 Association dated January 29, 1998 filing on Form 10-Q (.18) Interest rate master swap agreement Incorporated by between the Registrant and KeyBank reference to the National Association dated December 31, 1997 December 11, 1997 filing on Form 10-Q - 27 - Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ---------------- (.19) Schedule to the master agreement Incorporated by between the Registrant and KeyBank reference to the National Association dated December 31, 1997 December 11, 1997 filing on Form 10-Q (.20) Swap transaction confirmation with Incorporated by a notional amount of $2,512,000 reference to the between the Registrant and KeyBank December 31, 1997 National Association dated filing on Form 10-Q December 30, 1997 (.21) Swap transaction confirmation with Incorporated by a notional amount of $388,000 reference to the between the Registrant and KeyBank December 31, 1997 National Association dated filing on Form 10-Q December 30, 1997 (.22) Advice of borrowing terms Incorporated by between the Registrant and reference to the National Westminster Bank PLC June 30, 1999 filing dated February 22, 1999 on Form 10-Q (.23) Credit Agreement between the Incorporated by Registrant and KeyBank reference to the International dated June 30, 1998 filing July 20, 1998 on Form 10-Q (.24) Swap transaction confirmation with Incorporated by a notional amount of $4,425,000 reference to the between the Registrant and KeyBank 1998 Annual Report National Association dated on Form 10-K September 9, 1998 (.25) Stock purchase agreement between 10.25 the Registrant and Isaac Gershoni dated August 12, 1999 (.26) Escrow agreement among the 10.26 Registrant, Isaac Gershoni and European American Bank dated August 12, 1999 (.27) Loan Agreement between the 10.27 Registrant and KeyBank National Association dated October 12, 1999 (.28) Mortgage Note between the 10.28 Registrant and KeyBank National Association dated October 12, 1999 - 28 - Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- --------------- (.29) Mortgage and Security Agreement 10.29 in the amount of $1,200,000 between the Registrant and KeyBank National Association dated October 12, 1999 (.30) 1999 Incentive Stock Option Plan 10.30 (.31) 1999 Non-Qualified Stock Option 10.31 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. Other Matters - Form S-8 and S-2 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), 33-90038 (filed February 24, 1995) and 333-30097 (filed June 26, 1997) and on Form S-2 No. 333-46841 (effective May 1, 1998): 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. - 29 - 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1999, 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 LLP Melville, New York November 30, 1999 - 30 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended September 30, 1999, 1998 and 1997 1999 1998 1997 ---- ---- ---- Net sales $73,414,046 $63,310,466 $51,518,940 Cost of sales 48,714,749 42,478,384 37,043,750 ------------ ------------ ------------ Gross profit 24,699,297 20,832,082 14,475,190 Operating expenses: Selling expense 12,201,943 9,536,988 7,957,340 General and administrative expense 4,604,702 4,426,107 3,767,529 ----------- ----------- ----------- 16,806,645 13,963,095 11,724,869 ----------- ----------- ----------- Operating income 7,892,652 6,868,987 2,750,321 Interest expense 591,826 1,107,196 1,143,699 Other income (141,003) (48,190) (39,896) ----------- ----------- ----------- Income before income taxes 7,441,829 5,809,981 1,646,518 Income tax expense 2,681,628 - 82,000 ----------- ----------- ------------ Net income $4,760,201 $5,809,981 $ 1,564,518 =========== =========== ============ Earnings per share: Basic $1.05 $1.61 $ .56 ===== ===== ===== Diluted $1.01 $1.50 $ .52 ===== ===== ===== See accompanying notes to consolidated financial statements. - 31 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1999 and 1998 ASSETS 1999 1998 - ------ ---- ---- Current Assets: Cash $ 1,998,767 $4,854,557 Accounts receivable (less allowance of $818,000 in 1999 and $694,000 in 1998) 13,771,411 12,758,080 Inventories: Parts, components, and materials 2,647,781 2,944,303 Work-in-process 5,298,862 2,374,769 Finished products 13,381,900 12,079,335 ----------- ----------- 21,328,543 17,398,407 Deferred income taxes 1,303,791 1,079,736 Prepaid expenses 630,716 332,241 ----------- ----------- Total current assets 39,033,228 36,423,021 Property, plant and equipment: Land 1,195,248 1,204,498 Buildings and improvements 5,156,490 4,185,298 Machinery, equipment, and vehicles 8,188,688 7,312,594 ----------- ----------- 14,540,426 12,702,390 Less accumulated depreciation and amortization 6,486,937 5,565,352 8,053,489 7,137,038 Goodwill, net of accumulated amortization 1,768,056 37,724 Deferred income taxes 264,218 116,973 Other assets 780,028 671,645 ----------- ---------- $49,899,019 $44,386,401 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Borrowings under revolving credit agreement $ 374,806 $ 634,388 Current maturities of long-term debt 1,212,316 1,179,367 Accounts payable 4,022,892 3,133,505 Accrued compensation and employee benefits 2,233,441 1,955,462 Accrued expenses 1,749,395 1,316,855 Unearned service revenue 224,711 - Income taxes payable 167,013 561,173 ----------- ----------- Total current liabilities 9,984,574 8,780,750 Long-term debt 5,798,641 7,001,819 Unearned service revenue 639,169 - Other long-term liabilities 728,284 767,528 Commitments and contingencies - Note 11 Shareholders' equity Common stock, par value $.01 per share authorized - 10,000,000 shares issued 4,654,760 and 4,534,710 shares 46,547 45,347 Capital in excess of par value 21,343,676 20,947,515 Retained earnings 11,851,089 7,090,888 ----------- ----------- 33,241,312 28,083,750 Less treasury stock at cost, 74,948 shares in 1999 and 62,517 shares in 1998 (508,745) (409,687) Accumulated other comprehensive income 15,784 162,241 ----------- ------------ Total shareholders' equity 32,748,351 27,836,304 ----------- ----------- $49,899,019 $44,386,401 =========== =========== See accompanying notes to consolidated financial statements - 32 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Fiscal Years Ended September 30, 1999, 1998, and 1997
Accumulated Total Capital in Retained other share- Common excess of earnings Treasury comprehensive holders' Shares Stock par value (deficit) Stock income equity ------ ------ ----------- ----------- -------- ----------- ----------- Balance September 30, 1996 2,802,728 $28,027 $9,423,089 $ (283,611) $(82,901) $ (116,449) $ 8,968,155 Comprehensive income: Net income - - - 1,564,518 - - 1,564,518 Foreign currency translation adjustment - - - - - 149,678 149,678 Total comprehensive income - - - - - - 1,714,196 Stock bonus awarded from treasury - - (28,926) - 82,901 - 53,975 Exercise of stock options 244,332 2,443 473,900 - (298,686) - 177,657 ------------ ------ ---------- ----------- ----------- ------- ----------- Balance September 30, 1997 3,047,060 30,470 9,868,063 1,280,907 (298,686) 33,229 10,913,983 Comprehensive income: Net income - - - 5,809,981 - - 5,809,981 Foreign currency translation adjustment - - - - - 129,012 129,012 Total comprehensive income - - - - - - 5,938,993 Common stock offering, net of issuance costs 1,371,200 13,712 10,787,204 - - - 10,800,916 Exercise of stock options 116,450 1,165 253,063 - (111,001) - 143,227 Tax benefit from exercise of stock options - - 39,185 - - - 39,185 ------------ ------ ---------- ----------- ----------- ------- ----------- Balance September 30, 1998 4,534,710 45,347 20,947,515 7,090,888 (409,687) 162,241 27,836,304 Comprehensive income: Net income - - - 4,760,201 - - 4,760,201 Foreign currency translation adjustment - - - - - (146,457) (146,457) Total comprehensive income - - - - - - 4,613,744 Exercise of stock options 120,050 1,200 270,036 - (99,058) - 172,178 Tax benefit from exercise of stock options - - 126,125 - - - 126,125 ----------- ------- ----------- ----------- ----------- ------- ----------- Balance September 30, 1999 4,654,760 $46,547 $21,343,676 $11,851,089 $ (508,745) $15,784 $32,748,351 =========== ======= =========== =========== =========== ======= =========== See accompanying notes to consolidated financial statements.
- 33 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income $ 4,760,201 $ 5,809,981 $1,564,518 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 913,977 788,349 783,859 Amortization of deferred gain on sale and leaseback - - (433,993) Deferred income taxes (371,300) (1,196,709) - Stock bonus award - - 53,975 Foreign exchange gain - - (39,896) Change in assets and liabilities: Accounts receivable (403,392) (3,187,475) (820,556) Inventories (3,668,388) (382,087) (1,880,543) Prepaid expenses (301,590) (10,068) 230,371 Other assets (108,383) 228,772 4,910 Accounts payable 399,202 (403,060) (1,355,267) Accrued compensation and employee benefits 166,317 842,476 731,397 Accrued expenses 414,896 188,370 144,276 Unearned service revenue 863,880 - - Income taxes payable (482,201) 450,979 14,762 Other liabilities 60,976 179,256 (19,374) --------- --------- ---------- Net cash provided by (used in) operating activities 2,244,195 3,308,784 (1,021,561) --------- --------- ---------- Cash flows from investing activities: Capital expenditures, net of minor disposals (1,747,030) (4,231,674) (925,024) Acquisition, net of cash acquired (2,064,857) (158,925) - ----------- ----------- ------------ Net cash used in investing activities (3,811,887) (4,390,599) (925,024) ----------- ----------- ----------- Cash flows from financing activities: Repayments of U.S. term loan (900,000) - - Proceeds from exercise of stock options 172,179 143,227 177,657 Increase (decrease) in borrowings under short-term revolving credit agreement (238,003) 443,596 (831,275) Repayments of long-term debt (275,016) (310,692) (480,392) Borrowings under term loans - 4,500,000 810,000 Borrowings under mortgage loans - 2,900,000 - Repayments of term loan to related party - (1,800,000) (200,000) Net proceeds from sale of common stock - 10,800,916 - (Decrease) increase in borrowings under U.S. bank credit agreement - (6,003,416) 1,860,518 (Decrease) increase in interest-bearing accounts payable to related party - (5,031,919) 627,693 ----------- ----------- ----------- Net cash (used in) provided by financing activities (1,240,840) 5,641,712 1,964,201 ----------- ----------- ----------- Effect of exchange rate changes on cash (47,258) 7,080 64,088 ----------- ----------- ----------- Net (decrease) increase in cash (2,855,790) 4,566,977 81,704 Cash at beginning of year 4,854,557 287,580 205,876 ----------- ----------- ----------- Cash at end of year $ 1,998,767 $ 4,854,557 $ 287,580 =========== =========== =========== Non-cash investing and financing activities: Capital lease obligations - - $ 276,624 Cash paid during the fiscal year for: Income taxes $ 3,517,498 $ 64,523 $ 29,203 Interest $ 608,673 $ 1,265,243 $ 1,118,963 See accompanying notes to consolidated financial statements.
- 34 - VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years ended September 30, 1999, 1998, and 1997 NOTE 1. Summary of Significant Accounting Policies Nature of Operations The Company designs, manufactures, assembles and markets closed circuit television systems for use in security, surveillance, safety and control purposes by end users. The Company markets its products worldwide directly to installing dealers, systems integrators, government entities and distributors. Principles of Consolidation The consolidated financial statements include the accounts of Vicon Industries, Inc. (the Company) and its wholly owned subsidiaries: Vicon Industries Limited (formerly Vicon Industries (U.K.), Ltd.), TeleSite U.S.A., Inc. and subsidiary (Q.S.R. Ltd.), and Vicon Industries Foreign Sales Corp.; and its majority owned (60%) subsidiary, Vicon Industries (H.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. Advance service billings under a national supply contract with one customer are deferred and recognized as revenues on a pro rata basis over the term of the service agreement. 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. Long-Lived Assets 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. Machinery, equipment and vehicles are being depreciated over periods ranging from 2 to 10 years. The Company's buildings are being depreciated over periods ranging from 25 to 40 years and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term. The Company reviews its long-lived assets (property, plant and equipment) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. - 35 - Goodwill Goodwill represents the excess of purchase price over the fair value assigned to net assets acquired and is being amortized on a straight-line basis over 10 years. Periodically, the Company reviews the recoverability of goodwill. The measurement of possible impairment is based primarily on the ability to recover the balance of goodwill from expected future operating cash flows on an undiscounted basis. Accumulated amortization amounted to $41,668 and $5,389 at September 30, 1999 and 1998, respectively. Research and Development Product research and development costs are principally charged to cost of sales as incurred, and amounted to approximately $2,600,000, $2,200,000 and $2,000,000 in fiscal 1999, 1998, and 1997, respectively. Earnings Per Share The Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" requires companies to present basic and diluted earnings per share (EPS). Basic EPS is computed based on the weighted average number of shares outstanding. Diluted EPS reflects the maximum dilution that would have resulted from the exercise of stock options, warrants and incremental shares issuable under a deferred compensation agreement (see Note 10). 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 $16,000 and $162,000 at September 30, 1999 and 1998, respectively, is recorded as a component of shareholders' equity. Income Taxes The Company accounts for income taxes under the provisions of 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 6). Derivative Instruments The Company's derivative financial instruments consist of foreign currency forward exchange contracts and interest rate swap agreements. The Company enters into forward exchange contracts to hedge intercompany accounts receivable with its U.K. based subsidiary and Japanese Yen denominated trade accounts payable liabilities due inventory suppliers. The forward exchange contracts have maturities of less than one year and require the Company to exchange currencies at specified dates and rates. Gains and losses on these contracts are recorded in cost of sales generally when incurred. - 36 - The Company entered into interest rate swap agreements with its bank to effectively convert its floating rate long-term debt to fixed interest rates (see Note 7). Such agreements mature in the same amounts and over the same periods as the related debt. Outstanding notional amounts under such agreements approximated $6.2 million at September 30, 1999. Gains and losses on these contracts are recorded in interest expense when incurred. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of certain financial instruments. The carrying amounts for accounts and other receivables, accounts payable and accrued expenses approximate fair value because of the short-term maturity of these instruments. The carrying amounts of the Company's long-term debt approximate fair value. The carrying amounts of the Company's interest rate swap agreements approximated their fair market value at September 30, 1999. This value represents the estimated amount the Company would have to pay or would receive if such agreements were terminated before maturity, principally resulting from market interest rate changes. The fair value of forward exchange contracts is estimated by obtaining quoted market prices. The contracted exchange rates on committed forward exchange contracts at September 30, 1999 and 1998 approximated market rates for similar term contracts (see Note 11). Accounting for Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Segment Data On September 30, 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their business segments in financial statements. The adoption of SFAS 131 did not have an effect on the Company's primary financial statements, but did affect the disclosure of segment information contained in Note 8 of the Notes to the Consolidated Financial Statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassification Certain prior year amounts have been reclassified to conform to current year presentation. - 37 - NOTE 2. Business Acquisitions In August 1999, the Company acquired all of the outstanding shares of TeleSite U.S.A., Inc., a manufacturer and distributor of remote video surveillance systems, for $2.1 million. As additional compensation, the Company is liable to pay the sellers an amount equal to 30% of the acquired operation's yearly incremental consolidated sales for a three-year period commencing January 1, 2000. The acquisition has been accounted for as a purchase, and the results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired of approximately $1.8 million has been recorded as goodwill and is being amortized on a straight-line basis over 10 years. Assuming this acquisition had occurred on October 1, 1997, consolidated net sales would have been approximately $75.9 million for 1999 and $65.6 million for 1998. Consolidated pro forma net income and earnings per share would not have been materially different from the reported amounts for 1999 and 1998. Such unaudited pro forma amounts are not indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1998. In July 1998, the Company increased its interest to 60% in Vicon Industries (H.K.) Ltd. for approximately $197,000 in cash. The acquisition was accounted for as a purchase with the assets, liabilities and operations of the acquired business being consolidated with those of the Company since the acquisition date. The excess cost over the fair value of net assets acquired and the results of operations for this subsidiary for fiscal 1999 were not material. NOTE 3. Investment in Affiliate In September 1999, the Company's 50% ownership interest in Chun Shin Electronics, Inc. (CSE), a South Korean company which manufactures and assembles certain Vicon products, decreased to 34% with the merger of Chun Shin Industries, Inc. (CSI) into CSE. CSI is the former 50% shareholder of CSE and sells various security products, including the Company's products, principally within the South Korean market. The Company has not recognized its interest in the accumulated earnings of CSE since it does not have control over the operations of CSE and does not have the ability to repatriate any of its accumulated earnings. Net assets of CSE were approximately $5.6 million at September 30, 1999. Note 4. Public Offering In May 1998, the Company sold 1,371,200 shares of its common stock in a public offering, the net proceeds of which were approximately $10.8 million. The proceeds were principally used to repay certain interest bearing borrowings. - 38 - NOTE 5. Short-Term Borrowings Borrowings under the Company's short-term revolving credit agreement represent borrowings by the Company's U.K. based subsidiary under a bank overdraft facility. Such credit agreement provides for maximum borrowings of 600,000 pounds ($990,000) and is secured by all the assets of the subsidiary. Maximum borrowings during 1999, 1998 and 1997 amounted to approximately $852,000, $676,000 and $1,282,000, respectively. The weighted-average interest rate on borrowings during these years was 7.80% in 1999, 9.33% in 1998 and 8.27% in 1997. NOTE 6. Income Taxes The components of income tax expense for the fiscal years indicated are as follows: 1999 1998 1997 ---- ---- ---- Federal $ 2,392,000 $ (515,000) $ 24,000 State 200,000 380,000 5,000 Foreign 90,000 135,000 53,000 ------------- ----------- ------------ $ 2,682,000 $ - $ 82,000 ============= =========== ============ A reconciliation of the U.S. statutory tax rate to the Company's effective tax rate follows:
1999 1998 1997 ---- ---- ---- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- U.S. statutory tax $ 2,530,000 34.0% $1,975,000 34.0% $ 560,000 34.0% Change in valuation allowance - - (2,560,000) (44.0) (467,000) (28.3) State tax, net of federal benefit 132,000 1.8 251,000 4.3 - - Other 20,000 0.2 334,000 5.7 (11,000) (0.7) ----------- ------ ---------- ------ --------- ------ Effective Tax Rate $ 2,682,000 36.0% $ - - % $ 82,000 5.0% =========== ====== ========== ====== ========= ======
- 39 - The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 1999 and 1998 are presented below: 1999 1998 ---- ---- Deferred tax assets: Inventory reserves $1,009,000 $ 865,000 Deferred compensation accruals 179,000 186,000 Allowance for doubtful accounts receivable 256,000 226,000 Unearned service revenue 128,000 - Other 88,000 9,000 ---------- ---------- Total deferred tax assets 1,660,000 1,286,000 Deferred tax liabilities: Cash surrender value of officers' life insurance 46,000 58,000 Other 46,000 31,000 ---------- ----------- Total deferred tax liabilities 92,000 89,000 ---------- ----------- Net deferred tax assets and liabilities $1,568,000 $ 1,197,000 ---------- ----------- During fiscal year 1998, the Company fully utilized its remaining federal net operating loss carryforward and reversed the remaining valuation allowance based on management's assessment that it is reasonably assured that all net deferred income tax assets will be realized in the future given the Company's present level of earnings. Pretax domestic income amounted to approximately $7,385,000, $5,462,000 and $1,414,000 in fiscal years 1999, 1998 and 1997, respectively. Pretax foreign income amounted to approximately $57,000, $348,000 and $233,000 in fiscal years 1999, 1998 and 1997, respectively. NOTE 7. Long-Term Debt Long-term debt is comprised of the following at September 30, 1999 and 1998: 1999 1998 ---- ---- U.S. bank term loan $3,525,000 $4,425,000 U.S. bank mortgage loan 2,679,000 2,820,900 U.K. bank term loan 625,626 729,584 Other 181,331 205,702 ---------- ---------- 7,010,957 8,181,186 Less installments due within one year 1,212,316 1,179,367 ---------- ---------- $5,798,641 $7,001,819 ========== ========== In July 1998, the Company entered into a $14 million unsecured revolving credit and term loan agreement with a bank. Such agreement includes a $7.5 million revolving credit facility, which expires in July 2002, with an option to increase the facility to $9.5 million at any time through July 2000. Borrowings under this facility bear interest at the bank's prime rate minus 2% or, at the Company's option, LIBOR plus 90 basis points (6.25% and 6.30% at September 30, 1999). At September 30, 1999 and 1998, there were no revolving credit borrowings outstanding under this agreement. - 40 - The agreement also provided for a $4.5 million five-year term loan payable in equal monthly installments through July 2003, with interest at LIBOR plus 100 basis points. The agreement contains restrictive covenants which, among other things, require the Company to maintain certain levels of earnings and ratios of debt service coverage and debt to tangible net worth. In September 1998, the Company entered into an interest rate swap agreement with the same bank to effectively convert the foregoing floating rate long-term loan to a fixed rate loan. This agreement fixes the Company's interest rate on its $4.5 million term loan at 6.74%. The interest rate swap agreement matures in the same amounts and over the same periods as the related term loan. In January 1998, the Company entered into an aggregate $2.9 million mortgage and term loan agreement with a bank to finance the purchase of its principal operating facility. Such agreement includes a $2,512,000 ten-year mortgage loan payable in monthly installments through January 2008, with a $1,188,000 payment due at the end of the term. The agreement also provides a $388,000 five-year term loan payable in monthly installments through January 2003, with a $138,500 payment due at the end of the term. Both loans bear interest at the bank's prime rate minus 1.35%. The loans are secured by a first mortgage on the property and fixtures and contain restrictive covenants that, among other things, require the Company to maintain certain levels of earnings and ratios of debt service coverage and debt to tangible net worth. At the same time, the Company entered into interest rate swap agreements with the same bank to effectively convert the foregoing floating rate long-term loans to fixed rate loans. These agreements fix the Company's interest rate on its $2,512,000 mortgage loan at 7.79% and its $388,000 term loan at 7.7%. The interest rate swap agreements mature in the same amounts and over the same periods as the related mortgage and term loans. In October 1999, the Company entered into a $1.2 million mortgage loan agreement with its bank to finance the expansion of its principal operating facility. The loan is payable in equal monthly principal installments through January 2008, with a $460,000 payment due at the end of the term. The loan bears interest at the bank's prime rate minus 160 basis points or, at the Company's option, LIBOR plus 100 basis points and contains the same covenants as included in the existing mortgage loans. In April 1997, the Company's U.K. based subsidiary entered into a ten-year 500,000 pound sterling (approximately $825,000) bank term loan. The term loan is payable in equal monthly installments with interest at a fixed rate of 9%. The loan is secured by a first mortgage on the subsidiary's property and contains restrictive covenants which, among other things, require the subsidiary to maintain certain levels of net worth, earnings and debt service coverage. Long-term debt maturing in each of the fiscal years subsequent to September 30, 1999 approximates $1,212,000 in 2000, $1,216,000 in 2001, $1,199,000 in 2002, $1,197,000 in 2003, $438,000 in 2004 and $1,749,000 thereafter. At September 30, 1999, future minimum annual rental commitments under non-cancelable capital lease obligations were as follows: $69,334 per year in 2000 and 2001, and $33,454 in 2002. - 41 - NOTE 8. Segment and Related Information The Company adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" in 1999, which changes the way the Company reports information about its operating segments. The information for 1998 and 1997 has been restated from the prior year's presentation in order to conform to the 1999 presentation. The Company operates in one industry which encompasses the design, manufacture, assembly and marketing of closed-circuit video systems and system components for the electronic protection segment of the security industry. The Company manages its business segments primarily on a geographic basis. The Company's principal reportable segments are comprised of its United States (U.S.) and United Kingdom (U.K.) based operations. Its U.S. based operations consist of Vicon Industries, Inc., the Company's corporate headquarters and principal operating entity. Its U.K. based operations consist of Vicon Industries Limited, a wholly owned subsidiary which markets and distributes the Company's products principally within Europe. Other segments include the operations of Vicon Industries (H.K.), Ltd., a Hong Kong based majority owned subsidiary which markets and distributes the Company's products principally within Hong Kong and mainland China and TeleSite U.S.A., Inc. and subsidiary, a U.S. and Israeli based manufacturer and distributor of remote video surveillance systems. The Company evaluates performance and allocates resources based on, among other things, the net profit for each segment, which excludes intersegment sales and profits. Segment information for the fiscal years ended September 30, 1999, 1998 and 1997 is as follows:
1999 U.S. U.K. Other Consolidating Totals - ---- ---------- ---------- --------- ------------- ------ Net sales to external customers $62,939,000 $8,515,000 $1,960,000 $ - $73,414,000 Intersegment net sales 5,334,000 - 36,000 - 5,370,000 Net income (loss) 4,787,000 217,000 (194,000) (50,000) 4,760,000 Interest expense 506,000 174,000 7,000 (95,000) 592,000 Interest income 227,000 - - (86,000) 141,000 Depreciation and amortization 680,000 163,000 35,000 36,000 914,000 Total assets 45,025,000 5,912,000 2,904,000 (3,942,000) 49,899,000 Capital expenditures $ 1,469,000 $ 177,000 $ 101,000 - $ 1,747,000
1998 U.S. U.K. Other Consolidating Totals - ---- ---------- ---------- --------- ------------- ------ Net sales to external customers $54,184,000 $8,542,000 $ 584,000 $ - $63,310,000 Intersegment net sales 4,668,000 - - - 4,668,000 Net income (loss) 5,597,000 349,000 41,000 (177,000) 5,810,000 Interest expense 1,024,000 187,000 - (104,000) 1,107,000 Interest income 164,000 - - (99,000) 65,000 Depreciation and amortization 652,000 131,000 - 5,000 788,000 Total assets 40,214,000 5,575,000 1,181,000 (2,584,000) 44,386,000 Capital expenditures $ 4,037,000 $ 191,000 $ 4,000 - $ 4,232,000
- 42 -
1997 U.S. U.K. Other Consolidating Totals - ---- ---------- ---------- --------- ------------- ------ Net sales to external customers $43,605,000 $7,914,000 $ - $ - $51,519,000 Intersegment net sales 3,344,000 - - - 3,344,000 Net income (loss) 1,385,000 183,000 - (3,000) 1,565,000 Interest expense 1,041,000 191,000 - (88,000) 1,144,000 Interest income 79,000 - - (79,000) - Depreciation and amortization 639,000 145,000 - - 784,000 Total assets 28,209,000 4,938,000 - (1,947,000) 31,200,000 Capital expenditures $ 819,000 $ 106,000 $ - - $ 925,000
The consolidating segment presented above includes the elimination and consolidation of intersegment transactions. Net sales and long-lived assets related to operations in the United States and other foreign countries for the fiscal years ended September 30, 1999, 1998, and 1997 are as follows: 1999 1998 1997 ---- ---- ---- Net sales U.S. $63,236,000 $54,184,000 $43,605,000 Foreign 10,178,000 9,126,000 7,914,000 ----------- ----------- ---------- Total $73,414,000 $63,310,000 $51,519,000 Long-lived assets U.S. $ 6,234,000 $ 5,443,000 $ 2,059,000 Foreign 1,819,000 1,694,000 1,433,000 ---------- ----------- ---------- Total $ 8,053,000 $ 7,137,000 $ 3,492,000 U.S. sales include $5,236,000, $9,853,000 and $10,747,000 for export in fiscal years 1999, 1998, and 1997, respectively. Indirect sales to the United States Postal Service under a national supply contract approximated $22.7 million and $12.0 million in fiscal 1999 and 1998, respectively. NOTE 9. Stock Options and Stock Purchase Warrants The Company maintains stock option plans which include both incentive and non-qualified options covering a total of 430,532 shares of common stock reserved for issuance to key employees, including officers and directors. Such amount includes a total of 100,000 options reserved for issuance under the 1999 Incentive Stock Option Plan, as well as a total of 100,000 options reserved for issuance under the 1999 Non-Qualified Stock Option Plan, approved by the shareholders in April 1999. All options are issued at fair market value at the grant date and are exercisable in varying installments according to the plans. The plans allow for the payment of option exercises through the surrender of previously owned shares based on the fair market value of such shares at the date of surrender. During fiscal 1999 and 1998, a total of 12,431 and 16,565 common shares, respectively, were surrendered pursuant to stock option exercises, which are held in treasury. There were 59,885 shares available for grant at September 30, 1999. - 43 - Changes in outstanding stock options for the three years ended September 30, 1999 are as follows: Weighted Number Average of Exercise Shares Price - ------------------------------------------------------------------- Balance - September 30, 1996 444,649 $1.83 Options granted 241,000 $2.77 Options exercised (244,332) $1.95 Options forfeited (21,820) $2.35 - ------------------------------------------------------------------- Balance - September 30, 1997 419,497 $2.27 Options granted 48,250 $6.98 Options exercised (116,450) $2.18 Options forfeited (1,400) $6.50 - ------------------------------------------------------------------- Balance - September 30, 1998 349,897 $2.94 Options granted 143,000 $7.50 Options exercised (120,050) $2.26 Options forfeited (2,200) $7.00 - ------------------------------------------------------------------- Balance - September 30, 1999 370,647 $4.89 Price range $1.69 - $3.06 (weighted-average contractual 183,897 $2.36 life of 1.9 years) Price range $6.75 - $8.19 (weighted-average contractual 186,750 $7.38 life of 5.2 years) - ------------------------------------------------------------------- Exercisable options - September 30, 1997 149,838 $1.96 September 30, 1998 253,123 $2.47 September 30, 1999 210,147 $2.94 - ------------------------------------------------------------------- Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of this Statement. The fair value for options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997: 1999 1998 1997 ---- ---- ---- - ------------------------------------------------------------------------------ Risk-free interest rate 5.0% 5.0% 6.0% Dividend yield 0.0% 0.0% 0.0% Volatility factor 59.0% 67.3% 52.7% Weighted average expected life 4 years 3 years 3 years - ------------------------------------------------------------------------------ The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. - 44 - For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income and earnings per share are as follows: 1999 1998 1997 ---- ---- ---- Net income: As reported $4,760,201 $5,809,981 $1,564,518 Pro forma $4,646,938 $5,638,166 $1,364,368 Earnings per share: As reported Basic $1.05 $1.61 $ .56 Diluted $1.01 $1.50 $ .52 Pro forma Basic $1.03 $1.56 $ .49 Diluted $ .98 $1.46 $ .45 Weighted average fair value of options granted $3.74 $3.34 $1.13 Pro forma earnings reflect only options granted since October 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to October 1, 1995 was not considered. In connection with the public offering, the Company granted the Underwriters warrants to purchase up to 145,000 shares of Common Stock. The warrants are exercisable at any time through May 2003 at a price of $10.50 per share. NOTE 10. Earnings Per Share The following table provides the components of the basic and diluted earnings per share (EPS) computations: 1999 1998 1997 ---- ---- ---- Basic EPS Computation Net income $4,760,201 $5,809,981 $1,564,518 Weighted average shares outstanding 4,519,344 3,605,307 2,803,805 Basic earnings per share $ 1.05 $ 1.61 $ .56 ========== ========== ========== Diluted EPS Computation Net income $4,760,201 $5,809,981 $1,564,518 Weighted average shares outstanding 4,519,344 3,605,307 2,803,805 Stock options 185,940 260,425 218,191 Stock compensation arrangement 13,075 7,343 - --------- --------- --------- Diluted shares outstanding 4,718,358 3,873,075 3,021,996 Diluted earnings per share $ 1.01 $ 1.50 $ .52 ========== ========== ========== - 45 - NOTE 11. Commitments The Company occupies certain facilities, or is contingently liable, under operating leases that expire at various dates through 2008. The leases, which cover periods from three to nine years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment at September 30, 1999 was $522,000 with minimum rentals for the fiscal years shown as follows: 2000 - $158,000; 2001 - $136,000; 2002 - $73,000; 2003 - $27,000; 2004 - - $25,000; 2005 and thereafter - $103,000. The Company is a party to employment agreements with four executives that provide for, among other things, the payment of compensation if there is a change in control without Board of Director approval (as defined in the agreements). The contingent liability under such change in control provisions at September 30, 1999 was approximately $1,605,000. The total compensation payable under these agreements, absent a change in control, aggregated $2,215,000 at September 30, 1999. The Company is also a party to insured deferred compensation agreements with two retired officers. The aggregate remaining compensation payments of approximately $495,000 as of September 30, 1999 are subject to the individuals' adherence to certain non-compete covenants, and are payable in monthly installments through December 2003. In October 1997, 1998 and 1999, the Company's Chief Executive Officer was provided a deferred compensation benefit of 45,952, 16,565 and 8,130 shares, respectively, of common stock currently held by the Company in treasury. Such shares vest upon the expiration of the executive's employment agreement in October 2004, or earlier under certain occurrences including his death, involuntary termination or a change in control of the Company. The market value of such shares approximated $507,000 at the dates of grant, which is being amortized on the straight-line method over the term of the employment agreement. Sales to customers from the Company's U.K. based subsidiary are denominated in British pounds sterling. The Company attempts to minimize its currency exposure on these sales through the purchase of forward exchange contracts to cover its billings to this subsidiary. These contracts generally involve the exchange of one currency for another at a future date and specified exchange rate. At September 30, 1999 and 1998, the Company had approximately $1,550,000 and $2,200,000, respectively, of outstanding forward exchange contracts to sell British pounds. Such contracts have maturities of less than one year. The Company's purchases of Japanese sourced products through CBC Company, Ltd., a related party, are denominated in Japanese yen. At September 30, 1999, the Company had approximately $1,059,000 of outstanding forward exchange contracts to purchase Japanese yen. At September 30, 1998, the Company did not have any forward exchange contracts to purchase Japanese yen. The Company received notice from a competitor asserting that certain of the Company's products infringe upon a patent it allegedly owns and is seeking royalties on the Company's sales of such products. The Company is reviewing the claim and believes that it has good defenses in this matter. No assurance can be given that this matter will be resolved in the Company's favor and no reasonable estimate of potential loss, if any, can be made at this time. - 46 - NOTE 12. Related Party Transactions As of September 30, 1999, CBC Company, Ltd. and affiliates ("CBC") owned approximately 12.0% of the Company's outstanding common stock. The Company, which has been conducting business with CBC for approximately 20 years, imports certain finished products and components through CBC and also sells its products to CBC who resells the products in certain Asian and European markets. The Company purchased approximately $5.4 million, $5.3 million and $7.1 million of products and components from CBC in fiscal years 1999, 1998, and 1997, respectively, and the Company sold $1.3 million, $4.1 million and $2.7 million of product to CBC for distribution in fiscal years 1999, 1998, and 1997, respectively. At September 30, 1999 and 1998, the Company owed $955,000 and $652,000, respectively, to CBC and CBC owed $27,000 and $491,000, respectively, to the Company resulting from purchases of products. As of September 30, 1999, Mr. Chu S. Chun had voting control over approximately 4.5% of the Company's outstanding common stock. Mr. Chun beneficially owns a controlling interest in Chun Shin Electronics, Inc. (CSE), a South Korean supplier of certain of the Company's products (see Note 3). Mr. Chun also controls International Industries, Inc. (I.I.I.), a U.S. based company, which arranges the importation of all the Company's products purchased directly or indirectly from CSE. During fiscal years 1999 and 1998, the Company purchased approximately $5.7 million and $8.0 million of products from CSE through I.I.I. under this agreement. In addition, the Company sold approximately $535,000 and $344,000 of its products to I.I.I. in 1999 and 1998, respectively, for resale to CSE. At September 30, 1999 and 1998, I.I.I. owed the Company approximately $238,000 and $59,000, respectively. - 47 - VICON INDUSTRIES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited) Earnings Per Share ------------------ Quarter Net Gross Net Ended Sales Profit Income Basic Diluted ------- ----- ------ ------ ----- ------- Fiscal 1999 December $17,128,000 $ 5,609,000 $ 1,060,000 $ .24 $ .23 March 17,500,000 5,895,000 1,161,000 .26 .25 June 19,493,000 6,614,000 1,346,000 .30 .28 September 19,293,000 6,581,000 1,193,000 .26 .25 ----------- ----------- ----------- ----- ----- Total $73,414,000 $24,699,000 $ 4,760,000 $1.05 $1.01 =========== =========== =========== ===== ===== Fiscal 1998 December $14,874,000 $4,628,000 $ 1,009,000 $ .34 $ .31 March 14,731,000 4,826,000 1,154,000 .38 .35 June 16,106,000 5,451,000 1,575,000 .40 .38 September 17,599,000 5,927,000 2,072,000 .46 .44 ----------- ----------- ----------- ----- ----- Total $63,310,000 $20,832,000 $ 5,810,000 $1.61 $1.50 =========== =========== =========== ===== ===== 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. - 48 - SCHEDULE I VICON INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years ended September 30, 1999, 1998, and 1997 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, 1999 $694,000 $290,000 $166,000 $818,000 ======== ======== ======== ======== September 30, 1998 $493,000 $285,000 $ 84,000 $694,000 ======== ======== ======== ======== September 30, 1997 $396,000 $273,000 $176,000 $493,000 ======== ======== ======== ======== - 49 - 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 John M. Badke ------------------------- ------------------------- Kenneth M. Darby John M. Badke Chairman Vice President, Finance (Chief Executive Officer) (Chief Financial Officer) December 29, 1999 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. Kenneth M. Darby December 29, 1999 - --------------------- --------------------- Kenneth M. Darby Chairman and CEO Date Chu S. Chun December 29, 1999 - --------------------- --------------------- Chu S. Chun Director Date Milton F. Gidge December 29, 1999 - --------------------- --------------------- Milton F. Gidge Director Date Peter F. Neumann December 29, 1999 - --------------------- --------------------- Peter F. Neumann Director Date W. Gregory Robertson December 29, 1999 - --------------------- --------------------- W. Gregory Robertson Director Date Arthur D. Roche December 29, 1999 - --------------------- --------------------- Arthur D. Roche Director Date Kazuyoshi Sudo December 29, 1999 - --------------------- --------------------- Kazuyoshi Sudo Director Date - 50 - 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 Kenneth M. Darby John M. Badke Chairman Vice President, Finance (Chief Executive Officer) (Chief Financial Officer) December 29, 1999 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. December 29, 1999 - --------------------- --------------------- Kenneth M. Darby Chairman and CEO Date December 29, 1999 - --------------------- --------------------- Chu S. Chun Director Date December 29, 1999 - --------------------- --------------------- Milton F. Gidge Director Date December 29, 1999 - --------------------- --------------------- Peter F. Neumann Director Date December 29, 1999 - --------------------- --------------------- W. Gregory Robertson Director Date December 29, 1999 - --------------------- --------------------- Arthur D. Roche Director Date December 29, 1999 - --------------------- --------------------- Kazuyoshi Sudo Director Date - 50 - EX-10 2 EMPLOYMENT AGREEMENT - KENNETH M. DARBY EMPLOYMENT AND DEFERRED COMPENSATION AGREEMENT AGREEMENT, dated as of October 1, 1999, between KENNETH M. DARBY (hereinafter called "Darby") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 89 Arkay Drive, Hauppauge, New York 11788 (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 accepts such employment. 2. Term. The term of this Agreement shall commence as of the date of this Agreement and expire on September 30, 2004. 3. Compensation. A. The Company shall pay Darby a base salary of $285,000 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 full fee for service family medical, dental, and hospital coverage and long term disability insurance. 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 Hauppauge, 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 paid vacation per annum. 5. Covenant not to Compete. Darby agrees that during the term of this Agreement and for a period of five years thereafter unless the Company shall breach this agreement, he shall not directly or indirectly anywhere in the world engage in, or - 2 - 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 CCTV security equipment and protection devices anywhere in the United States, Europe and Asia. 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. 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, 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 the 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 entity shall directly or indirectly acquire a beneficial ownership of 20% (or in the case of Chugai Boyeki Co., Ltd. and its affiliates 35%) or 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 - 3 - 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 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 - 4 - 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 duties and 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. 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. - 5 - G. Payment of termination or severance payment shall not affect the Company's obligations under any other agreement with Darby. 8. Deferred Compensation. A. 70,647 shares of the Company's common stock now held by the Company as treasury shares (the "Deferred Compensation Shares") shall be set aside and held by the Company for future distribution to Darby under this paragraph. B. As deferred compensation, and in addition to all other compensation payable to Darby, the Deferred Compensation Shares shall become the property of Darby, and the Company shall deliver the certificates for the Deferred Compensation Shares to Darby (or his executor or administrator), on the Transfer Date, registered in Darby's name, within 10 days thereafter. The Transfer Date shall be the earliest of (i) the date of Darby's death; (ii) the date as of which Darby's employment by the Company involuntarily terminates; (iii) the date of execution of a Company Sale Agreement as defined in paragraph 7; (iv) the occurrence of a Change of Control as defined in paragraph 6; or (v) expiration of this Agreement (including any replacement agreement). Notwithstanding any other provision of this paragraph, Darby shall not be entitled to any Deferred Compensation Shares if the Company terminates this Agreement for Gross Misconduct as defined in paragraph 7. Prior to the Transfer Date, Darby's rights to the Deferred Compensation Shares shall not be transferrable and the Treasury Shares shall be the property of the Company. - 6 - E. Darby represents that he will be acquiring the Deferred Compensation Shares for investment only and without a view to the distribution thereof and that the Deferred Compensation Shares, when delivered to him, may constitute restricted stock under the Securities Act of 1933, and the regulations thereunder, and that the certificates therefor shall bear such legend relating to this subparagraph as the Company shall reasonably require. 9. 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 termination shall not release the Company from any liability to Darby for compensation earned, or for termination or severance due in accordance with paragraph 7 herein. Agreement termination under this paragraph shall not be deemed a termination of employment for Gross Misconduct. 10. 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. 11. Miscellaneous. Except for any deferred compensation agreement, retirement plan or stock options previously granted, this Agreement contains the entire agreement between the parties - 7 - 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. 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 Date: - 8 - EX-10 3 EMPLOYMENT AGREEMENT - JOHN ECKMAN EMPLOYMENT AGREEMENT AGREEMENT, dated as of October 1, 1999, between JOHN ECKMAN (hereinafter called "Eckman") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 89 Arkay Drive, Hauppauge, New York 11788 (hereinafter called the "Company"). WHEREAS, Eckman has previously been employed by the Company, and WHEREAS, the Company and Eckman mutually desire to assure the continuation of Eckman'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 Eckman as its Vice President - - Sales throughout the term of this Agreement, and Eckman 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, 2001 unless terminated earlier by the Company for cause. 3. Compensation. A. The Company shall pay Eckman a base salary of $135,000 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. B. Eckman's base salary shall be payable monthly or bi-weekly. C. Eckman shall also be entitled to participate in any life insurance, medical, dental, hospital, disability, 401(k) or other benefit plans as may from time to time be made available to non-executive officers of the Company, subject to the general eligibility requirements of such plans. 4. Covenant not to Compete. Eckman agrees that during the term of this Agreement and for a period of two 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 CCTV security equipment and protection devices anywhere in the United States and Europe. Eckman 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 Eckman 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. Eckman acknowledges that he may only be released from this covenant if the Company materially breach's this agreement or provides a written release of this provision. 5. Severance Payment on Certain Terminations. A. If either this Agreement expires, or the Company terminates Eckman's employment under this Agreement for reasons other than "Gross Misconduct", then Eckman, at his option, may - 2 - elect to receive severance payments except in the case of disability under paragraph 7, without reduction for any offset or mitigation, in an amount equal to (a) one-twelfth Eckman's annual base salary at the time of such termination multiplied by (b) the number of full years of Eckman's employment by the Company which shall be no less than three years and up to a maximum of 6 years. B. "Gross Misconduct" shall mean (a) a wilful, substantial and unjustifiable refusal or inability due to drug or alcohol impairment 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. C. Eckman'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 Eckman receives actual notice of termination or this Agreement expires, as the case may be. D. 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. E. The severance amount determined in 5A above shall be paid in equal monthly payments over the number of full years of Eckman's employment. 6. Termination Payment on Change of Control. A. Notwithstanding any other provision of this Agreement, if a "Change of Control" occurs without the consent of - 3 - the Board of Directors, Eckman, 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 the five years preceding the Change of Control or shorter period of actual employment, in either lump sum or extended payments over three years as Eckman shall elect. B. A "Change of Control" shall be deemed to have occurred if any entity shall directly or indirectly acquire beneficial ownership of 50% or more of the outstanding shares of capital stock of the Company. C. Eckman'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 Eckman receives actual notice of Change of Control. 7. Death or Disability. The Company may terminate this Agreement at its sole option and determination without liability for severance payments under paragraph 5 if during the term of this Agreement (a) Eckman dies or (b) Eckman becomes so disabled for a period of six months that he is substantially unable to perform his duties under this Agreement for such period. The Company shall be the sole judge of such disability. 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 - 4 - 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 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 may determine to provide or make available to Eckman. 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 State applicable to contracts between New York State residents and made and to be entirely performed in New York State. 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. - 5 - IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. VICON INDUSTRIES, INC. By John Eckman Kenneth M. Darby Vice President - Sales President Vicon Industries, Inc. - 6 - EX-10 4 EMPLOYMENT AGREEMENT - PETER HORN EMPLOYMENT AGREEMENT AGREEMENT, dated as of October 1, 1999, between PETER HORN (hereinafter called "Horn") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 89 Arkay Drive, Hauppauge, New York 11788 (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, 2001, unless terminated earlier by the Company for cause. 3. Compensation. A. The Company shall pay Horn a base salary of $130,000 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, 1999 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 life insurance, medical, dental, hospital, disability or other benefit plans as may from time to time be made available to non-executive 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 a written release of this provision. - 2 - 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 or inability due to drug or alcohol impairment 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. - 3 - 6. Termination Payment on Change of Control. A. Notwithstanding any other provision of this Agreement, if a "Change of Control" occurs without the 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 the 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 any entity shall directly or indirectly acquire beneficial ownership of 50% or more of the outstanding shares of capital stock of the Company. 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 at its sole option and determination 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. The Company shall be the sole judge of whether Horn is disabled or not. - 4 - 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 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 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 State applicable to contracts between New York State residents and made and to be entirely performed in New York State. 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 Peter Horn Kenneth M. Darby Vice President - Operations President Vicon Industries, Inc. Date: Date: - 6 - EX-10 5 EMPLOYMENT AGREEMENT - YACOV PSHTISSKY EMPLOYMENT AGREEMENT AGREEMENT, dated as of October 1, 1999, between YACOV PSHTISSKY (hereinafter called "Pshtissky") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 89 Arkay Drive, Hauppauge, New York 11788 (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, 2001, unless terminated earlier by the Company for cause. 3. Compensation. A. The Company shall pay Pshtissky a base salary of $130,000 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, 1999 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 life insurance, medical, dental, hospital, disability or other benefit plans as may from time to time be made available to non-executive 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 or provides a written release of this provision. - 2 - 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 or inability due to drug or alcohol impairment 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. The severance amount shall be paid in equal monthly payments over a 12 month period. - 3 - 6. Termination Payment on Change of Control. A. Notwithstanding any other provision of this Agreement, if a "Change of Control" occurs without the 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 the 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 any entity shall directly or indirectly acquire beneficial ownership of 50% or more of the outstanding shares of capital stock of the Company. 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 at its sole option and determination 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. The Company shall be the sole judge of whether Pshtissky is disabled or not. - 4 - 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 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 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 State applicable to contracts between New York State residents and made and to be entirely performed in New York State. 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 Yacov Pshtissky Kenneth M. Darby Vice President - New Technology President and Development Vicon Industries, Inc. Date: Date: - 6 - EX-10 6 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of July 30, 1999, between VICON INDUSTRIES, INC., a New York corporation whose address is 89 Arkay Drive, Hauppauge, New York 11788 ("Purchaser") and ISAAC GERSHONI, whose address is 97 Taylor Drive, Closter, New Jersey 07624 ("Seller"). The parties agree as follows: 1. Purchase and Sale of Stock Based upon the representations, warranties, and agreements contained in this Agreement and subject to the terms and conditions set forth in this Agreement, at the Closing Date, as defined in Section 3, Seller shall sell, transfer and deliver to Purchaser, and Purchaser shall purchase and accept from Seller, all of the issued and outstanding shares of TeleSite U.S.A., Inc. ("TeleSite"), free and clear of all claims, liens and encumbrances. The shares to be sold, transferred and delivered to Purchaser are referred to as the "TeleSite Stock." TeleSite and Q.S.R. Ltd., an Israeli corporation ("QSR"), are referred to as the "Acquired Companies." 2. Purchase Price and Method of Payments. The purchase price to be paid by Purchaser to Seller for the TeleSite Stock shall be $2,000,000 payable and adjusted as follows: (a) At the Closing, Purchaser will pay $1,000,000 to Seller, by certified check, or by wire transfer to a bank account in New York designated by Seller at least 3 days prior to the Closing. (b) At the Closing, Purchaser will pay $1,000,000, in escrow, pursuant to an escrow agreement as provided in Section 3B(c), to the escrow agent specified therein. (c) Purchaser will also pay to Seller an amount equal to 30% of the Sales Increase for each of the Measuring Periods. (d) For purposes of Section 2(c): (i) Sales Increase for any Measuring Period shall mean the amount by which Consolidated Sales of the Acquired Companies in any Measuring Period exceeds Consolidated Sales of the Acquired Companies in the immediately proceeding 12 month period. (ii) Consolidated Sales shall be the sum of: (a) Sales of the Acquired Companies (exclusive of all intercompany sales, and exclusive of sales to Purchaser); and (b) the amount obtained by multiplying Purchaser's unit sales of the Acquired Companies' products by 85% of the Purchaser's best published dealer price for such products (currently Dealer VIP level). (iii) The Measuring Periods shall be each of three successive 12 month periods. (iv) The first Measuring Period shall start on the first day of the calendar quarter that begins nearest the date that is six months after the Closing Date. (v) Payments in respect of any Measuring Period shall be made within 90 days after the end of such period. (vi) Seller has no obligation to pay Purchaser if the Sales Increase is a negative amount. 3. The Closing. A. The Closing shall be held on the date hereof immediately following the execution hereof at the offices of Purchaser's attorneys, Schoeman, Updike & Kaufman, LLP, 60 East 42nd Street, New York, New York 10165, or at such other time and place as may be fixed by mutual written agreement of Purchaser and Seller. The date and event of closing are respectively referred to in this Agreement as the "Closing Date" and "Closing." B. At the Closing: (a) Seller shall deliver to Purchaser: (i) the stock certificates for all of the outstanding stock of TeleSite duly endorsed for transfer to Purchaser and with all requisite stock transfer stamps attached; (ii) written resignations, effective as of the Closing, of all directors of the Acquired Companies; (iii) employment agreements in the form attached as Exhibit 3B(a)(iii) executed by Seller and Yigal Abiri, respectively; (iv) the certificates, opinions and other matters required by Section 6. (b) Purchaser shall deliver to Seller: (i) option grant letter to be issued pursuant to Purchaser's 1999 Non-Qualified Stock Option Plan for Seller to purchase 10,000 shares of Purchaser's Common Stock at fair market value on the Closing Date; and (ii) the wire transfer or check required by Section 2(a); (iii) the employment agreement in the form attached as Exhibit 3(b)(iii) executed by Purchaser; and (iv) the other matters required by Section 7. (c) Purchaser and Seller shall deliver to each other an Escrow Agreement (the "Escrow Agreement") in the form of Exhibit 3B(c) executed by them and by the Escrow Agent named therein (the "Escrow Agent") and Purchaser shall deliver the payment required by Section 2(b) to the Escrow Agent. 4. Representations and Warranties of Seller. To induce Purchaser to enter into this Agreement, Seller makes the representations and warranties set forth below in subparagraphs (a) through (ee). Each of such representations and warranties shall be deemed to be independently material and relied upon by Purchaser, regardless of any investigation made by, or information known to, Purchaser. Except as specifically indicated, none of such representations and warranties is conditioned on or limited by Seller's knowledge or reason to know, or the its lack of knowledge of reason to know, as to the fact so represented and warranted. (a) Corporate Existence and Qualification. TeleSite is a corporation duly organized validly existing and in good standing under the laws of the State of New Jersey. QSR is a corporation duly organized, validly existing and in good standing under the laws of Israel. Each of the Acquired Companies has all requisite power and authority and all material governmental licenses, authorizations, consents and approvals required to own its properties and to conduct its business as presently conducted and as presently proposed to be conducted. Each of the Acquired Companies is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, which jurisdictions are listed on Exhibit 4(a) to, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on its condition (financial or otherwise), business, assets, results of operation or prospects (a "Material Adverse Effect"). Seller has delivered to the Purchaser true, correct and complete copies of the Certificate of Incorporation and the Bylaws of each of the Acquired Companies. (b) Capitalization. Except as disclosed in Exhibit 4b(i): (i) the authorized capital stock of TeleSite consists solely of 2,500 shares of common stock, no par value, all of which are issued and outstanding, all of which are owned by Seller, free and clear of all claims, liens and encumbrances. (ii) As of the Closing, the authorized capital stock of QSR shall consist solely of 27,000 Ordinary and 100 Management Shares, par value NIS1 per share, of which 10 Management Shares and 251 Ordinary Shares shall be issued and outstanding and 100% of which oustanding shares shall be owned by TeleSite free and clear of all claims, liens and encumbrances (except for 1 Ordinary Share owned by Yigal Abiri free and clear of all claims, liens and encumbrances). (iii) TeleSite has not (and as of the Closing, QSR will not have) issued any securities except as set forth above. All outstanding shares of TeleSite have been, and, as of the Closing, all outstanding shares of QSR will be, duly authorized and validly issued and fully paid and nonassessable and none was or will be issued in violation of any U.S., Israeli or state securities law or any other legal requirement. As of the Closing Date, there will be no outstanding subscriptions, rights, options, warrants, conversion rights, agreements or other claims for the purchase or acquisition of any shares of stock of any of the Acquired Companies or any other securities or obligating any of the Acquired Companies to issue, repurchase or otherwise acquire any shares of stock or any other securities or any securities convertible into, exercisable or exchangeable for, or otherwise entitling the holder to acquire any shares of stock or any other securities of any of the Acquired Companies, except as disclosed on Exhibit 4b(iii). (c) Right to Transfer. Seller has good and valid legal title to the TeleSite Stock and full beneficial ownership thereof and full legal right and power to transfer and deliver to Purchaser the TeleSite Stock in the manner provided in this Agreement, and upon delivery of the TeleSite Stock against payment therefor at the Closing pursuant to the terms of this Agreement, Purchaser will receive good and valid legal title thereto and full beneficial ownership thereof, free and clear of all claims, liens or encumbrances. (d) No Violation. The execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated hereby will not violate any provision of law, order or regulation of any governmental authority, or the corporate charter or by-laws of any of the Acquired Companies or constitute a default under any judgment, order or decree of any court of governmental agency or instrumentality, or conflict or constitute a breach or a default under any agreement to which any of the Acquired Companies is a party or by which it is bound. (e) Financial Information. Attached as Exhibit 4(e) are unaudited balance sheets and statements of income, as of and for the fiscal year ended December 31, 1998 and the six month period ended June 30, 1999 for TeleSite, and audited balance sheets and statements of loss as of and for the fiscal years ended December 31, 1998 and 1997, and an unaudited balance sheet and income statement for the six month period ended June 30, 1999 for QSR (collectively, the "Financial Statements"). The Financial Statements: (1) Have been prepared in accordance with the respective books of account and records of the Acquired Companies. (2) Fairly present and are true, complete and correct statements of financial condition and the results of operations of the respective Acquired Companies, as the case may be, as of and for the periods therein specified. (3) Have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied. (4) Do not include or omit to state any fact which renders them misleading. (5) Make full and adequate disclosure of obligations and liabilities (fixed or contingent, known or unknown) of the respective Acquired Companies. (f) Title to Assets, Real Property. Each of the Acquired Companies owns and has good and marketable title to all of its assets, in each case, free and clear of liens, claims or restrictions, except as shown in Exhibit 4(f). Neither of the Acquired Companies owns any real property. (g) Agreements, Contracts, etc. Exhibit 4(g) lists all agreements, leases, contracts, commitments and obligations relating to or affecting the assets or business of any of the Acquired Companies and Seller has delivered a true copy of each such document to Purchaser. All such agreements, leases, contracts, commitments and obligations are legally valid and binding and are in full force and effect and there are no defaults or breaches thereunder, and Seller is aware of any notice of default relating thereto. (i) Notes, Loans, etc. Exhibit 4(i) lists all notes, loans or revolving credit agreements, indentures, mortgages, deeds of trust, security agreements, guaranty agreements, repurchase agreements, sale and lease back agreements, installment purchases, capital leases, informal banking arrangements and any other documents relating to long-term or short-term indebtedness of each of the Acquired Companies, and Seller has delivered a true copy of each such document to Purchaser. All such documents are legally valid and binding and are in full force and effect and there are no defaults or breaches thereunder, and Seller is aware of any notice of default relating thereto. (j) Condition of Assets. All assets of each of the Acquired Companies conform in all material respects with all applicable building, zoning, environmental health and safety rules and other governmental rules and regulations. All assets of each of the Acquired Companies including all their components and parts, are ready for operation, and taking into account their ages, are in normal operating condition and good order and repair. There are no conditions or events, except for normal wear and tear and the age of the assets of any of the Acquired Companies, which would prevent the continued normal operation thereof, or would otherwise materially and adversely affect the operation and/or use of the same as currently used. (k) Patent and Trade Rights. QSR owns free and clear of all claims, liens, encumbrances and restrictions the intellectual property described on Exhibit 4(k). Each of the Acquired Companies owns or has adequate licenses or other rights to all intangible property which are necessary to conduct its business as presently conducted. To the best of Seller's knowledge, no product manufactured or sold by any manufacturing process employed by any of the Acquired Companies conflicts with or infringes upon any United States or Israeli or other foreign patent of others. No claim, suit or action is pending, or to Seller's knowledge and belief threatened, alleging that any of the Acquired Companies is infringing upon the asserted and tangible rights of others, or that the use of any intangible companies infringes or conflicts with the asserted rights of others. (l) Liabilities; Receivables. The liabilities of each of the Acquired Companies as of December 31, 1998 are set forth on Exhibit 4(l). The accounts receivable of each of the Acquired Companies as of December 31, 1998 and as of June 30, 1999 are stated in accordance with GAAP. All of the accounts receivable arose from bona fide sales transactions, and no portion of such account is subject to counterclaim or offset or is otherwise in dispute. All of such accounts receivable are good and collectible in full in the ordinary course of business. (m) Inventories. The inventories of each of the Acquired Companies reflected on the Financial Statements are accurately valued in accordance with GAAP consistently applied. The Inventories, in the aggregate, of the Acquired Companies are usable and salable in the ordinary course of business and contain no slow-moving or obsolete items. No inventories have been consigned to others. (n) Contracts. Exhibit 4(n) describes all contract rights to which any of the Acquired Companies is a party or to which it is bound and which arose out of, or relate to, assets or liabilities of any of the Acquired Companies, which extend beyond the Closing Date. True and correct copies of all such documents evidencing the contract rights have been delivered by Seller to Purchaser. (o) Litigation. Except as disclosed in Exhibit 4(o), there are no actions, suits, proceedings or investigations pending or threatened against Seller or any of the Acquired Companies at law or in equity, or before any federal, state or municipal or other governmental department, commission, board, agency or instrumentality, domestic or foreign, which involves a demand for any judgment or liability, affecting any of the TeleSite Stock or the transactions contemplated by this Agreement. None of the Acquired Companies is in default with respect to any order, writ, injunction, or decree of any court or federal, state, or municipal or other governmental department, commission, board, agency or instrumentality, domestic or foreign, and that there are no such orders, decrees, injunctions or regulations issued specifically against Seller which may affect, limit or control the method or manner of use of the TeleSite Stock or the assets of any of the Acquired Companies, or any transactions contemplated by this Agreement. (p) Compliance with Law. Each of the Acquired Companies has complied with all applicable laws, orders and regulations of any federal, state or municipal or other governmental department, commission, board, agency or instrumentality, domestic or foreign, having jurisdiction, including but not limited, to laws, orders, and regulations thereof relating to antitrust, wage, hours, collective bargaining, environmental protection, employee safety, or legislation pertaining to illegal bribes or kickbacks. To the knowledge of Seller, no director, officer or employee of any of the Acquired Companies has engaged in any act which has violated any local rules, regulations or laws relating to foreign exchange, customs and excise and corporate income tax, and there has been no misappropriation, fraud, embezzlement or misuse in any way of company assets or monies by any director, officer or employee of the Acquired Companies. (q) Payment of Taxes. Each of the Acquired Companies have timely filed all required declarations, returns and reports with foreign, federal, state and local taxing authorities, and all taxes, interest and penalties required to be paid pursuant to those returns have been or are being paid when due. The income tax returns of TeleSite have never been audited by the Internal Revenue Service. There is no tax audit or examination now pending or threatened with respect to the Acquired Companies. (r) No Adverse Changes. Since June 30, 1999, there has been no material adverse change in the condition, financial or otherwise, of any of the Acquired Companies other than changes (not in the aggregate adverse) occurring in the ordinary course of business. (s) Warranties and Product Liability Seller has previously delivered to Purchaser copies of all outstanding standard product warranties and guaranties given by any of the Acquired Companies now in effect with respect to products manufactured or sold by any of the Acquired Companies. Except as fully described in Exhibit 4(o), there are no pending claims or actions against any of the Acquired Companies for breach of warranty or based upon product liability (whether based on tort or contract principles) and, to the best of Seller's knowledge, no such claims or actions are threatened. Seller knows of no defects in craftsmanship, design or engineering with respect to any product now or heretofore sold or manufactured by any of the Acquired Companies which may constitute the basis for any such claim against any of the Acquired Companies or Purchaser. (t) Contingent and Undisclosed Liabilities. None of the Acquired Companies has any debts, obligations or liabilities in excess of $1,000, fixed or contingent, of any nature whatsoever, not disclosed in the Exhibits to this Agreement. Seller knows of no basis for any assertion of any material claim against Seller or Purchaser for any material liability relating to the TeleSite Stock, or against any of the Acquired Companies with respect to its assets, except those disclosed in the Exhibits to this Agreement. (u) Performance of Contracts. Except as disclosed in Exhibit 4(u), (i) none of the Acquired Companies is in material default, nor has it breached any material provision of, any contract, agreement, lease, obligation or license or permit with regard to all agreements to which it is a party or by which it is bound; (ii) each of the Acquired Companies has fully performed each material term, condition and covenant of each such contract, agreement, lease, obligation, license or permit required to be performed on or prior to the date thereof; (iii) Seller knows of no state of facts which, with the giving of notice or the passing of time, or both, would give rise to any material default or revocation; and (iv) none of the Acquired Companies is subject to any penalty, discount or liquidated damages due to the delayed delivery of products, goods or services, nor has it received any notice that any of the customer relations are in jeopardy because of such late deliveries or otherwise. (v) Events Subsequent to December 31, 1998 Except as disclosed in Exhibit 4(v), none of the Acquired Companies has, since December 31, 1998: (1) Incurred Liabilities. Incurred any obligation or liability (absolute, contingent, accrued or otherwise) or guaranteed or become a surety of any debt, except in connection with the performance of this Agreement or in the ordinary course of business; (2) Discharged Debt. Discharged or satisfied any lien or encumbrance, or paid or satisfied any obligation or liability (absolute, contingent, accrued or otherwise) other than liabilities incurred since the date thereof in the ordinary course of business; (3) Encumbrances. Mortgaged, pledged or subjected to any lien, charge, security interest or other encumbrance any of its assets; (4) Disposition of Assets. Sold or transferred any of its assets or canceled any debts or claims or waived any rights, except in the ordinary course of business; (5) Sale of Business. Entered into any contract for the sale of its TeleSite Stock, or any part thereof, or for the purchase of another business, whether by merger, consolidation, exchange of capital stock or otherwise (other than negotiations with respect to this Agreement); (6) Accounting Procedure. Changed or modified the accounting methods or practices; or (7) Capital Expenditure. Purchased or made a commitment for the purchase of capital assets. (w) Customer Relations. Seller knows of no state of facts, nor have any communications been made to it, which would indicate that (i) any current customer of any of the Acquired Companies which accounted for more than 5% of each entity's sales for the most recent fiscal year ending or (ii) any current supplier of any of the Acquired Companies (if such supplier could not be replaced at comparable cost), will terminate its business relations with any of the Acquired Companies. (x) Brokerage. Seller has not made any commitments for a brokerage finders or similar fee in connection with the transactions contemplated by this Agreement. (y) Books and Records. The books of account of each of the Acquired Companies are complete and correct in all material respects and reflect all of the transactions entered into by or on behalf of such Acquired Company, to which it is a party, or by which it is affected. (z) Binding effect. The Agreement and all related documents has been duly executed, made and delivered by Seller and constitute a legal, valid and binding obligation of Seller enforceable against him in accordance with their respective terms, subject to the laws of general application affecting creditors' rights. (aa) Employee Relations. Exhibit 4(aa) sets forth a list of all of the officers, employees and agents of each of the Acquired Companies and, for each individual, indicates his or her position, salary or wage rate and respective fringe benefits and any other remuneration paid or payable. Except as disclosed on Exhibit 4(aa): (1) There is not now in existence or pending, nor has there been within the last three years, any grievance, arbitration, administrative hearing, claim of unfair labor practice, wrongful discharge, employment discrimination or sexual harassment or other employment dispute of any nature pending or, to the best of Seller's knowledge, threatened against any of the Acquired Companies. (2) Each of the Acquired Companies is, and during all applicable limitation periods have been, in material compliance with all applicable laws, executive orders and regulations respecting employment, and employment practice, terms and conditions of employment, occupational safety, wages and hours and there is no existing but unassented claim for violation of any such laws, executive orders or regulations nor, to the best of Seller's knowledge, is there any factual basis upon which such a claim could be asserted. (3) None of the Acquired Companies has any collective bargaining agreements or is a party to any written or oral, express or implied, other contract, agreement or arrangement with any labor union or any other similar arrangement that is not terminable at will by the employer without cost, liability or penalty. (4) None of the Acquired Companies is a party to any written or oral contract, agreement or arrangement with any of its present or former directors, officers, employees or agents with respect to length, duration or conditions of employment (or the termination thereof), salaries, bonuses, percentage compensation, deferred compensation or any other form of remuneration, or with respect to any matter not disclosed on Exhibit 4(aa)(4). (5) There is no pending claim or, to the best of Seller 's knowledge, threatened or existing but unasserted claim, against any of the Acquired Companies for violation of any contract, agreement or arrangement described in Exhibit 4(aa)(5), nor to the best of Seller's knowledge, is there any factual basis upon which such a claim could be asserted. (6) The consummation of the transactions contemplated by this Agreement will not result in any severance or other employee compensation or benefit obligation coming due and Seller has no reason to believe that such consummation will result in the termination of any employee of the Acquired Companies. (bb) Employee Benefit Plans. (1) Exhibit 4(bb) sets forth a description of employee benefit plans, employee welfare benefit plans and multi-employer plans, all incentive compensation plans, benefit plans for retired employees and all other employee benefit plans maintained by each of the Acquired Companies or to which any entity has made payments or contributions on behalf of employees, including, without limitation, all plans or contracts providing for bonuses, pensions, profit-sharing, stock options, stock purchase rights, deferred compensation, insurance and retirement benefits of any nature, whether formal or informal, and whether legally binding or not (each such plan is referred to individually as a "Plan", collectively as the Plans"). (2) To the best of Seller's knowledge, and except for any multi-employer plans, all Plans are, and during all applicable limitation periods have been, in material compliance with all applicable governmental regulations and, in the case of TeleSite, all retirement or pension Plans and welfare benefit plans are qualified plans under the Internal Revenue Code and each Plan is in material compliance with the applicable provisions of the Internal Revenue Code. (3) There has been no transaction in connection with which any of the Acquired Companies or any of its directors, agents, officers, or employees could be a subject to either a civil penalty or a tax. (4) To the best of Seller's knowledge, there are no payments that have become due from any Plan, the trusts created thereunder, or from any of the Acquired Companies which have not been paid through normal administrative procedures to the plan participants or beneficiaries entitled thereto. (5) Each of the Acquired Companies has made full and timely payment of all required and discretionary contributions to the Plans, and no unfunded liability exists with respect to any Plan. (6) None of the Acquired Companies nor any of their respective directors, officers, employees or agents have any outstanding liabilities of any nature in any way relating to the Plans. (7) None of the Acquired Companies is a party to or otherwise subject to any express or implied agreement or plan to provide health coverage or other benefits to retired or current employees except as set forth in Exhibit 4(cc). (8) None of the Acquired Companies is a party to or otherwise subject to any express or implied agreement or plan to provide any employee benefits, wages, deferral compensation or any other form of benefit or enumeration beyond the date of Closing. (9) With respect to all of its employees, former employees, and qualified beneficiaries as of the Closing Date, each of the Acquired Companies has or will comply with all applicable health care continuation requirements. (cc) Environmental Matters.Except as disclosed on Exhibit 4(cc): (1) No hazardous substances have been or are currently generated, stored, transported, utilized, disposed of, managed, released or located on, under or from any premises any of the Acquired Companies has occupied (the "Premises") (whether or not in reportable quantities) by any of the Acquired Companies or its agents or invites, or in any manner introduced onto the Premises by any of the Acquired Companies or its agents or invites, including without limitation, the septic, sewage or other waste disposal systems except in accordance with all applicable laws relating to the environment. (2) Seller has no knowledge of any threat of release of any hazardous substances on, under or from the property of any of the Acquired Companies. (3) None of the Acquired Companies has received any notice from the United States Environmental Protection Agency or any other domestic or foreign authority claiming that (i) any of its property or any use thereof violates any of the environmental laws, (ii) none of the Acquired Companies or of any of its employees or agents have violated any such laws. (dd) Insurance. Exhibit 4(dd) lists all policies of liability, property damage, fire, workers' compensation/employer's liability, title or other forms of insurance owned or carried by each of the Acquired Companies (the "Policies") and insurance agents or brokers providing such insurance coverage. None of the Acquired Companies has received notice from any insurance carrier regarding the possible cancellation of or premium increase with respect to the Policies. None of the Acquired Companies has any claim pending or anticipated against any of the insurance carriers under any of the Policies and there has been no actual or alleged occurrence of any kind which may give rise to any such claim. (ee) Representations and Warranties True and Correct. The representations and warranties contained herein, and all statements or information disclosed by any of the Exhibits, do not include any untrue statement or material fact nor omit to state a material fact required to be stated herein or therein or necessary in order to make the statement herein or therein, in light of the circumstances under which they are made, not misleading. 5. Representations and Warranties of Purchaser. To induce Seller to enter into this Agreement, Purchaser makes the representations and warranties set forth below in subparagraphs (a) through (e). Each of such representations and warranties shall be deemed to be independently material and relied upon by Seller, regardless of any investigation made by, or information known to, Seller. Except as specifically indicated, each of such representations and warranties is conditioned on or limited by Purchaser's knowledge or reason to know, or its lack of knowledge or reason to know, as to the fact so represented and warranted. (a) Organization. Purchaser is a corporation validly existing and in good standing under the laws of the State of New York. (b) Authorization. The execution and delivery of this Agreement and the transactions contemplated hereby have been duly authorized by the Board of Directors of Purchaser and on the Closing Date all of the necessary corporate action to authorize the execution and delivery of this Agreement and the purchase hereby will have been taken. (c) No Violation. The execution and delivery of this Agreement by the Purchaser and the consummation of the transactions contemplated hereby, will not violate any law, order or regulation of any governmental authority, or corporate charter or bylaws of Purchaser or constitute a default under any judgment, order or decree of any court or governmental agency or instrumentality, or conflict with or constitute a breach or default under any agreement to which Purchaser is a party or by which it is bound. (d) Brokerage. Purchaser has not made any commitment for a brokerage, finders or similar fees in connection with the transactions contemplated by this Agreement. (e) Binding Effect. This Agreement, and all related documents have been duly executed, made and delivered by Purchaser, as appropriate, and constitute a legal, valid and binding obligation of Purchaser enforceable against Purchaser in accordance with their respective terms, subject to the laws of general application affecting creditors' rights. (f) Representations and Warranties True and Correct. The representations and warranties contained herein do not include any untrue statement or material fact nor omit to state a material fact required to be stated herein or therein or necessary in order to make the statements herein or therein, in light of the circumstances under which they are made, not misleading. 6. Conditions of Purchaser's Obligation to Close. The obligations of Purchaser under this Agreement are subject to the following conditions having been met, or waived in writing by Purchaser, at or prior to the Closing Date: (a) Representations and Warranties. The representations and warranties made by Seller in Section 4 shall be true and correct in all material respects on and as of the Closing Date, and Seller shall has delivered to Purchaser a certificate to that effect executed by Seller. (b) Approvals and Consents. All necessary approvals and consents with respect to the transactions contemplated hereby, the absence of which would have a material and adverse effect on Purchaser's rights under this Agreement, or which would result in the forfeiture or breach of any material rights acquired by the Purchaser pursuant to the provision of any material contract or agreement assumed by and hereunder. Such approvals shall include, without limitation, all required approvals by the office of the Chief Scientist of Israel to the transfer of control to TeleSite and to Purchaser of the intellectual property described in Exhibit 4(k). (c) Delivery of Instruments of Conveyance of the TeleSite Stock. Seller shall has delivered to Purchaser, satisfactory to Purchaser in form and substance, conveyancing documents to transfer title to the TeleSite Stock to Purchaser. (d) No Litigation. No investigation, suit, action or other proceedings shall be threatened or pending before any court or governmental agency in which it is sought to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. (e) No Adverse Change. There shall have been no change or development related to the TeleSite Stock or the results of operations or in the condition, financial or otherwise, of any of the Acquired Companies, which has had or may reasonably be expected to have a material adverse effect on their condition. (f) Opinions of Counsel. Purchaser shall have received (i) an opinion of Seller's counsel, dated the Closing Date, satisfactory in form and substance to Purchaser and its counsel substantially in the form of Exhibit 6(f)(i) and (ii) an Opinion of Purchaser's counsel substantially in the form of Exhibit 6(f)(ii). (g) Abiri Employment Agreement. Yigal Abiri and QSR shall have executed and delivered an employment agreement substantially in the form of Exhibit 6(g) and such Agreement shall be in full force and effect. (h) Escrow Agreement. The Escrow Agent named in the Escrow Agreement shall have executed and delivered the Escrow Agreement. (i) QSR Shares Abiri and Video Cam, Ltd. shall have excued and delivered the Representations as to QSR in the form attached as Exhibit 6(i). Abiri shall have transferred his 1 Ordinary Share of QSR Stock to such person as Purchaser shall designate at or prior to the Closing, free and clear of all claims, liens and encumbrances. (j) Conversion of Shareholder Loans. All shareholder loans to any of the Acquired Companies shall have been converted to contributions to capital and Seller and Yigal Abiri shall have delivered a Purchaser a certificate dated the Closing Date, to that effect. 7. Conditions to Seller's Obligation to Close. The obligations of Seller under this Agreement are subject to the following conditions having been met, or waived in writing by Seller, at or prior to the Closing Date: (a) Representations and Warranties. The representations and warranties made by Purchaser in Section 5 shall be true and correct in all material respects on and as of the Closing Date. (b) Payment of Purchase Price. Purchaser shall have delivered to Seller the purchase price payable at Closing as required by Sections 2(a) and (b). (c) No Litigation. No investigation, suit, action or other proceedings shall be threatened or pending before any court or governmental agency in which it is sought to restrain, prohibit or obtain damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. (d) Opinion of Counsel. Seller shall have received an opinion of Purchaser's counsel, dated the Closing Date, satisfactory in form and substance to Seller and its counsel substantially in the form of Exhibit (d). (e) Escrow Agreement. The Escrow Agent named in the Escrow Agreement shall have executed and delivered the Escrow Agreement. 8. Survival of Representations and Indemnification. (a) Survival of Representations. All representations, warranties and covenants of Seller (the "Representations") shall survive the execution and delivery of this Agreement, the Closing Date and any investigation or audit made by Purchaser, and shall expire upon the third anniversary of the Closing Date. (b) Indemnification (i) Indemnification by Seller. Seller agrees promptly to indemnify, defend and hold harmless Purchaser from and against any and all assessments, judgments, debts, obligations, liabilities, losses, costs, damages or expenses (including interest, penalties and reasonable out-of-pocket fees, expenses and disbursements in connection with any claim, action, suit or proceeding) (collectively, "Damages") suffered, paid or incurred by Purchaser or any of the Acquired Companies resulting from or caused by or arising out of any one or more of the following: A. any breach of the representations and warranties made by Seller to Purchaser in this Agreement or any certificate delivered hereunder; B. any failure by Seller to perform any of his covenants or agreements contained in this Agreement; C. any claim, contingent or otherwise, that was in existence on December 30, 1998, whether or not then payable, that was not recorded in the books and records of TeleSite or QSR and was not reflected in the Financial Statements; D. any claim under the Royalty Agreement referred to in Exhibit 4(t) in excess of $474,000 minus the amount paid thereunder to the State of Israel since December 31, 1998 to the Date of Closing. E. Any claim of Electronics Line, Ltd., including without limitation any claim by such company under the Cooperation Agreement dated February 5, 1997; F. Any claim of any shareholders or secured or unsecured creditors, or of part or present employees (other than for severance pay to the aggregate extent described in Section 8(b)(ii)(C)), of TeleSite, Ltd.; G. Any claim of Doron Parianta, as Receiver or as Permanent Manager of TeleSite, Ltd.'s assets, or any other entity (including without limitation any governmental official) appointed or authorized by any court, government or government agency to collect or administer any assets of TeleSite, Ltd.; H. Any permanent income tax deduction disallowance for any period prior to December 31, 1998; or I. Any claim arising out of any transfer to TeleSite of shares of QSR. (ii) Limitation on Indemnification by Seller. Notwithstanding any other provision of this Agreement, Seller shall not be liable under Section 8(b) for: A. Any liabilities included in the Financial Statements of the Acquired Companies as of December 31, 1998 and June 30, 1999. B. Any good faith liability of any of the Acquired Companies incurred in the normal course of its business between June 30, 1999 and the Closing Date provided that Seller shall not have breached away representations and warranties, in Section 4 (r) ; C. Any liabilities to former employees of TeleSite, Ltd. for severance pay based on the length of their employment with TeleSite, Ltd. up to an aggregate maximum of $40,000; or D. Liabilities of any of the Acquired Companies not included in paragraphs A, B C or D, up to an aggregate maximum of $50,000. In no event will Seller be liable under Section 8 for any Damages in excess of total of the purchase price under Sections 2(b) and (c) and the compensation earned, if any, under section 3D of the Employment Agreement between Purchaser and Seller. (iii) Indemnification by Purchaser Purchaser agrees to indemnify and hold harmless Seller from and against any and all Damages suffered, paid or incurred by Seller resulting from or caused by or arising out of: A. any breach of the representations and warranties made by Purchaser in this Agreement or any certificate delivered hereunder; or B. any failure by the Purchaser to perform any covenant or agreement contained in this Agreement. (iii) Indemnity Procedure for Third Party Claims. A. Promptly after receipt by a party seeking indemnification hereunder (an "Indemnified Party) of notice (a "Third Party Claim Notice") of any claim, or of the commencement by any third party of any action, suit or proceeding, which might result in the other party hereto (the "Indemnifying Party") becoming obligated to indemnify or make any other payment to the Indemnified Party under this Agreement, the Indemnified Party shall notify the Indemnifying Party forthwith in writing of the commencement thereof or of the claim. The failure of the Indemnified Party to so notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which it may have on account of this indemnification or otherwise, except and only to the extent that the Indemnifying Party is prejudiced thereby. B. The Indemnifying Party shall have the right, within thirty (30) days after being so notified, to assume the defense of such claim, litigation or proceeding with counsel reasonably satisfactory to the Indemnified Party in good faith and at the Indemnifying Party's own expense. C. Unless and until the Indemnifying Party shall assume such defense pursuant to the foregoing sentence, the Indemnified Party shall have the right to conduct and control the defense of such claim, litigation or proceeding (including the settlement thereof) without the Indemnifying Party's consent and, without limiting any other indemnification obligation, shall be entitled to payment from the Indemnifying Party of all reasonable costs of such defense (including attorneys' fees and expenses). D. In any such claim, litigation or proceeding the defense of which the Indemnifying Party shall have so assumed, the Indemnified Party shall have the right to participate therein and retain its or his own counsel at its or his own expense, unless (a) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of the same counsel, or (b) the named parties to any such litigation or proceeding (including impleaded parties) include both the Indemnifying Party and the Indemnified Party, and representation of such parties by the same counsel would be inappropriate due to actual or potential differing interests between them in which case, such separate counsel may be retained by the Indemnified Party at the expense of the Indemnifying Party. E. The Indemnifying Party may elect to settle any claim, action or proceeding defended by it or him without the written consent of the Indemnified Party provided that such settlement is limited to payment of monetary damages which are payable in full by the Indemnifying Party and the Indemnified Party is fully discharged at the time of the settlement from any liability with respect to the claim, action or proceeding. The Indemnifying Party may not enter into any settlement that is not limited to payment of monetary damages without the Indemnified Party's prior written consent which will not be unreasonably withheld. F. Seller and Purchaser covenant to use all reasonable efforts to cooperate fully with respect to the defense of any claim, action or proceeding covered by this section. 9. Offset. In the event that seller is liable to Purchases pursuant to Section 8 or Purchaser receives a Third Party Claim Notice, Purchaser may (but shall not be obligated to) offset all or a portion of such liability or potential liability against any other payment owing to Seller under Sections 2(b) and (c) of this Agreement and section 3D of the Employment Agreement between Purchaser and Seller. 10. Purchaser's Covenants. After the Closing, Purchaser shall lend to TeleSite the sum of $750,000 in accordance with a future business plan reasonably satisfactory to Purchaser. 11. Further Assurances. Purchaser and Seller agree that, from time to time after Closing, and upon request, they shall execute, acknowledge, and deliver such other instruments as reasonably may be required to more effectively transfer and vest in Purchaser the TeleSite Stock or to otherwise carry out the terms and conditions of this Agreement. 12. Expenses. Each party will pay all of his or its own expenses in connection with the negotiation of this Agreement, the performance of his or its obligations hereunder and the consummation of the transactions contemplated hereby. 13. Amendment and Waiver. This Agreement may be amended only in writing signed by the parties hereto. Any provision of this Agreement may be waived by the party entitled to the benefit thereof only in a writing executed by the party against whom such waiver is sought to be enforced. No waiver shall be deemed a waiver of any other provision of this Agreement, and no waiver of a breach hereunder shall be deemed a waiver of any other or subsequent breach of this Agreement. 14. Notice. All notices, demands and other communications to be given or delivered hereunder shall be in writing and will be deemed to have been given if personally delivered or sent by overnight courier (in each such case delivery will be effective upon receipt) to the addresses indicated below or to such other addresses as the parties may specify or notice as herein provided: If to Purchaser, to: Vicon Industries, Inc. 89 Array Drive Hauppauge, New York 11788 Attention: The President with a copy to: Schoeman, Updike & Kaufman, LLP 60 East 42nd Street New York, New York 10165 Attention: Michael E. Schoeman, Esq. If to Gershoni to: Mr. Isaac Gershoni 97 Taylor Drive Closter, New Jersey 07624 with a copy to: Mark Eliott Gold, Esq. 19 Phelps Avenue Tenafly, New Jersey 07670 15. Survival of Representations, Warranties and Covenants. Each of the representation and warranties of the parties that are set forth in this Agreement or in any certificate delivered hereunder shall survive the Closing Date until the third anniversary of the Closing Date (the "Expiration Date"). Delivery to one party to the other of notice of a breach of any representation or warranty, specifying the breach in reasonable detail, and making a formal claim with respect thereto, on or prior to the Expiration Date, or the expiration of the applicable statute of limitations, as the case may be, shall be deemed to preserve such party's claim. Those covenants contained in this Agreement that contemplate or may involve actions to be taken or obligations in effect after the Closing Date shall survive the Closing Date until the expiration of the applicable statute of limitations. 16. Binding Agreement; Assignment. This Agreement and all of the provisions hereof will be binding upon and inure to the benefit of the parties hereto and their respective successors. Seller may not assign his rights or delegate his duties hereunder without the prior written consent of the Purchaser, which consent may be granted, withheld or conditioned in the sole and absolute discretion of the Purchaser. Purchaser may assign all it part of its rights under this Agreement, including, without limitation, the right to purchase the TeleSite Stock, to a wholly owned subsidiary of Purchaser. 17. Severability. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provision of this Agreement. 18. Captions. The captions used in this Agreement are for convenience of reference only and do not constitute a part of this Agreement and will not be deemed to limit, characterize or in any way affect any provision of this Agreement and all provisions of this Agreement will be enforced and construed as if no captions had been used in this Agreement. 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which need not contain signatures of more than one party, but all such counterparts taken together will constitute one and the same instrument. Signatures may be exchanged by telecopy, with original signatures to follow. Each party to this Agreement agrees that it will be bound by its own telecopied signature and that it accepts the telecopied signatures of the other party to this Agreement. 20. Governing Law. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York, without reference to its choice of law provisions. Each party agrees that service of notice or process in any legal action or proceeding with respect to this Agreement or any transaction related hereto may be made on such party by delivery of such process by certified mail, return receipt requested, to such party at its address for notice pursuant Section 14 of this Agreement with the same effect as if such process were personally served on such party within the State of New York. Each of the parties hereto hereby irrevocably waives, to the extent permitted by applicable law, any objection, including, but not limited to, any objection to the laying of venue or based on the ground of forum non conveniens, with it or he may now or hereafter have to the bringing of any proceeding in respect of this Agreement or any transaction related hereto. Nothing contained herein shall affect the right of any party hereto serve process in any other manner permitted by law. 21. Remedies. All rights, remedies or powers hereby conferred shall, to the extent no prohibited by law, be deemed cumulative and not exclusive or any other thereof, or of any other rights, remedies or powers available. No single or partial exercise of any right, remedy or power by a party shall preclude further exercise thereof. No delay or omission to exercise any right, power or remedy accruing to a party upon the occurrence of any breach of any warranty, covenant or agreement contained in this Agreement shall impair any such right, power or remedy or be construed to be a waiver of any such breach or any acquiescence therein or to any similar breach thereafter occurring. 22. Arbitration. Any controversy between the parties, arising out, in relation to, or in connection with, this Agreement shall be resolved exclusively by binding arbitration in New York City conducted in accordance with the then existing commercial arbitration rules of the American Arbitration Association. The award in such arbitration shall be in writing and shall include separate finding facts and conclusions of law. Judgment upon the award may be entered in any court having jurisdiction thereof and for that purpose the parties consent to the jurisdiction of all state and federal courts located in the City of New York. 23. Public Announcements. No public announcement concerning the transactions contemplated hereby may be made by either party without the consent of the other except as may be required by law or the rules of any applicable securities exchange. 24. Entire Agreement. This Agreement (including the Exhibits, documents and instruments referred to herein) constitutes the entire agreement and understanding of the parties hereto and thereto with respect to the subject matter hereof and thereof. No party shall be entitled to rely upon any representation or warranty of the other except to the extent such representation or warranty is included in this Agreement or any Exhibit hereto or document or instrument delivered hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered on their behalf as of the date first above written. VICON INDUSTRIES, INC. By: President Isaac Gershoni Third Party Representations, Warranties and Indemnification To induce Vicon Industries, Inc. ("Purchaser") to enter into the foregoing Agreement, and in consideration thereof, each of the undersigned, jointly and severally, agrees as follows: (a) each of the undersigned represents and warrants to Purchaser that the representations and warranties set forth in section 4 of the foregoing Agreement, each of which shall be deemed to be independently material and relied upon by Purchaser, regardless of any investigation made by, or information known to, Purchaser, are true and correct on the date of such Agreement and will be true and correct as of the Closing thereunder, and (b) each of the undersigned indemnifies Purchaser against all Damages as defined in section 8(b) thereof to the same extent as if each of the undersigned were separately defined as Seller in such section Yigal Abiri Yaakov Drori EX-10 7 TELESITE ESCROW ESCROW AGREEMENT dated as of July 30, 1999 (the "Escrow Agreement") among Vicon Industries, Inc., a New York corporation ("Purchaser"), Isaac Gershoni ("Seller"), and European American Bank, a New York banking corporation (the "Escrow Agent"). W I T N E S S E T H: WHEREAS, Purchaser and Seller have entered into a Stock Purchase Agreement dated as of July 3028, 1999 (the "Stock Purchase Agreement"), providing for the sale by Seller to Purchaser of all of the shares of TeleSite U.S.A., Inc.; and WHEREAS, Seller has agreed that Purchaser shall deposit with the Escrow Agent a portion of the Purchase Price (as defined in the Purchase Agreement) with the Escrow Agent; NOW, THEREFORE, the parties agree as follows: 1. Creation of Escrow and Deposit of Escrow Amount. Purchaser herewith deposits with the Escrow Agent the amount of $1,000,000.00 (such amount, including all income and interest thereon, is hereinafter referred to as the "Escrow Amount"). The Escrow Agent hereby acknowledges the receipt of the Escrow Amount hereby deposited, and the Escrow Agent agrees to hold the Escrow Amount for the purposes and upon the terms and conditions hereinafter set forth. 2. Distribution of Escrow Amount. A. Escrow Agent shall make the following distributions from the Escrow Amount to Purchaser: (i) within 15 days after the first anniversary hereof, 100% of all interest earned prior to such anniversary (ii) within 15 days after the second anniversary hereof, 66_% of all interest earned between the first and second anniversaries; and (iii) within 15 days after the third anniversary hereof, 33_% of all interest earned between the second and third anniversaries. B. Within 10 days after the third anniversary of this Agreement, the Escrow Agent shall distribute the balance of the Escrow Amount to Seller, or such payee(s) in the United States as Seller may designate by written notice to the Escrow Agent unless prior to such third anniversary, Escrow Agent shall have received from Purchaser a notice of claim as provided in section 3. C. If prior to such third anniversary, the Escrow Agent shall have received such a notice of claim, the Escrow Agent shall continue to retain from the Escrow Amount the aggregate sum specified in such notice of claim, and the excess, if any, shall be paid as provided in section 2B. D. Amounts retained pursuant to section 2C shall continue to be held in escrow under this Agreement and shall be distributed only in accordance with (a) an instruction signed and notarized by Purchaser and Seller and delivered to the Escrow Agent, or (b) an arbitration award pursuant to section 22 of the Stock Purchase Agreement, a copy of which award shall have been delivered to the Escrow Agent, together with a certificate signed by the party presenting such award and an opinion of such party's counsel satisfactory to Escrow Agent, each stating that such award was made pursuant to such section and is in full force and effect. E. In no event shall the aggregate amount of disbursements made by the Escrow Agreement exceed the actual amount of the Escrow Amount. 3. Notice of Claim. If Purchaser in good faith believes that it has any claim for indemnification or damages against Seller under or relating to the Stock Purchase Agreement or the transactions contemplated thereby, Purchaser may deliver to the Escrow Agent a notice of such claim. Such notice shall specify the nature of the claim and the amount thereof and shall be signed by Purchaser. 4. Escrow Investments. The Escrow Agent shall invest the Escrow Amount, and any income and interest thereon and on reinvested income and interest, by (i) depositing such amounts in interest bearing certificates of deposit with the Escrow Agent, having maturities of 12 months or less or (ii) purchasing obligations of the United States of America, or any instrumentality thereof and fully guaranteed thereby, having maturities of 12 months or less. In connection with making any distributions pursuant to this Escrow Agreement, the Escrow Agent may sell, liquidate or dispose of such investments as it deems necessary to make such distributions. 5. Compensation, Expenses and Liability of the Escrow Agent. (a) The Escrow Agent shall be entitled to receive reasonable compensation for its services hereunder as set forth in Schedule A. The compensation and expenses of the Escrow Agent, and the fees and expenses incurred in connection with maintaining the escrow, shall be borne 50% by Purchaser and 50% by Seller in advance of the date on which such payments shall be due to the Escrow Agent. The Escrow Agent may deduct any amount to which Seller or Purchaser may be entitled under this Escrow Agreement any unpaid fees, compensation or expenses of the Escrow Agent for which Seller or Purchaser is, as the case may be, liable under this Section 5. (b) The Escrow Agent shall not be liable for any action taken by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Escrow Agreement, and the Escrow Agent may rely and shall be protected in acting or refraining from acting in reliance upon the opinion of counsel or upon any certificate, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Escrow Agent shall not be obligated to make any inquiry as to the authority, capacity, existence, or identity of any person purporting to give any such certificate, request or other document. If the Escrow Agent shall become involved in any litigation by which Seller shall contest any claim by Purchaser against the Escrow Amount, the Escrow Agent is authorized to comply with any final order or decree duly entered by any court of competent jurisdiction in any such litigation. Purchaser and Seller agree to indemnify the Escrow Agent against, and to hold the Escrow Agent harmless from, any and all loss, damage or liability, and all expenses (including without limitation legal fees), except to the extent arising out of the gross negligence or willful misconduct of the Escrow Agent, incurred by the Escrow Agent arising out of or in connection with the execution, delivery or performance by the Escrow Agent of this Escrow Agreement. The Escrow Agent shall not be liable for any investment losses resulting from the investment, reinvestment, sale or liquidation of any portion of the Escrow Account, within the agreed upon investments as referred to in Section 4, "Escrow Investments." 6. Resignation of the Escrow Agent. The Escrow Agent may resign and may be discharged from any further duties or obligations hereunder by giving at least 30 days prior written notice of such resignation to Purchaser and Seller. On the effective date of such resignation, the Escrow Agent shall pay the Escrow Amount to such successor escrow agent as Purchaser and Seller shall have designated in a notice delivered to Escrow Agent or, in the absence of such notice, to the Clerk's Office of the United States District Court of the Eastern District of New York or of the New York State Supreme Court for Suffolk County. 7. Notices. All notices or other communications which are required or permitted hereunder shall be in writing and sufficient if delivered personally or sent by registered or certified mail, postage prepaid, addressed as follows: If to Seller, at: Mr. Isaac Gershoni 97 Taylor Drive Closter, New Jersey 07624 Tel: (201) 568-5050 Fax: (201) 568-6444 with a copy to: Mark Eliott Gold, Esq. 19 Phelps Avenue Tenafly, New Jersey 07670 Tel: (201) 227-1830 Fax: (201) 227-1831 If to Purchaser, to: Vicon Industries, Inc. 89 Arkay Drive Hauppauge, New York 11788 Attention: Kenneth M. Darby President Tel: (516) 952-2288 Fax: (516) 951-2288 with a copy to: Schoeman, Updike & Kaufman, LLP 60 East 42nd Street 39th Floor New York, New York 10165 Attention: Michael E. Schoeman, Esq. Tel: (212) 661-5030 Fax: (212) 687-2123 If to Escrow Agent: European American Bank 150 Motor Parkway Hauppauge, New York 11788 Attention: Branch Manager with a copy to: European American Bank 730 Veterans Memorial Highway Hauppauge, New York 11788 Attention: Stuart N. Berman Any party may by notice change the address to which notice or other communications to it are to be delivered or mailed. 8. Governing Law. This Escrow Agreement shall be governed by and construed in accordance with the laws of the State of New York exclusive of its choice of law provisions. 9. Waivers and Amendments. Any term or provision of this Escrow Agreement may be waived at any time by the party which is entitled to the benefits thereof, and any term or provision of this Escrow Agreement may be amended or supplemented at any time by the mutual consent of the parties hereto, except that any waiver of any term or condition, or any amendment or supplementation, of this Escrow Agreement must be in writing. A waiver of any breach or failure to enforce any of the terms or conditions of this Escrow Agreement shall not in any way affect, limit or waive a party's right hereunder at any time to enforce strict compliance thereafter with every term or condition of this Escrow Agreement. 10. Descriptive Headings. The descriptive headings of this Escrow Agreement are for convenience only and shall not control or affect the meaning or construction of any provision of this Escrow Agreement. 11. Entire Agreement. This Escrow Agreement contains the entire agreement among Purchaser, Seller and the Escrow Agent with respect to the transactions contemplated by this Escrow Agreement and supersedes all prior arrangements or understandings with respect thereto. 12. Counterparts. This Escrow Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute but one agreement. 13. Illegality. In the event that any one or more of the provisions contained in this Escrow Agreement shall be determined to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in any other respect and the remaining provisions of this Escrow Agreement shall not, at the election of the party for whom the benefit of the provision exists, be in any way impaired. IN WITNESS WHEREOF, the undersigned have caused this Escrow Agreement to be executed on their behalf as of the date first above written. VICON INDUSTRIES, INC. By: Kenneth M. Darby President Isaac Gershoni EUROPEAN AMERICAN BANK as Escrow Agent By: EX-10 8 LOAN AGREEMENT LOAN AGREEMENT Dated: October 12, 1999 NAME OF BORROWER: VICON INDUSTRIES, INC. PRINCIPAL PLACE OF BUSINESS: 89 Arkay Drive Hauppauge Suffolk NY 11788 Street & No. City/Town County State Zip Code STATE OF INCORPORATION: New York State 1. PREAMBLE The Borrower has requested KEYBANK NATIONAL ASSOCIATION (the "Bank" or "Lender"), a national banking association, with an office for the transaction of business located at 1377 Motor Parkway, Islandia, New York 11788 to grant (i) a mortgage loan in the amount of ONE MILLION TWO HUNDRED THOUSAND ($1,200,000) DOLLARS (the "Loan") to the Borrower, and the Bank is willing to do so but only upon the terms and conditions of: (a) this Loan Agreement (the "Agreement"), (b) a Mortgage Note (the "Mortgage Note"), dated on even date herewith, (c) a third Mortgage and Security Agreement dated on even date herewith covering the Premises (hereinafter defined)(collectively, the "Mortgage"), (d) an Assignment of Leases and Rents covering the Premises (the "Assignment of Rents"), (e) and other documents executed or provided by Borrower in connection with this transaction (this Agreement, the Note, the Mortgage, the Assignment of Rents, and the other documents are hereinafter collectively referred to as, the "Loan Documents"). 2. USE OF LOAN PROCEEDS The Borrower will use the Loan proceeds in connection with the propert located at 89 Arkay Drive, Hauppauge, New York 11788 (the "Premises"). 3. LOAN PAYABLE IN ACCORDANCE WITH NOTE. The Loan shall be payable as provided for in the Note. The Bank, in addition to its legal right of setoff shall be entitled to debit any accounts maintained by Borrower with the Bank for payment due under the Note. 4. INTEREST The Loan shall bear interest computed at a rate (the "Interest Rate") as set forth in the Note. 5. SECURITY As collateral security for the payment of all present and future debts, obligations and liabilities of the Borrower to the Bank, including but not limited to those set forth in the Note (collectively, the "Obligations"), the Borrower will grant to the Bank a security interest in all of the following (the "Collateral"): (a) a security interest in and assignment and pledge of all monies, deposits or other sums now or hereafter held by the Bank on deposit, in safekeeping, transit or otherwise, at any time credited by or due from the Bank to the Borrower, or in which the Borrower shall have an interest; (b) a third mortgage lien on the property located 89 Arkay Drive, Hauppauge, New York 11788 evidence by the Mortgage; and (c) an assignment of leases and rents from the Premises. From time to time, the Borrower will execute and deliver to the Bank such assignments, agreements, documents, Uniform Commercial Code ("UCC") forms and other papers as the Bank may request in connection with the granting, perfection or continuation of the security interests granted hereunder. Borrower hereby authorizes the Bank to file at any time UCC forms signed only by the Bank or copies thereof or of this Agreement. 6. CONDITIONS TO LOAN (a) Conditions Precedent. Borrower agrees that prior to or in any event no later than the time of the closing of the Loan under this Agreement, it will deliver to the Bank: (1) Certified copies of corporate resolutions authorizing the execution and delivery of all Loan Documents; (2) Certificate of good standing from the Secretary of State of New York and any other state or foreign country where Borrower is doing business as to Borrower; (3) Proof satisfactory to the Bank that the Borrower is authorized to do business in the State of New York; (4) New York State franchise tax search as to Borrower; (5) A Certificate of incumbency as to Borrower; (6) Certificates of insurance for any insurance required pursuant to this Agreement or any of the Loan Documents; (7) UCC searches satisfactory to the Bank; (8) Duly executed UCC financing statements; (9) Duly executed Loan Documents; (10) An opinion from counsel for the Borrower as to such matters as may be deemed appropriate by the Bank and its counsel; (11) Payment by the Borrower of all costs and expenses incurred by the Bank in establishing the Loan. (b) Financial Reporting Requirements. The Borrower agrees as follows: (1) Borrower shall furnish annually to the Bank, audited Financial Statements of Assets and Liabilities, together with Profit and Loss Statements and Borrower's Form 10K, not later than ninety (90) days following the close of the Borrower's Fiscal Year, which Financial Statements shall be prepared on a consolidated basis by an independent Certified Public Accountant (CPA), reasonably satisfactory to the Bank, in accordance with Generally Accepted Accounting Principles(GAAP), including the report/letter, all statements and all footnotes. (2) Annually, within 90 days of its Fiscal Year End and quarterly within 60 days of each quarter end, Borrower shall submit compliance certificates setting forth Borrower's calculations of and demonstrating compliance with its Financial Covenants pursuant to this Agreement and further certifying that, to the best of its knowledge, no Event of Default has occurred hereunder or is occurring or, if a default or Event of Default has occurred or is occurring, then how same shall be cured within thirty (30) days. The compliance certificates must be duly executed by the Borrower. (3) Annually, within 90 days of each fiscal year end and quarterly, within 60 days of each quarter end, Borrower shall submit management prepared consolidating financial statements. (4) The Borrower shall, within 60 days following each quarter end, furnish to the Bank a copy of its Form 10-Q and consolidated Financial Statements. (5) Annually, Borrower shall submit its budget for the upcoming year including projected Profit and Loss Statements and a Balance Sheet, said budget to be delivered with Borrower's Year End Financial Statements. (6) Borrower shall submit such other financial documentation to the Bank as the Bank may reasonably require so long as the Loan is outstanding. (7) Failure to deliver financial information within fifteen (15) days of the date specified will constitute an Event of Default hereunder. (c) Financial Covenants. Except for Section 6(c)5 below, the following financial covenants are intended to duplicate those contained in the $14,000,000.00 credit agreement (the "Credit Agreement") between the Lender and Borrower dated July 20, 1998. For so long as the Credit Agreement remains in effect, including all extension and renewal periods, all modifications or waivers of financial covenants under the Credit Agreement will also modify or waive the corresponding financial covenants under this Loan Agreement. At the termination of the Credit Agreement if prior to the termination of the Loan Agreement, the then effective and governing financial covenants under the Credit Agreement will be deemed to be the effective financial covenants under the Loan Agreement and same will be confirmed in writing by an agreement to be executed by the Borrower and the Lender. 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, Borrower shall comply with each of the following covenants: (1) Net Income. Borrower shall on a consolidated basis (i) maintain a positive Net Income on a fiscal year basis, (ii) not have two consecutive fiscal quarters in which it has net losses that total in excess of $500,000.00 and (iii) not have net losses for four consecutive fiscal quarters that total in excess of $800,000.00. (2) Maximum Liabilities to Worth Ratio. Borrower shall maintain on a consolidated basis at all times a ratio of Total Liabilities to Tangible Net Worth of not more than 1.50:1.0. (3) Debt Coverage Ratio. Borrower shall maintain on a consolidated basis at all times a Debt Coverage Ratio of not less than 1.25:1.0, to be tested quarterly on a rolling four quarter basis. (4) Capital Expenditures. Borrower shall not make any Capital Expenditures in excess of $2,000,000.00 during any fiscal year, excluding Capital Expenditures incurred in Borrower's one time expansion of its facility on Arkay Drive, Hauppauge, New York and Acquisitions identified as Permitted Acquisitions under section 9.07 of the Credit Agreement, including acquisitions permitted by waiver or modification to such Credit Agreement. (5) Modification/Release of Financial Covenants. Notwithstanding anything to the contrary herein, upon the written request of Borrower to the Lender, (i) the Debt Coverage Ratio set forth above shall be increased to 1.3:1.0 to be tested as hereinafter set forth, and (ii) Capital Expenditures, the Maximum Liabilities to Worth Ratio and Net Income financial covenants set forth above shall be released PROVIDED Borrower has complied with all of the following: (a) The Loan to Value Ratio must be decreased to sixty-five (65%) percent or less(either by normal amortization and/or a partial prepayment); (b) Borrower has provided a new appraisal of the Premises to the Bank evidencing a Loan to Value Ratio of sixty-five (65%) percent or less prepared by a Bank approved appraiser and in form satisfactory to the Bank; and (c) Borrower is not in default under any of the Loan Documents (as defined in the Loan Agreement). (6) Determination of Compliance. Compliance with these financial covenants shall be determined by reference to the financial statements of Borrower calculated for Borrower and its Subsidiaries delivered to Lender and shall exclude any balance sheet information or results of operations of any Subsidiary which is not also a Guarantor. All financial covenants shall be applicable at all times and shall be tested at the end of each fiscal quarter except as set forth in paragraph 6(c)(1) above. (7) DEFINITIONS. "Acquisition" means any transaction pursuant to which Borrower or any of its Subsidiaries (i) acquires equity securities (or warrants, option or other rights to acquire such securities) of any corporation, partnership, limited liability company or other business organization, or any Person which is not then a Subsidiary of Borrower, pursuant to a solicitation of tenders thereof, or in one or more negotiated block, market or other transactions not involving a tender offer, or a combination of any of the foregoing, or (ii) makes any Person not then a Subsidiary of Borrower a Subsidiary of Borrower, or causes any such Person to be merged into or purchased by Borrower or any of its Subsidiaries, in any case pursuant to a merger, purchase of assets or any reorganization providing for the delivery or issuance to the holders of such Person's then outstanding securities, in exchange for such securities, of cash or securities of Borrower or any of its Subsidiaries, or a combination thereof, or (iii) purchases all or substantially all of the business or assets of any Person. "Affiliate" means, with respect to any Person, any Person (i) that directly or indirectly controls, or is controlled by, or is under common control with, such Person, (ii) that directly or indirectly beneficially owns or holds 5% or more of any class of voting stock of such Person, (iii) 5% or more of the voting stock of which is directly or indirectly beneficially owned or held by such Person, (iv) which is a partnership or limited liability company in which such Person is respectively a general partner or manager or (v) who is among such Person's officers, directors joint venturers, managers or partners. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Amortization" means amortization as determined in accordance with GAAP. "Capital Expenditures" means expenditures for any fixed assets or improvements, replacements, substitutions, or additions thereto which have a useful life of more than one year. "Capital Lease" means any lease which is required to be capitalized on the balance sheet of the lessee in accordance with GAAP. "Chun Shin" means Chun Shin Industries, Inc., a corporation formed under the laws of the Republic of Korea. "Current Debt" means, on the date of determination with respect to any Person, that portion of such Person's long term debt, including Capital Leases and the outstanding principal balance of the Term Loan, that is due and payable within the next 12 months. Current Debt shall exclude all Revolving Credit Loans. "Debt" means, with respect to any Person (i) indebtedness of such Person for borrowed money, (ii) indebtedness relating to the acquisition of property where the full purchase price is not paid at the time such property is acquired but is required to be paid, in whole or in part, thereafter (excluding trade debt and accounts payable), (iii) the face amount of any outstanding letters of credit issued for the account of such Person, (iv) obligations arising under acceptance facilities, (v) guaranties and endorsements (other than endorsements for collection in the ordinary course of business) under which such Person has a direct, non-contingent payment or performance obligation, (vi) other direct, non-contingent obligations to purchase, to provide funds for payment, to supply funds to invest in any Person, or otherwise to assure a creditor against loss, (vii) obligations secured by any Lien on property of such Person, (viii) obligations of such Person as lessee under Capital Leases and (ix) indebtedness of such Person evidenced by a note, bond, indenture or similar instrument. "Debt Coverage Ratio" means (i) the consolidated EBITDA of Borrower and its Subsidiaries, minus any cash Dividends paid or declared to be paid to shareholders of Borrower for the prior 12 month period, (ii) divided by the sum of the Current Debt (including Current Chun Shin Acquisition Debt, except as provided below) and Interest Expense of Borrower and its Subsidiaries all on a consolidated basis, as determined at the end of each fiscal quarter, based upon Borrower's financial statements delivered in accordance with the Loan Agreement. If Borrower completes an Acquisition of Chun Shin under terms where all or part of the Acquisition price is payable following consummation of the Acquisition ("Chun Shin Acquisition Debt"), and if, at the date of determination of Debt Coverage Ratio, the amount of the Revolving Credit Commitment then available to Borrower hereunder equals or exceeds that portion of the Chun Shin Acquisition Debt which is due and payable within the next 12 months ("Current Chun Shin Acquisition Debt"), then 50% of the Current Chun Shin Acquisition Debt shall be excluded from Current Debt for the purposes of computing the Debt Coverage Ratio. "Depreciation" means depreciation as determined in accordance with GAAP. "Dividends" means, for any period, dividends paid by Borrower or any Subsidiary during such period. "EBITDA" means, for any period, the sum of (i) Net Income, (ii) income taxes paid or payable to any government or government instrumentality, (iii) all Interest Expense paid or accrued on any Debt, (iv) Depreciation and (v) Amortization during such period. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time, applied on a basis consistent with those used in the preparation of the Borrower's financial statements. "Guarantors" means Vicon Industries International Sales Corp., Vicon Industries Foreign Sales Corp. and each future Subsidiary which is required to become a party to the Guaranty in accordance with the Credit Agreement. "Interest Expense" means interest expense of Borrower and its Subsidiaries on a consolidated basis for a particular period as reflected in its financial statements and calculated in accordance with GAAP. "Lien" means any lien (statutory or otherwise), security interest, mortgage, deed of trust, priority, pledge, charge, conditional sale, title retention agreement, Capital Lease or other encumbrance or similar right of others, or any agreement to give any of the foregoing. "Net Income" means with respect to any Person for any period, such Person's net income after taxes for such period as reflected on such Person's financial statements. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, limited liability company, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Revolving Credit Commitment" means the obligation of the Lender to extend revolving credit to Borrower in accordance with the terms of a certain credit agreement (the "Credit Agreement") dated July 20, 1998 in the aggregate principal amount not to exceed $7,500,000.00, or if Borrower elects to increase the Revolving Credit Commitment, $9,500,000.00, as such amount may be reduced or otherwise modified from time to time in accordance with the terms of said Credit Agreement. "Revolving Credit Loans" mean any Revolving Credit Loan made by the Lender to the Borrower under the Credit Agreement. "Revolving Credit Termination Date" means the earlier of (i) the date on which the Revolving Credit Loan is paid in full and the Revolving Credit Commitments shall terminate and the obligations of Borrower in connection therewith have been satisfied or (ii) the date four years from the date of the Revolving Credit Commitment unless such date is not a Banking Day, then the next succeeding Banking Day. "Subsidiary" means, as to any Person, any corporation, partnership, limited liability company or other business organization or entity of which at least a majority of the securities or other ownership interests having ordinary voting power (absolutely or contingently) for the election of directors or other persons performing similar functions are at the time owned directly or indirectly by such Person. For the purposes of the financial covenants set forth in Article 10 under the Credit Agreement and in the Modification Agreement and the definitions of Current Debt, Debt, Debt Coverage Ratio, EBITDA, Interest Expense, Net Income, Tangible Net Worth, Total Assets and Total Liabilities, the balance sheet information and results of operations of Vicon U.K. and any other Subsidiary which is not a Guarantor under the Credit Agreement shall be excluded. "Tangible Net Worth" means, at any particular date, the amount of excess of Total Assets over Total Liabilities which would, in accordance with GAAP, be included under shareholders' equity on a consolidated balance sheet of Borrower and its Subsidiaries as at such date. There shall be excluded from the determination of Total Assets all intangible assets, including, without limitation, organization expenses, patents, trademarks, copyrights, goodwill, covenants not to compete, research and developmental costs, training costs, treasury stock, deferred charges and any loans receivable from officers or Affiliates, other than loans receivable from Affiliates incurred as a result of sales of goods in the ordinary course of business. "Term Loan" means the Term Loan made to Borrower by Lender under the Credit Agreement. "Total Assets" means, at a particular date, all amounts which would, in accordance with GAAP, be included under assets on a consolidated balance sheet of Borrower and its Subsidiaries as at such date. "Total Liabilities" means, at a particular date, all amounts which would, in accordance with GAAP, be included under liabilities on a consolidated balance sheet of Borrower and its Subsidiaries as at such date. 7. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: (a) The Borrower is a corporation duly organized and existing under the laws of the State of New York and is authorized to do business in the State of New York and, that it has full corporate power to execute this Agreement, the Note and all other Loan Documents and do all things required of it hereunder, and that the Borrower's main office for doing business is as indicated at the beginning of this Agreement; (b) The Borrower maintains offices at the following location(s): 89 Arkay Drive, Hauppauge, New York 11788; (c) The Borrower's most recent financial statement as submitted to the Bank fairly represents the Borrower's financial condition as of the dates shown; that the Borrower is the owner of all of the assets and property as shown in the financial statement, subject to no liens, encumbrances or charges whatever other than as set forth in said financial statement, and that the Borrower has no liabilities other than shown on said financial statement; (d) The Borrower is the owner of the Collateral, free and clear of any liens, claims or rights of any other party, except as listed in Schedule A; (e) There is no action, litigation, suit, proceeding, inquiry or investigation, at law or in equity, or before or by any court, public board or body, pending, threatened against or affecting the Borrower which involves the possibility of materially adversely affecting the property, business, profits or conditions (financial or otherwise) of the Borrower; (f) The Borrower has filed all required federal, state and local tax returns and has paid all taxes shown on such returns as they become due; (g) The execution and delivery of this Agreement, and all other Loan Documents will not violate any provision of this Agreement or of any other agreement or instrument to which the Borrower is a party for which waivers of same have not been obtained; (h) All necessary corporate action to authorize the Borrower's entry into this Agreement and the execution of the Loan Documents has been taken and that the Loan Documents when executed by the Borrower shall be valid and binding obligations of the Borrower enforceable in accordance with their terms; (i) The execution, delivery and performance of the Loan Documents, the consummation of the transactions therein contemplated and compliance with the provisions of each by the Borrower does not and will not (i) conflict with, violate or result in a breach of any of the terms or provisions of the certificate of incorporation or by-laws of the Borrower, (ii) require consent which has not hereto been received or will result in a breach or default of any credit agreement, indenture, purchase agreement, mortgage, deed of trust, commitment, guaranty agreement, or any other instrument to which the Borrower is a party, or by which the Borrower may be bound or affected for which waivers of same have not been obtained, or (iii) conflict with or violate any existing law, rule, regulation, judgment, order or decree of any government, governmental instrumentality, or court, domestic or foreign, having jurisdiction over the Borrower or any of its properties; (j) The Borrower possesses all licenses, trademarks, trademark rights, and tradenames which are required for the conduct of its business without conflict with the rights of others. 8. NEGATIVE COVENANTS While the Loan remains outstanding, the Borrower agrees that it will not, without prior written consent of the Bank: (a) Merge or consolidate with any other person, firm, corporation or business if (i) Borrower is not the surviving corporation, or (ii) the surviving entity has a lower credit rating than Borrower; or (b) Sell, lease, assign, transfer or otherwise dispose of any significant assets or property, except in the normal course of business as presently conducted, and for full and adequate consideration. 9. AFFIRMATIVE COVENANTS While the Loan remains outstanding, the Borrower agrees that it will: (a) Make all payments required under the Note; (b) Furnish the Bank with copies of Financial Statements and other financial documentation as set forth herein; (c) Pay and discharge any and all taxes, assessments and governmental charges on the due date thereof, unless the same are being contested by the Borrower in good faith and provided such contest does not impair the Bank's security; (d) Timely comply with all of the terms and conditions of the Loan Documents; (e) Keep all of its property insured by insurance companies licensed to do business in New York and in such other state(s) where the property is located against loss or damage by fire or other risk usually insured against by other owners or users of such properties in similar businesses under extended coverage endorsement and against theft, burglary, and pilferage together with such other hazards as the Bank may from time to time reasonably request, in amounts satisfactory to the Bank. The Borrower shall deliver the policy or policies of such insurance to the Bank. All such insurance shall contain endorsements in form satisfactory to the Bank providing that the insurance shall not be cancelable except upon thirty (30) days prior written notice to the Bank and showing the Bank as a party insured as its interest may appear. The Borrower shall promptly notify the Bank of any event or occurrence causing a material loss or decline in value of property insured or the existence of an event justifying a material claim under any insurance and the estimated amount thereof; (f) Keep the Bank fully informed as to all matters that may affect the Loan; (g) Preserve and maintain its assets and keep the same in good order and condition; (h) If the Bank so reasonably requires, provide the Bank with an appraisal or appraisals of the Premises subsequent to the closing of the Loan but not more often than once every twelve (12) months except as otherwise set forth herein. All costs of such future appraisals shall be paid by the Borrower. 10. DEFAULT Each of the following shall be an "Event of Default" under this Agreement: (a) The occurrence of an Event of Default under the Note, any of the Loan Documents; or (b) Borrower shall fail to perform any other obligation required to be performed under this Agreement or any other Loan Document, for thirty (30) days after receipt of notice from the Bank of such failure; or (c) Any warranty, representation or other statement by or on behalf of Borrower in any Loan Document or instrument furnished in compliance with or in reference to any Loan Document proves in the Bank's reasonable opinion to be false or misleading in any material respect; or (d) Borrower shall generally not be paying debts as they become due or file a petition or seek relief under or take advantage of any insolvency law; make an assignment for the benefit of creditors; commence a proceeding for the appointment of a receiver, trustee, liquidator, custodian or conservator of Borrower or of the whole or substantially all of Borrower's property or of any collateral pledged as security for the Note; or if Borrower shall file a petition or an answer to a petition under any chapter of the Bankruptcy Reform Act of 1978, as amended (or any successor statute thereto), or file a petition or seek relief under or take advantage of any other similar law or statute of the United States of America, any State thereof, or any foreign country or subdivision thereof; or (e) A Court of competent jurisdiction shall enter an order, judgment or decree appointing or authorizing a receiver, trustee, liquidator, custodian or conservator of Borrower or of the whole or substantially all of Borrower's property, or any portion of the collateral pledged as security for the Note, or enter an order for relief against Borrower in any case commenced under any chapter of the Bankruptcy Reform Act of 1978, as amended (or any successor statute thereto), or grant relief under any other similar law or statute of the United States of America, any State thereof, or any foreign country or subdivision thereof and the same is not stayed or discharged within sixty (60) days of entry; or (f) Under the provisions of any law for the relief or aid of debtors, a court of competent jurisdiction or a receiver, trustee, liquidator, custodian or conservator shall assume custody or control or take possession from Borrower of all or substantially all of Borrower's property or any portion of any collateral pledged as security for the Note; or (g) There is commenced against Borrower any proceeding for any of the foregoing relief or if a petition is filed against Borrower under any chapter of the Bankruptcy Reform Act of 1978, as amended (or any successor statute thereto), or under any other similar law or statute of the United States of America, any State thereof, or any foreign country or subdivision thereof, and such proceeding or petition remains undismissed for a period of sixty (60) days or if Borrower by any act indicates consent to, approval of or acquiescence in any such proceeding or petition; or (h) The Bank receives a notice to creditors with regard to a bulk transfer by Borrower pursuant to Article VI of the Uniform Commercial Code; or (i) In the event that (a) any entity then having a lesser credit rating than Borrower shall acquire beneficial ownership of a majority interest in the voting stock of Borrower, or (b) the Borrower shall merge with such an entity and shall not be the surviving corporation; or (j) Borrower shall fail to satisfy a final judgment entered against it for the payment of money within thirty (30) days from entry or affirmance, and in any event, prior to any execution or enforcement thereof; or (k) Borrower shall be in default under any other agreement or document with the Bank; or (l) Borrower shall fail to obtain and deliver to Lender a certificate of occupancy (or certificate of compliance) for the open permit on the Premises identified as Permit number 101969 with the Town of Smithtown within one hundred twenty (120) days of the date hereof. If an Event of Default occurs or, if an event which, but for the passage of time, the giving of notice or both (unless same is required under the Loan Documents), would constitute an Event of Default, the Bank may declare the Loan and any other Obligations to be immediately due and payable and the Bank shall have, in addition to all other rights and remedies including those set forth in the Mortgage and in the Assignment of Leases and Rents, those of a secured party under the Uniform Commercial Code of the State of New York including without limitation, the right to institute foreclosure proceedings and the right to take possession of all Collateral, and for that purpose the Bank may enter the Premises where the Collateral may be situated and remove the same therefrom without legal process. At the request of the Bank, if applicable, Borrower (i) will disclose the exact location of any personal property Collateral, (ii) assist in the collection of any personal property Collateral, and (iii) assemble any personal property Collateral at a place to be designated by the Bank. The requirements of reasonable notice shall be met if the Bank gives to the Borrower at least five (5) days prior written notice of the time and place of any public sale of any personal property Collateral or if the time after which any private sale or any other intended disposition is to be made. For the purpose of realizing the Bank's rights in the Collateral, the Bank may endorse notes, checks, drafts, money orders, documents of title or other evidences of payment, shipment or storage or endorse any other forms of Collateral on behalf of and in the name of Borrower and may compromise and settle claims and otherwise generally deal with the Collateral. The Borrower hereby irrevocably appoints the Bank as its lawful attorney-in-fact with full power of substitution for the Borrower in its name, place and stead to take all actions with respect to the Collateral permitted hereunder. Any sale or disposition of Collateral by the Bank shall be done in a commercially reasonable manner. All decisions with respect to sale or disposition of the Collateral shall be made solely by the Bank. All proceeds received from the disposition and/or collection of Collateral shall be applied by the Bank, in its discretion and in such order as it elects, to (i) the payment of all expenses incurred in connection with the sale and/or collection of the Collateral, including reasonable attorney's fees and other expenses and disbursements and the reasonable expenses of retaking, collecting, holding, preparing for sale, sale and the like and (ii) the payment of all interest, principal and other sums due under the Loan Documents. 11. INDEMNIFICATION The Bank by virtue of the pledge and assignment of the Collateral to it hereunder shall not be deemed to have assumed the Borrower's obligations under the Collateral or be responsible for servicing the Collateral and the Borrower shall and does hereby agree to defend, indemnify and hold the Bank harmless of and from any and all liability of any name, nature or kind which may arise or be alleged to have arisen as a result of the pledge and assignment of the Collateral to the Bank hereunder. 12. FEES AND EXPENSES All filing fees, recording costs and all other fees or charges, including reasonable attorneys fees, incurred by the Bank in connection with the preparation of this Agreement and the other Loan Documents and in perfecting and defending the Bank's security interests in the Collateral and its rights hereunder, shall be deemed to be sums payable under the Note and secured by the Collateral and shall be paid by the Borrower on demand. 13. GENERAL PROVISIONS (a) Inspection. The Bank may examine the Borrower's books and records with respect to the Collateral and this Agreement at all reasonable times to insure compliance with the terms of the Loan Documents. Additionally, the Borrower hereby agrees to allow the Bank, its personnel and representatives, access to the Borrower's books and records for the purpose of conducting periodic audits. Such audits shall be done as frequently as the Bank may reasonably determine is necessary and Borrower shall pay the Bank an audit fee of $650.00 per audit, it being understood that audit fees shall be charged only at such times as an Event of Default has occurred and is continuing. (b) Notice To Others. The Bank may, upon the occurrence of an Event of Default or upon the occurrence of an event which, but for the passage of time, the giving of notice or both unless same is required under the Loan Documents, would constitute an Event of Default, notify any party obligated to make payments to Borrower under any lease of the Premises or portion , to make payment directly to the Bank. (c) Paragraph Headings. Paragraph headings are for convenience and shall not operate to change or modify any of the terms of this Agreement. (d) Partial Invalidity. The invalidity or unenforceability of any clause or part of this Agreement or any other Loan Documents shall not affect the validity or enforceability of any other clause or part hereof. (e) Waiver. Any waiver by the Bank of any breach or of any Event of Default shall not be deemed a waiver of any other breach or Event of Default of the same or any other provision. (f) Rights Cumulative. All of the Bank's rights, remedies and powers, whether pursuant to this Agreement or any other Loan Document or otherwise ("Rights") shall be cumulative and may be exercised independently or concurrently, partially or wholly, and as often as the Bank deems expedient. No delay or omission in exercising such Right or any other Right shall be construed as a waiver or acquiescence to an Event of Default. Waiver of a Right or an Event of Default on any one occasion shall not bar or be a waiver of such Right or Event of Default on any future occasion. (g) Governing Law. This Agreement shall be governed by the laws of the State of New York. (h) Waiver Of Jury Trial. The parties hereto hereby waive trial by jury in any litigation in any court with respect to, in connection with, or arising out of this Agreement, any other Loan Document or the Loan, or any instrument or document delivered in connection with the Loan, or the validity, protection, interpretation, collection or enforcement thereof, or any other claim or dispute howsoever arising between the Borrower and the Bank. (i) Notices. All notices and communications under this Agreement, except those communications permitted by the terms of this Agreement to be made by telephone, shall be: (i) personally delivered or (ii) forwarded by overnight courier service, in each instance addressed to the addresses hereinafter set forth, or such other addresses as the parties may for themselves designate in writing as provided herein for the purpose of receiving notices hereunder. All notices shall be in writing and shall be deemed given, in the case of notice by personal delivery, upon actual delivery, and in the case of courier service, upon delivery to the courier service as follows: If to Bank: KeyBank National Association 1377 Motor Parkway Islandia, New York 11788 Attn: James V. Maiorino, Vice President If to Borrower: Vicon Industries, Inc. 89 Arkay Boulevard Hauppauge, New York 11788 Attn: Kenneth M. Darby, President (j) Bank Approval. All Loan Documents and all other documents delivered by Borrower to the Bank must be acceptable to the Bank and its Counsel. (k) Entire Agreement. This Agreement and the other Loan Documents constitute the complete agreement of the parties with respect to the subject matters referred to herein and supersede all prior or contemporaneous negotiations, promises, covenants, agreements or representations of every nature whatsoever with respect thereto, all of which have become merged and finally integrated into this Agreement. Each of the parties understands that in the event of any subsequent litigation, controversy or dispute concerning any of the terms, conditions or provisions of this Agreement, neither shall be permitted to offer or introduce any oral evidence concerning any other oral promises or oral agreements between the parties relating to the subject matter of this Agreement not included or referred to herein and not reflected by a writing signed by the Bank. (l) Counterparts. This Agreement may be executed in counterparts and any combination or group of counterparts bearing, in the aggregate, the signatures of all of the parties hereto shall be deemed one Agreement and sufficient execution of the within Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. VICON INDUSTRIES, INC. KEYBANK NATIONAL ASSOCIATION By:____________________ By:_________________________ John Badke James V. Maiorino Vice President-Finance Vice President STATE OF NEW YORK ) ) SS.: COUNTY OF SUFFOLK ) On the 12th day of October, 1999, before me, the undersigned, personally appeared JOHN BADKE, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person on behalf of which the individual acted, executed the instrument. NOTARY STATE OF NEW YORK ) ) SS.: COUNTY OF SUFFOLK ) On the 12th day of October, 1999, before me, the undersigned, personally appeared JAMES V. MAIORINO, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person on behalf of which the individual acted, executed the instrument. NOTARY SCHEDULE "A" PRIOR LIENS, CLAIMS OR RIGHTS OF OTHERS IN AND TO COLLATERAL KEYBANK NATIONAL ASSOCIATION EX-10 9 MORTGAGE NOTE KEYBANK NATIONAL ASSOCIATION MORTGAGE NOTE BORROWER: VICON INDUSTRIES, INC. PRINCIPAL: $1,200,000 Date: October 12, 1999 PROMISE TO PAY: The undersigned (the "Borrower"), jointly and severally if more than one signer, does hereby promise to pay to the order of KEYBANK NATIONAL ASSOCIATION (the "Bank") at its offices at 1377 Motor Parkway, Islandia, New York 11788, or at any of its branches, the sum of ONE MILLION TWO HUNDRED THOUSAND ($1,200,000) DOLLARS plus interest thereon, from the date hereof in the manner set forth below. COMPUTATION OF INTEREST: Interest on the outstanding principal balance of this Note shall be computed on the basis of "a 360-day year for the actual number of days elapsed" (such phrase, as used throughout this Note shall mean that in computing interest for the subject period, the interest rate shall be multiplied by a fraction, the denominator of which is 360 and the numerator of which is the actual number of days elapsed from the date of the first disbursement of the Loan or the date of the preceding interest and/or principal due date, as the case may be, to the date of the next interest and/or principal due date). Interest shall accrue until the date of receipt of payment. RATE AND PAYMENT: The unpaid principal balance hereof shall bear interest at a variable rate equal to, at Borrower's option, either (i) the 30, 60, or 90 day LIBOR Rate (at Borrower's option) plus One Hundred (100) Basis Points, or (ii) the Prime Rate minus one hundred sixty (160) Basis Points, payable monthly on the first day of the first month following the date hereof and on the first day of each month thereafter until this Note is paid in full. The option selected by Borrower shall be the applicable "Interest Rate" for such Interest Period (hereinafter defined). "LIBOR Rate" shall mean the rate of interest per annum (rounded upwards if necessary to the nearest 1/16 of 1%) that is equal to the rate quoted by the Bank, or its successors or assigns, for a LIBOR Period of one (1) month, two (2) months or three (3) months (each, a "LIBOR Period"), as adjusted for statutory requirements, two (2) Business Days prior to the first day of the Interest Period for which the LIBOR Rate is calculated, for the offering to leading banks in the London interbank market of U.S. dollar deposits in immediately available funds, for a period, and in an amount, comparable to such Interest Period (hereinafter defined) and principal amount of the Loan which shall be outstanding during such Interest Period. "Interest Period" means each period during which the Interest Rate is a LIBOR Rate, commencing on the date the Loan bears such LIBOR Rate based Interest Rate and ending, as Borrower has elected, on the 30th, 60th, or 90th day thereafter, providing that no Interest Period shall extend beyond the Maturity Date. "LIBOR Loan" means this Loan when the interest rate therefor is determined on the basis of a LIBOR Rate. "Prime Rate shall mean that rate set forth in Federal Reserve Publication H15(519) under the heading "Prime Interest Rate". If such rate does not appear in the Federal Reserve Publication H15(519) the rate shall be the Prime Rate as published in the "Money Rates" column of the Wall Street Journal. Each change in the Interest Rate shall take effect simultaneously with the corresponding change in the Prime Rate. The Prime Rate may not be the lowest rate of interest charged by the Bank for commercial or other extensions of credit. "Prime Rate Loan" means this Loan when the interest rate therefor is determined on the basis of the Prime Rate. The term "Business Day" means any day other than (i) Saturday or Sunday; or (ii) a day on which commercial banks in New York are authorized to close. In the event Borrower elects a LIBOR Rate based Interest Rate for an Interest Period, Borrower shall select an Interest Period of a duration in accordance with the definition of Interest Period above, except that if an Interest Period would end on a day which is not a Business Day, such Interest Period shall be extended to the next Business Day, unless such Business Day would fall in the next calender month, in which event such Interest Period shall end on the immediately preceding Business Day. Any Interest Period which would otherwise extend beyond the Maturity Date shall end on the Maturity Date. Upon the expiration of an Interest Period bearing a LIBOR Rate based Interest Rate, the Loan shall be automatically converted to a "Prime Rate Loan" unless Borrower shall have notified the Bank of its intention to continue such LIBOR Rate or elect a different LIBOR Rate at least two (2) Business days prior to the end of the Interest Period and subject to the following conditions and to the terms and conditions of this Note: (i) the Interest Rate on the Loan may not be converted to a LIBOR Rate less than one month before the Maturity Date; (ii) the Loan may be converted to a Prime Rate Loan only on the last day of an Interest Period; (iii) if the Loan is a Prime Rate Loan, the Loan may be converted to a LIBOR Loan only upon at least two (2) Business Day's prior notice to the Bank; (iv) the Loan may not be converted to a LIBOR Loan during the occurrence and continuance of an Event of Default; and (v) the Interest Period selected shall apply to the entire Loan balance for such Interest Period. In the event that the LIBOR Rate quoted by the Bank, its successors or assigns, is no longer available, the Interest Rate shall automatically convert to the Prime Rate minus one hundred sixty (160) Basis Points. The LIBOR Rate may not be the lowest rate of interest charged by the Bank for commercial or other extensions of credit. Each change in the applicable LIBOR Rate shall effect a simultaneous and corresponding change in the interest rate hereunder without notice to the Borrower. Interest shall be calculated on a three hundred sixty (360) day year and actual number of days elapsed. Principal repayment shall begin on December 1, 1999 when Borrower shall begin making equal consecutive monthly installments of principal, each in an amount sufficient to fully amortize the outstanding principal balance hereof over an one hundred fifty-nine (159) month period, plus accrued interest at the Interest Rate. On February 1, 2008 (the "Maturity Date") (or such earlier date in the event Borrower defaults hereunder), the entire unpaid principal balance of this Note and all accrued but unpaid interest and any other sums due hereunder shall be due and payable. Each installment payment shall be applied first to interest at the Interest Rate with the balance, if any, applied to principal. If any monthly installment payment is insufficient to pay the interest due at the Interest Rate, KeyBank will notify the Borrower of the amount of additional interest due and the Borrower will remit said sum to KeyBank or KeyBank shall offset such amount (as hereinafter provided) within five (5) business days. PREPAYMENT: The Loan may be prepaid in whole or in part in multiples of at least $100,000 on the first of each month following not less than ten (10) days prior written notice, provided Borrower is not then in default beyond any applicable cure period. Partial prepayment shall be credited in inverse order of maturity. Prepayments of borrowings covered by an interest rate swap agreement or other rate protection mechanism may require termination or adjustment of the swap and will be subject to the terms and conditions of the swap agreement with respect to prepayment/termination. DEFAULT INTEREST RATE: After maturity hereof (whether by acceleration or otherwise) the principal amount hereof and the unpaid interest and fees thereon shall bear interest at a rate per annum equal to the greater of three (3%) percent in excess of the highest applicable interest rate provided for herein or sixteen (16%) percent per annum, but in no event shall the rate either be for or after the occurrence of any event of default or acceleration exceed the highest rate of interest, if any, permitted under applicable New York or Federal Law. RIGHT OF OFFSET: If any payment is not made when due inclusive of any applicable grace period, or if the entire balance becomes due and payable and is not paid, all or part of the amount due may be offset out of any account or other property which the Borrower has at the Bank or any affiliate of the Bank without prior notice or demand. LATE CHARGES: The Borrower shall pay to the Bank, prior to maturity, for each payment of principal and interest not paid in full within ten (10) days after its due date, a late fee equal to the greater of five (5%) percent of the amount of such payment or fifty ($50) dollars, but not more than one thousand ($1,000) dollars. SECURITY: This Note is secured by: (1) a security interest in and assignment and pledge of all monies, deposits, or other sums now or hereafter held by the Bank on deposit, in safekeeping, transit or otherwise, at any time credited by or due from Bank to the Borrower, or in which the Borrower shall have an interest; and (2) a third mortgage on property located at 89 Arkay Drive, Hauppauge, New York 11788 and known on the Suffolk County Tax Map as District 0800 Section 181.00 Block 03.00 Lot 002.013 (the "Mortgage"); and (3) an Assignment of All Leases and Rents from the premises that is the subject of the Mortgage. DEFAULT: The Bank may declare the entire unpaid balance of this Note due and payable on the happening of any of the following events ("Events of Default"): (a) Failure to pay any amount required by this Note when due and Borrower fails to cure such default within five (5) business days or, if applicable, failure to have sufficient funds in its account for loan payments to be debited on the due date and Borrower fails to cure such default within five (5) business days; (b) Failure to perform or keep or abide by any term, covenant or condition contained in this Note, the Mortgage, or any other document or instrument given to the Bank in connection with this loan (collectively, the "Loan Documents") within any applicable cure period; (c) The filing of a bankruptcy proceeding, assignment for the benefit of creditors, issuance of any execution, garnishment, or levy against, or the commencement of any proceeding for relief from indebtedness by or against the Borrower; (d) The happening of any event which, in the judgment of the Bank, materially adversely affects the Borrower's ability to repay or the value of any collateral; (e) If any material written representation or statement made to the Bank by the Borrower is untrue; (f) If any material written representation, covenant or warranty made to the Bank by the Borrower is breached; (g) The occurrence of a default under the Mortgage, or any other document or instrument given to the Bank in connection with this loan and Borrower fails to cure such default within any applicable cure period; (h) Failure to provide any reasonable financial information on request upon reasonable notice or permit an examination of books and records upon reasonable notice. Notwithstanding the foregoing, the balance of this Note shall become immediately due and payable upon the occurrence of any of the events set forth in (c) above. ATTORNEYS FEES: In the event the Bank retains counsel with respect to enforcement of this Note or any other document or instrument given to the Bank by reason of Borrower's default, the Borrower agrees to pay the Bank's reasonable attorneys fees (whether or not an action is commenced and whether or not in the court of original jurisdiction, appellate court, bankruptcy court, or otherwise). SUBSEQUENT AGREEMENTS: The Borrower shall be bound by any agreement extending the time or modifying the above terms of payment made by the Bank and any owner(s) of the property covered by the mortgage referred to herein, without notice to the Borrower, and the Borrower shall continue to be liable to pay all amounts due hereunder, but at an interest rate not exceeding the rate set forth herein, according to the terms of any such agreement of extension or modification. MISCELLANEOUS: Delay or failure of the Bank to exercise any of its rights under this Note shall not be deemed a waiver thereof. No waiver of any condition or requirement shall operate as a waiver of any other or subsequent condition or requirement. The Bank or any other holder of this Note does not have to present it before requiring payment. The Borrower waives trial by jury, offset, and counterclaim with respect to any action arising out of or relating to this Note. This Note may not be modified or terminated orally. This Note shall be governed by the laws of the State of New York without regard to its conflicts of laws rules. The Borrower irrevocably consents to the jurisdiction and venue of the New York State Supreme Court, Suffolk County in any action concerning this Note. This Note is binding upon the Borrower, its heirs, successors and assigns. IN WITNESS WHEREOF, the Borrower has signed this Note as of the 12th day of October, 1999. VICON INDUSTRIES, INC. By:___________________________ John Badke, Vice President-Finance STATE OF NEW YORK ) ) SS.: COUNTY OF SUFFOLK ) On the 12th day of October, 1999, before me, the undersigned, personally appeared JOHN BADKE, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person on behalf of which the individual acted, executed the instrument. NOTARY EX-10 10 MORTGAGE AND SECURITY AGREEMENT MORTGAGE and SECURITY AGREEMENT Dated: October 12, 1999 in the amount of $1,200,000 (the "Mortgage Amount") from VICON INDUSTRIES, INC. having an office at: 89 Arkay Drive Hauppauge, New York 11788 (the "Mortgagor") to KEYBANK NATIONAL ASSOCIATION A National Banking Association having an office at: 1377 Motor Parkway Islandia, New York 11788 (the "Mortgagee") LOCATION OF PREMISES: Street Address : 89 Arkay Drive, Hauppauge County of : Suffolk State of : New York District : 0800 Section : 181.00 Block : 03.00 Lot : 002.013 After recording, please return to: GANDIN, SCHOTSKY, RAPPAPORT, GLASS & GREENE, LLP 445 Broad Hollow Road Melville, N. Y. 11747 This instrument was prepared by the above-named attorneys. MORTGAGE AND SECURITY AGREEMENT $1,200,000 THIS MORTGAGE AND SECURITY AGREEMENT, made the 12th day of October, 1999, by VICON INDUSTRIES, INC., a New York State corporation with an office for the transaction of business located at 89 Arkay Drive, Hauppauge, New York , the MORTGAGOR to KEYBANK NATIONAL ASSOCIATION, a national banking association, with an office for the transaction of business located at 1377 Motor Parkway, Islandia, New York 11788, the MORTGAGEE. WITNESSETH, that to secure the payment of an indebtedness evidenced by a certain note bearing even date herewith in the principal sum of ONE MILLION TWO HUNDRED THOUSAND ($1,200,000) Dollars lawful money of the United States, as the same may be modified, renewed or extended (the "Note") which sum, with interest thereon is to be paid by Mortgagor to Mortgagee in accordance with the terms of said Note, and also to secure the payment by Mortgagor to Mortgagee of all sums expended or advanced by Mortgagee pursuant to any covenant, term or provision of this Mortgage or any other Loan Document (as that term is defined in the Note), and to secure the performance of each covenant, term and provision by Mortgagor to be performed pursuant to this Mortgage or any other Loan Document, Mortgagor hereby mortgages to Mortgagee, its successors and assigns, the following described property (the "Mortgaged Property") whether now owned or held or hereafter acquired: ALL THAT TRACT OR PARCEL OF LAND situate in the County of Suffolk, State of New York, and being the same premises described in Schedule "A" hereto annexed and made a part hereof (the "Premises"). ALL RIGHT, TITLE AND INTEREST of Mortgagor in and to any and all buildings, structures and improvements, including without limitation, the foundations and footings thereof, now or at any time hereafter erected, constructed or situated upon the Premises or any part thereof (the "Improvements"). TOGETHER with all fixtures, chattels and articles of personal property now or hereafter attached to or used in connection with the Premises, together with any and all replacements thereof and additions thereto (the "Chattels"). This Mortgage shall be considered a financing statement pursuant to the provisions of the Uniform Commercial Code, covering fixtures which are affixed to the Premises. The types of collateral covered hereby are described in this paragraph. The debtor is VICON INDUSTRIES, INC. The secured party is KEYBANK NATIONAL ASSOCIATION. Their addresses are set forth above. TOGETHER with all right, title and interest, if any, of Mortgagor of, in and to the bed of any street, road or avenue, opened or proposed, in front of, adjoining or abutting upon the Premises to the center line thereof. TOGETHER with any and all awards heretofore and hereafter made to the present and all subsequent owners of the Premises by any governmental or other lawful authorities for the taking by eminent domain of the whole or any part of the Premises, or any easement therein, including any awards for any changes of grade of streets, which said awards are hereby assigned to Mortgagee, who is hereby authorized to collect and receive the proceeds of any such awards from such authorities and to give proper receipts and acquittances therefor, and to apply the same toward the payment of the amount owing on account of this Mortgage and the Note, notwithstanding the fact that the amount owing thereon may not then be due and payable. TO HAVE AND TO HOLD the Mortgaged Property unto the Mortgagee, its successors and assigns, PROVIDED ALWAYS that if Mortgagor shall pay or cause to be paid to Mortgagee, its successors and assigns, said principal sum of money and other charges mentioned and set forth in this Mortgage and in the Note, together with interest thereon, then and from thence forth, the Mortgage and the estate hereby granted shall cease, determine and be void. AND Mortgagor covenants with Mortgagee as follows: 1. REPRESENTATIONS. Mortgagor hereby represents and warrants to Mortgagee as follows: (a) That the Loan Documents (as that term is defined in the Note) are in all respects valid and legally binding obligations, enforceable in accordance with their respective terms. (b) That the execution and delivery of the Loan Documents by Mortgagor does not, and the performance and observance by Mortgagor of its obligations thereunder will not, contravene or result in a breach of (i) if Mortgagor purports to be a corporation, any provision of Mortgagor's corporate charter or by-laws, or, if Mortgagor purports to be partnership, any provision of Mortgagor's partnership agreement or certificate, or (ii) any governmental requirements, or (iii) any decree or judgement binding on Mortgagor, or (iv) any agreement or instrument binding on Mortgagor for which waivers of the same have not been obtained or any of their respective properties, nor will the same result in the creation of any lien or security interest under any such agreement or instrument. (c) That there are no actions, suits, investigations or proceedings pending, or, to the knowledge of Mortgagor, threatened against or affecting Mortgagor (or any general partner of Mortgagor), or the Mortgaged Property, or involving the validity or enforceability of any of the Loan Documents or the priority of the lien thereof, or which will affect Mortgagor's ability to repay the Note, at law or in equity or before or by any governmental authority. (d) That Mortgagor has no knowledge of any violations or notices of violations of any requirements for which waiver(s) of same have not been obtained. (e) If Mortgagor (or any general partner of Mortgagor if Mortgagor is a partnership) purports to be a corporation, that (i) it is a corporation duly organized, validly existing and in good standing under the laws of the state or foreign country in which it is incorporated, (ii) if required by the laws of the state in which the Premises is located, it is duly qualified to do business and is in good standing therein, (iii) it has the corporate power, authority and legal right to own and operate its properties and assets, carry on the business now being conducted and proposed to be conducted by it, and to engage in the transactions contemplated by the Loan Documents, and (iv) the execution and delivery of the Loan Documents to which it is a party and the performance and observance of the provisions thereof have been duly authorized by all necessary corporate actions. If Mortgagor (or any general partner of Mortgagor if Mortgagor) is a partnership, that (i) it is duly formed and validly existing under the laws of the state in which it is formed, (ii) if required by the laws of the state in which the Premises is located, it is fully qualified to do business therein, (iii) it has the power, authority and legal right to own and operate its properties and assets, to carry on the business conducted and proposed to be conducted by it, and to engage in the transactions contemplated by the Loan Documents, and (iv) the execution and delivery of the Loan Documents to which it is a party and the performance and observance of the provisions thereof have all been duly authorized by all necessary actions of its partners. (f) That all utility services necessary and sufficient for the construction, development and operation of the Mortgaged Property for its intended purposes are presently available to the Premises (or the boundaries thereof if this Mortgage is executed in conjunction with a construction loan) through dedicated public rights of way or through perpetual private easements, approved by Mortgagee, with respect to which the Mortgage creates a valid, binding and enforceable first lien, including, but not limited to, water supply, storm and sanitary sewer, gas, electric and telephone facilities, and drainage. (g) That neither the Mortgaged Property nor any portion thereof is now damaged or injured as result of any fire, explosion, accident, flood or other casualty or has been the subject of any taking, and to the knowledge of Mortgagor, no taking is pending or contemplated. (h) That any brokerage commissions payable by Mortgagor due in connection with the transactions contemplated hereby have been paid in full and that any such commissions coming due in the future will be promptly paid by Mortgagor. Mortgagor agrees to and shall indemnify Mortgagee from any liability, claims or losses arising by reason of any such brokerage commissions. This provision shall survive the repayment of the Note and shall continue in full force and effect so long as the possibility of such liability, claims or losses exists. (i) That the financial statements of Mortgagor previously delivered to Mortgagee are true and correct in all respects, have been prepared in accordance with generally accepted accounting principles consistently applied, and fairly present the respective financial conditions of Mortgagor as of the respective dates thereof and the results of their operations for the periods covered thereby; that no materially adverse change has occurred in the assets, liabilities, or financial conditions reflected therein since the respective dates thereof; and that no additional borrowings (except for borrowings under existing line of credit with IBJ Schroeder as disclosed to the Mortgagee) have been made by Mortgagor since the date thereof other than the borrowing contemplated hereby. (j) That all federal, state and other tax returns of Mortgagor required by law to be filed have been filed, that all federal, state and other taxes, assessments and other governmental charges upon Mortgagor or its respective properties which are due and payable have been paid, and that Mortgagor has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods for which such returns have been filed. (k) That Mortgagor has made no contract or arrangement of any kind or type whatsoever (whether oral or written, formal or informal), the performance of which by the other party thereto could give rise to a lien or encumbrance on the Mortgaged Property, except for contracts (all of which have been disclosed in writing to Mortgagee) made by Mortgagor with parties who will execute and deliver lien waivers to Mortgagor within one hundred twenty (120) days of the date hereof, copies of which Mortgagor shall deliver to Mortgagee, and which will not create rights in existing or future lien claimants which may be superior to the lien of the Mortgage. (l) That the rights of way for all roads necessary for the full utilization of the Improvements for their intended purposes have either been acquired by the Mortgagor, the appropriate governmental authority or have been dedicated to public use and accepted by such governmental authority, and all such roads shall have been completed, or all necessary steps shall have been taken by Mortgagor and such governmental authority to assure the complete construction and installation thereof prior to the date upon which access to the Mortgaged Property via such roads will be necessary. All curb cuts, driveway permits and traffic signals necessary for access to the Mortgaged Property are existing or have been fully approved by the appropriate governmental authority. (m) That no Event of Default (hereinbelow defined) exists and no event which but for the passage of time, the giving of notice or both would constitute an Event of Default has occurred. 2. THE INDEBTEDNESS. Mortgagor will pay the indebtedness as provided in the Note or in any modification, renewal or extension of the Note. 3. INSURANCE. At all times that the Note is outstanding, including without limitation during any construction period (a "Construction Period"), Mortgagor shall maintain insurance with respect to the Premises the Improvements and the Chattels against such risks and for such amounts as are customarily insured against by businesses of like size and type paying, as the same become due and payable, all premiums in respect thereto, including but not limited to: (a) Prior to completion of construction of the Improvements, if the same have not been completed, builder's risk all risk (or equivalent coverage) insurance upon any work done or material furnished in connection with construction of the Improvements, issued to Mortgagor and Mortgagee and written in non-reporting completed form to cover the replacement cost of the Improvements and at such time that builder's risk insurance shall not be available due to completion of the construction of the Improvements, or if all Improvements have been completed, insurance protecting the interests of the Mortgagor and Mortgagee as their interests may appear against loss or damage to the Improvements by fire, lightning, flood and other casualties normally insured against, with a uniform standard extended coverage endorsement, such insurance at all times to be in an amount of the Note or the total cash replacement value of the Improvements not covered by builder's risk insurance, as determined at least once every three years by a recognized appraiser or insurer selected by the Mortgagor and approved by the Mortgagee. (b) Boiler and machinery insurance covering physical damage to the Improvements and to the major components of any central heating, air conditioning or ventilation systems and such other equipment as Mortgagee shall designate. (c) Workers' compensation insurance, disability benefits insurance, and such other form of insurance which the Mortgagor is required by law to provide, covering loss resulting from injury, sickness, disability or death of employees of Mortgagor who are located at or assigned to the Premises or who are responsible for the construction of the Improvements. (d) Insurance protecting Mortgagor and Mortgagee against loss or losses from liabilities imposed by law or assumed in any written contract and arising from personal injury and death or damage to the property of others caused by accident or occurrence, in such amounts as may be reasonably designated from time to time by Mortgagee, excluding liability imposed upon the Mortgagor by any applicable workers' compensation law, or such other amounts as may be required in writing by the Mortgagee; and a blanket excess liability policy in an amount reasonably satisfactory to the Mortgagee protecting Mortgagor and Mortgagee against any loss or liability or damage for personal injury or property damage. 4. OTHER INSURANCE PROVISIONS. All insurance required under this Mortgage shall be procured and maintained in financially sound and generally recognized responsible insurance companies selected by the Mortgagor and authorized to write such insurance in the State of New York and acceptable to the Mortgagee. Such insurance may be written with deductible amounts comparable to those on similar policies carried by other entities engaged in businesses similar in size, character and other respects to those in which the Mortgagor is engaged. All policies evidencing such insurance shall provide for (i) payment of the losses to Mortgagor and Mortgagee as their respective interests may appear, and (ii) at least thirty (30) days written notice to Mortgagor and Mortgagee prior to cancellation, reduction in policy limits or material change in coverage thereof. The insurance required by Section 3(a) shall contain a New York Standard mortgagee endorsement in favor of Mortgagee. All insurance required hereunder shall be in form, content and coverage satisfactory to the Mortgagee. The original policy, or a certified duplicate copy thereof, for all insurance required hereby shall be delivered to Mortgagee. The proceeds of any insurance which are paid to the Mortgagee, if less than $100,000, shall be paid over to the Mortgagor in whole or in part for the repair of the Improvements, or, if equal to $100,000 or more, may be applied by the Mortgagee toward the payment of any monies secured by this Mortgage, or, may be paid over, wholly or in part, to the Mortgagor for the repair of the Improvements or for any other purpose or object satisfactory to the Mortgagee. Mortgagor shall deliver to Mortgagee at least thirty (30) days prior to the expiration date of any insurance coverages required hereunder, a certificate reciting that there is in full force and effect, with a term covering at least the next succeeding year, insurance in the amounts and of the types required hereunder. 5. ALTERATIONS. No Improvements shall be structurally altered, removed or demolished without the prior written consent of Mortgagee which consent shall not be unreasonably withheld. 6. APPOINTMENT OF RECEIVER. Mortgagee in any action to foreclose this Mortgage shall be entitled, without notice and as a matter of right and without regard to the adequacy of any security of the indebtedness or the solvency of Mortgagor, upon application to any court having jurisdiction, to the appointment of a receiver of the rents, income and profits of the Mortgaged Property. If an Event of Default (hereinbelow defined) occurs under this Mortgage, as a matter of right and without regard to the adequacy of any security for the Note, the Mortgagor, upon demand of the Mortgagee, shall surrender the possession of, and it shall be lawful for Mortgagee, by such officer or agent as it may appoint, to take possession, of all or any part of the Mortgaged Property together with the books, papers, and accounts of the Mortgagor pertaining thereto, and to hold, operate and manage the same, and from time to time to make all needed repairs and improvements as Mortgagee shall deem wise; and, if Mortgagee deems it necessary or desirable, to complete construction and equipping of any Improvements and in the course of such construction or equipping to make such changes to the same as it may deem desirable; and Mortgagee may sell the Mortgaged Property or any part thereof, or institute proceedings for the complete or partial foreclosure of the lien of this Mortgage on the Mortgaged Property, or lease the Premises or any part thereof in the name and for the account of the Mortgagor or Mortgagee and collect, receive and sequester the rents, revenues, earnings, income, products and profits therefrom, and out of the same and any other monies received hereunder pay or provide for the payment of, all proper costs and expenses of taking, holding, leasing, selling and managing the same, including reasonable compensation to Mortgagee, its agents and counsel, and any charges of Mortgagee hereunder, and any taxes and other charges prior to the lien of this Mortgage which Mortgagee may deem it wise to pay. 7. PAYMENT OF TAXES. Mortgagor will pay all taxes, assessments, sewer rents or water rates or sums due under any payment in lieu of tax agreement ("Pilot Agreement") and in default thereof, Mortgagee may pay the same. In the event that Mortgagee shall pay any such tax, assessment, sewer rent or water rate, Mortgagee shall have the right, among other rights, to declare the amount so paid with interest thereon immediately due and payable, and upon default of Mortgagor in paying any such amount with interest thereon, Mortgagee shall have the right to foreclose for such amount subject to the continuing lien of this Mortgage for the balance of the mortgage indebtedness not then due. In the event that the Mortgagor should fail to pay any sum the Mortgagor has agreed to pay pursuant to this covenant for a period in excess of sixty (60) days after the same is due and payable, in addition to any other remedies available to the Mortgagee hereunder, the Mortgagee may, at its option, require that the Mortgagor deposit with the Mortgagee, monthly, one-twelfth (1/12th) of the annual charges for taxes and any other sums the Mortgagor is obligated to pay pursuant to this covenant and the Mortgagor shall make such deposits with the Mortgagee. The Mortgagor shall simultaneously therewith deposit with the Mortgagee a sum of money which together with the monthly installments aforementioned will be sufficient to make payment of all sums required to be paid hereunder at least thirty (30) days prior to the due date of such payments, it being understood that the Mortgagee shall calculate the amount of such deposits and notify the Mortgagor of the sum due. Should an Event of Default (hereinbelow defined) occur, the funds deposited with the Mortgagee pursuant to this provision may be applied in payment of the charges for which said funds shall have been deposited or to the payment of any other sums secured by this Mortgage as the Mortgagee sees fit. 8. PAYMENT OF MORTGAGE TAXES. Mortgagor shall pay all taxes imposed pursuant to Article 11 of the Tax Law or any other statute, order or regulation, whether said tax is imposed at the time of recording or subsequent thereto. This obligation shall survive the satisfaction or other termination of this Mortgage. Mortgagee shall pay the tax imposed by Section 253 1-a(a), if applicable, if the Mortgaged Property consists of real property principally improved or to be improved by one or more structures containing in the aggregate not more than six residential units, each dwelling unit having its own separate cooking facilities. 9. STATEMENT OF AMOUNT DUE. Mortgagor, within five (5) days upon request in person or within fifteen (15) days upon request by mail, will furnish a written statement duly acknowledged of the amount due on this Mortgage and whether any offsets or defenses exist against the said indebtedness. 10. NOTICES. Any notices required or permitted to be given hereunder shall be: (i) personally delivered or (ii) forwarded by overnight courier service, in each instance addressed to the addresses set forth at the head of this Mortgage, or such other addresses as the parties may for themselves designate in writing as provided herein for the purpose of receiving notices hereunder. All notices shall be in writing and shall be deemed given, in the case of notice by personal delivery, upon actual delivery, and in the case of courier service, upon delivery to the courier service. 11. WARRANTY OF TITLE. Mortgagor warrants the title to the Premises, Improvements and Chattels. 12. SALE IN ONE PARCEL. In case of a sale, the Premises may be sold in one parcel together with the Improvements and Chattels. Should the Premises consist of more than one parcel, in the event of a foreclosure of this Mortgage or any mortgage at any time consolidated with this Mortgage, Mortgagor agrees that Mortgagee shall be entitled to a judgment directing the referee appointed in the foreclosure proceeding to sell all of the parcels constituting the Premises at one foreclosure sale, either as a group or separately and that the Mortgagor expressly waives any right that it may now have or hereafter acquire to (i) request or require that the parcels be sold separately or (ii) request, if Mortgagee has elected to sell parcels separately, that there be a determination of any deficiency amount after any such separate sale or otherwise require a calculation of whether said parcel or parcels separately sold were conveyed for their "fair market value". 13. NEGATIVE COVENANTS. Mortgagor will not (i) execute an assignment of the rents, income or profits, or any part thereof from the Mortgaged Property except to Mortgagee, or (ii) except where the tenant is in default thereunder, terminate or consent to the cancellation or surrender of any lease of the Premises or Improvements or of any part thereof, now existing or hereafter to be made, having an unexpired term of two (2) years or more, except that any lease may be canceled provided that promptly after the cancellation or surrender thereof a new lease is entered into with a new tenant having a credit standing, in the judgment of the Mortgagee, at least equivalent to that of the tenant whose lease was canceled, on substantially the same terms as the terminated or canceled lease, or modify any such lease so as to shorten the unexpired term thereof or so as to decrease the amount of the rents payable thereunder, or (iii) accept prepayments of any sums to become due under such leases, except prepayments of rent for more than one (1) month in advance or prepayments in the nature of security for the performance of the tenants thereunder, (iv) in any other manner impair the value of the Mortgaged Property or the security of this Mortgage or (v) further encumber, alienate, hypothecate, grant a security interest in or grant any other interest whatsoever in the Mortgaged Property. Restrictions (ii) and (iii) are made with reference to Section 291-f of the Real Property Law and actions in violation of those provisions shall be voidable at the option of the Mortgagee. No rent reserved under any lease of the Premises or Improvements has been assigned or anticipated, and no rent for any period subsequent to the date hereof has been collected in advance of the due date thereof. Mortgagor will not execute any lease of all or a substantial portion of the Premises or Improvements except for actual occupancy by the tenant thereunder, and will at all times promptly and faithfully perform, or cause to be performed, all of the covenants, conditions and agreements contained in all leases of the Premises or Improvements now or hereafter existing, on the part of the landlord thereunder to be kept and performed and will at all times do all things necessary to compel performance by the tenant under each lease of all obligations, covenants and agreements by such tenant to be performed thereunder. If any of such leases provide for the giving by the tenant of certificates with respect to the status of such leases, Mortgagor shall exercise its right to request such certificates within five (5) days of any demand therefor by Mortgagee. Mortgagor shall furnish to Mortgagee, upon request of Mortgagee to do so, a written statement containing the names of all tenants of the Premises or Improvements, the terms of their respective leases, the space occupied and the rentals payable thereunder. 14. APPRAISAL. For the purposes of this Section, the following terms shall be defined as follows: (a) "Appraisal" shall mean an appraisal of the fair market value of the Mortgaged Property prepared by an Appraiser. (b) "Appraiser" shall mean an appraiser selected by Mortgagor and approved by Mortgagee. Within ninety (90) days from the date Mortgagee has mailed a written notice to Mortgagor requesting the same, Mortgagor shall provide Mortgagee, at Mortgagor's expense, with an Appraisal of the Mortgaged Property. An Appraisal may be required not more frequently than once every twelve (12) months except that it may also be required prior to any extension or renewal of the Note or as otherwise set forth in the Loan Agreement executed on even date. 15. FINANCIAL STATEMENTS. In addition to any requirements elsewhere in the Loan Documents, Mortgagor shall provide the Mortgagee with the following financial statements during the term hereof: (a) Annual audited financial statements of the Mortgagor prepared on a consolidated basis within 90 days after the end of each applicable fiscal year by an independent CPA satisfactory to Mortgagee, in accordance with GAAP; (b) Annual Form 10K of Mortgagor within 90 days of each fiscal year end; (c) Quarterly review quality consolidated financial statements and Form 10Q within 60 days of each quarter end; (d) Management prepared annual, within ninety (90) days of each fiscal year end, and quarterly, within sixty (60) days of each quarter end, consolidating financial statements; (e) Simultaneous with the delivery of the annual and quarterly financial statements referred to above, a certificate will be furnished to Mortgagee by Mortgagor executed by a duly authorized officer of the Mortgagor setting forth computations in detail reasonably satisfactory to Mortgagee demonstrating compliance with the financial covenants set forth in that certain Loan Agreement executed by Mortgagor and Mortgagee dated on even date herewith and certifying that, to the best of its knowledge, no default or Event of Default has occurred or is occurring or, in the event a default or Event of Default has occurred or is occurring, then how same will be cured within thirty (30) days. For purposes of the Loan covenants, all accounting terms shall be defined according to generally accepted accounting principles (GAAP) definitions; (f) An annual budget for the upcoming year to include projected Profit and Loss Statements and a Balance Sheet, such budget to be delivered with the year-end financial statements; (g) Such other financial documentation as Mortgagee may reasonably require. 16. BOOKS AND RECORDS. (a) In addition to any requirements elsewhere in the Loan Documents, Mortgagor shall keep and maintain at all times at Mortgagors' addresses stated in this Mortgage, or such other place as Mortgagee may approve in writing, complete and accurate books of accounts and records adequate to reflect correctly the results of the operation of the Mortgaged Property and copies of all written contracts, leases and other instruments which affect the Mortgaged Property. Such books, records, contracts, leases and other instruments shall be subject to examination and inspection at any reasonable time by Mortgagee. (b) Upon request of Mortgagee in writing, Mortgagor shall promptly provide Mortgagee with all documents reasonably requested by Mortgagee prepared in the form and manner called for in such request and as may reasonably relate to the operation or condition thereof, or the financial condition of Mortgagor or any party obligated on the Note, including, without limitation, all leases or leasehold interests granted to or by Mortgagor, rent rolls and tenant lists, rent and damage deposit ledgers, operating statements, profit and loss statements and balance sheets, personal financial statements of Mortgagor or income tax returns (including quarterly returns), any or all of which documents shall be audited or certified as true and accurate by a certified public accountant, if requested by Mortgagee, and shall cover such period or periods as may be specified by Mortgagee. (c) In addition, Mortgagor shall promptly furnish or cause to be furnished to Mortgagee, to the extent any tenant prepares the same or the same are required by any tenant's lease, annual financial statements of any tenant of the Mortgaged Property where such tenant leases fifteen (15%) percent or more of the gross leasable area of the Improvements, each such statement to be delivered as soon as practicable following the end of each fiscal year of such tenant, but in any event within one hundred twenty (120) days thereafter, and each such statement to include balance sheets, statements of operations and statements of changes in financial position as of the end of such year. 17. FUTURE LAWS. In the event of the passage after the date of this Mortgage of any federal, state or municipal law, deducting from the value of land for the purposes of taxation any lien thereon, or changing in any way, the laws for the taxation of mortgages or debts secured by mortgages, or the manner of collection of any such taxes, so as to affect Mortgagee, this Mortgage, or said indebtedness, Mortgagee shall have the right to give thirty (30) days' written notice to Mortgagor requiring the payment of said indebtedness. If such notice be given, said indebtedness shall become due, payable and collectible at the expiration of said thirty (30) days. 18. INTENTIONALLY OMITTED. 19. PROVISIONS REGARDING USE OF MORTGAGED PROPERTY. Mortgagor warrants and represents that: (a) Mortgagor is not responsible for any action or omission, and does not know of any action or omission by any prior owner, that would cause the Mortgaged Property to be subject to forfeiture pursuant to any law, rule or regulation (a "Forfeiture"). (b) The Mortgaged Property has not been acquired with any proceeds from a transaction or an activity that would cause the Mortgaged Property to be subject to Forfeiture. Mortgagor covenants that Mortgagor will not use, and will not permit any third party to use, the Mortgaged Property or any portion thereof or interest therein for any purpose or activity that would cause a Forfeiture thereof. 20. ACTIONS AND PROCEEDINGS. If any action or proceeding be commenced to which action or proceeding Mortgagee is made a party and in which it becomes necessary in the opinion of Mortgagee to defend or uphold the lien of this Mortgage, all sums paid by Mortgagee for the expense of any litigation to prosecute and defend the rights and lien created by this Mortgage, including reasonable counsel fees, costs and allowances, shall, together with interest thereon be a lien on the Mortgaged Property and secured by this Mortgage and shall be collectible in like manner as said indebtedness and shall be paid by Mortgagor on demand. 21. SECURITY INTEREST UNDER THE UNIFORM COMMERCIAL CODE. Mortgagee is authorized to sign as the agent of Mortgagor such agreement in addition to this Mortgage as Mortgagee at any time may deem necessary or proper or require to grant to Mortgagee a perfected security interest in the Chattels. Mortgagor hereby authorizes Mortgagee to file financing statements (as such term is defined in said Uniform Commercial Code) with respect to the Chattels, at any time, without the signature of Mortgagor. Mortgagor will, however, at any time upon request of Mortgagee, sign such financing statements. Mortgagor will pay all filing fees for the filing of such financing statements and for the refiling thereof at the times required, in the opinion of Mortgagee, by said Uniform Commercial Code. If the lien of this Mortgage be subject to any security agreement covering the Chattels, then in the event of any default under this Mortgage, all the right, title and interest of Mortgagor in and to any and all of the Chattels is hereby assigned to Mortgagee, together with the benefit of any deposits or payments now or hereafter made thereof by Mortgagor or the predecessors or successors in title of Mortgagor in the Mortgaged Property. 22. CONDEMNATION. Any and all awards heretofore and hereafter made to Mortgagor and all subsequent owners of the Mortgaged Property by any governmental or other lawful authorities for the taking by eminent domain of the whole or any part of the Mortgaged Property or any easement therein, including any awards for any changes of grade of streets, are hereby assigned to Mortgagee, who is hereby authorized to collect and receive the proceeds of any such awards from such authorities, to give proper receipts and acquittances therefor and to apply the same toward the payment of the amount owing on account of this Mortgage and said indebtedness, notwithstanding the fact that the amount owing thereon may not then be due and payable provided, however, if such award is less than $100,000 it shall be paid over to the Mortgagor for the repair if any damages resulting from such taking; and Mortgagor hereby covenants and agrees, upon request, to make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning the aforesaid awards to Mortgagee free, clear and discharged of any and all encumbrances of any kind or nature whatsoever. Mortgagor shall continue to make all payments required by the Note until any such award shall have been actually received by Mortgagee and any reduction in said indebtedness resulting from the application by Mortgagee of such award shall be deemed to take effect only on the date of such receipt. Notwithstanding the foregoing, if any one or more of the portions of the Mortgaged Property described in subparagraphs (a), (b) and (c) below shall be damaged or taken through condemnation, either temporarily or permanently, then the entire balance due under the Note and any other Loan Documents shall, at the option of Mortgagee, become immediately due and payable: (a) Any portion or portions of the Improvements or the support or foundation of any portion or portions of the Improvements; or (b) Ten (10%) percent or more of any parking area; or (c) Any portion or portions of the Premises which, when so damaged or taken, would result either in (i) an impairment of access to the Improvements from the publicly dedicated rights of way now adjoining the Premises, or (ii) the failure of the Improvements to comply with any building code, zoning or other governmental laws or regulations, lease or other agreement to which the Mortgaged Property is subject. Mortgagor authorizes Mortgagee, at Mortgagee's option, as attorney in fact for Mortgagor, to commence, appear in and prosecute in Mortgagor's or Mortgagee's name, any action or proceeding relating to any condemnation or other taking of the Mortgaged Property and to settle or compromise any claim in connection with such condemnation or other taking. 23. TITLE TO MORTGAGED PROPERTY. Mortgagor is now the owner of the Mortgaged Property upon which this Mortgage is a valid third lien for the amount above specified, with interest thereon at the rate set forth in the Note and there are no defenses or offsets to this Mortgage or to the said indebtedness. 24. LEASES OF THE MORTGAGED PROPERTY. Mortgagor will not lease all or any portion of the Mortgaged Property or amend, modify or terminate (except to the extent permitted under paragraph 13(ii) hereof) any now existing or future lease of the Mortgaged Property without the prior written consent of Mortgagee. Notwithstanding the foregoing, all leases covering more than fifteen percent (15%) of the gross leasable area of the Mortgaged Property (if the Mortgaged Property is improved rental property) must require the tenant thereunder to provide Mortgagee with annual financial statements of the tenant certified to by an independent certified public accountant. Mortgagor, at Mortgagee's request, shall furnish Mortgagee with executed copies of all leases hereafter made of all or any part of the Mortgaged Property, and all leases now or hereafter entered into will be in form and substance subject to the approval of Mortgagee. Upon Mortgagee's request, Mortgagor shall make a separate and distinct assignment to Mortgagee, as additional security, of all leases hereafter made a part of the Mortgaged Property. 25. TRANSFER OF MORTGAGED PROPERTY. In the event that (a) any entity then having a lesser credit rating than Mortgagor shall acquire beneficial ownership of a majority interest in the voting stock of Mortgagor, (b) the Mortgagor shall merge with such an entity and shall not be the surviving corporation, or (c) the Mortgaged Property or a part thereof, while this Mortgage shall remain a lien thereon, shall be sold, conveyed or transferred by deed, any other voluntary or involuntary act or by operation of law or otherwise, the full balance of the indebtedness then remaining unpaid, with interest, shall at the option of the Mortgagee, or its assigns, be immediately due and payable without notice or demand unless the prior written consent of the Mortgagee to such acquisition, merger, or sale, conveyance or transfer shall have been obtained. A mortgage of the Mortgaged Property to any mortgagee other than the Mortgagee shall be deemed a conveyance for the purpose of this Section. 26. ACCESS. Mortgagee, by its employees or agents, shall at all times have the right to enter upon the Mortgaged Property during reasonable business hours for the purpose of examining and inspecting the same. 27. REAL PROPERTY LAW. All covenants hereof, which are in addition to those set forth in Sections 254 and 291-f of the Real Property Law, shall be construed as affording to Mortgagee rights additional to, and not exclusive of, the rights conferred under the provisions of said Sections 254 and 291-f. 28. PERFORMANCE OF MORTGAGOR'S COVENANTS BY MORTGAGEE. In the event of any default in the performance of any of the covenants, terms, or provisions of Mortgagor under this Mortgage, which default is not cured within any applicable cure period, Mortgagee may, at the option of Mortgagee, perform the same and the cost thereof, with interest, shall immediately be due from Mortgagor to Mortgagee and secured by this Mortgage. 29. REMEDIES NOT EXCLUSIVE. Mortgagee shall have the right from time to time, to take action to recover any amounts of past due principal indebtedness and interest thereon, or any installment of either, or any other sums required to be paid under the covenants, terms and provisions of this Mortgage or the Note, as the same become due, whether or not the principal indebtedness secured, or any other sums secured by the Note or this Mortgage shall be due, and without prejudice to the right of Mortgagee thereafter to bring an action of foreclosure, or any other action, for default or defaults by Mortgagor existing at the time such earlier action was commenced. 30. ADDITIONAL ACTS AND DOCUMENTS. Mortgagor covenants that it will do, execute, acknowledge, deliver, file and/or record, or cause to be recorded every and all such further acts, deeds, conveyances, advances, mortgages, transfers and assurances, in law as Mortgagee shall require for the better assuring, conveying, transferring, mortgaging, assigning and confirming unto Mortgagee all and singular the Mortgaged Property. 31. REMEDIES CUMULATIVE. The rights and remedies herein afforded to Mortgagee shall be cumulative and supplementary to and not exclusive of any other rights and remedies afforded the holder of this Mortgage and the Note. 32. SUCCESSORS. All of the provisions of this Mortgage shall inure to the benefit of Mortgagee and of any subsequent holder of this Mortgage and shall be binding upon Mortgagor and each subsequent owner of the Mortgaged Property. 33. EFFECT OF RELEASES. Mortgagee, without notice, may release any part of the security described herein, or any person or entity liable for any indebtedness secured hereby without in any way affecting the lien hereof upon any part of the security not expressly released, and may agree with any party obligated on said indebtedness or having any interest in the security described herein to extend the time for payment of any part or all of the indebtedness secured hereby. Such agreement shall not in any way release or impair the lien hereof, but shall extend the lien hereof as against the title of all parties having any interest in said security, which interest is subject to said lien, and no such release or agreement shall release any person or entity obligated to pay any indebtedness secured hereby. 34. WAIVERS. Any failure by Mortgagee to insist upon the strict performance by Mortgagor of any of the covenants, terms and provisions of this Mortgage shall not be deemed to be a waiver of any of the covenants, terms and provisions of this Mortgage, and Mortgagee, notwithstanding any such failure, shall have the right thereafter to insist upon the strict performance by Mortgagor of any and all of the covenants, terms and provisions of this Mortgage to be performed by Mortgagor. Neither Mortgagor nor any other person or entity now or hereafter obligated for the payment of the whole or any part of said indebtedness shall be relieved of such obligation by reason of (i) the failure of Mortgagee to comply with any request of Mortgagor, or of any other person or entity so obligated, (ii) the failure of Mortgagee to take action to foreclose this Mortgage or otherwise enforce any of the covenants, terms and provisions of this Mortgage or the Note, (iii) the release, regardless of consideration, of the whole or any part of the security held for payment of said indebtedness or (iv) any agreement or stipulation between any subsequent owner or owners of the Mortgaged Property and Mortgagee modifying the covenants, terms and provisions of this Mortgage or the Note without first having obtained the consent of Mortgagor or such other person or entity. In the last mentioned event, Mortgagor and all such other persons or entities shall continue liable to make such payments according to the terms and provisions of any such agreement or extension or modification unless expressly released and discharged in writing by Mortgagee. Mortgagee may release, regardless of consideration, any part of the security held for payment of said indebtedness without, as to the remainder of the security, in any way impairing or affecting the lien of this Mortgage or the priority of such lien over any subordinate lien. Mortgagee may resort for the payment of said indebtedness to any other security therefor held by Mortgagee in such order and manner as Mortgagee may elect. 35. INTEREST ON ADVANCES. Wherever, under the provisions of this Mortgage or by law, Mortgagee is entitled to interest on advances made or expenses incurred, such interest shall be computed at a rate per annum which shall be the interest rate payable under the Note. 36. MORTGAGEE NOT OBLIGATED. Nothing herein contained shall be construed as making the payment of any insurance premiums, taxes or assessments obligatory upon Mortgagee, although Mortgagee may pay same, or as making Mortgagee liable in any way for loss, damage or injury, resulting from the non-payment of any such insurance premiums, taxes or assessments. 37. LIEN LAW. Mortgagor will, in compliance with Section 13 of the Lien Law, receive the advances secured by this Mortgage and will hold the right to receive such advances as a trust fund to be applied first for the purpose of paying the cost of the improvement and will apply the same first to the payment of the cost of the improvement before using any part of the total of the same for any other purpose. 38. ENVIRONMENTAL WARRANTIES AND COVENANTS. (a) Warranties. Mortgagor makes the following representations and warranties: (i) Mortgagor (or the present owner of the Mortgaged Property, if different) is in compliance in all respects with all applicable federal, state and local laws and regulations, including, without limitation, those relating to toxic and hazardous substances and other environmental matters (the "Laws"), (ii) no portion of the Mortgaged Property is being used or, to the best of Mortgagor's knowledge, has been used at any previous time, for the disposal, storage, treatment, processing or other handling of any hazardous or toxic substances, in a manner not in compliance with the Laws, (iii) the soil and any surface water and ground water which are a part of the Mortgaged Property are free from any solid wastes, toxic or hazardous substance or contaminant and any discharge of sewage or effluent; and (iv) neither the federal government nor the State of New York Department of Environmental Conservation or any other governmental or quasi governmental entity has filed a lien on the Mortgaged Property, nor are there any governmental, judicial or administrative actions with respect to environmental matters pending, or to the best of the Mortgagor's knowledge, threatened, which involve the Mortgaged Property. (b) Inspection. In the event Mortgagee reasonably believes that an environmental problem may exist, Mortgagor agrees that Mortgagee or its agents or representatives may, at any reasonable time and at Mortgagor's expense inspect Mortgagor's books and records and inspect and conduct any tests on the Mortgaged Property including taking soil samples in order to determine whether Mortgagor is in continuing compliance with the Laws. (c) Agreement to Comply. If any environmental contamination is found on the Mortgaged Property for which any removal or remedial action is required pursuant to Law, ordinance, order, rule, regulation or governmental action, Mortgagor agrees that it will at its sole cost and expense, take such removal or remedial action promptly and to Mortgagee's satisfaction. (d) Indemnification. Mortgagor agrees to defend, indemnify and hold harmless Mortgagee, its employees, agents, officers and directors from and against any claims, actions, demands, penalties, fines, liabilities, settlements, damages, costs or expenses (including, without limitation, reasonable attorney and consultant fees, investigations and laboratory fees, court costs and litigation expenses of whatever kind or nature known or unknown, contingent or otherwise) arising out of or in any way related to: (i) the past or present disposal, release or threatened release of any hazardous or toxic substances on the Mortgaged Property; (ii) any personal injury (including wrongful death or property damage, real or personal) arising out of or related to such hazardous or toxic substances; (iii) any lawsuit brought or threatened, settlement reached or government order given relating to such hazardous or toxic substances; and/or (iv) any violation of any law, order, regulation, requirement, or demand of any government authority, or any policies or requirements of Mortgagee, which are based upon or in any way related to such hazardous or toxic substances. (e) Other Sites. Mortgagor knows of no on-site or off-site locations where hazardous or toxic substances from the operation of any Improvement or otherwise have been stored, treated, recycled or disposed of. (f) Leases. Mortgagor agrees not to lease or permit the sublease of the Mortgaged Property to a tenant or subtenant whose operations may result in contamination of the Mortgaged Property with hazardous or toxic substances. (g) Non-Operation by Mortgagee. Mortgagor acknowledges that any action Mortgagee takes under this Mortgage shall be taken to protect Mortgagee's security interest only; Mortgagee does not hereby intend to be involved in the operations of the Mortgagor. (h) Compliance Determinations. Mortgagor acknowledges that any determinations Mortgagee makes under this Section regarding compliance with environmental laws shall be made for Mortgagee's benefit only and are not intended to be relied upon by any other party. (i) Survival of Conditions. The provisions of this Section shall be in addition to any other obligations and liabilities Mortgagor may have to Mortgagee at common law, and shall survive the transactions contemplated herein. (j) Other Insurance. Mortgagor shall carry adequate insurance to fulfill Mortgagor's obligations under this Section if required by law. (k) Definitions. The term "hazardous substance" shall include, without limit, any substance or material defined in 42 U.S.C. Section 9601 (as the same may be amended from time to time), the Hazardous Materials Transportation Act (as amended from to time), and the New York Environmental Conservation Law or the Resource Conservation And Recovery Act (as each may be amended from time to time) and in any regulations adopted or publications promulgated pursuant to any of the foregoing. 39 EVENTS OF DEFAULT. The whole of the principal sum of the indebtedness secured hereby and interest thereon, and all other sums due and payable hereunder shall become due, at the option of Mortgagee, if one or more of the following events (an "Event of Default") shall happen: (a) The occurrence of an "Event of Default" under the Note; or (b) If Mortgagor defaults in the payment of any tax, water rate or sewer rent or payment under any Pilot Agreement against the Mortgaged Property for thirty (30) days after the same become due and payable or fails to exhibit to Mortgagee, within thirty (30) days after demand, receipts showing payment of all taxes, water rates or sewer rents; or (c) The actual or threatened removal, demolition or structural alteration, in whole or in part, of any Improvement, without the prior written consent of Mortgagee; or the removal, demolition or destruction in whole or in part, of any Chattels without replacing the same with Chattels at least equal in quality and condition to those replaced, free from any security interest or other encumbrance thereon and free from any reservation of title thereto; or the commission of any waste in respect to the Mortgaged Property; or (d) Failure of Mortgagor to pay within thirty (30) days after notice and demand any installment of any assessment made against the Premises for local improvements, heretofore or hereafter made, which assessment is, or may become, a lien on the Premises prior to the lien of this Mortgage, notwithstanding the fact that such installment be not due and payable at the time of such notice and demand; or (e) Failure of Mortgagor to pay the said indebtedness secured by this Mortgage within (30) days after notice and demand, in the event of the passage after the date of this Mortgage of any federal, state or municipal law deducting from the value of land for the purpose of taxation any lien thereon, or changing in any way the laws now in force for the taxation of mortgages, or of debts secured by mortgages, or the manner of collection of any such taxes, so as to affect Mortgagee, this Mortgage or the indebtedness which is secured, notwithstanding that Mortgagor, before or after such notice, may have the option to pay or contest the payment of such tax; or (f) Failure of Mortgagor to maintain the Improvements on the Premises in a rentable or tenantable state of repair to the satisfaction of Mortgagee, for thirty (30) days after notice of such failure has been given to Mortgagor, or to comply with any order or requirement of any municipal, state, federal or other governmental authority having jurisdiction of the Premises within thirty (30) days after such order or requirement shall have been issued by any such authority; or failure of Mortgagor or of any tenant holding under Mortgagor, to comply with any and all and singular the statutes, requirements, orders or decrees of any federal, state or municipal authority relating to the use of the Mortgaged Property, or of any part thereof; or failure of Mortgagor to observe and timely perform all of the covenants, terms and provisions contained in any lease now or hereafter affecting the Premises or the Improvements or any portion thereof, on the part of the landlord to be observed and performed; or (g) Failure of Mortgagor, in the event of the entry of a final judgment for the payment of money against Mortgagor, to discharge such judgment or to have it stayed pending appeal within thirty (30) days from the entry thereof, or if such judgment shall be affirmed on appeal, the failure to discharge such judgment within thirty (30) days from the entry of such affirmance; or (h) Failure of Mortgagor to pay within thirty (30) days after notice and demand any filing or refiling fees required hereunder; or (i) Failure of Mortgagor or any occupant of the Mortgaged Property, to allow or permit Mortgagee, or its duly authorized agent, to inspect said Mortgaged Property at any time and from time to time during reasonable business hours; or (j) Default for thirty (30) days after notice and demand in the observance or performance of any other covenant or agreement under this Mortgage; or (k) Failure of Mortgagor to deliver executed lien waivers from all parties who supplied labor and materials for the improvements at the Mortgaged Property within one hundred twenty (120) days of the date hereof. 40 INTEREST TO ACCRUE. If the whole of the principal sum evidenced by the Note and interest, shall become due by exercise of the option of the Mortgagee after default by the Mortgagor under any of the terms, covenants and conditions of this Mortgage and/or the Note, or if the whole of said principal sum and interest shall mature and become due under the terms, covenants and conditions of this Mortgage and the Note regardless of default, if any, on the part of the Mortgagor, then interest on said principal sum shall continue to accrue at the rate provided for in the Note, and in this Mortgage, until said principal sum is fully paid. 41 FLOOD INSURANCE. In addition to the terms and provisions of this Mortgage with regard to insurance, in the event the Premises are determined to be in a special flood hazard area as determined by any governmental agency, Mortgagor further covenants and agrees to fully insure the Premises and Improvements against loss or damage by flood, with coverage as is therein provided for by fire and other specified perils to the same extent and effect as if such flood insurance was therein specifically set forth. 42 COSTS, EXPENSES AND ATTORNEY'S FEES. Should one or more Events of Default occur hereunder, and should an action be commenced for the foreclosure of this Mortgage, Mortgagee shall be entitled to recover all sums due hereunder, statutory costs, and any additional allowances made pursuant to Section 8303(a) of the Civil Practice Law and Rules of the State of New York, and in addition thereto, reasonable attorneys' fees in such proceeding and in all proceedings related thereto necessary to and related to the foreclosing proceeding, and such amount shall be added to the principal balance and interest then due and shall be a lien on the Mortgaged Property prior to any right or title to, interest in or claim upon the Mortgaged Property attaching and accruing subsequent to the lien of this Mortgage, and shall be deemed to be secured by this Mortgage and the indebtedness which it secures. 43 INTERVENING LIENS. Should any agreement be hereafter entered into modifying or changing the terms of this Mortgage or the Note secured hereby in any manner, the rights of the parties to such agreement shall be superior to the rights of the holder of any intervening lien. 44 TERMS. It is understood and agreed that the words, "Mortgagor" and "Mortgagee" herein shall include the respective heirs, successors and assigns of Mortgagor and Mortgagee. 45 ENTIRE AGREEMENT. This Mortgage and the other Loan Documents constitute the entire understanding between Mortgagor and Mortgagee as to the loan evidenced by the Note and to the extent that any writings not signed by Mortgagee or oral statements or conversations at any time made or had shall be inconsistent with the provisions of this Mortgage and the other Loan Documents, the same shall be null and void. 46 GOVERNING LAW; SEVERABILITY. This Mortgage shall be governed by the law of the jurisdiction in which the Mortgaged Property is located. In the event that any provision or clause of this Mortgage or the Note conflicts with applicable law, such conflict shall not affect other provisions of this Mortgage or the Note which can be given effect without the conflicting provision, and to this end, the provisions of this Mortgage and the Note are declared to be severable. 47 TIME OF THE ESSENCE. Time is of the essence with respect to each and every covenant, agreement and obligation of Mortgagor under this Mortgage, the Note and any and all other Loan Documents. 48 INDEMNIFICATION; SUBROGATION; WAIVER OF OFFSET. (a) Mortgagor shall indemnify, defend and hold Mortgagee harmless against: (i) any and all claims for brokerage, leasing, finders or similar fees which may be made relating to the Mortgaged Property or the loan which is the subject of the Note, and (ii) against any and all liability, obligations, losses, damages, penalties, claims, actions, suits, costs, and expenses (including its reasonable attorneys' fees, together with reasonable appellate counsel fees, if any) of whatever kind or nature which may be imposed on or incurred by Mortgagee at any time pursuant either to a judgment or decree or other order entered into by a court or administrative agency or to a settlement reasonably approved by Mortgagor, which judgment, decree, order or settlement relates in any way to or arises out of the offer, sale or lease of the Mortgaged Property and/or the ownership, use, occupation or operation of any portion of the Mortgaged Property. (b) If Mortgagee is made a party defendant to any litigation concerning the loan which is the subject of the Note, this Mortgage, the Mortgaged Property, or any part thereof, or any interest therein, or the occupancy thereof, then Mortgagor shall indemnify, defend and hold Mortgagee harmless from all liability by reason of said litigation, including reasonable attorneys' fees (together with reasonable appellate counsel fees, if any) and expenses incurred by Mortgagee in any such litigation, whether or not any such litigation is prosecuted to judgment. If Mortgagee commences an action against Mortgagor to enforce any of the terms hereof or to prosecute any breach by Mortgagor of any of the terms hereof or to recover any sum secured hereby, Mortgagor shall pay to Mortgagee such reasonable attorneys' fees (together with reasonable appellate counsel fees, if any) and expenses. The right to such attorneys fees (together with reasonable appellate counsel fees, if any) and expenses shall be deemed to have accrued on the commencement of such action, and shall be enforceable whether or not such action is prosecuted to judgment. If Mortgagor breaches any term of this Mortgage, Mortgagee may employ an attorney or attorneys to protect its rights hereunder, and in the event of such employment following any breach by Mortgagor, Mortgagor shall pay Mortgagee reasonable attorneys' fees (together with reasonable appellate counsel fees, if any) and expenses incurred by Mortgagee, whether or not an action is actually commenced against Mortgagor by reason of such breach. (c) A waiver of subrogation shall be obtained by Mortgagor from its property insurance carrier and, consequently, Mortgagor waives any and all right to claim or recover against Mortgagee, its officers, employees, agents and representatives, for loss of or damage to Mortgagor, the Mortgaged Property, Mortgagor's property or the property of others under Mortgagor's control from any cause insured against or required to be insured against by the provisions of this Mortgage. (d) All sums payable by Mortgagor hereunder shall be paid without notice (except as may otherwise be provided herein), demand, counterclaim, set-off, deduction or defense and without abatement, suspension, deferment, diminution or reduction, and the obligations and liabilities of Mortgagor hereunder shall in no way be released, discharged or otherwise affected by reason of: (i) any damage to or destruction of or any condemnation or similar taking of the Mortgaged Property or any part thereof; (ii) any restriction or prevention of or interference with any use of the Mortgaged Property or any part thereof; (iii) any title defect or encumbrance or any eviction from the Premises or the Improvements or any part thereof by title superior or otherwise; (iv) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation, or other like proceeding relating to Mortgagee, or any action taken with respect to this Mortgage by any trustee or receiver of Mortgagee, or by any court, in such proceeding; (v) any claim which Mortgagor has, or might have, against Mortgagee; (vi) any default or failure on the part of Mortgagee to perform or comply with any of the terms hereof or of any other agreement with Mortgagor; or (vii) any other occurrence whatsoever, whether similar or dissimilar to the foregoing, whether or not Mortgagor shall have notice or knowledge of any of the foregoing. Mortgagor waives all rights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution, or reduction of any sum secured hereby and payable by Mortgagor. 49 WAIVER OF JURY TRIAL. The Mortgagor and the Mortgagee hereby waive trial by jury in any litigation in any court with respect to, in connection with, or arising out of this Mortgage or any other Loan Document, or any instrument or document delivered in connection with the loan which is the subject of the Note, or the validity, protection, interpretation, collection or enforcement thereof, or the relationship between Mortgagor and Mortgagee as borrower and lender, or any other claim or dispute howsoever arising between the Mortgagor and Mortgagee. 50 TAX LAW SECTION 253 STATEMENT. Check one box only. ----------------------------- [ ] This Mortgage covers real property principally improved or to be improved by one or more structures containing in the aggregate not more than six residential dwelling units, each having their own separate cooking facilities. [ X ] This Mortgage does not cover real property improved as described above. Where used herein, the word, "Mortgagor" may be read "Mortgagors" where applicable. 51. PRIOR MORTGAGES. This mortgage is subordinate to the following mortgages: a) Mortgage made by Mortgagor to Mortgagee in the original principal amount of $2,512,000 dated January 29, 1998 and recorded February 11, 1998 in Liber 19299 Page 73 in the Suffolk County Clerk's Office. b) Mortgage made by Mortgagor to Mortgagee in the original principal amount of $388,000 dated January 29, 1998 and recorded February 11, 1998 in Liber 19299 Page 74 in the Suffolk County Clerk's Office. IN WITNESS WHEREOF, this Mortgage has been duly executed by Mortgagor. VICON INDUSTRIES, INC. By:___________________________ John Badke, Vice President-Finance STATE OF NEW YORK ) ) SS.: COUNTY OF SUFFOLK ) On the 12th day of October, 1999, before me, the undersigned, personally appeared JOHN BADKE, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person on behalf of which the individual acted, executed the instrument. NOTARY EX-10 11 INCENTIVE STOCK OPTION PLAN 1999 INCENTIVE STOCK OPTION PLAN of VICON INDUSTRIES, INC. 1. Purpose of the Plan This Incentive Stock Option Plan (hereinafter called the "Plan"), is intended to encourage ownership of stock of VICON INDUSTRIES, INC. (hereinafter called the "Company"), by officers and other employees of the Company, and its subsidiaries, and to provide additional incentive for them to promote the success of the business. 2. Stock Subject to the Plan Subject to the provisions of Paragraph "6", the total number of shares of stock which may be optioned under the Plan is 100,000 shares of Common Stock (par value of $.01 per share) of the Company, which shall be either authorized and unissued stock or reacquired stock. 3. Administration of the Plan The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee") who may, from time to time, amend and rescind rules and regulations for carrying out the provisions and purposes of the Plan. All awards of options by the Committee are subject to approval by the Board of Directors. the interpretation, construction and application of the Plan and any provision thereof made by the Committee shall be final and conclusive. No director shall be liable for any action taken or determination made in good faith. The Committee shall consist of at least three members of the Board of Directors. All of whom shall be non-employee directors. The members of the Committee shall be designated by two-thirds vote of the entire Board of Directors of the Company and shall serve for a term of one year and thereafter until their successors are designated. 4. Participants Participants will be selected by the Committee, in its sole discretion, from among the officers and other employees of the Company, and its subsidiaries, including subsidiaries which become such after adoption of the Plan, to accomplish the purposes of this Plan. 5. Award of Incentive Stock Options The Committee may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more stock options (intended to qualify as incentive stock options under the provisions of section 422 of the Internal Revenue Code of 1986, as amended (the "Code") to purchase for cash or shares the number of shares of Common Stock allotted by the Committee. The date an option is granted shall mean the dated selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. 6. Changes to Capital Structure In the event that the outstanding shares of common stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason or reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in capital stock, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable to the end that the optionee's proportionate interest shall be maintained as before the occurrence of such events; such adjustment in outstanding options shall be made without change in the total price applicable to the unexercised portion of the option and with a corresponding adjustment of the option price per share; provided, however, that each such adjustment in the number and kind of shares subject to outstanding options, including any adjustment in the option price, shall be made in such manner as not to constitute a "modification" as defined in Section 424 of the Code. Any such adjustment made by the Board of Directors shall be conclusive. 7. Terms and Conditions of Options The grant of an option shall be evidenced by a written Incentive Stock Option Agreement, executed by the Company and the holder of an option (the "optionee"), stating the number of shares of Common Stock subject to the option evidenced thereby, and in such form as the Committee may from time to time determine. a) Option Price - The option price per share of Common Stock deliverable upon the exercise of an option shall be 100% of the fair market value of a share of Common Stock on the date the option is granted; however, an optionee who is the record and beneficial owner of more than 10% of the Company's issued and outstanding common stock shall be awarded options at a price equivalent to 110% of the fair market value at the date of grant. b) Method of Exercise - Stock purchased under the options shall, at the time of purchase, be paid for in full. To the extent that the right to purchase shares has accrued thereunder, options may be exercised from time to time by written notice by the optionee to the Company stating the number of shares with respect to which the option is being exercised, and the time of the delivery thereof, which time shall be at least 15 days after the giving of such notice unless an earlier date shall have been mutually agreed upon. At the time specified in such notice, the Company shall deliver, without transfer or issue tax to the optionee (or other person entitled to exercise the option), at the main office of the Company, or such other places as shall be mutually acceptable, a certificate or certificates for such shares or reacquired shares of its Common Stock, as the Company may elect, against payment of the option price in full for the number of shares to be delivered by (i) certified check or the equivalent thereof acceptable to the Company; or (ii) the delivery to the Company of issued and outstanding Common Stock of Vicon Industries, Inc. which has been owned by the optionee for at least six month, the total fair market value of which on such delivery date is equal to the total exercise price of options being exercised; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any applicable listing requirements of any national securities exchange, if the stock is so listed. If the optionee (or other person entitled to exercise the option) fails to accept delivery of and pay for all or any part of the number of shares specified in such notice upon termination of delivery thereof, his right to exercise the option with respect to such undelivered shares may be terminated by the Option Committee of the Board of Directors without any formal notice to the optionee. Anything herein to the contrary notwithstanding, if any law or any regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require the Company or a participant to take any action in connection with the shares specified in a notice of election before such shares can be delivered to such participant, then the date stated therein for the delivery of the shares shall be postponed until the fifth business day next following the completion of such action. c) Option Term - No option will be exercisable prior to the date of shareholder approval of the plan, or any time after expiration of six years from the date the option is granted (the "Grant Date"). d) Maximum Amount of Incentive Stock Option Grant - The aggregate fair market value (determined on the date the option is granted) of Common Stock subject to an incentive stock option granted to an optionee (pursuant to any plan) by the Committee and exercisable for the first time in any calendar year shall not exceed $100,000. e) Exercise of Options - As to any option issued under the Plan: it may be exercised up to 30% of the total number of shares covered thereby after two years from the date of grant, it may be exercised up to an additional 30% of the total number of shares covered thereby after three years from date of grant; and the remaining 40% after four years from the date of grant, and thereafter, the option may be exercised at any time from time to time within its terms, in whole or in part, but it shall not be exercisable after the expiration of six years from the Grant Date. Notwithstanding the foregoing, all options granted under this Plan may be exercised in the entirety should a "Change in Control" occur. A "Change in 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 or merger or assignment of assets or otherwise, shall be persons other than Directors on the date this Plan became effective (April 22, 1999). f) Non-Assignability of Option Rights - No option shall be assignable or transferable by the optionee except by will or the by laws or descent and distribution. During the life of an optionee, the option shall be exercisable only the optionee. g) Effect of Termination of Employment or Death - In the event an optionee ceases to be an employee of the Company for any reason other than retirement or death, any exercisable portion of any option as of the date such optionee ceased to perform services to the Company must be exercised within three months after the date on which the optionee ceases to perform services. In the event of the retirement of an optionee, any option or unexercised portion thereof granted to him shall be exercisable within not more than three months from the date on which the optionee retires. In the event of the death of an optionee while such optionee is an employee of the Company, or any subsidiary of the Company, or within three months from the date of such optionee's retirement, the option or unexercised portion thereof granted to such optionee may be exercised by such optionee's personal representative, or a person who acquired the right to exercise such option by bequest or inheritance at any time prior to the expiration of one year from the date of death of the optionee. The foregoing provisions with respect to retirement or death of any optionee shall, in no event, be deemed to extend the date of expiration of the term provided in any option held by any such optionee. h) Restriction on Issuance of Shares - On the date stated in the notice of election for the payment and delivery of the shares specified in such notice, the participant shall certify to the Company in such form as it shall require that such participant will receive and hold such shares for investment and not with a view to resale or distribution thereof to the public, unless the issuance of such shares shall have been registered under the Securities Act of 1933, as amended, and the Rules and Regulations promulgated thereunder, or counsel to the Company shall have advised the Company that for any other reason such certification is unnecessary. i) Rights as a Stockholder - The optionee shall have no rights as a Stockholder with respect to any shares covered by such optionee's option until the date of issuance of a stock certificate to such optionee for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. j) Successive Options - Options may be exercised in any order. k) Termination of Options Upon Consent - The Option Committee may terminate any outstanding option with the consent of the holder thereof. 8. Effective Date and Term of Plan a) The Plan, which was adopted by the Board of Directors on December 10, 1998, is subject to the condition that the Stockholders approve the Plan prior to July 1, 1999. The Plan shall become effective upon adoption by the Company's Board of Directors. b) The Plan shall terminate on December 9, 2008, provided, however, that the Plan and all awards made under the Plan prior to such date shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. 9. Definitions In this Plan the following definitions shall apply: a) "subsidiary" means any corporation or which, at any applicable time, more than 50% of the shares entitled to vote generally in an election of directors are owned directly or indirectly by Vicon Industries, Inc., or any subsidiary thereof. c) "fair market value" as of any date and in respect of any share of Common Stock means the closing price on such date or on the next business day, if such date is not a business day, of a share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (presently the AMEX-Composite Transactions) or any other publication selected by the Committee, provided that, if shares of Common Stock shall not have been traded on the American Stock Exchange for more than 10 days immediately preceding such date or if deemed appropriate by the Committee for any other reason, the fair market value of shares of Common Stock shall be as determined by the Committee in such other manner as it may deem appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. 10. Amendment of Plan The Board of Directors may at any time amend the Plan, provided that without approval of Stockholders there shall be, except by operation of the provisions of paragraph "6" above, no increase in the total number of shares covered by the Plan; there shall be no change in the class of persons eligible to receive options granted under the Plan; there shall be no change in the limitations on the option price; and there shall be no extension of the latest date upon which options may be exercised. Neither the Board of Directors nor the Stockholders by amendment to this Plan can affect options granted and outstanding under any prior stock option plan of the Company or its subsidiaries. 11. Use of Proceeds The proceeds from the sale of stock pursuant to options granted under the Plan shall constitute general funds of the Company. 12. Governing Law Options granted under this Plan shall be construed and shall take effect in accordance with the laws of the State of New York. 13. Liquidation Upon the complete liquidation of the Company, any unexercised options heretofore granted under this Plan shall be deemed canceled. In the event of the complete liquidation of any employer corporation (other than the Company) employing the participant or in event such corporation ceases to be an employer corporation, any unexercised part of any option granted hereunder shall be deemed canceled unless the participant shall become employed by another employer corporation (including the Company) concurrently with such event. EX-10 12 NON-QUALIFIED STOCK OPTION PLAN 1999 NON-QUALIFIED STOCK OPTION PLAN of VICON INDUSTRIES, INC. 1. Purpose of the Plan The Non-Qualified Stock Option Plan (hereinafter called the "Plan"), is intended to encourage ownership of stock of VICON INDUSTRIES, INC. (hereinafter called the "Company"), by directors, officers and other key employees of the Company, and its subsidiaries, and to provide additional incentive for them to promote the success of the business. 2. Stock Subject to the Plan Subject to the provisions of Paragraph "6", the total number of shares of stock which may be optioned under the Plan is 100,000 shares of Common Stock (par value of $.01 per share) of the Company, which shall be either authorized and unissued stock or reacquired stock. 3. Administration of the Plan The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee") who may, from time to time, with the approval of the Board of Directors, amend and rescind rules and regulations for carrying out the provisions and purposes of the Plan. The interpretation, construction and application of the Plan and any provision thereof made by the Board shall be final and conclusive. No director shall be liable for any action taken or determination made in good faith. The Committee shall consist of at least three members of the Board of Directors, all of whom shall be non-employee directors. The members of the Committee shall be designated by two-thirds vote of the entire Board of Directors of the Company and shall serve for a term of one year and thereafter until their successors are designated. 4. Participants Participants will be recommended by the Committee, in its sole discretion, from among the directors, officers and other key employees of the Company to accomplish the purposes of this Plan. 5. Award of Non-Qualified Stock Options The Committee may, in its discretion, recommend options to be granted under this Plan from time to time, prior to the expiration date of the Plan. A majority of the Board of Directors shall be required to approve the grant of any options under this Plan. The shares related to the unexercised portions of any terminated or expired options shall be deemed not to have been optioned shares for the purposes of Paragraph "2" and may again be subjected to option grant under the Plan. 6. Changes to Capital Structure In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason or reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in capital stock, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for the purchase of which options shall be granted under the Plan. In addition, the Board of Directors shall make appropriate adjustment in the number and kind of shares as to which outstanding options, or portions thereof then unexercised, shall be exercisable to the end that the optionee's proportionate interest shall be maintained as before the occurrence of such events; such adjustment in outstanding options shall be made without change in the total price applicable to the unexercised portion of the option and with a corresponding adjustment of the option price per share; provided, however, that each such adjustment in the number and kind of shares subject to outstanding options, including any adjustment in the option price, shall be made in such manner as not to constitute a "modification" as defined in Section 424 of the Internal Revenue Code of 1986, as amended. Any such adjustment made by the Board of Directors shall be conclusive. 7. Terms and Conditions of Options Options shall be evidenced by written Stock-Option Agreements in such form not inconsistent with the Plan as the Committee shall from time to time determine, provided that the substance of the following be included therein: a) Option Price - The option price shall not be less than 100% of the fair market value on the date the option is granted, which shall be the date on which the Board of Directors approved the award of any Option. An optionee, however, who is the record and beneficial owner of more than 10% of the Company's common stock shall be awarded options at a price equivalent to 110% of the fair market value at the date of grant. b) Method of Exercise - Stock purchased under the options shall, at the time of purchase, be paid for in full. To the extent that the right to purchase shares has accrued thereunder, options may be exercised from time to time by written notice by the optionee to the Company stating the number of shares with respect to which the option is being exercised, and the time of the delivery thereof, which time shall be at least 15 days after the giving of such notice unless an earlier date shall have been mutually agreed upon. At the time specified in such notice, the Company shall deliver, without transfer or issue tax to the optionee (or other person entitled to exercise the option), at the main office of the Company, or such other places as shall be mutually acceptable, a certificate or certificates for such shares or reacquired shares of its Common Stock, as the Company may elect, against payment of the option price in full for the number of shares to be delivered by (i) certified check or the equivalent thereof acceptable to the Company; or (ii) the delivery to the Company of issued and outstanding Common Stock of Vicon Industries, Inc. which has been owned by the optionee for at least six months, the total fair market value of which on such delivery date is equal to the total exercise price of options being exercised; provided, however, that the time of such delivery may be postponed by the Company for such period as may be required for it with reasonable diligence to comply with any applicable listing requirements of any national securities exchange, if the stock is so listed. If the optionee (or other person entitled to exercise the option) fails to accept delivery of and pay for all or any part of the number of shares specified in such notice upon tender of delivery thereof, his/her right to exercise the option with respect to such undelivered shares may be terminated by the Committee without any formal notice to the optionee. Anything herein to the contrary notwithstanding, if any law or any regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require the Company or a participant to take any action in connection with the shares specified in a notice of election before such shares can be delivered to such participant, then the date stated therein for the delivery of the shares shall be postponed until the fifth business day next following the completion of such action. c) Option Term - No option will be exercisable after expiration of six years from the date the option is granted or the date of shareholder approval of the Plan, whichever date is later (the "Grant Date"). d) Exercise of Options - As to any option issued under the Plan to non-employee directors, at all times after the first anniversary of the Grant Date, the option may be exercised at any time from time to time within its terms, in whole or in part but it shall not be exercisable after the expiration of six years from the Grant Date. As to any option issued under the Plan to officers and other key employees, it may be exercised up to 30% of the total number of shares covered thereby after two years from the date of grant, it may be exercised up to an additional 30% of the total number of shares covered thereby after three years from date of grant; and the remaining 40% after four years from the date of grant, and thereafter, the option may be exercised at any time from time to time within its terms, in whole or in part, but it shall not be exercisable after the expiration of six years from the Grant Date. Notwithstanding the foregoing, all options granted under this Plan may be exercised in their entirety should a "Change in Control" occur. A "Change in Control" shall be deemed to have occurred if 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. e) Non-Assignability of Option Rights - No option shall be assignable or transferable by the optionee except by will or by the laws of descent and distribution. During the life of an optionee, the option shall be exercisable only the optionee. f) Effect of Termination of Employment or Death - In the event an optionee ceases to be a director or an employee of the Company for any reason other than retirement, disability or death, any unexercisable portion of any option granted to such optionee as of the date such optionee ceases to perform services to the Company must be exercised within three months after the date on which the optionee ceases to perform services. In the event of the retirement or disability of an optionee, any option or unexercised portion thereof granted to him shall be exercisable within not more than three months from the date on which the optionee retires or ceases to provide services to the Company. In the event of the death of an optionee while such optionee is a director or employee of the Company or within three months from the date of such optionee's retirement, the option or unexercised portion thereof granted to such optionee may be exercised by such optionee's personal representative, or a person who acquired the right to exercise such option by bequest or inheritance at any time prior to the expiration of one year from the date of death of the optionee. The foregoing provisions with respect to retirement, disability, or death of any optionee shall, in no event, be deemed to extend the date of expiration of the term provided in any option held by any such optionee. g) Restriction on Issuance of Shares - On the date stated in the notice of election for the payment and delivery of the shares specified in such notice, the participant shall certify to the Company in such form as it shall require that such participant will receive and hold such shares for investment and not with a view to resale or distribution thereof to the public, unless the issuance of such shares shall have been registered under the Securities Act of 1933, as amended, and the Rules and Regulations promulgated thereunder, or counsel to the Company shall have advised the Company that for any other reason such certification is unnecessary. h) Rights as a Stockholder - The optionee shall have no rights as a Stockholder with respect to any shares covered by such optionee's option until the date of issuance of a stock certificate to such optionee for such shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. i) Successive Options - Options may be exercised in any order. j) Termination of Options Upon Consent - The Option Committee may terminate any outstanding option with the consent of the holder thereof. 8. Effective Date and Term of Plan The Plan, which was adopted by the Board of Directors on December 10, 1998, is subject to the condition that the Stockholders approve the Plan prior to July 1, 1999. The Plan shall become effective upon adoption by the Company's Board of Directors. The Plan shall terminate on December 9, 2008. The Board of Directors may terminate this Plan at any time. Termination of the Plan will not affect the rights and obligations. Theretofore granted, and then in effect, if the Stockholders shall have approved the Plan prior to termination. 9. Definitions In this plan the following definitions shall apply: a) "Subsidiary" means any corporation or which, at any applicable time, more than 50% of the shares entitled to vote generally in an election of directors are owned directly or indirectly by Vicon Industries, Inc., or any subsidiary thereof. b) "Fair Market Value" as of any date and in respect of any share of Common Stock means the closing price on such date or on the next business day, if such date is not a business day, of a share of Common Stock reflected in the consolidated trading tables of The Wall Street Journal (Presently the AMEX-Composite Transactions) or any other publication selected by the Committee, provided that, if shares of Common Stock shall not have been traded on the American Stock Exchange for more than 10 days immediately preceding such date or if deemed appropriate. In no event shall the fair market value of any share of Common Stock be less than its par value. 10. Amendment of Plan The Board of Directors may at any time amend the Plan, provided that without approval of Stockholders there shall be, except by operation of the provisions of Paragraph "6" above, no increase in the total number of shares covered by the Plan; there shall be no change in the class of persons eligible to receive options granted under the Plan; there shall be no change in the limitations on the option price; and there shall be no extension of the latest date upon which options may be exercised. Neither the Board of Directors nor the Stockholders by amendment to this Plan can affect options granted before such amendment or any unexercised portion thereof. The adoption of this Plan shall not be deemed to affect the terms and conditions of any unexercised portion of options granted and outstanding under any prior stock option plan of the Company or its subsidiaries. 11. Use of Proceeds The proceeds from the sale of stock pursuant to option granted under the Plan shall constitute general funds of the Company. 12. Governing Law Options granted under this Plan shall be construed and shall take effect in accordance with the laws of the State of New York. 13. Liquidation Upon the complete liquidation of the Company, any unexercised options heretofore granted under this Plan shall be deemed canceled. In the event of the complete liquidation of any employer corporation (other than the Company) employing the participant or in event such corporation ceases to be an employer corporation, any unexercised part of any option granted hereunder shall be deemed canceled unless the participant shall become employed by another employer corporation (including the Company) concurrently with such event. EX-24 13 INDEPENDENT AUDITORS' CONSENT EXHIBIT 24 KPMG 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, 33-90038 and 333-30097) on Form S-8 and No. 333-46841 on Form S-2 of Vicon Industries, Inc. of our report dated November 30, 1999 relating to the consolidated balance sheets of Vicon Industries, Inc. and subsidiaries as of September 30, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and cash flows and related schedule for each of the years in the three-year period ended September 30, 1999, which report appears in the September 30, 1999 annual report on Form 10-K of Vicon Industries, Inc. KPMG LLP Melville, New York December 29, 1999 EX-27 14 FDS
5 3-MOS 12-MOS SEP-30-1999 SEP-30-1999 SEP-30-1999 SEP-30-1999 1,998,767 1,998,767 0 0 16,524,184 16,524,184 (818,266) (818,266) 21,328,543 21,328,543 39,033,228 39,033,228 17,352,728 17,352,728 (6,486,937) (6,486,937) 49,899,019 49,899,019 9,984,574 9,984,574 7,166,094 7,166,094 0 0 0 0 46,547 46,547 32,701,804 32,701,804 49,899,019 49,899,019 19,292,612 73,414,046 0 0 12,711,735 48,714,749 0 0 4,563,295 16,566,645 60,000 240,000 128,080 450,823 1,829,502 7,441,829 636,628 2,681,628 1,192,874 4,760,201 0 0 0 0 0 0 1,192,874 4,760,201 .26 1.05 .25 1.01
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