-----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, Sd2E2eUfOIDTpcdfKnlaSxoTg31jzVmjG5W8WtwEC2lTQH6Xz8lNvD3NWPJZbcyB zZUjUU1LSo8H9n/0grMtjA== 0001047469-98-007451.txt : 19980226 0001047469-98-007451.hdr.sgml : 19980226 ACCESSION NUMBER: 0001047469-98-007451 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980225 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: VICON INDUSTRIES INC /NY/ CENTRAL INDEX KEY: 0000310056 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112160665 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-2 SEC ACT: SEC FILE NUMBER: 333-46841 FILM NUMBER: 98548577 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 S-2 1 S-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 25, 1998 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- VICON INDUSTRIES, INC. (Exact name of registrant as specified in its charter) NEW YORK 11-2160665 (State of Incorporation) (I.R.S. Employer Identification No.)
89 ARKAY DRIVE HAUPPAUGE, N.Y. 11788 (516) 952-2288 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) KENNETH M. DARBY PRESIDENT VICON INDUSTRIES, INC. 89 ARKAY DRIVE HAUPPAUGE, N.Y. 11788 (516) 952-2288 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ WITH COPIES TO: MICHAEL E. SCHOEMAN THEODORE LAPIER Schoeman, Marsh & Updike, LLP Whitman Breed Abbott & Morgan LLP 60 East 42nd Street, 39th Floor 200 Park Avenue New York, N.Y. 10165 New York, N.Y. 10166 (212) 661-5030 (212) 351-3000
------------------------ Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. ------------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED REGISTERED SHARE (1) PRICE (1) REGISTRATION FEE Common Stock, par value $.01 per share (2)........ 1,811,250 Shares $12.6875 $22,980,234 $6,779.17 Underwriters' Warrants to purchase Common Stock (4)............................................... 157,500 Warrants $.0001 $15.75 (3) Common Stock issuable upon exercise of Underwriters' Warrants............................ 157,500 Shares $15.225 $2,397,938 $707.39 Total Registration Fee $7,486.56
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the "Securities Act"). (2) Includes up to 236,250 shares of Common Stock issuable pursuant to the Underwriters' over-allotment option. See "Underwriting." (3) No registration fee required pursuant to Rule 457(g) of the Securities Act. (4) Pursuant to Rule 416 of the Securities Act, there are also being issued such additional indeterminate number of shares of Common Stock as may become issuable pursuant to the anti-dilution provisions of the Underwriters' Warrants. ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VICON INDUSTRIES, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM NO. FORM S-2 CAPTION CAPTION OR LOCATION IN PROSPECTUS ----- ---------------------------------------------------- ---------------------------------------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus............................ Forepart of Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......................................... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges........................... Summary; Risk Factors 4. Use of Proceeds..................................... Use of Proceeds 5. Determination of Offering Price..................... Not Applicable 6. Dilution............................................ Not Applicable 7. Selling Security Holders............................ Principal and Selling Shareholders 8. Plan of Distribution................................ Underwriting 9. Description of Securities to Be Registered.......... Outside Front Cover Page; Price Range of Common Stock and Dividends; Description of Capital Stock 10. Interests of Named Experts and Counsel.............. Legal Matters 11. Information With Respect to the Registrant.......... The Company; Price Range of Common Stock and Dividends; Selected Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Consolidated Financial Statements 12. Incorporation of Certain Information by Reference... Information Incorporated by Reference 13. Disclosure of Commission Position on Indemnification for Securities Act Liabilities...................... Description of Capital Stock--Indemnification
SUBJECT TO COMPLETION, DATED FEBRUARY 25, 1998 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. {LOGO} 1,575,000 SHARES COMMON STOCK Of the 1,575,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), of Vicon Industries, Inc. (the "Company") offered hereby (the "Offering"), 1,250,000 shares are being issued and sold by the Company and 325,000 are being sold by certain selling stockholders (the "Selling Shareholders"). The Company will not receive any proceeds from the sale of shares by the Selling Shareholders. See "Principal and Selling Shareholders." The Company's Common Stock is quoted on the American Stock Exchange ("AMEX") under the symbol "VII." The last reported sales price for the Common Stock on AMEX on February 23, 1998 was $12.875 per share. See "Price Range of Common Stock and Dividends." ------------------------ THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS (2) Per Share........................................ Total (3)........................................
(1) Does not include additional compensation paid or payable to the Underwriters. See "Underwriting" for information concerning compensation paid and payable to the Underwriters, indemnification of the Underwriters and other matters. (2) Before deducting expenses payable by the Company and the Selling Shareholders estimated at $ , including the Underwriters' non-accountable expense allowance of $100,000. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 236,250 additional shares of Common Stock, solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be , and , respectively. See "Principal and Selling Shareholders" and "Underwriting." ------------------------ The shares of Common Stock are offered by the Underwriters named herein, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify the Offering and to reject any orders in whole or in part. It is expected that delivery of certificates representing the shares of Common Stock will be made against payment therefor on or about , 1998 at the offices of Fahnestock & Co. Inc. in New York, N.Y. FAHNESTOCK & CO. INC. SOUTHEAST RESEARCH PARTNERS, INC. THE DATE OF THIS PROSPECTUS IS , 1998. {VARIOUS PHOTOGRAPHS OF VICON PRODUCTS.} {LOGO} CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF COMMON STOCK, INCLUDING THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." VICON-Registered Trademark-, MATRIX 66-Registered Trademark-, NOVA-TM-, SURVEYOR-TM-, PROTECH-Registered Trademark-, VISTAR-TM-, VICOAX-Registered Trademark-, AURORA-TM- and DIGITEK-TM- ARE TRADEMARKS OF VICON INDUSTRIES, INC. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at its regional offices located at Seven World Trade Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of such material may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a web site (http: //www.sec.gov) that contains reports, proxy, and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. The Company's Common Stock is listed on the American Stock Exchange under the symbol "VII" and investors may contact the American Stock Exchange at (212) 306-1000 to arrange to examine similar information at its offices at 86 Trinity Place, New York, N.Y. 10006-1881. The Company has filed with the Commission a registration statement on Form S-2 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, does not contain all of the information contained in the Registration Statement. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement. Statements contained herein concerning the provisions of any contract or other document filed as an exhibit to the Registration Statement or otherwise filed with the Commission are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document as so filed. Each such statement is qualified in its entirety by such reference. No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained or incorporated by reference in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, any Selling Shareholders or any Underwriter. This Prospectus does not constitute an offer to sell or solicitation of an offer to buy any of the securities offered hereby in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. Neither the delivery of this Prospectus nor any offer, solicitation or sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company since the dates as of which information is furnished or the date hereof. INFORMATION INCORPORATED BY REFERENCE The following documents have been filed by the Company with the Commission and are hereby incorporated by reference into this Prospectus: (1) Annual Report on Form 10-K for the fiscal year ended September 30, 1997; (2) Quarterly Report on Form 10-Q for the quarter ended December 31, 1997; and (3) Proxy Statement dated March 2, 1998. All other documents and reports filed pursuant to Sections 13(a) or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of this Offering shall be deemed to be incorporated by reference in this Prospectus and to be made a part hereof from the date of the filing of such reports and documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner of Common Stock, to whom this Prospectus is delivered, upon the written or oral request of such person, a copy of any or all documents incorporated herein by reference (not including the exhibits to such documents, unless such exhibits are specifically incorporated by reference in the document which this Prospectus incorporates). Requests for such documents should be directed to Vicon Industries, Inc., 89 Arkay Drive, Hauppauge, N.Y. 11788 Attention: Corporate Secretary. The Company's executive office telephone number is (516) 952-2288. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS ABOUT THE COMPANY'S PROSPECTS AND STRATEGIES AND ITS EXPECTATIONS ABOUT EXPANSION INTO NEW MARKETS, GROWTH IN EXISTING MARKETS, ENHANCED OPERATING MARGINS OR GROWTH IN ITS BUSINESS, ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS OTHERWISE STATED, REFERENCES IN THIS PROSPECTUS TO THE YEARS 1997, 1996, 1995, 1994 AND 1993 REFER TO THE FISCAL YEARS ENDED SEPTEMBER 30, 1997, 1996, 1995, 1994 AND 1993, RESPECTIVELY, AND REFERENCES TO THE FIRST QUARTER OF 1998 AND THE FIRST QUARTER OF 1997 RELATE TO THE THREE-MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996, RESPECTIVELY. THE COMPANY The Company designs, manufactures, assembles and markets a wide range of closed circuit television ("CCTV") systems and system components used for security, surveillance, safety and control purposes by a broad group of end users. A CCTV system is a private video system that transmits and receives video, audio and data signals in accordance with the operational needs of the user. The Company's primary focus is the design and sale of software-based engineered CCTV systems and components that it sells worldwide primarily to installing dealers, system integrators, government entities and distributors. The Company's products are typically utilized for visual crime deterrence, for visual documentation, for observation of inaccessible or hazardous areas, to enhance safety, to obtain cost savings (such as lower insurance premiums), to manage control systems and to improve 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, casino gaming facilities, health care facilities and financial institutions. The Company's products have been used at various high profile locations worldwide, including: O'Hare International Airport; Foxwoods Resort & Casino, Connecticut; Henry Ford Hospital, Detroit; Fort Bragg, North Carolina; City of Sao Paulo Traffic Control; and Xiamen International Airport, China. In 1993, the Company commenced a strategic redirection of its business by shifting its product focus from hardware-oriented CCTV components to software-based CCTV systems solutions, some of which incorporate digital technology. As part of the strategic redirection, the Company also developed project design and management capabilities, upgraded its sales organization, built a customer service and technical support group, increased operating efficiency and reduced product costs by changing suppliers. As a result, the Company's financial performance has improved. Gross profit margins have increased from 20.2% in 1993 to 31.1% in the first quarter of 1998. Net sales grew 19.3% in 1997 to $51.5 million, while net income increased to $1.6 million from $300,000 in 1996. For the first quarter of 1998, net sales rose 31.7% to $14.9 million. According to statistics compiled and published by the Security Industry Association (the "SIA"), in its 1997 SECURITY INDUSTRY MARKET OVERVIEW, the wholesale CCTV equipment market in the U.S. was estimated to be $840 million in 1997. Based in part upon published data for Europe, the Company believes the worldwide market was approximately $1.7 billion in 1997. The Company believes that demand for CCTV products is influenced by (i) the acceptance of CCTV for crime deterrence; (ii) the perceived need for increased safety in response to publicized acts of crime; (iii) the use of CCTV as a cost effective alternative to security personnel; (iv) lower prices due to technological advancements and competition which increase affordability; and (v) the movement towards the integration of security systems. 2 In the U.S., the Company's products are sold to installing dealers and integrators of various types of security systems and internationally to independent distributors and major installation companies. Domestic sales are made by in-house field sales engineers and several independent manufacturer's representatives. This effort is supported by an in-house customer and technical services group. The Company sells internationally by direct export and through Vicon Industries (U.K.), Ltd. ("Vicon U.K."), its European sales subsidiary. The Company's principal sales offices are located in Long Island, Atlanta and Segensworth, England. The Company's objective is to be a leading provider of high-end engineered CCTV systems worldwide. The key elements of its growth strategy are as follows: FOCUS ON NEW PRODUCT DEVELOPMENT AND ENHANCEMENTS. The Company intends to focus on research and development of new products. As a result of its research and development efforts, in the last two years, the Company has introduced, among other products, the AURORA digital video multiplexer and the SURVEYOR line of domed camera systems. See "Business--Products." In addition, the Company intends to continue to emphasize the improvement of the technological capabilities of its existing products and the development of new products which incorporate digital technology. EXPAND DOMESTIC MARKETING EFFORTS. The Company intends to increase its domestic marketing efforts by (i) expanding its domestic sales organization, (ii) increasing promotional activities to further develop brand name identity with dealers and end users and (iii) emphasizing in-house dealer training. In addition, the award of an exclusive one-year renewable contract with the U.S. Postal Service in July 1997 is anticipated to increase the Company's exposure to additional dealers. INCREASE INTERNATIONAL MARKET PENETRATION. The Company intends to expand the market for its existing and new products by increasing its penetration of international markets. The Company believes China and Europe present opportunities for growth. The Company's international sales were $18.7 million, or 36%, of net sales, in 1997, and $5.9 million, or 39% of net sales, in the first quarter of 1998. The Company believes that by opening additional independent or Company-operated sales offices and increasing its distribution channels outside the U.S., its ability to penetrate these markets would be enhanced. The Company helped to establish an independent sales company in China in July 1997 to further its marketing initiatives in Asia, and in February 1998 it acquired a 30% ownership interest in such company. ENHANCE CUSTOMER AND TECHNICAL SUPPORT SERVICES. The Company believes its commitment to service and technical support of CCTV systems enables it to build strong relationships with dealers and end users. The Company offers training on its proprietary systems, technical classes, installation assistance, field support and project design and management capabilities to installing dealers. PURSUE STRATEGIC INITIATIVES. The Company intends to selectively pursue strategic alliances and investment opportunities as they arise. Such alliances may include the opening of independent or Company-operated sales offices or other similar arrangements with third parties to broaden the Company's sales presence on a worldwide basis. The Company's principal executive offices are located at 89 Arkay Drive, Hauppauge, N.Y. 11788, and its telephone number is (516) 952-2288. 3 THE OFFERING Common Stock offered by the Company....................... 1,250,000 shares Common Stock offered by the Selling Shareholders.......... 325,000 shares Common Stock to be outstanding after this Offering (1)....... 4,315,058 shares Use of Proceeds................. Payment of bank indebtedness, payment of interest-bearing accounts payable and term loan to related party, and for other general corporate purposes, including working capital. Risk Factors.................... This Offering involves a high degree of risk. Prospective investors should review and consider the information set forth under "Risk Factors." AMEX Symbol..................... VII
- ------------------------ (1) Does not include (i) 388,832 shares of Common Stock reserved for issuance upon exercise of options granted or which may be granted under the Company's 1986 Incentive Stock Option Plan, 1994 Incentive Stock Option Plan, 1994 Non-Qualified Stock Option Plan for Outside Directors, 1996 Incentive Stock Option Plan and 1996 Non-Qualified Stock Option Plan for Outside Directors (collectively, the "Stock Option Plans"); (ii) 45,952 shares of Common Stock held in treasury and deliverable as deferred compensation to Kenneth M. Darby, the Company's President and Chief Executive Officer, upon his retirement or earlier under certain conditions; and (iii) 157,500 shares of Common Stock reserved for issuance upon exercise of the Underwriters' Warrants. See "Management" and "Underwriting." 4 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED THREE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, ----------------------------------------------------- ---------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- ----------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales............................ $ 45,923 $ 47,714 $ 43,847 $ 43,191 $ 51,519 $ 11,298 $ 14,874 Gross profit......................... 9,274 10,714 9,546 10,957 14,475 3,181 4,629 Operating expenses................... 10,315 9,901 9,800 9,732 11,725 2,721 3,216 Operating income (loss).............. (1,041) 813 (254) 1,226 2,750 460 1,413 Interest expense..................... 555 784 1,013 882 1,144 264 339 Income (loss) before income taxes.... (1,858) 74 (1,267) 385 1,647 229 1,074 Net income (loss).................... $ (1,875) $ 45 $ (1,347) $ 300 $ 1,565 $ 215 $ 1,009 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Earnings (loss) per share (1) Basic.............................. $ (.68) $ .02 $ (.49) $ .11 $ .56 $ .08 $ .34 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Diluted............................ $ (.68) $ .02 $ (.49) $ .11 $ .52 $ .08 $ .31 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Shares used to compute earnings (loss) per share (1) Basic.............................. 2,763 2,763 2,763 2,765 2,804 2,777 3,001 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Diluted............................ 2,763 2,763 2,763 2,841 3,022 2,870 3,293 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- -----------
AT DECEMBER 31, 1997 ---------------------------- AS ADJUSTED BALANCE SHEET DATA: ACTUAL (2)(3) --------- ----------------- Cash................................................................................ $ 225 $ Working capital..................................................................... 15,284 Total assets........................................................................ 31,279 Interest-bearing accounts payable to related party.................................. 6,401 Long-term debt...................................................................... 7,216 Shareholders' equity................................................................ 11,931
- ------------------------ (1) Pursuant to new FASB standard No. 128. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--New Accounting Standard." (2) Adjusted to reflect the sale of 1,250,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $ and the application of the net proceeds therefrom in the manner described under "Use of Proceeds." (3) Reflects agreement in principle with a related party, that upon closing of this Offering and the Company's repayment of $3.7 million ($1.9 million of interest-bearing accounts payable and $1.8 million outstanding under a term loan), the balance of approximately remaining $4.5 million of interest-bearing accounts payable to the related party will be converted into a new five-year term loan. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 5 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements as a result of any number of factors discussed elsewhere in this Prospectus, including, without limitation, under the captions "Prospectus Summary;" "Risk Factors;" "Use of Proceeds;" "Capitalization;" "Selected Financial Data;" "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." When used in this Prospectus, the words "anticipate," "expect," "estimate," "intend," "believe," "project," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, expected, estimated, intended, believed or projected. Among the key factors that may have a direct bearing on the Company's business, financial condition and results of operations are the effects of risks associated with loss of a significant customer, product design and development, possible future strategic investments or alliances, foreign currency risks, dependence on manufacturers and suppliers, the lack of assurance of continued profitability and history of losses, limited public float for the Common Stock, the volatility of the trading market for the Common Stock and general economic conditions, risks associated with international sales and risks associated with the occurrence of the year 2000. The Company assumes no obligation to update its forward-looking statements or to advise of changes in the assumptions and factors on which they are based. Given these uncertainties, prospective purchasers are cautioned not to place undue reliance on such forward-looking statements. RISK FACTORS THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING ANY SHARES OF COMMON STOCK. THE DESCRIPTION OF THESE RISK FACTORS IS BASED ON MANAGEMENT'S CURRENT EXPECTATIONS. THESE RISK FACTORS ARE SUBJECT TO A NUMBER OF UNCERTAINTIES WHICH COULD CAUSE THE COMPANY'S ACTUAL PERFORMANCE AND OTHER MATTERS TO DIFFER SIGNIFICANTLY. NO ASSURANCE OF CONTINUED PROFITABILITY; HISTORY OF LOSSES; SUBSTANTIAL INDEBTEDNESS The Company had net income of approximately $300,000 and $1.6 million for 1996 and 1997, respectively, and net income of $1.0 million for the first quarter of 1998. However, for all years between 1989 and 1995 (other than 1994) the Company experienced net losses. In addition, cash flow from operations was negative in 1996 and 1997 primarily due to an increase in inventory and accounts receivable. Thus, although the Company has reported net income for the past two years and the most recent quarter, there can be no assurance that this trend will continue. Future annual and quarterly operating results and net income may fluctuate significantly as a result of a variety of factors, including, but not limited to, the loss of any significant customer, including the U.S. Postal Service; changes in the demand for the Company's products due to competition or other factors, including foreign or domestic economic recession; the timing of product development; the nature, size, timing and shipment of individual product or supply orders; fluctuations in foreign currency exchange rates; the general mix of products sold; worldwide economic conditions; higher effective tax rates due to the use of all available net operating loss carryforwards; costs related to the expansion of the Company's operations; unanticipated litigation and other costs associated with defending its proprietary rights and other rights; and changes in government regulations. Each of the foregoing factors, among others, could have an adverse effect on the Company's profitability. In addition, the Company has substantial indebtedness, which may impair the ability of the Company to obtain additional financing in the future; require a substantial portion of operating cash flow to be dedicated to the repayment of debt, thereby reducing funds available to the Company for other purposes; limit the Company's flexibility in planning for or reacting to changes in general economic conditions; and make the Company vulnerable in the event of a downturn in its business. 6 The ability of the Company to meet its debt service obligations will depend on the future operating performance and financial results of the Company, which, in turn, will be affected by prevailing economic conditions and financial, competitive and similar factors. The Company's loan agreements contain covenants, that among other things, require the Company to maintain certain levels of net worth, earnings and debt service coverage and certain ratios of interest coverage and debt-to-net worth. In addition, substantially all of the Company's assets are pledged to secure its indebtedness under its loan agreements. Although the Company believes that, based upon current levels of operations, its cash flow from operations, together with external sources of capital, will be adequate to make required payments on its debt, finance anticipated capital expenditures and fund working capital, there can be no assurance in this regard. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." In addition, the Company is presently negotiating with its bank lender to amend its existing credit agreement to, among other things, increase the borrowing limit, reduce the interest rate and extend the term. However, there can be no assurance as to the definitive terms of any such amended agreement. See "Use of Proceeds." RISKS ASSOCIATED WITH PRODUCT DESIGN AND DEVELOPMENT The Company's business strategy emphasizes the development of new engineered CCTV systems and related components and the enhancement of existing products. Further, the market for engineered CCTV systems is characterized by changing technology, such as the movement to digital technologies for the storage and retrieval of video data. There can be no assurance that the Company will be able to keep pace with such technological developments or develop new CCTV systems or products. In addition, the CCTV marketplace experiences frequent new product introductions and changing customer requirements. For the Company to meet these changing conditions, significant planning, design, development and testing is required throughout each level of product design and development. Such activity requires substantial resources in terms of capital and qualified personnel. There can be no assurance that the Company will have such resources at its disposal. Furthermore, any significant delays in product development or introduction, or any failure by the Company to anticipate or to respond quickly to changing customer requirements, could cause potential customers to delay or decide against the purchase of the Company's systems or products and could render its existing products uncompetitive. There can be no assurance that the Company's products will remain competitive and will not become obsolete. DEPENDENCE ON MANUFACTURERS AND SUPPLIERS 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 1997, approximately 22% of the Company's purchases of components and finished products were from Chun Shin Electronics, Inc. ("CSE"). CSE is a South Korean joint venture equally owned by the Company and Chun Shin Industries, Inc. ("CSI"), an entity controlled by Mr. Chu S. Chun, who is a substantial shareholder of the Company and a director nominee. Additionally, in 1997, the Company purchased approximately 23% of its components and finished products from Chugai Boyeki Company, Ltd. (such company, together with its affiliates and associates, are referred to herein as "CBC"), a supplier and sourcing agent for the Company. CBC is also a substantial shareholder of the Company. See "Certain Transactions" and "Principal and Selling Shareholders." The Company's relationships with outside manufacturers, assemblers and suppliers are not covered by formal contractual agreements. The loss of CSE, CBC or any other significant manufacturer, assembler or supplier for any reason, or the extent to which such entities encounter difficulties that delay shipment to the Company or that affect the quality of items supplied to the Company, would impair the Company's ability to meet its obligations to customers and would have a material adverse effect on the Company's business. While the Company believes that alternate manufacturers, assemblers and suppliers exist, there can be no assurance that adequate arrangements could be found in a timely manner or on comparable terms or with the level of support currently provided to the Company by its existing manufacturers, assemblers and suppliers. See "Business--Manufacturing and Purchasing." 7 RISKS ASSOCIATED WITH INVENTORY MANAGEMENT The Company maintains inventory at levels which are based upon factors such as its historical sales rates, backlog and anticipated future sales. Generally, the Company places orders with manufacturers, assemblers and suppliers based in part on management's estimates of future orders from its customers. Such estimates may deviate substantially from actual orders. In the event that subsequent orders fall short of original estimates, the Company would likely be left with excess inventory. Significant excess inventory could result in price discounts, increased inventory carrying costs and inventory write-downs. On the other hand, if the Company fails to have an adequate supply of products manufactured or assembled on a timely basis, the Company may, as a result, lose sales opportunities. See "--Dependence on Manufacturers and Suppliers." Despite the Company's efforts to adjust its production schedule based on anticipated customer demand, there can be no assurance that the Company will maintain appropriate inventory levels. Further, due to ordinary course time delays between purchasing, production and shipping of product, the Company must make firm purchase commitments to manufacturers and assemblers four to nine months in advance of required delivery. Inability to maintain appropriate inventory levels due to incorrect estimates of future orders or time delays with respect to product delivery may have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Backlog" and "Business--Manufacturing and Purchasing." Additionally, the obsolescence of a significant amount of inventory due to changes in customer preferences or technological improvements could have a material adverse effect on the Company's operations. The Company experienced approximately a 2.4x inventory turnover rate in 1997, but there can be no assurance as to the rate of inventory turnover in the future. See "--Risks Associated with Product Design and Development" and "Business--Inventory." DEPENDENCE ON INDEPENDENT RESELLERS The Company primarily sells its products to independent installing dealers and other resellers who, in turn, sell to end users. Consequently, the Company is dependent upon installing dealers and other resellers to sell its products to their customers and will continue to be dependent upon such dealers and resellers in the future. Dealers and resellers generally purchase from the Company to fill specific orders from their customers. As a result, there can be no assurance that installing dealers and resellers will continue to purchase the Company's products. Further, such dealers generally are not exclusive to the Company and are free to sell, and do sell, competing CCTV products. See "Business--Marketing and Sales." COMPETITION The Company operates in a highly competitive marketplace both domestically and internationally. Most of the Company's competitors are larger companies whose financial resources and scope of operations are substantially greater than those of the Company. The Company's principal engineered systems competitors include the following companies or their affiliates: Checkpoint Systems, Inc., Matsushita Electric Industrial Co., Ltd. (Panasonic) ("Matsushita"), Pelco Sales Company, Philips Communications and Security Systems, Inc. (Burle Industries, Inc.), Sensormatic Electronics Corporation and Ultrak, Inc. In addition, some consumer video electronic companies or their affiliates, including Matsushita, Mitsubishi Electric Corporation, Sanyo Electric Co., Ltd. and Sony Corporation, compete with the Company for the sale of video products, including cameras, monitors and VCRs. CBC, an affiliate of the Company also competes with the Company for the sale of video products. There can be no assurance that the Company's current products, products under development, or ability to develop new or enhanced products will be sufficient to enable it to compete effectively with its competitors. See "Business-- Competition" and "Certain Transactions." RISKS ASSOCIATED WITH INTERNATIONAL SALES Sales to customers outside the U.S. accounted for approximately 36% of the Company's net sales in 1997 and 39% of net sales in the first quarter of 1998. Sales to customers in foreign countries are subject to a number of risks, including (i) fluctuating exchange rates which may affect the level of foreign sales; (ii) delays in collecting or the inability to collect receivables; (iii) the possibility of countries imposing 8 import tariffs or adopting other restrictions on foreign trade; (iv) the difficulty of enforcing rights; (v) the inability to obtain U.S. export licenses; and (vi) the difficulty of protecting proprietary rights. See "-- Foreign Currency Risks" and "--Protection, Defense and Use of Intellectual Property; Possible Infringement." There can be no assurance that one or more of these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. FOREIGN CURRENCY RISKS The Company's foreign sales can be adversely affected by fluctuations in currency exchange rates and there can be no assurance that such effect will not be material. Recent weakening of the currencies of Indonesia, Malaysia, Singapore, South Korea and other Asian countries against the U.S. Dollar has made the Company's products more expensive, and is likely to reduce demand for the Company's products, in such countries. Further weakening of such currencies, or weakening of the currencies of other countries, may further reduce demand for the Company's products in the affected countries. In addition, Vicon U.K. sells products to customers in Europe denominated in British Pounds Sterling. A strong British Pound relative to the currencies of the countries in which Vicon U.K. sells products could have a similar adverse effect on sales of Vicon U.K. RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH The Company has recently experienced significant growth in its operations. The Company's future operating results will depend, in part, on its ability to effectively manage such growth in the future. The Company's success in this regard will depend upon the availability of working capital to support such growth, and its ability to accurately forecast future sales, broaden its management team and attract, hire and retain additional skilled employees. See "Business--Strategy." There can be no assurance that the Company will be able to manage future growth effectively. Failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. Due to recent growth in operations, the Company may need to expand its principal operating facility or to obtain adequate alternative space to meet growing capacity demands. The failure to expand its current facility or to obtain adequate alternative space in response to the Company's increasing need for space could adversely affect the Company's operations. DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant extent upon the performance of a number of senior management, engineering, operations and sales personnel, including Kenneth M. Darby, President, Chief Executive Officer and a director; Arthur D. Roche, Executive Vice President, Chief Financial Officer, Secretary and a director; John L. Eckman, Vice President, U.S. Sales; Peter A. Horn, Vice President, Compliance and Quality Assurance; and Yacov A. Pshtissky, Vice President, Technology and Development. The Company has entered into employment agreements with each of these individuals which provide that, if his employment with the Company is terminated, he will not compete with the Company for varying periods after such termination. There can be no assurance that such non-compete provisions will be enforceable against these individuals. The Company does not have key-man life insurance policies in respect of any of its officers. The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company believes that its future success will depend in part on its continued ability to attract, motivate, and retain highly skilled and qualified technical, managerial, operations, sales, and marketing personnel, and its failure to do so could adversely affect its operations. See "Business" and "Management." 9 RISKS ASSOCIATED WITH FUTURE STRATEGIC INITIATIVES The Company's growth strategy includes the possibility of strategic investments in, and strategic alliances with, entities that complement or expand the Company's current operations, production or marketing capabilities. Each of the foregoing actions, if pursued by the Company, involves significant risks. Such risks include, among others, the identification of appropriate candidates to invest in or partner with and the capital requirements of such candidates; the potential disruption of such activity on the Company's ongoing business; the inability of management to capitalize on the opportunities presented by such activities; the failure to successfully incorporate any acquired technology or rights into the Company's products; the inability to maintain or impose uniform standards, controls, procedures and policies; and the impairment of relationships with employees and customers that may result from changes associated with such transactions. Further, to the extent that any such transaction involves operations located outside the U.S., such as the Company's recent investment in a China sales company, the transaction would involve numerous risks associated with international operations, including possible regulatory, legal and tax obstacles or economic and political instability. See "--Risks Associated with International Sales." Additionally, to date the Company has only limited experience in connection with investments and alliances of the nature contemplated by its business strategy. There can be no assurance that the Company would be successful in overcoming these risks or any other difficulties encountered with respect to such strategic investments or alliances. See "Business--Strategy." PROTECTION, DEFENSE AND USE OF INTELLECTUAL PROPERTY; POSSIBLE INFRINGEMENT Many of the Company's products employ proprietary software which is protected by U.S. copyright. The Company considers its proprietary software to be unique and valuable and a principal element in the differentiation of the Company's products from its competition. There can be no assurance that these intellectual property rights will not be infringed or breached, that the Company would have adequate remedies for any infringements or breaches, or that others will not independently develop products that are similar or superior to the Company's products or technologies, or design around proprietary rights of the Company. In addition, 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. See "--Risks Associated with International Sales." The Company does not believe that any of its products infringe on the proprietary rights of third parties. However, any future infringement claims against the Company, if proven, could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, although any such claims could ultimately prove to be without merit, the necessary management attention to, and legal costs associated with, litigation or other resolution of such claims could also adversely affect the Company. See "Business-- Intellectual Property." LIMITATIONS ON UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS As of December 31, 1997, the Company had net operating loss ("NOL") carryforwards of approximately $4 million for federal income tax purposes, which begin to expire in 2007. Under section 382 of the Internal Revenue Code of 1986, as amended, utilization of NOL carryforwards is subject to limitation after a more-than-50% ownership change occurs over a three-year period. In general, if an ownership change were to occur, the Company's NOL carryforwards would be subject to an annual limitation on the amount of carryforwards generated prior to the ownership change which can be used in any one post-change year to offset the Company's future taxable income. The Company believes that the Offering together with other relevant transactions could result in a more-than-50% ownership change, which would result in the limitation on the use of the Company's NOL carryforwards existing as of the date of ownership change. LIMITED PUBLIC FLOAT; VOLATILITY OF STOCK PRICE The Common Stock is quoted on the American Stock Exchange. While a public market currently exists for the Company's Common Stock, trading activity has been limited. Average daily trading volume of the Common Stock for the four weeks ended , 1998 was shares per day. Thus, trading of 10 relatively small blocks of shares of Common Stock could have a significant impact on the price at which the Common Stock is traded. In addition, the market price of the Common Stock may from time to time be significantly affected by a number of factors, including variations in the Company's quarterly operating results, evolving business prospects of the Company and its competitors and general conditions in the economy or the financial markets. Also, the securities markets generally have experienced significant price and volume fluctuations from time to time in recent years. This volatility can have a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance, and these broad fluctuations may adversely affect the market price of the Common Stock. See "Price Range of Common Stock and Dividends." POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK Immediately after completion of the Offering, the Company will have 4,315,058 shares of Common Stock outstanding, of which approximately 3,137,784 will be freely tradable without restriction, except for those shares, if any, acquired in the Offering by "affiliates" of the Company as that term is defined in the Securities Act. Subject to the nine (9) month lock-up arrangements described below, holders of the remaining 1,177,274 shares of Common Stock will be eligible to sell such shares pursuant to Rule 144 ("Rule 144") under the Securities Act at prescribed times and subject to the applicable restrictions of Rule 144. The Company's officers, directors and certain other shareholders, who collectively own 1,177,274 shares of Common Stock and hold options to acquire an additional 248,700 shares of Common Stock exercisable at various dates through April 1999, have agreed with the Underwriters not to offer, sell, pledge, contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for Common Stock, or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any Common Stock, for a period of nine (9) months after the date of this Prospectus without the prior written consent of Fahnestock & Co. Inc. ("Fahnestock"). After the expiration of the nine (9) month lock-up period, 1,151,874 shares of Common Stock held by affiliates of the Company will become tradable, subject to the restrictions of Rule 144 (other than the holding period restriction, which has been satisfied). The 25,400 shares issued to Kenneth M. Darby, the President and the Chief Executive Officer of the Company, and Arthur D. Roche, its Executive Vice President, Chief Financial Officer and Secretary, as compensation in January 1997 will become tradable under Rule 144 in January 1999. The 248,700 shares of Common Stock reserved for issuance under the Stock Option Plans will be freely tradable upon issuance. In addition to the foregoing shares, 45,952 shares of Common Stock are held in treasury and deliverable as deferred compensation to Mr. Darby, upon his retirement or earlier under certain conditions. Such shares are restricted securities that, when issued, can be sold pursuant to the restrictions of Rule 144 (see "Management --Executive Compensation"). Also, 157,500 shares of Common Stock have been reserved for issuance upon exercise of the Underwriters' Warrants (see "Underwriting"). Such warrants are exercisable for Common Stock at an exercise price of $ per share during a four-year period commencing one year from the date of this Prospectus. In addition, the Company may issue shares of Common Stock in connection with future business acquisitions and resales of such shares by the recipients. Such shares, if registered, could be sold in the public market. No predictions can be made as to the effect, if any, that market sales of the shares described above or the availability of such shares for sale will have on the market price for shares of Common Stock prevailing from time to time. Sales of substantial amounts of shares of Common Stock in the public market following the Offering could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of equity securities. See "Shares Eligible for Future Sale." 11 CONTROL BY CERTAIN SHAREHOLDERS; IMPEDIMENTS TO CHANGE OF CONTROL Following the completion of this Offering, CBC, Mr. Chu S. Chun, and the executive officers and directors of the Company will collectively beneficially own approximately 28.8% of the Common Stock. See "Principal and Selling Shareholders." Accordingly, following this Offering, by virtue of their ownership of shares, the shareholders referred to above acting together may effectively have the ability to influence significant corporate actions. Such actions include the election of directors of the Company and the approval or disapproval of certain fundamental corporate transactions, including mergers, the sale of all or substantially all of the Company's assets, liquidation, and the adoption or amendment of provisions in the Company's Certificate of Incorporation and Bylaws. Such actions could delay or prevent a change in control of the Company. See "Principal and Selling Shareholders" and "Description of Capital Stock." In addition, Section 912 of the New York Business Corporation Law restricts certain business combinations with interested shareholders and the Company's Certificate of Incorporation contains provisions, such as those providing for a classified Board of Directors, which may discourage, delay or prevent a third party from acquiring control of the Company by means of a tender offer, a proxy contest for a majority of the Board of Directors or otherwise. See "Description of Capital Stock--Anti-Takeover Effects of the Company's Governing Documents." PROCEEDS TO BENEFIT PRINCIPAL SHAREHOLDERS; POTENTIAL CONFLICTS OF INTEREST The Company intends to use a portion of the net proceeds of the Offering received by it to repay interest-bearing accounts payable and certain other indebtedness of the Company to CBC. In addition, certain existing shareholders who are currently directors of the Company are Selling Shareholders and will receive a portion of the proceeds from this Offering. See "Use of Proceeds," "Certain Transactions" and "Principal and Selling Shareholders." Management of the Company believes that it has benefitted from its past business relationships with its two principal shareholders, CBC and Mr. Chu S. Chun, who, following the completion of this Offering, will beneficially own approximately 12.2% and 4.5%, respectively, of the Common Stock. However, the Company's continuing business relationships with CBC and Mr. Chun and his affiliates, the continuing beneficial ownership of Common Stock by CBC and Mr. Chun, and the service on the Company's Board of Directors by Kazuyoshi Sudo, a director of CBC, and by Mr. Chun, a nominee to the Board and the principal of CSE, could create a potential conflict of interest when the Board of Directors of the Company is faced with decisions that could have different implications for the Company, CBC, Mr. Chun and his affiliates, or in which the Company, CBC, Mr. Chun and his affiliates have conflicting interests. See "-- Dependence on Manufacturers and Suppliers," "Management," and "Certain Transactions." REGULATION Many of the Company's products are subject to regulations of the Federal Communications Commission (the "FCC") and the European Commission (the "CE") pertaining to the emission of electronic signals and require compliance with standards of the FCC and the CE before such products may be marketed. Additionally, commercial acceptance of the Company's CCTV systems and system components may be dependent upon the listing of such items by Underwriters Laboratories (UL) to certify product safety or certification to International Standards Order (ISO) 9001 quality systems. The delay or absence of compliance testing, safety listing or quality certification could have a material adverse effect on the Company's operations. Further, countries could impose tariffs or adopt other restrictions on foreign trade or other regulations which could adversely affect the Company's operations internationally. The Company may become subject to additional regulations, domestically and internationally, and there can be no assurance that the regulatory environment in which the Company operates will not change significantly in the future, or that the cost of regulatory compliance will not be material. See "Business--Regulation." 12 POSSIBLE "YEAR 2000" PROBLEMS Although the Company's software-based CCTV products have been tested for year 2000 problems and the Company believes that such products are year 2000 compatible, 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 is in the process of inquiring as to the progress of its principal suppliers in identifying and addressing problems that their computer systems will face in correctly processing date information as the year 2000 approaches. However, there can be no assurance that the Company will identify the future date-handling problems of its suppliers or its customers in advance of their occurrence, or that such parties will be able to successfully remedy any problems that are discovered. The failure to identify and solve all year 2000 problems affecting its business could have a material and adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 13 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of 1,250,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $ per share are estimated to be approximately $ million ($ million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and other estimated expenses of the Offering. The Company intends to use the net proceeds as follows (all figures are approximate):
APPROXIMATE APPROXIMATE AMOUNT OF NET PERCENTAGE OF NET PROCEEDS PROCEEDS ----------------- ----------------- (IN MILLIONS) Payment of Bank Indebtedness.................................................... $ 4.9 % Payment of Interest-Bearing Accounts Payable and Term Loan to Related Party..... 3.7 General Corporate Purposes, including Working Capital........................... --- ----- Total..................................................................... $ 100.0% --- ----- --- -----
PAYMENT OF BANK INDEBTEDNESS. From the net proceeds of this Offering, the Company intends to repay its domestic bank indebtedness to IBJ Schroeder Bank & Trust Company ("Schroeder Bank") under an existing credit agreement (the "Credit Agreement"), which amounted to $4.9 million at December 31, 1997. The Company is presently negotiating with Schroeder Bank to amend the Credit Agreement to, among other things, extend the term, increase the borrowing limit and reduce the interest rate. See "Risk Factors--No Assurance of Continued Profitability; History of Losses; Substantial Indebtedness" and Note 6 to the Consolidated Financial Statements. PAYMENT OF INTEREST-BEARING ACCOUNTS PAYABLE AND TERM LOAN TO RELATED PARTY. CBC and the Company have agreed in principle that upon the closing of this Offering and payment to CBC of $3.7 million ($1.9 million of interest-bearing accounts payable and $1.8 million outstanding under a term loan), the balance of interest-bearing accounts payable of approximately $4.5 million will be converted to a five-year term loan, which will amortize in equal semi-annual installments. See Notes 4 and 6 to the Consolidated Financial Statements. Interest will be calculated at the higher of the base lending rate of the Sanwa Bank, Ltd. or the rate payable under the then existing credit agreement. The loan may be prepaid at any time without penalty. GENERAL CORPORATE PURPOSES. The balance of approximately $ million of the net proceeds of this Offering will be used by the Company for general corporate purposes, including working capital. The Company intends to use the estimated net proceeds as indicated above. In the event that the Company's plans change, or if the proceeds of this Offering or internal cash flow otherwise proves to be insufficient to fund operations, the Company may find it necessary or advisable to reallocate some of the proceeds within the categories noted above. If the Underwriters exercise their over-allotment option in full, the Company will realize additional net proceeds of $ million, which will be used for general corporate purposes. 14 PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Company's Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "VII." The following table sets forth the high and low prices for the Company's Common Stock on AMEX for each quarter in fiscal 1998, 1997 and 1996.
FISCAL YEARS ----------------------------------------------------- 1998 1997 ---------------- --------- QUARTER ENDED HIGH LOW HIGH - ------------------------------------------------------------------- ------ ----- --------- First Quarter...................................................... 8 11/16 5 9/16 2 Second Quarter (through February 23)............................... 13 15/16 6 1/4 3 Third Quarter...................................................... -- -- 4 Fourth Quarter..................................................... -- -- 8 1996 -------------------- QUARTER ENDED LOW HIGH - ------------------------------------------------------------------- ----- ----- First Quarter...................................................... 3/4 1 3/4 2 3/8 Second Quarter (through February 23)............................... 7/16 1 15/16 2 Third Quarter...................................................... 1/4 3 2 3/4 Fourth Quarter..................................................... 11/16 4 5 7/16 QUARTER ENDED LOW - ------------------------------------------------------------------- ----- First Quarter...................................................... 1 3/16 Second Quarter (through February 23)............................... 1 1/4 Third Quarter...................................................... 1 11/16 Fourth Quarter..................................................... 2 1/16
The last sale price of the Company's Common Stock on February 23, 1998 as reported on AMEX was $12.875 per share. As of February 23, 1998, there were approximately 325 shareholders of record. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock and anticipates that all earnings, if any, in the foreseeable future will be retained to finance the growth and development of its business. In addition, the Credit Agreement prohibits, and any new financing agreements entered into by the Company may limit or prohibit, the payment of cash dividends on its Common Stock. 15 CAPITALIZATION The following table presents as of December 31, 1997: (i) the actual capitalization of the Company and (ii) the adjusted capitalization of the Company after giving effect to the sale by the Company of 1,250,000 shares of Common Stock offered hereby at an assumed offering price of $ per share and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with the more detailed financial data and notes thereto included elsewhere in this Prospectus.
AT DECEMBER 31, 1997 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) Interest-bearing accounts payable to related party (1).................................... $ 6,401 $ -- Total interest-bearing debt, including current portion: Related party (1)....................................................................... 1,800 Banks and other (2)..................................................................... 6,389 Shareholders' equity: Common Stock, $.01 par value, 10,000,000 shares authorized, 3,047,060 shares issued, 4,307,060 shares issued on an as adjusted basis (3)................................... 30 Capital in excess of par value.......................................................... 9,868 Retained earnings....................................................................... 2,290 Treasury stock, at cost (4)............................................................. (299) Foreign currency translation adjustment................................................. 42 --------- ----------- Total shareholders' equity.......................................................... 11,931 --------- ----------- Total capitalization.................................................................... $ 26,521 $ --------- ----------- --------- -----------
- ------------------------ (1) Reflects agreement in principle with a related party, that upon closing of this Offering and the Company's repayment of $3.7 million ($1.9 million of interest-bearing accounts payable and $1.8 million outstanding under a term loan), the balance of approximately $4.5 million of interest-bearing accounts payable to the related party will be converted into a new five-year term loan. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) In January 1998, the Company incurred $2.9 million of mortgage indebtedness in connection with the purchase of its principal operating facility. See "Business--Property." (3) Does not include (i) 388,832 shares of Common Stock reserved for issuance upon exercise of options granted or which may be granted under the Company's Stock Option Plans; and (ii) 157,500 shares of Common Stock reserved for issuance upon exercise of the Underwriters' Warrants. See "Management" and "Underwriting." (4) Represents 45,952 shares of Common Stock held in treasury and deliverable as deferred compensation to Kenneth M. Darby, the Company's President and Chief Executive Officer, upon his retirement or earlier under certain conditions. 16 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) The selected consolidated financial data presented below under the captions "Statements of Operations Data" and "Balance Sheet Data" for and as of the end of each of the years in the five-year period ended September 30, 1997, are derived from the Consolidated Financial Statements of the Company which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements as of September 30, 1996 and 1997, and for each of the years in the three-year period ended September 30, 1997, and the report thereon, are included elsewhere in this prospectus. The selected consolidated financial data presented below for the three months ended December 31, 1996 and 1997 are derived from the unaudited interim Consolidated Financial Statements which, in the opinion of management, reflect all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of financial position and results of operations for the interim periods. Results of operations for interim periods are not necessarily indicative of the results that can be expected for any other interim period or the results for the full year. The following data should be read in conjunction with the Consolidated Financial Statements, including the Notes thereto, included elsewhere in this Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
THREE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31, ----------------------------------------------------- -------------------- 1993 1994 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- --------- --------- (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Net sales......................................... $ 45,923 $ 47,714 $ 43,847 $ 43,191 $ 51,519 $ 11,298 $ 14,874 Cost of sales..................................... 36,649 37,000 34,301 32,234 37,044 8,117 10,245 --------- --------- --------- --------- --------- --------- --------- Gross profit...................................... 9,274 10,714 9,546 10,957 14,475 3,181 4,629 General and administrative expenses............... 3,488 3,188 3,367 2,931 3,542 817 1,023 Selling expenses.................................. 6,827 6,713 6,433 6,800 7,957 1,904 2,193 Relocation expense................................ -- -- -- -- 225 -- -- --------- --------- --------- --------- --------- --------- --------- Operating expenses................................ 10,315 9,901 9,800 9,731 11,724 2,721 3,216 --------- --------- --------- --------- --------- --------- --------- Operating income (loss)........................... (1,041) 813 (254) 1,226 2,751 460 1,413 Other (income) expense............................ 262 (45) -- (41) (40) (33) -- Interest expense.................................. 555 784 1,013 882 1,144 264 339 --------- --------- --------- --------- --------- --------- --------- Income (loss) before income taxes................. (1,858) 74 (1,267) 385 1,647 229 1,074 Income tax expense................................ 17 29 80 85 82 14 65 --------- --------- --------- --------- --------- --------- --------- Net income (loss)................................. $ (1,875) $ 45 $ (1,347) $ 300 $ 1,565 $ 215 $ 1,009 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Earnings (loss) per share (1) Basic........................................... $ (.68) $ .02 $ (.49) $ .11 $ .56 $ .08 $ .34 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted......................................... $ (.68) $ .02 $ (.49) $ .11 $ .52 $ .08 $ .31 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Shares used to compute earnings (loss) per share (1) Basic........................................... 2,763 2,763 2,763 2,765 2,804 2,777 3,001 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted......................................... 2,763 2,763 2,763 2,841 3,022 2,870 3,293 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
AT SEPTEMBER 30, AT ----------------------------------------------------- DECEMBER 31, 1993 1994 1995 1996 1997 1997 --------- --------- --------- --------- --------- ------------- (UNAUDITED) BALANCE SHEET DATA: Cash................................................... $ 1,039 $ 910 $ 1,152 $ 206 $ 288 $ 225 Working capital........................................ 13,420 13,359 10,721 12,064 15,351 15,284 Total assets........................................... 26,069 28,857 26,423 28,085 31,200 31,279 Interest-bearing accounts payable to related party..... 2,317 4,349 4,486 4,404 5,032 6,401 Long-term debt......................................... 5,621 6,059 5,339 6,429 8,344 7,216 Shareholders' equity................................... 9,880 10,043 8,633 8,968 10,914 11,931
- ------------------------ (1) Pursuant to new FASB standard No. 128. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--New Accounting Standard." 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company designs, manufactures, assembles and markets a wide range CCTV systems and system components used for security, surveillance, safety and control purposes by a broad group of end users. In 1993, the Company commenced a strategic redirection of its business by shifting its product focus from hardware-oriented CCTV components to software-based CCTV systems solutions, some of which incorporate digital technology. As part of the strategic redirection, the Company also developed project design and management capabilities, upgraded its sales organization, built a customer service and technical support group, increased operating efficiency and reduced product costs by changing suppliers. These strategic initiatives required several years to implement and have been the principal reason for the Company's recent growth in sales and earnings and its gross margin improvement. In 1997, sales grew 19% to $51.5 million compared with $43.2 million in 1996. New product introductions, greater fixed cost absorption associated with increased sales and lower costs of private label video products contributed to an improvement in gross margins from 25.4% in 1996 to 28.1% in 1997 and 31.1% in the first quarter of 1998. Due to the large number of different products that are typically required for larger CCTV systems, a significant investment in inventory is required. In addition, the Company's principal sales channel of installing dealers and system integrators do not typically carry any significant inventory. The Company recognizes sales upon shipment of products to third parties. The Company's U.S. sales are generally made on a net 30-day term basis after a credit review has been performed to establish creditworthiness. Foreign sales are typically made on a letter of credit or prepaid basis. Cost of sales includes finished products or components purchased directly, subcontract or direct assembly labor and indirect overhead. Research and development expenses are also charged principally to cost of sales as incurred and include costs of salaries and benefits of engineering personnel, supplies, occupancy and prototype material suppliers. The Company provides reserves for inventory to reduce its carrying value to estimated net realizable value. Selling expenses include freight, packing material and other costs associated with the delivery of products to customers and both direct and indirect costs related to the Company's sales and marketing activities. General and administrative expenses encompass principally executive, administrative, legal and financial expenditures. The Company's effective income tax rate for 1996, 1997 and the first quarter of 1998 was 22%, 5% and 6%, respectively, reflecting the utilization of federal and state net operating loss ("NOL") carryforwards. In 1992, the Company established a valuation allowance for the NOL carryforwards based on management's uncertainty regarding future earnings. At December 31, 1997, the Company had NOL carryforwards of approximately $4.0 million for federal income tax purposes. See "Risk Factors-- Limitations on Utilization of Net Operating Loss Carryforwards." 18 RESULTS OF OPERATIONS The following table sets forth the approximate percentages of net sales of certain income and expense items of the Company for the last three fiscal years and for the quarters ended December 31, 1996 and 1997.
THREE MONTHS ENDED FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------------------- -------------------- 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................ 78.2 74.6 71.9 71.8 68.9 --------- --------- --------- --------- --------- Gross profit............................. 21.8 25.4 28.1 28.2 31.1 Operating expenses....................... 22.4 22.5 22.8 24.1 21.6 --------- --------- --------- --------- --------- Operating income (loss).................. (0.6) 2.8 5.3 4.1 9.5 Other income............................. -- (0.1) (0.1) (0.3) -- Interest expense......................... 2.3 2.0 2.2 2.3 2.3 --------- --------- --------- --------- --------- Income (loss) before income taxes........ (2.9) 0.9 3.2 2.0 7.2 Income tax expense....................... 0.2 0.2 0.2 0.1 0.4 --------- --------- --------- --------- --------- Net income (loss)........................ (3.1)% 0.7% 3.0% 1.9% 6.8% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997 Net sales for the quarter ended December 31, 1997 increased $3.6 million, or 32%, to $14.9 million compared with $11.3 million in the similar year ago period. The sales growth was experienced worldwide as U.S. sales increased 24% to $9.0 million and international sales rose 45% to $5.9 million. The U.S. sales increase was principally the result of video systems 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. The increase in international sales was due to more systems sales and increased sales to a private label customer for distribution primarily in Europe. The backlog of unfilled orders was $8.7 million at December 31, 1997 compared with $4.4 million at December 31, 1996. Gross profit margins for the first quarter of 1998 increased to 31.1% compared with 28.2% in the year ago period. The margin improvement was primarily the result of a greater mix of more profitable products, lower procurement costs for certain video products and greater fixed cost absorption associated with the sales growth. Operating expenses for the first quarter of 1998 were $3.2 million or 21.6% of net sales compared with $2.7 million or 24.1% of net sales in the comparable period of 1997. The increase of $495,000 or 18% was principally the result of higher selling expenses associated with the revenue growth and profit related bonus accruals. As a percentage of sales, operating expenses were lower due to greater absorption of fixed operating costs. Operating income rose to $1.4 million in the first quarter of 1998 compared with $460,000 in the comparable period of 1997 as a result of increased sales, higher gross margins and greater absorption of fixed operating expenses. Interest expense increased $75,000 to $339,000, principally as a result of higher borrowing levels during the first quarter of 1998. Income tax expense was $65,000 for the first quarter of 1998 compared with $14,000 in the comparable period of 1997, with an effective tax rate of approximately 6% for both periods. In both periods, the Company utilized NOL carryforwards to offset federal and state taxable income. As of December 31, 1997, 19 the remaining balance of the NOL was approximately $4.0 million for federal income tax purposes. The nominal tax provision primarily relates to foreign subsidiary income. As a result of the foregoing, net income increased to $1.0 million for the first quarter of 1998 compared with net income of $215,000 for the comparable period of 1997. FISCAL 1997 COMPARED WITH FISCAL 1996 Net sales for 1997 were $51.5 million, an increase of 19%, compared with $43.2 million in 1996. The increase was principally due to incremental sales worldwide of certain new products. The backlog of orders was $7.0 million at September 30, 1997 compared with $3.1 million at September 30, 1996. The gross profit margin in 1997 increased to 28.1% compared with 25.4% in 1996. The margin improvement was principally attributable to capacity gains from increased sales, higher margins on certain new products and lower costs for video products. Operating expenses increased $2.0 million to $11.7 million in 1997 compared with $9.7 million in 1996. The increase was the result of payroll and related costs as the Company added sales, technical support and engineering personnel to support increased sales and product development activities. The Company also incurred $225,000 of costs and expenses to relocate to a new principal operating facility. Interest expense in 1997 increased by $261,000 to $1.1 million as a result of increased bank borrowings to support higher levels of working capital. The increase in net income in 1997 of $1.3 million was due to higher sales and gross margins, offset in part by increased operating expenses. FISCAL 1996 COMPARED WITH FISCAL 1995 Net sales for 1996 were $43.2 million, a decrease of 1.5%, compared with $43.8 million in 1995. The sales decline was principally the result of the termination of low margin video product sales (cameras and VCRs) to a Far East distributor. Lower sales in Europe due to delays in new product introductions were offset by an increase in other export sales. Domestic revenue levels were essentially unchanged from 1995. The backlog of orders was $3.1 million at September 30, 1996 compared with $2.7 million at September 30, 1995. The gross profit margin was 25.4% in 1996, compared with 21.8% in 1995. The margin improvement was due principally to a beneficial sales mix of higher margin products, particularly new proprietary digital video products and control systems. The Company also shifted sourcing of a major portion of its video product line to lower cost suppliers outside of Japan. In addition, during 1996, the value of the U.S. Dollar increased against the Japanese Yen which increased margins for those remaining products sourced in Japan. Operating expenses totaled $9.7 million in 1996 compared with $9.8 million in 1995. Operating expenses, as a percent of sales, amounted to 22.5% and 22.4% in 1996 and 1995, respectively. The decline in expenses was due primarily to ongoing cost control measures. Interest expense declined $131,000 to $882,000 principally due to the lower cost of new bank borrowings. As a result of the foregoing, net income improved significantly to $300,000 from a net loss of $1.3 million in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds for conducting its business activities have been borrowings under its bank facilities, vendor financing and cash flow from operations. 20 Net cash provided by operating activities was $956,000 for the first quarter of 1998 due primarily to the $1.0 million net profit reported for the period. The increase in accounts receivable due to higher sales activity was substantially offset by a reduction in inventories. Net cash used in investing activities was $108,000 in the first quarter of 1998 as a result of capital expenditures for office equipment. Net cash used in financing activities was $856,000, which included a $1.1 million reduction of borrowings under the Credit Agreement offset by increased Vicon U.K. borrowings. As a result of the foregoing, the net decrease in cash was $62,000 for the first quarter of 1998 after the nominal effects of exchange rate changes on the cash position of the Company. Net cash used in operating activities was $394,000 in fiscal 1997. Net income of $1.6 million, non-cash items and increases in accrued wages and expenses were more than offset by increases in inventories and accounts receivable of $1.9 million and $821,000, respectively, and a $728,000 decrease in accounts payable. Net cash used in investing activities was $925,000 in 1997 due to capital expenditures primarily incurred for leasehold improvements and furniture and fixtures related to the Company's recent relocation of its principal operating facility. Net cash provided by financing activities was $1.3 million in 1997 primarily from increased borrowings under the Credit Agreement. As a result of the foregoing, the net increase in cash was $82,000 in 1997. The Company requires liquidity and working capital primarily to fund increases in inventories and accounts receivable associated with sales growth and to a lesser extent for capital expenditures. The Company anticipates that in 1998 capital expenditures will be approximately $4.0 million, of which $3.3 million represents the January 1998 acquisition of its principal operating facility and $700,000 for product tooling and office equipment. The purchase of this facility was funded by mortgage loans of $2.9 million (the "Mortgage") and from internal cash flow. 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 U.K. (the "Overdraft Facility"). At December 31, 1997, borrowings under this facility were approximately $471,000. The Credit Agreement permits the Company to borrow up to a maximum of $6.5 million, subject to availability under a borrowing base formula consisting of accounts receivable and inventories. The agreement expires on January 31, 1999. Borrowings under the Credit Agreement amounted to approximately $4.9 million at December 31, 1997. Concurrent with the closing of this Offering, the Company intends to repay the outstanding balance under the Credit Agreement. The Company is presently negotiating with its lender to amend the Credit Agreement to, among other things, extend the term, increase the borrowing limit and reduce the interest rate. The Company purchases certain products from CBC, whose interest-bearing accounts payable amounted to $6.4 million at December 31, 1997 and are due on demand. The Company historically has made accounts payable payments to CBC as cash availability permits. The Company expects to use $3.7 million of the net proceeds of this Offering to repay indebtedness to CBC and to refinance the balance of interest-bearing debt of approximately $4.5 million. Such amount will be converted to a new five-year term loan which will amortize in equal semi-annual installments and which will bear interest at an annual rate equal to the higher of the base lending rate of the Sanwa Bank, Ltd. or the rate payable under the then existing credit agreement. Any residual amount of accounts payable to CBC will be due within agreed terms. See "Use of Proceeds." The Company believes that cash flow from operations, proceeds from the Offering, the Mortgage, and additional funds available under the Credit Agreement and the Overdraft Facility will be sufficient to meet its currently anticipated operating, capital expenditures and debt service requirements for at least the next 12 months. See "Risk Factors--No Assurance of Continued Profitability; History of Losses; Substantial Indebtedness." 21 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, which are denominated in Japanese Yen, accounted for approximately 7% of product purchases in 1997. Although the U.S. Dollar strengthened against the Japanese Yen during 1997, in prior years the U.S. Dollar had weakened dramatically in relation to the Yen, resulting in increased costs for such products. When market conditions permit, cost increases due to currency fluctuations are passed on to customers through price increases. The Company also attempts to reduce the impact of an unfavorable exchange rate condition through cost reductions from its suppliers, lowering production cost through product redesign, and shifting product sourcing to suppliers transacting in more stable and favorable currencies. At the Company's request, CBC has entered into foreign exchange contracts on behalf of the Company to hedge the currency risk on Japanese-sourced product purchases. Sales by Vicon U.K. to customers in Europe are made in Pounds Sterling. In 1997, approximately $3.3 million of products were sold by the Company to Vicon U.K. for resale. The U.S. Dollar was stable against the Pound Sterling in 1997. In the years when the Pound weakened significantly against the U.S. Dollar, the cost of U.S.-sourced product sold by Vicon U.K. increased. When market conditions permitted, such cost increases were passed on to the customer through price increases. The Company attempts to control its currency exposure on intercompany sales through the purchase of forward exchange contracts. In general, the Company attempts to increase prices and seek lower costs from suppliers to mitigate exchange rate exposures. However, there can be no assurance that such steps will be effective in limiting foreign currency exposure. See "Risk Factors--Foreign Currency Risks." INFLATION The impact of inflation on the Company's operations has lessened in recent years as the rate of inflation has remained low. However, inflation continues to increase various costs to the Company. As operating expenses and production costs increase, the Company seeks to pass along price increases to its customers to the extent permitted by market conditions. YEAR 2000 The Company's software-based CCTV products have been tested for year 2000 problems and the Company believes that such products are year 2000 compatible. It is possible, however 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 is in the process of inquiring as to the progress of its principal suppliers in identifying and addressing problems that their computer systems will face in correctly processing date information as the year 2000 approaches. However, there can be no assurance that the Company will identify the future date-handling problems of its suppliers or its customers in advance of their occurrence, or that such parties will be able to successfully remedy any problems that are discovered. With respect to its own systems, the Company intends to upgrade its principal operating computer software to the most recent available revision sold by its software supplier, which the supplier has represented to be year 2000 compliant. The Company believes that such upgrade will identify and solve those year 2000 problems that could affect its operating software and can be accomplished before the year 2000 at a reasonable cost. The failure to identify and solve all year 2000 problems affecting its business could have a material and adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Possible Year 2000 Problems." 22 NEW ACCOUNTING STANDARD On March 3, 1997, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards No. 128, "EARNINGS PER SHARE." This pronouncement provides for the calculation of Basic and Diluted earnings per share which is different from the prior standard. The Company adopted this new standard in the first quarter of 1998 and all prior earnings per share information reflected herein has been restated to give effect to this pronouncement. NEW ACCOUNTING STANDARDS NOT YET ADOPTED In June 1997, the FASB issued two new disclosure standards. Management believes that the results of operations and financial position of the Company will be unaffected by implementation of these new standards. Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for reporting and displaying comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE, establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Both of these new standards are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. 23 BUSINESS INTRODUCTION The Company designs, manufactures, assembles and markets a wide range of CCTV systems and system components used for security, surveillance, safety and control purposes by a broad group of end users. A CCTV system is a private video system that transmits and receives 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 CCTV systems and components that it sells worldwide primarily to installing dealers, system integrators, government entities and distributors. The Company's products are typically utilized for visual crime deterrence, for visual documentation, for observation of inaccessible or hazardous areas, to enhance safety, to obtain cost savings (such as lower insurance premiums), to manage control systems and to improve 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, casino gaming facilities, health care facilities and financial institutions. The Company's products have been used at various high profile locations worldwide, including: O'Hare International Airport; Foxwoods Resort & Casino, Connecticut; Henry Ford Hospital, Detroit; Fort Bragg, North Carolina; City of Sao Paulo Traffic Control; and Xiamen International Airport, China. In 1993, the Company commenced a strategic redirection of its business by shifting its product focus from hardware-oriented CCTV components to software-based CCTV systems solutions, some of which incorporate digital technology. As part of the strategic redirection, the Company also developed project design and management capabilities, upgraded its sales organization, built a customer service and technical support group, increased operating efficiency and reduced product costs by changing suppliers. As a result, the Company's financial performance has improved. Gross profit margins have increased from 20.2% in 1993 to 31.1% in the first quarter of 1998. Net sales grew 19.3% in 1997 to $51.5 million, while net income increased to $1.6 million from $300,000 in 1996. For the first quarter of 1998, net sales rose 31.7% to $14.9 million. INDUSTRY OVERVIEW 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 burglary alarm systems, access control, CCTV, article surveillance, guard services and equipment, locks, safes, armored vehicles, security fencing, private investigations and others. The Company operates within the electronic protection segment of the security industry, which includes fire and burglary alarm systems, access control, CCTV and article surveillance. Domestic wholesale CCTV equipment sales within that segment, according to statistics compiled and published by the SIA in its 1997 SECURITY INDUSTRY MARKET OVERVIEW, were estimated at $840 million in 1997. Based in part upon published data for Europe, the Company believes the worldwide market was approximately $1.7 billion in 1997. In recent years, a trend of product development and demand within the CCTV industry has been toward the application of digital technology, specifically toward the compression, transmission, storage and display of digitized video signals. The Company believes that demand for CCTV products is influenced by (i) the acceptance of CCTV for crime deterrence; (ii) the perceived need for increased safety in response to publicized acts of crime; (iii) the use of CCTV as a cost effective alternative to security personnel; (iv) lower prices due to technological advancements and competition which increase affordability; and (v) the movement towards the integration of security systems, such as access control with CCTV. CCTV systems range from basic systems that consist of a single camera and monitor to very complex engineered systems employing 2,000 cameras or more. CCTV systems may either be manned or 24 unmanned. In a manned system, an operator is able to command the system to position remote cameras to selected sites, thereby observing events as they occur. In an unmanned system, the system computer manages all the functions and operations in accordance with its programming. For example, an unmanned system can be designed to monitor objects continuously or automatically respond in a specified manner to changes in a video scene, such as move a camera to another target, activate alarms and begin recording, all without any operator involvement. The Company's product development, marketing and sales efforts are directed primarily at the users of more complex systems whose needs include security, surveillance, safety and control. These users include: - FEDERAL, STATE, AND LOCAL GOVERNMENT AGENCIES--post offices, municipal offices, prisons, military bases, airports and other mass transit systems; - COMMERCIAL AND INDUSTRIAL COMPANIES--office buildings, manufacturing plants, warehouses, apartment complexes, shopping malls and retail stores; - ENTERTAINMENT COMPANIES--casino gaming facilities, sports arenas and museums; - HEALTH CARE PROVIDERS--hospitals, particularly psychiatric wards and intensive care units; and - FINANCIAL INSTITUTIONS--banks, clearing houses, brokerage firms and depositories. GROWTH STRATEGY The Company's objective is to be a leading provider of high-end engineered CCTV systems worldwide. The key elements of the Company's growth strategy are as follows: FOCUS ON NEW PRODUCT DEVELOPMENT AND ENHANCEMENTS. The Company intends to focus on research and development of new products. As a result of its research and development efforts, in the last two years, the Company has introduced, among other products, the AURORA digital video multiplexer and the SURVEYOR line of domed camera systems. See "--Products." In addition, the Company intends to continue to emphasize the improvement of the technological capabilities of its existing products and the development of new products which incorporate digital technology. EXPAND DOMESTIC MARKETING EFFORTS. The Company intends to increase its domestic marketing efforts by (i) expanding its domestic sales organization by hiring additional field sales engineers and in-house customer service and technical support personnel, (ii) increasing promotional activities to further develop brand name identity with dealers and end users and (iii) emphasizing in-house dealer training. In addition, the award of an exclusive one-year renewable contract with the U.S. Postal Service in July 1997 is anticipated to increase the Company's exposure to additional dealers. INCREASE INTERNATIONAL MARKET PENETRATION. The Company intends to expand the market for its existing and new products by increasing its penetration of international markets. The Company believes China and Europe present opportunities for growth. In 1997, the Company's international sales were $18.7 million, or 36% of net sales, in 1997, and $5.9 million, or 39% of net sales, in the first quarter of 1998. The Company believes that by opening additional independent or Company-operated sales offices and increasing its distribution channels outside the U.S., its ability to penetrate these markets would be enhanced. The Company helped to establish an independent sales company in China in July 1997 to further its marketing initiatives in Asia, and in February 1998 acquired a 30% ownership interest in such company. ENHANCE CUSTOMER AND TECHNICAL SUPPORT SERVICES. The Company believes its commitment to service and technical support of CCTV systems enables it to build strong relationships with its dealers and end users. The Company offers training on its proprietary systems, technical classes, installation assistance, field support and project design and management capabilities to installing dealers. 25 PURSUE STRATEGIC INITIATIVES. The Company intends to selectively pursue strategic alliances and investment opportunities as they arise. Such alliances may include the opening of independent or Company-operated sales offices or other similar arrangements with third parties to broaden the Company's sales presence on a worldwide basis. PRODUCTS The Company offers engineered CCTV systems and system components that can be configured to meet the operational needs of each end user. The Company's products are capable of being integrated with other security systems, including fire and burglary alarm systems and access control. The capability and versatility of a system can be increased by incorporating sophisticated control and digital video products. A typical engineered system would include cameras, remote camera positioning equipment, video switchers, controls, recording equipment and monitors. The Company's proprietary products include all system components with the exception of VCRs, monitors, cameras and lenses. The Company's products range in price from $10 for a single camera mounting bracket to hundreds of thousands of dollars (depending upon configuration) for a large digital control and video switching system. The basic components of an engineered CCTV system of the Company are shown in the following diagram: [Graphic: Shows a Company engineered CCTV system, including its components] 26 Remote camera positioning devices, including the Company's VISTAR and SURVEYOR products, allow the system operator to move and control multiple remote cameras from across the room or across the country. The NOVA series of microprocessor-based controls, or central processing unit (the "CPU"), is the heart of the system. Commands are received by the CPU from an operator keyboard and are immediately converted into various actions, such as moving cameras, responding to alarms or routing video signals. The MATRIX 66, a video switcher, permits video signals from many cameras to be routed to any one of the system's video monitors and VCRs. The DIGITEK digital motion detector identifies change in the video signal which can activate alarms and recording equipment. The AURORA digital video multiplexer allows recording and individual playback of up to 16 cameras on a single VCR, while providing such capabilities as motion detection, digital magnification and multi-screen display. The Intelligent Keyboard is used by the operator to send real-time commands to the CPU or to program the SURVEYOR. By adding the Company's PROTECH software, a Vicon system can be controlled by a PC and integrated with other security systems. CONTROL PRODUCTS Control products are the technological brains of any sophisticated CCTV system. Control products consist of microprocessor-based and hardwired controls, video switchers, digital video multiplexers and digital video motion detectors, all of which activate system components. For example, control products (i) route video signals to display units or recording equipment, (ii) process alarm signals in accordance with system design, (iii) transmit command signals to operate remote camera positioning units and related accessories, and (iv) perform multiple signal processing functions, such as time and date generation and video loss detection. Sales of control products in 1997 were approximately $17.7 million, or 34%, of net sales, and in the first quarter of 1998 were approximately $4.6 million, or 31% of net sales. MICROPROCESSORS. The principal function of a microprocessor is to manage system functions. Microprocessors transmit command signals to remote camera positioning units and associated accessories such as camera housings and lenses. Microprocessors function either at operator command or unattended in accordance with system programming. The Company's NOVA family of microprocessor-based controls include its Powermate, Powerpac and Powermax products, which were introduced during 1995 and 1996. The Company's microprocessors are enhanced by its proprietary PROTECH software, which was initially introduced in 1995. This software allows operators to control NOVA systems via a personal computer and interact with graphical displays of surveillance sites and systems components. In addition, PROTECH facilitates integration with other operating systems. VIDEO SWITCHERS. Video switchers permit video signals from cameras to be routed to system monitors and VCRs. Sophisticated matrix switchers have the advantage of routing any video input to any output device to create greater flexibility. The Company offers the MATRIX 44 and MATRIX 66 line of matrix switchers, which detect video loss and route system cameras to system monitors at operator command or in accordance with the programming of the system. MATRIX 44 was introduced in 1993 and MATRIX 66 in 1996. DIGITAL VIDEO MULTIPLEXERS. Digital video multiplexers encode for identification the video signals from multiple camera inputs for recording to a single video tape. During playback, the multiplexer ensures that only images from the selected cameras are displayed. The Company's multiplexers can accept input from up to 16 cameras. The Company's AURORA line of digital video multiplexers, among other things, digitizes video signals for multi-screen display on a single monitor and encodes and decodes video signals for efficient video recording and playback. AURORA was introduced in February 1996. 27 DIGITAL VIDEO MOTION DETECTORS. Digital video motion detectors enable a security system to be programmed to activate an alarm and begin recording based upon changes in a video scene compared with a reference scene. DIGITEK, introduced in 1995, provides over 65,000 sensing points in a single video frame, each of which can be programmed to activate an alarm based upon a set of parameters. Other control products include hardwired controls, character generators for source identification and equipment for transmitting, receiving, distributing and amplifying video, audio and data signals. MECHANICAL PRODUCTS Mechanical products position and protect cameras. They consist of remote camera positioning units, which include pan-and-tilts and domed camera systems, environmental camera enclosures, mounting equipment and both fixed focal length and zoom lenses. Sales of mechanical products in 1997 were approximately $20.6 million, or 40% of net sales, and in the first quarter of 1998, were approximately $6.4 million, or 43% of net sales. DOMED CAMERA SYSTEMS. A dome is a camera enclosure shaped like a sphere. Typically, the dome includes a pan-and-tilt mechanism as described below. Some domes include fast, compact pan-and-tilt mechanisms which can move cameras very rapidly--pan speeds of up to 360 degrees per second and tilt speeds of up to 120 degrees per second. The Company's SURVEYOR line of dome systems, introduced in 1997, are frequently used in casino gaming facilities, retail stores and airports, where discreet surveillance is desired. PAN-AND-TILTS. Pan-and-tilts are motorized robotic devices which support a CCTV camera and allow it to be pointed at targets by remote control. Typically, a pan-and-tilt device can move a camera at a rate of up to six degrees per second. The Company is scheduled to begin delivering its new VISTAR pan-and-tilt line to customers in May 1998. The VISTAR line is designed for rugged indoor or outdoor use. VIDEO PRODUCTS Video products generate, display and record video and audio signals. These products consist of stand-alone standard or high resolution black and white or color electronic cameras, digital or analog format recording equipment for video and audio signals and standard or high resolution black and white or color display monitors. Video products are supplied to the Company by others on a private label basis. Sales of video products in 1997 were approximately $11.4 million, or 22% of net sales, and in the first quarter of 1998, were approximately $3.2 million, or 21% of net sales. OTHER PRODUCTS Sales in 1997 of special order items, replacement parts, design and project management fees and miscellaneous products were approximately $1.8 million, or 4% of net sales, and in the first quarter of 1998, were approximately $700,000, or 5% of net sales. WARRANTY The Company's systems and system components are covered by a comprehensive two-year warranty for both parts and labor. The warranty period begins when the end user begins beneficial use of the system. Notwithstanding this extended warranty period, to date, the Company's annual warranty cost has not been material. MARKETING AND SALES The Company's marketing strategy is to emphasize engineered CCTV systems 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 28 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 also maintains showrooms at its principal operating facility in Long Island and at its European sales office in England for customers to use and train on the Company's systems. The Company intends to expand its worldwide marketing and sales efforts by increasing its promotional activity and visibility in the marketplace. 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, system design, project management and hardware and software technical support. The Company believes its commitment to service and technical support enables it to build strong relationships with its customers. The Company's principal sales offices are located in Long Island, New York, Atlanta, Georgia, and Segensworth, England. The following table sets forth the Company's recent U.S. and international sales:
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------------------- -------------------- 1995 1996 1997 1996 1997 --------- --------- --------- --------- --------- (UNAUDITED) (IN THOUSANDS) U.S. sales................................................. $ 26,133 $ 26,937 $ 32,858 $ 7,258 $ 9,008 International sales........................................ 17,714 16,254 18,661 4,040 5,866 --------- --------- --------- --------- --------- Net sales.................................................. $ 43,847 $ 43,191 $ 51,519 $ 11,298 $ 14,874 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
The Company's products have been used at various high profile locations worldwide, including: O'Hare International Airport; Foxwoods Resort & Casino, Connecticut; Henry Ford Hospital, Detroit; Fort Bragg, North Carolina; City of Sao Paulo Traffic Control; and Xiamen International Airport, China. In addition, the Company has received an order for certain products for a major installation in the MGM Grand Hotel and Casino in Las Vegas. U.S. SALES Sales in the U.S. are made by 11 in-house customer service representatives, 18 in-house field sales engineers and seven independent sales representative companies. The Company sells or markets its CCTV systems and systems components domestically on a non-exclusive basis to the following: - Installing dealers and system integrators; - Engineers, consultants and architects; - Government entities; and - Independent distributors. Installing dealers are companies which sell, design and install CCTV systems. Dealers also train operators and provide after-market service and support to end users. System integrators link different types of electronic systems, such as access control with CCTV, to enable such systems to interact and be managed from a centralized control point. Installing dealers and system integrators, in turn, market the Company's products to commercial and industrial end users, including office buildings, manufacturing plants, warehouses, apartment complexes, shopping malls and retail stores. The majority of domestic sales are through installing dealers and system integrators. Engineers, consultants and architects are professionals who are involved in projects that use CCTV systems. These firms or individuals do not purchase products from the Company, but specify the Company's products to end users. 29 Government entities include the United States Government and its agencies. Typical government customers include the Federal Bureau of Prisons, Federal Aviation Administration and the United States Border Patrol. In July 1997, the Company was awarded a one-year contract to supply certain types of video surveillance systems to the U.S. Postal Service. The contract, which does not obligate the U.S. Postal Service to purchase any systems, makes the Company the sole source supplier for certain video surveillance systems. The U.S. Postal Service has the option to renew the contract for two additional one-year periods. Independent distributors are organizations that typically resell manufacturers' products to installing dealers. INTERNATIONAL SALES The Company sells its products in Europe through Vicon U.K. and elsewhere outside the U.S. by direct export. Sales are made to installing dealers or independent distributors which outside of Europe typically assume the responsibility for warranty repair as well as sales and marketing costs to promote the Company's product line. The Company has territorial exclusivity agreements with customers in China, Japan and South Korea but uses a wide range of installation companies and distributors in other international markets. The Company also sells to one private label reseller, CBC, which markets certain of the Company's products, principally in Europe, under the label "VISION STATION." CBC is an affiliate of the Company. See "Certain Transactions." The Company's international sales are conducted by 10 field sales engineers and nine in-house customer service representatives. For most international sales, the Company generally purchases credit insurance or requires a letter of credit or cash in advance of shipment. Some international customers, who have a long standing relationship with the Company, buy on an open account basis, subject to a satisfactory credit review. See "Risk Factors--Risks Associated with International Sales." The Company's principal foreign markets are Europe and the Pacific Rim which together accounted for approximately 80% of international sales in 1997. In Australia, Japan, Norway and South Korea, the Company permits independent sales representatives to use the Company's name for marketing purposes. These arrangements are not covered by formal agreements and can be terminated at the option of the Company under certain conditions. In February 1998, the Company acquired a 30% ownership interest in an independent sales company in China, which opened in July 1997. MANUFACTURING AND PURCHASING The Company's strategy is to manufacture its products wherever the best combination of reliability, cost, quality and timely delivery can be found. The Company implements this strategy predominantly through a combination of manufacturing and assembly operations. These operations include the CSE manufacturing plant; independent labor subcontractors; independent contract manufacturers and in-house personnel. There are no formal contracts with any of the Company's production vendors and, except for the fulfillment of any outstanding orders, the Company or the vendors may terminate the relationship at any time. CSE is a joint venture owned equally by the Company and Chun Shin Industries, a South Korean company controlled by Mr. Chu S. Chun. CSE currently produces products that in 1997 represented 22% or $7.0 million of the Company's materials purchases. CSE employs approximately 60 people at its approximately 12,000 square foot manufacturing facility. CSE's capacity is now fully utilized, but can be expanded as the need arises. The Company has no capital commitment obligations to CSE. See "Risk Factors--Dependence on Manufacturers and Suppliers" and "Certain Transactions." Independent Long Island-based labor subcontractors assemble the Company's products in accordance with the Company's instructions, quality standards and test procedures. All materials are supplied to the subcontractors by the Company. Independent labor subcontractors assemble certain mechanical, electro- mechanical and electronic products for the Company. 30 Independent U.S.-based contract manufacturers also assemble the Company's products. However, unlike independent labor subcontractors, contract manufacturers also purchase the materials required for production. Independent contract manufacturers are monitored by the Company as to quality and production performance. Independent contract manufacturers produce certain mechanical and electro-mechanical products for the Company. The Company's in-house personnel perform assembly, system configuration, testing and inspection of CCTV systems and system components at the Company's principal operating facility in Long Island. It has in-house personnel who assemble a limited number of electro-mechanical products, configure all CPU- based systems and test all key products. The Company purchases CCTV lenses and certain cameras, monitors and VCRs from various suppliers. The most significant supplier of such products to the Company is CBC, a Japanese trading company which is a major shareholder of the Company. See "Risk Factors--Dependence on Manufacturers and Suppliers." The Company has been conducting business with CBC continuously for 20 years. See "Certain Transactions." In 1997, the Company purchased approximately $7.1 million of products from CBC, or 23% of the Company's total purchases of materials. The Company has no obligation to purchase any of the foregoing products from CBC, except that CBC has the exclusive right to sell a certain Asian-manufactured VCR to the Company. All of the products purchased from CBC are resold under the VICON brand name. INVENTORY The Company carries substantial inventory levels for a number of operating reasons. First, since the Company utilizes installing dealers as its primary sales channel, it must maintain significant levels of inventory as dealers typically do not carry significant inventory. See "--Marketing and Sales". Second, as part of its manufacturing strategy, the Company has shifted from using contract manufacturers to using labor subcontractors. Consequently, the Company must carry materials and work-in-progress inventories for its labor subcontractors. Third, the Company holds a minimum level of safety stock of finished goods at both its Long Island and U.K. facilities to respond to unanticipated customer orders. Finally, the Company's inventory levels are affected by the ordinary course time delays of four to nine months between purchasing, production and shipping of products. See "Risk Factors--Risks Associated with Inventory Management." RESEARCH AND DEVELOPMENT The Company's research and development ("R&D") strategy is to develop new and improved CCTV systems and system components. In recent years, a trend of product development and demand within the CCTV industry 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. Through its R&D efforts, the Company developed and introduced its AURORA, NOVA, MATRIX and SURVEYOR lines of products, among others. See "Risk Factors--Risks Assocated with Product Design and Development" and "-- Products." The Company employs a total of 23 engineers in the following areas: seven in software development, eight in mechanical design, and eight in electrical and circuit design. R&D expenditures have averaged approximately 4% of net sales for each of the past three years. 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 31 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 CCTV systems competitors include the following companies or their affiliates: Checkpoint Systems, Inc., Matsushita, Pelco Sales Company, Philips Communications and Security Systems, Inc. (Burle Industries, 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, Mitsubishi Electric Corporation, Sanyo Electric Co., Ltd. and Sony Corporation, compete with the Company for the sale of video products. CBC also competes with the Company for the sale of video products. Most of the Company's competitors are larger companies whose financial resources and scope of operations are substantially greater than the Company's. See "Risk Factors--Competition." INTELLECTUAL PROPERTY Many of the Company's products employ proprietary software that is protected by U.S. copyright. The Company believes that its proprietary software is unique and is a principal element in the differentiation of the Company's products from those of its competitors. The Company also has certain trademarks and owns a limited number of design and utility patents expiring at various times. The Company has no technology licenses or franchises with respect to any of its products or business dealings. The Company does not deem its lack of patents, licenses or franchises to be of substantial significance or to have a material effect on its business. See "Risk Factors--Protection, Defense and Use of Intellectual Property; Possible Infringement" BACKLOG The backlog of orders was approximately $8.7 million as of December 31, 1997 compared with $4.4 million as of December 31, 1996. The Company does not generally accept orders unless the scheduled delivery date is within six months. While all backlog orders have scheduled delivery dates, most orders are cancelable without penalty at the option of the customer. REGULATION Many of the Company's products are subject to regulations of the FCC and the CE pertaining to the emission of electronic signals and require compliance with standards of the FCC and the CE before such products may be marketed. Additionally, commercial acceptance of the Company's CCTV systems and system components may be dependent upon the listing of such items with UL to certify product safety or certification to ISO 9001 quality systems. The delay or absence of compliance testing, safety listing, or quality certification could have a material adverse effect on the Company's operations. Further, countries could impose tariffs or adopt other restrictions on foreign trade or other regulations which could adversely affect the Company's operations internationally. The Company may become subject to additional regulations, domestically and internationally, and there can be no assurance that the regulatory environment in which the Company operates will not change significantly in the future, or that the cost of regulatory compliance will not be material. See "Risk Factors--Regulation." PROPERTY The Company owns and operates a 56,000 square-foot facility located on approximately five acres at 89 Arkay Drive, Hauppauge, N.Y. to which it relocated its principal offices in April 1997. In January 1998, the Company purchased the property it previously leased. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company also operates, under short-term leases, an 8,500 square-foot warehouse in Hauppauge, N.Y., and a 3,500 square-foot sales office in Atlanta, Georgia. In addition, the Company owns and operates 32 a 14,000 square-foot sales, service and warehouse facility in southern England which services the U.K. and Europe. The Company believes that its facilities are adequate to meet its needs for the current year. Due to recent growth in operations, the Company may need to expand its principal operating facility or obtain adequate alternative space to meet growing capacity demands. See "Risk Factors--Risks Associated With Management of Growth." EMPLOYEES At December 31, 1997, the Company employed 191 full-time employees in the following areas: five in senior management, 43 in administration, 81 in sales, 29 in engineering, and 33 in production. 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. LEGAL PROCEEDINGS The Company is involved in various legal proceedings occurring in the ordinary course of business, none of which are believed by management to be material. 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors, executive officers and officers of the Company are set forth below.
NAME AGE POSITION - --------------------------------------- --- ------------------------------------------------------------------ Donald N. Horn......................... 69 Chairman of the Board Kenneth M. Darby....................... 52 President, Chief Executive Officer, and Director Arthur D. Roche........................ 59 Executive Vice President, Chief Financial Officer, Secretary, Member of the Office of the President and Director John L. Eckman......................... 48 Vice President, U.S. Sales Peter A. Horn.......................... 42 Vice President, Compliance and Quality Assurance Yacov A. Pshtissky..................... 46 Vice President, Technology and Development Peter F. Barry......................... 69 Director Milton F. Gidge........................ 68 Director Michael D. Katz........................ 59 Director Peter F. Neumann....................... 63 Director W. Gregory Robertson................... 54 Director Kazuyoshi Sudo......................... 55 Director Arthur V. Wallace...................... 72 Director Chu S. Chun............................ 63 Director-nominee*
- ------------------------ * Mr. Chu S. Chun is not currently a director but has been nominated by the Board of Directors as a director for the election to be held at the Annual Meeting of Shareholders scheduled for April 23, 1998. The business experience, principal occupations and employment, as well as period of service, of each of the directors, executive officers and certain other key employees of the Company during at least the last five years are set forth below. DONALD N. HORN, CHAIRMAN OF THE BOARD. Mr. Horn was the founder of the Company in 1967 and has served as its Chairman of the Board since that time. He also served as Chief Executive Officer from 1967 until April 1992 and as President until September 1991. Mr. Horn's current term on the Board ends in April 1999. KENNETH M. DARBY, PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR. Mr. Darby has served 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 2000. ARTHUR D. ROCHE, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, SECRETARY, MEMBER OF THE OFFICE OF THE PRESIDENT AND DIRECTOR. Mr. Roche has been Executive Vice President and co-participant in the Office of the President of the Company since August 1993. For the six months earlier, Mr. Roche provided consulting services to the Company. In October 1991, Mr. Roche retired as a partner of Arthur Andersen & Co., an international accounting firm which he joined in 1960. Mr. Roche has served as a director since 1992. His current term on the Board ends in April 1999. JOHN L. ECKMAN, VICE PRESIDENT, U.S. SALES. Mr. Eckman has been Vice President, U.S. Sales of the Company since July 1996. He joined the Company in August 1995 as Eastern Regional Manager. Prior to joining the Company, he was Director of Field Operations for Cardkey Systems, Inc., an access control security products manufacturer, with which he was employed for 12 years. 34 PETER A. HORN, VICE PRESIDENT, COMPLIANCE AND QUALITY ASSURANCE. Mr. Horn has been Vice President, Compliance and Quality Assurance of the Company since 1995. He joined the Company in January 1974 and has been employed in various technical capacities. From 1994 to 1995, Mr. Horn served as Vice President, Product Management. From September 1993 to 1994, he was Vice President, Marketing. From May 1990 through August 1993, Mr. Horn served as Vice President, New Products and Technical Support Services. Prior to that time, Mr. Horn was Vice President, Engineering. 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. PETER F. BARRY, DIRECTOR. Mr. Barry has been a director of the Company since 1984. From August 1988 to March 1991, he served as Senior Vice President of the Washington, D.C. operations of Grumman Corp, an aerospace manufacturer. Prior to such time, he served as President of Hartman Systems, Inc., a manufacturer of electronic controls and display devices for military applications. Mr. Barry currently acts as a consultant to private industry on government relations. His current term on the Board ends in April 1999. 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. Mr. Gidge's current term on the Board ends in April 1998. MICHAEL D. KATZ, DIRECTOR. Dr. Katz has been a director of the Company since 1993. Dr. Katz is a physician practicing in New York. Since 1970, he has been the President of Katz, Rosenthal, Ganz, Snyder & PDC. Dr. Katz's current term on the Board ends in April 1998 and he has informed the Company that he will not stand for reelection on the Board after the expiration of his current term. 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 served 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 1998. KAZUYOSHI SUDO, DIRECTOR. Mr. Sudo has been a director of the Company since 1987. Mr. Sudo is Chief Executive Officer of Chugai Boyeki (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 Chugai Boyeki Company, Ltd. since 1997. Mr. Sudo's current term on the Board ends in April 2000. ARTHUR V. WALLACE, DIRECTOR. Mr. Wallace has been a director of the Company since 1974. From 1979 to September 1990, he was Executive Vice President of the Company. Mr. Wallace's current term on the Board ends in April 1998, and he has informed the Company that he will not stand for reelection on the Board after the expiration of his current term. CHU S. CHUN, DIRECTOR-NOMINEE. Mr. Chun has been the President of CSI, Chairman of the Board and Chief Executive Officer of International Industries, Inc. ("I.I.I.") and President of CSE since at least 1988. See "Certain Transactions." 35 Except for the relationship between Peter A. Horn, an officer of the Company, and Donald N. Horn, Chairman of the Board, there are no family relationships between any director, executive officer, officer or person nominated or chosen by the Company to became a director or officer. Peter A. Horn is the son of Donald N. Horn. 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 1997, no person who, at any time during 1997, was a director, officer or beneficial owner of more than 10% 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 reports required by Section 16 of the Exchange Act during 1997. MEETINGS OF THE BOARD AND COMMITTEES OF THE BOARD The Board of Directors has a number of standing committees including the Executive Committee, the Compensation Committee and Audit Committee. The Executive Committee consists of Messrs. Horn, Gidge, Darby and Roche, of whom Messrs. Gidge and Horn are non-employee directors. The committee meets in special situations when the full Board cannot be convened. The committee also recommends candidates to the Board as nominees for election at the annual meeting of shareholders. Nominees are selected on the basis of recognized achievements and their ability to bring skills and experience to the deliberations of the Board. The committee did not meet during the past fiscal year. The Compensation Committee, whose present members are Messrs. Neumann, Robertson and Wallace, held one meeting during the last fiscal year. The function of the Compensation Committee is to establish and approve the appropriate compensation for the President (including salary and incentive bonus), recommend the award of stock options, and review the recommendations of the President with respect to the compensation (including salary and incentive bonuses) of all other officers. The Audit Committee consists of Messrs. Gidge, Barry and Sudo, each of whom is a non-employee director. The Audit Committee reviews the internal financial controls of the Company and the objectivity of its financial reporting. The committee meets with appropriate financial personnel from the Company and independent certified public accountants in connection with their audits. The committee recommends to the Board the appointment of independent certified public accountants to serve as the Company's auditors, subject to ratification by the shareholders. The independent certified public accountants have complete and free access to the committee at any time. The committee met once during the last fiscal year. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by, or paid for all services rendered to the Company during 1997, 1996 and 1995 by the Chief Executive Officer and the Company's most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 during any such year. 36 SUMMARY COMPENSATION TABLE
OTHER ANNUAL COMPENSATION ALL OPTIONS OTHER SALARY (NO. OF COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) SHARES) ($) - --------------------------------------------------------------- --------- ---------- ------------- ------------- Kenneth M. Darby, Chief Executive Officer...................... 1997 $ 225,000 58,000 $ 87,017(1) 1996 195,000 95,000 34,750(2) 1995 195,000 -- 3,000(3) Arthur D. Roche, Executive Vice President...................... 1997 170,000 35,000 45,240(4) 1996 150,000 25,000 15,875(5) 1995 150,000 -- -- No listed officer received other non-cash compensation amounting to more than 10% of salary.
- ------------------------ (1) Represents life insurance policy payment of $3,000 and cash bonus of $84,017. The cash bonus equaled 4.55% of the sum of consolidated pre-tax income and provision for officers' bonuses, which bonus formula was adopted for years 1997 and 1998 by the Board of Directors upon the recommendation of its Compensation Committee. (2) Represents life insurance policy premium payment of $3,000 and bonus in the form of 16,933 shares of Common Stock issued from treasury. (3) Represents life insurance policy payment. (4) Represents cash bonus. The cash bonus equaled 2.45% of the sum of consolidated pre-tax income and provision for officers' bonuses, which bonus formula was adopted for years 1997 and 1998 by the Board of Directors upon the recommendation of its Compensation Committee. (5) Represents bonus in the form of 8,467 shares of Common Stock issued from treasury. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED -------------------------------------------------------- ANNUAL RATES OF % OF TOTAL STOCK NO. OF OPTIONS PRICE SHARES GRANTED EXERCISE APPRECIATION FOR UNDERLYING TO EMPLOYEES PRICE OPTION TERM OPTIONS IN PER SHARE EXPIRATION -------------------- NAME GRANTED FISCAL YEAR ($) DATE 5% 10% - -------------------------------------------------- ----------- ----------------- ----------- ----------- --------- --------- Kenneth M. Darby.................................. 38,000 16% $ 2.5000 10/01 $ 26,200 $ 58,000 20,000 8 3.0625 4/02 16,900 37,400 Arthur D. Roche................................... 25,000 10 2.5000 10/01 17,300 38,200 10,000 4 3.0625 4/02 8,500 18,700
Options granted in 1997 were issued under the Company's 1996 Incentive Stock Option Plan. The options granted above are exercisable as follows: up to 30% of the shares at the grant date, an additional 30% of the shares on the first anniversary of the grant date, and the balance of the shares on the second anniversary of the grant date, except that no option is exercisable after the expiration of five years from the date of grant. 37 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
AT SEPTEMBER 30, 1997 ---------------------------- NUMBER OF NUMBER OF SECURITIES VALUE OF SHARES VALUE UNDERLYING UNEXERCISABLE ACQUIRED REALIZED UNEXERCISABLE IN-THE-MONEY NAME ON EXERCISE (1) OPTIONS(2) OPTIONS(3) - ---------------------------------------------------------- ----------- ----------- ------------- ------------- Kenneth M. Darby.......................................... 153,432 $ 698,621 78,600 $ 484,775 Arthur D. Roche........................................... 75,500 343,750 34,500 206,875
- ------------------------ (1) Calculated based on the difference between the closing quoted market price ($6.50) per share at the date of exercise and the exercise price. (2) No options were exercisable by the above named officers at September 30, 1997. (3) Calculated based on the closing quoted market price ($8.375). NON-QUALIFIED STOCK OPTION PLANS FOR OUTSIDE DIRECTORS The Company has two Non-qualified Stock Option Plans for Outside Directors, the 1994 Non-qualified Stock Option Plan for Outside Directors and the 1996 Non-qualified Stock Option Plan for Outside Directors (collectively the "Non-qualified Plans"). Each of the Non-qualified Plans provides for the granting (without payment by optionees) of non-qualified options for an aggregate of 50,000 shares of Common Stock to outside directors. The Compensation Committee of the Company, comprised of independent directors ("Independent Directors"), determines the Independent Directors to whom options are granted and the number of shares to be granted. All awards by the Compensation Committee are subject to the approval of the Board of Directors. The exercise price per share of each option is equal to its fair market value on the date the option is granted. Options become exercisable after one year following the date of grant. All options granted under the Non-qualified Plans expire upon the earlier of five years following the date of grant or three months following the date the optionee ceases to be a director. Upon retirement or death, all options previously granted become exercisable within one year. There are no shares currently available for grant under the Non-qualified Plans. INCENTIVE STOCK OPTION PLANS The Company has three Incentive Stock Option Plans, the 1986 Incentive Stock Option Plan, the 1994 Incentive Stock Option Plan and the 1996 Incentive Stock Option Plan (collectively, the "Incentive Plans"). Options granted under the Incentive Plans qualify for special tax treatment under the Internal Revenue Code. The purpose of the Incentive Plans is to provide additional incentives to officers, directors and key employees of the Company who make important contributions to the Company's operations and who will contribute to the Company's growth and success. Officers, directors and other full time employees of the Company and its subsidiaries are eligible to receive (without any payment by them) options to purchase an aggregate of 150,000, 200,000 and 200,000 shares, respectively, of Common Stock under each of the Incentive Plans. The Compensation Committee of the Company, comprised of Independent Directors, selects the officers, directors and employees to whom options are to be granted and the number of shares to be granted. All awards by the Compensation Committee are subject to the approval of the Board of Directors. Options granted under the Incentive Plans may be exercised within five years from the date of grant. The exercise price for shares to be acquired may not be less than 100% of their fair market value on the date the option is granted or, in the case of any optionee who owns more than 10% of the outstanding Common Stock, not less than 110% of their fair market value on the date the option is granted. Further, (i) 38 during the first year that an option is outstanding, it may be exercised in respect of up to 30% of the shares covered by such option; (ii) during the second year, it may be exercised in respect of an additional 30% of the shares covered thereby; and (iii) during the third, fourth and fifth year, the option may be exercised as to all remaining shares covered thereby. In addition, the fair market value of the Common Stock with respect to which options are exercisable by any optionee in any given calendar year may not exceed $100,000, such value being determined at the time the options are granted, plus certain carryover amounts. No option granted under the Incentive Plans will be exercisable after the date on which the optionee ceases to perform services for the Company except that, in the event of death, options may be exercised for up to one year thereafter, and upon retirement, for up to three months after the date an optionee ceases to perform services. The exercise price payable for Common Stock purchased under the Incentive Plans may be paid in cash, through the surrender of previously held shares of Common Stock valued at the fair market value on the date of exercise, or a combination of cash and Common Stock. An aggregate of 45,535 additional options may be issued under the Incentive Plans. EMPLOYMENT AGREEMENTS Mr. Darby and Mr. Roche have each entered into employment agreements with the Company that provide for annual salaries of $225,000 and $170,000, respectively, through 2002 and 1999, respectively. Each of these agreements provides for payment in an amount up to three times their 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 agreements). In addition, Messrs. Darby and Roche are eligible to receive cash and stock bonuses based on performance of the Company. In 1997, they received a cash bonus equal to 4.55% and 2.45%, respectively, of the sum of consolidated pre-tax income and provision for officers' bonuses, which bonus formula was adopted for years 1997 and 1998 by the Board of Directors upon the recommendation of its Compensation Committee. Mr. Darby's agreement also provides for a deferred compensation benefit of 45,952 shares of Common Stock held by the Company in treasury. Such benefit vests upon his retirement, or earlier under certain conditions. The market value of such benefit approximated $345,000 at the date of grant. Donald N. Horn and Arthur V. Wallace (current directors of the Company) each have deferred compensation agreements with the Company which provide that upon reaching retirement age total payments of $917,000 and $631,000, respectively, will be made in monthly installments over a 10-year period. The full deferred compensation payment is subject to such individuals' adherence to certain noncompete covenants. Mr. Wallace, who retired in September 1990, began receiving payments under the agreement in October 1990 and Mr. Horn began receiving payments under the agreement in January 1994. DIRECTORS' COMPENSATION Directors, except the Chairman of the Board and employee directors, were each compensated at the rate of $600 per Board meeting and $300 per committee meeting attended in person while the Chairman of the Board was compensated at the rate of $1,000 per Board meeting and $300 per committee meeting attended in person through December 31, 1996. Since January 1, 1997, the directors and the Chairman of the Board have been compensated at annual rates of $6,000 and $10,000, respectively, while committee fees have been $500 per meeting attended in person. Employee directors are not compensated for Board or committee meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors consists of Messrs. Neumann, Robertson and Wallace. Mr. Wallace retired in 1990 as Executive Vice President. Neither of Messrs. Neumann or Robertson has ever been an officer of the Company. See the section entitled "Certain Transactions" 39 included elsewhere herein for a discussion of certain other relationships maintained by Mr. Neumann with the Company. BOARD COMPENSATION COMMITTEE REPORT The Compensation Committee's compensation policies applicable to the Company's executive officers for 1997 were to pay a competitive market price for the services of such officers, taking into account the overall performance and financial capabilities of the Company and the officer's individual level of performance. Mr. Darby makes recommendations to the Compensation Committee as to the base salary and incentive compensation of all executive officers other than 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 executive 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 executive officers. Also, the Company has established an incentive compensation plan for all of the executive officers, which provides a specified bonus to each officer upon the Company's achievement of certain annual profitability targets. The Compensation Committee grants options to executive officers to 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 executive 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 operating restructuring plan. 40 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth, as of the date of this Prospectus, and as adjusted to reflect the sale of 1,575,000 shares of Common Stock offered by the Company and the Selling Shareholders hereby, information regarding the beneficial ownership of Common Stock by (i) Selling Shareholders and each shareholder known by the Company to be the beneficial owner of more than 5% of the Company's outstanding Common Stock, (ii) each director, (iii) each executive officer named in the Summary Compensation Table and (iv) all directors, executive officers and officers of the Company as a group. The information set forth below includes 133,200 shares of Common Stock issuable under presently exercisable options granted to directors, executive officers and officers of the Company pursuant to the Stock Option Plans. The information set forth in the table does not include (a) 125,500 shares of Common Stock issuable under the Company's stock option plans (the "Stock Option Plans") under options that are not currently exercisable or (b) shares of Common Stock issuable upon the exercise of the Underwriters' Warrants granted in connection with this Offering. See "Underwriting." Donald N. Horn, Michael D. Katz and Arthur W. Wallace will sell 48,605, 257,700 and 18,695 shares of Common Stock, respectively, in this Offering. See "Certain Transactions."
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO THE OFFERING(2) AFTER THE OFFERING ------------------------ ------------------------ NUMBER OF SHARES TO BE SOLD NAME AND ADDRESS(1) SHARES PERCENTAGE IN THIS OFFERING SHARES PERCENTAGE - ---------------------------------------------- --------- ------------- ---------------- --------- ------------- Chugai Boyeki Company, Ltd. and affiliates.... 548,715 16.8% -- 548,715 12.2% Chu S. Chun................................... 204,507(3) 6.3 -- 204,507 4.5 Michael D. Katz............................... 257,700(4) 7.9 257,700 -- -- Kenneth M. Darby.............................. 231,837 7.1 -- 231,837 5.1 Arthur D. Roche............................... 136,967(5) 4.2 -- 136,967 3.0 Donald N. Horn................................ 101,003(6) 3.1 48,605 52,398 1.2 Arthur V. Wallace............................. 18,695(6) * 18,695 -- -- Kazuyoshi Sudo................................ 14,000(6) * -- 14,000 * Milton F. Gidge............................... 10,000(7) * -- 10,000 * Peter F. Neumann.............................. 8,000(6) * -- 8,000 * Peter F. Barry................................ 5,600(6) * -- 5,600 * W. Gregory Robertson.......................... 5,000(6) * -- 5,000 * All executive officers, officers and directors 872,252(8) 26.8% 325,000 547,252 12.1% as a group (13 individuals).................
- ------------------------ * Less than 1%. (1) The address of Chugai Boyeki Company, Ltd. is 2-15-13 Tsukishima, Chuo-ku, Tokyo, Japan 104. The address of Chu S. Chun is c/o I.I.I. Companies, Inc., 915 Hartford Turnpike, Shrewsbury, Massachusetts 01545. The address of each of the other beneficial owners identified is c/o Vicon Industries, Inc., 89 Arkay Drive, Hauppauge, N.Y. 11788. (2) Unless otherwise indicated, the Company believes that all persons named in the table have sole investment and voting power over the shares of capital stock owned. (3) 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. (4) Includes currently exercisable options to purchase 5,000 shares and 252,700 shares owned jointly by Mr. Katz and his wife. (5) Includes currently exercisable options to purchase 7,500 shares and 124,467 shares owned jointly by Mr. Roche and his wife. (6) Includes currently exercisable options to purchase 5,000 shares. (7) Includes currently exercisable options to purchase 8,000 shares. (8) Includes currently exercisable options to purchase 133,200 shares. 41 CERTAIN TRANSACTIONS CBC beneficially owns 16.8% of the Common Stock of the Company. The business relationship between the Company and CBC has continued for 18 years, during which period CBC has served as (i) a lender, (ii) a product supplier and sourcing agent, and (iii) 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. In 1997, the Company incurred approximately $383,000 in interest expense on amounts it owed to CBC in respect of extended accounts payable. CBC also acts as the Company's sourcing agent for the purchase of certain video products. In 1997, the Company purchased approximately $7.1 million of video products from or through CBC, which includes approximately $286,000 in commissions on purchases of such products. Additionally, the Company sells finished products to CBC for resale by CBC in certain Asian and European markets. Sales to CBC were $2.7 million in 1997. CBC also has the exclusive right to sell the Company's products in Japan. See "Risk Factors--Dependence on Manufacturers and Suppliers" and "Business--Marketing and Sales." In April 1997, the Company repaid $236,000 of mortgage loan indebtedness of Vicon U.K. to CBC with the proceeds of a new 10-year bank term loan. See "Statement of Cash Flow in Consolidated Financial Statements." Although management believes that the CBC relationship has been beneficial to the Company on an overall basis, the terms provided to the Company by CBC for the foregoing may be less favorable than those the Company may be able to obtain from unaffiliated third parties. Kazuyoshi Sudo, a director of the Company and of CBC, is Chief Executive Officer of Chugai Boyeki (America) Corp., a U.S. subsidiary of CBC. See "Risk Factors--Proceeds to Benefit Principal Shareholders; Potential Conflicts of Interest." Mr. Chu S. Chun, who beneficially owns 6.3% of the Common Stock of the Company, also owns CSI, a 50% partner with the Company in CSE. In 1997, CSE sold approximately $7.0 million of products to the Company through I.I.I., a U.S.-based company controlled by Mr. Chun. I.I.I. arranges the importation of, and provides short-term financing on, all the Company's product purchases from CSE which in 1997, included approximately $137,000 in connection with such services. CSE also sold approximately $1.7 million of products to CSI, which has the exclusive right to sell the Company's products in South Korea. In addition, I.I.I. purchased approximately $1.1 million of products directly from the Company during 1997 for resale to CSI. Although the Company believes its relationships with CSE, CSI and I.I.I. have been beneficial to the Company on an overall basis, the terms provided to the Company by I.I.I. for import financing may be less favorable than those the Company may be able to obtain from unaffiliated third parties. See "Risk Factors--Dependence on Manufacturers and Suppliers" and "--Proceeds to Benefit Principal Shareholders; Potential Conflicts of Interest." Peter F. Neumann, a director of the Company, is a former principal in the insurance brokerage firm of Bradley & Parker, Inc., which is the agent for certain of the Company's commercial insurance. The premium paid for such insurance amounted to approximately $61,000 in 1997. 42 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 10,000,000 authorized shares of Common Stock, $.01 par value per share, 3,055,058 shares of which were outstanding as of February 23, 1998. Subject to the rights of the holders of any then outstanding preferred stock (none are authorized as of the date of this Prospectus), each holder of Common Stock on the applicable record date is entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor. Upon liquidation or dissolution of the Company, each holder of Common Stock will be entitled to share pro rata in any distribution of the Company's assets after the payment of all debts and other liabilities, subject to the rights of the holders of then outstanding preferred stock, if any. Each holder of Common Stock is entitled to one vote per share owned of record on the applicable record date on all matters presented to a vote of the holders of Common Stock, including the election of directors. Holders of Common Stock have no cumulative voting rights and, therefore, the holders of a majority of the shares voting for the election of a class of directors can elect all the directors of such class and in such event the holders of the remaining shares will not be able to elect any of such directors. The holders of Common Stock have no preemptive rights to purchase or subscribe for any stock or other securities and there are no conversion rights or redemption or sinking fund provisions with respect to such stock. All outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be when issued, fully paid and nonassessable. ANTI-TAKEOVER EFFECTS OF THE COMPANY'S GOVERNING DOCUMENTS Certain provisions of the Company's Certificate of Incorporation and Bylaws may be deemed to have anti-takeover effects and may discourage, delay or prevent a third party from acquiring control of the Company by means of a tender offer, a proxy contest for a majority of the Board of Directors or otherwise, including such an action as might result in payment of a premium over the market price for shares held by shareholders. These provisions (i) classify the Company's Board of Directors into three classes, each of which serves for a different three-year period, (ii) provide that only the Board of Directors and the Chairman of the Board may call special meetings of the shareholders, (iii) provide that directors of the Company may be removed without cause only by the affirmative vote of the holders of at least 80% of the votes entitled to be cast by all then outstanding shares of Common Stock, (iv) require an 80% shareholder vote to amend or repeal the provisions described in item (i) and (iii) above, and (v) do not provide for cumulative voting. See "Risk Factors--Control by Certain Shareholders; Impediments to Change of Control." INDEMNIFICATION Article 7 of the New York Business Corporation Law provides for the indemnification of directors and officers subject to certain limitations. Among other provisions, the statute provides that to be entitled to indemnification under the statutory provisions, a person who is sued or threatened to be sued by reason of being a director or officer of a New York corporation must affirmatively establish that he acted in good faith for a purpose which he reasonably believed to be in the best interests of the corporation. The statute requires court approval to provide indemnification in a derivative action under certain circumstances. Additionally, the indemnification to which directors, officers and other persons serving the corporation are entitled excludes amounts payable in a derivative action where the director, officer or other person is adjudged to be liable to the corporation. The By-laws of the Company provide for the indemnification of its directors and officers to the maximum extent provided by law. It is the position of the Securities and Exchange Commission and certain state securities administrators that any attempt to limit the liability of persons controlling an issuer under the federal securities laws or state securities laws is contrary to public policy and therefore, unenforceable. 43 TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is Harris Trust Company, New York, N. Y. SHARES ELIGIBLE FOR FUTURE SALE Immediately after completion of the Offering, the Company will have 4,315,058 shares of Common Stock outstanding, of which approximately 3,137,784 will be freely tradable without restriction, except for those shares, if any, acquired in the Offering by "affiliates" of the Company as that term is defined in the Securities Act of 1933, as amended. Subject to the nine (9) month lock-up arrangements described below, holders of the remaining 1,177,274 shares of Common Stock will be eligible to sell such shares pursuant to Rule 144 ("Rule 144") under the Securities Act at prescribed times and subject to the applicable restrictions of Rule 144. The Company's officers, directors and certain other shareholders, who collectively own 1,177,274 shares of Common Stock and hold options to acquire an additional 248,700 shares of Common Stock exercisable at various dates through April 1999, have agreed with the Underwriters not to offer, sell, pledge, contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for Common Stock, or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any Common Stock, for a period of nine (9) months after the date of this Prospectus without the prior written consent of Fahnestock. After the expiration of the nine (9) month lock-up period, 1,151,874 shares of Common Stock held by affiliates of the Company will become tradable, subject to the restrictions of Rule 144 (other than the holding period restriction, which has been satisfied). The 25,400 shares issued to Kenneth M. Darby, the Company's President and Chief Executive Officer, and Arthur D. Roche, its Executive Vice President, Chief Financial Officer and Secretary, as compensation in January 1997 will become tradable under Rule 144 in January 1999. The 248,700 shares of Common Stock reserved for issuance under various stock option plans will be freely tradeable upon issuance. In addition to the foregoing shares, 45,952 shares of Common Stock are held in treasury and deliverable as deferred compensation to Mr. Darby upon his retirement or earlier under certain conditions, which shares are restricted securities that, when issued, can be sold pursuant to the restrictions of Rule 144 (see "Management--Executive Compensation."). Also, 157,500 shares of Common Stock have been reserved for issuance upon exercise of the Underwriters' Warrants (see "Underwriting"). Such warrants are exercisable for Common Stock at an exercise price of $ per share commencing one year from the date of this Prospectus. In addition, the Company may issue shares of Common Stock in connection with future business acquisitions and resales of such shares by the recipients. Such shares, if registered, could be sold in the public market. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned shares for at least one year (including the holding period of any prior owner, except an affiliate) is entitled to sell in "broker's transactions" or to market makers within any three-month period, a number of shares that does not exceed the greater of (i) one percent of the number of shares of Common Stock then outstanding (approximately 43,000 shares immediately after this Offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the required filing of a Form 144 with respect to such sale. Sales under Rule 144 are generally subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner, except an affiliate), is entitled to sell such shares without having to comply with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Affiliates of the Company remain subject to all of the restrictions contained in Rule 144, even after the expiration of a two-year holding period. 44 No predictions can be made as to the effect, if any, that market sales of the shares described above or the availability of such shares for sale will have on the market price for shares of Common Stock prevailing from time to time. Sales of substantial amounts of shares of Common Stock in the public market following the Offering could adversely affect the market price of the Common Stock and could impair the Company's future ability to raise capital through an offering of equity securities. 45 UNDERWRITING The underwriters named below (the "Underwriters"), have each severally agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase, and the Company and the Selling Shareholders have agreed to sell to the Underwriters, the number of shares of Common Stock indicated below opposite the name of such underwriter at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus.
NAME OF UNDERWRITER NUMBER OF SHARES - ----------------------------------------------------------------------------------------------- ----------------- Fahnestock & Co. Inc........................................................................... Southeast Research Partners, Inc............................................................... ----------------- TOTAL.................................................................................... 1,575,000 ----------------- -----------------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions and that the Underwriters are committed to purchase all of the shares (other than those covered by the over-allotment) if any are purchased. The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or will contribute to payments the Underwriters may be required to make in respect thereof. The Underwriters have advised the Company that they propose to offer the Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not to exceed $ per share. The Underwriters may allow, and such dealers may reallow, a concession of not more than $ to certain other dealers. After the public offering, the offering price, the concession to certain dealers and other selling terms may be changed by the Underwriters. The Underwriters have agreed not to confirm sales of Common Stock offered hereby to any account over which they exercise discretionary authority without the prior written approval of the customer. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to a maximum of 236,250 additional shares of Common Stock solely to cover over-allotments, if any, at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each Underwriter will be committed, subject to certain conditions, to purchase approximately the same proportion of additional Shares as the number of shares to be purchased by it shown in the foregoing table bears to the total number of shares of Common Stock initially offered hereby. The Company's officers, directors and holders of 5% or more of the Company's outstanding Common Stock as of the date of this Prospectus have agreed not to sell, other than the over-allotment shares, if any, and shares to be sold in the Offering by the Selling Shareholders, for a period of nine (9) months from the date of this Prospectus, without the prior written consent of Fahnestock. The lock-up period in respect of all officers and directors of the Company commenced on December 15, 1997. The Company and Fahnestock will enter into an investment banking agreement which, amongst other things, will grant Fahnestock a right of first refusal for a period of eighteen (18) months after the closing date for any public offerings or private equity financings of the Company or any of its present or future subsidiaries. In addition, Fahnestock shall have the right to attend Board of Director meetings and to receive the same information as Directors for one year. The Company has also agreed to pay Fahnestock a non-accountable expense allowance of $100,000, $40,000 of which has been paid to date. In connection with this Offering, the Company has agreed to grant to the Underwriters warrants to purchase up to 157,500 shares of Common Stock (the "Underwriters' Warrants"). The Underwriters' Warrants, which warrants (and the underlying shares of Common Stock) are being registered pursuant to the Registration Statement filed with respect to the Common Stock offered hereby, shall be exercisable at 46 any time during a period of four (4) years commencing one year after their issuance and provide for an exercise price equaling one hundred twenty percent (120%) of the initial public offering price set forth herein. The Underwriters' Warrants are non-transferrable during the term, except to affiliates of the Underwriters, and grant to the holder thereof certain registration rights for the securities issuable upon the exercise thereof. In connection with this Offering, the Underwriters and certain selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which such persons may bid for a purchase Common Stock for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Common Stock in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 236,250 shares of Common Stock, by exercising the over-allotment option referred to above. In addition, the Underwriters may impose "penalty bids" under contractual arrangements with certain dealers participating in the Offering whereby the Underwriters may reclaim from such dealers for the account of the Underwriters, the selling concession with respect to Common Stock that is distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discounted at any time. LEGAL MATTERS Certain legal matters with respect to the Common Stock offered hereby will be passed upon for the Company by Schoeman, Marsh & Updike, LLP, New York, New York. Certain legal matters will be passed upon for the Underwriters by Whitman Breed Abbott & Morgan LLP, New York, New York. Richard Crystal, a member of Whitman Breed Abbott & Morgan LLP, is a director of Fahnestock Viner Holdings Inc., the parent company of Fahnestock. EXPERTS The consolidated financial statements as of September 30, 1997 and 1996 and for each of the years in the three-year period ended September 30, 1997 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in auditing and accounting. 47 VICON INDUSTRIES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Certified Public Accountants......................................................... F-2 Consolidated Balance Sheets at September 30, 1996 and 1997 and December 31, 1997 (unaudited)............... F-3 Consolidated Statements of Operations, fiscal years ended September 30, 1995, 1996 and 1997 and three months ended December 31, 1996 and 1997 (unaudited)...................................................... F-4 Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 1995, 1996 and 1997 and three months ended December 31, 1997 (unaudited)......................................................... F-5 Consolidated Statements of Cash Flows, fiscal years ended September 30, 1995, 1996, and 1997 and the three months ended December 31, 1996 and 1997 (unaudited)...................................................... F-6 Notes to Consolidated Financial Statements................................................................. F-7
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Shareholders Vicon Industries, Inc.: We have audited the accompanying consolidated balance sheets of Vicon Industries, Inc. and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Jericho, New York November 12, 1997 F-2 VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, ---------------------- ------------ ASSETS 1996 1997 1997 - -------------------------------------------------------------------------------------- ---------- ---------- ------------ (UNAUDITED) Current Assets: Cash................................................................................ $ 205,876 $ 287,580 $ 225,276 Accounts receivable (less allowance of $396,000, $493,000 and $603,000 at September 30, 1996 and 1997, and December 31, 1997, respectively)........................... 8,706,839 9,578,297 10,152,090 Inventories: Parts, components, and materials.................................................. 2,175,408 3,399,133 3,356,001 Work-in-process................................................................... 1,391,552 2,046,174 1,904,228 Finished products................................................................. 11,135,798 11,188,217 10,919,277 ---------- ---------- ------------ 14,702,758 16,633,524 16,179,506 Prepaid expenses.................................................................... 529,631 307,580 392,154 ---------- ---------- ------------ Total current assets............................................................ 24,145,104 26,806,981 26,949,026 Property, plant and equipment: Land................................................................................ 290,448 299,698 305,248 Building and improvements........................................................... 1,507,630 1,653,503 1,677,056 Machinery, equipment, and vehicles.................................................. 11,842,120 6,409,729 6,525,922 ---------- ---------- ------------ 13,640,198 8,362,930 8,508,226 Less accumulated depreciation and amortization...................................... 10,606,013 4,870,717 5,048,244 ---------- ---------- ------------ 3,034,185 3,492,213 3,459,982 Other assets.......................................................................... 905,327 900,417 870,481 ---------- ---------- ------------ $28,084,616 $31,199,611 $31,279,489 ---------- ---------- ------------ ---------- ---------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------- Current Liabilities: Borrowings under revolving credit agreement......................................... $ 959,583 $ 169,006 $ 471,490 Current maturities of long-term debt................................................ 203,719 515,092 501,169 Accounts payable: Related party..................................................................... 7,457,482 7,146,985 6,902,119 Other............................................................................. 1,811,730 1,407,917 1,785,825 Accrued wages and expenses.......................................................... 1,229,087 2,111,670 1,852,334 Income taxes payable................................................................ 87,205 105,188 152,343 Deferred gain on sale and leaseback................................................. 332,100 -- -- ---------- ---------- ------------ Total current liabilities....................................................... 12,080,906 11,455,858 11,665,280 Long-term debt: Related party....................................................................... 2,262,005 1,440,000 1,440,000 Banks and other..................................................................... 4,166,881 6,904,368 5,776,092 Deferred gain on sale and leaseback................................................... 101,893 -- -- Other long-term liabilities........................................................... 504,776 485,402 466,746 Commitments and contingencies--Note 11 Shareholders' equity Common Stock, par value $.01 per share Authorized--10,000,000 shares Issued 2,802,728 shares at September 30, 1996 and 3,047,060 shares at September 30, 1997 and December 31, 1997................................................... 28,027 30,470 30,470 Capital in excess of par value...................................................... 9,423,089 9,868,063 9,868,063 Retained earnings (deficit)......................................................... (283,611) 1,280,907 2,289,880 ---------- ---------- ------------ 9,167,505 11,179,440 12,188,413 Less treasury stock at cost, 25,400 shares at September 30, 1996 and 45,952 shares at September 30, 1997 and December 31, 1997....................................... (82,901) (298,686) (298,686) Foreign currency translation adjustment............................................. (116,449) 33,229 41,644 ---------- ---------- ------------ Total shareholders' equity...................................................... 8,968,155 10,913,983 11,931,371 ---------- ---------- ------------ $28,084,616 $31,199,611 $31,279,489 ---------- ---------- ------------ ---------- ---------- ------------
See accompanying notes to consolidated financial statements. F-3 VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------------------------------- ---------------------------- 1995 1996 1997 1996 1997 ------------- ------------- ------------- ------------- ------------- (UNAUDITED) Net sales............................ $ 43,846,571 $ 43,191,446 $ 51,518,940 $ 11,297,775 $ 14,874,200 Cost of sales........................ 34,300,638 32,234,192 37,043,750 8,116,967 10,245,525 ------------- ------------- ------------- ------------- ------------- Gross profit....................... 9,545,933 10,957,254 14,475,190 3,180,808 4,628,675 Operating expenses: General and administrative expense........................ 3,366,662 2,931,333 3,542,400 817,046 1,022,952 Selling expense.................. 6,433,483 6,800,361 7,957,340 1,904,149 2,192,954 Relocation expense............... -- -- 225,129 -- -- ------------- ------------- ------------- ------------- ------------- 9,800,145 9,731,694 11,724,869 2,721,195 3,215,906 ------------- ------------- ------------- ------------- ------------- Operating income (loss)............ (254,212) 1,225,560 2,750,321 459,613 1,412,769 Other income......................... (550) (41,908) (39,896) (33,623) -- Interest expense..................... 1,013,383 882,290 1,143,699 263,948 338,796 ------------- ------------- ------------- ------------- ------------- Income (loss) before income taxes.......................... (1,267,045) 385,178 1,646,518 229,288 1,073,973 Income tax expense................... 80,000 85,000 82,000 14,000 65,000 ------------- ------------- ------------- ------------- ------------- Net income (loss)................ $ (1,347,045) $ 300,178 $ 1,564,518 $ 215,288 $ 1,008,973 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Earnings (loss) per share: Basic............................ $ (.49) $ .11 $ .56 $ .08 $ .34 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- Diluted.......................... $ (.49) $ .11 $ .52 $ .08 $ .31 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to consolidated financial statements. F-4 VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOREIGN TOTAL CAPITAL IN RETAINED CURRENCY SHARE- COMMON EXCESS OF EARNINGS TREASURY TRANSLATION HOLDERS' SHARES STOCK PAR VALUE (DEFICIT) STOCK ADJUSTMENT EQUITY --------- ----------- ---------- ---------- --------- ----------- ----------- Balance September 30, 1994............. 2,788,228 $ 27,882 $9,396,890 $ 763,256 $ (82,901) $ (62,595) $10,042,532 Foreign currency translation adjustment........................... -- -- -- -- -- (62,461) (62,461) Net loss............................... -- -- -- (1,347,045) -- -- (1,347,045) --------- ----------- ---------- ---------- --------- ----------- ----------- Balance September 30, 1995............. 2,788,228 $ 27,882 $9,396,890 $ (583,789) $ (82,901) $(125,056) $ 8,633,026 Foreign currency translation adjustment........................... -- -- -- -- -- 8,607 8,607 Exercise of stock options.............. 14,500 145 26,199 -- -- -- 26,344 Net income............................. -- -- -- 300,178 -- -- 300,178 --------- ----------- ---------- ---------- --------- ----------- ----------- Balance September 30, 1996............. 2,802,728 $ 28,027 $9,423,089 $ (283,611) $ (82,901) $(116,449) $ 8,968,155 Foreign currency translation adjustment........................... -- -- -- -- -- 149,678 149,678 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 Net income............................. -- -- -- 1,564,518 -- -- 1,564,518 --------- ----------- ---------- ---------- --------- ----------- ----------- Balance September 30, 1997............. 3,047,060 $ 30,470 $9,868,063 $1,280,907 $(298,686) $ 33,229 $10,913,983 Foreign currency translation adjustment (unaudited).......................... -- -- -- -- -- 8,415 8,415 Net income (unaudited)................. -- -- -- 1,008,973 -- -- 1,008,973 --------- ----------- ---------- ---------- --------- ----------- ----------- Balance December 31, 1997 (unaudited).. 3,047,060 $ 30,470 $9,868,063 $2,289,880 $(298,686) $ 41,644 $11,931,371 --------- ----------- ---------- ---------- --------- ----------- ----------- --------- ----------- ---------- ---------- --------- ----------- -----------
See accompanying notes to consolidated financial statements. F-5 VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ----------------------------------- --------------------- 1995 1996 1997 1996 1997 ----------- ---------- ---------- --------- ---------- (UNAUDITED) Cash flows from operating activities: Net income (loss)....................... $(1,347,045) $ 300,178 $1,564,518 $ 215,288 $1,008,973 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization......... 704,900 699,211 783,859 183,127 166,752 Amortization of deferred gain on sale and leaseback....................... (332,100) (332,100) (433,993) (343,210) -- Stock bonus award..................... -- -- 53,975 -- -- Foreign exchange gain................. (550) (41,908) (39,896) (33,623) -- Change in assets and liabilities: Accounts receivable................. 1,417,089 (122,162) (820,556) (27,179) (548,035) Inventories......................... 1,358,533 (2,593,382) (1,880,543) (819,790) 487,928 Prepaid expenses.................... 13,513 (218,762) 230,371 (57,163) (83,995) Other assets........................ (30,000) 67,780 4,910 (13,728) 29,936 Accounts payable.................... 708,591 1,045,453 (727,574) (107,485) 129,235 Accrued wages and expenses.......... 409,285 (460,350) 875,673 217,849 (262,876) Income taxes payable................ 48,077 7,517 14,762 13,844 46,419 Other liabilities................... (63,878) (45,833) (19,374) (15,136) (18,656) ----------- ---------- ---------- --------- ---------- Net cash provided by (used in) operating activities............ 2,886,415 (1,694,358) (393,868) (787,206) 955,681 ----------- ---------- ---------- --------- ---------- Cash flows from investing activities: Capital expenditures, net of minor disposals............................. (608,808) (482,111) (925,024) (102,286) (107,865) ----------- ---------- ---------- --------- ---------- Net cash used in investing activities...................... (608,808) (482,111) (925,024) (102,286) (107,865) ----------- ---------- ---------- --------- ---------- Cash flows from financing activities: Net borrowings under U.S. credit and security agreement.................... -- 4,142,898 1,860,518 767,426 (1,107,861) Repayments of U.S. revolving credit agreement............................. (1,700,000) (2,800,000) -- -- -- Proceeds from exercise of stock options............................... -- 26,344 177,657 -- -- (Decrease) increase in borrowings under U.K. revolving credit agreement....... (29,511) 57,251 (831,275) 302,509 301,169 Borrowings under U.K. term loan......... -- -- 810,000 -- -- Repayment of U.K. mortgage.............. (145,280) (140,846) (353,112) (139,080) -- Repayment of term loan.................. -- -- (200,000) -- -- Repayments of other debt................ (92,443) (79,779) (127,280) (19,345) (48,839) ----------- ---------- ---------- --------- ---------- Net cash (used in) provided by financing activities............ (1,967,234) 1,205,868 1,336,508 911,510 (855,531) ----------- ---------- ---------- --------- ---------- Effect of exchange rate changes on cash... (68,923) 24,627 64,088 (102,900) (54,589) ----------- ---------- ---------- --------- ---------- Net increase (decrease) in cash........... 241,450 (945,974) 81,704 (80,882) (62,304) Cash at beginning of period............... 910,400 1,151,850 205,876 205,876 287,580 ----------- ---------- ---------- --------- ---------- Cash at end of period..................... $ 1,151,850 $ 205,876 $ 287,580 $ 124,994 $ 225,276 ----------- ---------- ---------- --------- ---------- ----------- ---------- ---------- --------- ---------- Non-cash investing and financing activities: Capital lease obligations............... $ 178,151 -- $ 276,624 -- -- Cash paid during the period for: Income taxes............................ $ 32,097 $ 78,121 $ 29,203 -- -- Interest................................ $ 974,640 $ 888,061 $1,118,963 $ 249,483 $ 301,054
See accompanying notes to consolidated financial statements. F-6 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) 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, system 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 Foreign Sales Corp., a Foreign Sales Corporation (FSC), and Vicon Industries (U.K.), Ltd. after elimination of intercompany accounts and transactions. REVENUE RECOGNITION Revenues are recognized when products are sold and title is passed to a third party, generally at the time of shipment. INVENTORIES Inventories are valued at the lower of cost (on a moving average basis which approximates a first-in, first-out method) or market. When it is determined that a product or product line will be sold below carrying cost, affected on hand inventories are written down to their estimated net realizable values. 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 for financial reporting purposes and on an accelerated basis for income tax purposes. Machinery, equipment and vehicles are being depreciated over periods ranging from 2 to 10 years. The Company's building is being depreciated over a period of 40 years and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term. In connection with the Company's move to a new principal operating facility in 1997, approximately $6.3 million of fully depreciated abandoned assets and leasehold improvements were written off. The Company implemented the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," effective October 1, 1996. 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. The adoption of Statement No.121 had no impact on the Company's financial positions or results of operations. F-7 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESEARCH AND DEVELOPMENT Product research and development costs are principally charged to cost of sales as incurred, and amounted to approximately $1,900,000, $1,800,000 and $2,000,000 in fiscal 1995, 1996, and 1997, respectively. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share" which requires companies to present basic and diluted earnings per share (EPS), instead of primary and fully diluted EPS that was previously required. Basic earnings per share are computed based on the weighted average number of shares outstanding. Diluted earnings per share reflect the maximum dilution that would have resulted from the exercise of stock options and incremental shares issuable under a deferred compensation agreement (see Note 9). The new standard was adopted by the Company in the first quarter ended December 31, 1997 of fiscal year 1998. Prior period earnings per share data has been restated to apply the provisions of SFAS 128. 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 $(116,000) and $33,000 at September 30, 1996 and 1997, respectively, is recorded as a component of shareholders' equity. Intercompany balances not deemed long-term in nature at the balance sheet date resulted in a translation gain of $47,000, $14,000 and $35,000 in 1995, 1996, and 1997, respectively, which is reflected in cost of sales. Gains and losses on contracts which hedge specific foreign currency denominated commitments, primarily inventory purchases, are included in cost of sales. INCOME TAXES The Company accounts for income taxes under the provisions of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled (see Note 5). FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards 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 and extended term related party accounts payable approximates fair value since the interest rates are prime-based and, accordingly, are adjusted for market rate fluctuations. The fair value of forward F-8 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) exchange contracts is estimated by obtaining quoted market prices. The exchange rates on committed forward exchange contracts at September 30, 1997 approximated market rates for similar term contracts. 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). 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 with current year presentation. NOTE 2. INVESTMENT IN AFFILIATE The Company's 50 percent ownership interest in Chun Shin Electronics, Inc., a joint venture company which assembles certain Vicon products in South Korea, is accounted for using the equity method of accounting which reflects the cost of the Company's investment adjusted for the Company's proportionate share of earnings or losses. Such earnings or losses were not material during each of the three years ended September 30, 1997. Assets and sales of the joint venture were approximately $4.9 million and $8.8 million, respectively, for the fiscal year ended September 30, 1997. A significant portion of joint venture product sales were to related parties including approximately $7.0 million indirectly to the Company and approximately $1.7 million to a company owned by the other joint venture partner (see Note 12). NOTE 3. DEFERRED GAIN ON SALE AND LEASEBACK In fiscal 1988, under a sale and leaseback agreement, the Company sold its principal operating facility in Melville, New York for approximately $11 million and leased it back under a ten-year lease agreement. The transaction resulted in a net gain of $3,321,000 which was deferred and was amortized over the ten-year lease period. The Company terminated this lease in 1997 and wrote off the unamortized balance against the cost of relocation. F-9 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 4. SHORT-TERM BORROWINGS Borrowings under revolving credit agreement represent short term borrowings by the Company's U.K. subsidiary under a bank overdraft facility. In April 1997, such credit agreement was amended to provide for maximum borrowings of 600,000 pounds ($972,000) and is secured by all the assets of the subsidiary. Maximum borrowings during 1995, 1996 and 1997 amounted to approximately $1,083,000, $1,045,000 and $1,282,000, respectively. The weighted-average interest rate on borrowings during these years was 8.50% in 1995, 8.00% in 1996 and 8.27% in 1997. At September 30, 1996 and 1997 and December 31, 1997, Accounts Payable--related party included approximately $4.4 million, $5.0 million and $6.4 million, respectively, of extended accounts payable balances due Chugai Boyeki Company, Ltd., a shareholder of the Company. The extended accounts payable balances at September 30, 1996 and 1997 and December 31, 1997, includes approximately $4.1 million, $4.7 million and $6.3 million, respectively, of purchases denominated in U.S. dollars which bear interest at the prime rate of the related party's U.S. bank (8.25% at September 30, 1996 and 8.50% at September 30, 1997 and December 31, 1997). The remaining balances are denominated in Japanese yen and bear interest at the related party's internal lending rate (4.0% at September 30, 1996 and 1997 and December 31, 1997). NOTE 5. INCOME TAXES The components of income tax expense for the fiscal years indicated are as follows:
1995 1996 1997 ---------- ---------- ---------- Federal.................................................. $ -- $ -- $ 24,000 State.................................................... -- -- 5,000 Foreign.................................................. 80,000 85,000 53,000 ---------- ---------- ---------- $ 80,000 $ 85,000 $ 82,000 ---------- ---------- ---------- ---------- ---------- ----------
There were no deferred tax expenses in any of the years presented above. A reconciliation of the U.S. statutory tax rate to the Company's effective tax rate follows:
1995 1996 1997 ------------------------ ------------------------ ------------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ----------- ----------- ----------- ----------- ----------- ----------- U.S. statutory tax............................ $ (431,000) (34.0%) $ 131,000 34.0% $ 560,000 34.0% Change in valuation allowance................. 532,000 42.0 (56,000) (14.5) (467,000) (28.3) Foreign subsidiary operations................. (42,000) (3.3) -- -- 3,000 0.2 Officers' life insurance...................... 17,000 1.3 5,000 1.3 4,000 0.2 Other......................................... 4,000 .3 5,000 1.3 (18,000) (1.1) ----------- ----- ----------- ----- ----------- ----- Effective Tax Rate........................ $ 80,000 6.3% $ 85,000 22.1% $ 82,000 5.0% ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
F-10 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 5. INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 1996 and 1997 are presented below:
1996 1997 ------------- ------------- Deferred tax assets: Deferred gain on sale and leaseback............................................... $ 146,000 $ -- Inventory obsolescence and disposition reserves................................... 418,000 457,000 Deferred compensation accruals.................................................... 206,000 199,000 Allowance for doubtful accounts receivable........................................ 123,000 162,000 Net operating loss carryforwards.................................................. 2,001,000 1,726,000 General business credit carryforwards............................................. 186,000 186,000 Other............................................................................. 8,000 8,000 ------------- ------------- Total deferred tax assets....................................................... 3,088,000 2,738,000 Less valuation allowance............................................................ (2,992,000) (2,525,000) ------------- ------------- Net deferred tax assets......................................................... 96,000 213,000 ------------- ------------- Deferred tax liabilities: Cash surrender value of officers' life insurance.................................. 73,000 73,000 Other............................................................................. 23,000 140,000 ------------- ------------- Total deferred tax liabilities.................................................. 96,000 213,000 ------------- ------------- Net deferred tax assets and liabilities............................................. $ -0- $ -0- ------------- -------------
The Company has provided a valuation allowance of $2,525,000 for deferred tax assets since realization of these assets was not assured. At September 30, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $5,100,000 which are available to offset future federal taxable income, if any, through 2011. The Company also had general business tax credit carryforwards for federal income tax purposes of approximately $186,000 which are available to reduce future federal income taxes, if any, through 2003. Pretax domestic income (loss) amounted to approximately ($1,626,000), $136,000 and $1,414,000 in fiscal years 1995, 1996 and 1997, respectively. Pretax foreign income amounted to approximately $291,000, $311,000 and $236,000 in fiscal years 1995, 1996 and 1997, respectively. F-11 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 6. LONG-TERM DEBT Long-term debt is comprised of the following:
SEPTEMBER 30, DECEMBER -------------------- 31, 1996 1997 1997 --------- --------- ----------- (UNAUDITED) Related party: Mortgage loan denominated in Japanese yen at a formula interest rate (6.3% at September 30, 1996)........... $ 393,008 $ -- $ -- Term loan with interest rate of 1% above the prevailing prime rate (9.25% at September 30, 1996 and 9.50% at September 30, 1997 and December 31, 1997)............ 2,000,000 1,800,000 1,800,000 --------- --------- ----------- 2,393,008 1,800,000 1,800,000 Less installments due within one year.................. 131,003 360,000 360,000 --------- --------- ----------- $2,262,005 $1,440,000 $1,440,000 --------- --------- ----------- --------- --------- ----------- Banks and other: Revolving credit loan.................................. $4,142,898 $6,003,416 $4,895,555 Bank term loan......................................... -- 776,250 770,001 Capital lease obligations.............................. 86,520 279,794 251,705 Other.................................................. 10,179 -- -- --------- --------- ----------- 4,239,597 7,059,460 5,917,261 Less installments due within one year.................. 72,716 155,092 141,169 --------- --------- ----------- $4,166,881 $6,904,368 $5,776,092 --------- --------- ----------- --------- --------- -----------
In October 1993, the Company issued a $2,000,000 secured promissory note to Chugai Boyeki Company, Ltd., a related party. The note is subordinated to senior bank debt with regard to liens and interest under certain conditions. The remaining balance at September 30, 1997 and December 31, 1997 is due in installments of $360,000 on July 1, 1998 and $1,440,000 on July 1, 1999. In December 1995, the Company entered into a two year Credit and Security Agreement with a bank which currently provides for maximum borrowings of $6,500,000, subject to an availability formula based on accounts receivable and inventory balances. In February 1997, the term of the agreement was extended to January 31, 1999. Borrowings under the agreement bear interest at the bank's prime rate plus 1.00% (9.50% at September 30, 1997 and December 31, 1997). The Credit and Security Agreement contains restrictive covenants which, among other things, restricts the payment of dividends and requires the Company to maintain certain levels of net worth, earnings and ratios of interest coverage and debt to net worth. Borrowings under this agreement are secured by substantially all assets of the Company. In April 1997, the Company repaid its U.K. related party mortgage loan with the proceeds of a new ten year 500,000 pound sterling (approximately $810,000) 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. F-12 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 6. LONG-TERM DEBT (CONTINUED) Long-term debt maturing in each of the fiscal years subsequent to September 30, 1997 approximates $515,000 in 1998, $7,577,000 in 1999, $139,000 in 2000, $144,000 in 2001, $113,000 in 2002 and $371,000 thereafter. At September 30, 1997, future minimum annual rental commitments under non-cancelable capital lease obligations were as follows: $100,090 in 1998, $69,334 per year in 1999 through 2001, and $33,454 in 2002. NOTE 7. FOREIGN OPERATIONS The Company operates one foreign entity, Vicon Industries (U.K.), Ltd., a wholly owned subsidiary which markets and distributes the Company's products principally within the United Kingdom and Europe. The following summarizes certain information concerning the Company's operations in the U.S. and U.K. for fiscal years 1995, 1996, and 1997:
1995 1996 1997 ------------- ------------- ------------- Net sales U.S............................................................... $ 34,294,000 $ 35,468,000 $ 43,605,000 U.K............................................................... 9,553,000 7,723,000 7,914,000 ------------- ------------- ------------- Total........................................................... $ 43,847,000 $ 43,191,000 $ 51,519,000 Operating income (loss) U.S............................................................... $ (827,000) $ 805,000 $ 2,387,000 U.K............................................................... 573,000 421,000 363,000 ------------- ------------- ------------- Total........................................................... $ (254,000) $ 1,226,000 $ 2,750,000 Identifiable assets U.S............................................................... $ 21,213,000 $ 23,260,000 $ 26,372,000 U.K............................................................... 5,210,000 4,825,000 4,828,000 ------------- ------------- ------------- Total........................................................... $ 26,423,000 $ 28,085,000 $ 31,200,000 Net assets--U.K..................................................... $ 711,000 $ 935,000 $ 1,515,000
U.S. sales include $8,161,000, $8,531,000 and $10,747,000 for export in fiscal years 1995, 1996, and 1997, respectively. Operating income (loss) excludes foreign exchange gain/loss, interest expense and income taxes. U.S. assets include $1,127,000, $117,000 and $162,000 in fiscal years 1995, 1996 and 1997, respectively, of cash for general corporate use. NOTE 8. STOCK OPTIONS AND STOCK PURCHASE RIGHTS The Company maintains stock option plans which include both incentive and non-qualified options covering a total of 467,032 shares of common stock reserved for issuance to key employees, including officers, and directors. Such amount includes a total of 200,000 options reserved for issuance under the 1996 Incentive Stock Option Plan, as well as a total of 50,000 options reserved for issuance under the 1996 Non-Qualified Stock Option Plan for Outside Directors, approved by the shareholders in April 1997. All F-13 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 8. STOCK OPTIONS AND STOCK PURCHASE RIGHTS (CONTINUED) 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 1997, a total of 45,952 common shares were surrendered pursuant to stock option exercises, which are held in treasury. There were 32,935 and 47,535 shares available for grant at September 30, 1996 and 1997, respectively. As of September 30, 1995, 1996, and 1997, options exercisable pursuant to the plans amounted to 198,783, 289,471 and 149,838, respectively. As of December 31, 1997, there were 47,535 shares available for grant and 271,938 options exercisable pursuant to the plans. Changes in outstanding stock options are as follows:
WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE ---------- ----------- Balance--September 30, 1994.................................................................. 431,174 $ 2.03 Options granted.............................................................................. 25,000 $ 1.94 Options exercised............................................................................ -- -- Options forfeited............................................................................ (156,513) $ 2.07 - ---------------------------------------------------------------------------------------------------------------------- Balance--September 30, 1995.................................................................. 299,661 $ 2.01 Options granted.............................................................................. 245,397 $ 1.72 Options exercised............................................................................ (14,500) $ 1.82 Options forfeited............................................................................ (85,909) $ 2.13 - ---------------------------------------------------------------------------------------------------------------------- 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 (unaudited).................................................................. -- -- Options exercised (unaudited)................................................................ -- -- Options forfeited (unaudited)................................................................ -- -- - ---------------------------------------------------------------------------------------------------------------------- Balance--December 31, 1997 (unaudited)....................................................... 419,497 $ 2.27 Price range $1.69--$2.24 (weighted-average contractual life of 2.7 years) (unaudited)........ 206,897 $ 1.78 Price range $2.25--$3.06 (weighted-average contractual life of 4.3 years) (unaudited)........ 212,600 $ 2.76 - ---------------------------------------------------------------------------------------------------------------------- Exercisable options-- September 30, 1995......................................................................... 198,783 $ 2.07 September 30, 1996......................................................................... 289,471 $ 1.89 September 30, 1997......................................................................... 149,838 $ 1.96 December 31, 1997 (unaudited).............................................................. 271,938 $ 1.96 - ----------------------------------------------------------------------------------------------------------------------
F-14 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 8. STOCK OPTIONS AND STOCK PURCHASE RIGHTS (CONTINUED) 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 1996 and 1997.
1996 1997 --------- --------- Risk-free interest rate...................................................................... 6.0% 6.0% Dividend yield............................................................................... 0.0% 0.0% Volatility factor............................................................................ 46.2% 52.7% Weighted average expected life............................................................... 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. 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:
1996 1997 ---------- ------------ Net income: As reported....................................................... $ 300,178 $ 1,564,518 Pro forma......................................................... $ 213,848 $ 1,364,368 Earnings per share: As reported Basic........................................................... $ .11 $ .56 Diluted......................................................... $ .11 $ .52 Pro forma Basic........................................................... $ .08 $ .49 Diluted......................................................... $ .08 $ .45 Weighted average fair value of options granted...................... $ .64 $ 1.13
Pro forma net earnings reflect only options granted in fiscal 1996 and 1997. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net earnings 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. F-15 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 9. EARNINGS PER SHARE The following table provides the components of the basic and diluted earnings per share (EPS) computations:
FOR THE YEARS ENDED SEPTEMBER 30, ----------------------------------------- 1995 1996 1997 ------------- ------------ ------------ BASIC EPS COMPUTATION Net income (loss)...................................................... $ (1,347,045) $ 300,178 $ 1,564,518 Weighted average shares outstanding.................................... 2,762,828 2,765,245 2,803,805 Basic earnings (loss) per share........................................ $ (.49) $ .11 $ .56 ------------- ------------ ------------ ------------- ------------ ------------ DILUTED EPS COMPUTATION Net income (loss)...................................................... $ (1,347,045) $ 300,178 $ 1,564,518 Weighted average shares outstanding.................................... 2,762,828 2,765,245 2,803,805 Stock options.......................................................... -- 75,341 218,191 ------------- ------------ ------------ Diluted shares outstanding............................................. 2,762,828 2,840,586 3,021,996 Diluted earnings (loss) per share...................................... $ (.49) $ .11 $ .52 ------------- ------------ ------------ ------------- ------------ ------------
FOR THE THREE MONTHS ENDED DECEMBER 31, -------------------------- 1996 1997 ------------ ------------ (UNAUDITED) BASIC EPS COMPUTATION Net income............................................................................ $ 215,288 $ 1,008,973 Weighted average shares outstanding................................................... 2,777,328 3,001,108 Basic earnings per share.............................................................. $ .08 $ .34 ------------ ------------ ------------ ------------ DILUTED EPS COMPUTATION Net income............................................................................ $ 215,288 $ 1,008,973 Weighted average shares outstanding................................................... 2,777,328 3,001,108 Stock options......................................................................... 93,104 291,264 Stock compensation arrangement........................................................ -- 353 ------------ ------------ Diluted shares outstanding............................................................ 2,870,432 3,292,725 Diluted earnings per share............................................................ $ .08 $ .31 ------------ ------------ ------------ ------------
NOTE 10. INDUSTRY SEGMENT AND MAJOR CUSTOMER The Company operates in one industry which encompasses the design, manufacture, assembly, and marketing of closed-circuit television ("CCTV") equipment and systems for the CCTV segment of the F-16 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 10. INDUSTRY SEGMENT AND MAJOR CUSTOMER (CONTINUED) security products industry. The Company's products include all components of a video surveillance system such as remote positioning devices, cameras, monitors, video switchers, housings, mounting accessories, recording devices, manual and motorized lenses, controls, video signal equipment, and consoles for system assembly. No customer represented sales in excess of ten percent of consolidated revenues during any of the three fiscal years presented. NOTE 11. COMMITMENTS In December 1996, the Company entered into a five year lease agreement for a new principal operating facility. The aggregate remaining commitment under such agreement amounted to $1,614,000 at September 30, 1997 with minimum rentals for the fiscal years shown as follows: 1998--$370,000; 1999-- $377,000; 2000--385,000; 2001--$392,000; and 2002--$90,000. Additionally, the Company occupies certain other facilities, or is contingently liable, under operating leases which expire at various dates through 2000. The leases, which cover periods from one to three years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment at September 30, 1997 was $106,000 with minimum rentals for the fiscal years shown as follows: 1998--$79,000; 1999--$18,000; and 2000- $9,000. The Company is a party to employment agreements with five executives which 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 these change in control provisions at September 30, 1997 was approximately $2,115,000. The total compensation payable under these agreements aggregated $2,085,000 at September 30, 1997. The Company is also a party to insured deferred compensation agreements with two retired officers. The aggregate remaining compensation payments of approximately $813,000 as of September 30, 1997 are subject to the individuals' adherence to certain non-compete covenants, and are payable in monthly installments through December 2003. In October 1997, the Company's Chief Executive Officer was provided a deferred compensation benefit of 45,952 shares of common stock currently held by the Company in treasury. The issuance of such shares occurs upon retirement of the executive, or earlier under certain conditions. The market value of such shares approximated $345,000 at the date of agreement, which will be amortized over the expected minimum service period of the executive. Sales to customers from the Company's U.K. 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 U.S. dollar denominated product cost. These contracts generally involve the exchange of one currency for another at a future date and specified exchange rate. At September 30, 1997, the Company had approximately $1,350,000 of outstanding forward exchange contracts to sell British pounds. Such contracts expire at varying dates and exchange rates through January 26, 1998. The Company's purchases of Japanese sourced products through Chugai Boyeki Company, Ltd., a related party, are denominated in Japanese yen. At September 30, 1997, the Company did not have any forward exchange contracts to purchase Japanese yen. F-17 VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) NOTE 12. RELATED PARTY TRANSACTIONS As of September 30, 1996 and 1997, Chugai Boyeki Company, Ltd. and affiliates ("Chugai") owned 548,715 shares of the Company's common stock (18.3% of the total outstanding shares). The Company, which has been conducting business with Chugai for approximately 18 years, imports certain finished products and components through Chugai and also sells its products to Chugai who resells the products in certain Asian and European markets. The Company purchased approximately $11.6, $9.2 and $7.1 million of products and components from Chugai in fiscal years 1995, 1996, and 1997, respectively, and the Company sold $3.4, $2.1, and $2.7 million of product to Chugai for distribution in fiscal years 1995, 1996, and 1997, respectively. At September 30, 1996 and 1997 and December 31, 1997, the Company owed $7.5 million, $7.1 million and $6.9 million, respectively, to Chugai and Chugai owed $148,000, $276,000 and $816,000, respectively, to the Company resulting from purchases of products. The amounts owed to Chugai are secured by a subordinated lien on substantially all the Company's assets. During 1997, the Company repaid a mortgage loan made by Chugai. In October 1993, the Company borrowed $2 million from Chugai under a promissory note agreement. See Note 6 for a further discussion of this transaction. As of September 30, 1997, Mr. Chu S. Chun controlled 204,507 shares of the Company's common stock (6.8% of the total outstanding shares). Mr. Chun owns Chun Shin Industries, Inc., the Company's 50% South Korean joint venture partner in Chun Shin Security which purchases product from the joint venture (see Note 2). Mr. Chun also controls International Industries, Inc. (I.I.I.), a U.S. based company, which arranges the importation and provides short term financing on all the Company's product purchases from the joint venture company, Chun Shin Electronics, Inc. During fiscal years 1996 and 1997, the Company purchased approximately $5.8 million and $7.0 million of products from I.I.I. under this agreement. In addition, the Company sold approximately $900,000 and $1,100,000 of its products to I.I.I. in 1996 and 1997, respectively. At September 30, 1996 and 1997 and December 31, 1997, I.I.I. owed the Company approximately $368,000, $279,000 and $192,000, respectively. NOTE 13. SUBSEQUENT EVENT (UNAUDITED) In January 1998, the Company purchased its principal operating facility for approximately $3.3 million. The purchase was financed with the proceeds of an aggregate $2.9 million mortgage and term loan agreement with a bank. 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. Both loans bear interest at the bank's prime rate minus 1.35% (7.15% at January 29, 1998). The loans are secured by a first mortgage on the property and fixtures and contain restrictive covenants which, among other things, requires the company to maintain certain levels of earnings and ratios of debt service and interest coverage and debt to 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 change the Company's interest rate exposure on its $2,512,000 floating rate mortgage loan to a fixed 7.79% and its $388,000 floating rate term loan to a fixed 7.7%. The interest rate swap agreements mature in the same amount and over the same period as the related mortgage and term loans. F-18 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER, SOLICITATION OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS FURNISHED OR THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE --------- Available Information........................... 1 Information Incorporated by Reference........... 1 Prospectus Summary.............................. 2 Special Note Regarding Forward-Looking Statements.................................... 6 Risk Factors.................................... 6 Use of Proceeds................................. 14 Price Range of Common Stock and Dividends....... 15 Capitalization.................................. 16 Selected Consolidated Financial and Operating Data.......................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 18 Business........................................ 24 Management...................................... 34 Principal and Selling Shareholders.............. 41 Certain Transactions............................ 42 Description of Capital Stock.................... 43 Shares Eligible for Future Sale................. 44 Underwriting.................................... 46 Legal Matters................................... 47 Experts......................................... 47 Index to Consolidated Financial Statements.................................... F-1
[LOGO] 1,575,000 SHARES COMMON STOCK --------------------- PROSPECTUS --------------------- FAHNESTOCK & CO. INC. SOUTHEAST RESEARCH PARTNERS, INC. , 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The Registrant estimates that expenses payable by the Registrant in connection with the Offering described in this Registration Statement (other than underwriting discounts and commissions) will be as follows: Securities and Exchange Commission registration fee............. $7,486.56 American Stock Exchange filing fee.............................. $ * NASD filing fee................................................. $2,798.00 Registrar and Transfer Agent's fees and expenses................ * Printing and engraving expenses................................. * Accounting fees and expenses.................................... * Fees and expenses (including legal fees) for qualification under state securities laws......................................... * Miscellaneous................................................... * Total..................................................... $ * --------- ---------
- ------------------------ * To be filed by amendment. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Article 7 of the New York Business Corporation Law provides for the indemnification of directors and officers subject to certain limitations. Among other matters, the statute provides that to be entitled to indemnification under the statutory provisions, a person who is sued or threatened to be sued by reason of being a director or officer of a New York corporation must affirmatively establish that he acted in good faith for a purpose which he reasonably believed to be in the best interests of the corporation. The statute requires court approval to provide indemnification in a derivative action under certain circumstances. Additionally, the indemnification to which directors, officers and other persons serving the corporation are entitled excludes amounts payable in a derivative action where the director, officer or other person is adjudged to be liable to the corporation. The By-laws of the Company provide for the indemnification of its directors and officers to the maximum extent provided by law. The Company's directors and officers are insured against certain liabilities for actions taken in such capacities, excluding certain liabilities under the Securities Act of 1933, the Securities Exchange Act of 1934 or similar state laws relating to offerings of securities. II-1 ITEM 16. EXHIBITS 1 Underwriting Agreement+ 3 Certificate of Incorporation and By-laws, as amended (incorporated by reference to Exhibit 3 of the 1985 Annual Report on Form 10-K; Exhibit 4B of Form S-2 filed in Registration Statement No. 33-10435 and Exhibit A, B and C of the 1987 Proxy Statement) 4.1 Specimen Common Stock Certificate* 4.2 Underwriters' Warrants and Warrant Agreement+ 5 Opinion of Schoeman, Marsh & Updike, LLP* 10.1 Credit and Security Agreement dated December 27, 1995 between the Registrant and IBJ Schroeder Bank & Trust Company (incorporated by reference to Exhibit 10 the 1995 Annual Report on Form 10-K) 10.2 Credit and Security Agreement between the Registrant and IBJ Schroeder Bank & Trust Company, First Amendment dated August 19, 1996 (incorporated by reference to Exhibit 10.2 of the 1996 Annual Report on Form 10-K) 10.3 Credit and Security Agreement between the Registrant and IBJ Schroder Bank & Trust Company, Second Amendment dated February 5, 1997 (incorporated by reference to the Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1997) 10.4 Promissory Note dated October 5, 1993 between the Registrant and Chugai Boyeki Company, Ltd., first amendment dated February 5, 1997 (incorporated by reference to Exhibit 10.4 of the 1997 Annual Report on Form 10-K) 10.5 Employment Contract dated October 1, 1997 between the Registrant and Kenneth M. Darby (incorporated by reference to Exhibit 10.5 of the 1997 Annual Report on Form 10-K) 10.6 Employment Contract dated October 1, 1996 between the Registrant and Arthur D. Roche (incorporated by reference to Exhibit 10.6 of the 1996 Annual Report on Form 10-K) 10.7 Employment Agreement dated October 1, 1997 between the Registrant and John L. Eckman (incorporated by reference to Exhibit 10.7 of the 1997 Annual Report on Form 10-K) 10.8 Employment Agreement dated October 1, 1997 between the Registrant and Peter Horn (incorporated by reference to Exhibit 10.8 of the 1997 Annual Report on Form 10-K) 10.9 Employment Agreement dated October 1, 1997 between the Registrant and Yacov Pshtissky (incorporated by reference to Exhibit 10.9 of the 1997 Annual Report on Form 10-K) 10.10 Deferred Compensation Agreements dated November 1, 1986 between the Registrant and Donald N. Horn and Arthur V. Wallace (incorporated by reference to Exhibit 10E of the 1992 Annual Report on Form 10-K)
II-2 10.11 Lease agreement dated December 24, 1996 between the Registrant and RREEF MIDAMERICA/EAST-V NINE, INC. (incorporated by reference to Exhibit 10.8 of the 1996 Annual Report on Form 10-K) 10.12 Amended and restated 1986 Incentive Stock Option Plan (incorporated by reference to Exhibit 19 of the 1990 Annual Report on Form 10-K) 10.13 1994 Incentive Stock Option Plan (incorporated by reference to Exhibit 10L of the 1994 Annual Report on Form 10-K) 10.14 1994 Non-Qualified Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 10M of the 1994 Annual Report on Form 10-K) 10.15 1996 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.15 of the 1997 Annual Report on Form 10-K) 10.16 1996 Non-Qualified Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 10.16 of the 1997 Annual Report on Form 10-K) 10.17 Advice of borrowing terms between the Registrant and National Westminster Bank PLC dated April 22, 1997 (incorporated by reference to Exhibit 10 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.18 Commercial fixed rate loan agreement between the Registrant and National Westminster Bank PLC dated April 8, 1997 (incorporated by reference to Exhibit 10 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.19 Agreement of Purchase and Sale dated as of January 29, 1998 between Vicon Industries, Inc. and RREEF Midamerica/East-V, Nine, Inc. (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.20 Loan Agreement dated January 29, 1998 between Vicon Industries, Inc. and Keybank National Association (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.21 Mortgage Note dated January 29, 1998 by Vicon Industries, Inc., as borrower, to order of Keybank National Association in the initial principal amount of $2,512,000 (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.22 Term Loan Note dated January 29, 1998 by Vicon Industries, Inc., as borrower, to order of Keybank National Association in the initial principal amount of $388,000 (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.23 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries, Inc. in favor of Keybank National Association in amount of $2,512,000 (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.24 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries, Inc. in favor of Keybank National Association in amount of $388,000 (incorporated by reference to Exhibit 10.6 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997).
II-3 10.25 Interest Rate Master Swap Agreement dated December 11, 1997 between the Registrant and KeyBank National Association (incorporated by reference to Exhibit 10.7 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 22 Subsidiaries of the Registrant (incorporated by reference to the Notes to the Consolidated Financial Statements) 23.1 Consent of Schoeman, Marsh & Updike, LLP (included in Exhibit 5)* 23.2 Consent of KPMG Peat Marwick LLP+ 24 Power of Attorney (included in Part II of the Registration Statement)+
- ------------------------ + Filed herewith * To be filed by amendment ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liabilities under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act 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 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of 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. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Hauppauge, State of New York, on February 24, 1998. VICON INDUSTRIES, INC. By: /s/ KENNETH M. DARBY ----------------------------------------- Kenneth M. Darby PRESIDENT (PRINCIPAL EXECUTIVE OFFICER) By: /s/ ARTHUR D. ROCHE ----------------------------------------- Arthur D. Roche EXECUTIVE VICE PRESIDENT (PRINCIPAL FINANCIAL OFFICER) By: /s/ JOHN M. BADKE ----------------------------------------- John M. Badke CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Kenneth M. Darby and Arthur D. Roche his true and lawful attorneys-in-fact, each acting alone, with full powers of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments, including any post-effective amendments, to this registration statement, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or their substitutes, each acting alone, may lawfully do or cause to be done by virtue hereof. II-5 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the 24th day of February, 1998. NAME TITLE - ------------------------------ -------------------------- /s/ DONALD N. HORN - ------------------------------ Chairman of the Board Donald N. Horn /s/ KENNETH M. DARBY - ------------------------------ Director Kenneth M. Darby /s/ ARTHUR D. ROCHE - ------------------------------ Director Arthur D. Roche /s/ ARTHUR V. WALLACE - ------------------------------ Director Arthur V. Wallace - ------------------------------ Director Peter F. Barry - ------------------------------ Director Milton F. Gidge /s/ MICHAEL D. KATZ - ------------------------------ Director Michael D. Katz - ------------------------------ Director Peter F. Neumann /s/ W. GREGORY ROBERTSON - ------------------------------ Director W. Gregory Robertson - ------------------------------ Director Kazuyoshi Sudo II-6 EXHIBIT INDEX
PAGE NO. ----------- 1 Underwriting Agreement+ 3 Certificate of Incorporation and By-laws, as amended (in corporated by reference to Exhibit 3 of the 1985 Annual Report on Form 10-K; Exhibit 4B of Form S-2 filed in Registration Statement No. 33-10435 and Exhibit A, B and C of the 1987 Proxy Statement) 4.1 Specimen Common Stock Certificate* 4.2 Underwriters' Warrants and Warrant Agreement+ 5 Opinion of Schoeman, Marsh & Updike, LLP* 10.1 Credit and Security Agreement dated December 27, 1995 between the Registrant and IBJ Schroeder Bank & Trust Company (incorporated by reference to Exhibit 10 the 1995 Annual Report on Form 10-K) 10.2 Credit and Security Agreement between the Registrant and IBJ Schroeder Bank & Trust Company, First Amendment dated August 19, 1996 (incorporated by reference to Exhibit 10.2 of the 1996 Annual Report on Form 10-K) 10.3 Credit and Security Agreement between the Registrant and IBJ Schroder Bank & Trust Company, Second Amendment dated February 5, 1997 (incorporated by reference to the Exhibit 10.1 of March 31, 1997 filing on Form 10-Q) 10.4 Promissory Note dated October 5, 1993 between Registrant and Chugai Boyeki Company, Ltd., first amendment dated February 5, 1997 (incorporated by reference to Exhibit 10.4 of the 1997 Annual Report on Form 10-K) 10.5 Employment Contract dated October 1, 1997 between the Registrant and Kenneth M. Darby (incorporated by reference to Exhibit 10.5 of the 1997 Annual Report on Form 10-K) 10.6 Employment Contract dated October 1, 1996 between Registrant and Arthur D. Roche (incorporated by reference to Exhibit 10.6 of the 1996 Annual Report on Form 10-K) 10.7 Employment Agreement dated October 1, 1997 between Registrant and John L. Eckman (incorporated by reference to Exhibit 10.7 of the 1997 Annual Report on Form 10-K) 10.8 Employment Agreement dated October 1, 1997 between Registrant and Peter Horn (incorporated by reference to Exhibit 10.8 of the 1997 Annual Report on Form 10-K) 10.9 Employment Agreement dated October 1, 1997 between Registrant and Yacov Pshtissky (incorporated by reference to Exhibit 10.9 of the 1997 Annual Report on Form 10-K) 10.10 Deferred Compensation Agreements dated November 1, 1986 between the Registrant and Donald N. Horn and Arthur V. Wallace (incorporated by reference to Exhibit 10E of the 1992 Annual Report on Form 10-K) Page No. 10.11 Lease agreement dated December 24, 1996 between the Registrant and RREEF MIDAMERICA/EAST-V NINE, INC. (incorporated by reference to Exhibit 10.8 of the 1996 Annual Report on Form 10-K) 10.12 Amended and restated 1986 Incentive Stock Option Plan (incorporated by reference to Exhibit 19 of the 1990 Annual Report on Form 10-K) 10.13 1994 Incentive Stock Option Plan (incorporated by reference to Exhibit 10L of the 1994 Annual Report on Form 10-K)
PAGE NO. ----------- 10.14 1994 Non-Qualified Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 10M of the 1994 Annual Report on Form 10-K) 10.15 1996 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.15 of the 1997 Annual Report on Form 10-K) 10.16 1996 Non-Qualified Stock Option Plan for Outside Directors (incorporated by reference to Exhibit 10.16 of the 1997 Annual Report on Form 10-K) 10.17 Advice of borrowing terms between the Registrant and National Westminster Bank PLC dated April 22, 1997 (incorporated by reference to Exhibit 10 of the June 30, 1997 filing on Form 10-Q) 10.18 Commercial fixed rate loan agreement between the Registrant and National Westminster Bank PLC dated April 8, 1997 (incorporated by reference to Exhibit 10 of the June 30, 1997 filing on Form 10-Q) 10.19 Agreement of Purchase and Sale dated as of January 29, 1998 between Vicon Industries, Inc. and RREEF Midamerica/East-V, Nine, Inc. (incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.20 Loan Agreement dated January 29, 1998 between Vicon Industries, Inc. and Keybank National Association (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.21 Mortgage Note dated January 29, 1998 by Vicon Industries, Inc., as borrower, to order of Keybank National Association in the initial principal amount of $2,512,000 (incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.22 Term Loan Note dated January 29, 1998 by Vicon Industries, Inc., as borrower, to order of Keybank National Association in the initial principal amount of $388,000 (incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.23 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries, Inc. in favor of Keybank National Association in amount of $2,512,000 (incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.24 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries, Inc. in favor of Keybank National Association in amount of $388,000 (incorporated by reference to Exhibit 10.6 of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997). 10.25 Interest Rate Master Swap Agreement dated December 11, 1997 between the Registrant and KeyBank National Association (incorporated by reference to Exhibit 10.7 Quarterly Report on Form 10-Q for the quarter ended December 31, 1997) 22 Subsidiaries of the Registrant (incorporated by reference to the Notes to the Consolidated Financial Statements) 23.1 Consent of Schoeman, Marsh & Updike, LLP (included in Exhibit 5)* 23.2 Consent of KPMG Peat Marwick LLP+ 24 Power of Attorney (included in Part II of the Registration Statement)+
- ------------------------ + Filed herewith * To be filed by amendment EX-1 2 UNDERWRITING AGMT. Exhibit 1 1,575,000 Shares of Common Stock VICON INDUSTRIES, INC. FORM OF UNDERWRITING AGREEMENT New York, New York _______ __, 1998 FAHNESTOCK & CO. INC. SOUTHEAST RESEARCH PARTNERS, INC. c/o Fahnestock & Co. Inc. 125 Broad Street 16th Floor New York, New York 10004 Ladies and Gentlemen: Vicon Industries, Inc., a New York corporation (the "Company"), proposes to issue and sell to the Underwriters named in Schedule A hereto (the "Underwriters") 1,250,000 shares (the "Company Shares") of Common Stock, $.01 par value, (such class of stock being herein called the "Common Stock"), of the Company. In addition, certain shareholders of the Company named in Schedule B hereto (the "Selling Shareholders"), propose to sell to the Underwriters an additional 325,000 shares of Common Stock (the "Selling Shareholder Shares"). The Company shares and the Selling Shareholder Shares are herein called the "Firm Shares." In addition, the Company will grant to the Underwriters an option to purchase up to an additional 237,250 shares of Common Stock (the "Option Shares") for the purpose of covering over-allotments in connection with the sale of Firm Shares. The Firm Shares and any Option Shares purchased pursuant to this Underwriting Agreement are herein called "Shares." The Company also proposes to issue and sell to the Underwriters warrants (the "Underwriters' Warrants") pursuant to the Underwriters' Warrant Agreement (the "Underwriters' Warrant Agreement") for the purchase of an additional aggregate 157,500 shares of Common Stock. The shares of Common Stock issuable upon exercise of the Underwriters' Warrants are hereinafter referred to as the "Underwriters' Shares." The Firm Shares, the Option Shares, the Underwriters' Warrants and the Underwriters' Shares (collectively, hereinafter referred to as the "Securities") are more fully described in the Registration Statement and the Prospectus referred to below. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters as of the date hereof, and as of the Closing Date (hereinafter defined) and the Option Closing Date (hereinafter defined), if any, as follows: (a) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement, and an amendment or amendments thereto, on Form S-2 (No. 333-_____), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities under the Securities Act of 1933, as amended (the "Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the rules and regulations (the "Regulations") of the Commission under the Act. The Company will promptly file a further amendment to said registration statement in the form heretofore delivered to the Underwriters, and will not file any other amendment thereto to which the Underwriters shall have objected to in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein (including, but not limited to, those documents or information incorporated by reference therein) and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration Statement", and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the "Prospectus." For purposes hereof, "Rules and Regulations" mean the rules and regulations adopted by the Commission under either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable. (b) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus, the Registration Statement or the Prospectus or any part of any thereof and no proceedings for a stop order suspending the effectiveness of the Registration Statement or any of the Company's securities have been instituted or are pending or to the Company's knowledge, threatened. Each of the Preliminary Prospectus, Registration Statement and Prospectus at the time of filing thereof conformed with the requirements of the Act and the Rules and Regulations, and none of the Preliminary Prospectus, Registration Statement or Prospectus at the time of filing thereof contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein and necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of any Underwriter expressly for use in such Preliminary Prospectus, Registration Statement or Prospectus. 2 (c) When the Registration Statement becomes effective and at all times subsequent thereto, the Registration Statement and the Prospectus will contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and will conform to the requirements of the Act and the Rules and Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of any Underwriter expressly for use in the Preliminary Prospectus, Registration Statement or Prospectus or any amendment thereof or supplement thereto. (d) (i) Each of the Company and its subsidiaries, all of which are identified in the Registration Statement (each, a "Subsidiary and, collectively the "Subsidiaries"), has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization. Neither the Company nor the Subsidiaries owns an interest in any corporation, partnership, trust, joint venture or other business entity, except as described in the Registration Statement. Each of the Company and its Subsidiaries is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing. Each of the Company and its Subsidiaries has all requisite corporate power and authority, and each of the Company and its Subsidiaries has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; each of the Company and its Subsidiaries is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state and local laws, rules and regulations; and neither the Company nor the Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, position, prospects, value, operation, properties, business or results of operations of the Company and its Subsidiaries, taken as a whole. The disclosures in the Registration Statement concerning the effects of federal, state and local laws, rules and regulations on the Company's and the Subsidiaries' business as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. (ii) Neither the Company nor any Subsidiary is party to any joint venture or partnership agreement ("Joint Venture") except as set forth in the Registration Statement. Each Joint Venture has all requisite corporate power and authority, and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and 3 from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus; each Joint Venture is and has been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all applicable national and local laws, rules and regulations; and no Joint Venture has received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the earnings, position, prospects, value, operation, properties, business or results of operations of the Joint Venture, taken as a whole. The disclosures in the Registration Statement concerning the effects of national and local laws, rules and regulations on the Joint Venture business as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. (e) The Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus, under "Capitalization" and "Description of Securities" and will have the adjusted capitalization set forth therein on the Closing Date and the Option Closing Date, if any, based upon the assumptions set forth therein, and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Underwriters' Warrant Agreement and as described in the Prospectus. The Securities and all other securities issued or issuable by the Company conform or, when issued and paid for, will conform, in all respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable and the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The Securities are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely by reason of being such holders; all corporate action required to be taken for the authorization, issue and sale of the Securities has been duly and validly taken; and the certificates representing the Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Securities to be sold by the Company or the Selling Shareholders hereunder, the Underwriters or the Underwriters, as the case may be, will acquire good and marketable title to such Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever. (f) KPMG Peat Marwick LLP, the accountants who have certified the financial statements filed and to be filed with the Commission as part of the Registration 4 Statement, each Preliminary Prospectus and the Prospectus, are independent public accountants within the meaning of the Act and the Regulations. The consolidated financial statements, including the related notes and schedules thereto, included in the Registration Statement, each Preliminary Prospectus and the Prospectus fairly present the financial position, income, changes in cash flow, changes in stockholders' equity, and the results of operations of the Company and the Subsidiaries at the respective dates and for the respective periods to which they apply and the pro forma financial information included in the Registration Statement and Prospectus presents fairly, on a basis consistent with that of the audited financial statements included therein, what the Company's pro forma capitalization would have been for the respective periods and as of the respective dates to which they apply after giving effect to the adjustments described therein. Such financial statements have been prepared in conformity with generally accepted accounting principles and the Regulations, consistently applied throughout the periods involved. There has been no adverse change or development involving a material prospective change in the condition, financial or otherwise, or in the earnings, position, prospects, value, operation, properties, business, or results of operations of the Company and the Subsidiaries, whether or not arising in the ordinary course of business, since the date of the financial statements included in the Registration Statement and the Prospectus, and the outstanding debt, the property, both tangible and intangible, and the business of the Company and the Subsidiaries conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. Financial information set forth in the Prospectus under the headings "Summary Consolidated Financial Data," "Selected Consolidated Financial Data," "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," fairly present, on the basis stated in the Prospectus, the information set forth therein, have been derived from or compiled on a basis consistent with that of the audited financial statements included in the Prospectus. (g) Each of the Company and the Subsidiaries (i) has paid all federal, state, local, and foreign taxes for which it is liable and for which payment is due, including, but not limited to, withholding taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of 1986 (the "Code"), and has furnished all information returns it is required to furnish pursuant to the Code, (ii) has established adequate reserves for such taxes which are not due and payable, and (iii) does not have any tax deficiency or claims outstanding, proposed or assessed against it. (h) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Underwriters in connection with (i) the issuance by the Company of the Securities, (ii) the purchase by the Underwriters of the Securities to be sold by the Company or any Selling Shareholder hereunder and the purchase by the Underwriters of the Underwriters' Warrants from the Company, (iii) the consummation by each of the Company or any Selling Shareholder of any of its obligations under this Agreement or the Underwriters' Warrant Agreement, as the case may be or (iv) resales of the Shares in connection with the distribution contemplated hereby. (i) Each of the Company and the Subsidiaries maintains insurance policies, including, but not limited to, general liability, product liability and property insurance, 5 which insures the Company, the Subsidiaries and their respective employees, against such losses and risks generally insured against by comparable businesses. Neither the Company nor any of the Subsidiaries (A) has failed to give notice or present any insurance claim with respect to any matter, including but not limited to the Company's business, property or employees, under the insurance policy or surety bond in a due and timely manner, (B) has any disputes or claims against any underwriter of such insurance policies or surety bonds or has not failed to pay any premiums due and payable thereunder, or (C) has failed to comply with all conditions contained in such insurance policies and surety bonds. There are no facts or circumstances under any such insurance policy or surety bond which would relieve any insurer of its obligation to satisfy in full any valid claim of the Company or any Subsidiary. (j) There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of, the Company or any of the Subsidiaries which (i) questions the validity of the capital stock of the Company, this Agreement or the Underwriters' Warrant Agreement or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement or the Underwriters' Warrant Agreement, (ii) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), or (iii) except for matters disclosed in the Prospectus, might materially and adversely affect the condition, financial or otherwise, or the earnings, position, prospects, stockholders' equity, value, operation, properties, business or results of operations of the Company. (k) The Company has full legal right, corporate power and authority to authorize, issue, deliver and sell the Securities (other than the Selling Shareholder Shares), enter into this Agreement and the Underwriters' Warrant Agreement and to consummate the transactions provided for in such agreements; and this Agreement and the Underwriters' Warrant Agreement have each been duly and properly authorized, executed and delivered by the Company. Each of this Agreement and the Underwriters' Warrant Agreement constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except (i) as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification or contribution provisions may be limited under applicable laws or the public policies underlying such laws and (iii) that the remedies of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceedings may be brought. None of the Company's issue and sale of the Securities, execution or delivery of this Agreement or the Underwriters' Warrant Agreement, its performance hereunder and thereunder, its consummation of the transactions contemplated herein and therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, 6 pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company or the Subsidiaries pursuant to the terms of, (i) the certificate of incorporation or by-laws of any of the Company or the Subsidiaries, (ii) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement or any other agreement or instrument to which any of the Company or the Subsidiaries is a party or by which it is or may be bound or to which any of its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation applicable to any of the Company or the Subsidiaries of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over any of the Company or the Subsidiaries or any of its activities or properties. (l) Except as described in the Prospectus, no consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Shares pursuant to the Prospectus and the Registration Statement, the issuance of the Underwriters' Warrants, the performance of this Agreement and the Underwriters' Warrant Agreement and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Shares or the Underwriters' Warrants, except such as have been or may be obtained under the Act or may be required under state securities or Blue Sky laws in connection with the Underwriters' purchase and distribution of the Shares, and the Underwriters' Warrants to be sold by the Company hereunder and under the Underwriters' Warrant Agreement. (m) All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which any of the Company or the Subsidiaries is a party or by which it may be bound or to which any of its assets, properties or business may be subject have been duly and validly authorized, executed and delivered by the Company, and constitute the legal, valid and binding agreements of the Company or the Subsidiaries, as the case may be, enforceable against the Company, in accordance with their respective terms. The descriptions in the Registration Statement of agreements, contracts and other documents are accurate in all material respects and fairly present the information required to be shown with respect thereto on Form S-2, and there are no contracts or other documents which are required by the Act to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are in all material respects complete and correct copies of the documents of which they purport to be copies. (n) Subsequent to the respective dates as of which information is set forth in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, neither the Company nor any of the Subsidiaries has (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, (ii) entered into any transaction other than in the ordinary course of business, or (iii) declared or paid any dividend or made any other distribution on or in respect of its capital stock of any 7 class, and there has not been any change in the capital stock, or any material change in the debt (long or short term) or liabilities or material adverse change in or affecting the general affairs, management, financial operations, stockholders' equity or results of operations of the Company or any of the Subsidiaries. (o) No default exists in the due performance and observance of any term, covenant or condition of any license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, stockholders agreement, partnership agreement, note, loan or credit agreement, purchase order, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound or to which the property or assets (tangible or intangible) of the Company is subject or affected. (p) Each of the Company and the Subsidiaries has generally enjoyed a satisfactory employer-employee relationship with its employees and is in compliance with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. There are no pending investigations involving the Company or any of the Subsidiaries by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. There is no unfair labor practice charge or complaint against the Company or any of the Subsidiaries pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company or any of the Subsidiaries, or any predecessor entity, and none has ever occurred. No representation question exists respecting the employees of the Company or any of the Subsidiaries, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company and the Subsidiaries. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company or any of the Subsidiaries. No labor dispute with the employees of the Company exists, or, is imminent. (q) Except as described in the Prospectus, neither the Company nor any of the Subsidiaries maintains, sponsors or contributes to any program or arrangement that is an "employee pension benefit plan," an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). To the Company's knowledge, neither the Company nor any of the Subsidiaries maintains or contributes, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA. To the Company's knowledge, no ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code, which could subject the Company or any of the Subsidiaries to any tax penalty on prohibited transactions and which has not adequately been corrected. To the Company's knowledge, each ERISA Plan is in compliance with all reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. The Company has never completely or partially withdrawn from a "multiemployer plan." 8 (r) Neither the Company, the Subsidiaries, nor any of their employees, directors, stockholders, partners, or affiliates (within the meaning of the Regulations) of any of the foregoing has taken or will take, directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or otherwise. (s) None of the patents, patent applications, trademarks, service marks, service names, trade names and copyrights, and none of the licenses and rights to the foregoing presently owned or held by the Company or any of the Subsidiaries are in dispute or are in any conflict with the right of any other person or entity. Each of the Company and the Subsidiaries (i) owns or has the right to use, free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, all patents, patent applications, trademarks, service marks, service names, trade names and copyrights, technology and licenses and rights with respect to the foregoing, used in the conduct of its business as now conducted or proposed to be conducted without infringing upon or otherwise acting adversely to the right or claimed right of any person, corporation or other entity under or with respect to any of the foregoing and (ii) is not obligated or under any liability whatsoever to make any payment by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to, any patent, patent application, trademark, service mark, service name, trade name, copyright, know-how, technology or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. (t) There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental or other proceeding, domestic or foreign, pending or threatened (or circumstances that may give rise to the same) against the Company which challenges the exclusive rights of the Company with respect to any trademarks, trade names, service marks, service names, copyrights, patents, patent applications or licenses or rights to the foregoing used in the conduct of its business, or which challenge the right of the Company to use any technology presently used or contemplated to be used in the conduct of its business. (u) Each of the Company and the Subsidiaries owns and has the unrestricted right to use all trade secrets, know-how (including all other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), inventions, technology, designs, processes, works of authorship, computer programs and technical data and information (collectively herein "intellectual property") that are material to the development, manufacture, operation and sale of all products and services sold or proposed to be sold by the Company or any of the Subsidiaries, free and clear of and without violating any right, lien, or claim of others, including without limitation, former employers of its employees; provided, however, that the possibility exists that other persons or entities, completely independently of the Company or any of the Subsidiaries, or their employees or agents, could have developed trade secrets or items of technical information similar or identical to those of the Company or any of the Subsidiaries. Neither the Company nor any of the Subsidiaries is aware of any such development of similar or identical trade secrets or technical information by others. 9 (v) Each of the Company and the Subsidiaries has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus, to be owned or leased by it free and clear of all liens, charges, claims, encumbrances, pledges, security interests, defects, or other restrictions or equities of any kind whatsoever, other than those referred to in the Prospectus, taxes, lessor's interests and liens for taxes not yet due and payable. (w) The Company has caused to be duly executed legally binding and enforceable agreements pursuant to which the holders of the Common Stock and holders of securities exchangeable or exercisable for or convertible into shares of Common Stock agreed not to, directly or indirectly, offer to sell, sell, grant any option for the sale of, assign, transfer, pledge, hypothecate, distribute or otherwise encumber or dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose of any beneficial interest therein for a period of not less than nine (9) months following the effective date of the Registration Statement without the prior written consent of Fahnestock. During the nine (9) month period commencing on the effective date of the Registration Statement, neither the Company nor any Selling Shareholder shall, without the prior written consent of the Underwriters, sell, contract or offer to sell, issue, transfer, assign, pledge, distribute, or otherwise dispose of, directly or indirectly, any shares of Common Stock or any options, rights or warrants with respect to any shares of Common Stock other than the Securities pursuant hereto and other than up to 225,400 shares of Common Stock reserved for issuance upon the exercise of options under the Company's Stock Option Plans as described in the Prospectus which shares are also subject to such restriction. The Company will cause the Transfer Agent, as defined below, to place "stop transfer" orders on the Company's stock ledgers. (x) Except as described in the Prospectus under "Underwriting," there are no claims, payments, issuances, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Securities hereunder or any other arrangements, agreements, understandings, payments or issuance with respect to the Company, the Subsidiaries or any of their respective officers, directors, stockholders, partners, employees or affiliates that may affect the Underwriters' compensation, as determined by the National Association of Securities Dealers, Inc. ("NASD"). (y) The Shares and the Underwriters' Common Stock have been approved for listing on the American Stock Exchange ("AMEX"). (z) Neither the Company nor any of the Subsidiaries nor any of their respective officers, employees, agents, or any other person acting on behalf of the Company or the Subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other 10 person who was, is, or may be in a position to help or hinder the business of the Company (or assist the Company or the Subsidiaries in connection with any actual or proposed transaction) which (a) might subject the Company or the Subsidiaries, or any other such person to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign), (b) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company or any Subsidiary, or (c) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company or any of the Subsidiaries. The Company's and each Subsidiary's internal accounting controls are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended. (bb) Except as set forth in the Prospectus, no officer, director or stockholder of the Company, or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company or any Subsidiary, or (B) purchases from or sells or furnishes to the Company or any Subsidiary any goods or services, or (ii) a beneficial interest in any contract or agreement to which the Company or any Subsidiary is a party or by which it may be bound or affected. Except as set forth in the Prospectus under "Certain Transactions," there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company and any officer, director, or Principal Shareholder (as such term is defined in the Prospectus) of the Company or any Subsidiary, or any partner, affiliate or associate of any of the foregoing persons or entities. (cc) Any certificate signed by any officer of the Company or any Subsidiary, and delivered to the Underwriters or to Underwriters' Counsel (as defined herein) shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. (dd) The minute books of each of the Company and the Subsidiaries have been made available to the Underwriters and contains a complete summary of all meetings and actions of the directors, stockholders, audit committee, compensation committee and any other committee of the Board of Directors of each of the Company and the Subsidiaries, since the time of its incorporation, and reflects all transactions referred to in such minutes accurately in all material respects. (ee) Except and to the extent described in the Prospectus, no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company in the Registration Statement or any registration statement to be filed by the Company or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. 11 (ff) The Company has as of the effective date of the Registration Statement entered into, and there remains in effect, valid and binding, employment agreements with each of Kenneth M. Darby, Arthur D. Roche, John L. Eckman, Peter A. Horn and Yacov A. Pshtissky in the forms filed as Exhibits 10.5, 10.6, 10.7, 10.8 and 10.9, respectively, to the Registration Statement. 2. Representations and Warranties of the Selling Shareholders. Each Selling Shareholder (except as otherwise indicated) represents and warrants, for such Selling Shareholder only and not for any other Selling Shareholder, to, and agrees with, each of the Underwriters as of the date hereof, and as of the Closing Date and the Option Closing Date, if any, as follows: (a) Such Selling Shareholder has full right, power and authority to enter into this Agreement the Power of Attorney (the "Power of Attorney") and the Custody Agreement (the "Custody Agreement") hereinafter referred to and at the date hereof such Selling Shareholder has, and at the time of delivery of the Selling Shareholder Shares to the Underwriters hereunder such Selling Shareholder will have, full right, power and authority to sell and deliver the Selling Shareholder Shares to be sold by such Selling Shareholder to the Underwriters, and at the date hereof such Selling Shareholder is, and at the time of delivery of Selling Shareholders Shares to the Underwriters such Selling Shareholder will be, the lawful owner of and has, and will have, marketable title to such shares free and clear of any claims, liens, encumbrances or security interests. (b) The performance of this Agreement, the Power of Attorney and the Custody Agreement, and the consummation of the transactions herein and therein contemplated, will not conflict with or result in a breach of, or default under, any agreement, indenture or other instrument to which such Selling Shareholder is a party or by which such Selling Shareholder is bound, or any law, rule, administrative regulation or court decree. This Agreement, the Power of Attorney and the Custody Agreement have been validly authorized, executed and delivered by such Selling Shareholder and each constitutes the valid and binding agreement of such Selling Shareholder. (c) When the Registration Statement becomes effective, and at all times subsequent thereto, the Registration Statement and Prospectus and any amendments thereof and supplements thereto will not contain any untrue statement of a material fact regarding such Selling Shareholder or omit to state a material fact regarding such Selling Shareholder required to be stated therein or necessary in order to make the statements therein regarding such Selling Shareholder not misleading. (d) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Common Stock. 12 (e) Certificates in negotiable form representing all of the Selling Shareholder Shares to be sold by such Selling Shareholder have been placed in custody under a Custody Agreement, in the form heretofore furnished to you, duly executed and delivered by such Selling Shareholder to the Company, as custodian (the "Custodian"), and such Selling Shareholder has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you, appointing, each of Kenneth M. Darby and Arthur D. Roche as such Selling Shareholder's attorney-in-fact (together, the "Attorneys-in-Fact") with authority to execute and deliver this Agreement on behalf of such Selling Shareholders, to authorize the delivery of the Selling Shareholder Shares to be sold by such Selling Shareholders hereunder and otherwise to act on behalf of such Selling Shareholder in connection with the transactions contemplated by this Agreement and the Custody Agreement. (f) The Selling Shareholder Shares held in custody for such Selling Shareholder under the Custody Agreement are subject to the interests of the Underwriters hereunder, and the arrangements made by such Selling Shareholder for such custody, as well as the appointment by such Selling Shareholder of the Attorney-in-Fact, are, to that extent, irrevocable. Each Selling Shareholder specifically agrees that the obligations of the Selling Shareholders hereunder shall not be terminated by operation of law, whether by the death or incapacity of any individual Selling Shareholder or by the occurrence of any other event. If any individual Selling Shareholder should die or become incapacitated, or if any other such event should occur, before the delivery of the Stock hereunder, certificates representing the Selling Shareholder Shares shall be delivered by or on behalf of such Selling Shareholder in accordance with the terms and conditions of this Agreement and of the Custody Agreement, and the actions taken by the Attorney-in-Fact pursuant to the Power of Attorney shall be as valid as if such death, incapacity or other event had not occurred, whether or not the Custodian or the Attorney-in-Fact shall have received notice of such death, incapacity or other event. 3. Purchase, Sale and Delivery of the Securities and Underwriters' Warrants. (a) On the basis of the representations, warranties, covenants and agreements herein contained, and subject to the terms and conditions herein set forth (i) the Company agrees to sell to each Underwriter, and each Underwriter, severally and not jointly, agrees to purchase from the Company at a price of $____ per share, that number of Company Shares set forth in Schedule A opposite the name of such Underwriter, and (ii) each Selling Shareholder agrees, severally and not jointly, to sell to the Underwriters, and the Underwriters, severally and not jointly, agree to purchase from each Selling Shareholder at a price of $____ per share, that number of Selling Shareholder Shares set forth in Schedule B opposite the name of such Selling Shareholder. (b) In addition, on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase all or any part of the Option Shares. The option granted hereby will expire 30 days 13 after (i) the date the Registration Statement becomes effective, if the Company has elected not to rely on Rule 430A under the Rules and Regulations, or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Rules and Regulations, and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Firm Shares upon notice by the Underwriters to the Company setting forth the number of Option Shares as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for any such Option Shares. Any such time and date of delivery (an "Option Closing Date") shall be determined by the Underwriters, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Date, as hereinafter defined, unless otherwise agreed upon by the Underwriters and the Company. Nothing herein contained shall obligate the Underwriters to make any over-allotments. No Option Shares shall be delivered unless the Firm Shares shall be simultaneously delivered or shall theretofore have been delivered as herein provided. (c) Payment of the purchase price for, and delivery of certificates for, the Firm Shares shall be made at the offices of Fahnestock & Co. Inc., 125 Broad Street, New York, New York 10004, or at such other place as shall be agreed upon by the Underwriters and the Company. Such delivery and payment shall be made at 10:00 a.m. (New York City time) on March __, 1998 or at such other time and date as shall be agreed upon by the Underwriters and the Company, but not less than three (3) nor more than seven (7) full business days after the effective date of the Registration Statement (such time and date of payment and delivery being herein called the "Closing Date"). In addition, in the event that any or all of the Option Shares are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Shares shall be made at the above-mentioned office of the Underwriters or at such other place as shall be agreed upon by the Underwriters and the Company on each Option Closing Date as specified in the notice from the Underwriters to the Company. (d) Delivery of the certificates for the Firm Shares and the Option Shares, if any, shall be made to the Underwriters against payment by the Underwriters, severally and not jointly, of the purchase price for the Firm Shares and the Option Shares, if any, to the order of the Company for the Firm Shares and the Option Shares, if any, by New York Clearing House funds. In the event such option is exercised, each of the Underwriters, acting severally and not jointly, shall purchase that proportion of the total number of Option Shares then being purchased which the number of Firm Shares set forth in Schedule A hereto opposite the name of such Underwriter bears to the total number of Firm Shares, subject in each case to such adjustments as the Underwriters in their discretion shall make to eliminate any sales or purchases of fractional shares. Delivery of certificates for the Selling Shareholder Shares shall be made on behalf of the Selling Shareholders by the Custodian to the Underwriters against payment by the Underwriters, severally and not jointly, of the purchase price therefor in New York Clearing House Funds. Certificates for the Firm Shares and the Option Shares, if any, and the shares sold by the Selling Shareholders shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Underwriters may request in writing at least two (2) business days prior to the Closing Date or 14 the relevant Option Closing Date, as the case may be. The certificates for the Firm Shares and the Option Shares, if any, shall be made available to the Underwriters at such office or such other place as the Underwriters may designate for inspection, checking and packaging no later than 9:30 a.m. on the last business day prior to Closing Date or the relevant Option Closing Date, as the case may be. (e) On the Closing Date, the Company shall issue and sell to the Underwriters, one or more Underwriters' Warrants at a purchase price of $[.0001] per warrant, which warrants shall entitle the holders thereof to purchase an aggregate of 157,500 shares of Common Stock. The Underwriters' Warrants shall be exercisable for a period of four years commencing one year from the effective date of the Registration Statement at a price equaling one hundred twenty percent (120%) of the initial public offering price of the Firm Shares. The Underwriters' Warrant Agreement and form of Warrant Certificate shall be substantially in the form filed as Exhibit 4.2 to the Registration Statement. Payment for the Underwriters' Warrants shall be made by the Underwriters on the Closing Date. 4. Public Offering of the Shares. As soon after the Registration Statement becomes effective as the Underwriters deem advisable, the Underwriters shall, subject to the terms and conditions hereof, make a public offering of the Firm Shares and such of the Option Shares as they may determine (other than to residents of or in any jurisdiction in which qualification of the Shares is required and has not become effective) at the price and upon the other terms set forth in the Prospectus. The Underwriters may from time to time increase or decrease the public offering price after distribution of the Shares has been completed to such extent as the Underwriters, in their discretion deem advisable. The Underwriters may enter into one of more agreements as the Underwriters, in each of their sole discretion, deem advisable with one or more broker-dealers who shall act as dealers in connection with such public offering. 5. Covenants and Agreements of the Company. (a) The Company covenants and agrees with each of the Underwriters as follows: i) The Company shall use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practicable and will not at any time, whether before or after the effective date of the Registration Statement, file any amendment to the Registration Statement or supplement to the Prospectus or file any document under the Act or Exchange Act before termination of the offering of the Shares by the Underwriters of which the Underwriters shall not previously have been advised and furnished with a copy, or to which the Underwriters shall have objected or which is not in compliance with the Act, the Exchange Act or the Regulations. ii) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Underwriters and the 15 Selling Shareholders and confirm the notice in writing, (i) when the Registration Statement, as amended, becomes effective, if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to the Registration Statement becomes effective, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding, suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of the Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or the institution of proceedings for that purpose, (iii) of the issuance by the Commission or by any state securities commission of any proceedings for the suspension of the qualification of any of the Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the receipt of any comments from the Commission; and (v) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. If the Commission or any state securities commission authority shall enter a stop order or suspend such qualification at any time, the Company will make every effort to obtain promptly the lifting of such order. iii) The Company shall file the Prospectus (in form and substance satisfactory to the Underwriters) or transmit the Prospectus by a means reasonably calculated to result in filing with the Commission pursuant to Rule 424(b)(1) (or, if applicable and if consented to by the Underwriters, pursuant to Rule 424(b)(4)) not later than the Commission's close of business on the earlier of (i) the second business day following the execution and delivery of this Agreement and (ii) the fifteenth business day after the effective date of the Registration Statement. iv) The Company will give the Underwriters and the Selling Shareholders notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Securities which differs from the corresponding prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Regulations), and will furnish the Underwriters with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such prospectus to which the Underwriters or Whitman Breed Abbott & Morgan LLP ("Underwriters' Counsel"), shall object. 16 v) The Company shall endeavor in good faith, in cooperation with the Underwriters, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws of such jurisdictions as the Underwriters may designate to permit the continuance of sales and dealings therein for as long as may be necessary to complete the distribution, and shall make such applications, file such documents and furnish such information as may be required for such purpose; provided, however, the Company shall not be required to qualify as a foreign corporation or file a general or limited consent to service of process in any such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Underwriters agree that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction to continue such qualification. vi) During the time when a prospectus is required to be delivered under the Act, the Company shall use all reasonable efforts to comply with all requirements imposed upon it by the Act and the Exchange Act, as now and hereafter amended and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus, or any amendments or supplements thereto. If at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify the Underwriters promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act, each such amendment or supplement to be satisfactory to Underwriters' Counsel, and the Company will furnish to the Underwriters copies of such amendment or supplement as soon as available and in such quantities as the Underwriters may request. vii) As soon as practicable, but in any event not later than 45 days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (90 days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company shall make generally available to its security holders, 17 in the manner specified in Rule 158(b) of the Regulations, and to the Underwriters, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which statement need not be audited unless required by the Act, covering a period of at least 12 consecutive months after the effective date of he Registration Statement. viii) During a period of five years after the date hereof, the Company will furnish to its stockholders annual reports (including financial statements audited by independent public accountants) and will deliver to the Underwriters: (a) concurrently with furnishing such quarterly reports to its stockholders, statements of income of the Company for each quarter in the form furnished to the Company's stockholders and certified by the Company's principal financial or accounting officer; (b) concurrently with furnishing such annual reports to its stockholders, a balance sheet of the Company as at the end of the preceding fiscal year, together with statements of operations, stockholders' equity, and cash flows of the Company for such fiscal year, accompanied by a copy of the report thereon of independent certified public accountants; (c) as soon as they are available, copies of all reports (financial or other) mailed to stockholders; (d) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the NASD or any securities exchange; (e) every press release and every material news item or article of interest to the financial community in respect of the Company, or its affairs which was released or prepared by or on behalf of the Company; and (f) any additional information of a public nature concerning the Company (and any future subsidiary) or its businesses which the Underwriters may request. During such five (5) year period, if the Company has an active subsidiary, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its 18 subsidiary are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. ix) The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. x) The Company will furnish to the Underwriters or on the Underwriters' order, without charge, at such place as the Underwriters may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Underwriters may request. xi) On or before the effective date of the Registration Statement, the Company shall provide the Underwriters with true copies of duly executed, legally binding and enforceable agreements pursuant to which for a period of not less than nine (9) months from the effective date of the Registration Statement, holders of all shares of Common Stock and holders of securities exchangeable or exercisable for or convertible into shares of Common Stock, will not directly or indirectly, issue, offer to sell, sell, grant an option for the sale of, assign, transfer, pledge, hypothecate, distribute or otherwise encumber or dispose of any shares of Common Stock or securities convertible into, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Rules and Regulations or otherwise) or dispose of any beneficial interest therein without the prior written consent of Fahnestock (collectively, the "Lock-up Agreements"). On or before the Closing Date, the Company shall deliver instructions to the Transfer Agent authorizing it to place appropriate stop transfer orders on the Company's ledgers. During the nine (9) month period commencing with the effective date of the Registration Statement, the Company shall not, without the prior written consent of Fahnestock, sell, contract or offer to sell, issue, transfer, assign, pledge, hypothecate, distribute, or otherwise dispose of, directly or indirectly, any shares of Common Stock or any options, rights or warrants with respect to any shares of Common Stock. During the nine (9) month period commencing with the effective date of the Registration Statement, the Company shall not file any registration statement with the Securities and Exchange Commission on Form S-8 without the prior written consent of the Underwriters. 19 xii) Neither the Company nor any of the Subsidiaries, nor any of their officers, directors, stockholders, nor any of their respective affiliates (within the meaning of the Rules and Regulations) will take, directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. xiii) The Company shall apply the net proceeds from the sale of the Securities in the manner, and subject to the conditions, set forth under "Use of Proceeds" in the Prospectus. Except as described in the Prospectus, no portion of the net proceeds will be used, directly or indirectly, to acquire any securities issued by the Company. xiv) The Company shall timely file all such reports, forms or other documents as may be required from time to time, under the Act, the Exchange Act, and the Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Rules and Regulations. xv) The Company shall furnish to the Underwriters as early as practicable prior to each of the date hereof, the Closing Date and each Option Closing Date, if any, but no later than two (2) full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company (which in no event shall be as of a date more than thirty (30) days prior to the date of the Registration Statement) which have been read by the Company's independent public accountants, as stated in their letter to be furnished pursuant to Section 6(j) hereof. xvi) The Company shall cause the Common Stock to be quoted on the AMEX or a National Securities exchange and for a period of seven (7) years from the date hereof, and use its best efforts to maintain the AMEX quotation or exchange listing of the Common Stock to the extent outstanding. xvii) For a period of five (5) years from the Closing Date, the Company shall furnish to the Underwriters at the Underwriters' request and at the Company's sole expense, (i) daily consolidated transfer sheets relating to the Common Stock, (ii) the list of holders of all of the Company's securities and (iii) a Blue Sky "Trading Survey" for secondary sales of the Company's securities prepared by counsel to the Company. xviii) As soon as practicable, (i) but in no event more than 5 business days before the effective date of the Registration Statement, file 20 a Form 8-A with the Commission providing for the registration under the Exchange Act of the Securities and (ii) but in no event more than 30 days from the effective date of the Registration Statement, take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such inclusion for a period of not less than seven (7) years. xix) The Company hereby agrees that it will not without the written consent of a majority of the Company's stockholders who are not affiliates of the Company at such time or the vote of a majority of such non-affiliate stockholders, voting at a duly held stockholder's meeting for a period of thirteen (13) months from the effective date of the Registration Statement, adopt, propose to adopt or otherwise permit to exist any employee, officer, director, consultant or compensation plan or arrangement permitting the grant, issue or sale of any shares of Common Stock or other securities of the Company (i) in an amount greater than an aggregate of _________ shares of Common Stock, (ii) at an exercise or sale price per share less than the fair market value of the Common Stock on the date of grant or sale, (iii) with the payment for such securities with any form of consideration other than cash, (iv) upon payment of less than the full purchase or exercise price for such shares of Common Stock or other securities of the Company. xx) Until the completion of the distribution of the Shares, and for 25 days thereafter, the Company shall not without the prior written consent of the Underwriters and Underwriters' Counsel, issue, directly or indirectly, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby. xxi) For a period equal to the lesser of (i) seven (7) years from the date hereof, and (ii) the sale to the public of the Underwriters' Shares, the Company will use reasonable efforts not to take any action or actions which may prevent or disqualify the Company's use of Form S-2 (or other appropriate form) for the registration under the Act of the Underwriters' Shares. xxii) The Company shall enter into an investment banking agreement with Fahnestock which, amongst other things, will grant to Fahnestock a right of first refusal for a period of fifteen (15) months after the effective date of the Registration Statement (the "Effective Date") for any investment banking services, including amongst other things, any sales of securities to be made by the Company or any of its present or future Subsidiaries. 21 xxiii) For a period of three (3) years after the Effective Date, the Company shall appoint two additional independent persons to the Company's Board of Directors, each of whom shall be satisfactory to the Company and Fahnestock. Such persons shall be entitled to all of the rights and privileges as each of the other members of the Company's Board of Directors. For a period of three years after the Effective Date, Fahnestock shall have the right to designate one person to attend all meetings of the Company's Board of Directors. Such person shall be entitled to attend all such meetings and to receive all such notices and other correspondence and communications sent by the Company to members of its Board of Directors. The Company shall reimburse such designee for his or her reasonable out-of-pocket expenses incurred in connection with his or her attendance of such meetings. xxiv) Each of the Selling Shareholders covenants and agrees that such Selling Shareholder will not, during the 60 days following the effective date of the Registration Statement, except with the prior written consent of Fahnestock, offer for sale, sell, distribute or otherwise dispose of any shares of Common Stock, otherwise than in accordance with this Agreement or as contemplated in the Prospectus. 6. Payment of Expenses. (a) The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date (to the extent not paid at the Closing Date) all expenses and fees (other than fees of Underwriters' Counsel, except as provided in (iv) below) incident to the performance of the obligations of the Company under this Agreement and the Underwriters' Warrant Agreement, including, without limitation, (i) the fees and expenses of accountants and counsel for the Company, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing, (including mailing and handling charges) filing, delivery and mailing (including the payment of postage with respect thereto) of the Registration Statement and the Prospectus and any amendments and supplements thereto and the printing, mailing (including the payment of postage with respect thereto) and delivery of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreements, and related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus and any amendments thereof or supplements thereto supplied to the Underwriters and such dealers as the Underwriters may request, in quantities as hereinabove stated, (iii) the printing, engraving, issuance and delivery of the Securities including, but not limited to, (x) the purchase by the Underwriters of the Shares and the purchase by the Underwriters of the Underwriters' Warrants from the Company, (y) the consummation by the Company and the Selling Shareholders of any of their obligations under this Agreement and the Underwriters' Warrant Agreement, and (z) resale of the Shares by the Underwriters in connection with the distribution contemplated hereby, (iv) the qualification of the Securities under state or foreign securities or "Blue Sky" laws and determination of the status of such securities under legal investment laws, including the costs of printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky 22 Memorandum" and "Legal Investments Survey," if any, and disbursements and fees of counsel in connection therewith, (v) costs and expenses in connection with due diligence investigations, including but not limited to the fees of any independent counsel or consultant retained, (vi) fees and expenses of the transfer agent and registrar, (vii) applications for assignments of a rating of the Securities by qualified rating agencies, (viii) the fees payable to the Commission and the NASD, and (ix) the fees and expenses incurred in connection with the quotation of the Securities on the AMEX and any other exchange. Notwithstanding any other provision of this Agreement, whether or not the offering contemplated hereby is successfully completed, it shall be the Company's obligation to bear all of its expenses in connection with the proposed offering, including, but not limited to, the following: filing fees, printing and duplicating costs, all postage and mailing expenses with respect to the transmission of prospectuses, registrar and transfer agent fees, costs and expenses related to "Tombstone" advertisements, the Company's "road show" and information meetings and presentation costs, its own counsel and accounting fees, costs of due diligence investigations, bound volumes, prospectus memorabilia, issue and transfer taxes, if any, and "Blue Sky" filing fees, counsel fees and expenses. (b) If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 6 or Section 12, the Company shall reimburse and indemnify the Underwriters for all of their actual out-of-pocket expenses, including the fees and disbursements of Underwriters' Counsel, but not in excess of $100,000, less any amounts already paid pursuant to Section 5(c) hereof. (c) The Company further agrees that, in addition to the expenses payable pursuant to subsection (a) of this Section 5, it will pay to the Underwriters on the Closing Date by certified or bank cashier's check or, at the election of the Underwriters, by deduction from the proceeds of the offering contemplated herein a non-accountable expense allowance equal to one hundred thousand dollars ($100,000), twenty thousand dollars ($20,000) of which has been paid to date. 7. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder shall be subject to the continuing accuracy of each of the representations and warranties of the Company and the Selling Shareholders contained herein as of the date hereof and as of the Closing Date and each Option Closing Date, if any, as if it had been made on and as of the Closing Date or each Option Closing Date, as the case may be; the accuracy on and as of the Closing Date or Option Closing Date, if any, of the statements of the officers of the Company made pursuant to the provisions hereof; and the performance by the Company and each of the Selling Shareholders on and as of the Closing Date and each Option Closing Date, if any, of their respective covenants and obligations hereunder and to the following further conditions: (a) The Registration Statement shall have become effective not later than 12:00 Noon, New York time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Underwriters, and, at the Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be 23 pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the Regulations, the price of the Shares and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Underwriters of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. (b) The Underwriters shall not have advised the Company that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Underwriters' opinion, is material, or omits to state a fact which, in the Underwriters' opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Underwriters' opinion, is material, or omits to state a fact which, in the Underwriters' opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) On or prior to the Closing Date, the Underwriters shall have received from Underwriters' Counsel, such opinion or opinions with respect to the organization of the Company, the validity of the Securities, the Underwriters' Warrants, the Registration Statement, the Prospectus and other related matters as the Underwriters requests and Underwriters' Counsel shall have received such papers and information as they request to enable them to pass upon such matters. (d) At Closing Date, the Underwriters shall have received the favorable opinion of Schoeman, Marsh & Updike, LLP, counsel to the Company, dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: i) each of the Company and the Subsidiaries (A) has been duly organized, except as to the Subsidiaries which shall be to the knowledge of Counsel, and based upon certificates of good standing or authorization or the like received from applicable jurisdictions, is validly existing as a corporation in good standing under the laws of its jurisdiction, (B) is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, except where the failure to be so qualified and in good standing has no material adverse effect on the Company, and (C) has all requisite corporate power and authority; and the Company has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies 24 (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus. The disclosures in the Registration Statement concerning the effects of federal, state and local laws, rules and regulations on the Company's business as currently conducted and as contemplated are correct in all material respects; ii) the Company owns, directly or indirectly, one hundred percent (100%) of the outstanding capital stock of each of the Subsidiaries, and all such shares have been validly issued, are fully paid and non-assessable and were not in violation of any statutory preemptive rights; iii) the Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus, and any amendment or supplement thereto, under "Capitalization" and "Description of Securities, and, to the best of counsel's knowledge, is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Underwriters' Warrant Agreement and as described in the Prospectus. The Securities, and all other securities issued or issuable by the Company conform in all material respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have, to our knowledge, no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. The Shares, the Underwriters' Warrants and the Underwriters' Shares to be sold by the Company hereunder and under the Underwriters' Warrant Agreement are not and will not be subject to any preemptive or other similar rights of any stockholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and conform to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Shares, the Underwriters' Warrants and the Underwriters' Shares has been duly and validly taken, and the certificates representing the Shares and the Underwriters' Warrants are in due and proper form. The Underwriters' Warrants constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby. Upon the issuance and delivery pursuant to this Agreement and the Underwriters' Warrant Agreement of the Shares and the Underwriters' Warrants, respectively, to be sold by the Company, the Underwriters and the Underwriters, respectively, will acquire good and marketable title to the Shares and the Underwriters' Warrants free and clear of any pledge, lien, charge, claim, encumbrance, security interest, 25 or other restriction or equity of any kind whatsoever. No transfer tax is payable by or on behalf of the Underwriters in connection with (A) the issuance by the Company of the Shares, (B) the purchase by the Underwriters and the Underwriters of the Shares and the Underwriters' Warrants, respectively, from the Company, (C) the consummation by the Company of any of its obligations under this Agreement or the Underwriters' Warrant Agreement, or (D) resales of the Shares in connection with the distribution contemplated hereby; iv) the Registration Statement is effective under the Act, and, if applicable, filing of all pricing information has been timely made in the appropriate form under Rule 430A, and to the knowledge of such counsel, no stop order suspending the use of the Preliminary Prospectus, the Registration Statement or Prospectus or any part of any thereof or suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of such counsel's knowledge, threatened or contemplated under the Act; v) each of the Preliminary Prospectus, the Registration Statement, and the Prospectus and any amendments or supplements thereto (other than the financial statements and related notes and other financial and statistical data included therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Regulations; vi) to the best of such counsel's knowledge, (A) there are no agreements, contracts or other documents required by the Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement (or required to be filed under the Exchange Act if upon such filing they would be incorporated, in whole or in part, by reference therein) and the Prospectus and filed as exhibits thereto, and the exhibits which have been filed are correct copies of the documents of which they purport to be copies; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company or any Subsidiary is a party or by which it is bound, including any document to which the Company or any Subsidiary is a party or by which it is bound, incorporated by reference into the Prospectus and any supplement or amendment thereto, are accurate in all material respects and fairly represent the information required to be shown by Form S-2; (C) there is no pending or threatened against the Company or any Subsidiary any action, arbitration, suit, proceeding, inquiry, investigation, litigation, governmental or other proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or business of the Company or any Subsidiary which (x) is required to be disclosed in the Registration Statement which is not so disclosed, (and such proceedings as are summarized in the Registration Statement 26 are accurately summarized in all material respects), (y) questions the validity of the capital stock of the Company or this Agreement or the Underwriters' Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with any of the foregoing; (D) no statute or regulation or legal or governmental proceeding required to be described in the Prospectus is not described as required; and (E) there is no action, suit or proceeding pending, or threatened, against or affecting the Company or any Subsidiary before any court or arbitrator or governmental body, agency or official (or any basis thereof known to such counsel) in which there is a reasonable possibility of an adverse decision which may result in a material adverse change in the condition, financial or otherwise, or results of operations of the Company and its Subsidiaries, taken as a whole, which could materially adversely affect the present or prospective ability of the Company to perform its obligations under this Agreement or the Underwriters' Warrant Agreement or which in any manner draws into question the validity or enforceability of this Agreement or the Underwriters' Warrant Agreement; vii) the Company has full legal right, power and authority to enter into each of this Agreement and the Underwriters' Warrant Agreement and to consummate the transactions provided for herein and therein; and each of this Agreement and the Underwriters' Warrant Agreement has been duly authorized, executed and delivered by the Company. Each of this Agreement and the Underwriters' Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law), and none of the Company's execution or delivery of this Agreement and the Underwriters' Warrant Agreement, its performance hereunder or thereunder, its consummation of the transactions contemplated herein or therein, or the conduct of its business as described in the Registration Statement, the Prospectus and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company or any Subsidiary pursuant to the terms of (A) the certificate of incorporation or by-laws of the Company or any Subsidiary, (B) to our knowledge, any license, contract, indenture, mortgage, deed of trust, voting trust agreement, stockholders agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound or to which any of its respective properties or assets (tangible 27 or intangible) is or may be subject, or any indebtedness, or (C) to our knowledge, any statute, judgement, decree, order, rule or regulation applicable to the Company or any Subsidiary of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any Subsidiary, or any of their activities or properties; viii) except as described in the Prospectus, no consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body (other than such as may be required under Blue Sky laws, as to which no opinion need be rendered) is required in connection with the issuance of the Shares pursuant to the Prospectus, the issuance of the Underwriters' Warrants, the performance of this Agreement and the Underwriters' Warrant Agreement and the transactions contemplated hereby and thereby; ix) to the best knowledge of such counsel, neither the Company nor any of its Subsidiaries is in breach of, or in default under, any term or provision of any license, contract, indenture, mortgage, installment sale agreement, deed of trust, lease, voting trust agreement, stockholders' agreement, partnership agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary may be bound or to which the property or assets (tangible or intangible) of the Company or any Subsidiary is subject or affected; and neither the Company nor any of the Subsidiaries is in violation of any term or provision of its certificate of incorporation by-laws, or to such Counsel's knowledge, in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation; x) the statements in the Prospectus under [identify sections] have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are correct in all material respects; xi) the Shares and the Underwriters' Common Stock have been accepted for listing on the AMEX; xii) to the best knowledge of such counsel, except as described in the Prospectus, no person, corporation, trust, partnership, association or other entity has the right to include and/or register any securities of the Company in the Registration Statement, require the Company to file any registration statement or, if filed, to include any security in such registration statement; 28 xiii) assuming due execution by the parties thereto other than the Company, the Lock-up Agreements are legal, valid and binding obligations of parties thereto, enforceable against the party and any subsequent holder of the securities subject thereto in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law); and Such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company and representatives of the independent public accountants for the Company at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Preliminary Prospectus, the Registration Statement, the Prospectus; and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Prospectus, the Registration Statement and Prospectus, on the basis of the foregoing, no facts have come to the attention of such counsel which lead them to believe that either the Registration Statement or any amendment thereto, at the time such Registration Statement or amendment became effective or the Preliminary Prospectus or Prospectus or amendment or supplement thereto as of the date of such opinion contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Preliminary Prospectus, the Registration Statement or Prospectus). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to Underwriters' Counsel) of other counsel acceptable to Underwriters' Counsel, familiar with the applicable laws, including but not limited to ______________________, [patent counsel] to the Company as to licenses of the Company and ___________ as to matters of United Kingdom laws; (B) as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and the Subsidiaries, and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company and the Subsidiaries, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. The opinion of such counsel for the Company and the Subsidiaries shall state that the opinion of any such other counsel is in form satisfactory to such counsel and that the Underwriters and they are justified in relying thereon. Such opinion shall also state that Underwriters' Counsel is entitled to rely thereon. 29 (e) On the Closing Date there shall have been furnished to you the opinion of _________________________________, special counsel for the Selling Shareholders, dated such Closing Date and in form and substance satisfactory to Underwriter's Counsel, to the effect that: i) this Agreement has been validly authorized, executed and delivered by or on behalf of each of the Selling Shareholders. ii) a Power of Attorney and the Custody Agreement have been validly authorized, executed and delivered by each of the Selling Shareholders. iii) if shares of Common Stock are sold by a Selling Shareholder on such Closing Date, marketable title to the shares sold by such Selling Shareholder hereunder, free and clear of any liens, claims, encumbrances and security interests whatsoever (other than those as may have been created by the Underwriters), has been transferred to, and is vested in, the Underwriter who has purchased such shares hereunder. In rendering such opinion as to questions of the law of jurisdictions other than the state of New York or the United States, such counsel may rely upon an opinion (dated such Closing Date, addressed to the Underwriters and in form satisfactory to you) of counsel acceptable to Underwriter's Counsel. Such opinion of counsel for the Selling Shareholders shall state that the opinion of other such counsel is in form and substance satisfactory to counsel for the Selling Shareholders and, in their opinion, you and they are justified in relying on such other opinion. (f) At each Option Closing Date, if any, the Underwriters shall have received the favorable opinion of Schoeman, Marsh & Updike, LLP, or other counsel acceptable to the Underwriter, counsel to the Company and the Subsidiaries, dated the Option Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel confirming as of the Option Closing Date the statements made by Schoeman, Marsh & Updike, LLP, or other counsel acceptable to the Underwriter, in its opinion delivered on the Closing Date. (g) On or prior to each of the Closing Date and the Option Closing Date, if any, Underwriters' Counsel shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in subsection (c) of this Section 6, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions of the Company or the Selling Shareholders, or herein contained. (h) Prior to each of the Closing Date and each Option Closing Date, if any, (i) there shall have been no material adverse change nor development involving a prospective change in the condition, financial or otherwise, prospects, stockholders' equity or the business activities of the Company, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Registration Statement and 30 Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company or any of the Subsidiaries, from the latest date as of which the financial condition of the Company and the Subsidiaries is set forth in the Registration Statement and Prospectus which is materially adverse to the Company or any of the Subsidiaries; (iii) the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness; (iv) neither the Company nor any of the Subsidiaries shall have issued any securities (other than the Securities); neither the Company nor any of the Subsidiaries shall have declared or paid any dividend or made any distribution in respect of its capital stock of any class; and there has not been any change in the capital stock of the Company or any of the Subsidiaries, or any material change in the debt (long or short term) or liabilities or obligations of the Company or any of the Subsidiaries (contingent or otherwise); (v) no material amount of the assets of the Company or any of the Subsidiaries shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall have been pending or, to the best knowledge of the Company, threatened (or circumstances giving rise to same) against the Company or any of the Subsidiaries, or affecting any of its properties or business before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement and Prospectus; and (vii) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated, to the best knowledge of the Company, threatened or contemplated by the Commission. (i) At each of the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a certificate of the Company signed by the principal executive officer and by the chief financial or chief accounting officer of the Company, dated the Closing Date or Option Closing Date, as the case may be, to the effect that each of such persons has carefully examined the Registration Statement, the Prospectus and this Agreement, and that: i) The representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to such Closing Date or Option Closing Date, as the case may be; ii) No stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of each of such person's knowledge, after due inquiry, are contemplated or threatened under the Act; iii) The Registration Statement and the Prospectus and, if any, each amendment and each supplement thereto, contain all statements and information 31 required to be included therein, and none of the Registration Statement, the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and neither the Preliminary Prospectus nor any supplement thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and except as disclosed in the Prospectus, (a) neither the Company nor any of the Subsidiaries has incurred up to and including the Closing Date or the Option Closing Date, as the case may be, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent; (b) neither the Company nor any of its Subsidiaries has paid or declared any dividends or other distributions on its capital stock; (c) neither the Company nor any of the Subsidiaries has entered into any material transactions not in the ordinary course of business; (d) there has not been any change in the capital stock of the Company or any material change in the debt (long or short-term) of the Company or any of the Subsidiaries; (e) neither the Company nor any of the Subsidiaries has sustained any material loss or damage to its property or assets, whether or not insured; (g) there is no litigation which is pending or, to the best knowledge of the Company, threatened (or circumstances giving rise to same) against the Company, or any affiliated party of any of the foregoing which is required to be set forth in an amended or supplemented Prospectus which has not been set forth; and (h) there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been set forth. References to the Registration Statement and the Prospectus in this subsection (i) are to such documents as amended and supplemented at the date of such certificate. (j) On the Closing Date there shall have been furnished to you a certificate, dated such Closing Date and addressed to you, signed by or on behalf of the Selling Shareholders, to the effect that the representations and warranties of the Selling Shareholders in this Agreement are materially correct on and as of the date of this Agreement and on and as of such Closing Date, as if made on and as of such Closing Date, and that the Selling Shareholders have complied with all the agreements and satisfied all the conditions on their part to be performed or satisfied at or prior to such Closing Date. (k) By the Closing Date, the Underwriters will have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriters, as described in the Registration Statement. 32 (l) At the time this Agreement is executed, the Underwriters shall have received a letter, dated such date, addressed to the Underwriters in form and substance satisfactory (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) in all respects to the Underwriters and Underwriters' Counsel, from KPMG Peat Marwick LLP: i) confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the applicable Regulations; ii) stating that it is their opinion that the financial statements and supporting schedules of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations thereunder and that the Underwriters may rely upon the opinion of KPMG Peat Marwick LLP with respect to such financial statements and supporting schedules included in the Registration Statement; iii) stating that, on the basis of a limited review which included a reading of the latest available unaudited interim financial statements of the Company and the Subsidiaries, a reading of the latest available minutes of the stockholders and Board of Directors and the various committees of the Board of Directors of the Company, consultations with officers and other employees of the Company and the Subsidiaries responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the unaudited financial statements and supporting schedules of the Company and the Subsidiaries included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements of the Company and the Subsidiaries included in the Registration Statement, or (B) at a specified date not more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock of the Company, any change in the long-term debt of the Company or any of the Subsidiaries, or any decrease in the stockholders' equity of the Company or any of the Subsidiaries or any decrease in the net current assets or net assets of the Company as compared with amounts shown in the December 31, 1997 balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease, and (C) during the period from January 1, 1998 to a specified date not more than five (5) days prior to the effective date of the Registration Statement, there was any decrease in net revenues or net earnings of the Company or any of the Subsidiaries or increase in net earnings per common share of the Company, in 33 each case as compared with the corresponding period in the prior year other than as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; iv) setting forth, at a date not later than five (5) days prior to the date of the Registration Statement, the amount of liabilities of the Company and the Subsidiaries (including a break-down of commercial paper and notes payable to the banks); v) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company and the Subsidiaries set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and the Subsidiaries and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and vi) statements as to such other matters incident to the transaction contemplated hereby as the Underwriters may request. (m) At the Closing Date and each Option Closing Date, if any, the Underwriters shall have received from KPMG Peat Marwick LLP a letter, dated as of the Closing Date or the Option Closing Date, as the case may be, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (i) of this Section hereof except that the specified date referred to shall be a date not more than five days prior to the Closing Date or the Option Closing Date, as the case may be, and, if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further effect that they have carried out procedures as specified in clause (v) of subsection (k) of this Section with respect to certain amounts, percentages and financial information as specified by the Underwriters and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (v). (n) At the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a letter, dated such date, addressed to the Underwriters in form and substance satisfactory in all respects to the Underwriters and counsel to the Underwriters, from KPMG Peat Marwick LLP containing statements and information of the type ordinarily included in accountant's "comfort letters" to Underwriters with respect to financial information contained in the Registration Statement and the Prospectus. 34 (o) The Company shall have delivered to the Underwriters a letter from KPMG Peat Marwick LLP addressed to the Company stating that they have not during the immediately preceding two-year period brought to the attention of the Company's management any "weakness" as defined in Statement of Auditing Standards No. 60 "Communication of Internal Control Structure Related Matters Noted in an Audit," in any of the Company's internal controls. (p) On each of the Closing Date and Option Closing Date, if any, there shall have been duly tendered to the Underwriters for their respective accounts the appropriate number of Shares. (q) No order suspending the sale of the Securities in any jurisdiction designated by the Underwriters pursuant to subsection (e) of Section 5 hereof shall have been issued on either the Closing Date or the Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or shall be contemplated. [(r) On or before the Closing Date, the Underwriters shall have received the favorable opinion of ____________________, special intellectual property counsel to the Company with respect to certain intellectual property matters , or in such form reasonably acceptable to the Underwriters' counsel.] (s) On or before the Closing Date, the Company shall have executed and delivered to the Underwriters, (i) the Underwriters' Warrant Agreement substantially in the form filed as Exhibit 4.2 to the Registration Statement in final form and substance satisfactory to the Underwriters, and (ii) the Underwriters' Warrants in such denominations and to such designees as shall have been provided to the Company (t) On or before the Closing Date, the Shares shall have been duly approved for listing on the AMEX, subject to official notice of issuance. (u) On or before the Closing Date, there shall have been delivered to the Underwriters all of the Lock-up Agreements, in form and substance satisfactory to Underwriters' Counsel. If any condition to the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Underwriters may terminate this Agreement or, if the Underwriters so elect, it may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 8. Indemnification. (a) The Company agrees to indemnify and hold harmless each of the Underwriters (for purposes of this Section 8 "Underwriter" shall include the officers, directors, partners, employees, agents and counsel of the Underwriter, and each person, if any, who controls the Underwriter ("controlling person") within the meaning of Section 15 of the Act or 35 Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions, proceedings, investigations, inquiries, and suits in respect thereof), whatsoever (including but not limited to any and all costs and expenses whatsoever reasonably incurred in investigating, preparing or defending against such action, proceeding, investigation, inquiry or suit, commenced or threatened, or any claim whatsoever), as such are incurred, to which the Underwriter or such controlling person may become subject under the Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon (A) any untrue statement or alleged untrue statement of a material fact contained (i) in any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time amended and supplemented); (ii) in any post-effective amendment or amendments or any new registration statement and prospectus in which is included securities of the Company issued or issuable upon exercise of the Securities; or (iii) in any application or other document or written communication (in this Section 8 collectively called "application") executed by the Company or based upon written information furnished by the Company filed, delivered or used in any jurisdiction in order to qualify the Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, AMEX or any other securities exchange, (B) the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made), or (C) any breach of any representation, warranty, covenant or agreement of the Company contained herein or in any certificate by or on behalf of the Company or any of its officers delivered pursuant hereto unless, in the case of clause (A) or (B) above, such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or any Prospectus, or any amendment thereof or supplement thereto, or in any application, as the case may be. The indemnity agreement in this subsection (a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each Selling Shareholder, each of the Company's directors, each of the Company's officers who has signed the Registration Statement, and each other person, if any, who controls the Company or any Selling Shareholder within the meaning of the Act, to the same extent as the foregoing indemnity from the Company to the Underwriters but only with respect to statements or omissions or alleged omissions, if any, made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any application made in reliance upon, and in strict conformity with, written information furnished to the Company with respect to any Underwriter by such Underwriter expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any such application, provided that such written information or omissions only pertain to disclosures in the Preliminary Prospectus, the Registration Statement or Prospectus directly relating to the transactions effected by the Underwriters in connection with this Offering. The Company acknowledges that the 36 statements with respect to the public offering of the Securities set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriters expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Prospectus. The indemnity agreement in this subsection (b) shall be in addition to any liability which the Underwriters may have at common law or otherwise. (c) Each Selling Shareholder severally, but not jointly, will indemnify and hold harmless the Company, each of the Company's directors, each of the Company's officers who signed the Registration Statement, each person, if any, who controls the Company within the meaning of the 1933 Act, the Underwriters and each person, if any, who controls the Underwriters within the meaning of the 1933 Act against any loss, claim, damage or liability to which the Company, the Underwriter or any such director or officer or controlling person may become subject, under the 1933 Act or otherwise, insofar as such loss, claim, damage or liability (or action in respect thereof) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Registration Statement (including each Preliminary Prospectus and the Prospectus as a part thereof) or any amendment thereof or supplement thereto, or (B) in any Blue Sky Application, or (ii) the omission or alleged omission to state in the Registration Statement (including any Preliminary Prospectus and the Prospectus as a part thereof) or any amendment thereof or supplement thereto or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Shareholder specifically for use in the preparation of the Registration Statement or any such amendment thereof or supplement thereto or any such Blue Sky Application or any such Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto; and will reimburse any legal or other expenses reasonably incurred by the Company, or the Underwriters or any such director or officer or controlling person in connection with investigating or defending against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action, and further provided, however, that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any Preliminary Prospectus but eliminated or remedied in the Prospectus, such indemnity agreement shall not inure to the benefit of the Underwriters from whom the person asserting any loss, claim, damage or liability purchased the Stock which is the subject thereof (or to the benefit of any person who controls such Underwriter), if a copy of the Prospectus was not sent or given to such person with or prior to the written confirmation of the sale of such shares of Common Stock to such person; and further provided, however, that the Selling Shareholders will be liable under the foregoing indemnity agreement only to the extent of the proceeds received by them from the sale of their stock to the Underwriters pursuant to the terms hereof. This indemnity agreement is in addition to any liability which such Selling Shareholder may otherwise have. 37 (d) The Company will indemnify and hold harmless each Selling Shareholder and each person, if any, who controls such Selling Shareholder, against any loss, claim, damage or liability, joint or several, to which such Selling Shareholder or such controlling person may be subject, under the Act or otherwise, insofar as such loss, claim, damage or liability (or action in respect thereof) arises out of or is based upon (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Registration Statement (including any Preliminary Prospectus and the Prospectus as a part thereof) or any amendment or supplement thereof, or (B) in any blue sky application or other document executed by the Company specifically for that purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the shares of Common Stock sold hereunder under the securities laws thereof (any such application, document or information being hereinafter called a "Blue Sky Application"), or (ii) the omission or alleged omission to state in the Registration Statement (including any Preliminary Prospectus and the Prospectus as a part thereof) or any amendment or supplement thereof or in any Blue Sky Application a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Selling Shareholder for any legal or other expenses reasonably incurred by such Selling Shareholder in connection with investigating or defending against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Selling Shareholder specifically for use in the preparation of the Registration Statement or any such amendment or supplement thereof or any such Blue Sky Application or any such preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto. (e) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, suit or proceeding, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 8, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent that it has been prejudiced in any material respect by such failure or from any liability which it may have otherwise). In case any such action, investigation, inquiry, suit or proceeding is brought against any indemnified party, and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in correction with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably 38 satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action, investigation, inquiry, suit or proceeding on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action, investigation, inquiry, suit or proceeding or separate but similar or related actions, investigations, inquiries, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances. Anything in this Section 8 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. An indemnifying party will not, without the prior written consent of the indemnified parties, settle compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, investigation, inquiry, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 8, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 8 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions, investigations, inquiries, suits or proceedings in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand, from the offering of the Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where the Company or any Selling Shareholder is the contributing party and the Underwriters are the indemnified party, the relative benefits received by the Company or such Selling Shareholder, as the case may be, on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares (before deducting expenses) bear to the 39 total underwriting discounts received by the Underwriters hereunder, in each case as set forth in the table on the Cover Page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, any Selling Shareholder or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions, investigations, inquiries, suits or proceedings in respect thereof, referred to above in this subdivision (f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, claim, investigation, inquiry, suit or proceeding. Notwithstanding the provisions of this subdivision (f) the Underwriters shall not be required to contribute any amount in excess of the underwriting discount applicable to the Securities purchased by the Underwriters hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls the Company or any Selling Shareholder within the meaning of the Act, each officer of the Company who has signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company or such Selling Shareholder, as the case may be, subject in each case to this subparagraph (f). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit, inquiry, investigation or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this subparagraph (f), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this subparagraph (f), or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 9. Representations and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Company or certificates delivered on behalf of any Selling Shareholder submitted pursuant hereto, shall be deemed to be representations, warranties and agreements at the Closing Date and the Option Closing Date, as the case may be, and such representations, warranties and agreements of the Company and the indemnity agreements contained in Section 8 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter, the Company, any controlling person of any Underwriter, the Company, and shall survive termination of this Agreement or the issuance, sale and delivery of the Securities to the Underwriters and the Underwriters, as the case may be. 10. Effective Date. (a) This Agreement shall become effective at 10:00 a.m., New York City time, on the next full business day following the date hereof, or at such earlier time after 40 the Registration Statement becomes effective as the Underwriters, in their discretion, shall release the Securities for sale to the public; provided, however, that the provisions of Sections 6, 8 and 11 of this Agreement shall at all times be effective. For purposes of this Section 10, the Shares to be purchased hereunder shall be deemed to have been so released upon the earlier of dispatch by the Underwriters of telegrams to securities dealers releasing such shares for offering or the release by the Underwriters for publication of the first newspaper advertisement which is subsequently published relating to the Shares. 11. Termination. (a) Subject to subsection (b) of this Section 11, the Underwriters shall have the right to terminate this Agreement, after the date hereof, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Underwriters' opinion will in the immediate future materially adversely disrupt the financial markets; or (ii) any material adverse change in the financial markets shall have occurred; or (iii) if trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the AMEX, the National Association of Securities Dealers, Inc., the Boston Stock Exchange, the Commission or any other government authority having jurisdiction; or (iv) if trading of any of the securities of the Company shall have been suspended, or any of the securities of the Company shall have been delisted, on any exchange or in any over-the-counter market; or (v) if the United States shall have become involved in a war or major hostilities, or if there shall have been an escalation in an existing war or major hostilities or a national emergency shall have been declared in the United States; or (vi) if a banking moratorium has been declared by a state or federal authority; or (vii) if a moratorium in foreign exchange trading has been declared; or (viii) if the Company shall have sustained a loss material or substantial to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Underwriters' opinion, make it inadvisable to proceed with the delivery of the Securities; or (viii) if there shall have occurred any outbreak or escalation of hostilities or any calamity or crisis or there shall have been such a material adverse change in the conditions or prospects of the Company, or such material adverse change in the general market, political or economic conditions, in the United States or elsewhere as in the Underwriters' judgment would make it inadvisable to proceed with the offering, sale and/or delivery of the Securities or (ix) if Donald N. Horn, Kenneth M. Darby and Arthur D. Roche shall no longer serve the Company in their present capacity. (b) If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 11(a) the Company shall promptly reimburse and indemnify the Underwriters for all of their actual out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriters (less amounts previously paid pursuant to Section 6(c) above). Notwithstanding any contrary provision contained in this Agreement, if this Agreement shall not be carried out within the time specified herein, or any extension thereof granted to the Underwriters, by reason of any failure on the part of the Company to perform any undertaking or satisfy any condition of this Agreement by it to be performed or satisfied (including, without limitation, pursuant to Section 7 or Section 13) then, the Company shall promptly reimburse and 41 indemnify the Underwriters for all of their actual out-of-pocket expenses, including the fees and disbursements of counsel for the Underwriters (less amounts previously paid pursuant to Section 6(c) above). Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 7, 11, 12 and 13 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 6 and Section 8 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 12. Default by the Company. If the Company or any Selling Shareholder shall fail at the Closing Date or at any Option Closing Date, as applicable, to sell and deliver the number of Shares which it is obligated to sell hereunder on such date, then this Agreement shall terminate (or, if such default shall occur with respect to any Option Shares to be purchased on an Option Closing Date, the Underwriters may at the Underwriters' option, by notice from the Underwriters to the Company, terminate the Underwriters' obligation to purchase Option Shares from the Company on such date) without any liability on the part of any non-defaulting party other than pursuant to Section 6, Section 8 and Section 11 hereof. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. 13. Substitution of Underwriters. If one of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 7, 11, or 12 hereof to purchase and pay for the number of Shares agreed to be purchased by such Underwriter upon tender to you of such shares in accordance with the terms hereof, then (unless within 48 hours after such default arrangements satisfactory to the Company and the non-defaulting Underwriter shall have been made for the purchase of the defaulted Stock by another Underwriter or Underwriters) this Agreement will terminate without liability on the part of any non-defaulting Underwriter or on the part of the Company except as otherwise provided in Sections 5 and 8 hereof. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this paragraph. Nothing in this Section 13, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 14. Notices. All notices and communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Underwriters c/o Fahnestock & Co. Inc., 125 Broad Street, 16th Floor, New York, New York 10004, Attention: Henry P. Williams, with a copy to Whitman Breed Abbott & Morgan LLP, 200 Park Avenue, New York, New York 10166, Attention: Theodore La Pier, Esq. Notices to the Company shall be directed to the Company at 89 Arkay Drive, Hauppauge, New York 11788, Attention: Kenneth M. Darby, President, with a copy to Schoeman, Marsh & Updike, LLP, 60 E. 42nd Street, 39th Floor, New York, New York 10165, Attention: Michael Schoeman, Esq. 15. Parties. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriters, the Company, the Selling Shareholders and the controlling persons, directors and officers referred to in Section 8 hereof, and their respective successors, 42 legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 16. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the choice of law or conflict of laws principles. 17. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. 18. Entire Agreement; Amendments. This Agreement and the Underwriters' Warrant Agreement constitute the entire agreement of the parties hereto and supersede all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may not be amended except in a writing, signed by the Underwriters, the Company and the Selling Shareholders. If the foregoing correctly sets forth the understanding between the Underwriters, the Company and the Selling Shareholders, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, VICON INDUSTRIES, INC. By: --------------------------------------- Kenneth M. Darby President DONALD N. HORN, Selling Shareholder By: --------------------------------------- Attorney-in-Fact MICHAEL D. KATZ, Selling Shareholder By: --------------------------------------- Attorney-in-Fact ARTHUR V. WALLACE, Selling Shareholder By: --------------------------------------- Attorney-in-Fact 43 Confirmed and accepted as of the date first above written. FAHNESTOCK & CO. INC. By: --------------------------------- Name: Title: As Attorney-in-Fact for each of the Underwriters SOUTHEAST RESEARCH PARTNERS, INC. By: --------------------------------- Name: Title: As Attorney-in-Fact for each of the Underwriters 44 SCHEDULE A Underwriter Number of Shares - ----------- ---------------- Fahnestock & Co. Inc. Southeast Research Partners, Inc. TOTAL 1,575,000 --------- --------- 45 SCHEDULE B Selling Shareholder Number of Shares - ------------------- ---------------- Donald N. Horn 48,605 Michael D. Katz 257,700 Arthur W. Wallace 18,695 46 Exhibit A [FORM OF INTELLECTUAL PROPERTY OPINION] _____________, 1998 FAHNESTOCK & CO. INC. Southeast Research Partners, Inc. c/o Fahnestock & Co. Inc. 125 Broad Street New York, New York 10004 Re: Public Offering of Vicon Industries, Inc. Gentlemen: We have acted as special counsel to VICON INDUSTRIES, INC., a New York corporation (the "Company"), in connection with the entering into by the Company of that certain Underwriting Agreement by and between FAHNESTOCK & CO. INC. ("Fahnestock") and SOUTHEAST RESEARCH PARTNERS, INC. ("Southeast"), as representatives of the several underwriters named in Schedule A thereto, and the Company, dated _____________, 1998 (the "Underwriting Agreement"). This opinion is provided to you pursuant to Section 7(p) of the Underwriting Agreement. For the purpose of rendering the opinions set forth below we have reviewed the following (collectively, the "Documents"): (i) the Underwriting Agreement; (ii) that certain Registration Statement filed _________, 1998, together with any and all amendments thereof exhibits thereto (collectively, the "Registration Statement"); (iii) the company's Prospectus dated _________________, 1998 (the "Prospectus"); (iv) a search of the United States Patent and Trademark Office records relevant to ownership of any and all: 47 patents and patent applications (including, without limitation, the patents and patent applications listed on Schedule A annexed hereto and hereby incorporated by reference herein (collectively, the "Patents")), and trademarks, trademark applications, service marks and service mark applications (collectively, the "Marks") (including, without limitation, the Marks listed on Schedule B annexed hereto and hereby incorporated by reference herein (collectively, the "Trademarks")), owned, purportedly owned or licensed by the Company (including, those patents, patent applications and Marks licensed, without limitation, pursuant to the licenses listed on Schedule C annexed hereto and hereby incorporated by reference herein (collectively, the "Licenses")), conducted by _____________________ and certified as true and correct as of _________________, 1998 (no earlier than 5 days prior to the date of the Closing (as defined in the Underwriting Agreement)); (v) a search of the United States Copyright Office records relevant to ownership of any and all copyrighted material (including, without limitation, the copyright in, or license permitting the Company's actual use of, the material licensed or otherwise distributed by the Company and listed on Schedule D annexed hereto and hereby incorporated by reference herein (collectively, the "Copyrighted Material")), owned, purportedly owned or licensed by the Company conducted by _______________________ and certified as true and correct as of ___________________, 1998 (no earlier than 5 days prior to the date of the Closing); (vi) an intellectual property litigation search with respect to all Patents, Trademarks, Licenses and Copyrighted Material, listed on Schedules A, B, C and D, respectively; (vii) a search of the Uniform Commercial Code ("UCC") recordation offices, in the following jurisdictions -- [________________________, ________________ and ____________________], with respect to the following two categories of general intangibles: (a) the intellectual property general intangibles of the Company, including, without limitation, the Company's 48 patents, patent applications, inventions, know how, trademarks, service marks, copyrights, service and trade names, intellectual property licenses and other rights, and (b) the intellectual property general intangibles licensed to the Company, including, without limitation, the patents, patent applications, inventions, know how, trademarks, service marks, copyrights, service and trade names and other intellectual property rights licensed to the Company pursuant to the Licenses (listed on Schedule C), said search certified to us as complete and accurate by ________________________ and current through _______________ , 1998 (no earlier than 5 days prior to the date of the Closing) and said jurisdictions being the only jurisdictions in which filing of UCC financing statements or other documents may be filed to effectively evidence a security or other interest in said general intangibles; and (viii) any and all records, documents, instruments and agreements in our possession or under our control relating to the Company. We have also examined such corporate records, documents, instruments and agreements, and inquired into such other makers, as we have deemed necessary or appropriate as a basis for the opinions set forth herein. Whenever our opinion herein is qualified by the phrase "to the best of our knowledge" or "to the best of our knowledge, after due inquiry," such language means that, based upon (i) our inquiries of officers of the Company, (ii) our review of the Documents, and (iii) our review of such other corporate records, documents, instruments and agreements described in the first sentence of this paragraph, we believe that such opinions are factually correct. To the best of our knowledge, as to all matters of fact represented to you by the Company, we advise you that nothing has come to our attention that would cause us to believe that such facts are incorrect, incomplete or misleading or that reliance thereon is not warranted under the circumstances. We call to your attention that our opinion is limited to such facts as they exist on the date hereof and do not take into account any change of circumstances, fact or law subsequent thereto. Based upon and subject to the foregoing, we are of the opinion that: 49 1. To the best of our knowledge, after due inquiry, except as described in the Registration Statement, the Company owns or has the right to use, free and clear of all liens, encumbrances, pledges, security interests, defects or other restrictions or equities of any kind whatsoever, (i) all patents and patent applications (including, without limitation, the Patents), (ii) all trademarks and service marks (including, without limitation, the Trademarks), (iii) all copyrights (including, without limitation, the Copyrighted Material), (iv) all service and trade names, (v) all intellectual property licenses (including, without limitation, the Licenses), and (vi) all technology used in, contemplated to be used in or required for, the conduct of the Company's business. 2. To the best of our knowledge, after due inquiry, the Company possesses all material intellectual property licenses or rights used in, or required for, the conduct of its business (including, the Licenses and without limitation, any such licenses or rights described in the Registration Statement as being owned, possessed or licensed by the Company, as the case may be), such licenses and rights are in full force and effect, and the Company's products, methods and services do not infringe any unlicensed intellectual property of any third parties. 3. To the best of our knowledge, after due inquiry, there is no claim or action, pending, threatened or potential, which affects or could affect the rights of the Company with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications or licenses used in, or required for, the conduct of the Company's business and all trademarks, service marks, copyrights, trade names, and patents owned or licensed to the Company are valid. 4. To the best of our knowledge, after due inquiry, there is no intellectual property based claim or action, pending, threatened or potential, which affects or could affect the rights of the Company with respect to any products, services, processes or licenses, including, without limitation, the Licenses used in the conduct of the Company's business. 5. To the best of our knowledge, after due inquiry, except as described in the Registration Statement, the Company is not under any obligation to pay royalties or fees to any third party with respect to any material, technology or intellectual properties developed, employed, licensed or used by the Company. 50 6. To the best of our knowledge, after due inquiry, the statements in the Registration Statement under the headings, "Risk Factors - Patents, Trademarks and Proprietary Information" and "Business - Patents, Trademarks and Proprietary Information," are accurate in all material respects, fairly represent the information disclosed therein and do not omit to state any fact necessary to make the statements made therein complete and accurate. 7. To the best of our knowledge, after due inquiry, the statements in the Registration Statement and the Prospectus do not contain any untrue statement of a material fact with respect to the intellectual property position of the Company, or omit to state any material fact relating to the intellectual property position of the Company which is required to be stated in the Registration Statement and the Prospectus or is necessary to make the statements therein not misleading. We call your attention to the fact that the members of this firm are licensed to practice law in the State of _______________________ and before the United States Patent and Trademark Office as Registered Patent Attorneys. Accordingly, we express no opinion with respect to the laws, rules and regulations of any jurisdictions other than the State of ___________ and the United States of America. The opinions expressed herein are for the sole benefit of, and may be relied upon only by, the several Underwriters named in Schedule A to the Underwriting Agreement and Whitman Breed Abbott & Morgan LLP. Very truly yours, 51 EX-4.2 3 UNDERWRITERS WARRANT & WARRANT AGMT. Exhibit 4.2 FORM OF UNDERWRITER'S WARRANT AGREEMENT - ------------------------------------------------------------------------------- VICON INDUSTRIES, INC. AND FAHNESTOCK & CO. INC. AND SOUTHEAST RESEARCH PARTNERS, INC. UNDERWRITERS' WARRANT AGREEMENT Dated as of __________, 1998 - ------------------------------------------------------------------------------- UNDERWRITERS' WARRANT AGREEMENT dated as of __________, 1998 between VICON INDUSTRIES, INC., a New York corporation (the "Company"), FAHNESTOCK & CO. INC. and SOUTHEAST RESEARCH PARTNERS, INC. (each hereinafter referred to individually as a "Holder" or "Underwriter" and, collectively, as "Holders" or the "Underwriters"). W I T N E S S E T H : WHEREAS, the Company proposes to issue to the Underwriters or their designees warrants ("Warrants") to purchase up to an aggregate of 153,500 shares of common stock, par value $.01 per share, of the Company ("Common Stock"); and WHEREAS, the Underwriters have agreed pursuant to the underwriting agreement (the "Underwriting Agreement") dated as of the date hereof among the Underwriters, the Company and the Selling Shareholders named therein to act as Underwriters in connection with the Company's proposed public offering of up to 1,535,000 shares of Common Stock at a public offering price of $____ per share of Common Stock (the "Public Offering"); and WHEREAS, the Warrants to be issued pursuant to this Agreement will be issued on the Closing Date (as such term is defined in the Underwriting Agreement) by the Company to the Underwriters in consideration for, and as part of the Underwriters' compensation in connection with the Public Offering; NOW, THEREFORE, in consideration of the premises, the payment by the Underwriters to the Company of an aggregate of twenty dollars ($20.00), the agreements herein set forth and other good and valuable consideration, hereby acknowledged, the parties hereto agree as follows: 1. Grant. Fahenstock & Co., Inc. is hereby granted the right to purchase, at any time from __________, 1999, until 5:30 P.M., New York time, on __________, 2003, up to an aggregate of _______ shares of Common Stock at an initial exercise price (subject to adjustment as provided in Section 8 hereof) of $_____ per share of Common Stock subject to the terms and conditions of this Agreement. Southeast Research Partners, Inc. is hereby granted the right to purchase, at any time from __________, 1999, until 5:30 P.M., New York time, on __________, 2003, up to an aggregate of _______ shares of Common Stock (together with the Common Stock issuable upon exercise of the Warrants referred to in the preceding sentence, the "Shares") at an initial exercise price (subject to adjustment as provided in Section 8 hereof) of $_____ per share of Common Stock subject to the terms and conditions of this Agreement. 2. Warrant Certificates. The warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth in Exhibit A, attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions, and other variations as required or permitted by this Agreement. Except as set forth herein, the Shares issuable upon exercise of the Warrants are in all respects identical to the shares of Common Stock being purchased by the Underwriters for resale to the public pursuant to the terms and provisions of the Underwriting Agreement. 2 3. Exercise of Warrant. Section 3.1 Method of Exercise. The Warrants initially are exercisable at an aggregate initial exercise price (subject to adjustment as provided in Section 8 hereof) per share of Common Stock set forth in Section 1 hereof payable by certified or official bank check in New York Clearing House funds, subject to adjustment as provided in Section 8 hereof. Upon surrender of a Warrant Certificate with a duly executed copy of the annexed Form of Election to Purchase, together with payment of the Exercise Price (as hereinafter defined) for the shares of Common Stock purchased at the Company's principal offices in Hauppauge, New York (presently located at 89 Arkay Drive) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional shares of the Common Stock underlying the Warrants). Warrants may be exercised to purchase all or part of the shares of Common Stock represented thereby. In the case of the purchase of less than all the shares of Common Stock purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the shares of Common Stock purchasable thereunder. Section 3.2 Exercise by Surrender of Warrant. In addition to the method of payment set forth in Section 3.1 and in lieu of any cash payment required thereunder, a Holder of Warrants shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering the Warrant Certificate in the manner 3 specified in Section 3.1 in exchange for the number of Shares equal to the product of (x) the number of Shares as to which the Warrants are being exercised multiplied by (y) a fraction, the numerator of which is the Market Price (as defined in Section 3.3 below) of the Shares less the Exercise Price and the denominator of which is such Market Price. Solely for the purposes of this paragraph, Market Price shall be calculated either (i) on the date which the form of election attached hereto is deemed to have been sent to the Company pursuant to Section 12 hereof ("Notice Date") or (ii) as the average of the Market Prices for each of the five trading days preceding the Notice Date, whichever of (i) or (ii) is greater. Section 3.3 Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Common Stock is listed or admitted to trading or by the Nasdaq National Market ("NNM"), or, if the Common Stock is not listed or admitted to trading on any national securities exchanged or quoted by NNM, the average closing bid price as furnished by the NASD through NNM or similar organization if NNM is no longer reporting such information, or if the Common Stock is not quoted on NNM, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for shares of Common Stock and/or other securities, properties or rights underlying such Warrants, shall be made forthwith (and in any event within 4 three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder, and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates representing the Shares underlying the Warrants (and/or other securities, property or rights issuable upon the exercise of the Warrants) shall be executed on behalf of the Company by the manual or facsimile signature of the then Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 5. Restriction On Transfer of Warrants. The Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof; that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the date hereof, except to officers of the Underwriter. 5 6. Exercise Price. Section 6.1 Initial and Adjusted Exercise Price. Except as otherwise provided in Section 8 hereof, the initial exercise price of each Warrant shall be as set forth in Section 1 hereof. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Section 8 hereof. Section 6.2 Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. Section 7.1 Registration Under the Securities Act of 1933. The Warrants, the Shares, and any of the other securities issuable upon exercise of the Warrants have been registered under the Securities Act of 1933, as amended (the "Act"), pursuant to the Company's Registration Statement on Form S-2 (Registration No. 333-_____) (the "Registration Statement"). All of the representations and warranties of the Company contained in the Underwriting Agreement relating to the Registration Statement, the Preliminary Prospectus and Prospectus (as such terms are defined in the Underwriting Agreement) and made as of the dates provided therein, are hereby incorporated by reference. The Company agrees and covenants promptly to file post-effective amendments to such Registration Statement as may be necessary in order to maintain its effectiveness and otherwise to take such action as may be necessary to maintain the effectiveness of the Registration Statement as long as any Warrants are outstanding. In the event that, for any reason, whatsoever, the Company shall fail to maintain the effectiveness of the Registration Statement, upon exercise, in part or in whole, of the 6 Warrants, certificates representing the Shares underlying the Warrants, and any of the other securities issuable upon exercise of the Warrants (collectively, the "Warrant Securities") shall bear the following legend: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended ("Act"), and may not be offered or sold except pursuant to (i) an effective registration statement under the Act, (ii) to the extent applicable, Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) an opinion of counsel, if such opinion shall be reasonably satisfactory to counsel to the issuer, that an exemption from registration under such Act is available. Section 7.2 Piggyback Registration. If, at any time commencing after the date hereof and expiring seven (7) years from the date hereof, the Company proposes to register any of its securities under the Act (other than in connection with a merger or pursuant to Form S-8) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement, to the Holder and to all other Holder(s) of the Warrants and/or the Warrant Securities, if not previously sold pursuant to this Section 7, of its intention to do so. If the Underwriters or other Holder(s) of the Warrants and/or Warrant Securities notify the Company within twenty-five (25) days after receipt of any such notice of its or their desire to include any such securities in such proposed registration statement, the Company shall afford the Underwriters and such Holder(s) of the Warrants and/or Warrant Securities the opportunity to have any such Warrant Securities registered under such registration statement (sometimes referred to herein as the "Piggyback Registration"). 7 Notwithstanding the provisions of this Section 7.2, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.2 (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. Section 7.3 Demand Registration. (a) At any time commencing after the date hereof and expiring five (5) years from the date hereof, the Holder of the Warrants and/or Warrant Securities representing a "Majority" (as hereinafter defined) of such securities (assuming the exercise of all of the Warrants), not previously sold pursuant to this Section 7, shall have the right (which right is in addition to the registration rights under Section 7.2 hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Underwriter and Holder, in order to comply with the provisions of the Act, so as to permit a public offering and sale of Warrant Securities for the period necessary for such Holders to effect the proposed sale or other disposition of the applicable Warrants and/or Warrant Securities. (b) The Company covenants and agrees to (x) give written notice of any registration request under this Section 7.3 by any Holder to all other registered Holder of the Warrants and the Warrant Securities within ten (10) days from the date of the receipt of any such registration request and (y) include all the Warrant Securities, not 8 previously sold pursuant to this Section 7, in such registration statement unless it receives notification from a Holder within five (5) days following the Company's notification of registration that such Holder does not want its Warrant Securities to be included in the registration statement. (c) In addition to the registration rights under Section 7.2 and subsection (a) of this Section 7.3, at any time commencing after the date hereof and expiring five (5) years thereafter, any Holder of Warrants and/or Warrant Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file, on one occasion, with the Commission a registration statement so as to permit a public offering and sale for the period necessary for such Holder to effect the sale or other disposition of the applicable Warrant Securities provided, however, that the provisions of Section 7.4(b) hereof shall not apply to any such registration request and registration and all costs incident thereto shall be at the expense of the Holder or Holders that participate in such sale or disposition, including the Company's reasonable legal and accounting fees, printing expenses and blue sky fees and expenses, making such request. (d) Notwithstanding anything to the contrary contained herein, if the Company shall not have filed a registration statement for the Warrant Securities within the time period specified in Section 7.4(a) hereof pursuant to the written notice specified in Section 7.3(a) of a Majority of the Holders of the Warrants and/or Warrant Securities, the Company shall have the option, upon the written notice of election of a Majority of the Holders of the Warrants and/or Warrant Securities, to repurchase (i) any and all Warrant Securities at the higher of the Market Price per share of Common Stock on (x) the date of the notice sent pursuant to Section 7.3(a) or (y) the expiration of the period 9 specified in Section 7.4(a) and (ii) any and all Warrants at such Market Price less the Exercise Price of such Warrant. Such repurchase, if elected by the Company, shall be in immediately available funds and shall close within two (2) days after the later of (i) the expiration of the period specified in Section 7.4(a) or (ii) the delivery of the written notice of election specified in this Section 7.3(d). Section 7.4 Covenants of the Company With Respect to Registration. In connection with any registration under Section 7.2 or 7.3 hereof, the Company covenants and agrees as follows: (a) The Company shall use its best efforts to file a registration statement within forty-five (45) days of receipt of any demand therefor, shall use its best efforts to have any registration statements declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses. The Holder(s) will pay all costs, fees and expenses, including the Company's reasonable legal and accounting fees, printing expenses and blue sky fees and expenses, in connection with any registration statement filed pursuant to Section 7.3(c). If the Company shall fail to comply with the provisions of Section 7.4(a), the Company shall, in addition to any other equitable or other relief 10 available to the Holder(s), be liable for any or all incidental or special damages sustained by the Holder(s) requesting registration of their Warrant Securities. (c) The Company will take all necessary action which may be required in qualifying or registering the Warrant Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) The Company shall indemnify the Holder(s) of the Warrant Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holder within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify each of the Underwriters contained in Section 7 of the Underwriting Agreement. (e) The Holder(s) of the Warrant Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all 11 expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holder, or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company. (f) Nothing contained in this Agreement shall be construed as requiring the Holder(s) to exercise their Warrants prior to the filing of any registration statement or the effectiveness thereof. (g) The Company shall not permit the inclusion of any securities other than the Warrant Securities to be included in any registration statement filed pursuant to Section 7.3(c) hereof, or permit any other registration statement to be or remain effective during the effectiveness of a registration statement filed pursuant to Section 7.3 (c) hereof, for a period of thirty (30) days, without the prior written consent of the Holder of the Warrants and Warrant Securities representing a Majority of such securities. (h) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the 12 closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (i) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally available to its security holder" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (j) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and to the managing underwriters, copies of all correspondence between the Commission and the Company and between the Commission and the Company's counsel or auditors and all reasonable memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriters to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties 13 and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder or underwriter shall reasonably request. (k) The Company shall enter into an underwriting agreement with the managing underwriters selected for such underwriting by Holders holding a Majority of the Warrant Securities requested to be included in such underwriting, which may be one or both of the Underwriters. Such agreement shall be satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holder shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holder. Such Holder shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holder and their intended methods of distribution. (l) In addition to the Warrant Securities, upon the written request therefor by any Holder(s), the Company shall include in the registration statement any other securities of the Company held by such Holder(s) as of the date of filing of such registration statement, including without limitation restricted shares of Common Stock, options, warrants or any other securities convertible into shares of Common Stock. 14 (m) For purposes of this Agreement, the term "Majority" in reference to the Holders of Warrants or Warrant Securities, shall mean a percentage in excess of fifty percent (50%) of the then outstanding Warrant Securities (treating all such securities as fully exercised for Shares for purposes of such calculation) that (i) are not held by the Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith and (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. 8. Adjustments to Exercise Price and Number of Securities. Section 8.1 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. Section 8.2 Stock Dividends and Distributions. In case the Company shall pay a dividend in, or make a distribution of, shares of Common Stock or of the Company's capital stock convertible into Common Stock, the Exercise Price shall forthwith be proportionately decreased. An adjustment made pursuant to this Section 8.2 shall be made as of the record date for the subject stock dividend or distribution. Section 8.3 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 8, the number of Warrant Securities issuable upon the exercise at the adjusted exercise price of each Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Securities 15 issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. Section 8.4 Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as may be amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. Section 8.5 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger, by a holder of the number of shares of Common Stock of the Company for which such warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in Section 8. The above provision of this subsection shall similarly apply to successive consolidations or mergers. 16 Section 8.6 No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made: (a) Upon the issuance or sale of the Warrants to the Underwriters or the shares of Common Stock issued upon the exercise of the Warrants; (b) If the amount of said adjustment shall be less than two cents ($0.02) per Warrant Security, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least two cents (2CENTS) per Warrant Security. 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of Warrant Securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 17 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrants, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights. 11. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed (subject to official notice of issuance) on all securities exchanges on which the Common Stock issued to the public in connection herewith may then be listed on a National Securities Exchange and/or quoted on NNM. 12. Notices to Warrant Holder. Nothing contained in this Agreement shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholder for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of 18 the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holder of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holder of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholder entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or 19 the issuance of any convertible or exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made and sent when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holder of Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 hereof or to such other address as the Company may designate by notice to the Holder. 14. Supplements and Amendments. The Company and the Underwriters may from time to time supplement or amend this Agreement without the approval of any holder of Warrant Certificates (other than the Underwriters) in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriters may deem necessary or desirable and which the Company and the Underwriters deem shall not adversely affect the interests of the Holder of Warrant Certificates. 15. Successors. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Holder and their respective successors and assigns hereunder. 20 16. Termination. This Agreement shall terminate at the close of business on __________, 2004. Notwithstanding the foregoing, the indemnification provisions of Section 7 shall survive such termination until the close of business on __________, 2010. 17. Governing Law; Submission to Jurisdiction. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State without giving effect to the rules of said State governing the conflicts of laws. The Company, the Underwriters and the Holders hereby agree that any action, proceeding or claim against it arising out of, or relating in any way to, this Agreement shall be brought and enforced in the courts of the State of New York or of the United States of America for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company, the Underwriters and the Holders hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum. Any such process or summons to be served upon any of the Company, the Underwriters and the Holders (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 13 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any action, proceeding or claim. The Company, the Underwriters and the Holders agree that the prevailing party(ies) in any such action or proceeding shall be entitled to recover from the other 21 party(ies) all of its/their reasonable legal costs and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. 18. Entire Agreement; Modification. This Agreement (including the Underwriting Agreement to the extent portions thereof are referred to herein) contains the entire understanding between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. 19. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. 20. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriters and any other registered Holder(s) of the Warrant Certificates or Warrant Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole benefit of the Company and the Underwriters and any other registered Holders of Warrant Certificates or Warrant Securities. 22. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. 22 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. VICON INDUSTRIES, INC. By: --------------------------------------- Name: Title: Attest: - -------------------------------------- Secretary FAHNESTOCK & CO. INC. By: --------------------------------------- Henry P. Williams Senior Vice President SOUTHEAST RESEARCH PARTNERS, INC. By: --------------------------------------- Deborah Novick Senior Vice President 23 EXHIBIT A [FORM OF WARRANT CERTIFICATE] THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:30 P.M., NEW YORK TIME, ________________ , 2003 No. W- Warrants to Purchase ___ Shares of Common Stock WARRANT CERTIFICATE This Warrant Certificate certifies that , or registered assigns, is the registered holder of Warrants to purchase initially, at any time from __________, 1999 until 5:30 p.m. New York time on __________, 2003 ("Expiration Date"), up to _________ fully-paid and non-assessable shares of common stock, par value $.01 per share ("Common Stock") of VICON INDUSTRIES, INC. a New York corporation (the "Company"), (one share of Common Stock referred to individually as a "Security" and collectively as the "Securities") at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $_____ per share of Common Stock upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of __________, 1998 among the Company, FAHNESTOCK & CO. INC. and SOUTHEAST RESEARCH PARTNERS, INC. (the "Warrant Agreement"). Payment of the Exercise Price shall be made by certified or official bank check in New York Clearing House funds payable to the order of the Company. 24 No Warrant may be exercised after 5:30 p.m., New York time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, hereby shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holder (the words "holder" or "holders" meaning the registered holder or registered holders) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection with such transfer. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. 25 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated as of __________, 1998 VICON INDUSTRIES, INC. [SEAL] By: --------------------------------------- Name: Title: Attest: - --------------------------------------- Secretary 26 [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.1] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase: / / __________ shares of Common Stock; and herewith tenders in payment for such securities a certified or official bank check payable in New York Clearing House Funds to the order of Vicon Industries, Inc. in the amount of $____, all in accordance with the terms of Section 3.1 of the Underwriters' Warrant Agreement dated as of __________ __, 1998 among Vicon Industries, Inc., Fahnestock & Co., Inc. and Southeast Research Partners, Inc.. The undersigned requests that a certificate for such securities be registered in the name of ______________ __, whose address is _______________________________ and that such Certificate be delivered to ________________ whose address is ________________________ . Dated: Signature___________________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) ______________________________________________________ (Insert Social Security or Other Identifying Number of Holder) 27 [FORM OF ASSIGNMENT] (To be executed by the registered holder is such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED _________________ hereby sells, assigns and transfer unto - ------------------------------------------------------------------------------- (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________ Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated:________________ Signature:_____________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) _________________________________________________ (Insert Social Security or Other Identifying Number of Assignor) [6~ 28 EX-23.2 4 KPMG CONSENT Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS ------------------------------- The Board of Directors Vicon Industries, Inc.: We consent to the use of our report included herein and incorporated herein by reference and to the reference to our firm under the heading "Experts" and "Selected Consolidated Financial and Operating Data" in the prospectus. KPMG PEAT MARWICK LLP Jericho, New York February 24, 1998 -----END PRIVACY-ENHANCED MESSAGE-----