SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
September 30, 2006 Commission File No. 1-7939
---------------------------------------------- -----------
VICON INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-2160665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01
----------------------------
(Title of class)
American Stock Exchange
-----------------------
(Name of each exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No X
----- -----
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes No X
----- -----
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one)
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer X
---- --- ----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
----- -----
The aggregate market value of voting and non-voting Common Stock held by
non-affiliates of the registrant based upon the closing price of $3.20 per share
as of March 31, 2006 was approximately $9,525,000.
The number of shares outstanding of the registrant's Common Stock as of December
15, 2006 was 4,660,711.
PART I
------
ITEM 1 - BUSINESS
-----------------
General
-------
Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs,
manufactures, assembles and markets a wide range of video systems and system
components used for security, surveillance, safety and control purposes by a
broad group of end users. A video system is generally a private network that can
transmit and receive video, audio and data signals in accordance with the
operational needs of the user. The Company's primary business focus is the
design of digital video systems that it produces and sells worldwide, primarily
to installing dealers, system integrators, government entities and distributors.
The Company operates within the electronic protection segment of the security
industry which includes, among others: fire and burglar alarm systems, access
control, biometric and video systems and asset protection. The U.S. security
industry consists of thousands of individuals and businesses (exclusive of
public sector law enforcement) that provide products and services for the
protection and monitoring of life, property and information. The security
industry includes fire and burglar alarm systems, access control, video systems,
asset protection, guard services and equipment, locks, safes, armored vehicles,
security fencing, private investigations, biometric systems and others. The
Company's products are typically used for crime deterrence, visual
documentation, observation of inaccessible or hazardous areas, enhancing safety,
managing liability, obtaining cost savings (such as lower insurance premiums),
managing control systems and improving the efficiency and effectiveness of
personnel. The Company's products are used in, among others, office buildings,
manufacturing plants, apartment complexes, retail stores, government facilities,
airports, transportation operations, prisons, casinos, hotels, sports arenas,
health care facilities and financial institutions.
Products
--------
The Company's product line consists of various elements of a video system,
including network video encoders, decoders, servers and related video management
software, analog and IP cameras, digital recorders, display units (monitors),
matrix switchers, robotic camera dome systems and system controls. The Company
provides a comprehensive line of products due to the many varied climatic and
operational environments in which the products are expected to perform. In
addition to selling from a standard catalog line, the Company at times produces
to specification or will modify an existing product to meet customer
requirements.
The Company's products range in price from $10 for a simple camera mounting
bracket to several hundred thousand dollars (depending upon configuration) for a
large digital control, transmission, recording, storage and video matrix
switching system. The Company's sales are concentrated principally among its
digital video systems and dome camera systems product lines.
- 2 -
Marketing
---------
The Company's marketing emphasizes engineered video system solutions which
includes system design, project management, technical training and pre and post
sales support. The Company promotes and markets its products through industry
trade shows worldwide, product brochures and catalogues, direct marketing and
electronic mailings to existing and prospective customers, website promotions,
in-house training seminars for customers and end users, road shows which preview
new systems and system components, and advertising through trade and end user
magazines and the Company's web site (www.vicon-cctv.com). The Company's
products are sold principally to over 1,000 independent dealers, system
integrators and distributors. Sales are made principally by field sales
engineers and inside customer service representatives. The Company's sales
effort is supported by in-house customer service coordinators and technical
support groups which provide product information, application engineering,
design detail, field project management, and hardware and software technical
support.
The Company's products are employed in video system installations by: (1)
commercial and industrial users, such as office buildings, manufacturing plants,
warehouses, apartment complexes, shopping malls and retail stores; (2) federal,
state, and local governments for national security purposes, municipal
facilities, prisons, and military installations; (3) financial institutions,
such as banks, clearing houses, brokerage firms and depositories, for security
purposes; (4) transportation departments for highway traffic control, bridge and
tunnel monitoring, and airport, subway, bus and seaport security and
surveillance; (5) gaming casinos, where video surveillance is often mandated by
regulatory authorities; and (6) health care facilities, such as hospitals,
particularly psychiatric wards and intensive care units.
The Company's principal sales offices are located in Hauppauge, New York;
Fareham, England; Zaventem, Belgium; and Neumunster, Germany.
International Sales
-------------------
The Company sells its products in Europe, Scandinavia and the Middle East
through its European-based subsidiary and elsewhere outside the U.S. principally
by direct export from its U.S. based parent company. In October 2004, the
Company acquired all of the operating assets of Videotronic Infosystems GmbH, a
30-year old Germany based video system supplier, to expand its presence into the
sizable German video security market. The Company has a few territorial
exclusivity agreements with customers but primarily uses a wide range of
installation companies and distributors in international markets. In Australia,
Japan and Norway, the Company permits independent sales representatives to use
the Company's name for marketing purposes.
Direct export sales and sales from the Company's foreign subsidiaries amounted
to $26.0 million, $27.0 million and $22.3 million or 46%, 48% and 42% of
consolidated net sales in fiscal years 2006, 2005, and 2004, respectively. The
Company's principal foreign markets are Europe, the Middle East and the Pacific
Rim, which together accounted for approximately 89% of international sales in
fiscal 2006.
- 3 -
Competition
-----------
The Company operates in a highly competitive marketplace both domestically and
internationally. The Company competes by providing high-end video systems and
system components that incorporate broad capability together with high levels of
customer service and technical support. Generally, the Company does not compete
based on price alone.
The Company's principal engineered video systems competitors include the
following companies or their affiliates: Matsushita Electric Corp. (Panasonic),
Pelco Sales Company, Bosch Security Systems, Inc., Sensormatic Electronics Corp.
(a division of Tyco International), GE Security Systems and Honeywell Security
Systems. Many additional companies, both domestic and international, produce
products that compete against one or more of the Company's system components. In
addition, many consumer video electronic companies or their affiliates,
including Matsushita Electric Corp. (Panasonic), Mitsubishi Electric
Corporation, Sanyo Electric Co., Ltd. and Sony Corporation, compete with the
Company for the sale of video products and systems. Almost all of the Company's
principal competitors are larger companies whose financial resources and scope
of operations are substantially greater than the Company's.
Engineering and Development
---------------------------
The Company's engineering and development is focused on new and improved video
systems and system components. In recent years, the trend of product development
and demand within the video security and surveillance market has been toward the
application of digital technology, principally relating to the compression,
analysis, transmission, storage, manipulation, imaging and display of digital
video over IP networks. As the demands of the Company's target market segment
require the Company to keep pace with changes in technology, the Company has
focused its engineering effort in these developing areas. Development projects
are chosen and prioritized based on direct customer feedback, the Company's
analysis as to the needs of the marketplace, anticipated technological advances
and market research.
At September 30, 2006, the Company employed a total of 41 engineers in the
following areas: software development, mechanical design, manufacturing/testing
and electrical and circuit design. Engineering and development expense amounted
to approximately 8% of net sales in fiscal 2006 and 9% of net sales in each of
fiscal years 2005 and 2004.
Source and Availability of Raw Materials
----------------------------------------
The Company relies upon independent manufacturers and suppliers to manufacture
and assemble certain of its proprietary products and expects to continue to rely
on such entities in the future. The Company's relationships with certain of its
independent manufacturers, assemblers and suppliers are not covered by formal
contractual agreements.
Raw materials and components purchased by the Company and its suppliers are
generally readily available in the market, subject to market lead times at the
time of order. The Company is not dependent upon any single source for a
significant amount of its raw materials or components.
- 4 -
Intellectual Property
---------------------
The Company owns, and has pending, a limited number of design and utility
patents expiring at various times. The Company owns certain trademarks and
several other trademark applications are pending both in the United States and
in Europe. Most of the Company's key products employ proprietary software which
is protected by copyright. The Company considers its software products to be
unique and is a principal element in the differentiation of the Company's
products from its competition. However, the laws of certain foreign countries do
not protect intellectual property rights to the same extent or in the same
manner as the laws of the U.S. The Company has no significant licenses,
franchises or concessions with respect to any of its products or business
dealings. In addition, the Company does not believe its limited number of
patents or its lack of licenses, franchises and concessions to be of substantial
significance. However, the Company is a defendant in a patent infringement suit
as discussed in "Item 3 - Legal Proceedings", the outcome of which could
possibly have a material effect on the Company's business.
Inventories
-----------
The Company generally maintains sufficient finished goods inventory levels to
respond to unanticipated customer demand, since most sales are to installing
dealers and contractors who normally do not carry any significant inventory. The
Company principally builds inventory to known or anticipated customer demand. In
addition to normal safety stock levels, certain additional inventory levels may
be maintained for products with long purchase and manufacturing lead times. The
Company believes that it is important to carry adequate inventory levels of
parts, components and products to avoid production and delivery delays that
detract from its sales effort.
Backlog
-------
The backlog of orders believed to be firm as of September 30, 2006 and 2005 was
approximately $7.2 million and $6.7 million, respectively. Orders are generally
cancelable without penalty at the option of the customer. The Company prefers
that its backlog of orders not exceed its ability to fulfill such orders on a
timely basis, since experience shows that long delivery schedules only encourage
the Company's customers to look elsewhere for product availability.
Employees
---------
At September 30, 2006, the Company employed 208 full-time employees, of whom 8
are officers, 44 are in administration, 83 are in sales and technical service
capacities, 41 are in engineering and 32 are production employees. At September
30, 2005, the Company employed 218 persons. There are no collective bargaining
agreements with any of the Company's employees and the Company considers its
relations with its employees to be good.
ITEM 1A - RISK FACTORS
----------------------
The Company designs, manufactures and markets a wide range of video systems and
components worldwide and is subject to all business risks that similar
technology companies and all other companies encounter in their operations.
Market risks that pertain particularly to the Company are discussed elsewhere in
this Form 10-K under Item 1 - Business; Item 3 - Legal Proceedings; Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations; and Item 7A - Quantitative and Qualitative Disclosures about Market
Risk.
ITEM 1B - UNRESOLVED STAFF COMMENTS
-----------------------------------
None.
- 5 -
ITEM 2 - PROPERTIES
-------------------
The Company principally operates from an 80,000 square-foot facility located at
89 Arkay Drive, Hauppauge, New York, which it owns. The Company also owns a
14,000 square-foot sales, service and warehouse facility in southern England
which services the U.K., Europe and the Middle East. In addition, the Company
operates under leases from offices in Yavne, Israel; Neumunster, Germany; and
various local sales offices throughout Europe. The Company believes that its
facilities are adequate to meet its current and foreseeable operating needs.
ITEM 3 - LEGAL PROCEEDINGS
--------------------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems and other products that represent
significant sales to the Company. Among other things, the suit seeks past and
enhanced damages, injunctive relief and attorney's fees. In January 2006, the
Company received the plaintiff's claim for past damages through December 31,
2005 that approximated $11.7 million plus pre-judgment interest. The Company and
its outside patent counsel believe that the complaint against the Company is
without merit. The Company is vigorously defending itself and is a party to a
joint defense with certain other named defendants. The Company is unable to
reasonably estimate a range of possible loss, if any, at this time. Although the
Company believes that it has meritorious defenses to such claims, there is a
possibility that an unfavorable outcome could ultimately occur that could result
in a liability that is material to the Company's results of operations and
financial position. The Company has held discussions with the plaintiff in the
interest of settling the case. However, there can be no assurance that any
settlement can be reached.
In connection with this suit, the Company petitioned the U.S. Patent and
Trademark Office (USPTO) for reexamination of the plaintiff's patent. In April
2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company citing the existence of
prior art of the Company and another defendant. The plaintiff has appealed the
USPTO ruling and has additional appeals available to them in the USPTO and,
thereafter, in the Court of Appeals for the Federal Circuit. On June 30, 2006,
the Federal District Court granted the defendants' motion for continuance
(delay) of the trial, pending the outcome of the USPTO's reexamination office
proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
None
- 6 -
PART II
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
AND ISSUER PURCHASES OF EQUITY SECURITIES
-----------------------------------------
The Company's stock is traded on the American Stock Exchange (AMEX) under the
symbol (VII). The following table sets forth for the periods indicated, the
range of high and low prices for the Company's Common Stock on AMEX:
Quarter Ended High Low
------------- ---- ---
Fiscal 2006
December 3.68 2.63
March 3.47 2.82
June 3.39 2.60
September 3.65 2.80
Fiscal 2005
December 5.75 4.33
March 4.74 3.23
June 3.72 2.55
September 4.80 2.50
The last sale price of the Company's Common Stock on December 15, 2006 as
reported on AMEX was $3.59 per share. As of December 15, 2006, there were
approximately 200 shareholders of record.
The Company has never declared or paid cash dividends on its Common Stock and
anticipates that any earnings in the foreseeable future will be retained to
finance the growth and development of its business.
On April 26, 2001, the Company announced that its Board of Directors authorized
the repurchase of up to $1 million of shares of the Company's common stock,
which represented approximately 9.8% of shares outstanding on the announcement
date. The Company did not repurchase any of its common stock during the three
month period ended September 30, 2006.
ITEM 6 - SELECTED FINANCIAL DATA
--------------------------------
FISCAL YEAR 2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $56,279 $56,056 $53,533 $51,954 $54,168
Gross profit 22,094 20,996 19,711 19,091 18,218
Operating loss (367) (2,931) (2,226) (1,677) (2,180)
Loss before income taxes (397) (3,069) (2,210) (1,739) (2,349)
Net loss (1) (547) (2,885) (2,691) (4,874) (1,579)
Net loss per share (1):
Basic and Diluted (.12) (.63) (.59) (1.05) (.34)
Total assets 35,955 34,192 38,867 41,893 47,426
Long-term debt 1,740 2,062 2,410 2,732 3,040
Working capital 20,181 19,713 22,793 25,333 27,827
Property, plant and
equipment (net) 6,229 6,616 7,090 7,286 7,666
(1) Fiscal 2003 includes the effects of the Company's adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", on October 1, 2002.
- 7 -
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
---------------------
Fiscal Year 2006 Compared with 2005
-----------------------------------
Net sales for 2006 increased slightly to $56.3 million compared with $56.1
million in 2005. Domestic sales increased 4% to $30.3 million compared with
$29.1 million in 2005. International sales decreased 4% to $26.0 million
compared with $27.0 million in 2005. The backlog of unfilled orders was $7.2
million at September 30, 2006 compared with $6.7 million at September 30, 2005.
Gross profit margins for 2006 increased to 39.3% compared with 37.5% in 2005 due
principally to production cost reductions within the Company's digital video
product line and a favorable product sales mix.
Operating expenses for 2006 decreased to $22.5 million or 39.9% of net sales
compared with $23.9 million or 42.7% of net sales in 2005 as a result of cost
reduction initiatives spread among all operating expense categories. In 2006 and
2005, the Company incurred $537,000 and $661,000, respectively, of legal expense
in the defense of a patent infringement suit ($1.9 million since inception in
2003). In addition, the Company continued to invest in new product development,
incurring $4.5 million of engineering and development expenses in 2006 compared
with $4.8 million in 2005.
The Company incurred an operating loss of $367,000 in 2006 compared with a loss
of $2.9 million in 2005. The $2.6 million improvement in operating performance
in 2006 was due principally to improved gross margins and lower operating
expenses. The current year results include a $525,000 operating loss from the
Company's Videotronic subsidiary compared with a $357,000 loss in 2005. Since
its acquisition on October 1, 2004, this subsidiary has incurred operating
losses as it continued to transition from former bankruptcy protection.
Interest expense decreased to $165,000 for 2006 compared with $181,000 in 2005
principally as a result of the paydown of bank borrowings offset, in part, by
the effect of increased interest rates during 2006. Interest and other income
increased to $136,000 for 2006 compared with $88,000 in 2005 principally as a
result of increased interest rates during the current year. During 2005, the
Company also liquidated the principal portion of its investment in marketable
securities, resulting in a $45,000 loss for the year.
Income tax expense for 2006 was $150,000 compared with $27,000 in 2005 relating
principally to profits reported by the Company's U.K. subsidiary. The Company
has ceased recognizing tax benefits on its U.S. operating losses due to the
uncertainty of their future realization.
An extraordinary gain in the amount of $211,000 was recorded in 2005 relating to
the Company's acquisition of its Videotronic subsidiary. The gain represents the
recovery of tangible net assets acquired in excess of their purchase price.
As a result of the foregoing, the Company incurred a net loss of $547,000 in
2006 compared with a net loss of $2.9 million in 2005.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
---------------------
Fiscal Year 2005 Compared with 2004
-----------------------------------
Net sales for 2005 increased 5% to $56.1 million compared with $53.5 million in
2004. Net sales for 2005 included $6.2 million of sales from the Company's
German subsidiary, Videotronic, whose operating assets were acquired on October
1, 2004. Domestic sales decreased 7% to $29.1 million compared with $31.2
million in 2004. International sales, excluding the Company's Videotronic
subsidiary, decreased 7% to $20.8 million compared with $22.3 million in 2004.
The backlog of unfilled orders was $6.7 million at September 30, 2005 compared
with $4.7 million at September 30, 2004.
Gross profit margins for 2005 increased to 37.5% compared with 36.8% in 2004.
The 2004 margin was negatively impacted by $1.1 million (2.1%) of charges for
the phase out of certain discontinued product lines. Excluding the effects of
these year ago period charges, the Company's 2005 margins declined as a result
of reduced selling prices on its digital video server/recorder product line.
Operating expenses for 2005 increased to $23.9 million or 42.7% of net sales
compared with $21.9 million or 41.0% of net sales in 2004. The increase included
$2.3 million of operating expenses incurred by the Company's Videotronic
subsidiary. In 2005 and 2004, the Company incurred $661,000 and $562,000,
respectively, of legal expense in the defense of a patent infringement suit
($1.3 million since inception in 2003). In addition, the Company continued to
invest in new product development in 2005, incurring $4.8 million of engineering
and development expenses compared with $4.9 million in 2004.
The Company incurred an operating loss of $2.9 million in 2005 compared with a
loss of $2.2 million in 2004. The current year results include a $357,000
operating loss from the Company's Videotronic subsidiary as it transitioned from
former bankruptcy protection.
Interest expense decreased to $181,000 for 2005 compared with $187,000 in 2004
principally as a result of the paydown of bank borrowings offset, in part, by
the effect of increased interest rates during 2005. Interest and other income
decreased to $88,000 for 2005 compared with $204,000 in 2004 principally as a
result of reduced investable funds during the current year. During 2005, the
Company also liquidated the principal portion of its investment in marketable
securities, resulting in a $45,000 loss for the year.
Income tax expense for 2005 was $27,000 compared with $481,000 in 2004 relating
principally to profits reported by the Company's European operation. The Company
has ceased recognizing tax benefits on its U.S. operating losses due to the
uncertainty of its future realization.
An extraordinary gain in the amount of $211,000 was recorded in 2005 relating to
the Company's acquisition of its Videotronic subsidiary. The gain represents the
recovery of tangible net assets acquired in excess of the purchase price of the
assets.
As a result of the foregoing, the Company incurred a net loss of $2.9 million in
2005 compared with a net loss of $2.7 million in 2004.
- 9 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided by operating activities was $722,000 for 2006. The net loss of
$547,000 for the year was more than offset by $1.1 million of non-cash charges.
Increases in accounts receivable of $872,000 and inventories of $1.4 million
were offset in part by an increase in accounts payable of $1.6 million. Net cash
used in investing activities was $516,000 for 2006 due principally to $510,000
of general capital expenditures. Net cash used in financing activities was
$396,000 in 2006, which included $403,000 of scheduled repayments of bank
mortgage loans. As a result of the foregoing, cash decreased by $179,000 for
2006 after the effect of exchange rate changes on the cash position of the
Company.
The Company's European-based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of one million Pounds Sterling (approximately
$1,870,000) to support its local working capital requirements. This facility
expires in March 2007. At September 30, 2006 and 2005, there were no outstanding
borrowings under this facility.
The following is a summary of the Company's long-term debt and material
operating lease obligations as of September 30, 2006:
Debt Lease
Year Repayments Commitments Total
---- ---------- ----------- -----
2007 $ 332,000 $379,000 $ 711,000
2008 1,740,000 119,000 1,859,000
2009 - 19,000 19,000
The Company has incurred operating losses in recent years which, if continued,
could exhaust the Company's cash reserves and limit its ability to secure
additional bank financing, if needed. The Company has instituted certain plans
to preserve its cash. The Company believes that it will have sufficient cash to
meet its anticipated operating costs, capital expenditures and debt service
requirements for at least the next twelve months.
The Company does not have any off-balance sheet transactions, arrangements or
obligations (including contingent obligations) that have, or are reasonably
likely to have, a material effect on the Company's financial condition, results
of operations, liquidity, capital expenditures or capital resources.
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems and other products that represent
significant sales to the Company. Among other things, the suit seeks past and
enhanced damages, injunctive relief and attorney's fees. In January 2006, the
Company received the plaintiff's claim for past damages through December 31,
2005 that approximated $11.7 million plus pre-judgment interest. The Company and
its outside patent counsel believe that the complaint against the Company is
without merit. The Company is vigorously defending itself and is a party to a
joint defense with certain other named defendants. The Company is unable to
reasonably estimate a range of possible loss, if any, at this time. Although the
Company believes that it has meritorious defenses to such claims, there is a
possibility that an unfavorable outcome could ultimately occur that could result
in a liability that is material to the Company's results of operations and
financial position. The Company has held discussions with the plaintiff in the
interest of settling the case. However, there can be no assurance that any
settlement can be reached.
In connection with this suit, the Company petitioned the U.S. Patent and
Trademark Office (USPTO) for reexamination of the plaintiff's patent. In April
2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company citing the existence of
prior art of the Company
- 10 -
and another defendant. The plaintiff has appealed the USPTO ruling and has
additional appeals available to them in the USPTO and, thereafter, in the Court
of Appeals for the Federal Circuit. On June 30, 2006, the Federal District Court
granted the defendants' motion for continuance (delay) of the trial, pending the
outcome of the USPTO's reexamination office proceedings.
Critical Accounting Policies
----------------------------
The Company's significant accounting policies are fully described in Note 1 to
the consolidated financial statements included in Part IV. Management believes
the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue is generally
recognized when products are sold and title is passed to the customer. Shipping
and handling costs are included in cost of sales. Advance service billings under
a national supply contract with one customer are deferred and recognized as
revenues on a pro rata basis over the term of the service agreement. Pursuant to
the adoption of EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables", the Company evaluates multiple-element revenue arrangements for
separate units of accounting, and follows appropriate revenue recognition
policies for each separate unit. Elements are considered separate units of
accounting provided that (i) the delivered item has stand-alone value to the
customer, (ii) there is objective and reliable evidence of the fair value of the
delivered item, and (iii) if a general right of return exists relative to the
delivered item, delivery or performance of the undelivered item is considered
probable and substantially within the control of the Company. As applied to the
Company, under arrangements involving the sale of product and the provision of
services, product sales are recognized as revenue when the products are sold and
title is passed to the customer, and service revenue is recognized as services
are performed. For products that include more than incidental software, and for
separate licenses of the Company's software products, the Company recognizes
revenue in accordance with the provisions of Statement of Position 97-2,
"Software Revenue Recognition", as amended.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the carrying cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write-downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
- 11 -
The Company assesses the recoverability of the carrying value of its long-lived
assets, including identifiable intangible assets with finite useful lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company evaluates the recoverability of
such assets based upon the expectations of undiscounted cash flows from such
assets. If the sum of the expected future undiscounted cash flows were less than
the carrying amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
The Company plans to provide a full valuation allowance against its deferred tax
assets until such time that it can achieve a sustained level of profitability or
other positive evidence arises that would demonstrate an ability to recover such
assets.
The Company is subject to proceedings, lawsuits and other claims related to
labor, product and other matters. The Company assesses the likelihood of an
adverse judgment or outcomes for these matters, as well as the range of
potential losses. A determination of the reserves required, if any, is made
after careful analysis. The required reserves may change in the future due to
new developments.
Recent Accounting Pronouncements
--------------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes --
an interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect that the adoption
of FIN 48 will have a material impact on its consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be
exchanged to sell an asset or transfer a liability in an orderly transaction
between market participants. Further, the standard establishes a framework for
measuring fair value in generally accepted accounting principles and expands
certain disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company does not expect that
the adoption of SFAS 157 will have a material impact on its consolidated
financial position, results of operations or cash flows.
In September 2006, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff believes
that registrants should quantify errors using both a balance sheet and an income
statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective for fiscal years beginning after
November 15, 2006. The Company does not expect that the adoption of SAB 108 will
have a material impact on its consolidated financial position, results of
operations or cash flows.
- 12 -
Foreign Currency Activity
-------------------------
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. dollar to the British pound sterling, the Euro and the
Israeli shekel.
Sales by the Company's U.K. and German based subsidiaries to customers in Europe
are made in British pounds sterling (pounds) or Eurodollars (Euros). In fiscal
2006, approximately $5.8 million of products were sold by the Company to its
U.K. based subsidiary for resale. The Company attempts to minimize its currency
exposure on intercompany sales through the purchase of forward exchange
contracts.
The Company's Israeli based subsidiary incurs shekel based operating expenses
which are funded by the Company in U.S. dollars. In past years, the Company had
purchased forward exchange contracts to minimize its currency exposure on these
expenses during periods of favorable fluctuating exchange rates.
As of September 30, 2006, the Company had forward exchange contracts outstanding
with notional amounts aggregating $800,000. The Company also attempts to reduce
the impact of an unfavorable exchange rate condition through cost reductions
from its suppliers and shifting product sourcing to suppliers transacting in
more stable and favorable currencies.
In general, the Company seeks lower costs from suppliers and enters into forward
exchange contracts to mitigate short-term exchange rate exposures. However,
there can be no assurance that such steps will be effective in limiting
long-term foreign currency exposure.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
Market Risk Factors
-------------------
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. The Company has a policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes.
The Company enters into forward exchange contracts to hedge certain foreign
currency exposures and minimize the effect of such fluctuations on reported
earnings and cash flow (see "Foreign Currency Activity", Note 1 "Derivative
Instruments" and "Fair Value of Financial Instruments" to the accompanying
financial statements). At September 30, 2006, the Company's foreign currency
exchange risks included an aggregate $2.5 million of intercompany account
balances between the Company and its subsidiaries, which are short term and will
be settled in fiscal 2007. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant.
At September 30, 2006, a 10% strengthening or weakening of the U.S. dollar
versus the British pound would result in a $248,000 decrease or increase,
respectively, in the intercompany accounts receivable balance. Certain of such
foreign currency exchange risk at September 30, 2006 has been hedged by $800,000
of forward exchange contracts.
At September 30, 2006, the Company had $1.4 million of outstanding floating rate
bank debt which was covered by an interest rate swap agreement that effectively
converts the foregoing floating rate debt to a stated fixed rate (see "Note 5.
Long-Term Debt" to the accompanying financial statements). Thus, the Company has
substantially no net interest rate exposures on these instruments. However, the
Company had approximately $589,000 of floating rate bank debt that is subject to
interest rate risk as it was not covered by an interest rate swap agreement. The
Company does not believe that a 10% fluctuation in interest rates would have a
material effect on its consolidated financial position and results of
operations.
- 13 -
Related Party Transactions
--------------------------
Refer to Item 13 and "Note 13. Related Party Transactions" to the accompanying
financial statements.
Inflation
---------
The impact of inflation on the Company has been minimal 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
principally seeks to increase sales and lower its product cost where possible.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
--------------------------------------------------------------------------------
1995
----
Statements in this Report on Form 10-K and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Results of
Operations" and "Liquidity and Financial Condition" are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that should be considered as subject to the many risks and uncertainties
that exist in the Company's operations and business environment. The
forward-looking statements are based on current expectations and involve a
number of known and unknown risks and uncertainties that could cause the actual
results, performance and/or achievements of the Company to differ materially
from any future results, performance or achievements, express or implied, by the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, and that in light of the significant
uncertainties inherent in forward-looking statements, the inclusion of such
statements should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved. The
Company also assumes no obligation to publicly update or revise its
forward-looking statements or to advise of changes in the assumptions and
factors on which they are based.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
See Part IV, Item 15, for an index to consolidated financial statements and
financial statement schedules.
ITEM 9A - CONTROLS AND PROCEDURES
---------------------------------
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission's rules and forms.
- 14 -
Changes in Internal Controls
----------------------------
There were no changes in the Company's internal control over financial reporting
identified in connection with the evaluation referred to above that occurred
during the fourth quarter of the fiscal year ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
The Company's size dictates that it conducts business with a minimal number of
financial and administrative employees, which inherently results in a lack of
documented controls and segregation of duties within the Company and its
operating subsidiaries. Management will continue to evaluate the employees
involved and the control procedures in place, the risks associated with such
lack of segregation and whether the potential benefits of adding employees to
clearly segregate duties justifies the expense associated with such added
personnel. In addition, management is aware that many of the internal controls
that are in place at the Company are undocumented controls.
Limitations on the Effectiveness of Controls
--------------------------------------------
The Company believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
ITEM 9B - OTHER INFORMATION
---------------------------
None.
- 15 -
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
The Executive Officers and Directors of the Company are as follows:
Name Age Position
---- --- --------
Kenneth M. Darby 60 Chairman of the Board, President and
Chief Executive Officer
John M. Badke 47 Senior Vice President, Finance and
Chief Financial Officer
Peter A. Horn 51 Vice President, Operations
Bret M. McGowan 41 Vice President, U.S. Sales and Marketing
Yacov A. Pshtissky 55 Vice President, Technology and Development
Joan L. Wolf 52 Executive Administrator and
Corporate Secretary
Christopher J. Wall 53 Managing Director, Vicon Industries Ltd.
Yigal Abiri 57 General Manager, Vicon Systems Ltd.
Clifton H.W. Maloney 69 Director
Peter F. Neumann 72 Director
W. Gregory Robertson 63 Director
Arthur D. Roche 68 Director
The business experience, principal occupations and employment, as well as period
of service, of each of the officers and directors of the Company during at least
the last five years are set forth below.
Kenneth M. Darby - Chairman of the Board, President and Chief Executive Officer.
Mr. Darby has served as Chairman of the Board since April 1999, as Chief
Executive Officer since April 1992 and as President since October 1991. He has
served as a director since 1987. Mr. Darby also served as Chief Operating
Officer and as Executive Vice President, Vice President, Finance and Treasurer
of the Company. He joined the Company in 1978 as Controller after more than nine
years at Peat Marwick Mitchell & Co., a public accounting firm. Mr. Darby's
current term on the Board ends in May 2008.
John M. Badke - Senior Vice President, Finance and Chief Financial Officer. Mr.
Badke has been Senior Vice President, Finance since May 2004 and Chief Financial
Officer since December 1999. Previously, he was Vice President, Finance since
October 1998 and served as Controller since joining the Company in 1992. Prior
to joining the Company, Mr. Badke was Controller for NEK Cable, Inc. and an
audit manager with the international accounting firms of Arthur Andersen & Co.
and Peat Marwick Main & Co.
Peter A. Horn - Vice President, Operations. Mr. Horn has been Vice President,
Operations since June 1999. From 1995 to 1999, he was Vice President, Compliance
and Quality Assurance. Prior to that time, he served as Vice President in
various capacities since his promotion in May 1990.
Bret M. McGowan - Vice President, U.S. Sales and Marketing. Mr. McGowan has been
Vice President, U.S. Sales and Marketing since April 2005. From 2001 to 2005, he
served as Vice President, Marketing. Previously, he served as Director of
Marketing since 1998 and as Marketing Manager since 1994. He joined the Company
in 1993 as a Marketing Specialist.
- 16 -
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.
Joan L. Wolf - Executive Administrator and Corporate Secretary. Ms. Wolf has
been Executive Administrator since she joined the Company in 1990 and was
appointed to the non-operating officer position of Corporate Secretary in May
2002.
Christopher J. Wall - Managing Director, Vicon Industries, Ltd. Mr. Wall has
been Managing Director, Vicon Industries Ltd. since February 1996. Previously he
served as Financial Director, Vicon Industries, Ltd. since joining the Company
in 1989. Prior to joining the Company he held a variety of senior financial
positions within Westland plc, a UK aerospace company.
Yigal Abiri - General Manager, Vicon Systems Ltd. Mr. Abiri has been General
Manager, Vicon Systems Ltd. since joining the Company in August 1999.
Previously, he served as President of QSR, Ltd., a developer and manufacturer of
remote video surveillance equipment.
Clifton H.W. Maloney - Director. Mr. Maloney has been a director of the Company
since May 2004. Mr. Maloney is the President of C.H.W. Maloney & Co., Inc., a
private investment firm that he founded in 1981. From 1974 to 1984, he was a
Vice President in investment banking at Goldman, Sachs & Co. Mr. Maloney is a
Director of Interpool, Inc., Chromium Industries, Inc. and The Wall Street Fund.
His current term on the Board ends in May 2007.
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. Mr. Neumann's current term on the Board ends in May
2009.
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
Thomson McKinnon Securities, Inc. as head of investment banking and public
finance. Mr. Robertson's current term on the Board ends in May 2007.
Arthur D. Roche - Director. Mr. Roche has been a director of the Company since
1992. He served as Executive Vice President and co-participant in the Office of
the President of the Company from August 1993 until his retirement in November
1999. For the six months prior to that time, Mr. Roche provided consulting
services to the Company. In October 1991, Mr. Roche retired as a partner of
Arthur Andersen & Co., an international accounting firm which he joined in 1960.
His current term on the Board ends in May 2008.
There are no family relationships between any director, executive officer or
person nominated or chosen by the Company to become a director or officer.
- 17 -
Audit Committee Financial Expert
--------------------------------
All independent directors are members of the Audit Committee. The Board of
Directors has determined that Arthur D. Roche, Chairman of the Audit Committee,
qualifies as an "Audit Committee Financial Expert", as defined by Securities and
Exchange Commission Rules, based on his education, experience and background.
Mr. Roche is independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Exchange Act.
Code of Ethics
--------------
The Company has adopted a Code of Ethics that applies to all its employees,
including its chief executive officer, chief financial and accounting officer,
controller, and any persons performing similar functions. Such Code of Ethics is
published on the Company's internet website (www.vicon-cctv.com).
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, 2006 and certain written
representations that no Form 5 is required, no person who, at any time during
the year ended September 30, 2006 was a director, officer or beneficial owner of
more than 10 percent of any class of equity securities of the Company registered
pursuant to Section 12 of the Exchange Act failed to file on a timely basis, as
disclosed in the above forms, reports required by Section 16(a) of the Exchange
Act during the year ended September 30, 2006.
- 18 -
ITEM 11 - EXECUTIVE COMPENSATION
--------------------------------
The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to the Company during 2006, 2005 and 2004 by the Chief
Executive Officer and the Company's most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during any such year.
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term Compensation
----------------------------
Annual Compensation Awards Payouts
----------------------------- ---------------------- ---------------
Other All
Annual Restricted Securities Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Position Year Salary Bonus sation Award Options (#) Payouts sation
------------------ ---- ------- ------- ------ ---------- ----------- ------- -------
Kenneth M. Darby 2006 $310,000 $ 75,000 (1) - - - - -
Chairman and 2005 298,462 75,000 (1) - - - - -
Chief Executive 2004 310,000 75,000 (1) - - - - -
Officer
John M. Badke 2006 $171,923 $ 35,000 (1) - - 5,000 - -
Senior Vice President 2005 165,000 35,000 (1) - - 5,000 - -
and Chief Financial 2004 152,000 35,000 (1) - - - - -
Officer
Christopher J. Wall 2006 $171,000 $ 35,300 (2) - - 5,000 - -
Managing Director 2005 176,000 14,000 (2) - - 5,000 - -
Vicon Industries Ltd. 2004 148,000 113,000 (2) - - - - -
Bret M. McGowan 2006 $151,923 $ 32,601 (1) - - 5,000 - -
Vice President, U.S. 2005 132,917 20,831 (6) - - 5,000 - -
Sales and Marketing 2004 112,000 25,000 (1) - - - - -
Yigal Abiri 2006 $160,000 $ - - - - - $ -
General Manager 2005 160,000 - - - - - 90,000 (5)
Vicon Systems Ltd. 2004 160,000 10,725 (3) - - - - 66,946 (4)
(1) Represents discretionary cash bonus approved by the Board of Directors upon
the recommendation of its Compensation Committee.
(2) Represents sales and profit related bonus based on financial results of
Vicon Industries Ltd.
(3) Represents discretionary bonus.
(4) Represents $43,938 of severance pay paid into a management insurance policy
and $23,008 paid as compensation for accrued vacation.
(5) Represents performance based compensation associated with the introduction
of the Company's new digital video product line.
(6) Represents sales related commission.
- 19 -
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%
------------- ------- ------------- ---------- ----------- -------- ----------
John Badke 5,000 12.5% $3.17 12/10 $ 4,379 $ 9,677
Christoper Wall 5,000 12.5% $3.17 12/11 $ 5,391 $ 12,229
Bret McGowan 5,000 12.5% $3.17 12/11 $ 5,391 $ 12,229
Options granted in the year ended September 30, 2006 were issued under the 1996
Incentive Stock Option Plan, the 1999 Non-Qualified Stock Option Plan and the
2002 Non-Qualified Stock Option Plan. Options issued under the 1996 Incentive
Stock Option Plan are exercisable as follows: up to 30% on the grant date, an
additional 30% on the first anniversary of the grant date, and the balance 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. Options issued under
the 1999 and 2002 Non-Qualified Stock Option Plans are exercisable as follows:
up to 30% of the shares on the second anniversary of the grant date, an
additional 30% of the shares on the third anniversary of the grant date, and the
balance of the shares on the fourth anniversary of the grant date, except that
no option is exercisable after the expiration of six years from the date of
grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
-----------------------------------------------
AND FISCAL YEAR-END OPTION VALUES
---------------------------------
At September 30, 2006
---------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options Options (2)
------- -----------
Shares
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized (1) Unexercisable Unexercisable
---------------- ----------- ------------ ------------- -------------
Kenneth M. Darby -0- -0- 64,545/35,455 $15,030/$9,470
John M. Badke -0- -0- 32,500/18,500 8,430/4,810
Christopher J. Wall -0- -0- 12,000/18,000 2,940/4,010
Bret M. McGowan -0- -0- 15,077/14,423 3,954/3,451
Yigal Abiri -0- -0- 26,000/4,000 7,600/-0-
(1) Calculated based on the difference between the closing quoted market prices
per share at the dates of exercise and the exercise prices.
(2) Calculated based on the difference between the closing quoted market price
($3.29) and the exercise price.
- 20 -
Compensation Arrangements
-------------------------
On November 10, 2006, the Company entered into a new one-year employment
agreement with Kenneth M. Darby, the Company's Chief Executive Officer, to
expire on September 30, 2007. The terms of the new agreement provide for a
$15,000 increase in Mr. Darby's annual base salary to $325,000 effective October
1, 2006. In conjunction with his new employment agreement, Mr. Darby entered
into a stock lock-up agreement whereby he agreed not to sell more than 100,000
shares (50,000 per year) of his Company stock holdings in open market
transactions through September 30, 2008 without Board of Director approval. Such
lock-up agreement provisions terminate under certain conditions, including Mr.
Darby's death, disability, termination without cause and a Company change in
control as defined. Mr. Darby's previous employment agreement, which expired on
September 30, 2006, entitled him to receive a $620,000 severance benefit and
deferred compensation in the form of 70,647 shares of the Company's Common Stock
upon its expiration. Such amounts have been earned by Mr. Darby over his many
years of service with the Company in varying capacities and have been paid
subsequent to year end.
In addition, the Compensation Committee of the Board of Directors ("the
Committee") approved a performance-based bonus plan for Mr. Darby for fiscal
year 2007, whereby he can earn a minimum of $175,000 for achievement of a
certain minimum annual profit target as defined by the Board. For fiscal year
2006, the Committee approved a $75,000 discretionary bonus for Mr. Darby. The
Company also granted Mr. Darby 10,000 stock options at the closing price on
October 25, 2006.
On November 13, 2006, the Company executed an amendment to the January 1, 2006
employment agreement with John M. Badke, the Company's Chief Financial Officer,
to provide him with a $5,000 increase in annual base salary to $180,000
effective October 1, 2006 and includes provisions to comply with the
requirements of Section 409A of the Internal Revenue Code. The agreement, which
expires on December 31, 2007, provides Mr. Badke a lump sum payment in the
amount of three times his average annual compensation for the previous five
years if there is a change in control of the Company without Board of Director
approval as defined. The agreement also provides Mr. Badke a
severance/retirement benefit of $350,000 payable under certain occurrences.
In addition, a performance based bonus plan for fiscal year 2007 was adopted for
Mr. Badke whereby he will receive a bonus equal to 3% of a certain minimum
annual profit target as defined by the Committee. For the fiscal year 2006, the
Committee approved a $35,000 discretionary bonus for Mr. Badke. The Company also
granted Mr. Badke 15,000 stock options at the closing price on October 25, 2006.
On November 1, 2006, the Company entered into a new employment agreement with
Christopher J. Wall, Managing Director of Vicon Industries Ltd. (Europe), to
expire on September 30, 2007. The new agreement provides Mr. Wall with a $5,000
increase in annual base salary to approximately $185,000 (97,850 Pounds
Sterling) and provides a performance based bonus plan for fiscal year 2007
whereby he will receive an amount equal to between 2% and 6% (based on
achievement levels) of the combined pretax operating profits of the Company's
Europe based subsidiaries. For fiscal year 2006, Mr. Wall received a bonus of
approximately $35,300 based upon his achievement of certain sales and profit
targets. The new agreement also provides Mr. Wall a severance/retirement benefit
of approximately $190,000 (100,000 Pounds Sterling) under certain occurrences.
The Company also granted Mr. Wall 5,000 stock options at the closing price on
October 25, 2006.
On August 7, 2006, the Company entered into an employment agreement with Mr.
Bret M. McGowan, the Company's Vice President of U.S. Sales and Marketing,
providing him an annual base salary of $155,000. The agreement, which expires on
September 30, 2007, provides Mr. McGowan a lump sum payment in the amount of
three times his average annual compensation for the previous five years if
- 21 -
there is a change in control of the Company without Board of Director approval
as defined. The agreement also provides Mr. McGowan a severance/retirement
benefit of $290,000 payable under certain occurrences. Effective October 1,
2006, Mr. McGowan's annual base salary was increased to $170,000.
In addition, a performance based bonus plan for fiscal year 2007 was established
for Mr. McGowan whereby he earns variable compensation upon achieving certain
U.S. sales targets. For the fiscal year 2006, the Committee approved a $30,000
discretionary bonus for Mr. McGowan. The Company also granted Mr. McGowan 13,500
stock options at the closing price on October 25, 2006.
Directors' Compensation and Term
--------------------------------
During the fiscal year ending September 30, 2006, directors were compensated at
an annual rate of $16,000 for regular Board meetings and $1,000 per committee
meeting attended in person or by teleconference. Effective October 1, 2006, the
Board of Directors approved an increase in non-employee director compensation to
an annual rate of $20,000 for regular Board meetings and $1,200 per committee
meeting. The Chairman of the Audit Committee also receives an additional annual
retainer of $8,000. Employee directors are not compensated for Board or
committee meetings. Directors may not stand for reelection after age 70, except
that any director may serve one additional three-year term after age 70 with the
unanimous consent of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
-----------------------------------------------------------
The Compensation Committee of the Board of Directors consists of Messrs.
Maloney, Neumann, Robertson and Roche, none of whom has ever been an officer of
the Company except for Mr. Roche, who served as Executive Vice President from
August 1993 until his retirement in November 1999.
Board Compensation Committee Report
-----------------------------------
The Compensation Committee's compensation policies applicable to the Company's
officers for 2006 were to pay a competitive market price for the services of
such officers, taking into account the overall performance and financial
capabilities of the Company and the officer's individual level of performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base
salary and incentive compensation of all officers other than himself. The
Committee reviews these recommendations with Mr. Darby and, after such review,
determines compensation. In the case of Mr. Darby, the Compensation Committee
makes its determination after direct negotiation with him. For each officer, the
committee's determinations are based on its conclusions concerning each
officer's performance and comparable compensation levels for similarly situated
officers at comparable companies. The overall level of performance of the
Company is taken into account but is not specifically related to the base salary
of these officers. Also, the Company has established an incentive compensation
plan for certain officers, which provides for a specified bonus upon the
Company's achievement of certain annual sales and/or profitability targets.
The Compensation Committee grants options to officers to link compensation to
the performance of the Company. Options are exercisable in the future at the
fair market value at the time of grant, so that an officer granted an option is
rewarded by the increase in the price of the Company's stock. The committee
grants options to officers based on significant contributions of such officer to
the performance of the Company. In addition, in determining Mr. Darby's salary
and bonus for service as Chief Executive Officer, the committee considers the
responsibility assumed by him in formulating, implementing and managing the
operational and strategic objectives of the Company.
Submitted by the Compensation Committee,
Peter F. Neumann, Chairman Clifton H.W. Maloney
W. Gregory Robertson Arthur D. Roche
- 22 -
This graph compares the return of $100 invested in the Company's stock on
October 1, 2001, with the return on the same investment in the AMEX U.S. Market
Index and the AMEX Technology Index.
(The following table was represented by a chart in the printed material)
Vicon AMEX U.S. AMEX Technology
Date Industries, Inc. Market Index Index
---- ---------------- ------------ --------------
10/01/01 100 100 100
10/01/02 91 88 62
10/01/03 122 113 89
10/01/04 138 131 102
10/01/05 91 155 104
10/01/06 97 168 113
- 23 -
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
The following table sets forth the beneficial ownership of the Company's Common
Stock as of December 15, 2006 by (i) those persons known by the Company to be
beneficial owners of more than 5% of the Company's outstanding Common Stock;
(ii) each current executive officer named in the Summary Compensation Table;
(iii) each director; and (iv) all directors and executive officers as a group.
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned (1) % of Class
------------------- ---------------------- ----------
CBC Co., Ltd. and affiliates
2-15-13 Tsukishima, Chuo-ku,
Tokyo, Japan 104 543,715 10.9%
Leviticus Partners, L.P.
405 Lexington Ave., 45th Floor
New York, NY 10174 300,000 6.0%
Dimensional Fund Advisors
1299 Ocean Avenue
Santa Monica, CA 90401 297,237 (11) 5.9%
Al Frank Asset Management, Inc.
32392 Coast Highway, Suite 260
Laguna Beach, CA 92651 277,299 (10) 5.5%
******************************************************************************
C/O Vicon Industries, Inc.
Kenneth M. Darby 404,610 (2) 8.1%
Arthur D. Roche 149,654 (3) 3.0%
John M. Badke 40,819 (4) *
Peter F. Neumann 37,072 (5) *
W. Gregory Robertson 31,900 (5) *
Christopher J. Wall 28,300 (6) *
Yigal Abiri 16,000 (6) *
Bret M. McGowan 15,154 (7) *
Clifton H.W. Maloney 15,000 (8) *
Total all Executive Officers and
Directors as a group (12 persons) 836,950 (9) 16.7%
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment control over the shares of stock
owned.
(2) Includes currently exercisable options to purchase 83,871 shares.
(3) Includes 50,000 shares held by Mr. Roche's wife and currently exercisable
options to purchase 20,000 shares.
(4) Includes currently exercisable options to purchase 27,500 shares.
(5) Includes currently exercisable options to purchase 20,000 shares.
(6) Includes currently exercisable options to purchase 16,000 shares.
(7) Includes currently exercisable options to purchase 15,154 shares.
(8) Includes currently exercisable options to purchase 15,000 shares.
(9) Includes currently exercisable options to purchase 267,325 shares.
(10) Al Frank Asset Management, Inc. had voting control over 179,047 shares and
investment control over 277,299 shares.
(11) Dimensional Fund Advisors had voting control over 291,637 shares and
investment control over 297,237 as investment advisor and manager for
various mutual funds and other clients. These shares are beneficially owned
by such mutual funds or other clients.
- 24 -
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------
at September 30, 2006
Number of securities
Number of securities Weighted average remaining available for
to be issued upon exercise price future issuance under
exercise of of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan category (a) (b) (c)
------------------ ------------------- ---------------- ------------------------
Equity compensation
plans approved by
security holders 545,283 $3.28 73,933
Equity compensation
plans not approved
by security holders - - -
Total 545,283 $3.28 73,933
EQUITY COMPENSATION GRANTS NOT APPROVED BY SECURITY HOLDERS
-----------------------------------------------------------
Through September 30, 2006, the Company had granted certain of its officers with
deferred compensation benefits aggregating 103,898 shares of common stock
currently held by the Company in treasury. Such shares vest upon retirement or,
in the case of 70,647 shares, the expiration of Mr. Darby's employment agreement
in September 2006. Such shares were distributed to Mr. Darby in November 2006.
All shares vest earlier under certain occurrences including death, involuntary
termination or a change in control of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The Company and CBC Co., Ltd. (CBC), a Japanese corporation which beneficially
owns 10.9% of the outstanding shares of the Company, have been conducting
business with each other for approximately twenty-seven years. During this
period, CBC has served as a lender, a product supplier and sourcing agent, and a
private label reseller of the Company's products. CBC has also acted as the
Company's sourcing agent for the purchase of certain video products. In fiscal
2006, the Company purchased approximately $404,000 of products and components
from or through CBC. CBC competes with the Company in various markets,
principally in the sale of video products and systems. Sales of all products to
CBC were $205,000 in 2006.
- 25 -
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------
The following table details: the aggregate fee arrangements with BDO Seidman,
LLP for professional services rendered for the audit of the Company's
consolidated annual financial statements and review of the financial statements
included in the Company's quarterly reports on Form 10-Q; the aggregate fees
billed by BDO Seidman, LLP for audit related matters and; the aggregate fees
billed by BDO Seidman, LLP for tax compliance, tax advice and tax planning
during fiscal years ended September 30, 2006 and 2005:
2006 2005
---- ----
Audit fees $171,000 $158,000
Audit related fees $ 4,000 $ -
Tax fees $ 39,000 $ 46,000
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
--------------------------------------------------------------------------------
Independent Auditors
--------------------
The Audit Committee pre-approves all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services,
audit related services, tax services and other services. The Audit Committee has
adopted a policy for the pre-approval of services provided by the independent
auditors. Under the policy, pre-approval generally is provided for an annual
period and any pre-approval is detailed as to the particular service or category
of services and is subject to a specific limit. In addition, the Audit Committee
may also pre-approve particular services on a case-by-case basis, which must be
accompanied by a detailed explanation for each proposed service. The Audit
Committee may delegate pre-approval authority to one or more of its members.
Such member must report any decisions to the Audit Committee at the next
scheduled meeting.
- 26 -
PART IV
-------
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
----------------------------------------------------
(a) (1) Financial Statements
Included in Part IV, Item 15:
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Statements of Operations, fiscal years ended
September 30, 2006, 2005, and 2004
Consolidated Balance Sheets at September 30, 2006 and 2005
Consolidated Statements of Shareholders' Equity, fiscal years
ended September 30, 2006, 2005, and 2004
Consolidated Statements of Cash Flows, fiscal years ended
September 30, 2006, 2005, and 2004
Notes to Consolidated Financial Statements, fiscal years ended
September 30, 2006, 2005, and 2004
(a) (2) Financial Statement Schedule
Included in Part IV, Item 15:
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 2006, 2005, and 2004
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.
- 27 -
15(a)(3) Exhibits Exhibit Number or
Exhibit -------- Incorporation by
Numbers Description Reference to
------- ----------- ------------
3 (.1) 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
(.2) Amendment of the Certificate Incorporated by reference
of Incorporation dated to the 2002 Annual Report
May 7, 2002 on Form 10-K
4 Instruments defining the rights of
security holders
(.1) Rights Agreement dated December Incorporated by reference
4, 2001 between the Registrant and to the 2001 Annual Report
Computershare Investor Services on Form 10-K
10 Material Contracts
(.1) Employment Agreement dated Incorporated by reference
November 10, 2006 between the to the Current Report on
Registrant and Kenneth M. Darby Form 8-K dated
November 16, 2006
(.2) Common Stock Lock-up Agreement Incorporated by reference
dated November 10, 2006 between to the Current Report on
the Registrant and Form 8-K dated
Kenneth M. Darby November 16, 2006
(.3) 1994 Incentive Stock Option Plan Incorporated by
reference to the
1994 Annual Report
on Form 10-K
(.4) 1994 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1994 Annual Report
on Form 10-K
(.5) 1996 Incentive Stock Option Plan Incorporated by
reference to the
1997 Annual Report
on Form 10-K
(.6) 1996 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1997 Annual Report
on Form 10-K
(.7) Commercial fixed rate loan Incorporated by
agreement between the Registrant reference to the
and National Westminster Bank PLC June 30, 1997 filing
dated April 8, 1997 on Form 10-Q
(.8) Loan Agreement between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated December 31, 1997
January 29, 1998 filing on Form 10-Q
- 28 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ------------
(.9) Mortgage Note between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated December 31, 1997
January 29, 1998 filing on Form 10-Q
(.10) Mortgage and Security Agreement Incorporated by
in the amount of $2,512,000 between reference to the
the Registrant and The Dime December 31, 1997
Savings Bank of New York, FSB dated filing on Form 10-Q
January 29, 1998
(.11) Interest rate master swap agreement Incorporated by
between the Registrant and KeyBank reference to the
National Association dated December 31, 1997
December 11, 1997 filing on Form 10-Q
(.12) Schedule to the master agreement Incorporated by
between the Registrant and KeyBank reference to the
National Association dated December 31, 1997
December 11, 1997 filing on Form 10-Q
(.13) Swap transaction confirmation with Incorporated by
a notional amount of $2,512,000 reference to the
between the Registrant and KeyBank December 31, 1997
National Association dated filing on Form 10-Q
December 30, 1997
(.14) Advice of borrowing terms Incorporated by
between the Registrant and reference to the
National Westminster Bank PLC March 31, 2006 filing
dated March 6, 2006 on Form 10-Q
(.15) Loan Agreement between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.16) Mortgage Note between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.17) Mortgage and Security Agreement Incorporated by reference
in the amount of $1,200,000 between to the 1999 Annual Report
the Registrant and The Dime Savings on Form 10-K
Bank of New York, FSB dated
October 12, 1999
(.18) 1999 Incentive Stock Option Plan Incorporated by reference
to the 1999 Annual Report
on Form 10-K
(.19) 1999 Non-Qualified Stock Incorporated by reference
Option Plan to the 1999 Annual Report
on Form 10-K
(.20) 2002 Incentive Stock Option Plan Incorporated by reference
to the 2002 Annual Report
on Form 10-K
- 29 -.
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
------- ----------- ------------
(.21) 2002 Non-Qualified Stock Incorporated by reference
Option Plan to the 2002 Annual Report
on Form 10-K
(.22) Employment and Deferred Incorporated by reference
Compensation Agreement dated to the Current Report on
January 1, 2006 between the Form 8-K dated
Registrant and John M. Badke March 6, 2006
(.23) Amendment 1 to the Employment Incorporated by reference
and Deferred Compensation to the Current Report on
Agreement dated November 13, 2006 Form 8-K dated
between the Registrant and November 16, 2006
John M. Badke
(.24) Employment Agreement dated 10.24
August 7, 2006 between the
Registrant and Bret M. McGowan
(.25) Employment Agreement dated Incorporated by reference
November 1, 2006 between the to the Current Report on
Registrant and Christopher J. Wall Form 8-K dated
November 16, 2006
(.26) Amendment 1 to the Employment Incorporated by reference
Agreement dated November 1, 2006 to the Current Report on
between the Registrant and Form 8-K dated
Christopher J. Wall November 16, 2006
21 Subsidiaries of the Registrant Incorporated by
reference to the Notes
to the Consolidated
Financial Statements
23 Consent of BDO Seidman, LLP 23.1
31 Rule 13a-14(a)/15d-14(a) Certifications
(.1) Certification of Chief Executive
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 31.1
(.2) Certification of Chief Financial
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 31.2
32 Section 1350 Certifications
(.1) Certification of Chief Executive
Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 32.1
(.2) Certification of Chief Financial
Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 32.2
- 30 -
No other exhibits are required to be filed.
Other Matters - Form S-8 and S-2 Undertaking
--------------------------------------------
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892
(filed June 30, 1986), 33-34349 (filed April 1, 1990), 33-90038 (filed February
24, 1995), 333-30097 (filed June 26, 1997), 333-71410 (filed October 11, 2001)
and 333-116361 (filed June 10, 2004) and on Form S-2 No. 333-46841 (effective
May 1, 1998):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
- 31 -
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Vicon Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Vicon
Industries, Inc. as of September 30, 2006 and 2005 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years ended September 30, 2006. In connection with our audit of the
consolidated financial statements, we also have audited the financial statement
schedule as listed in Part IV, item 15(a)(2) for the fiscal years ended
September 30, 2006, 2005 and 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation and schedule. 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. at September 30, 2006 and 2005, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 2006,
in conformity with accounting principles generally accepted in the United States
of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Melville, New York
December 1, 2006
- 32 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30, 2006, 2005 and 2004
2006 2005 2004
---- ---- ----
Net sales $56,278,971 $56,055,715 $53,532,631
Cost of sales 34,184,675 35,060,060 33,821,618
------------ ------------ ------------
Gross profit 22,094,296 20,995,655 19,711,013
Operating expenses:
Selling, general and
administrative expense 17,930,872 19,152,692 17,058,460
Engineering and development expense 4,530,806 4,773,516 4,878,981
------------ ------------ -------------
22,461,678 23,926,208 21,937,441
------------ ------------ ------------
Operating loss (367,382) (2,930,553) (2,226,428)
Other expense (income):
Interest expense 164,827 181,126 187,390
Interest and other income (135,654) (88,026) (204,224)
Loss on sale of marketable securities - 44,936 -
------------ ------------ ------------
Loss before income taxes (396,555) (3,068,589) (2,209,594)
Income tax expense 150,000 27,000 481,000
------------ ------------ ------------
Loss before extraordinary gain (546,555) (3,095,589) (2,690,594)
Extraordinary gain (Note 14) - 210,968 -
------------ ------------ -------------
Net loss $ (546,555) $(2,884,621) $(2,690,594)
============ ============ ============
Basic and diluted loss per share:
Loss before extraordinary gain $(.12) $ (.68) $ (.59)
Extraordinary gain - .05 -
------ ------- -------
Net loss $(.12) $ (.63) $ (.59)
====== ======= =======
See accompanying notes to consolidated financial statements.
- 33 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2006 and 2005
ASSETS 2006 2005
------ ---- ----
Current Assets:
Cash and cash equivalents $ 5,639,334 $ 5,818,178
Marketable securities 126,697 121,830
Accounts receivable (less allowance of
$1,325,000 in 2006 and $1,297,000 in 2005) 11,269,529 10,125,967
Inventories:
Parts, components, and materials 2,809,152 2,277,415
Work-in-process 2,347,354 2,782,761
Finished products 6,812,732 5,406,593
----------- -----------
11,969,238 10,466,769
Prepaid expenses and other current assets 484,713 419,942
----------- -----------
Total current assets 29,489,511 26,952,686
Property, plant and equipment:
Land 1,235,950 1,217,450
Buildings and improvements 5,844,093 5,730,548
Machinery, equipment, and vehicles 5,970,168 5,942,803
----------- -----------
13,050,211 12,890,801
Less accumulated depreciation and amortization 6,821,126 6,274,975
----------- -----------
6,229,085 6,615,826
Other assets 236,521 623,393
----------- -----------
Total assets $35,955,117 $34,191,905
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 331,830 $ 409,343
Accounts payable 4,162,263 2,462,671
Accrued compensation and employee benefits 2,427,525 2,353,849
Accrued expenses 1,429,566 1,403,734
Unearned revenue 806,142 566,065
Income taxes payable 151,323 44,306
----------- -----------
Total current liabilities 9,308,649 7,239,968
Long-term debt 1,740,335 2,061,825
Unearned revenue 457,474 582,679
Other long-term liabilities 429,818 328,953
Commitments and contingencies - Note 11
Shareholders' equity:
Common stock, par value $.01 per share
authorized - 25,000,000 shares
issued - 4,860,901 and 4,857,401 shares 48,609 48,574
Capital in excess of par value 22,562,126 22,391,815
Retained earnings 1,734,490 2,281,045
----------- -----------
24,345,225 24,721,434
Treasury stock at cost, 287,817 shares
in 2006 and 2005 (1,299,999) (1,299,999)
Accumulated other comprehensive income 973,615 557,045
----------- -----------
Total shareholders' equity 24,018,841 23,978,480
----------- -----------
Total liabilities and shareholders' equity $35,955,117 $34,191,905
=========== ===========
See accompanying notes to consolidated financial statements.
- 34 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended September 30, 2006, 2005, and 2004
Accumulated
Capital in other Total
Common excess of Retained Treasury comprehensive shareholders'
Shares Stock par value earnings Stock income equity
------ ------- ----------- ---------- --------- ------------ --------------
Balance September 30, 2003 4,832,576 $48,326 $22,218,644 $ 7,856,260 $(980,199) $ 91,700 $29,234,731
Comprehensive income (loss):
Net loss - - - (2,690,594) - - (2,690,594)
Foreign currency translation
adjustment - - - - - 459,779 459,779
Unrealized gain on derivatives - - - - - 107,782 107,782
Unrealized loss on marketable
securities - - - - - (42,022) (42,022)
Total comprehensive income (loss) - - - - - - (2,165,055)
Repurchases of common
stock (64,400 shares) - - - - (298,685) - (298,685)
Exercise of stock options 16,470 164 38,359 - - - 38,523
Stock-based compensation - - 27,104 - - - 27,104
Deferred compensation amortization - - 76,727 - - - 76,727
--------- ------- ----------- ----------- ----------- ---------- -----------
Balance September 30, 2004 4,849,046 48,490 22,360,834 5,165,666 (1,278,884) 617,239 26,913,345
Comprehensive income (loss):
Net loss - - - (2,884,621) - - (2,884,621)
Foreign currency translation
adjustment - - - - - (201,918) (201,918)
Unrealized gain on derivatives - - - - - 95,198 95,198
Change in unrealized loss on
marketable securities - - - - - 46,526 46,526
Total comprehensive income (loss) - - - - - - (2,944,815)
Repurchases of common
stock (4,500 shares) - - - - (21,115) - (21,115)
Exercise of stock options 8,355 84 22,096 - - - 22,180
Stock-based compensation - - (67,718) - - - (67,718)
Deferred compensation amortization - - 76,603 - - - 76,603
--------- ------- ----------- ----------- ----------- ---------- -----------
Balance September 30, 2005 4,857,401 48,574 22,391,815 2,281,045 (1,299,999) 557,045 23,978,480
Comprehensive income (loss):
Net loss - - - (546,555) - - (546,555)
Foreign currency translation
adjustment - - - - - 425,286 425,286
Unrealized loss on derivatives - - - - - (8,091) (8,091)
Change in unrealized loss on
marketable securities - - - - - (625) (625)
Total comprehensive income (loss) - - - - - - (129,985)
Exercise of stock options 3,500 35 7,665 - - - 7,700
Stock-based compensation - - 152,413 - - - 152,413
Deferred compensation amortization - - 10,233 - - - 10,233
--------- ------- ----------- ----------- ----------- ---------- -----------
Balance September 30, 2006 4,860,901 $48,609 $22,562,126 $ 1,734,490 $(1,299,999) $ 973,615 $24,018,841
========= ======= =========== =========== =========== ========== ===========
See accompanying notes to consolidated financial statements.
- 35 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 30, 2006, 2005 and 2004
2006 2005 2004
---- ---- ----
Cash flows from operating activities:
Net loss $ (546,555) $(2,884,621) $(2,690,594)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 973,535 999,942 1,046,553
Amortization of deferred compensation 10,233 76,603 76,727
Stock compensation expense 152,413 (67,718) 27,104
Extraordinary gain on acquisition - (210,968) -
Loss on sale of marketable securities - 44,936 -
Change in assets and liabilities:
Accounts receivable, net (871,872) 133,959 1,728,523
Inventories (1,357,802) 2,605,961 (470,812)
Recoverable income taxes - 239,402 1,813,260
Prepaid expenses and other current assets (52,070) (36,549) 325,889
Other assets 390,364 6,434 (98,919)
Accounts payable 1,641,824 (847,762) 688,172
Accrued compensation and employee benefits 57,959 277,966 4,462
Accrued expenses 13,761 (137,935) (900,647)
Unearned revenue 114,872 (48,048) (595,074)
Income taxes payable 102,964 (299,358) 233,309
Other liabilities 92,774 (366,684) 254,731
Net cash provided by (used in) ----------- ----------- ------------
operating activities 722,400 (514,440) 1,442,684
----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (510,375) (556,643) (730,102)
Acquisition, net of cash acquired - (868,000) -
Net decrease (increase) in
marketable securities (5,492) 1,998,458 1,165,053
----------- ----------- ------------
Net cash provided by (used in)
investing activities (515,867) 573,815 434,951
----------- ----------- ------------
Cash flows from financing activities:
Repayments of long-term debt (403,419) (286,470) (324,639)
Proceeds from exercise of stock options 7,700 22,180 38,523
Repurchases of common stock - (21,115) (298,685)
----------- ----------- -----------
Net cash used in financing activities (395,719) (285,405) (584,801)
----------- ----------- -----------
Effect of exchange rate changes on cash 10,342 (18,990) (65,784)
----------- ----------- -----------
Net increase (decrease) in cash (178,844) (245,020) 1,227,050
Cash at beginning of year 5,818,178 6,063,198 4,836,148
----------- ----------- -----------
Cash at end of year $ 5,639,334 $ 5,818,178 $ 6,063,198
=========== =========== ===========
Cash paid during the fiscal year for:
Income taxes $ 35,802 $ 345,396 $ 309,780
Interest $ 169,356 $ 176,435 $ 233,898
See accompanying notes to consolidated financial statements.
- 36 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 2006, 2005, and 2004
NOTE 1. Summary of Significant Accounting Policies
---------------------------------------------------
Nature of Business
------------------
The Company designs, manufactures, assembles and markets video systems and
system components for use in security, surveillance, safety and control purposes
by end users. The Company markets its products worldwide primarily to installing
dealers, systems integrators, government entities and distributors.
Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of Vicon
Industries, Inc. (the Company) and its wholly owned subsidiaries: Vicon
Industries Limited and subsidiary (Videotronic Infosystems GmbH) and TeleSite
U.S.A., Inc. and subsidiary (Vicon Systems Ltd.), after elimination of
intercompany accounts and transactions.
Revenue Recognition
-------------------
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue is generally
recognized when products are sold and title is passed to the customer. Shipping
and handling costs are included in cost of sales. Advance service billings under
a national supply contract with one customer are deferred and recognized as
revenues on a pro rata basis over the term of the service agreement. The Company
evaluates multiple-element revenue arrangements for separate units of
accounting, and follows appropriate revenue recognition policies for each
separate unit. Elements are considered separate units of accounting provided
that (i) the delivered item has stand-alone value to the customer, (ii) there is
objective and reliable evidence of the fair value of the delivered item, and
(iii) if a general right of return exists relative to the delivered item,
delivery or performance of the undelivered item is considered probable and
substantially within the control of the Company. As applied to the Company,
under arrangements involving the sale of product and the provision of services,
product sales are recognized as revenue when the products are sold and title is
passed to the customer, and service revenue is recognized as services are
performed. For products that include more than incidental software, and for
separate licenses of the Company's software products, the Company recognizes
revenue in accordance with the provisions of Statement of Position 97-2,
"Software Revenue Recognition", as amended.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash on deposit and amounts invested in highly
liquid money market funds.
Marketable Securities
---------------------
Marketable securities consist of mutual fund investments in U.S. government debt
securities. Such securities are stated at market value and are classified as
available-for-sale under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 115, with unrealized gains and
losses reported in other comprehensive income as a component of shareholders'
equity. The cost of such securities was $129,373 and $123,881 at September 30,
2006 and 2005, respectively, with $2,676 and $2,051 of unrealized losses
included in the carrying amounts at September 30, 2006 and 2005, respectively.
- 37 -
Allowances for Doubtful Accounts
--------------------------------
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
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. Depreciation and
amortization of assets under capital leases, is computed by the straight-line
method over the estimated useful lives of the related assets. Machinery,
equipment and vehicles are being depreciated over periods ranging from 2 to 10
years. The Company's buildings are being depreciated over periods ranging from
25 to 40 years and leasehold improvements are amortized over the lesser of their
estimated useful lives or the remaining lease term. Fully depreciated fixed
assets are retired from the balance sheet when they are no longer in use.
The Company reviews its long-lived assets 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.
Engineering and Development
---------------------------
Product engineering and development costs are charged to expense as incurred,
and amounted to approximately $4,500,000, $4,800,000 and $4,900,000 in fiscal
2006, 2005, and 2004, respectively.
Earnings (Loss) Per Share
-------------------------
Basic EPS is computed based on the weighted average number of common shares
outstanding. Diluted EPS reflects the maximum dilution that would have resulted
from the exercise of stock options, warrants and incremental shares issuable
under a deferred compensation agreement (see Note 10). In periods when losses
are incurred, the effects of these securities are antidilutive and, therefore,
are excluded from the computation of diluted EPS.
Foreign Currency Translation
----------------------------
The Company translates the financial statements of its foreign subsidiaries by
applying 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 cumulative translation adjustment of $998,000
and $573,000 at September 30, 2006 and 2005, respectively, is recorded as a
component of shareholders' equity in accumulated other comprehensive income
(loss).
- 38 -
Income Taxes
------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred U.S. income taxes are not provided
on undistributed earnings of foreign subsidiaries as the Company presently
intends to reinvest such earnings indefinitely, and any plan to repatriate any
of such earnings in the future is not expected to result in a material
incremental tax liability to the Company. In fiscal 2006 and 2005, the Company
recognized a valuation allowance against its entire net deferred tax asset
balance due to the uncertainty of future realization (see Note 4 for further
discussion).
Product Warranties
------------------
The Company provides for the estimated cost of product warranties at the time
revenue is recognized (see Note 3). While the Company engages in product quality
programs and processes, including monitoring and evaluating the quality of its
component suppliers, its warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from its estimates, revisions to the estimated warranty
liability may be required.
Derivative Instruments
----------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
establishes accounting and reporting standards for derivative instruments as
either assets or liabilities in the statement of financial position based on
their fair values. Changes in the fair values are required to be reported in
earnings or other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. Derivative instruments are
designated and accounted for as either a hedge of a recognized asset or
liability (fair value hedge) or a hedge of a forecasted transaction (cash flow
hedge). For derivatives designated as effective cash flow hedges, changes in
fair values are recognized in other comprehensive income. Changes in fair values
related to fair value hedges as well as the ineffective portion of cash flow
hedges are recognized in earnings.
The Company does not use derivative instruments for speculative or trading
purposes. Derivative instruments are primarily used to manage exposures related
to transactions with the Company's Europe and Israel based subsidiaries and
interest rate risk on certain variable rate bank indebtedness. To accomplish
this, the Company uses certain contracts, primarily foreign currency forward
contracts ("forwards") and interest rate swaps, which minimize cash flow risks
from changes in foreign currency exchange rates and interest rates,
respectively. These derivatives have been designated as cash flow hedges for
accounting purposes.
As of September 30, 2006, the Company had an interest rate swap and currency
forwards outstanding with notional amounts aggregating $1.4 million and
$800,000, respectively, whose aggregate fair value was a liability of
approximately $22,000. The change in the fair value of these derivatives is
reflected in other comprehensive income in the accompanying statement of
shareholders' equity, net of tax where applicable. The forwards have maturities
of less than one year and require the Company to exchange currencies at
specified dates and rates. The interest rate swap matures in the same amounts
and over the same periods as the related debt. The Company considers the credit
risk related to the interest rate swaps and the forwards to be low because such
instruments are entered into with financial institutions having high credit
ratings and are generally settled on a net basis. There were no gains or losses
recognized in operations due to hedge ineffectiveness during the three-year
period ended September 30, 2006. The Company does not expect that the amounts
currently classified in accumulated other comprehensive income that will be
recognized in operations in the next fiscal year will be material.
- 39 -
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts for trade accounts and other receivables, accounts payable
and accrued expenses approximate fair value due to the short-term maturity of
these instruments. The carrying amounts of the Company's long-term debt
instruments approximate fair value. The Company's interest rate swap agreement
is carried at its fair market value (which was a liability of approximately
$20,000 at September 30, 2006). This value represents the estimated amount the
Company would need to pay if such agreement was terminated before maturity,
principally resulting from market interest rate decreases. The fair value of the
Company's foreign currency forward exchange contracts is estimated by obtaining
quoted market prices. The contracted exchange rates on committed forward
exchange contracts was approximately $2,000 less favorable than the market rates
for similar term contracts at September 30, 2006.
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Accounting for Stock-Based Compensation
---------------------------------------
Prior to October 1, 2005, the Company followed Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
related interpretations in accounting for its employee stock-based compensation.
Under APB No. 25, compensation expense was recorded if, on the date of grant,
the market price of the underlying stock exceeded its exercise price. As
permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") and SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123" ("SFAS No. 148"), the Company had retained the accounting
prescribed by APB No. 25 and presented the disclosure information prescribed by
SFAS No. 123 and SFAS No. 148.
Had compensation expense for stock option grants issued been determined under
the fair value method of SFAS No. 123, the Company's net loss and loss per share
(EPS) for the fiscal years ended September 30, 2005 and 2004 would have been:
2005 2004
---------- --------
Reported net loss $(2,884,621) $(2,690,594)
Stock-based compensation cost, net of tax (194,935) (227,113)
------------ ------------
Pro forma net loss $(3,079,556) $(2,917,707)
============ ============
Reported basic and diluted EPS $ (.63) $ (.59)
Pro forma basic and diluted EPS $ (.67) $ (.63)
Effective October 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based
Payment", which requires that all share based payments to employees, including
stock options, be recognized as compensation expense in the consolidated
financial statements based on their fair values and over the requisite service
period. For the year ended September 30, 2006, the Company recorded non-cash
compensation expense of $152,413 ($.03 per basic and diluted share) relating to
stock options. The Company elected to utilize the modified-prospective
application method, whereby compensation expense is recorded for all awards
granted after October 1, 2005 and for the unvested portion of awards granted
prior to this date. Accordingly, prior period amounts have not been restated.
The adoption of SFAS No. 123(R) resulted in an immaterial cumulative change in
accounting as of the date of adoption.
- 40 -
The fair value for options granted during the fiscal years ended September 30,
2006, 2005 and 2004 was determined at the date of grant using a Black-Scholes
valuation model and the straight-line attribution approach using the following
weighted average assumptions:
2006 2005 2004
---- ---- ----
Risk-free interest rate 4.4% 3.8% 3.5%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 75.9% 62.2% 67.9%
Weighted average expected life 5 years 4 years 4 years
The risk-free interest rate used in the Black-Scholes valuation method is based
on the implied yield currently available in U.S. Treasury securities at maturity
with an equivalent term. The Company has not recently declared or paid any
dividends and does not currently expect to do so in the future. Expected
volatility is based on the annualized daily historical volatility of the
Company's stock over a representative period. The weighted-average expected life
represents the period over which stock-based awards are expected to be
outstanding and was determined based on a number of factors, including
historical weighted average and projected holding periods for the remaining
unexercised shares, the contractual terms of the Company's stock-based awards,
vesting schedules and expectations of future employee behavior.
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.
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. Such
estimates include, but are not limited to, provisions for doubtful accounts
receivable, net realizable value of inventory, warranty obligations, deferred
tax valuation and assessments of the recoverability of the Company's long-lived
assets. Actual results could differ from those estimates.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2. Short-Term Borrowings
------------------------------
The Company's European based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of one million Pounds Sterling ($1,870,000) and
is secured by all the assets of the subsidiary. This facility expires in March
2007. During fiscal 2006 and 2005, there were no outstanding borrowings under
this facility.
- 41 -
NOTE 3. Accrued Warranty Obligation
------------------------------------
The Company recognizes the estimated cost associated with its standard warranty
on products at the time of sale. The estimate is based on historical warranty
claim cost experience. The following is a summary of the changes in the
Company's accrued warranty obligation (which is included in accrued expenses)
for the years ended September 30, 2006 and 2005:
Balance as of September 30, 2004 $ 541,000
Deduct: Expenditures (302,000)
Add: Provision 213,000
---------
Balance as of September 30, 2005 $ 452,000
Deduct: Expenditures (268,000)
Add: Provision 218,000
---------
Balance as of September 30, 2006 $ 402,000
=========
NOTE 4. Income Taxes
---------------------
The components of income tax expense for the fiscal years indicated are as
follows:
2006 2005 2004
---- ---- ----
Federal:
Current $ - $ - $ -
Deferred - - -
------------- ----------- ------------
- - -
State - 8,805 12,015
Foreign 150,000 18,195 468,985
------------- ----------- ------------
Total income tax expense $ 150,000 $ 27,000 $ 481,000
============= =========== =============
A reconciliation of the U.S. statutory tax rate to the Company's effective tax
rate follows:
2006 2005 2004
---- ---- ----
Amount Percent Amount Percent Amount Percent
U.S. statutory tax (135,000) (34.0)% $ (972,000) (34.0)% $ (751,000) (34.0)%
Increase in valuation
allowance 423,000 106.5 1,019,000 35.6 1,408,000 63.7
Unrecognized prior year
foreign operating
losses (121,000) (30.6) - - - -
Foreign tax rate
difference 42,000 10.6 - - - -
Permanent differences (41,000) (10.2) - - - -
State tax, net of
federal benefit - - 6,000 0.2 8,000 0.4
Dissolution of
subsidiary - - - - (192,000) (8.7)
Other (18,000) (4.5) (26,000) (0.9) 8,000 0.4
------------ ------ ---------- ------ --------- ------
Effective Tax Rate $ 150,000 37.8% $ 27,000 0.9% $ 481,000 21.8%
=========== ====== ========== ====== ========== ======
- 42 -
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at September 30, 2006 and 2005 are presented below:
2006 2005
---- ----
Deferred tax assets:
Inventories $ 619,000 $ 797,000
Accrued compensation 666,000 488,000
Warranty accrual 147,000 166,000
Depreciation 394,000 240,000
Allowance for doubtful
accounts receivable 421,000 414,000
Unearned revenue 378,000 268,000
U.S. net operating loss carryforwards 2,372,000 2,621,000
Foreign net operating loss carryforwards 300,000 -
U.S. capital loss carryforward 17,000 -
Unrealized loss on derivatives 8,000 5,000
Other 1,000 1,000
----------- -----------
Gross deferred tax assets 5,323,000 5,000,000
Deferred tax liabilities:
Other 37,000 137,000
----------- -----------
Gross deferred tax liabilities 37,000 137,000
----------- -----------
Total deferred tax assets and liabilities $ 5,286,000 $ 4,863,000
Less valuation allowance (5,286,000) (4,863,000)
----------- -----------
Net deferred tax assets and liabilities $ - $ -
=========== ===========
The Company maintains a valuation allowance against its deferred tax assets due
to the uncertainty of future realization. The establishment of such valuation
allowance in 2003 was determined to be appropriate due to recent operating
losses and the inherent uncertainties of predicting future operating results in
periods over which such net tax differences become deductible. Deferred U.S.
income taxes are not provided on undistributed earnings of foreign subsidiaries
as the Company presently intends to reinvest such earnings indefinitely, and any
plan to repatriate any of such earnings in the future is not expected to result
in a material incremental tax liability to the Company.
The Company has approximately $6.9 million of U.S. federal income tax loss
carryforwards that expire in 2023 through 2026.
Pretax domestic loss amounted to approximately $(189,000), $(2,767,000) and
$(3,856,000) in fiscal years 2006, 2005 and 2004, respectively. Pretax foreign
income (loss) amounted to approximately $(208,000), $(91,000) and $1,646,000 in
fiscal years 2006, 2005 and 2004, respectively.
NOTE 5. Long-Term Debt
-----------------------
Long-term debt is comprised of the following at September 30, 2006 and 2005:
2006 2005
---- ----
U.S. bank mortgage loans $2,010,201 $2,266,867
U.K. bank term loan 54,540 140,124
Other 7,424 64,177
---------- ----------
2,072,165 2,471,168
Less current maturities 331,830 409,343
---------- ----------
$1,740,335 $2,061,825
========== ==========
- 43 -
In January 1998, the Company entered into an aggregate $2.9 million mortgage and
term loan agreement with a bank to finance the purchase of its principal
operating facility. Such agreement included 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 mortgage loan bears interest at the bank's prime
rate minus 1.35% (6.90% and 5.40% at September 30, 2006 and 2005, respectively)
and is secured by all the assets of the Company. At the same time, the Company
entered into interest rate swap agreements with the same bank at the time to
effectively convert the foregoing floating rate long-term loans to fixed rate
loans. Subsequently, such bank sold its local operations, including the
Company's loans, to another bank while retaining the Company's interest rate
swap agreements. These agreements effectively fixed the Company's interest rate
on its $2,512,000 mortgage loan at 7.79%. The interest rate swap agreement
matures in the same amounts and over the same periods as the related mortgage
loan.
In October 1999, the Company entered into a $1.2 million mortgage loan agreement
with its bank to finance the expansion of its principal operating facility. The
loan is payable in equal monthly principal installments through January 2008,
with a $460,000 payment due at the end of the term. The loan bears interest at
the bank's prime rate minus 160 basis points (6.65% and 5.15% at September 30,
2006 and 2005, respectively) or, at the Company's option, LIBOR plus 100 basis
points (6.37% and 5.06% at September 30, 2006 and 2005, respectively).
In April 1997, the Company's Europe based subsidiary entered into a ten-year
500,000 pound sterling (approximately $935,000) 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 that, among other things, require the subsidiary to
maintain certain levels of net worth, earnings and debt service coverage.
Current and long-term debt maturing in each of the fiscal years subsequent to
September 30, 2006 approximates $332,000 in 2007 and $1,740,000 in 2008.
NOTE 6. Other Comprehensive Income
-----------------------------------
The accumulated other comprehensive income balances at September 30, 2006 and
2005 consisted of the following:
2006 2005
---------- -----------
Foreign currency translation adjustment $ 998,132 $ 572,846
Unrealized loss on derivatives (21,841) (13,750)
Unrealized loss on securities (2,676) (2,051)
---------- -----------
Accumulated other comprehensive income $ 973,615 $ 557,045
=========== ===========
NOTE 7. Segment and Geographic Information
-------------------------------------------
The Company operates in one business segment which encompasses the design,
manufacture, assembly and marketing of video systems and system components for
the electronic protection segment of the security industry. Its U.S. based
operations consist of Vicon Industries, Inc., the Company's corporate
headquarters and principal operating entity. Its Europe-based operations consist
of Vicon Industries Limited and its Videotronic subsidiary, which market and
distribute the Company's products principally within Europe and the Middle East.
- 44 -
Net sales and long-lived assets related to operations in the United States and
other foreign countries for the fiscal years ended September 30, 2006, 2005, and
2004 are as follows:
2006 2005 2004
---- ---- ----
Net sales
U.S. $35,358,000 $36,035,000 $36,530,000
Foreign 20,921,000 20,021,000 17,003,000
---------- ----------- -----------
Total $56,279,000 $56,056,000 $53,533,000
Long-lived assets
U.S. $ 4,518,000 $ 4,710,000 $ 5,059,000
Foreign 1,711,000 1,906,000 2,031,000
---------- ----------- -----------
Total $ 6,229,000 $ 6,616,000 $ 7,090,000
U.S. sales include $5,040,000, $6,969,000 and $5,310,000 for export in fiscal
years 2006, 2005, and 2004, respectively. Foreign sales principally represent
sales from the Company's Europe based subsidiaries.
NOTE 8. Stock Option Plans
---------------------------
The Company maintains stock option plans which include both incentive and
non-qualified options covering a total of 616,881 shares of common stock
reserved for issuance to key employees, including officers and directors, as of
September 30, 2006. All options are issued at fair market value at the grant
date and are exercisable in varying installments according to the plans. The
plans allow for the payment of option exercises through the surrender of
previously owned mature shares based on the fair market value of such shares at
the date of surrender. There were 73,933 shares available for grant at September
30, 2006.
Changes in outstanding stock options for the three years ended September 30,
2006 are as follows:
Weighted
Average
Weighted Remaining
Number Average Contractual Aggregate
of Exercise Term Intrinsic
Options Price (in years) Value
------- ----- ---------- -----
Balance at September 30, 2003 562,537 $3.34
Options granted 35,000 $5.40
Options exercised (16,470) $2.34
Options forfeited (25,747) $3.33
----------------------------------------------------------
Balance at September 30, 2004 555,320 $3.50
Options granted 86,000 $3.00
Options exercised (8,355) $2.65
Options forfeited (50,224) $4.58
----------------------------------------------------------
Balance at September 30, 2005 582,741 $3.35
Options granted 39,975 $3.17
Options exercised (3,500) $2.20
Options forfeited (73,933) $3.79
----------------------------------------------------------
Balance at September 30, 2006 545,283 $3.28 2.6 $150,544
Exercisable at September 30, 2006 332,927 $3.32 2.0 $100,387
The weighted-average grant date fair value of options granted during the years
ended September 30, 2006, 2005 and 2004 was $2.05, $1.52 and $2.90,
respectively. The total intrinsic value of options exercised during the years
ended September 30, 2006, 2005 and 2004 was $3,150, $12,475 and $50,265,
respectively.
- 45 -
A summary of the status of the Company's nonvested shares as of September 30,
2006 and changes during the year is as follows:
Weighted-Average
Grant-Date
Nonvested Shares Shares Fair Value
---------------- ------ ----------
Nonvested at October 1, 2005 294,253 $1.79
Granted 39,975 $2.05
Vested (88,372) $1.79
Forfeited (33,500) $2.40
------- -------
Nonvested at September 30, 2006 212,356 $1.74
As of September 30, 2006, there was $205,678 of total unrecognized compensation
cost, net of estimated forfeitures, related to nonvested share-based
compensation arrangements, which is expected to be recognized over a
weighted-average period of 1.1 years. The total fair value of shares vested
during the years ended September 30, 2006, 2005 and 2004 was $158,299, $252,062
and $178,965, respectively.
NOTE 9. Shareholder Rights Plan
--------------------------------
On November 14, 2001, the Company's Board of Directors adopted a Shareholder
Rights Plan, which declared a dividend of one Common Stock Purchase Right (a
Right) for each outstanding share of common stock of the Company to shareholders
of record on December 21, 2001. Each Right entitles the holder to purchase from
the Company one share of common stock at a purchase price of $15 per share. In
the event of the acquisition of or tender offer for 20% or more of the Company's
outstanding common stock by certain persons or group without the Board of
Directors' consent, such purchase price will be adjusted to equal fifty percent
of the average market price of the Company's common stock for a period of thirty
consecutive trading days immediately prior to the event. Until the Rights become
exercisable, they have no dilutive effect on the Company's earnings per share.
The Rights, which are non-voting and exercisable until November 30, 2011, can be
redeemed by the Company in whole at a price of $.001 per Right at any time prior
to the acquisition by certain persons or group of 50% of the Company's common
stock. Separate certificates for the Rights will not be distributed, nor will
the Rights be exercisable, until either (i) a person or group acquires
beneficial ownership of 20% or more of the Company's common stock or (ii) the
tenth day after the commencement of a tender or exchange offer for 20% or more
of the Company's common stock. Following an acquisition of 20% or more of the
Company's common shares, each Right holder, except for the 20% or more
stockholder, can exercise their Right(s), unless the 20% or more stockholder has
offered to acquire all of the outstanding shares of the Company under terms that
a majority of the independent Directors of the Company have determined to be
fair and in the best interest of the Company and its stockholders. On May 7,
2002, the Company's shareholders approved an amendment of the Company's
Certificate of Incorporation to increase the total number of shares of common
stock authorized to issue from 10,000,000 to 25,000,000 shares.
- 46 -
NOTE 10. Earnings (Loss) Per Share
-----------------------------------
The following table provides the components of the basic and diluted loss per
share (EPS) computations:
2006 2005 2004
---- ---- ----
Basic and Diluted EPS Computation
Net loss $ (546,555) $(2,884,621) $(2,690,594)
Weighted average shares
outstanding 4,571,905 4,566,621 4,597,961
Basic and diluted loss per share $ (.12) $ (.63) $ (.59)
============ =========== ===========
In 2006, 2005 and 2004, 103,218, 148,645 and 238,717 shares, respectively, have
been omitted from the calculation of diluted EPS as their effect would have been
antidilutive.
NOTE 11. Commitments and Contingencies
---------------------------------------
The Company leases vehicles and occupies certain facilities under operating
leases that expire at various dates through 2009. The leases, which cover
periods from three to eight years, generally provide for renewal options at
specified rental amounts. The aggregate operating lease commitment at September
30, 2006 was $517,000 with minimum rentals for the fiscal years shown as
follows: 2007 - $379,000; 2008 - $119,000; and 2009 - $19,000.
The Company is a party to employment agreements with certain of its officers
that provide for, among other things, the payment of compensation if there is a
change in control without Board of Director approval (as defined in the
agreements). The contingent liability under such change in control provisions at
September 30, 2006 was approximately $2.0 million. Certain of the Company's
employment agreements with its officers provide for a severance benefit upon
certain occurrences or at a specified date of retirement, absent a change in
control, aggregating $2.1 million at September 30, 2006. The Company is
amortizing such obligation to expense on the straight-line method through the
specified dates of retirement. Such expense amounted to approximately $93,000
and $289,000 in fiscal 2006 and 2005, respectively.
The Company has agreements with certain of its officers to provide a deferred
compensation benefit in the form of 103,898 shares of common stock currently
held by the Company in treasury. Such shares vest upon retirement or, in the
case of 70,647 shares, the expiration of one officer's employment agreement in
September 2006. All shares vest earlier under certain occurrences including
death, involuntary termination or a change in control of the Company. The market
value of such shares approximated $630,000 at the dates of grant, which is being
amortized on the straight-line method through the specified dates of retirement
or over the term of the employment agreement.
NOTE 12. Litigation
--------------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems and other products that represent
significant sales to the Company. Among other things, the suit seeks past and
enhanced damages, injunctive relief and attorney's fees. In January 2006, the
Company received the plaintiff's claim for past damages through December 31,
2005 that approximated $11.7 million plus pre-judgment interest. The Company and
its outside patent counsel believe that the complaint against the Company is
without merit. The Company is vigorously defending itself and is a party to a
joint defense with certain other named defendants. The Company is unable to
reasonably estimate a range of possible loss, if any, at this time. Although the
Company believes that it has meritorious defenses to such claims, there is a
possibility that an unfavorable outcome could ultimately occur that could result
in a liability that is material to the Company's results of operations and
financial position. The Company has held discussions with the plaintiff in the
interest of settling the case. However, there can be no assurance that any
settlement can be reached.
- 47 -
In connection with this suit, the Company petitioned the U.S. Patent and
Trademark Office (USPTO) for reexamination of the plaintiff's patent. In April
2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company citing the existence of
prior art of the Company and another defendant. The plaintiff has appealed the
USPTO ruling and has additional appeals available to them in the USPTO and,
thereafter, in the Court of Appeals for the Federal Circuit. On June 30, 2006,
the Federal District Court granted the defendants' motion for continuance
(delay) of the trial, pending the outcome of the USPTO's reexamination office
proceedings.
In the normal course of business, the Company is a party to certain other claims
and litigation. Management believes that the settlement of such claims and
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.
NOTE 13. Related Party Transactions
------------------------------------
As of September 30, 2006, CBC Co., Ltd. and affiliates ("CBC") owned
approximately 11.9% of the Company's outstanding common stock. The Company,
which has been conducting business with CBC for approximately twenty-seven
years, imports certain finished products and components through CBC and also
sells its products to CBC. The Company purchased approximately $404,000,
$566,000 and $651,000 of products and components from CBC in fiscal years 2006,
2005, and 2004, respectively, and the Company sold $205,000, $362,000 and
$712,000 of products to CBC for distribution in fiscal years 2006, 2005, and
2004, respectively. At September 30, 2006 and 2005, the Company owed $11,000 and
$37,000, respectively, to CBC and CBC owed $5,000 and $32,000, respectively, to
the Company resulting from purchases of products.
Note 14: Asset Purchase
------------------------
On October 1, 2004, the Company entered into an agreement to purchase all of the
operating assets of Videotronic Infosystems GmbH ("Videotronic"), a Germany
based video system supplier which was operating under insolvency protection, for
700,000 Eurodollars (approximately $868,000). The purchase was ratified by
Videotronic's Creditors on November 26, 2004. During the year ended September
30, 2005, the Company recognized a $211,000 extraordinary gain on the recovery
of Videotronic net assets in excess of their allocated purchase price. Such gain
includes adjustments to assigned values of accounts receivable, inventories,
trade payables and severance liabilities. Pro forma results of operations have
not been presented due to the relative insignificance of the operating assets
acquired.
Note 15: Recent Accounting Pronouncements
------------------------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes --
an interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect that the adoption
of FIN 48 will have a material impact on its consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be
exchanged to sell an asset or transfer a liability in an orderly transaction
between market participants. Further, the standard establishes a framework for
measuring fair value in generally accepted accounting principles and expands
certain disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company does not expect that
the adoption of SFAS 157 will have a material impact on its consolidated
financial position, results of operations or cash flows.
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In September 2006, the U.S. Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"). SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff believes
that registrants should quantify errors using both a balance sheet and an income
statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective for fiscal years beginning after
November 15, 2006. The Company does not expect that the adoption of SAB 108 will
have a material impact on its consolidated financial position, results of
operations or cash flows.
NOTE 16. Quarterly Financial Data (unaudited)
----------------------------------------------
Earnings (Loss)
Net Per Share
Quarter Net Gross Income ---------------
Ended Sales Profit (Loss) Basic Diluted
----- ----- ------ ------ ----- -------
Fiscal 2006
-----------
December $14,259,000 $5,636,000 $ 147,000 $ .03 $ .03
March 12,223,000 4,578,000 (848,000) (.19) (.19)
June 14,675,000 5,914,000 37,000 .01 .01
September 15,122,000 5,966,000 117,000 .03 .03
----------- ----------- ----------- ------ ------
Total $56,279,000 $22,094,000 $ (547,000) $ (.12) $ (.12)
=========== =========== =========== ====== ======
Fiscal 2005
-----------
December $15,582,000 $5,868,000 $ (740,000) $ (.16) $ (.16)
March 12,802,000 4,708,000 (1,169,000) (.26) (.26)
June 13,991,000 5,319,000 (548,000) (.12) (.12)
September 13,681,000 5,101,000 (428,000) (.09) (.09)
----------- ----------- ----------- ------ ------
Total $56,056,000 $20,996,000 $(2,885,000) $ (.63) $ (.63)
=========== =========== =========== ====== ======
The Company has not declared or paid cash dividends on its common stock for any
of the foregoing 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 II
VICON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 2006, 2005, and 2004
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
----------- --------- -------- ---------- ---------
Allowance for uncollectible
accounts:
September 30, 2006 $1,297,000 $ 48,000 $ 20,000 $1,325,000
========== ======== ======== ==========
September 30, 2005 $1,162,000 $198,000 $ 63,000 $1,297,000
========== ======== ======== ==========
September 30, 2004 $1,135,000 $192,000 $165,000 $1,162,000
========== ======== ======== ==========
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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 /s/ Kenneth M. Darby By /s/ John M. Badke
----------------------- --------------------
Kenneth M. Darby John M. Badke
Chairman and Senior Vice President, Finance
Chief Executive Officer and Chief Financial Officer
December 29, 2006
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.
/s/ Kenneth M. Darby December 29, 2006
--------------------- ---------------------
Kenneth M. Darby Chairman and CEO Date
/s/ Clifton H.W. Maloney December 29, 2006
------------------------ ---------------------
Clifton H.W. Maloney Director Date
/s/ Peter F. Neumann December 29, 2006
--------------------- ---------------------
Peter F. Neumann Director Date
/s/ W. Gregory Robertson December 29, 2006
------------------------ ---------------------
W. Gregory Robertson Director Date
/s/ Arthur D. Roche December 29, 2006
--------------------- ---------------------
Arthur D. Roche Director Date
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