ITEM 1 - BUSINESS
General
Vicon Industries, Inc. (the "Company"), incorporated in New York in October, 1967, designs, manufactures, assembles and markets a wide range of closed circuit television ("CCTV") components and CCTV systems for security, surveillance, safety, process and control applications by end users. The Company sells CCTV components and systems directly to distributors, dealers and original equipment manufacturers, principally within the security industry. The U.S. security industry is a multi-billion dollar industry which includes guard services, armored carrier, electronic alarms and sensing equipment, safes, locking devices and access systems, as well as CCTV. The nature of the Company's business and the general security market it serves has not changed materially in the past five years.
Users of the Company's products typically utilize them as a visual crime deterrent, for visual documentation, observing inaccessible or hazardous areas, enhancing safety, obtaining cost savings (such as lower insurance premiums), managing control systems, and improving the efficiency and effectiveness of personnel. The Company's products are marketed under its own brand names and registered trademarks. In fiscal 1996, no customer represented more than 10% of consolidated revenues.
Products
The Company's product line consists of approximately 600 products, of which about a third represent model variations. The Company's product line consists of various elements of a video surveillance system, including video cameras, display units (monitors), cassette recorders, switching equipment for video distribution, digital video and signal processing units (which perform character generation, multi screen display, video insertion, intrusion detection, source identification and alarm processing), motorized zoom lenses, remote camera positioning devices, manual and computer based system controls, environmental camera enclosures and consoles for system assembly. The Company maintains a large line of products due to the many varied climatic and operational environments under which the products are expected to perform. In addition to selling from a standard catalog line, for significant orders, the Company will produce to specification or modify an existing product to meet a customer's requirements. The Company's products range in price from $10 for a simple camera mounting bracket to approximately one hundred thousand dollars (depending upon configuration) for a large digital control and video switching system.
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Marketing
The Company's products are sold worldwide, principally to independent distributors, dealers and integrators of various types of security-related systems. Sales are made by in-house customer service representatives, field sales engineers and by independent sales representatives in certain areas of the United States. The sales effort is supported by several in-house application engineers.
Although the Company does not sell directly to end users, much of its sales promotion and advertising is directed at end user markets. The Company's products are employed in video system installations by: (1) commercial and industrial users, such as office buildings, manufacturing plants, warehouses, apartment complexes, shopping malls and retail stores; (2) federal, state, and local governments for national security purposes, municipal facilities, prisons, and military installations; (3) financial institutions, such as banks, clearing houses, brokerage firms and depositories, for security purposes; (4) transportation departments for highway traffic control, bridge and tunnel monitoring, and airport, subway, bus and seaport surveillance; (5) gaming casinos, where video security is often mandated by local statute; and (6) health care facilities, such as hospitals, particularly psychiatric wards and intensive care units. The Company estimates that approximately 50 percent of its total revenues are sales for commercial and industrial uses.
The Company's principal sales offices are located in Melville, New York; Atlanta, Georgia and Segensworth, England.
International Sales
The Company sells internationally by direct export to dealers and distributors, and, in Europe through the Company's United Kingdom (U.K.) subsidiary. In fiscal 1996, the operating profit and identifiable assets for the Company's U.K. subsidiary amounted to approximately $421,000 and $4.8 million, respectively. For more information regarding foreign operations, see Note 7 of Notes to Consolidated Financial Statements included elsewhere herein. Direct export sales and sales from the Company's U.K. subsidiary amounted to $16.2 million, $17.5 million, and $16.7 million or 38%, 40% and 35% of consolidated revenues in fiscal years 1996, 1995, and 1994, respectively. Export sales are made through a wholly-owned subsidiary, Vicon Industries Foreign Sales Corporation, a tax advantaged foreign sales corporation. The Company's principal foreign markets are Europe and the Far East, which together accounted for approximately 82 percent of international sales in fiscal 1996. Additional information is contained in the discussion of foreign currency activity included in Item 7.
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Competition
The Company competes in areas of price, service, product performance and availability with several large and small public and privately-owned companies in the manufacture and distribution of CCTV systems and components (excluding cameras, monitors and video cassette recorders "Video Products") within the security industry. The Company's Video Products compete with many large companies whose financial resources and scope of operations are substantially greater than the Company's. The Company is one of a few domestic market suppliers that design, assemble, manufacture, market and support an extensive line of products offering a comprehensive system capability in a wide range of applications. Many competitors, including manufacturers of cameras, monitors and recorders, typically produce a limited product line since components and accessories are low volume items. The Company believes a broad product line is desirable since many customers prefer to obtain a complete video system from one supplier with the assurance of product compatibility and reliability. In recent years, price competition has intensified limiting the amount of cost increases the Company can pass on to customers and in some instances requiring price reductions.
Research and Development
The Company is engaged in ongoing research and development activities in connection with new or existing products. Changes in CCTV technology have incorporated the use of advanced electronic components and new materials which add to product life and performance. Nineteen professional employees devote full time to the development of new products and to improving the qualities and capabilities of existing products. Further, the Company engages the services of others to assist in the development of new products. Expenditures for research and development amounted to approximately $1,800,000 in 1996, $1,900,000 in 1995, and $1,600,000 in 1994 or approximately 4.2% of revenues in 1996, 4.2% of revenues in 1995, and 3.4% of revenues in 1994.
Source and Availability of Raw Materials
The Company has not experienced shortages or significant difficulty in obtaining its raw materials, components or purchased finished products. Raw materials are principally aluminum, steel and plastics, while components are mainly motors, video lenses and standard electronic parts. In 1996, the Company procured directly and indirectly approximately 20% of its product purchases from Chun Shin Electronics, Inc., its South Korean joint venture company (see Item 13 for further discussion of this joint venture). The Company is not dependent upon any other single source for a significant amount of its raw materials, components or purchased finished products.
Patents and Trademarks
The Company owns a limited number of design and utility patents expiring at various times and has several patent applications pending with respect to the design and/or mechanical function of its products. The Company has certain trademarks registered and several other trademark applications pending both in the United States and in Europe. The Company has no licenses, franchises or concessions with respect to any of its products or business dealings. The Company does not deem its patents and trademarks, or the lack of licenses, franchises and concessions, to be of substantial significance or to have a material effect on its business.
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Inventories
The Company maintains an inventory of finished products sufficient to accommodate its customers' requirements, since most sales are to dealer/contractors who do not carry large stock inventories. Parts and components inventories are also carried in sufficient quantities to permit prompt delivery of certain items. The Company would rather carry adequate inventory quantities than experience shortages which detract from the production process and sales effort. The Company's business is not seasonal.
Backlog
The backlog of orders believed to be firm as of September 30, 1996 and 1995 was approximately $3.1 million and $2.7 million, respectively. All orders are cancelable without penalty at the option of the customer. The Company prefers that its backlog of orders not exceed its ability to fulfill such orders on a timely basis, since experience shows that long delivery schedules only encourage the Company's customers to look elsewhere for product availability.
Employees
At September 30, 1996, the Company employed 176 full-time employees, of whom five are officers, 41 administrative personnel, 77 employed in sales capacities, 26 in engineering, and 27 production employees. At September 30, 1995, the Company employed 175 persons categorized in similar proportions to those of 1996. There are no collective bargaining agreements with any of the Company's employees and the Company considers its relations with its employees to be good.
ITEM 2
ITEM 2 - PROPERTIES
In January 1988, the Company sold and subsequently leased back its 108,000 square foot headquarters facility in Melville, New York, which accommodates the Company's sales, distribution, administration, product development and limited assembly and manufacturing operations. Currently, the Company subleases 28,000 sq. ft. of its facility under an agreement which expires on January 30, 1998. In November 1994, the Company entered into a sublease agreement dated as of January 1, 1993, which gives a company affiliated with its landlord the right to occupy approximately 25,000 sq. ft. of its primary operating facility with two months notice in exchange for specified rent payments through the expiration of the primary lease in 1998. In connection with such agreement, the landlord and the subtenant were each granted an option to ask the Company to vacate the entire premises with six months notice and the landlord agreed to release the Company from all future obligations under its lease in exchange for a lease termination payment by the Company. (See Notes 3 and 10 of Notes to Consolidated Financial Statements included elsewhere herein for further information).
In October 1996, the landlord exercised the aforementioned option which obligates the Company to vacate the Melville facility in April 1997. In December 1996, the Company entered into a five year lease for a 56,000 square foot facility which will accomodate all of the operations of the vacated facility. The Company also operates, under lease, a regional sales office in Atlanta, Georgia. In addition, the Company owns a 14,000 square foot sales, service and warehouse facility in southern England which services the U.K. and European Community markets.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
None
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's stock is traded on the American Stock Exchange under the symbol (VII). The following table sets forth for the periods indicated, the range of high and low prices for the Company's Common Stock on the American Stock Exchange:
Quarter Ended High Low
Fiscal 1996 December 2-3/8 1- 3/16 March 2 1- 1/4 June 2-3/4 1-11/16 September 5-7/16 2- 1/16
Fiscal 1995 December 2-1/16 1-1/2 March 2-15/16 1-1/2 June 2-1/2 1-3/8 September 2-1/8 1-9/16
The Company has not declared or paid cash dividends on its Common Stock for any of the foregoing periods. Additionally, under the current loan agreement, the Company may not declare dividends. The approximate number of holders of Common Stock at December 15, 1996 was 1,500.
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ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
FISCAL YEAR 1996 1995 1994 1993 1992 ---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $43,191 $ 43,847 $ 47,714 $ 45,923 $ 45,041 Gross profit 10,957 9,546 10,714 9,724 8,150* Pretax income (loss) 385 (1,267) 74 (1,858) (3,317) Net income (loss) 300 (1,347) 45 (1,875) (3,906) Income (loss) per share: Primary .11 (.49) .02 (.68) (1.42) Fully diluted .10 (.49) .02 (.68) (1.42) Total assets 28,085 26,423 28,857 26,069 26,701 Long-term debt 6,429 5,339 6,059 5,621 6,273 Working capital 12,064 10,721 13,359 13,420 15,741 Property, plant and equipment (net) 3,034 3,262 3,180 3,245 3,913
Cash dividends - - - - -
* Includes a provision of $2.7 million for discontinuance of certain products and product lines.
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ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1996 Compared with 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 VCR's) to a Far East distributor. Lower sales in Europe due to delays in new product introduction were offset by increased 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.
Gross profit margins were 25.4% of net sales 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 dollar increased against the Japanese yen which increased margins for those few products still 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.
During 1996, the Company recorded an unrealized foreign exchange gain of $42,000. This gain resulted from the Company's revaluation of its yen denominated mortgage obligation into U.S. dollars as the value of the British pound sterling gained against the Japanese yen.
Interest expense declined $131,000 due principally to the lower cost of new bank borrowings.
Income improved approximately $1.6 million principally as a result of the higher gross margins discussed above.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Fiscal Year 1995 Compared with 1994
Net sales for 1995 were $43.8 million, a decrease of 8.1%, compared with $47.7 million in 1994. The sales decline was the result of lower domestic shipments, while foreign sales increased $.8 million to $17.5 million. Domestic sales were affected by several factors such as direct end user selling by competition; lack of competitiveness of certain products whose cost is denominated in yen; and shortened product life cycles which made certain of the Company's key control systems less competitive. The backlog of orders was $2.7 million at September 30, 1995 compared with $3.0 million at September 30, 1994.
Gross profit margins were 21.8% of net sales in 1995, compared with 22.5% in 1994. The margin decline was due principally to the impact of lower sales in relation to a substantially fixed overhead structure. In addition, the value of the dollar declined significantly against the Japanese yen for most of the year which lowered margins of those products sourced in Japan.
Operating expenses in 1995 totaled $9.8 million compared with $9.9 million in 1994. Operating expenses, as a percent of sales, amounted to 22.4% and 20.7% in 1995 and 1994, respectively. The increase in expenses as a percent of sales is due in part to higher bad debt expense, severance pay, bank and professional fees.
During 1994, the Company recorded an unrealized foreign exchange gain of $45,000. This gain resulted from the Company's revaluation of its yen denominated mortgage obligation into U.S. dollars as the value of the British pound sterling gained against the Japanese yen.
Interest expense increased $230,000 as a result of higher interest rates.
The net loss of $1.3 million compared with a profit of $45,000 was the result of lower sales and gross margins and higher interest expenses as discussed above.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
September 30, 1996 Compared with 1995
Total shareholders' equity increased approximately $335,000 to $9.0 million at September 30, 1996, due primarily to the year's reported profit. Working capital increased approximately $1.3 million to $12.1 million at September 30, 1996 due principally to increased long term bank borrowings to finance higher inventory levels.
Accounts receivable increased approximately $.3 million to $8.6 million at September 30, 1996. The increase was principally the result of higher fourth quarter sales compared with the prior year. Inventories increased $2.6 million to $14.7 million at September 30, 1996. Finished products inventories increased $2.3 million due principally to the introduction of new digital video products and a general increase in stocking levels to meet anticipated customer demand. Raw material and component inventories also increased principally to accomodate production of a new camera dome system. Total accounts payable increased approximately $1.0 million to $9.3 million at September 30, 1996 to support the higher inventory levels.
The Company maintains an overdraft facility of 700,000 pounds sterling (approx. $1.1 million) in the U.K. to support local working capital requirements. At September 30, 1996, borrowings under this facility were approximately $960,000.
In December 1995, the Company repaid $2.8 million of bank debt with the proceeds of a new U.S. bank loan. The new two year loan agreement provides for maximum borrowings of $5,500,000 at September 30, 1996, subject to an availability formula based on U.S. accounts receivable and inventories. Borrowings under such agreement amounted to approximately $4.1 million at September 30, 1996. Concurrent with the new loan agreement, the Company amended its $2,000,000 secured promissory note with Chugai Boyeki Co., Ltd., a related party, to defer all scheduled principal installments to July 1998. The Company believes that the new loan agreement and its other sources of credit provide adequate funding to meet its near term cash requirements.
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Foreign Currency Activity
The Company's foreign exchange exposure is principally limited to the relationship of the U.S. dollar to the Japanese yen and the British pound sterling.
Japan sourced products denominated in Japanese yen accounted for approximately 7 percent of product purchases in fiscal 1996 compared with 19 percent in fiscal 1995. Although the dollar strengthened against the Japanese yen during fiscal 1996, in past years the 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. The Company's purchases from Japan are denominated in Japanese yen. At the Company's direction, Chugai Boyeki Co., Ltd., its Japanese supplier, has entered into foreign exchange contracts on behalf of the Company to hedge the currency risk on these product purchases.
Sales to the Company's U.K. subsidiary, which approximated $3.7 million in fiscal 1996, are made in pounds sterling and include products sourced from the Far East. In the years when the pound weakened significantly against the U.S. dollar and Japanese yen, the cost of U.S. and Japanese sourced product sold by the Company's U.K. subsidiary increased. When market conditions permitted, such cost increases were passed on to the customer through price increases. The Company attempts to minimize its currency exposure on intercompany sales through the purchase of forward exchange contracts.
The Company intends to increase prices and seek lower prices from suppliers to mitigate exchange rate exposures, however, there can be no assurance that such steps will be effective in limiting foreign currency exposure.
Inflation
The impact of inflation on the Company has lessened in recent years as the rate of inflation remains low. However, inflation continues to increase costs to the Company. As operating expenses and production costs increase, the Company seeks price increases to its customers to the extent permitted by competition.
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 123, "Accounting for Stock-Based Compensation," which must be adopted by the Company in fiscal 1997. The Company has elected not to implement the fair value based accounting method for employee stock options, but has elected to disclose, commencing in fiscal 1997, the pro-forma net income and earnings per share as if such method had been used to account for stock-based compensation cost as described in the Statement.
In March 1995, the FASB issued Statement No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which must also be adopted by the Company in fiscal 1997. The effect of adopting the standard will be insignificant.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14, for an index to consolidated financial statements and financial statement schedules.
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ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and Executive Officers of the Company are as follows:
Directors and Executive Officers
Donald N. Horn, age 67 Chairman of the Board (since 1967); term ends April 1999 Kenneth M. Darby, age 50 President, Chief Executive Officer, Assistant Secretary, and Director (since 1987); term ends April, 1997 Arthur D. Roche, age 58 Executive Vice President, Chief Financial Officer, Secretary, Member of the Office of the President and Director (since 1992); term ends April 1999 Peter F. Barry, age 67 Director since 1984; term ends April Milton F. Gidge, age 67 Director since 1987; term ends April Michael D. Katz, age 58 Director since 1993; term ends April Peter F. Neumann, age 62 Director since 1987; term ends April W. Gregory Robertson, age 52 Director since 1991; term ends April Kazuyoshi Sudo, age 54 Director since 1987; term ends April Arthur V. Wallace, age 71 Director since 1974; term ends April John L. Eckman, age 47 Vice President, U.S. Sales Peter A. Horn, age 41 Vice President, Compliance and Quality Assurance Yacov A. Pshtissky, age 45 Vice President, Engineering Gregory Stempkoski, age 36 Vice President, Export Sales
Mr. D. Horn founded the Company in 1967 and has served as Chairman of the Board since its inception. He also served as Chief Executive Officer from the Company's inception until April 1992 and as President to September, 1991.
Mr. Darby has served as Chief Executive Officer since April, 1992 and as President since October, 1991. Mr. Darby also served as Chief Operating Officer and as Executive Vice President, Vice President, Finance and Treasurer of the Company. He first joined the Company in 1978 as Controller after more than nine years at KPMG Peat Marwick, a major public accounting firm.
Mr. Roche joined the Company as Executive Vice President and co-participant in the Office of the President in August 1993. For the six months earlier, Mr. Roche provided consulting services to the Company. In October, 1991 Mr. Roche retired as a partner of Arthur Andersen & Co., an international accounting firm whom he joined in 1960.
Mr. Barry is a retired executive of Grumman Corp., an aerospace manufacturer, for whom he served from August 1988 to March 1991 as Senior Vice President of Washington D.C. operations. Previously, he served since 1974 as President of Hartman Systems, Inc., a manufacturer of electronic controls and display devices for military applications. Mr. Barry currently acts as a consultant to private industry on government relations.
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Mr. Gidge is a retired executive officer of Lincoln Savings Bank (1976-1994) and served as its Chairman, Credit Policy. He has also served as a director since 1980 of Interboro Mutual Indemnity Insurance Co., a general insurance mutual company and since 1988 as a director of Intervest Corporation of New York, a mortgage banking company.
Mr. Katz is a physician practicing in New York. He is the President of Katz, Rosenthal, Ganz, Snyder & PDC. He has served in that capacity since 1970.
Mr. Neumann has been President of Flynn-Neumann Agency, Inc. an insurance brokerage firm, since 1971. He has also served since 1978 as a director of Reliance Federal Savings Bank.
Mr. Robertson is President of TM Capital Corporation, a financial services company, an organization he founded in 1989. From 1985 to 1989, he was employed by Thomson McKinnon Securities, Inc. as head of investment banking and public finance.
Mr. Sudo has been Treasurer of Chugai Boyeki (America) Corp., a distributor of electronic, chemical and optical products, since 1985.
Mr. Wallace, who joined the Company in 1970, was Executive Vice President from 1979 until he retired in September, 1990.
Mr. Eckman joined the Company in August 1995 as Eastern Regional Manager. He was promoted to Vice President, U.S. Sales in July, 1996. Prior to joining the Company, he was Director of Field Operations for Cardkey Systems, Inc. with whom he was employed for twelve years.
Mr. P. Horn joined the Company in January, 1974 and has been employed in various technical capacities. In 1986 he was appointed as Vice President, Engineering; in May, 1990 as Vice President, New Products and Technical Support Services; in September 1993, he was appointed Vice President, Marketing; in 1994 as Vice President, Product Management; and in 1995 as Vice President, Compliance and Quality Assurance.
Mr. Pshtissky, who joined the Company in September 1979 as an Electrical Design Engineer, was promoted to Director of Electrical Product Development in March, 1988 and to Vice President, Engineering in May, 1990.
Mr. Stempkoski joined the Company in June 1986 as an Inside Sales Administrator. In October 1990, he was promoted to International Sales Manager and in October, 1996 he was promoted to Vice President, Export Sales.
There are no family relationships between any director, executive officer or person nominated or chosen by the Company to become a director or officer except for the relationship between Peter A. Horn, an officer of the Company, and Donald N. Horn, Chairman of the Board. Peter A. Horn is the son of Donald N. Horn.
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Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended September 30, 1996 and Form 5 and amendments thereto furnished to the Company with respect to the year ended and certain written representations, no person, who, at any time during the year ended September 30, 1996 was a director, officer or beneficial owner of more than 10 percent of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act failed to file on a timely basis, as disclosed in the above forms, reports required by Section 16 of the Exchange Act during the year ended September 30, 1996.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The following information is set forth with respect to all compensation paid by the Company to its Chief Executive Officer and its most highly compensated executive officers other than the CEO whose annual compensation exceeded $100,000, for each of the past three fiscal years.
Annual Long Term Compensation Compensation Fiscal Name and Year Ended Options All Other Principal Position September 30, Salary No. of Shares Compensation
Kenneth M. Darby 1996 $195,000 95,000 $34,750 (2) Chief Executive Officer 1995 $195,000 - $ 3,000 (1) 1994 $195,000 59,194 $ 3,000 (1)
Arthur D. Roche 1996 $150,000 25,000 $15,875 (3) Executive Vice President 1995 $150,000 - - 1994 $150,000 50,000 -
No listed officer received other non-cash compensation amounting to more than 10% of salary.
(1) Represents life insurance policy payment.
(2) Represents life insurance policy payment of $3,000 and bonus in the form of 16,933 shares of common stock to be issued from Treasury.
(3) Bonus in the form of 8,467 shares of common stock to be issued from Treasury.
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Stock Options
OPTION GRANTS IN LAST FISCAL YEAR Potential Realizable Individual Grants Value at Assumed Annual Rates of Stock % of Total Price Appreciation No. of Granted to Exercise For Option Term Options Employees In Price Expiration Name Granted Fiscal Year Per Share Date 5% 10% - ----------------- ---------- ------------- --------- ---------- ------- ------
Kenneth M. Darby 95,000 39% 1.6875 11/00 $44,300 $97,900 Arthur D. Roche 25,000 10% 1.6875 11/00 $11,700 $25,800
Options granted in the year ended September 30, 1996 were either issued under the 1994 Incentive Stock Option Plan or reissued under the 1986 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.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Value of Unexercised In- Number of Unexercised Options the-Money Options at As of September 30, 1996 September 30, 1996 (1) ----------------------------- ------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
Kenneth M. Darby 114,392 66,500 $66,800 $54,000
Arthur D. Roche 57,500 17,500 $37,300 $14,200
No options were exercised by any of the above-named officers during the year ended September 30, 1996.
(1) Calculated based on $2.50 per share closing market value at September 30, 1996.
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Mr. Darby has entered into an employment contract with the Company that entitles him to receive an annual salary of $225,000 through fiscal year 2001. Mr. Roche has an employment agreement with the Company that provides an annual salary of $170,000 through September 30, 1999. Each of these agreements provide for payment in an amount up to three times the average annual compensation for the previous five years if there is a change in control without Board of Director approval (as defined in the agreements).
Messrs. D. Horn and A. Wallace (current directors) each have insured deferred compensation agreements with the Company which provide that upon reaching retirement age total payments of $917,000 and $631,000, respectively, will be made in monthly installments over a ten year period. The full deferred compensation payment is subject to such individuals' adherence to certain non-compete covenants. Mr. Wallace, who retired in September 1990, began receiving payments under the agreement in October, 1990 and Mr. Horn began receiving payments under the agreement in January, 1994.
Directors, except the Chairman of the Board and employee directors, are each compensated at the rate of $600 per Board meeting and $300 per committee meeting attended in person. The Chairman of the Board is compensated at the rate of $1,000 per Board meeting and $300 per committee meeting attended in person. Effective January 1, 1997, the directors and Chairman will be compensated at annual rates of $6,000 and $10,000, respectively. Committee fees will be $500 per meeting attended in person.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs. Neumann, Robertson and Wallace, none of whom are or ever have been officers of the Company, except Mr. Wallace who retired in 1990 as Executive Vice President. See the section entitled "Certain Relationships and Related Transactions" included elsewhere herein, for a discussion of certain other relationships maintained by Mr. Neumann and Mr. Robertson with the Company.
BOARD COMPENSATION COMMITTEE REPORT
The Compensation Committee's compensation policies applicable to the Company's executive officers for the last completed fiscal year were to pay a competitive market price for the services of such officers, taking into account the overall performance and financial capabilities of the Company and the officer's individual level of performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base salary and incentive compensation of all executive officers other than Mr. Darby. The Committee reviews these recommendations with Mr. Darby, and after such review, determines compensation. In the case of Mr. Darby, the Compensation Committee makes its determination after direct negotiation with such officer. For each executive officer, the Committee's determinations are based on the committee's conclusions concerning each officer's performance and comparable compensation levels in the CCTV Industry and the Long Island area for similarly situated officers at other companies. The overall level of performance of the Company is taken into account but is not specifically related to the base salary of these executive officers. Also, the Company has established an incentive compensation plan for all of its executive officers, which provides a specified bonus to each officer upon the Company's achievement of certain annual profitability targets.
The Compensation Committee grants options to executive officers to connect compensation to the performance of the Company. Options are exercisable in the future at the fair market value at the time of grant, so that an officer granted an option is rewarded by the increase in the price of the Company's stock. The Committee grants options based on significant contributions of an executive officer to the performance of the Company.
In addition, in determining the salary compensation of Mr. Darby as CEO, the Committee considered the responsibility assumed by him in formulating and implementing a management and operating restructuring plan.
Compensation Committee
Peter F. Neumann, Chairman, W. Gregory Robertson and Arthur V. Wallace
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This graph compares the return of $100 invested in the Company's stock on October 1, 1991, with the return on the same investment in the AMEX Market Value Index and the AMEX High Technology Index.
(The following table was represented by a chart in the printed material)
AMEX High Vicon AMEX Market Technology Date Industries, Inc. Value Index Index
10/01/91 100 100 100 10/01/92 133 101 94 10/01/93 78 123 111 10/01/94 81 123 116 10/01/95 83 145 155 10/01/96 111 153 196
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ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth information as to each person, known to the Company to be a "beneficial owner" (as defined in regulations of the Securities and Exchange Commission) of more than five percent of the Company's Common Stock outstanding as of December 15, 1996 and the shares beneficially owned by the Company's Directors and by all Officers and Directors as a group.
Name and Address Amount of of Beneficial Owner Beneficial Ownership (1) % of Class ------------------- ------------------------ ----------
Chugai Boyeki (America) Corp. 55 Mall Drive Commack, NY 11725 and Chugai Boyeki Company, Ltd. 2-15-13 Tsukishima Chuo-ku Tokyo, Japan 104 548,715 17.6%
Chu Chun C/O I.I.I. Companies, Inc. 915 Hartford Turnpike Shrewsbury, MA 01545 300,557 9.7%
Dongwon Securities Co., Ltd. 34-7, Yoido-Dong Youngdungpo-Gu Seoul 150-010, Korea 143,000 4.6%
******************************************************************************* C/O Vicon Industries, Inc.
Michael D. Katz 271,400 (2) 8.7%
Kenneth M. Darby 225,239 (3) 7.2%
Donald N. Horn 124,300 (2) 4.0%
Arthur D. Roche 103,967 (4) 3.3%
Arthur V. Wallace 61,695 2.0%
Kazuyoshi Sudo 12,000 (2) .4%
Milton F. Gidge 6,500 (2) .2%
Peter F. Barry 5,600 (2) .2%
Peter F. Neumann 3,000 .1%
W. Gregory Robertson -- --
Total all officers and directors as a group (14 persons) 882,751 (5) 28.4%
(1) The nature of beneficial ownership of all shares is sole voting and investment power. (2) Includes currently exercisable options to purchase 5,000 shares. (3) Includes currently exercisable options to purchase 136,032 shares and 16,933 shares issuable from Treasury.
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(4) Includes currently exercisable options to purchase 65,000 shares and 8,467 shares issuable from Treasury. (5) Includes currently exercisable options to purchase 293,832 shares and 25,400 shares issuable from Treasury.
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ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Chugai Boyeki Company, Ltd. (Chugai), a Japanese corporation, which owns 19.8% of the outstanding shares of the Company, have been conducting business with each other for approximately seventeen years whereby the Company imports certain video products and lenses through Chugai and also sells its products to Chugai who resells the products in certain Asian and European markets. In fiscal 1996, the Company purchased approximately $9.2 million of products through Chugai and sold products to Chugai for resale totaling approximately $2.1 million. Kazuyoshi Sudo, a director, is Treasurer of Chugai Boyeki (America) Corp., a U.S. subsidiary of Chugai.
Chu S. Chun, who controls 10.8% of the outstanding shares of the Company, also owns Chun Shin Industries, Inc. (CSI). CSI is a 50% partner with the Company in Chun Shin Electronics, Inc. (CSE), a joint venture company which manufactures and assembles certain Vicon products in South Korea. In fiscal 1996, CSE sold approximately $5.8 million of product to the Company through I.I.I. Companies, Inc. (I.I.I.), a U.S. based company controlled by Mr. Chun. I.I.I. arranges the importation and provides short term financing on all the Company's product purchases from CSE. CSE also sold approximately $1.7 million of product to CSI which sells Vicon product exclusively in Korea. In addition, I.I.I. purchased approximately $900,000 of products directly from the Company during fiscal 1996 for resale to CSI.
Peter F. Neumann, a director of the Company, is a principal in the insurance brokerage firm of Bradley & Parker, Inc. which is the agent for a majority of the Company's commercial insurance. The premium paid for such insurance amounted to approximately $109,000 in fiscal 1996.
W. Gregory Robertson, a director of the Company, is President of TM Capital Corporation, an investment banking firm which provides investment banking services to the Company on a periodic basis. Services rendered to the Company during fiscal 1996 amounted to approximately $40,000.
During 1996, the Company purchased approximately $72,000 of products from Pro/Four Video Products, Inc., in which Donald N. Horn and Arthur V. Wallace, directors of the Company, have an ownership interest.
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PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Included in Part IV, Item 14:
Independent Auditors' Report
Financial Statements:
Consolidated Statements of Operations, fiscal years ended September 30, 1996, 1995, and 1994
Consolidated Balance Sheets at September 30, 1996 and 1995
Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows, fiscal years ended September 30, 1996, 1995, and 1994
Notes to Consolidated Financial Statements, fiscal years ended September 30, 1996, 1995, and 1994
(a) (2) Financial Statement Schedule
Included in Part IV, Item 14:
Schedule I - Valuation and Qualifying Accounts for the years ended September 30, 1996, 1995, and 1994
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted.
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14(a)(3) Exhibits
Exhibit Number or Exhibit Incorporation by Numbers Description Reference to
3 Articles of Incorporation and Incorporated by reference By-Laws, as amended to the 1985 Annual Report on Form 10-K; Form S-2 filed in Registration Statement No. 33-10435 and Exhibit A, B and C of the 1987 Proxy Statement
10 Material Contracts
(.1) Credit and Security Agreement Incorporated by reference dated December 27, 1995 to the 1995 Annual Report between the Registrant and on Form 10-K IBJ Schroder Bank and Trust Company
(.2) Credit and Security Agreement 10.2 between the Registrant and IBJ Schroder Bank and Trust Company, First Amendment dated August 19, 1996.
(.3) Promissory Note dated Incorporated by reference October 5, 1993 as amended to the 1995 Annual Report between Registrant and Chugai on Form 10-K Boyeki Company, Ltd.
(.4) Mortgage Loan Agreement dated Incorporated by June 2, 1989 between reference to the 1989 Registrant and Chugai Boyeki Annual Report on Company, Ltd. Form 10-K
(.5) Employment Contract dated 10.5 October 1, 1996 between the Registrant and Kenneth M. Darby
(.6) Employment Contract dated October 10.6 1, 1996 between Registrant and Arthur D. Roche
(.7) Employment Agreement dated August 10.7 1, 1996 between Registrant and John L. Eckman
(.8) Employment Agreement dated June 10.8 1, 1996 between Registrant and Peter Horn
(.9) Employment Agreement dated June 10.9 1, 1996 between Registrant and Yacov Pshtissky
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(.10) Deferred Compensation Agreements Incorporated by dated November 1, 1986 between the reference to the 1992 Registrant and Donald N. Horn and Annual Report on Arthur V. Wallace Form 10K
(.11) Agreement of lease dated Incorporated by January 18, 1988 between the reference to the 1988 Registrant and Allan V. Rose Annual Report on Form 10-K
(.12) Sublease Agreement dated Incorporated by reference as of January 1, 1993 between to the 1994 Annual Report the Registrant and AVR on Form 10-K Mart Inc.
(.13) Consent of Overlandlord and Incorporated by reference Release Agreement (undated) to the 1994 Annual Report between the Registrant and on Form 10-K Allan V. Rose
(.14) Sublease Agreement dated Incorporated by reference as of September 1, 1995 between to the 1995 Annual Report the Registrant and New York on Form 10-K Blood Center
(.15) Amended and restated 1986 Incorporated by Incentive Stock Option Plan reference to the 1990 Annual Report on Form 10-K
(.16) 1994 Incentive Stock Incorporated by reference Option Plan to the 1994 Annual Report on Form 10-K
(.17) 1994 Non-Qualified Stock Option Incorporated by reference Plan for Outside Directors to the 1994 Annual Report on Form 10-K
(.18) Lease agreement dated December 24, 10.10 1996 between the Registrant and RREEF MIDAMERICA/EAST-V NINE, INC.
22 Subsidiaries of the Registrant Incorporated by reference to the Notes to the Consolidated Financial Statements
24 Independent Auditors' Consent 24
No other exhibits are required to be filed.
14(b) - REPORTS ON FORM 8-K
No reports on Form 8-K were required to be filed during the last quarter of the period covered by this report.
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Other Matters - Form S-8 Undertaking
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892 (filed June 30, 1986), 33-34349 (filed April 1, 1990) and 33-90038 (filed February 24, 1995):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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Independent Auditors' Report
The Board of Directors and Shareholders Vicon Industries, Inc.:
We have audited the consolidated financial statements of Vicon Industries, Inc. and subsidiaries as listed in Part IV, item 14(a)(1). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Part IV, item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vicon Industries, Inc. and subsidiaries at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Jericho, New York November 12, 1996
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VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ----
Net sales $43,191,446 $43,846,571 $47,713,892 Cost of sales 32,234,192 34,300,638 37,000,055 ------------ ---------- -----------
Gross profit 10,957,254 9,545,933 10,713,837
Operating expenses: General and administrative expense 2,931,333 3,366,662 3,188,183 Selling expense 6,800,361 6,433,483 6,712,436 --------- --------- ----------- 9,731,694 9,800,145 9,900,619 --------- --------- -----------
Operating profit (loss) 1,225,560 (254,212) 813,218
Unrealized foreign exchange gain (41,908) (550) (44,748) Interest expense 882,290 1,013,383 783,731 ---------- ----------- ----------- Income (loss) before income taxes 385,178 (1,267,045) 74,235
Income tax expense 85,000 80,000 29,000 ---------- ----------- -----------
Net income (loss) $ 300,178 $(1,347,045) $ 45,235 ========== =========== ===========
Income (loss) per share:
Primary $ .11 $(.49) $.02 ===== ====== ====
Fully diluted $ .10 $(.49) $.02 ===== ====== ====
See accompanying notes to consolidated financial statements.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1996 and 1995
ASSETS 1996 1995 - ------ ---- ----
Current Assets: Cash $ 205,876 $1,151,850 Accounts receivable (less allowance of $396,000 in 1996 and $542,000 in 1995) 8,635,020 8,352,845 Other receivables 71,819 261,864 Inventories: Parts, components, and materials 2,175,408 1,594,462 Work-in-process 1,391,552 1,686,287 Finished products 11,135,798 8,831,852 ---------- ---------- 14,702,758 12,112,601 Prepaid expenses 529,631 309,288 ---------- ---------- Total current assets 24,145,104 22,188,448 Property, plant and equipment: Land 290,448 292,298 Building and improvements 1,507,630 1,512,601 Machinery, equipment, and vehicles 11,842,120 11,417,598 ---------- ---------- 13,640,198 13,222,497 Less accumulated depreciation and amortization 10,606,013 9,960,558 ---------- ---------- 3,034,185 3,261,939 Other assets 905,327 973,107 ---------- ---------- $28,084,616 $26,423,494
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities: Borrowings under revolving credit agreement $ 959,583 $ 906,955 Current maturities of long-term debt 203,719 220,739 Accounts payable: Related party 7,457,482 6,895,073 Other 1,811,730 1,335,935 Accrued wages and expenses 1,229,087 1,697,732 Income taxes payable 87,205 78,583 Deferred gain on sale and leaseback 332,100 332,100 ----------- ---------- Total current liabilities 12,080,906 11,467,117
Long-term debt: Related party 2,262,005 2,437,259 Other 4,166,881 2,901,490 Deferred gain on sale and leaseback 101,893 433,993 Other long-term liabilities 504,776 550,609 Commitments and contingencies - Note 10 Shareholders' equity Common Stock, par value $.01 per share Authorized - 10,000,000 shares Issued 2,802,728 and 2,788,228 shares 28,027 27,882 Capital in excess of par value 9,423,089 9,396,890 Accumulated deficit (283,611) (583,789) ---------- ---------- 9,167,505 8,840,983 Less treasury stock at cost, 25,400 shares (82,901) (82,901) Foreign currency translation adjustment (116,449) (125,056) ---------- ---------- Total shareholders' equity 8,968,155 8,633,026 ---------- ---------- $28,084,616 $26,423,494
See accompanying notes to consolidated financial statements.
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See accompanying notes to consolidated financial statements.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended September 30, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 300,178 $ (1,347,045) $ 45,235 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 699,211 704,900 722,488 Amortization of deferred gain on sale and leaseback (332,100) (332,100) (332,100) Unrealized foreign exchange gain (41,908) (550) (44,748) Change in assets and liabilities: Accounts receivable (312,207) 1,377,405 (422,815) Other receivables 190,045 39,684 230,259 Inventories (2,593,382) 1,358,533 (2,201,508) Prepaid expenses (218,762) 13,513 (17,618) Other assets 67,780 (30,000) (359,547) Accounts payable 1,045,453 708,591 572,724 Accrued wages and expenses (460,350) 409,285 (22,020) Income taxes payable 7,517 48,077 8,220 Other liabilities (45,833) (63,878) (35,277) ----------- ----------- ----------
Net cash (used in) provided by operating activities (1,694,358) 2,886,415 (1,856,707) ----------- ---------- -----------
Cash flows from investing activities: Capital expenditures, net of minor disposals (482,111) (608,808) (573,100) ----------- ----------- ---------- Net cash used in investing activities (482,111) (608,808) (573,100) ----------- ----------- ----------
Cash flows from financing activities: Borrowings under U.S. credit and security agreement 4,142,898 - - Repayments of U.S. revolving credit agreement (2,800,000) (1,700,000) (396,000) Proceeds from exercise of stock options 26,344 - - Increase (decrease) in borrowings under U.K. revolving credit agreement 57,251 (29,511) 941,365 Issuance of promissory note to related party - - 2,000,000 Repayments of other debt (220,625) (237,723) (229,506) ---------- ---------- ---------- Net cash provided by (used in) financing activities 1,205,868 (1,967,234) 2,315,859 ---------- ---------- ---------- Effect of exchange rate changes on cash 24,627 (68,923) (14,765) ---------- ---------- ----------
Net (decrease) increase in cash (945,974) 241,450 (128,713)
Cash at beginning of year 1,151,850 910,400 1,039,113 ---------- ---------- ---------- Cash at end of year $ 205,876 $1,151,850 $ 910,400 ========== ========== ==========
Non-cash investing and financing activities: Capital lease obligations - $ 178,151 -
Cash paid during the fiscal year for: Income taxes $ 78,121 $ 32,097 $ 17,431 Interest $ 888,061 $ 974,640 $ 707,357
See accompanying notes to consolidated financial statements.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 1996, 1995, and 1994
NOTE 1. Summary of Significant Accounting Policies
Nature of Operations
The Company designs, manufactures, assembles and markets closed circuit television components and systems for use in security, surveillance, safety, process and control applications by end users. The Company markets its products worldwide directly to distributors, dealers and original equipment manufacturers, principally within the security industry.
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 (FCC) and Vicon Industries (U.K.), Ltd. after elimination of intercompany accounts and transactions.
Revenue Recognition
Revenues are recognized when products are sold and title is passed to a third party, generally at the time of shipment.
Inventories
Inventories are valued at the lower of cost (on a moving average basis which approximates a first-in, first-out method) or market. When it is determined that a product or product line will be sold below carrying cost, affected on hand inventories are written down to their estimated net realizable values.
Property, Plant and Equipment
Property, plant, and equipment are recorded at cost and include expenditures for replacements or major improvements. Depreciation, which includes amortization of assets under capital leases, is computed by the straight-line method over the estimated useful lives of the related assets for financial reporting purposes and on an accelerated basis for income tax purposes. Machinery, equipment and vehicles are being depreciated over periods ranging from 2 to 10 years. The Company's building is being depreciated over a period of 40 years and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term.
Research and Development
Product research and development costs are charged to cost of sales as incurred, and amounted to approximately $1,800,000, $1,900,000 and $1,600,000 in fiscal 1996, 1995, and 1994, respectively.
Earnings Per Share
Earnings per share are computed based on the weighted average number of shares outstanding and equivalent shares from dilutive stock options. The numbers of shares used to compute primary earnings/(loss) per share were 2,841,000 in 1996 and 2,763,000 in 1995 and 1994, respectively.
Fully diluted earnings per share reflect the maximum dilution that would have resulted from the exercise of stock options. The number of shares used to compute fully diluted earnings per share were 2,874,000 in 1996 and 2,763,000 in 1995 and 1994, respectively.
Foreign Currency Translation
Foreign currency translation is performed utilizing the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, while revenues, costs, and expenses are translated at the average exchange rate for the
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reporting period. The resulting translation adjustment of $(116,449) and $(125,056) at September 30, 1996 and 1995, 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 $14,399, $46,893 and $46,216 in 1996, 1995, and 1994, respectively, which is reflected in cost of sales. Gains and losses on contracts which hedge specific foreign currency denominated commitments, primarly 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 exchange contracts is estimated by obtaining quoted market prices. The exchange rates on committed forward exchange contracts at September 30, 1996 approximated market rates for similar term contracts.
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 have been insignificant during each of the three years ended September 30, 1996. Assets and sales of the joint venture were approximately $3.1 million and $8.1 million, respectively, for the fiscal year ended September 30, 1996. A significant portion of joint venture product sales were to related parties including approximately $5.8 million indirectly to the Company and approximately $1.7 million to a company owned by the other joint venture partner (see Note 11).
NOTE 3. Deferred Gain on Sale and Leaseback
In fiscal 1988, under a sale and leaseback agreement, the Company sold its principal operating facility in Melville, New York for approximately $11 million and leased it back under a ten-year lease agreement. The transaction resulted in a net gain of $3,321,000 which was deferred and is being amortized over the ten-year lease period (see Note 10).
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NOTE 4. Short-Term Borrowings
Borrowings under the revolving credit agreement represent short term borrowings by the Company's U.K. subsidiary. Maximum borrowings during 1996, 1995 and 1994 amounted to approximately $1,045,000, $1,083,000 and $1,123,000, respectively. The weighted-average interest rate on borrowings during these years was 8.00% in 1996, 8.50% in 1995 and 7.25% in 1994.
At September 30, 1996 and 1995, Accounts Payable - related party included approximately $4.4 million and $4.5 million, respectively, of extended accounts payable balances due Chugai Boyeki Company, Ltd., a shareholder of the Company. The extended accounts payable balance at September 30, 1996 and 1995, includes approximately $4.1 million and $.5 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% and 8.75% at September 30, 1996 and 1995, respectively). The remaining balances are denominated in Japanese yen and bear interest at the related party's internal lending rate (4.0% and 4.25% at September 30, 1996 and 1995, respectively).
NOTE 5. Income Taxes
The components of income tax expense (recovery) for the fiscal years indicated are as follows:
Current Deferred Total
Federal $ - $ - $ - State - - - Foreign 85,000 - 85,000 ------------- ------------ ------------- $ 85,000 $ - $ 85,000 ============= ============ =============
Federal $ - $ - $ - State - - - Foreign 80,000 - 80,000 ------------- ------------ ------------- $ 80,000 $ - $ 80,000 ============= ============ =============
Federal $ - $ - $ - State - - - Foreign 29,000 - 29,000 ------------- ------------ ------------- $ 29,000 $ - $ 29,000 ============= ============ =============
A reconciliation of the U.S. statutory tax rate to the Company's effective tax rate follows:
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 1996 and 1995 are presented below:
1996 1995 ---- ----
Deferred tax assets: Deferred gain on sale and leaseback $ 146,000 $ 259,000 Inventory obsolescence and disposition reserves 418,000 328,000 Deferred compensation accruals 206,000 221,000 Allowance for doubtful accounts receivable 123,000 177,000 Net operating loss carryforwards 1,987,000 1,926,000 General business credit carryforwards 186,000 186,000 Other 8,000 18,000 ---------- ---------- Total deferred tax assets 3,074,000 3,115,000 Less valuation allowance (2,998,000) (3,054,000) ---------- ---------- Net deferred tax assets 76,000 61,000 ---------- ----------
Deferred tax liabilities: Cash surrender value of officers' life insurance 61,000 61,000 Other 15,000 - ---------- ---------- Total deferred tax liabilities 76,000 61,000 ---------- ---------- Net deferred tax assets and liabilities $ -0- $ -0- ---------- ----------
The Company has provided a valuation allowance of $2,998,000 for deferred tax assets since realization of these assets was not assured due to the Company's recent history of operating losses. At September 30, 1996, the Company had net operating loss carryforwards for federal income tax purposes of approximately $5,800,000 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 $136,000, ($1,626,000), and $6,000 in fiscal years 1996, 1995 and 1994, respectively. Pretax foreign income amounted to approximately $311,000, $291,000 and $83,000 in fiscal years 1996, 1995 and 1994, respectively.
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NOTE 6. Long-Term Debt
Long-term debt is comprised of the following at September 30, 1996 and 1995: 1996 1995 ---- ---- Related party: Mortgage loan denominated in Japanese yen at a formula interest rate (6.3% and 6.1% at September 30, 1996 and 1995) with annual installments of 14,400,000 yen to December 1998 $ 393,008 $ 583,010
Term loan with interest rate of 1% above the prevailing prime rate (9.25% and 10.0% at September 30, 1996 and 1995) due July 1998 2,000,000 2,000,000 ---------- ---------- 2,393,008 2,583,010 Less installments due within one year 131,003 145,751 ---------- ---------- $2,262,005 $2,437,259 ========== ========== Banks and other: Revolving credit loan (see below) $4,142,898 $2,800,000 Capital lease obligations 86,520 146,048 Other 10,179 30,430 ---------- ---------- 4,239,597 2,976,478 Less installments due within one year 72,716 74,988 ---------- ----------
$4,166,881 $2,901,490
In October 1993, the Company issued a $2,000,000 secured promissory note to Chugai Boyeki Co., Ltd., a related party. The note is subordinated to senior bank debt with regard to liens and interest under certain conditions and is due in July 1998.
At September 30, 1995, the Company was a party to a secured Revolving Credit Agreement with two banks which provided for aggregate maximum borrowings of $2,800,000 subject to an availability formula based on accounts receivable. Borrowings under the Credit Agreement were due in October, 1995, with interest at 3% above the banks' prime rate (11.75% at September 30, 1995), and required no compensating balances. At September 30, 1995, the Company was in default of certain financial covenants under this agreement. Such debt was repaid on December 28, 1995 with the proceeds received under a new two year Credit and Security Agreement with another bank which provides for maximum borrowings of $5,500,000, subject to an availability formula based on accounts receivable and inventory balances. Borrowings under the agreement bear interest at the bank's prime rate plus 1.25% (9.50% at September 30, 1996).
The Credit and Security Agreement contains restrictive covenants which, among other things, require the Company to maintain certain levels of net worth, earnings and ratios of interest coverage and debt to net worth. Borrowings under this agreement are secured by substantially all assets of the Company.
Long-term debt maturing in each of the three fiscal years subsequent to September 30, 1996 approximates $204,000 in 1997, $6,298,000 in 1998 and $131,000 in 1999, respectively.
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At September 30, 1996, future minimum annual rental commitments under the non-cancellable capital lease obligations were as follows: $68,556 in 1997 and $24,585 in 1998, which includes imputed interest of $6,019 in 1997 and $602 in 1998.
NOTE 7. Foreign Operations
The Company operates one foreign entity, Vicon Industries (U.K.), Ltd., a wholly owned subsidiary which markets and distributes the Company's products principally within the United Kingdom and Europe.
The following summarizes certain information concerning the Company's operations in the U.S. and U.K. for fiscal years 1996, 1995, and 1994:
1996 1995 1994 ---- ---- ---- Net sales U.S. $35,468,000 $34,294,000 $39,342,000 U.K. 7,723,000 9,553,000 8,372,000 ----------- ----------- ----------- Total $43,191,000 $43,847,000 $47,714,000 Operating profit (loss) U.S. $ 805,000 $ (827,000) $ 542,000 U.K. 421,000 573,000 271,000 ----------- ----------- ----------- Total $ 1,226,000 $ (254,000) $ 813,000 Identifiable assets U.S. $23,260,000 $21,213,000 $23,388,000 U.K. 4,825,000 5,210,000 5,469,000 ----------- ----------- ----------- Total $28,085,000 $26,423,000 $28,857,000
Net assets-- U.K. $ 935,000 $ 711,000 $ 499,000
U.S. sales include $8,531,000, $7,987,000 and $8,358,000 for export in fiscal years 1996, 1995, and 1994, respectively. Operating profit (loss) excludes unrealized foreign exchange gain/loss, interest expense and income taxes. U.S. assets include $117,000, $1,127,000, and $888,000 in fiscal years 1996, 1995, and 1994, 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 477,584 shares of common stock reserved for issuance to key employees, including officers and directors. Such amount includes a total of 200,000 options reserved for issuance in 1994 under an Incentive Stock Option Plan, as well as a total of 50,000 options reserved for issuance in 1994 under a Non-Qualified Stock Option Plan for Outside Directors. All options are issued at fair market value at the grant date and are exercisable in varying installments according to the plans. There were 32,935 and 227,923 shares available for grant at September 30, 1996 and 1995, respectively. As of September 30, 1996, 1995, and 1994, options exercisable pursuant to the plans amounted to 289,471, 198,783, and 268,054, respectively.
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Changes in outstanding stock options for the three years ended September 30, 1996, are presented below: Shares Price Range Per Share
Balance-September 30, 1993 313,174 $ 2.12 -- 4.88
Granted 221,694 $ 1.88 -- -- Cancelled (103,694) $ 2.12 -- 4.88 ------- Balance-September 30, 1994 431,174 $ 1.88 -- 2.38 -------
Granted 25,000 $ 1.94 -- -- Cancelled (156,513) $ 1.88 -- 2.25 ------- Balance-September 30, 1995 299,661 $ 1.88 -- 2.38 -------
Granted 245,397 $ 1.69 -- 2.25 Exercised (14,500) $ 1.69 -- 1.88 Cancelled (85,909) $ 1.69 -- 2.38 ------- Balance-September 30, 1996 444,649 $ 1.69 -- 2.25 =======
In November 1986, the Board of Directors declared a dividend of one Stock Purchase Right for each share of common stock outstanding on December 1, 1986. In addition, 385,715 Rights were distributed with certain new shares subsequently issued by the Company. The Rights entitle the holder to purchase for $15 one share of common stock subject to adjustment under certain conditions. The Rights are redeemable by the Company until the occurrence of certain events at $.05 per Right. The Rights expire on November 30, 1996.
NOTE 9. 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 security products industry. The Company's products include all components of a video surveillance system such as remote positioning devices, cameras, monitors, video switchers, housings, mounting accessories, recording devices, manual and motorized lenses, controls, video signal equipment, and consoles for system assembly. No customer represented sales in excess of ten percent of consolidated revenues during any of the three fiscal years presented.
NOTE 10. Commitments
In January 1988, the Company entered into a sale and leaseback agreement involving its principal operating facility (see Note 3). The ten-year lease provides for rent of $1,128,000 in the first year, increasing 4 percent annually through 1998.
In November 1994, the Company entered into a sublease agreement, dated January 1, 1993, with an affiliated company of the landlord which provides for minimum sublease payments to the Company of $120,000 in calendar year 1993; $180,000 in 1994; $240,000 in 1995 and $300,000 per year from January 1, 1996 through January 19, 1998, in exchange for the right to occupy a total of approximately 25,000 sq. ft. of office and warehouse space in the Company's primary operating facility. At the same time, the Company entered into an agreement with its landlord and subtenant whereby the Company has agreed to vacate its principal operating facility at anytime after January 1995, at the landlord's or subtenant's option, and the landlord has agreed to release the Company from its future lease obligations in consideration of a lease termination payment by the Company to the landlord of $1,000,000. Such option, if exercised, would also require the landlord to provide the Company with at least six months notice prior to the required vacate date. The lease termination payment will be reduced by $27,778 for each month after January 31, 1995 that the Company remains obligated under the primary lease. In October 1996, the landlord exercised its option that the Company vacate within six months. The lease termination obligation will be approximately $260,000. Such expense will be substantially offset by the remaining unamortized balance of the deferred sale and leaseback gain. In the event the Company is unable to vacate by the required date, it will be required to refund all sublease payments received through the actual vacate date as specified above in the November 1994 sublease agreement.
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Additionally, the Company occupies certain other facilities, or is contingently liable, under long-term operating leases which expire at various dates through 1998. The leases, which cover periods from one to four years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment (net of sublease rental) at September 30, 1996 was $1,180,000 with minimum rentals for the fiscal years shown as follows: 1997--$907,000; 1998--$273,000. Subsequent to year end, the Company entered into a five year lease agreement for a new principal operating facility. The aggregate commitment under such agreement amounted to $1,803,000 with minimum rentals for the fiscal years shown as follows: 1997 -- $182,000; 1998 -- $369,000; 1999 -- $377,000; 2000 -- $384,000; 2001 and thereafter -- $491,000.
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, 1996 was approximately $1,635,000. The total compensation payable under these agreements aggregated $1,264,000 at September 30, 1996. The Company is also a party to insured deferred compensation agreements with two retired officers. The aggregate remaining compensation payments of approximately $966,000 as of September 30, 1996 are subject to the individuals adherence to certain non-compete covenants, and are payable over a ten year period commencing upon retirement.
Sales to the Company's U.K. subsidiary are denominated in British pounds sterling. The Company attempts to minimize its currency exposure on these intercompany sales through the purchase of forward exchange contracts to cover unpaid receivables. These contracts generally involve the exchange of one currency for another at a future date and specified exchange rate. At September 30, 1996, the Company had approximately $2,000,000 of outstanding forward exchange contracts to sell British pounds. Such contracts expire at varying dates and exchange rates through April 25, 1997.
The Company's purchases of Japanese sourced products through Chugai Boyeki Co., Ltd., a related party, are denominated in Japanese yen. At September 30, 1996, Chugai had purchased, on the Company's behalf, forward exchange contracts to purchase approximately 100 million Japanese yen to hedge the currency risk on accounts payables denominated in Japanese yen. Such contracts expire at varying dates and exchange rates through December 1996.
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NOTE 11: Related Party Transactions
As of September 30, 1996 and 1995, Chugai Boyeki Company, Ltd. ("Chugai") owned 548,715 shares of the Company's common stock (19.8% of the total outstanding shares). The Company, which has been conducting business with Chugai for approximately 17 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 $9.2, $11.6 and $14.1 million of products and components from Chugai in fiscal years 1996, 1995, and 1994, respectively, and the Company sold $2.1, $3.4, and $3.5 million of product to Chugai for distribution in fiscal years 1996, 1995, and 1994, respectively. At September 30, 1996 and 1995, the Company owed $7.5 million and $6.9 million, respectively, to Chugai and Chugai owed $148,000 and $92,000, respectively, to the Company resulting from purchases of products. The amounts owed to Chugai are secured by a subordinated lien on substantially all the Company's assets. During fiscal 1989, Chugai made a mortgage loan to the Company in the amount of $1,026,000 to partially finance the construction of a new sales/distribution facility in the U.K. In October 1993, the Company borrowed $2 million from Chugai under a promissory note agreement. See Note 6 for a further discussion of this transaction.
As of September 30, 1996, Mr. Chu S. Chun controlled 300,557 shares of the Company's common stock (10.8% of the total outstanding shares). Mr. Chun owns Chun Shin Industries, Inc., the Company's 50% South Korean joint venture partner, and Chun Shin Electronics. (CSE) which purchases product from the joint venture (see Note 2). Mr. Chun also controls I.I.I. Companies, 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 Chun Shin Electronics, Inc. During fiscal years 1996 and 1995, the Company purchased approximately $5.8 million and $5.1 million of products from I.I.I. under this agreement. Further, the Company sold approximately $900,000 of its products to I.I.I. during each of fiscal years 1996 and 1995. At September 30, 1996 and 1995, I.I.I. owed the Company approximately $368,000 and $422,000, respectively.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA
(Unaudited)
Net Earnings (loss) per share Quarter Net Gross Net Ended Sales Profit Profit (Loss) Primary Fully Diluted
Fiscal 1996 December $10,512,000 $2,706,000 $ 102,000 $ .04 $ .04 March 10,856,000 2,748,000 125,000 .05 .05 June 10,902,000 2,735,000 41,000 .01 .01 September 10,921,000 2,768,000 32,000 .01 .01 ----------- ----------- ----------- ----- ----- Total $43,191,000 $10,957,000 $ 300,000 $ .11 $ .10 =========== =========== =========== ===== =====
Fiscal 1995 December $11,828,000 $2,698,000 $ 16,000 $ .01 $ .01 March 10,952,000 2,351,000 (467,000) (.17) (.17) June 10,287,000 2,247,000 (540,000) (.20) (.20) September 10,780,000 2,250,000 (356,000) (.13) (.13) ----------- ---------- ----------- ----- ---- Total $43,847,000 $9,546,000 $(1,347,000) $(.49) $(.49) =========== ========== =========== ===== =====
The Company has not declared or paid cash dividends on its common stock for any of the foregoing periods. Additionally, certain loan agreements restrict the payment of any cash dividends in future periods.
Because of changes in the number of common shares outstanding and market price fluctuations affecting outstanding stock options, the sum of quarterly earnings per share may not equal the earnings per share for the full year.
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SCHEDULE I
VICON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 1996, 1995, and 1994
Balance at Charged to Balance beginning costs and at end Description of period expenses Deductions of period
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts:
September 30, 1996 $542,000 $186,000 $332,000 $396,000 ======== ======== ======== ========
September 30, 1995 $309,000 $381,000 $148,000 $542,000 ======== ======== ======== ========
September 30, 1994 $295,000 $180,000 $166,000 $309,000 ======== ======== ======== ========
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By Kenneth M. Darby By Arthur D. Roche By John M. Badke Kenneth M. Darby Arthur D. Roche John M. Badke President Executive Vice President Controller (Chief Executive Officer) (Chief Financial Officer) (Chief Acctg. Officer)
December 26, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
VICON INDUSTRIES, INC.
Donald N. Horn December 26, 1996 - --------------------- ----------------- Donald N. Horn Chairman of the Board Date
Kenneth M. Darby Director December 26, 1996 - --------------------- ----------------- Kenneth M. Darby Date
Arthur D. Roche Director December 26, 1996 - --------------------- ----------------- Arthur D. Roche Date
Arthur V. Wallace Director December 26, 1996 - --------------------- ----------------- Arthur V. Wallace Date
Peter F. Barry December 26, 1996 - --------------------- ----------------- Peter F. Barry Director Date
Milton F. Gidge December 26, 1996 - --------------------- ----------------- Milton F. Gidge Director Date
Michael D. Katz December 26, 1996 - --------------------- ----------------- Michael D. Katz Director Date
Peter F. Neumann December 26, 1996 - --------------------- ----------------- Peter F. Neumann Director Date
W. Gregory Robertson December 26, 1996 W. Gregory Robertson Director Date
Kazuyoshi Sudo December 26, 1996 Kazuyoshi Sudo Director Date
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By By By Kenneth M. Darby Arthur D. Roche John M. Badke President Executive Vice President Controller (Chief Executive Officer) (Chief Financial Officer) (Chief Acctg. Officer)
December , 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
VICON INDUSTRIES, INC.
December , 1996 Donald N. Horn Chairman of the Board Date
Director December , 1996 Kenneth M. Darby Date
Director December , 1996 Arthur D. Roche Date
Director December , 1996 Arthur V. Wallace Date
December , 1996 Peter F. Barry Director Date
December , 1996 Milton F. Gidge Director Date
December , 1996 Michael D. Katz Director Date
December , 1996 Peter F. Neumann Director Date
December , 1996 W. Gregory Robertson Director Date
December , 1996 Kazuyoshi Sudo Director Date
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