<PAGE>
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)
<TABLE>
<S> <C>
NEW YORK 11-2160665
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
------------------------
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
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
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
</TABLE>
(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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
VICON INDUSTRIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO
ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NO. FORM S-2 CAPTION CAPTION OR LOCATION IN PROSPECTUS
----- ---------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
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
</TABLE>
<PAGE>
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.
<PAGE>
{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.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS (2)
<S> <C> <C> <C> <C>
Per Share........................................
Total (3)........................................
</TABLE>
(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.
<PAGE>
{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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
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
</TABLE>
- ------------------------
(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
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------
<S> <C> <C>
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
</TABLE>
- ------------------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF NET PERCENTAGE OF NET
PROCEEDS PROCEEDS
----------------- -----------------
<S> <C> <C>
(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%
--- -----
--- -----
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997
---------------- ---------
<CAPTION>
QUARTER ENDED HIGH LOW HIGH
- ------------------------------------------------------------------- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
<S> <C> <C>
1996
--------------------
QUARTER ENDED LOW HIGH
- ------------------------------------------------------------------- ----- -----
<S> <C> <C>
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
<CAPTION>
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
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(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 $
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(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
<PAGE>
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."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(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
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT
----------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(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
</TABLE>
- ------------------------
(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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
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%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and officers of the Company are set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
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*
</TABLE>
- ------------------------
* 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.
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<PAGE>
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
<PAGE>
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 $100,000 during any such
year.
36
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
COMPENSATION ALL
OPTIONS OTHER
SALARY (NO. OF COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) SHARES) ($)
- --------------------------------------------------------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
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.
</TABLE>
- ------------------------
(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 $3,000 and bonus in the
form of 16,933 shares of Common Stock issued from treasury.
(3) Represents life insurance policy payment.
(4) Represents cash bonus. The cash bonus equaled 2.45% of the sum of
consolidated pre-tax income and provision for officers' bonuses, which bonus
formula was adopted for years 1997 and 1998 by the Board of Directors upon
the recommendation of its Compensation Committee.
(5) Represents bonus in the form of 8,467 shares of Common Stock issued from
treasury.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK
NO. OF OPTIONS PRICE
SHARES GRANTED EXERCISE APPRECIATION FOR
UNDERLYING TO EMPLOYEES PRICE OPTION TERM
OPTIONS IN PER SHARE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($) DATE 5% 10%
- -------------------------------------------------- ----------- ----------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
- ------------------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(2) AFTER THE OFFERING
------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
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).................
</TABLE>
- ------------------------
* 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Fahnestock & Co. Inc...........................................................................
Southeast Research Partners, Inc...............................................................
-----------------
TOTAL.................................................................................... 1,575,000
-----------------
-----------------
</TABLE>
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
<PAGE>
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
<PAGE>
VICON INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------
ASSETS 1996 1997 1997
- -------------------------------------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
(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
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN TOTAL
CAPITAL IN RETAINED CURRENCY SHARE-
COMMON EXCESS OF EARNINGS TREASURY TRANSLATION HOLDERS'
SHARES STOCK PAR VALUE (DEFICIT) STOCK ADJUSTMENT EQUITY
--------- ----------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
--------- ----------- ---------- ---------- --------- ----------- -----------
--------- ----------- ---------- ---------- --------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------- ---------------------
1995 1996 1997 1996 1997
----------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal.................................................. $ -- $ -- $ 24,000
State.................................................... -- -- 5,000
Foreign.................................................. 80,000 85,000 53,000
---------- ---------- ----------
$ 80,000 $ 85,000 $ 82,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
F-10
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
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-
------------- -------------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER
-------------------- 31,
1996 1997 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
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
--------- --------- -----------
--------- --------- -----------
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Balance--September 30, 1994.................................................................. 431,174 $ 2.03
Options granted.............................................................................. 25,000 $ 1.94
Options exercised............................................................................ -- --
Options forfeited............................................................................ (156,513) $ 2.07
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance--September 30, 1997.................................................................. 419,497 $ 2.27
Options granted (unaudited).................................................................. -- --
Options exercised (unaudited)................................................................ -- --
Options forfeited (unaudited)................................................................ -- --
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
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.
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
<S> <C> <C> <C>
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
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
(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
------------ ------------
------------ ------------
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
</TABLE>
[LOGO]
1,575,000 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FAHNESTOCK & CO. INC.
SOUTHEAST RESEARCH
PARTNERS, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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:
<TABLE>
<S> <C>
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..................................................... $ *
---------
---------
</TABLE>
- ------------------------
* 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
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S> <C>
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)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S> <C>
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).
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S> <C>
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)+
</TABLE>
- ------------------------
+ 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
<PAGE>
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.
<TABLE>
<S> <C> <C>
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)
</TABLE>
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
<PAGE>
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
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE NO.
-----------
<C> <S> <C>
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
-----------
<C> <S> <C>
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)+
</TABLE>
- ------------------------
+ Filed herewith
* To be filed by amendment
<PAGE>
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,
<PAGE>
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
<PAGE>
(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
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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
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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,
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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,
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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
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<PAGE>
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
<PAGE>
(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.
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<PAGE>
(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
<PAGE>
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.
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(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.
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<PAGE>
(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
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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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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,
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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(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,
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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
<PAGE>
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
<PAGE>
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;
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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.
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<PAGE>
(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
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<PAGE>
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
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<PAGE>
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.
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(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
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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.
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(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
<PAGE>
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
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<PAGE>
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.
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<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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,
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<PAGE>
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
<PAGE>
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
<PAGE>
SCHEDULE A
Underwriter Number of Shares
- ----------- ----------------
Fahnestock & Co. Inc.
Southeast Research Partners, Inc.
TOTAL 1,575,000
---------
---------
45
<PAGE>
SCHEDULE B
Selling Shareholder Number of Shares
- ------------------- ----------------
Donald N. Horn 48,605
Michael D. Katz 257,700
Arthur W. Wallace 18,695
46
<PAGE>
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:
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<PAGE>
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
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<PAGE>
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
<PAGE>
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.
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<PAGE>
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,
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<PAGE>
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
- -------------------------------------------------------------------------------
<PAGE>
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),
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
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<PAGE>
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.
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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
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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
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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
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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.
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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
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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.
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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
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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.
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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.
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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
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[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)
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[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~
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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
