<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 31, 1998
REGISTRATION NO. 333-46841
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
VICON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 11-2160665
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
89 ARKAY DRIVE
HAUPPAUGE, N.Y. 11788
(516) 952-2288
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
KENNETH M. DARBY
PRESIDENT
VICON INDUSTRIES, INC.
89 ARKAY DRIVE
HAUPPAUGE, N.Y. 11788
(516) 952-2288
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
MICHAEL E. SCHOEMAN THEODORE LAPIER
Schoeman, Marsh & Updike, LLP Whitman Breed Abbott & Morgan LLP
60 East 42nd Street, 39th Floor 200 Park Avenue
New York, N.Y. 10165 New York, N.Y. 10166
(212) 661-5030 (212) 351-3000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
VICON INDUSTRIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO
ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NO. FORM S-2 CAPTION CAPTION OR LOCATION IN PROSPECTUS
----- ---------------------------------------------------- ----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................ Forepart of Registration Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Summary; Risk Factors
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Not Applicable
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Principal and Selling Shareholders
8. Plan of Distribution................................ Underwriting
9. Description of Securities to Be Registered.......... Outside Front Cover Page; Price Range of Common
Stock and Dividends; Description of Capital Stock
10. Interests of Named Experts and Counsel.............. Legal Matters
11. Information With Respect to the Registrant.......... The Company; Price Range of Common Stock and
Dividends; Selected Financial and Operating Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Consolidated
Financial Statements
12. Incorporation of Certain Information by Reference... Information Incorporated by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Description of Capital Stock--Indemnification
</TABLE>
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 31, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
1,575,000 SHARES
[LOGO]
COMMON STOCK
Of the 1,575,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Vicon Industries, Inc. (the "Company") offered hereby (the
"Offering"), 1,250,000 shares are being issued and sold by the Company and
325,000 are being sold by certain selling shareholders (the "Selling
Shareholders"). The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
The Company's Common Stock is quoted on the American Stock Exchange ("AMEX")
under the symbol "VII." The last reported sale price for the Common Stock on
AMEX on March 27, 1998 was $10.91 per share. See "Price Range of Common Stock
and Dividends."
------------------------
THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) SHAREHOLDERS (2)
<S> <C> <C> <C> <C>
Per Share........................................
Total (3)........................................
</TABLE>
(1) Does not include additional compensation paid or payable to the
Underwriters. See "Underwriting" for information concerning compensation
paid and payable to the Underwriters, indemnification of the Underwriters
and other matters.
(2) Before deducting expenses payable by the Company and the Selling
Shareholders estimated at $500,000, including the Underwriters'
non-accountable expense allowance of $100,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 236,250 additional shares of Common Stock, solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be , and , respectively. See "Principal and
Selling Shareholders" and "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. The Underwriters reserve
the right to withdraw, cancel or modify the Offering and to reject any orders in
whole or in part. It is expected that delivery of certificates representing the
shares of Common Stock will be made against payment therefor on or about
, 1998 at the offices of Fahnestock & Co. Inc. in New York, N.Y.
FAHNESTOCK & CO. INC. SOUTHEAST RESEARCH PARTNERS, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[Two-page schematic of Company-engineered CCTV system, including pictures
and description of various Vicon products, including NOVA CPU, MATRIX 66 video
switcher, INTELLIGENT KEYBOARD, PROTECH software, DIGITEK digital motion
detector, AURORA digital video multiplexer, SURVEYOR mini-dome system and VISTAR
pan-and-tilts.]
{LOGO}
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF COMMON STOCK,
INCLUDING THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE
OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE
PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
VICON-Registered Trademark-, MATRIX 66-Registered Trademark-, NOVA-TM-,
SURVEYOR-TM-, PROTECH-Registered Trademark-, VISTAR-TM-,
VICOAX-Registered Trademark-, AURORA-TM- and DIGITEK-TM- ARE TRADEMARKS OF VICON
INDUSTRIES, INC.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at its regional offices located at Seven
World Trade Center, 13th Floor, New York, N.Y. 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
part of such material may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission also maintains a web site (http: //www.sec.gov) that contains
reports, proxy, and information statements and other information regarding
registrants, such as the Company, that file electronically with the Commission.
The Company's Common Stock is listed on the American Stock Exchange under the
symbol "VII" and investors may contact the American Stock Exchange at (212)
306-1000 to arrange to examine similar information at its offices at 86 Trinity
Place, New York, N.Y. 10006-1881.
The Company has filed with the Commission a registration statement on Form
S-2 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") with respect to the shares of Common Stock offered
hereby. This Prospectus, which constitutes part of the Registration Statement,
does not contain all of the information contained in the Registration Statement.
For further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement. Statements contained
herein concerning the provisions of any contract or other document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission are
not necessarily complete, and in each instance, reference is made to the copy of
such contract or other document as so filed. Each such statement is qualified in
its entirety by such reference.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, any Selling Shareholders or any Underwriter. This Prospectus
does not constitute an offer to sell or solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus nor any offer, solicitation or sale made hereunder shall, under any
circumstances, create an implication that there has been no change in the
affairs of the Company since the dates as of which information is furnished or
the date hereof.
INFORMATION INCORPORATED BY REFERENCE
The following documents have been filed by the Company with the Commission
and are hereby incorporated by reference into this Prospectus: (1) Annual Report
on Form 10-K for the fiscal year ended September 30, 1997; (2) Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997; and (3) Proxy Statement
dated March 2, 1998. All other documents and reports filed pursuant to Sections
13(a) or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of this Offering shall be deemed to be incorporated by
reference in this Prospectus and to be made a part hereof from the date of the
filing of such reports and documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of Common Stock, to whom this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all documents
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in the document
which this Prospectus incorporates). Requests for such documents should be
directed to Vicon Industries, Inc., 89 Arkay Drive, Hauppauge, N.Y. 11788
Attention: Corporate Secretary. The Company's executive office telephone number
is (516) 952-2288.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. STATEMENTS THAT ARE NOT
HISTORICAL FACTS, INCLUDING STATEMENTS ABOUT THE COMPANY'S PROSPECTS AND
STRATEGIES AND ITS EXPECTATIONS ABOUT EXPANSION INTO NEW MARKETS, GROWTH IN
EXISTING MARKETS, ENHANCED OPERATING MARGINS OR GROWTH IN ITS BUSINESS, ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS
AND EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED IN "RISK FACTORS." UNLESS OTHERWISE INDICATED, THE
INFORMATION CONTAINED IN THIS PROSPECTUS DOES NOT GIVE EFFECT TO THE EXERCISE OF
THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
UNLESS OTHERWISE STATED, REFERENCES IN THIS PROSPECTUS TO THE YEARS 1997,
1996, 1995, 1994 AND 1993 REFER TO THE FISCAL YEARS ENDED SEPTEMBER 30, 1997,
1996, 1995, 1994 AND 1993, RESPECTIVELY, AND REFERENCES TO THE FIRST QUARTER OF
1998 AND THE FIRST QUARTER OF 1997 RELATE TO THE THREE-MONTH PERIODS ENDED
DECEMBER 31, 1997 AND 1996, RESPECTIVELY.
THE COMPANY
The Company designs, manufactures, assembles and markets a wide range of
closed circuit television ("CCTV") systems and system components used for
security, surveillance, safety and control purposes by a broad group of end
users. A CCTV system is a private video system that can transmit and receive
video, audio and data signals in accordance with the operational needs of the
user. The Company's primary focus is the design and sale of software-based
engineered CCTV systems and components that it sells worldwide, primarily to
installing dealers, system integrators, government entities and distributors.
The Company's products are typically utilized for visual crime deterrence, for
visual documentation, for observation of inaccessible or hazardous areas, to
enhance safety, to obtain cost savings (such as lower insurance premiums), to
manage control systems and to improve the efficiency and effectiveness of
personnel. The Company's products are used in office buildings, manufacturing
plants, apartment complexes, large retail stores, government facilities,
transportation operations, prisons, casino gaming facilities, sports arenas,
health care facilities and financial institutions. The Company's products have
been used at various high profile locations worldwide, including: O'Hare
International Airport, Chicago; Foxwoods Resort & Casino, Connecticut; Bank One
Ballpark, Phoenix; Henry Ford Hospital, Detroit; Fort Bragg, North Carolina;
City of Sao Paulo Traffic Control, Brazil; Xiamen International Airport, China
and several locations of the U.S. Postal Service.
In 1993, the Company commenced a strategic redirection of its business by
shifting its product focus from hardware-oriented CCTV components to
software-based CCTV systems solutions, some of which incorporate digital
technology. As part of the strategic redirection, the Company also developed
project design and management capabilities, upgraded its sales organization,
built a customer service and technical support group, increased operating
efficiency and reduced product costs by changing suppliers. As a result, the
Company's financial performance has improved. Gross profit margins have
increased from 25.4% in 1996 to 31.1% in the first quarter of 1998. Net sales
grew 19.3% in 1997 to $51.5 million, while net income increased to $1.6 million
from $300,000 in 1996.
According to statistics compiled and published by the Security Industry
Association (the "SIA"), in its 1997 SECURITY INDUSTRY MARKET OVERVIEW, the
wholesale CCTV equipment market in the U.S. was estimated to be $840 million in
1997. Based in part upon published data for Europe, the Company believes the
worldwide market was approximately $1.7 billion in 1997. The Company believes
that demand for CCTV products is influenced by (i) the acceptance of CCTV for
crime deterrence; (ii) the perceived need for increased safety in response to
publicized acts of crime; (iii) the use of CCTV as a cost effective alternative
to security personnel; (iv) lower prices due to technological advancements and
competition which increase affordability; and (v) the movement towards the
integration of security systems.
2
<PAGE>
In the U.S., the Company's products are sold to installing dealers and
integrators of various types of security systems and internationally to
independent distributors and major installation companies. Domestic sales are
made by in-house field sales engineers and several independent manufacturer's
representatives. This effort is supported by an in-house customer and technical
services group. The Company sells internationally by direct export and through
Vicon Industries (U.K.), Ltd. ("Vicon U.K."), its European sales subsidiary. The
Company's principal sales offices are located in Long Island, Atlanta and
Fareham, England.
The Company's objective is to be a leading provider of high-end engineered
CCTV systems worldwide. The key elements of its growth strategy are as follows:
ACCELERATE NEW PRODUCT DEVELOPMENT AND ENHANCEMENT. The Company intends to
accelerate its new product development and enhancement program. As a result of
its research and development efforts, in the last two years, the Company has
introduced, among other products, the AURORA digital video multiplexer and the
SURVEYOR line of domed camera systems. See "Business--Products." In addition,
the Company intends to continue to emphasize the improvement of the
technological capabilities of its existing products and the development of new
products which incorporate digital technology.
EXPAND DOMESTIC SALES AND MARKETING ACTIVITIES. The Company intends to
increase its domestic sales and marketing efforts by (i) expanding its domestic
sales organization, (ii) increasing promotional activities to further develop
brand name identity with dealers and end users and (iii) emphasizing in-house
dealer training. In addition, the award of an exclusive one-year renewable
contract with the U.S. Postal Service in July 1997 is anticipated to increase
the Company's exposure to additional dealers.
INCREASE INTERNATIONAL SALES PRESENCE IN SELECT MARKETS. The Company
intends to expand the market for its existing and new products by increasing its
penetration of international markets. The Company believes Europe, China and
Australia present opportunities for growth. The Company's international sales
were $18.7 million, or 36%, of net sales, in 1997, and $5.9 million, or 39% of
net sales, in the first quarter of 1998. The Company believes that by opening
additional independent or Company-operated sales offices and increasing its
distribution channels outside the U.S., its ability to penetrate these markets
would be enhanced. The Company helped to establish an independent sales company
in China in July 1997 to further its marketing initiatives in Asia, and in
February 1998 it acquired a 30% ownership interest in such company.
PROMOTE SUPERIOR CUSTOMER AND TECHNICAL SUPPORT SERVICES. The Company
believes its commitment to service and technical support of CCTV systems enables
it to build strong relationships with dealers and end users. The Company offers
training on its proprietary systems, technical classes, installation assistance,
field support and project design and management capabilities to installing
dealers.
PURSUE STRATEGIC INITIATIVES. The Company intends to selectively pursue
strategic alliances and investment and acquisition opportunities as they arise.
Strategic initiatives may include the opening of independent or Company-operated
sales offices or other similar arrangements with third parties to broaden the
Company's sales presence on a worldwide basis.
The Company's principal executive offices are located at 89 Arkay Drive,
Hauppauge, N.Y. 11788, and its telephone number is (516) 952-2288.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company....................... 1,250,000 shares
Common Stock offered by the
Selling Shareholders.......... 325,000 shares
Common Stock to be outstanding
after this Offering (1)....... 4,311,658 shares
Use of Proceeds................. Payment of bank indebtedness, payment of interest-bearing
accounts payable and term loan to related party, and for
other general corporate purposes, including working
capital.
Risk Factors.................... This Offering involves a high degree of risk. Prospective
investors should review and consider the information set
forth under "Risk Factors."
AMEX Symbol..................... VII
</TABLE>
- ------------------------
(1) Does not include (i) 392,232 shares of Common Stock reserved for issuance
upon exercise of options granted or which may be granted under the Company's
1986 Incentive Stock Option Plan, 1994 Incentive Stock Option Plan, 1994
Non-Qualified Stock Option Plan for Outside Directors, 1996 Incentive Stock
Option Plan and 1996 Non-Qualified Stock Option Plan for Outside Directors
(collectively, the "Stock Option Plans"); (ii) 45,952 shares of Common Stock
held in treasury and deliverable as deferred compensation to Kenneth M.
Darby, the Company's President and Chief Executive Officer, upon his
retirement or earlier under certain conditions; and (iii) 157,500 shares of
Common Stock reserved for issuance upon exercise of the Underwriters'
Warrants. See "Management" and "Underwriting."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $ 45,923 $ 47,714 $ 43,847 $ 43,191 $ 51,519 $ 11,298 $ 14,874
Gross profit......................... 9,274 10,714 9,546 10,957 14,475 3,181 4,629
Operating expenses................... 10,315 9,901 9,800 9,732 11,725 2,721 3,216
Operating income (loss).............. (1,041) 813 (254) 1,226 2,750 460 1,413
Interest expense..................... 555 784 1,013 882 1,144 264 339
Income (loss) before income taxes.... (1,858) 74 (1,267) 385 1,647 229 1,074
Net income (loss).................... $ (1,875) $ 45 $ (1,347) $ 300 $ 1,565 $ 215 $ 1,009
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Earnings (loss) per share (1)
Basic.............................. $ (.68) $ .02 $ (.49) $ .11 $ .56 $ .08 $ .34
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Diluted............................ $ (.68) $ .02 $ (.49) $ .11 $ .52 $ .08 $ .31
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Shares used to compute earnings
(loss) per share (1)
Basic.............................. 2,763 2,763 2,763 2,765 2,804 2,777 3,001
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
Diluted............................ 2,763 2,763 2,763 2,841 3,022 2,870 3,293
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------
<S> <C> <C>
AS ADJUSTED
BALANCE SHEET DATA: ACTUAL (2)(3)
--------- -----------------
Cash................................................................................ $ 225 $ 4,012
Working capital..................................................................... 15,284 24,931
Total assets........................................................................ 31,279 35,066
Interest-bearing accounts payable to related party.................................. 6,401 --
Long-term debt...................................................................... 7,216 4,476
Shareholders' equity................................................................ 11,931 24,319
</TABLE>
- ------------------------
(1) Pursuant to new FASB standard No. 128. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--New Accounting
Standard."
(2) Adjusted to reflect the sale of 1,250,000 shares of Common Stock offered by
the Company hereby at an assumed public offering price of $11.00 and the
application of the net proceeds therefrom in the manner described under "Use
of Proceeds."
(3) Reflects agreement in principle with a related party, that upon closing of
this Offering and the Company's repayment of $3.7 million ($1.9 million of
interest-bearing accounts payable and $1.8 million outstanding under a term
loan), the balance of approximately $4.5 million of interest-bearing
accounts payable to the related party will be converted into a new five-year
term loan. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
5
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements. Actual results
could differ materially from those projected in the forward-looking statements
as a result of any number of factors discussed elsewhere in this Prospectus,
including, without limitation, under the captions "Prospectus Summary;" "Risk
Factors;" "Use of Proceeds;" "Capitalization;" "Selected Financial Data;"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." When used in this Prospectus, the words
"anticipate," "expect," "estimate," "intend," "believe," "project," and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks, uncertainties and assumptions. Should one or more
of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
expected, estimated, intended, believed or projected. Among the key factors that
may have a direct bearing on the Company's business, financial condition and
results of operations are the effects of risks associated with loss of a
significant customer, product design and development, possible future strategic
investments or alliances, foreign currency risks, dependence on manufacturers
and suppliers, the lack of assurance of continued profitability and history of
losses, limited public float for the Common Stock, the volatility of the trading
market for the Common Stock and general economic conditions, risks associated
with international sales and risks associated with the occurrence of the year
2000. The Company assumes no obligation to update its forward-looking statements
or to advise of changes in the assumptions and factors on which they are based.
Given these uncertainties, prospective purchasers are cautioned not to place
undue reliance on such forward-looking statements.
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS, THE FOLLOWING
RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING ANY SHARES OF COMMON STOCK. THE DESCRIPTION OF THESE
RISK FACTORS IS BASED ON MANAGEMENT'S CURRENT EXPECTATIONS. THESE RISK FACTORS
ARE SUBJECT TO A NUMBER OF UNCERTAINTIES WHICH COULD CAUSE THE COMPANY'S ACTUAL
PERFORMANCE AND OTHER MATTERS TO DIFFER SIGNIFICANTLY.
NO ASSURANCE OF CONTINUED PROFITABILITY; FLUCTUATING OPERATING RESULTS;
SUBSTANTIAL INDEBTEDNESS
The Company had net income of approximately $300,000 and $1.6 million for
1996 and 1997, respectively, and net income of $1.0 million for the first
quarter of 1998. However, for all years between 1989 and 1995 (other than 1994),
the Company experienced net losses. In addition, cash flow from operations was
negative in 1996 and 1997, primarily due to an increase in inventory and
accounts receivable. Thus, although the Company has reported net income for the
past two years and the most recent quarter, there can be no assurance that this
trend will continue.
Historically, the Company's operating results have fluctuated annually and
quarterly. Future annual and quarterly operating results and net income of the
Company may also fluctuate significantly as a result of a variety of factors,
including, but not limited to, the loss of any significant customer, including
the U.S. Postal Service; changes in the demand for the Company's products due to
competition or other factors, including foreign or domestic economic recession;
fluctuations in foreign currency exchange rates; the timing of product
development; the nature, size, timing and shipment of individual product or
supply orders; the general mix of products sold; worldwide economic conditions;
higher effective tax rates due to the use of all available net operating loss
carryforwards; costs related to the expansion of the Company's operations;
unanticipated litigation and other costs associated with defending its
proprietary rights and other rights; and changes in government regulations. Each
of the foregoing factors, among others, could have an adverse effect on the
Company's operating results and profitability.
In addition, the Company has substantial indebtedness, which may impair the
ability of the Company to obtain additional financing in the future; require a
substantial portion of operating cash flow to be
6
<PAGE>
dedicated to the repayment of debt, thereby reducing funds available to the
Company for other purposes; limit the Company's flexibility in planning for or
reacting to changes in general economic conditions; and make the Company
vulnerable in the event of a downturn in its business.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company, which,
in turn, will be affected by prevailing economic conditions and financial,
competitive and similar factors. The Company's loan agreements contain
covenants, that, among other things, require the Company to maintain certain
levels of net worth, earnings and debt service coverage and certain ratios of
interest coverage and debt-to-net worth. In addition, substantially all of the
Company's assets are pledged to secure its indebtedness under its loan
agreements. Although the Company believes that, based upon current levels of
operations, its cash flow from operations, together with external sources of
capital, will be adequate to make required payments on its debt, finance
anticipated capital expenditures and fund working capital, there can be no
assurance in this regard. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." In addition, the Company is
presently negotiating with its bank lender to amend its existing credit
agreement to, among other things, increase the borrowing limit, reduce the
interest rate and extend the term. However, there can be no assurance as to the
definitive terms of any such amended agreement. See "Use of Proceeds."
RISKS ASSOCIATED WITH PRODUCT DESIGN AND DEVELOPMENT
The Company's business strategy emphasizes the development of new engineered
CCTV systems and related components and the enhancement of existing products.
Further, the market for engineered CCTV systems is characterized by changing
technology, such as the movement to digital technologies for the storage and
retrieval of video data. There can be no assurance that the Company will be able
to keep pace with such technological developments or develop new CCTV systems or
products. In addition, the CCTV marketplace experiences frequent new product
introductions and changing customer requirements. For the Company to meet these
changing conditions, significant planning, design, development and testing is
required throughout each level of product design and development. Such activity
requires substantial resources in terms of capital and qualified personnel.
There can be no assurance that the Company will have such resources at its
disposal. Furthermore, any significant delays in product development or
introduction, or any failure by the Company to anticipate or to respond quickly
to changing customer requirements, could cause potential customers to delay or
decide against the purchase of the Company's systems or products and could
render its existing products uncompetitive. There can be no assurance that the
Company's products will remain competitive and will not become obsolete.
DEPENDENCE ON MANUFACTURERS AND SUPPLIERS
The Company is substantially dependent upon outside manufacturers and
suppliers to manufacture and assemble its products and will continue to be
dependent on such entities in the future. In 1997, approximately 22% of the
Company's purchases of components and finished products were from Chun Shin
Electronics, Inc. ("CSE"). CSE is a South Korean joint venture equally owned by
the Company and Chun Shin Industries, Inc. ("CSI"). CSI is an entity controlled
by Mr. Chu S. Chun, who is a substantial shareholder of the Company and a
director nominee. Mr. Chun is the President of CSE and has operating control of
CSE. Additionally, in 1997, the Company purchased approximately 23% of its
components and finished products from Chugai Boyeki Company, Ltd. (such company,
together with its affiliates and associates, are referred to herein as "CBC"), a
supplier and sourcing agent for the Company. CBC is also a substantial
shareholder and a competitor of the Company. See "--Competition," "Certain
Transactions" and "Principal and Selling Shareholders."
The Company's relationships with outside manufacturers, assemblers and
suppliers are not covered by formal contractual agreements. Although the Company
has held preliminary discussions concerning the possible acquisition by the
Company of CSI, no agreement has been reached in this regard. See "--Risks
7
<PAGE>
Associated with Future Strategic Initiatives." The loss of CSE, CBC or any other
significant manufacturer, assembler or supplier for any reason, or the extent to
which such entities encounter difficulties, including those associated with
deteriorating local economies, that delay shipment to the Company or that affect
the quality of items supplied to the Company, would impair the Company's ability
to meet its obligations to customers and would have a material adverse effect on
the Company's business. While the Company believes that alternate manufacturers,
assemblers and suppliers exist, there can be no assurance that adequate
arrangements could be found in a timely manner or on comparable terms or with
the level of support currently provided to the Company by its existing
manufacturers, assemblers and suppliers. See "Business--Manufacturing and
Purchasing."
DEPENDENCE ON INDEPENDENT RESELLERS
The Company primarily sells its products to independent installing dealers
and other resellers who, in turn, sell to end users. Consequently, the Company
is dependent upon installing dealers and other resellers to sell its products to
their customers and will continue to be dependent upon such dealers and
resellers in the future. Dealers and resellers generally purchase from the
Company to fill specific orders from their customers. As a result, there can be
no assurance that installing dealers and resellers will continue to purchase the
Company's products. Further, such dealers generally are not exclusive to the
Company and are free to sell, and do sell, competing CCTV products. See
"Business--Marketing and Sales."
RISKS ASSOCIATED WITH INVENTORY MANAGEMENT
The Company maintains inventory at levels which are based upon factors such
as its historical sales rates, backlog and anticipated future sales. Generally,
the Company places orders with manufacturers, assemblers and suppliers based in
part on management's estimates of future orders from its customers. Such
estimates may deviate substantially from actual orders. In the event that
subsequent orders fall short of original estimates, the Company would likely be
left with excess inventory. Significant excess inventory could result in price
discounts, increased inventory carrying costs and inventory write-downs. On the
other hand, if the Company fails to have an adequate supply of products
manufactured or assembled on a timely basis, the Company may, as a result, lose
sales opportunities. See "--Dependence on Manufacturers and Suppliers." Despite
the Company's efforts to adjust its production schedule based on anticipated
customer demand, there can be no assurance that the Company will maintain
appropriate inventory levels. Further, due to ordinary course time delays
between purchasing, production and shipping of product, the Company must make
firm purchase commitments to manufacturers and assemblers four to nine months in
advance of required delivery. Inability to maintain appropriate inventory levels
due to incorrect estimates of future orders or time delays with respect to
product delivery may have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Backlog" and
"Business--Manufacturing and Purchasing." Additionally, the obsolescence of a
significant amount of inventory due to changes in customer preferences or
technological improvements could have a material adverse effect on the Company's
operations. The Company experienced approximately a 2.4x inventory turnover rate
in 1997, but there can be no assurance as to the rate of inventory turnover in
the future. See "--Risks Associated with Product Design and Development" and
"Business--Inventory."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
Sales to customers outside the U.S. accounted for approximately 36% of the
Company's net sales in 1997 and 39% of net sales in the first quarter of 1998.
The Company's principal foreign markets are Europe and the Pacific Rim, which
together accounted for approximately 82% of international sales in 1997. Since
December 1997, the Company has experienced a decrease in demand for its products
in certain Asian countries, due principally to the deterioration of local
economies. There can be no assurance that the decrease will not adversely impact
the Company's overall sales growth rate for the balance of 1998 and beyond.
Sales to customers in foreign countries are subject to a number of risks,
including (i) general
8
<PAGE>
economic conditions in foreign countries; (ii) fluctuating exchange rates which
may affect the level of foreign sales; (iii) delays in collecting or the
inability to collect receivables; (iv) the possibility of countries imposing
import tariffs or adopting other restrictions on foreign trade; (v) the
difficulty of enforcing rights; (vi) the inability to obtain U.S. export
licenses; and (vii) the difficulty of protecting proprietary rights. See
"--Foreign Currency Risks" and "--Protection, Defense and Use of Intellectual
Property; Possible Infringement." There can be no assurance that one or more of
these factors will not have a material adverse effect on the Company's business,
financial condition or results of operations.
COMPETITION
The Company operates in a highly competitive marketplace both domestically
and internationally. Most of the Company's competitors are larger companies
whose financial resources and scope of operations are substantially greater than
those of the Company. The Company's principal engineered systems competitors
include the following companies or their affiliates: Checkpoint Systems, Inc.,
Matsushita Electric Industrial Co., Ltd. (Panasonic) ("Matsushita"), Pelco Sales
Company, Philips Communications and Security Systems, Inc. (Burle Industries,
Inc.), Sensormatic Electronics Corporation and Ultrak, Inc. In addition, some
consumer video electronic companies or their affiliates, including Matsushita
(Panasonic), Mitsubishi Electric Corporation, Sanyo Electric Co., Ltd. and Sony
Corporation, compete with the Company for the sale of video products, including
cameras, monitors and VCRs. CBC, an affiliate of the Company, also competes with
the Company in various markets, principally in the sale of video products and
systems. There can be no assurance that the Company's current products, products
under development, or ability to develop new or enhanced products will be
sufficient to enable it to compete effectively with its competitors. See
"Business--Competition" and "Certain Transactions."
FOREIGN CURRENCY RISKS
The Company's foreign sales can be adversely affected by fluctuations in
currency exchange rates and there can be no assurance that such effect will not
be material. Recent weakening of the currencies of Indonesia, Malaysia,
Singapore, South Korea and other Asian countries against the U.S. Dollar has
made the Company's products more expensive, and has reduced demand for the
Company's products in such countries. Further weakening of such currencies, or
weakening of the currencies of other countries, may further reduce demand for
the Company's products in the affected countries. In addition, Vicon U.K. sells
products to customers in Europe denominated in British Pounds Sterling. A strong
British Pound relative to the currencies of the countries in which Vicon U.K.
sells products could have a similar adverse effect on sales of Vicon U.K.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
The Company has recently experienced significant growth in its operations.
The Company's future operating results will depend, in part, on its ability to
effectively manage such growth in the future. The Company's success in this
regard will depend upon the availability of working capital to support such
growth, and its ability to accurately forecast future sales, broaden its
management team and attract, hire and retain additional skilled employees. See
"Business--Strategy." There can be no assurance that the Company will be able to
manage future growth effectively. Failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
Due to recent growth in operations, the Company may need to expand its
principal operating facility or to obtain adequate alternative space to meet
growing capacity demands. The failure to expand its current facility or to
obtain adequate alternative space in response to the Company's increasing need
for space could adversely affect the Company's operations.
9
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the performance
of a number of senior management, engineering, operations and sales personnel,
including Kenneth M. Darby, President, Chief Executive Officer and a director;
Arthur D. Roche, Executive Vice President, Chief Financial Officer, Secretary
and a director; John L. Eckman, Vice President, U.S. Sales; Peter A. Horn, Vice
President, Compliance and Quality Assurance; and Yacov A. Pshtissky, Vice
President, Technology and Development. The Company has entered into employment
agreements with each of these individuals which provide that, if his employment
with the Company is terminated, he will not compete with the Company for varying
periods after such termination. There can be no assurance that such non-compete
provisions will be enforceable against these individuals. The Company does not
have key-man life insurance policies in respect of any of its officers. The loss
of the services of one or more of these key employees could have a material
adverse effect on the Company. The Company believes that its future success will
depend in part on its continued ability to attract, motivate, and retain highly
skilled and qualified technical, managerial, operations, sales, and marketing
personnel, and its failure to do so could adversely affect its operations. See
"Business" and "Management."
RISKS ASSOCIATED WITH FUTURE STRATEGIC INITIATIVES
The Company's growth strategy includes the possibility of strategic
investments in, strategic alliances with, and acquisitions of, entities that
complement or expand the Company's current operations, production or marketing
capabilities. Each of the foregoing actions, if pursued by the Company, involves
significant risks. Such risks include, among others, the identification of
appropriate candidates to invest in, partner with or acquire and the capital
requirements of such candidates; the potential disruption of such activity on
the Company's ongoing business; the inability of management to capitalize on the
opportunities presented by such activities; the failure to successfully
incorporate any acquired technology or rights into the Company's products; the
inability to maintain or impose uniform standards, controls, procedures and
policies; and the impairment of relationships with employees and customers that
may result from changes associated with such transactions. Further, to the
extent that any such transaction involves operations located outside the U.S.,
such as the Company's recent investment in a Chinese sales company, the
transaction would involve numerous risks associated with international
operations, including possible regulatory, legal and tax obstacles or economic
and political instability. See "--Risks Associated with International Sales."
Additionally, to date, the Company has only limited experience in connection
with investments and alliances of the nature contemplated by its business
strategy and has never made an acquisition. There can be no assurance that the
Company would be successful in overcoming these risks or any other difficulties
encountered with respect to such strategic investments, alliances or
acquisitions. See "Business--Strategy."
In March 1998, the Company and Mr. Chun held preliminary discussions
concerning the possible acquisition by the Company of CSI. CSI and the Company
each own 50% of CSE, a joint venture manufacturing operation in South Korea. See
"Certain Transactions." In addition, CSI owns and operates a sales company that
sells various security products, including the Company's products, principally
within the South Korean market. No terms of such an acquisition were agreed
upon, but the Company intends to continue the discussions with Mr. Chun. There
can be no assurance that the Company and Mr. Chun will agree upon the terms of
such an acquisition or that such an acquisition will be consummated. Further, if
such an acquisition is consummated, there can be no assurance as to its effect
upon the future financial condition or operations of the Company.
PROTECTION, DEFENSE AND USE OF INTELLECTUAL PROPERTY; POSSIBLE INFRINGEMENT
Many of the Company's products employ proprietary software which is
protected by U.S. copyright. The Company considers its proprietary software to
be unique and valuable and a principal element in the differentiation of the
Company's products from its competition. There can be no assurance that these
10
<PAGE>
intellectual property rights will not be infringed or breached, that the Company
would have adequate remedies for any infringements or breaches, or that others
will not independently develop products that are similar or superior to the
Company's products or technologies, or design around proprietary rights of the
Company. In addition, the laws of certain foreign countries do not protect
intellectual property rights to the same extent or in the same manner as the
laws of the U.S. See "--Risks Associated with International Sales."
The Company does not believe that any of its products infringe on the
proprietary rights of third parties. However, any future infringement claims
against the Company, if proven, could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
although any such claims could ultimately prove to be without merit, the
necessary management attention to, and legal costs associated with, litigation
or other resolution of such claims could also adversely affect the Company. See
"Business-- Intellectual Property."
LIMITED PUBLIC FLOAT; VOLATILITY OF STOCK PRICE
The Common Stock is quoted on the American Stock Exchange. While a public
market currently exists for the Company's Common Stock, trading activity has
been limited. Average daily trading volume of the Common Stock for the four
weeks ended , 1998 was shares per day. Thus, trading of
relatively small blocks of shares of Common Stock could have a significant
impact on the price at which the Common Stock is traded. In addition, the market
price of the Common Stock may from time to time be significantly affected by a
number of factors, including variations in the Company's quarterly operating
results, evolving business prospects of the Company and its competitors and
general conditions in the economy or the financial markets. Also, the securities
markets generally have experienced significant price and volume fluctuations
from time to time in recent years. This volatility can have a significant effect
on the market prices of securities issued by many companies for reasons
unrelated to their operating performance, and these broad fluctuations may
adversely affect the market price of the Common Stock. See "Price Range of
Common Stock and Dividends."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Immediately after completion of the Offering, the Company will have
4,311,658 shares of Common Stock outstanding, of which approximately 3,139,384
will be freely tradable without restriction, except for those shares, if any,
acquired in the Offering by "affiliates" of the Company as that term is defined
in the Securities Act. Subject to the nine (9) month lock-up arrangements
described below, holders of the remaining 1,172,274 shares of Common Stock will
be eligible to sell such shares pursuant to Rule 144 ("Rule 144") under the
Securities Act at prescribed times and subject to the applicable restrictions of
Rule 144. The Company's officers, directors and certain other shareholders, who
collectively own 1,172,274 shares of Common Stock and hold options to acquire an
additional 253,700 shares of Common Stock exercisable at various dates through
2002, have agreed with the Underwriters not to offer, sell, pledge, contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of, directly or indirectly, any shares of Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for Common Stock,
or in any other manner transfer all or a portion of the economic consequences
associated with the ownership of any Common Stock, for a period of nine (9)
months after the date of this Prospectus without the prior written consent of
Fahnestock & Co. Inc. ("Fahnestock").
After the expiration of the nine (9) month lock-up period, 1,146,874 shares
of Common Stock held by affiliates of the Company will become tradable, subject
to the restrictions of Rule 144 (other than the holding period restriction,
which has been satisfied). The 25,400 shares issued to Kenneth M. Darby, the
President and the Chief Executive Officer of the Company, and Arthur D. Roche,
its Executive Vice President, Chief Financial Officer and Secretary, as
compensation in January 1997 will become tradable under Rule 144 in January
1999. The 253,700 shares of Common Stock reserved for issuance under the Stock
Option Plans will be freely tradable upon issuance.
11
<PAGE>
In addition to the foregoing shares, 45,952 shares of Common Stock are held
in treasury and deliverable as deferred compensation to Mr. Darby upon his
retirement or earlier under certain conditions. Such shares are restricted
securities that, when issued, can be sold pursuant to the restrictions of Rule
144 (see "Management --Executive Compensation"). Also, 157,500 shares of Common
Stock have been reserved for issuance upon exercise of the Underwriters'
Warrants (see "Underwriting"). Such warrants are exercisable for Common Stock at
an exercise price of $ per share during a four-year period commencing
one year from the date of this Prospectus. In addition, the Company may issue
shares of Common Stock in connection with future business acquisitions and
resales of such shares by the recipients. Such shares, if registered, could be
sold in the public market.
No predictions can be made as to the effect, if any, that market sales of
the shares described above or the availability of such shares for sale will have
on the market price for shares of Common Stock prevailing from time to time.
Sales of substantial amounts of shares of Common Stock in the public market
following the Offering could adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through an
offering of equity securities. See "Shares Eligible for Future Sale."
POSSIBLE LIMITATIONS ON UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, the Company had net operating loss ("NOL")
carryforwards of approximately $4 million for federal income tax purposes, which
begin to expire in 2007. Under section 382 of the Internal Revenue Code of 1986,
as amended, utilization of NOL carryforwards is subject to limitation after a
more-than-50% ownership change occurs over a three-year period. In general, if
an ownership change were to occur, the Company's NOL carryforwards would be
subject to an annual limitation on the amount of carryforwards generated prior
to the ownership change, which can be used in any one post-change year to offset
the Company's future taxable income. Although the Company does not believe that
the Offering itself will result in a more-than-50% ownership change, other
relevant transactions may occur in the future which could cause an ownership
change and result in the limitation on the use of the Company's NOL
carryforwards existing as of the date of such ownership change.
CONTROL BY CERTAIN SHAREHOLDERS; IMPEDIMENTS TO CHANGE OF CONTROL
Following the completion of this Offering, CBC, Mr. Chu S. Chun, and the
executive officers, officers and directors of the Company will collectively
beneficially own approximately 29.9% of the Common Stock. See "Principal and
Selling Shareholders." Accordingly, following this Offering, by virtue of their
ownership of shares, the shareholders referred to above acting together may
effectively have the ability to influence significant corporate actions. Such
actions include the election of directors of the Company and the approval or
disapproval of certain fundamental corporate transactions, including mergers,
the sale of all or substantially all of the Company's assets, liquidation, and
the adoption or amendment of provisions in the Company's Certificate of
Incorporation and Bylaws. Such actions could delay or prevent a change in
control of the Company. See "Principal and Selling Shareholders" and
"Description of Capital Stock."
In addition, Section 912 of the New York Business Corporation Law restricts
certain business combinations with interested shareholders, and the Company's
Certificate of Incorporation contains provisions, such as those providing for a
classified Board of Directors, which may discourage, delay or prevent a third
party from acquiring control of the Company by means of a tender offer, a proxy
contest for a majority of the Board of Directors or otherwise. See "Description
of Capital Stock--Anti-Takeover Effects of the Company's Governing Documents."
PROCEEDS TO BENEFIT PRINCIPAL SHAREHOLDERS; POTENTIAL CONFLICTS OF INTEREST
The Company intends to use a portion of the net proceeds of the Offering to
repay interest-bearing accounts payable and certain other indebtedness of the
Company to CBC. In addition, certain existing
12
<PAGE>
shareholders who are currently directors of the Company are Selling Shareholders
and will receive a portion of the proceeds from this Offering. See "Use of
Proceeds," "Certain Transactions" and "Principal and Selling Shareholders."
Management of the Company believes that it has benefitted from its past
business relationships with its two principal shareholders, CBC and Mr. Chu S.
Chun, who, following the completion of this Offering, will beneficially own
approximately 11.9% and 4.5%, respectively, of the Common Stock. However, the
Company's continuing business relationships with CBC and Mr. Chun and his
affiliates, the continuing beneficial ownership of Common Stock by CBC and Mr.
Chun, and the service on the Company's Board of Directors by Kazuyoshi Sudo, a
director of CBC, and by Mr. Chun, a nominee to the Board and the principal of
CSE, could create a potential conflict of interest when the Board of Directors
of the Company is faced with decisions that could have different implications
for the Company, CBC, Mr. Chun and his affiliates, or in which the Company, CBC,
Mr. Chun and his affiliates have conflicting interests. See "-- Dependence on
Manufacturers and Suppliers," "Management" and "Certain Transactions."
REGULATION
Many of the Company's products are subject to regulations of the Federal
Communications Commission (the "FCC") and the European Commission (the "CE")
pertaining to the emission of electronic signals and require compliance with
standards of the FCC and the CE before such products may be marketed.
Additionally, commercial acceptance of the Company's CCTV systems and system
components may be dependent upon the listing of such items by Underwriters
Laboratories (UL) to certify product safety or certification to International
Standards Order (ISO) 9001 quality systems. The delay or absence of compliance
testing, safety listing or quality certification could have a material adverse
effect on the Company's operations. Further, countries could impose tariffs or
adopt other restrictions on foreign trade or other regulations which could
adversely affect the Company's operations internationally. The Company may
become subject to additional regulations, domestically and internationally, and
there can be no assurance that the regulatory environment in which the Company
operates will not change significantly in the future, or that the cost of
regulatory compliance will not be material. See "Business--Regulation."
POSSIBLE "YEAR 2000" PROBLEMS
Although the Company's software-based CCTV products have been tested for
year 2000 problems and the Company believes that such products are year 2000
compatible, it is possible that certain computer systems or software products of
the Company's customers or suppliers may experience year 2000 problems and that
such problems could adversely affect the Company. The Company is in the process
of inquiring as to the progress of its principal suppliers in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the year 2000 approaches. However, there can be
no assurance that the Company will identify the future date-handling problems of
its suppliers or its customers in advance of their occurrence, or that such
parties will be able to successfully remedy any problems that are discovered.
The failure to identify and solve all year 2000 problems affecting its business
could have a material and adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 1,250,000
shares of Common Stock offered by the Company hereby at an assumed public
offering price of $11.00 per share are estimated to be approximately $12.4
million ($14.8 million if the Underwriters' over-allotment option is exercised
in full), after deducting the underwriting discount and other estimated expenses
of the Offering. The Company intends to use the net proceeds as follows (all
figures are approximate):
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF NET PERCENTAGE OF NET
PROCEEDS PROCEEDS
--------------- -----------------
<S> <C> <C>
(IN MILLIONS)
Payment of Bank Indebtedness.................................................... $ 4.9 39.5%
Payment of Interest-Bearing Accounts Payable and Term Loan to Related Party..... 3.7 29.9
General Corporate Purposes, including Working Capital........................... 3.8 30.6
----- -----
Total..................................................................... $ 12.4 100.0%
----- -----
----- -----
</TABLE>
PAYMENT OF BANK INDEBTEDNESS. From the net proceeds of this Offering, the
Company intends to repay its domestic bank indebtedness to IBJ Schroder Bank &
Trust Company ("Schroder Bank") under an existing credit agreement (the "Credit
Agreement"), which amounted to $4.9 million at December 31, 1997. The Company is
presently negotiating with Schroder Bank to amend the Credit Agreement to, among
other things, extend the term, increase the borrowing limit and reduce the
interest rate. See "Risk Factors--No Assurance of Continued Profitability;
Fluctuating Operating Results; Substantial Indebtedness" and Note 6 to the
Consolidated Financial Statements.
PAYMENT OF INTEREST-BEARING ACCOUNTS PAYABLE AND TERM LOAN TO RELATED
PARTY. CBC and the Company have agreed in principle that upon the closing of
this Offering and payment to CBC of $3.7 million ($1.9 million of
interest-bearing accounts payable and $1.8 million outstanding under a term
loan), the balance of interest-bearing accounts payable of approximately $4.5
million will be converted to a five-year term loan, which will amortize in equal
semi-annual installments. See Notes 4 and 6 to the Consolidated Financial
Statements. Interest will be calculated at the higher of the base lending rate
of the Sanwa Bank, Ltd. or the rate payable under the then existing credit
agreement. The loan may be prepaid at any time without penalty.
GENERAL CORPORATE PURPOSES. The balance of approximately $3.8 million of
the net proceeds of this Offering will be used by the Company for general
corporate purposes, including working capital.
The Company intends to use the estimated net proceeds as indicated above. In
the event that the Company's plans change, or if the proceeds of this Offering
or internal cash flow otherwise proves to be insufficient to fund operations,
the Company may find it necessary or advisable to reallocate some of the
proceeds within the categories noted above. If the Underwriters exercise their
over-allotment option in full, the Company will realize additional net proceeds
of $2.4 million, which will be used for general corporate purposes.
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is traded on the American Stock Exchange ("AMEX")
under the symbol "VII." The following table sets forth the high and low prices
for the Company's Common Stock on AMEX for each quarter in fiscal 1998, 1997 and
1996.
<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997
---------------- ---------
<CAPTION>
QUARTER ENDED HIGH LOW HIGH
- ------------------------------------------------------------------- ------ ----- ---------
<S> <C> <C> <C> <C> <C>
First Quarter...................................................... 8 11/16 5 9/16 2
Second Quarter (in 1998, through March 27)......................... 13 15/16 6 3/16 3
Third Quarter...................................................... -- -- 4
Fourth Quarter..................................................... -- -- 8
<CAPTION>
<S> <C> <C>
1996
--------------------
QUARTER ENDED LOW HIGH
- ------------------------------------------------------------------- ----- -----
<S> <C> <C>
First Quarter...................................................... 3/4 1 3/4 2 3/8
Second Quarter (in 1998, through March 27)......................... 7/16 1 15/16 2
Third Quarter...................................................... 1/4 3 2 3/4
Fourth Quarter..................................................... 11/16 4 5 7/16
<CAPTION>
QUARTER ENDED LOW
- ------------------------------------------------------------------- -----
First Quarter...................................................... 1 3/16
Second Quarter (in 1998, through March 27)......................... 1 1/4
Third Quarter...................................................... 1 11/16
Fourth Quarter..................................................... 2 1/16
</TABLE>
The last sale price of the Company's Common Stock on March 27, 1998 as
reported on AMEX was $10 29/32 per share. As of March 27, 1998, there were
approximately 325 shareholders of record.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and anticipates that all earnings, if any, in the foreseeable future will be
retained to finance the growth and development of its business. In addition, the
Credit Agreement prohibits, and any new financing agreements entered into by the
Company may limit or prohibit, the payment of cash dividends on its Common
Stock.
15
<PAGE>
CAPITALIZATION
The following table presents as of December 31, 1997: (i) the actual
capitalization of the Company and (ii) the adjusted capitalization of the
Company after giving effect to the sale by the Company of 1,250,000 shares of
Common Stock offered hereby at an assumed offering price of $11.00 per share and
the application of the estimated net proceeds therefrom as described under "Use
of Proceeds." This table should be read in conjunction with the more detailed
financial data and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Interest-bearing accounts payable to related party (1).................................... $ 6,401 $ --
Total interest-bearing debt, including current portion:
Related party (1)....................................................................... 1,800 4,500
Banks and other (2)..................................................................... 6,389 1,489
Shareholders' equity:
Common Stock, $.01 par value, 10,000,000 shares authorized, 3,047,060 shares issued,
4,297,060 shares issued on an as adjusted basis (3)................................... 30 43
Capital in excess of par value.......................................................... 9,868 22,243
Retained earnings....................................................................... 2,290 2,290
Treasury stock, at cost (4)............................................................. (299) (299)
Foreign currency translation adjustment................................................. 42 42
--------- -----------
Total shareholders' equity.......................................................... 11,931 24,319
--------- -----------
Total capitalization.................................................................... $ 26,521 $ 30,308
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Reflects agreement in principle with a related party, that upon closing of
this Offering and the Company's repayment of $3.7 million ($1.9 million of
interest-bearing accounts payable and $1.8 million outstanding under a term
loan), the balance of approximately $4.5 million of interest-bearing
accounts payable to the related party will be converted into a new five-year
term loan. See "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
(2) Excludes $2.9 million of mortgage indebtedness incurred in January 1998 in
connection with the Company's purchase of its principal operating facility.
See "Business--Property."
(3) Does not include (i) 392,232 shares of Common Stock reserved for issuance
upon exercise of options granted or which may be granted under the Company's
Stock Option Plans; and (ii) 157,500 shares of Common Stock reserved for
issuance upon exercise of the Underwriters' Warrants. See "Management" and
"Underwriting."
(4) Represents 45,952 shares of Common Stock held in treasury and deliverable as
deferred compensation to Kenneth M. Darby, the Company's President and Chief
Executive Officer, upon his retirement or earlier under certain conditions.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The selected consolidated financial data presented below under the captions
"Statements of Operations Data" and "Balance Sheet Data" for and as of the end
of each of the years in the five-year period ended September 30, 1997, are
derived from the Consolidated Financial Statements of the Company which have
been audited by KPMG Peat Marwick LLP, independent certified public accountants.
The consolidated financial statements as of September 30, 1996 and 1997, and for
each of the years in the three-year period ended September 30, 1997, and the
report thereon, are included elsewhere in this Prospectus. The selected
consolidated financial data presented below for the three months ended December
31, 1996 and 1997 are derived from the unaudited interim Consolidated Financial
Statements which, in the opinion of management, reflect all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation of financial position and results of operations for the interim
periods. Results of operations for interim periods are not necessarily
indicative of the results that can be expected for any other interim period or
the results for the full year. The following data should be read in conjunction
with the Consolidated Financial Statements, including the Notes thereto,
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
Net sales......................................... $ 45,923 $ 47,714 $ 43,847 $ 43,191 $ 51,519 $ 11,298 $ 14,874
Cost of sales..................................... 36,649 37,000 34,301 32,234 37,044 8,117 10,245
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................................... 9,274 10,714 9,546 10,957 14,475 3,181 4,629
General and administrative expenses............... 3,488 3,188 3,367 2,931 3,542 817 1,023
Selling expenses.................................. 6,827 6,713 6,433 6,800 7,957 1,904 2,193
Relocation expense................................ -- -- -- -- 225 -- --
--------- --------- --------- --------- --------- --------- ---------
Operating expenses................................ 10,315 9,901 9,800 9,731 11,724 2,721 3,216
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........................... (1,041) 813 (254) 1,226 2,751 460 1,413
Other (income) expense............................ 262 (45) -- (41) (40) (33) --
Interest expense.................................. 555 784 1,013 882 1,144 264 339
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes................. (1,858) 74 (1,267) 385 1,647 229 1,074
Income tax expense................................ 17 29 80 85 82 14 65
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................. $ (1,875) $ 45 $ (1,347) $ 300 $ 1,565 $ 215 $ 1,009
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) per share (1)
Basic........................................... $ (.68) $ .02 $ (.49) $ .11 $ .56 $ .08 $ .34
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted......................................... $ (.68) $ .02 $ (.49) $ .11 $ .52 $ .08 $ .31
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used to compute earnings (loss) per share
(1)
Basic........................................... 2,763 2,763 2,763 2,765 2,804 2,777 3,001
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Diluted......................................... 2,763 2,763 2,763 2,841 3,022 2,870 3,293
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT
----------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
BALANCE SHEET DATA:
Cash................................................... $ 1,039 $ 910 $ 1,152 $ 206 $ 288 $ 225
Working capital........................................ 13,420 13,359 10,721 12,064 15,351 15,284
Total assets........................................... 26,069 28,857 26,423 28,085 31,200 31,279
Interest-bearing accounts payable to related party..... 2,317 4,349 4,486 4,404 5,032 6,401
Long-term debt......................................... 5,621 6,059 5,339 6,429 8,344 7,216
Shareholders' equity................................... 9,880 10,043 8,633 8,968 10,914 11,931
</TABLE>
- ------------------------
(1) Pursuant to new FASB standard No. 128. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--New Accounting
Standard."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company designs, manufactures, assembles and markets a wide range of
CCTV systems and system components used for security, surveillance, safety and
control purposes by a broad group of end users. In 1993, the Company commenced a
strategic redirection of its business by shifting its product focus from
hardware-oriented CCTV components to software-based CCTV systems solutions, some
of which incorporate digital technology. As part of the strategic redirection,
the Company also developed project design and management capabilities, upgraded
its sales organization, built a customer service and technical support group,
increased operating efficiency and reduced product costs by changing suppliers.
These strategic initiatives required several years to implement and have been
the principal reason for the Company's recent growth in sales and earnings and
its gross margin improvement. In 1997, sales grew 19% to $51.5 million compared
with $43.2 million in 1996. New product introductions, greater fixed cost
absorption associated with increased sales and lower costs of private label
video products contributed to an improvement in gross margins from 25.4% in 1996
to 28.1% in 1997 and 31.1% in the first quarter of 1998. Since December 1997,
the Company has experienced a decrease in demand for its products in certain
Asian countries, due principally to the deterioration of local economies. There
can be no assurance that the decrease will not adversely impact the Company's
overall sales growth rate for the balance of 1998 and beyond. see "Risk
Factors--Risks Associated with International Sales."
Due to the large number of different products that are typically required
for larger CCTV systems, a significant investment in inventory is required. In
addition, the Company's principal sales channel of installing dealers and system
integrators do not usually carry any significant inventory.
The Company recognizes sales upon shipment of products to third parties. The
Company's U.S. sales are generally made on a net 30-day term basis after a
credit review has been performed. Foreign sales are typically made on a letter
of credit or prepaid basis. Cost of sales includes finished products or
components purchased directly, subcontract or direct assembly labor and indirect
overhead. Research and development expenses are also charged principally to cost
of sales as incurred and include costs of salaries and benefits of engineering
personnel, supplies, occupancy and prototype material suppliers. The Company
provides reserves for inventory to reduce its carrying value to estimated net
realizable value. Selling expenses include freight, packing material and other
costs associated with the delivery of products to customers and both direct and
indirect costs related to the Company's sales and marketing activities. General
and administrative expenses encompass principally executive, administrative,
legal and financial expenditures.
The Company's effective income tax rate for 1996, 1997 and the first quarter
of 1998 was 22%, 5% and 6%, respectively, reflecting the utilization of federal
and state net operating loss ("NOL") carryforwards. In 1992, the Company
established a valuation allowance for the NOL carryforwards based on
management's uncertainty regarding future earnings. At December 31, 1997, the
Company had NOL carryforwards of approximately $4.0 million for federal income
tax purposes. See "Risk Factors-- Limitations on Utilization of Net Operating
Loss Carryforwards."
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the approximate percentages of net sales of
certain income and expense items of the Company for the last three fiscal years
and for the quarters ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................ 78.2 74.6 71.9 71.8 68.9
--------- --------- --------- --------- ---------
Gross profit............................. 21.8 25.4 28.1 28.2 31.1
Operating expenses....................... 22.4 22.5 22.8 24.1 21.6
--------- --------- --------- --------- ---------
Operating income (loss).................. (0.6) 2.8 5.3 4.1 9.5
Other income............................. -- (0.1) (0.1) (0.3) --
Interest expense......................... 2.3 2.0 2.2 2.3 2.3
--------- --------- --------- --------- ---------
Income (loss) before income taxes........ (2.9) 0.9 3.2 2.0 7.2
Income tax expense....................... 0.2 0.2 0.2 0.1 0.4
--------- --------- --------- --------- ---------
Net income (loss)........................ (3.1)% 0.7% 3.0% 1.9% 6.8%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
Net sales for the quarter ended December 31, 1997 increased $3.6 million, or
32%, to $14.9 million compared with $11.3 million in the similar year ago
period. The sales growth was experienced worldwide as U.S. sales increased 24%
to $9.0 million and international sales rose 45% to $5.9 million. The U.S. sales
increase was principally the result of video systems supplied under a contract
with the U.S. Postal Service entered into in July 1997 and sales from a new line
of dome cameras introduced in February 1997. The increase in international sales
was due to more systems sales and increased sales to a private label customer
for distribution primarily in Europe. The backlog of unfilled orders was $8.7
million at December 31, 1997 compared with $4.4 million at December 31, 1996.
Gross profit margins for the first quarter of 1998 increased to 31.1%
compared with 28.2% in the year ago period. The margin improvement was primarily
the result of a greater mix of more profitable products, lower procurement costs
for certain video products and greater fixed cost absorption associated with the
sales growth.
Operating expenses for the first quarter of 1998 were $3.2 million or 21.6%
of net sales compared with $2.7 million or 24.1% of net sales in the comparable
period of 1997. The increase of $495,000 or 18% was principally the result of
higher selling expenses associated with the revenue growth and profit related
bonus accruals. As a percentage of sales, operating expenses were lower due to
greater absorption of fixed operating costs.
Operating income rose to $1.4 million in the first quarter of 1998 compared
with $460,000 in the comparable period of 1997 as a result of increased sales,
higher gross margins and greater absorption of fixed operating expenses.
Interest expense increased $75,000 to $339,000, principally as a result of
higher borrowing levels during the first quarter of 1998.
Income tax expense was $65,000 for the first quarter of 1998 compared with
$14,000 in the comparable period of 1997, with an effective tax rate of
approximately 6% for both periods. In both periods, the Company utilized NOL
carryforwards to offset federal and state taxable income. As of December 31,
1997,
19
<PAGE>
the remaining balance of the NOL was approximately $4.0 million for federal
income tax purposes. The nominal tax provision primarily relates to foreign
subsidiary income.
As a result of the foregoing, net income increased to $1.0 million for the
first quarter of 1998 compared with net income of $215,000 for the comparable
period of 1997.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net sales for 1997 were $51.5 million, an increase of 19%, compared with
$43.2 million in 1996. The increase was principally due to incremental sales
worldwide of certain new products. The backlog of orders was $7.0 million at
September 30, 1997 compared with $3.1 million at September 30, 1996.
The gross profit margin in 1997 increased to 28.1% compared with 25.4% in
1996. The margin improvement was principally attributable to capacity gains from
increased sales, higher margins on certain new products and lower costs for
video products.
Operating expenses increased $2.0 million to $11.7 million in 1997 compared
with $9.7 million in 1996. The increase was the result of payroll and related
costs as the Company added sales, technical support and engineering personnel to
support increased sales and product development activities. The Company also
incurred $225,000 of costs and expenses to relocate to a new principal operating
facility.
Interest expense in 1997 increased by $261,000 to $1.1 million as a result
of increased bank borrowings to support higher levels of working capital.
The increase in net income in 1997 of $1.3 million was due to higher sales
and gross margins, offset in part by increased operating expenses.
FISCAL 1996 COMPARED WITH FISCAL 1995
Net sales for 1996 were $43.2 million, a decrease of 1.5%, compared with
$43.8 million in 1995. The sales decline was principally the result of the
termination of low margin video product sales (cameras and VCRs) to a Far East
distributor. Lower sales in Europe due to delays in new product introductions
were offset by an increase in other export sales. Domestic revenue levels were
essentially unchanged from 1995. The backlog of orders was $3.1 million at
September 30, 1996 compared with $2.7 million at September 30, 1995.
The gross profit margin was 25.4% in 1996, compared with 21.8% in 1995. The
margin improvement was due principally to a beneficial sales mix of higher
margin products, particularly new proprietary digital video products and control
systems. The Company also shifted sourcing of a major portion of its video
product line to lower cost suppliers outside of Japan. In addition, during 1996,
the value of the U.S. Dollar increased against the Japanese Yen which increased
margins for those remaining products sourced in Japan.
Operating expenses totaled $9.7 million in 1996 compared with $9.8 million
in 1995. Operating expenses, as a percent of sales, amounted to 22.5% and 22.4%
in 1996 and 1995, respectively. The decline in expenses was due primarily to
ongoing cost control measures.
Interest expense declined $131,000 to $882,000 principally due to the lower
cost of new bank borrowings.
As a result of the foregoing, net income improved significantly to $300,000
from a net loss of $1.3 million in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for conducting its business
activities have been borrowings under its bank facilities, vendor financing and
cash flow from operations.
20
<PAGE>
Net cash provided by operating activities was $956,000 for the first quarter
of 1998 due primarily to the $1.0 million net profit reported for the period.
The increase in accounts receivable due to higher sales activity was
substantially offset by a reduction in inventories. Net cash used in investing
activities was $108,000 in the first quarter of 1998 as a result of capital
expenditures for office equipment. Net cash used in financing activities was
$856,000, which included a $1.1 million reduction of borrowings under the Credit
Agreement offset by increased Vicon U.K. borrowings. As a result of the
foregoing, the net decrease in cash was $62,000 for the first quarter of 1998
after the nominal effects of exchange rate changes on the cash position of the
Company.
Net cash used in operating activities was $394,000 in fiscal 1997. Net
income of $1.6 million, non-cash items and increases in accrued wages and
expenses were more than offset by increases in inventories and accounts
receivable of $1.9 million and $821,000, respectively, and a $728,000 decrease
in accounts payable. Net cash used in investing activities was $925,000 in 1997,
due to capital expenditures primarily incurred for leasehold improvements and
furniture and fixtures related to the Company's recent relocation of its
principal operating facility. Net cash provided by financing activities was $1.3
million in 1997 primarily from increased borrowings under the Credit Agreement.
As a result of the foregoing, the net increase in cash was $82,000 in 1997.
The Company requires liquidity and working capital primarily to fund
increases in inventories and accounts receivable associated with sales growth
and, to a lesser extent, for capital expenditures. The Company anticipates that
in 1998 capital expenditures will be approximately $4.0 million, of which $3.3
million represents the January 1998 acquisition of its principal operating
facility and $700,000 for product tooling and office equipment. The purchase of
this facility was funded by mortgage loans of $2.9 million (the "Mortgage") and
from internal cash flow.
The Company maintains a bank overdraft facility of 600,000 Pounds Sterling
(approximately $990,000) in the U.K. to support local working capital
requirements of Vicon U.K. (the "Overdraft Facility"). At December 31, 1997,
borrowings under this facility were approximately $471,000.
The Credit Agreement permits the Company to borrow up to a maximum of $6.5
million, subject to availability under a borrowing base formula consisting of
accounts receivable and inventories. The agreement expires on January 31, 1999.
Borrowings under the Credit Agreement amounted to approximately $4.9 million at
December 31, 1997. Concurrent with the closing of this Offering, the Company
intends to repay the outstanding balance under the Credit Agreement. The Company
is presently negotiating with its lender to amend the Credit Agreement to, among
other things, extend the term, increase the borrowing limit and reduce the
interest rate.
The Company purchases certain products from CBC, whose interest-bearing
accounts payable amounted to $6.4 million at December 31, 1997 and are due on
demand. The Company historically has made accounts payable payments to CBC as
cash availability permits. The Company expects to use $3.7 million of the net
proceeds of this Offering to repay indebtedness to CBC and to refinance the
balance of the interest-bearing debt of approximately $4.5 million. Such amount
will be converted to a new five-year term loan which will amortize in equal
semi-annual installments and which will bear interest at an annual rate equal to
the higher of the base lending rate of the Sanwa Bank, Ltd. or the rate payable
under the then existing credit agreement. Any residual amount of accounts
payable to CBC will be due within agreed terms. See "Use of Proceeds."
The Company believes that cash flow from operations, proceeds from the
Offering, the Mortgage, and additional funds available under the Credit
Agreement and the Overdraft Facility will be sufficient to meet its currently
anticipated operating, capital expenditures and debt service requirements for at
least the next 12 months. See "Risk Factors-- No Assurance of Continued
Profitability; Fluctuating Operating Results; Substantial Indebtedness."
21
<PAGE>
FOREIGN CURRENCY ACTIVITY
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. Dollar to the Japanese Yen and the British Pound
Sterling.
Japanese-sourced products, which are denominated in Japanese Yen, accounted
for approximately 7% of product purchases in 1997. Although the U.S. Dollar
strengthened against the Japanese Yen during 1997, in prior years the U.S.
Dollar had weakened dramatically in relation to the Yen, resulting in increased
costs for such products. When market conditions permit, cost increases due to
currency fluctuations are passed on to customers through price increases. The
Company also attempts to reduce the impact of an unfavorable exchange rate
condition through cost reductions from its suppliers, lowering production cost
through product redesign, and shifting product sourcing to suppliers transacting
in more stable and favorable currencies. At the Company's request, CBC has
entered into foreign exchange contracts on behalf of the Company to hedge the
currency risk on Japanese-sourced product purchases.
Sales by Vicon U.K. to customers in Europe are made in Pounds Sterling. In
1997, approximately $3.3 million of products were sold by the Company to Vicon
U.K. for resale. The U.S. Dollar was stable against the Pound Sterling in 1997.
In the years when the Pound weakened significantly against the U.S. Dollar, the
cost of U.S.-sourced product sold by Vicon U.K. increased. When market
conditions permitted, such cost increases were passed on to the customer through
price increases. The Company attempts to control its currency exposure on
intercompany sales through the purchase of forward exchange contracts.
In general, the Company attempts to increase prices and seek lower costs
from suppliers to mitigate exchange rate exposures. However, there can be no
assurance that such steps will be effective in limiting foreign currency
exposure. See "Risk Factors--Foreign Currency Risks."
QUARTERLY FINANCIAL INFORMATION
The following table provides certain unaudited financial information for the
Company for each quarter in fiscal 1996 and 1997 and the quarter ended December
31, 1997.
<TABLE>
<CAPTION>
NET EARNINGS PER SHARE
QUARTER NET GROSS NET ------------------------
ENDED SALES PROFIT INCOME BASIC DILUTED
------- --------- --------- --------- ----- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 1998
December.......................................... $ 14,874 $ 4,629 $ 1,009 $ .34 $ .31
FISCAL 1997
September......................................... $ 14,167 $ 3,992 $ 641 $ .23 $ .20
June.............................................. 13,726 3,910 543 .19 .18
March............................................. 12,328 3,392 166 .06 .06
December.......................................... 11,298 3,181 215 .08 .08
--------- --------- --------- --- ---
Total........................................... $ 51,519 $ 14,475 $ 1,565 $ .56 $ .52
--------- --------- --------- --- ---
--------- --------- --------- --- ---
FISCAL 1996
September......................................... $ 10,921 $ 2,768 $ 32 $ .01 $ .01
June.............................................. 10,902 2,735 41 .01 .01
March............................................. 10,856 2,748 125 .05 .05
December.......................................... 10,512 2,706 102 .04 .04
--------- --------- --------- --- ---
Total........................................... $ 43,191 $ 10,957 $ 300 $ .11 $ .11
--------- --------- --------- --- ---
--------- --------- --------- --- ---
</TABLE>
22
<PAGE>
INFLATION
The impact of inflation on the Company's operations has lessened in recent
years, as the rate of inflation has remained low. However, inflation continues
to increase various costs to the Company. As operating expenses and production
costs increase, the Company seeks to pass along price increases to its customers
to the extent permitted by market conditions.
YEAR 2000
The Company's software-based CCTV products have been tested for year 2000
problems and the Company believes that such products are year 2000 compatible.
It is possible, however that certain computer systems or software products of
the Company's customers or suppliers may experience year 2000 problems and that
such problems could adversely affect the Company. The Company is in the process
of inquiring as to the progress of its principal suppliers in identifying and
addressing problems that their computer systems will face in correctly
processing date information as the year 2000 approaches. However, there can be
no assurance that the Company will identify the future date-handling problems of
its suppliers or its customers in advance of their occurrence, or that such
parties will be able to successfully remedy any problems that are discovered.
With respect to its own systems, the Company intends to upgrade its principal
operating computer software to the most recent available revision sold by its
software supplier, which the supplier has represented to be year 2000 compliant.
The Company believes that such upgrade will identify and solve those year 2000
problems that could affect its operating software and can be accomplished before
the year 2000 at a reasonable cost. The failure to identify and solve all year
2000 problems affecting its business could have a material and adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors--Possible "Year 2000" Problems."
NEW ACCOUNTING STANDARD
On March 3, 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "EARNINGS PER SHARE." This
pronouncement provides for the calculation of Basic and Diluted earnings per
share which is different from the prior standard. The Company adopted this new
standard in the first quarter of 1998 and all prior earnings per share
information reflected herein has been restated to give effect to this
pronouncement.
NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued two new disclosure standards. Management
believes that the results of operations and financial position of the Company
will be unaffected by implementation of these new standards.
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, establishes standards for reporting and displaying
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which supersedes SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A
BUSINESS ENTERPRISE, establishes standards for the way that public enterprises
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated.
23
<PAGE>
BUSINESS
INTRODUCTION
The Company designs, manufactures, assembles and markets a wide range of
CCTV systems and system components used for security, surveillance, safety and
control purposes by a broad group of end users. A CCTV system is a private video
system that can transmit and receive video, audio and data signals in accordance
with the operational needs of the user. The Company's primary focus is the
design of software-based engineered CCTV systems and components that it sells
worldwide, primarily to installing dealers, system integrators, government
entities and distributors. The Company's products are typically utilized for
visual crime deterrence, for visual documentation, for observation of
inaccessible or hazardous areas, to enhance safety, to obtain cost savings (such
as lower insurance premiums), to manage control systems and to improve the
efficiency and effectiveness of personnel. The Company's products are used in
office buildings, manufacturing plants, apartment complexes, large retail
stores, government facilities, transportation operations, prisons, casino gaming
facilities, sports arenas, health care facilities and financial institutions.
The Company's products have been used at various high profile locations
worldwide, including: O'Hare International Airport, Chicago; Foxwoods Resort &
Casino, Connecticut; Bank One Ballpark, Phoenix; Henry Ford Hospital, Detroit;
Fort Bragg, North Carolina; City of Sao Paulo Traffic Control, Brazil; Xiamen
International Airport, China and several locations of the U.S. Postal Service.
In 1993, the Company commenced a strategic redirection of its business by
shifting its product focus from hardware-oriented CCTV components to
software-based CCTV systems solutions, some of which incorporate digital
technology. As part of the strategic redirection, the Company also developed
project design and management capabilities, upgraded its sales organization,
built a customer service and technical support group, increased operating
efficiency and reduced product costs by changing suppliers. As a result, the
Company's financial performance has improved. Gross profit margins have
increased from 25.4% in 1996 to 31.1% in the first quarter of 1998. Net sales
grew 19.3% in 1997 to $51.5 million, while net income increased to $1.6 million
from $300,000 in 1996.
INDUSTRY OVERVIEW
The U.S. security industry consists of thousands of individuals and
businesses (exclusive of public sector law enforcement) that provide products
and services for the protection and monitoring of life, property and
information. The security industry includes fire and burglary alarm systems,
access control, CCTV, article surveillance, guard services and equipment, locks,
safes, armored vehicles, security fencing, private investigations and others.
The Company operates within the electronic protection segment of the
security industry, which includes fire and burglary alarm systems, access
control, CCTV and article surveillance. Domestic wholesale CCTV equipment sales
within that segment, according to statistics compiled and published by the SIA
in its 1997 SECURITY INDUSTRY MARKET OVERVIEW, were estimated at $840 million in
1997. Based in part upon published data for Europe, the Company believes the
worldwide market was approximately $1.7 billion in 1997. In recent years, a
trend of product development and demand within the CCTV industry has been toward
the application of digital technology, specifically toward the compression,
transmission, storage and display of digitized video signals.
The Company believes that demand for CCTV products is influenced by (i) the
acceptance of CCTV for crime deterrence; (ii) the perceived need for increased
safety in response to publicized acts of crime; (iii) the use of CCTV as a cost
effective alternative to security personnel; (iv) lower prices due to
technological advancements and competition which increase affordability; and (v)
the movement towards the integration of security systems, such as access control
with CCTV.
CCTV systems range from basic systems that consist of a single camera and
monitor to very complex engineered systems employing 2,000 cameras or more. CCTV
systems may either be manned or
24
<PAGE>
unmanned. In a manned system, an operator is able to command the system to
position remote cameras to selected sites, thereby observing events as they
occur. In an unmanned system, the system computer manages all the functions and
operations in accordance with its programming. For example, an unmanned system
can be designed to monitor objects continuously or automatically respond in a
specified manner to changes in a video scene, such as move a camera to another
target, activate alarms and begin recording, all without any operator
involvement.
The Company's product development, marketing and sales efforts are directed
primarily at the users of more complex systems whose needs include security,
surveillance, safety and control. These users include:
- FEDERAL, STATE, AND LOCAL GOVERNMENT AGENCIES--post offices, municipal
offices, prisons, military bases, airports and other mass transit systems;
- COMMERCIAL AND INDUSTRIAL COMPANIES--office buildings, manufacturing
plants, warehouses, apartment complexes, shopping malls and retail stores;
- ENTERTAINMENT COMPANIES--casino gaming facilities, sports arenas and
museums;
- HEALTH CARE PROVIDERS--hospitals, particularly psychiatric wards and
intensive care units; and
- FINANCIAL INSTITUTIONS--banks, clearing houses, brokerage firms and
depositories.
GROWTH STRATEGY
The Company's objective is to be a leading provider of high-end engineered
CCTV systems worldwide. The key elements of the Company's growth strategy are as
follows:
ACCELERATE NEW PRODUCT DEVELOPMENT AND ENHANCEMENT. The Company intends to
accelerate its new product development and enhancement program. As a result of
its research and development efforts, in the last two years, the Company has
introduced, among other products, the AURORA digital video multiplexer and the
SURVEYOR line of domed camera systems. See "--Products." In addition, the
Company intends to continue to emphasize the improvement of the technological
capabilities of its existing products and the development of new products which
incorporate digital technology.
EXPAND DOMESTIC SALES AND MARKETING ACTIVITIES. The Company intends to
increase its domestic sales and marketing efforts by (i) expanding its domestic
sales organization by hiring additional field sales engineers and in-house
customer service and technical support personnel, (ii) increasing promotional
activities to further develop brand name identity with dealers and end users and
(iii) emphasizing in-house dealer training. In addition, the award of an
exclusive one-year renewable contract with the U.S. Postal Service in July 1997
is anticipated to increase the Company's exposure to additional dealers.
INCREASE INTERNATIONAL SALES PRESENCE IN SELECT MARKETS. The Company
intends to expand the market for its existing and new products by increasing its
penetration of international markets. The Company believes Europe, China and
Australia present opportunities for growth. In 1997, the Company's international
sales were $18.7 million, or 36% of net sales, and $5.9 million, or 39% of net
sales, in the first quarter of 1998. The Company believes that by opening
additional independent or Company-operated sales offices and increasing its
distribution channels outside the U.S., its ability to penetrate these markets
would be enhanced. The Company helped to establish an independent sales company
in China in July 1997 to further its marketing initiatives in Asia, and in
February 1998 acquired a 30% ownership interest in such company.
PROMOTE SUPERIOR CUSTOMER AND TECHNICAL SUPPORT SERVICES. The Company
believes its commitment to service and technical support of CCTV systems enables
it to build strong relationships with its dealers and end users. The Company
offers training on its proprietary systems, technical classes, installation
assistance, field support and project design and management capabilities to
installing dealers.
25
<PAGE>
PURSUE STRATEGIC INITIATIVES. The Company intends to selectively pursue
strategic alliances and investment and acquisition opportunities as they arise.
Strategic initiatives may include the opening of independent or Company-operated
sales offices or other similar arrangements with third parties to broaden the
Company's sales presence on a worldwide basis.
PRODUCTS
The Company offers engineered CCTV systems and system components that can be
configured to meet the operational needs of each end user. The Company's
products are capable of being integrated with other security systems, including
fire and burglary alarm systems and access control. The capability and
versatility of a system can be increased by incorporating sophisticated control
and digital video products. A typical engineered system would include cameras,
remote camera positioning equipment, video switchers, controls, recording
equipment and monitors. The Company's proprietary products include all
significant system components with the exception of VCRs, monitors, cameras and
lenses. The Company's products range in price from $10 for a single camera
mounting bracket to hundreds of thousands of dollars (depending upon
configuration) for a large digital control and video switching system.
The basic components of an engineered CCTV system of the Company are shown
in the following diagram:
[Schematic diagram of a typical Company--engineered system]
26
<PAGE>
Remote camera positioning devices, including the Company's VISTAR and
SURVEYOR products, allow the system operator to move and control multiple remote
cameras. The NOVA series of microprocessor-based controls, or central processing
unit (the "CPU"), is the heart of the system. Commands are received by the CPU
from an operator keyboard and are converted into various actions, such as moving
cameras, responding to alarms or routing video signals. The MATRIX 66, a video
switcher, permits video signals from many cameras to be routed to any one of the
system's video monitors and VCRs. The DIGITEK digital motion detector identifies
movement by comparing real time video signals to a stored reference scene. Once
motion is detected, DIGITEK can automatically activate alarms and recording
equipment. The AURORA digital video multiplexer allows recording and individual
playback of up to 16 cameras on a single VCR, while providing such capabilities
as motion detection, digital scene magnification and multi-screen display. The
INTELLIGENT KEYBOARD is used by the operator to send real time commands to the
CPU or to program the SURVEYOR. By adding the Company's PROTECH software, the
system can be operated by a PC and integrated with other security systems.
CONTROL PRODUCTS
Control products are the technological brains of any sophisticated CCTV
system. Control products consist of microprocessor-based and hardwired controls,
video switchers, digital video multiplexers and digital video motion detectors,
all of which activate system components. For example, control products (i) route
video signals to display units or recording equipment, (ii) process alarm
signals in accordance with system design, (iii) transmit command signals to
operate remote camera positioning units and related accessories, and (iv)
perform multiple signal processing functions, such as time and date generation
and video loss detection. Sales of control products in 1997 were approximately
$17.7 million, or 34%, of net sales, and in the first quarter of 1998 were
approximately $4.6 million, or 31% of net sales.
MICROPROCESSORS. The principal function of a microprocessor is to manage
system functions. Microprocessors transmit command signals to remote camera
positioning units and associated accessories such as camera housings and lenses.
Microprocessors function either at operator command or unattended in accordance
with system programming. The Company's NOVA family of microprocessor-based
controls include its Powermate, Powerpac and Powermax products, which were
introduced during 1995 and 1996. The Company's microprocessors are enhanced by
its proprietary PROTECH software, which was initially introduced in 1995. This
software allows operators to control NOVA systems via a personal computer and
interact with graphical displays of surveillance sites and systems components.
In addition, PROTECH facilitates integration with other operating systems.
VIDEO SWITCHERS. Video switchers permit video signals from cameras to be
routed to system monitors and VCRs. Sophisticated matrix switchers have the
advantage of routing any video input to any output device to create greater
flexibility. The Company offers the MATRIX 44 and MATRIX 66 line of matrix
switchers, which detect video loss and route system cameras to system monitors
at operator command or in accordance with the programming of the system. MATRIX
44 was introduced in 1993 and MATRIX 66 in 1996.
DIGITAL VIDEO MULTIPLEXERS. Digital video multiplexers encode for
identification the video signals from multiple camera inputs for recording to a
single video tape. During playback, the multiplexer ensures that only images
from the selected cameras are displayed. The Company's multiplexers can accept
input from up to 16 cameras. The Company's AURORA line of digital video
multiplexers, among other things, digitizes video signals for multi-screen
display on a single monitor and encodes and decodes video signals for efficient
video recording and playback. AURORA was introduced in February 1996.
27
<PAGE>
DIGITAL VIDEO MOTION DETECTORS. Digital video motion detectors enable a
CCTV system to be programmed to activate an alarm and begin recording based upon
changes in real time video signals compared with a reference scene. DIGITEK,
introduced in 1995, allows thousands of sensing points in a single video frame
to be programmed for alarm if a set of user-determined parameters is violated.
Other control products include hardwired controls, character generators for
source identification and equipment for transmitting, receiving, distributing
and amplifying video, audio and data signals.
MECHANICAL PRODUCTS
Mechanical products position and protect cameras. They consist of remote
camera positioning units, which include pan-and-tilts and domed camera systems,
environmental camera enclosures, mounting equipment and both fixed focal length
and zoom lenses. Sales of mechanical products in 1997 were approximately $20.6
million, or 40% of net sales, and in the first quarter of 1998, were
approximately $6.4 million, or 43% of net sales.
DOMED CAMERA SYSTEMS. A dome is a camera enclosure shaped like a sphere.
Typically, the dome includes a pan-and-tilt mechanism as described below. Some
domes include fast, compact pan-and-tilt mechanisms which can move cameras very
rapidly--pan speeds of up to 360 degrees per second and tilt speeds of up to 120
degrees per second. The Company's SURVEYOR line of dome systems, introduced in
1997, are frequently used in casino gaming facilities, retail stores and
airports, where discreet surveillance is desired.
PAN-AND-TILTS. Pan-and-tilts are motorized robotic devices which support a
CCTV camera and allow it to be pointed at targets by remote control. Typically,
a pan-and-tilt device can move a camera at a rate of up to six degrees per
second. The Company is scheduled to begin delivering its new VISTAR pan-and-tilt
line to customers in June 1998. The VISTAR line is designed for rugged indoor or
outdoor use.
VIDEO PRODUCTS
Video products generate, display and record video and audio signals. These
products consist of stand-alone standard or high resolution black-and-white or
color electronic cameras, digital or analog format recording equipment for video
and audio signals and standard or high resolution black-and-white or color
display monitors. Video products are supplied to the Company by others on a
private label basis. Sales of video products in 1997 were approximately $11.4
million, or 22% of net sales, and in the first quarter of 1998, were
approximately $3.2 million, or 21% of net sales.
OTHER PRODUCTS
Sales in 1997 of special order items, replacement parts, design and project
management fees and miscellaneous products were approximately $1.8 million, or
4% of net sales, and in the first quarter of 1998, were approximately $700,000,
or 5% of net sales.
WARRANTY
The Company's systems and system components are covered by a comprehensive
two-year warranty for both parts and labor. The warranty period begins when the
end user begins beneficial use of the system. Notwithstanding this extended
warranty period, to date, the Company's annual warranty cost has not been
material.
MARKETING AND SALES
The Company's marketing strategy is to emphasize engineered CCTV systems
solutions which incorporate system design, project management and technical
training and support. The Company markets its products through industry trade
shows worldwide, product brochures and catalogues, direct mailings to existing
and prospective customers, product videos, in-house training seminars for
customers and end
28
<PAGE>
users, road shows which preview new systems and system components, and
advertising through trade and end user magazines and the Company's internet web
site. The Company also maintains showrooms at its principal operating facility
in Long Island and at its European sales office in England for customers to use
and train on the Company's systems.
The Company's products are sold principally to approximately 2,000
independent dealers, system integrators and distributors. Sales are made
principally by field sales engineers, independent sales representatives and
customer service representatives. The Company's sales effort is supported by
in-house customer service and technical support groups which provide product
information, application engineering, system design, project management and
hardware and software technical support. The Company believes its commitment to
service and technical support enables it to build strong relationships with its
customers. The Company's principal sales offices are located in Long Island, New
York, Atlanta, Georgia, and Fareham, England. The following table sets forth the
Company's recent U.S. and international sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. sales................................................. $ 26,133 $ 26,937 $ 32,858 $ 7,258 $ 9,008
International sales........................................ 17,714 16,254 18,661 4,040 5,866
--------- --------- --------- --------- ---------
Net sales.................................................. $ 43,847 $ 43,191 $ 51,519 $ 11,298 $ 14,874
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The Company's products have been used at various high profile locations
worldwide, including: O'Hare International Airport, Chicago; Foxwoods Resort &
Casino, Connecticut; Bank One Ballpark, Phoenix; Henry Ford Hospital, Detroit;
Fort Bragg, North Carolina; City of Sao Paulo Traffic Control, Brazil; Xiamen
International Airport, China and several locations of the U.S. Postal Service.
In addition, the Company has received an order for certain products for a major
installation in the MGM Grand Hotel and Casino in Las Vegas.
U.S. SALES
Sales in the U.S. are made by 11 in-house customer service representatives,
18 in-house field sales engineers and seven independent sales representative
companies. The Company sells or markets its CCTV systems and system components
domestically on a non-exclusive basis to the following:
- Installing dealers and system integrators;
- Engineers, consultants and architects;
- Government entities; and
- Independent distributors.
Installing dealers are companies which sell, design and install CCTV
systems. Dealers also train operators and provide after-market service and
support to end users. System integrators link different types of electronic
systems, such as access control with CCTV, to enable such systems to interact
and be managed from a centralized control point. Installing dealers and system
integrators, in turn, market the Company's products to commercial and industrial
end users, including office buildings, manufacturing plants, warehouses,
apartment complexes, shopping malls and retail stores. The majority of domestic
sales are through installing dealers and system integrators.
Engineers, consultants and architects are professionals who are involved in
projects that use CCTV systems. These firms or individuals do not purchase
products from the Company, but specify the Company's products to end users.
29
<PAGE>
Government entities include the United States Government and its agencies.
Typical government customers include the Federal Bureau of Prisons, Federal
Aviation Administration and the United States Border Patrol. In July 1997, the
Company was awarded a one-year contract to supply certain types of video
surveillance systems to the U.S. Postal Service. The contract, which does not
obligate the U.S. Postal Service to purchase any systems, makes the Company the
sole source supplier for certain video surveillance systems. The U.S. Postal
Service has the option to renew the contract for two additional one-year
periods.
Independent distributors are organizations that typically resell
manufacturers' products to installing dealers.
INTERNATIONAL SALES
The Company sells its products in Europe through Vicon U.K. and elsewhere
outside the U.S. by direct export. Sales are made to installing dealers or
independent distributors which outside of Europe typically assume the
responsibility for warranty repair as well as sales and marketing costs to
promote the Company's product line. The Company has territorial exclusivity
agreements with customers in China and Japan but uses a wide range of
installation companies and distributors in other international markets. The
Company also sells to one private label reseller, CBC, which markets certain of
the Company's products in Europe and Russia, under the label "VISION STATION."
CBC is an affiliate and competitor of the Company. See "Certain Transactions."
The Company's international sales are conducted by 10 field sales engineers and
nine in-house customer service representatives.
For most international sales, the Company generally purchases credit
insurance or requires a letter of credit or cash in advance of shipment. Some
international customers, who have a long standing relationship with the Company,
buy on an open account basis, subject to a satisfactory credit review. See "Risk
Factors--Risks Associated with International Sales."
The Company's principal foreign markets are Europe and the Pacific Rim which
together accounted for approximately 82% of international sales in 1997. Since
December 1997, the Company has experienced a decrease in demand for its products
in certain Asian countries, due principally to the deterioration of local
economies. There can be no assurance that the decrease will not adversely impact
the Company's overall sales growth rate for the balance of 1998 and beyond. In
Australia, China, Japan, Norway and South Korea, the Company permits independent
sales representatives to use the Company's name for marketing purposes. These
arrangements are not covered by formal agreements and can be terminated at the
option of the Company under certain conditions. In February 1998, the Company
acquired a 30% ownership interest in an independent sales company in China,
which opened in July 1997.
MANUFACTURING AND PURCHASING
The Company's strategy is to manufacture its products wherever the best
combination of reliability, cost, quality and timely delivery can be found. The
Company implements this strategy predominantly through a combination of
manufacturing and assembly operations. These operations include the CSE
manufacturing plant; independent labor subcontractors; independent contract
manufacturers and in-house personnel. There are no formal contracts with any of
the Company's production vendors and, except for the fulfillment of any
outstanding orders, the Company or the vendors may terminate the relationship at
any time.
CSE is a joint venture owned equally by the Company and Chun Shin
Industries, Inc., a South Korean company controlled by Mr. Chu S. Chun. CSE
currently produces products that in 1997 represented 22% or $7.0 million of the
Company's purchases of components and finished products. CSE employs
approximately 60 people at its approximately 12,000 square foot manufacturing
facility. CSE's capacity is now fully utilized, but can be expanded as the need
arises. The Company has no capital commitment obligations to CSE. The Company
has held preliminary discussions concerning the possible acquisition by the
Company of CSI. No agreement has been reached in this regard. See "Risk
Factors--Risks Associated with Future
30
<PAGE>
Strategic Initiatives," "Risk Factors--Dependence on Manufacturers and
Suppliers" and "Certain Transactions."
Independent Long Island-based labor subcontractors assemble the Company's
products in accordance with the Company's instructions, quality standards and
test procedures. All materials are supplied to the subcontractors by the
Company. Independent labor subcontractors assemble certain mechanical, electro-
mechanical and electronic products for the Company.
Independent U.S.-based contract manufacturers also assemble the Company's
products. However, unlike independent labor subcontractors, contract
manufacturers also purchase the materials required for production. Independent
contract manufacturers are monitored by the Company as to quality and production
performance. Independent contract manufacturers produce certain mechanical and
electro-mechanical products for the Company.
The Company's in-house personnel perform assembly, system configuration,
testing and inspection of CCTV systems and system components at the Company's
principal operating facility in Long Island. It has in-house personnel who
assemble a limited number of electro-mechanical products, configure all CPU-
based systems and test all key products.
The Company purchases CCTV lenses and certain cameras, monitors and VCRs
from various suppliers. The most significant supplier of such products to the
Company is CBC, a Japanese trading company which is a major shareholder of the
Company. See "Risk Factors--Dependence on Manufacturers and Suppliers." The
Company has been conducting business with CBC continuously for 18 years. See
"Certain Transactions." In 1997, the Company purchased approximately $7.1
million of products from CBC, or 23% of the Company's total purchases of
components and finished products. The Company has no obligation to purchase any
of the foregoing products from CBC. Most of the products purchased from CBC are
resold under the VICON brand name.
INVENTORY
The Company carries substantial inventory levels for a number of reasons.
First, since the Company utilizes installing dealers as its primary sales
channel, it must maintain significant levels of inventory as dealers usually do
not carry significant inventory. See "--Marketing and Sales". Second, as part of
its manufacturing strategy, the Company has shifted from using contract
manufacturers to using labor subcontractors. Consequently, the Company must
carry materials and work-in-progress inventories for its labor subcontractors.
Third, the Company holds a minimum level of safety stock of finished goods at
both its Long Island and U.K. facilities to respond to unanticipated customer
orders. Finally, the Company's inventory levels are affected by the ordinary
course time delays of four to nine months between purchasing, production and
shipping of products. See "Risk Factors--Risks Associated with Inventory
Management."
RESEARCH AND DEVELOPMENT
The Company's research and development ("R&D") strategy is to develop new
and improved CCTV systems and system components. In recent years, a trend of
product development and demand within the CCTV industry has been toward the
application of digital technology, specifically toward the compression, storage
and display of digitized video signals. As the demands of the Company's target
market segment requires the Company to keep pace with changes in technology, the
Company intends to focus its R&D effort in these developing areas. R&D projects
are chosen and prioritized based on direct customer feedback, the Company's
analysis as to the needs of the marketplace and technological advances and
marketing research. Through its R&D efforts, the Company developed and
introduced its AURORA, NOVA, MATRIX and SURVEYOR lines of products, among
others. See "Risk Factors--Risks Associated with Product Design and Development"
and "-- Products."
31
<PAGE>
The Company employs a total of 23 engineers in the following areas: seven in
software development, eight in mechanical design, and eight in electrical and
circuit design. R&D expenditures have averaged approximately 4% of net sales for
each of the past three years.
COMPETITION
The Company operates in a highly competitive marketplace both domestically
and internationally. The Company competes by providing engineered systems and
system components that incorporate broad capability together with high levels of
customer service and technical support. Generally, the Company does not compete
based on price alone.
The Company's principal engineered CCTV systems competitors include the
following companies or their affiliates: Checkpoint Systems, Inc., Matsushita
(Panasonic), Pelco Sales Company, Philips Communications and Security Systems,
Inc. (Burle Industries, Inc.), Sensormatic Electronics Corporation, and Ultrak,
Inc. Many additional companies, both domestic and international, produce
products that compete against one or more of the Company's product lines. In
addition, some consumer video electronic companies or their affiliates,
including Matsushita (Panasonic), Mitsubishi Electric Corporation, Sanyo
Electric Co., Ltd. and Sony Corporation, compete with the Company for the sale
of video products and systems. CBC also competes with the Company in various
markets, principally in the sale of video products. Most of the Company's
competitors are larger companies whose financial resources and scope of
operations are substantially greater than the Company's. See "Risk
Factors--Competition."
INTELLECTUAL PROPERTY
Many of the Company's products employ proprietary software that is protected
by U.S. copyright. The Company believes that its proprietary software is unique
and is a principal element in the differentiation of the Company's products from
those of its competitors. The Company also has certain trademarks and owns a
limited number of design and utility patents expiring at various times. The
Company has no technology licenses or franchises with respect to any of its
products or business dealings. The Company does not deem its lack of patents,
licenses or franchises to be of substantial significance or to have a material
effect on its business. CBC has agreed to use its best efforts to ensure that
the Company's intellectual property rights in respect of the Company's products
acquired by CBC and then resold by it are not misappropriated, copied or used in
any manner other than their intended purpose without the written consent of the
Company. Similarly, the Company has agreed to use its best efforts to ensure
that CBC's intellectual property rights in respect of CBC's products acquired by
the Company and then integrated into the Company's products are not
misappropriated, copied or used in any manner other than their intended purpose
without the consent of CBC. See "Risk Factors--Protection, Defense and Use of
Intellectual Property; Possible Infringement."
BACKLOG
The backlog of orders was approximately $8.7 million as of December 31, 1997
compared with $4.4 million as of December 31, 1996. The Company does not
generally accept orders unless the scheduled delivery date is within six months.
While all backlog orders have scheduled delivery dates, most orders are
cancelable without penalty at the option of the customer.
REGULATION
Many of the Company's products are subject to regulations of the FCC and the
CE pertaining to the emission of electronic signals and require compliance with
standards of the FCC and the CE before such products may be marketed.
Additionally, commercial acceptance of the Company's CCTV systems and system
components may be dependent upon the listing of such items with UL to certify
product safety or certification to ISO 9001 quality systems. The delay or
absence of compliance testing, safety listing, or quality certification could
have a material adverse effect on the Company's operations. Further, countries
32
<PAGE>
could impose tariffs or adopt other restrictions on foreign trade or other
regulations which could adversely affect the Company's operations
internationally. The Company may become subject to additional regulations,
domestically and internationally, and there can be no assurance that the
regulatory environment in which the Company operates will not change
significantly in the future, or that the cost of regulatory compliance will not
be material. See "Risk Factors--Regulation."
PROPERTY
The Company owns and operates a 56,000 square-foot facility located on
approximately five acres at 89 Arkay Drive, Hauppauge, N.Y. to which it
relocated its principal offices in April 1997. The Company purchased the
property in January 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The Company also operates, under short-term leases, an 8,500 square-foot
warehouse in Hauppauge, N.Y., and a 3,500 square-foot sales office in Atlanta,
Georgia. In addition, the Company owns and operates a 14,000 square-foot sales,
service and warehouse facility in southern England which services the U.K. and
Europe.
The Company believes that its facilities are adequate to meet its needs for
the current year. Due to recent growth in operations, the Company may need to
expand its principal operating facility or obtain adequate alternative space to
meet growing capacity demands. See "Risk Factors--Risks Associated With
Management of Growth."
EMPLOYEES
At December 31, 1997, the Company employed 191 full-time employees in the
following areas: five in senior management, 43 in administration, 81 in sales,
29 in engineering, and 33 in production. There are no collective bargaining
agreements with any of the Company's employees and the Company considers its
relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings occurring in the
ordinary course of business, none of which are believed by management to be
material.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and officers of the Company are set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Donald N. Horn......................... 69 Chairman of the Board
Kenneth M. Darby....................... 52 President, Chief Executive Officer and Director
Arthur D. Roche........................ 59 Executive Vice President, Chief Financial Officer, Secretary,
Member of the Office of the President and Director
John L. Eckman......................... 48 Vice President, U.S. Sales
Peter A. Horn.......................... 42 Vice President, Compliance and Quality Assurance
Yacov A. Pshtissky..................... 46 Vice President, Technology and Development
Peter F. Barry......................... 69 Director
Milton F. Gidge........................ 68 Director
Michael D. Katz........................ 59 Director
Peter F. Neumann....................... 63 Director
W. Gregory Robertson................... 54 Director
Kazuyoshi Sudo......................... 55 Director
Arthur V. Wallace...................... 72 Director
Chu S. Chun............................ 63 Director-nominee*
</TABLE>
- ------------------------
* Mr. Chu S. Chun is not currently a director but has been nominated by the
Board of Directors as a director for the election to be held at the Annual
Meeting of Shareholders scheduled for April 23, 1998.
The business experience, principal occupations and employment, as well as
period of service, of each of the directors, executive officers and certain
other key employees of the Company during at least the last five years are set
forth below.
DONALD N. HORN, CHAIRMAN OF THE BOARD. Mr. Horn was the founder of the
Company in 1967 and has served as its Chairman of the Board since that time. He
also served as Chief Executive Officer from 1967 until April 1992 and as
President until September 1991. Mr. Horn's current term on the Board ends in
April 1999.
KENNETH M. DARBY, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. Mr.
Darby has served as Chief Executive Officer since April 1992 and as President
since October 1991. He has served as a director since 1987. Mr. Darby also
served as Chief Operating Officer and as Executive Vice President, Vice
President, Finance and Treasurer of the Company. He joined the Company in 1978
as Controller after more than nine years at Peat Marwick Mitchell & Co., a
public accounting firm. Mr. Darby's current term on the Board ends in April
2000.
ARTHUR D. ROCHE, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY, MEMBER OF THE OFFICE OF THE PRESIDENT AND DIRECTOR. Mr. Roche has
been Executive Vice President and co-participant in the Office of the President
of the Company since August 1993. For the six months earlier, Mr. Roche provided
consulting services to the Company. In October 1991, Mr. Roche retired as a
partner of Arthur Andersen & Co., an international accounting firm which he
joined in 1960. Mr. Roche has served as a director since 1992. His current term
on the Board ends in April 1999.
JOHN L. ECKMAN, VICE PRESIDENT, U.S. SALES. Mr. Eckman has been Vice
President, U.S. Sales of the Company since July 1996. He joined the Company in
August 1995 as Eastern Regional Manager. Prior to joining the Company, he was
Director of Field Operations for Cardkey Systems, Inc., an access control
security products manufacturer, with which he was employed for 12 years.
34
<PAGE>
PETER A. HORN, VICE PRESIDENT, COMPLIANCE AND QUALITY ASSURANCE. Mr. Horn
has been Vice President, Compliance and Quality Assurance of the Company since
1995. He joined the Company in January 1974 and has been employed in various
technical capacities. From 1994 to 1995, Mr. Horn served as Vice President,
Product Management. From September 1993 to 1994, he was Vice President,
Marketing. From May 1990 through August 1993, Mr. Horn served as Vice President,
New Products and Technical Support Services. Prior to that time, Mr. Horn was
Vice President, Engineering.
YACOV A. PSHTISSKY, VICE PRESIDENT, TECHNOLOGY AND DEVELOPMENT. Mr.
Pshtissky has been Vice President, Technology and Development since May 1990.
Mr. Pshtissky was Director of Electrical Product Development from March 1988
through April 1990. Prior to that time he was an Electrical Design Engineer.
PETER F. BARRY, DIRECTOR. Mr. Barry has been a director of the Company
since 1984. From August 1988 to March 1991, he served as Senior Vice President
of the Washington, D.C. operations of Grumman Corp, an aerospace manufacturer.
Prior to such time, he served as President of Hartman Systems, Inc., a
manufacturer of electronic controls and display devices for military
applications. Mr. Barry currently acts as a consultant to private industry on
government relations. His current term on the Board ends in April 1999.
MILTON F. GIDGE, DIRECTOR. Mr. Gidge has been a director of the Company
since 1987. He is a retired director and executive officer of Lincoln Savings
Bank for which he served from 1976 to 1994 as Chairman, Credit Policy. He has
also been a director since 1980 of Interboro Mutual Indemnity Insurance Co., a
general insurance mutual company, and a director of Intervest Bancshares
Corporation of New York, a mortgage banking holding company, and another
affiliated company of Intervest since 1988. Mr. Gidge's current term on the
Board ends in April 1998.
MICHAEL D. KATZ, DIRECTOR. Dr. Katz has been a director of the Company
since 1993. Dr. Katz is a physician practicing in New York. Since 1970, he has
been the President of Katz, Rosenthal, Ganz, Snyder M.D. P.C. Dr. Katz's current
term on the Board ends in April 1998 and he has informed the Company that he
will not stand for reelection on the Board after the expiration of his current
term.
PETER F. NEUMANN, DIRECTOR. Mr. Neumann has been a director of the Company
since 1987. He is the retired President of Flynn-Neumann Agency, Inc., an
insurance brokerage firm. Since 1978, Mr. Neumann has served as a director of
Reliance Federal Savings Bank. Mr. Neumann's current term on the Board ends in
April 2000.
W. GREGORY ROBERTSON, DIRECTOR. Mr. Robertson has been a director of the
Company since 1991. He is President of TM Capital Corporation, a financial
services company which he founded in 1989. From 1985 to 1989, he was employed by
Thomas McKinnon Securities, Inc. as head of investment banking and public
finance. Mr. Robertson's current term on the Board ends in April 1998.
KAZUYOSHI SUDO, DIRECTOR. Mr. Sudo has been a director of the Company since
1987. Mr. Sudo is Chief Executive Officer of Chugai Boyeki (America) Corp., a
distributor of electronic, chemical and optical products. From 1981 to 1996, he
was Treasurer of such company. He has also been a director of Chugai Boyeki
Company, Ltd. since 1997. Mr. Sudo's current term on the Board ends in April
2000.
ARTHUR V. WALLACE, DIRECTOR. Mr. Wallace has been a director of the Company
since 1974. From 1979 to September 1990, he was Executive Vice President of the
Company. Mr. Wallace's current term on the Board ends in April 1998, and he has
informed the Company that he will not stand for reelection on the Board after
the expiration of his current term.
CHU S. CHUN, DIRECTOR-NOMINEE. Mr. Chun has been the President of CSI,
Chairman of the Board and Chief Executive Officer of International Industries,
Inc. ("I.I.I.") and President of CSE since at least 1988. See "Certain
Transactions."
35
<PAGE>
Except for the relationship between Peter A. Horn, an officer of the
Company, and Donald N. Horn, Chairman of the Board, there are no family
relationships between any director, executive officer, officer or person
nominated or chosen by the Company to become a director or officer. Peter A.
Horn is the son of Donald N. Horn.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished
to the Company during 1997, no person who, at any time during 1997, was a
director, officer or beneficial owner of more than 10% of any class of equity
securities of the Company registered pursuant to Section 12 of the Exchange Act
failed to file on a timely basis reports required by Section 16 (a) of the
Exchange Act during 1997.
MEETINGS OF THE BOARD AND COMMITTEES OF THE BOARD
The Board of Directors has a number of standing committees including the
Executive Committee, the Compensation Committee and Audit Committee.
The Executive Committee consists of Messrs. Horn, Gidge, Darby and Roche, of
whom Messrs. Gidge and Horn are non-employee directors. The committee meets in
special situations when the full Board cannot be convened. The committee also
recommends candidates to the Board as nominees for election at the annual
meeting of shareholders. Nominees are selected on the basis of recognized
achievements and their ability to bring skills and experience to the
deliberations of the Board. The committee did not meet during the past fiscal
year.
The Compensation Committee, whose present members are Messrs. Neumann,
Robertson and Wallace, held one meeting during the last fiscal year. The
function of the Compensation Committee is to establish and approve the
appropriate compensation for the President (including salary and incentive
bonus), recommend the award of stock options, and review the recommendations of
the President with respect to the compensation (including salary and incentive
bonuses) of all other officers.
The Audit Committee consists of Messrs. Gidge, Barry and Sudo, each of whom
is a non-employee director. The Audit Committee reviews the internal financial
controls of the Company and the objectivity of its financial reporting. The
committee meets with appropriate financial personnel from the Company and
independent certified public accountants in connection with their audits. The
committee recommends to the Board the appointment of independent certified
public accountants to serve as the Company's auditors, subject to ratification
by the shareholders. The independent certified public accountants have complete
and free access to the committee at any time. The committee met once during the
last fiscal year.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for all services rendered to the Company during 1997, 1996 and 1995 by the
Chief Executive Officer and the Company's most highly compensated executive
officers whose total annual salary and bonus exceeded $100,000 during any such
year.
36
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
COMPENSATION ALL
OPTIONS OTHER
SALARY (NO. OF COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) SHARES) ($)
- --------------------------------------------------------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Kenneth M. Darby, Chief Executive Officer...................... 1997 $ 225,000 58,000 $ 87,017(1)
1996 195,000 95,000 34,750(2)
1995 195,000 -- 3,000(3)
Arthur D. Roche, Executive Vice President...................... 1997 170,000 35,000 45,240(4)
1996 150,000 25,000 15,875(5)
1995 150,000 -- --
No listed officer received other non-cash compensation
amounting to more than 10% of salary.
</TABLE>
- ------------------------
(1) Represents life insurance policy payment of $3,000 and cash bonus of
$84,017. The cash bonus equaled 4.55% of the sum of consolidated pre-tax
income and provision for officers' bonuses, which bonus formula was adopted
for years 1997 and 1998 by the Board of Directors upon the recommendation of
its Compensation Committee.
(2) Represents life insurance policy premium payment of $3,000 and bonus in the
form of 16,933 shares of Common Stock issued from treasury.
(3) Represents life insurance policy payment.
(4) Represents cash bonus. The cash bonus equaled 2.45% of the sum of
consolidated pre-tax income and provision for officers' bonuses, which bonus
formula was adopted for years 1997 and 1998 by the Board of Directors upon
the recommendation of its Compensation Committee.
(5) Represents bonus in the form of 8,467 shares of Common Stock issued from
treasury.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
% OF TOTAL STOCK
NO. OF OPTIONS PRICE
SHARES GRANTED EXERCISE APPRECIATION FOR
UNDERLYING TO EMPLOYEES PRICE OPTION TERM
OPTIONS IN PER SHARE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($) DATE 5% 10%
- -------------------------------------------------- ----------- ----------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kenneth M. Darby.................................. 38,000 16% $ 2.5000 10/01 $ 26,200 $ 58,000
20,000 8 3.0625 4/02 16,900 37,400
Arthur D. Roche................................... 25,000 10 2.5000 10/01 17,300 38,200
10,000 4 3.0625 4/02 8,500 18,700
</TABLE>
Options granted in 1997 were issued under the Company's 1996 Incentive Stock
Option Plan. The options granted above are exercisable as follows: up to 30% of
the shares at the grant date, an additional 30% of the shares on the first
anniversary of the grant date, and the balance of the shares on the second
anniversary of the grant date, except that no option is exercisable after the
expiration of five years from the date of grant.
37
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
----------------------------
<S> <C> <C> <C> <C>
NUMBER OF
NUMBER OF SECURITIES VALUE OF
SHARES VALUE UNDERLYING UNEXERCISABLE
ACQUIRED REALIZED UNEXERCISABLE IN-THE-MONEY
NAME ON EXERCISE (1) OPTIONS(2) OPTIONS(3)
- ---------------------------------------------------------- ----------- ----------- ------------- -------------
Kenneth M. Darby.......................................... 153,432 $ 698,621 78,600 $ 484,775
Arthur D. Roche........................................... 75,500 343,750 34,500 206,875
</TABLE>
- ------------------------
(1) Calculated based on the difference between the closing quoted market price
($6.50) per share at the date of exercise and the exercise price.
(2) No options were exercisable by the above named officers at September 30,
1997.
(3) Calculated based on the closing quoted market price ($8.375).
NON-QUALIFIED STOCK OPTION PLANS FOR OUTSIDE DIRECTORS
The Company has two Non-Qualified Stock Option Plans for Outside Directors,
the 1994 Non-Qualified Stock Option Plan for Outside Directors and the 1996
Non-Qualified Stock Option Plan for Outside Directors (collectively the
"Non-Qualified Plans"). Each of the Non-Qualified Plans provides for the
granting (without payment by optionees) of non-qualified options for an
aggregate of 50,000 shares of Common Stock to outside directors. The
Compensation Committee of the Company, comprised of independent directors
("Independent Directors"), determines the Independent Directors to whom options
are granted and the number of shares to be granted. All awards by the
Compensation Committee are subject to the approval of the Board of Directors.
The exercise price per share of each option is equal to its fair market
value on the date the option is granted. Options become exercisable after one
year following the date of grant. All options granted under the Non-Qualified
Plans expire upon the earlier of five years following the date of grant or three
months following the date the optionee ceases to be a director. Upon retirement
or death, all options previously granted become exercisable within one year.
There are no shares currently available for grant under the Non-Qualified Plans.
INCENTIVE STOCK OPTION PLANS
The Company has three Incentive Stock Option Plans, the 1986 Incentive Stock
Option Plan, the 1994 Incentive Stock Option Plan and the 1996 Incentive Stock
Option Plan (collectively, the "Incentive Plans"). Options granted under the
Incentive Plans qualify for special tax treatment under the Internal Revenue
Code. The purpose of the Incentive Plans is to provide additional incentives to
officers, directors and key employees of the Company who make important
contributions to the Company's operations and who will contribute to the
Company's growth and success. Officers, directors and other full time employees
of the Company and its subsidiaries are eligible to receive (without any payment
by them) options to purchase an aggregate of 150,000, 200,000 and 200,000
shares, respectively, of Common Stock under each of the Incentive Plans. The
Compensation Committee of the Company, comprised of Independent Directors,
selects the officers, directors and employees to whom options are to be granted
and the number of shares to be granted. All awards by the Compensation Committee
are subject to the approval of the Board of Directors.
Options granted under the Incentive Plans may be exercised within five years
from the date of grant. The exercise price for shares to be acquired may not be
less than 100% of their fair market value on the date the option is granted or,
in the case of any optionee who owns more than 10% of the outstanding Common
Stock, not less than 110% of their fair market value on the date the option is
granted. Further, (i)
38
<PAGE>
during the first year that an option is outstanding, it may be exercised in
respect of up to 30% of the shares covered by such option; (ii) during the
second year, it may be exercised in respect of an additional 30% of the shares
covered thereby; and (iii) during the third, fourth and fifth year, the option
may be exercised as to all remaining shares covered thereby. In addition, the
fair market value of the Common Stock with respect to which options are
exercisable by any optionee in any given calendar year may not exceed $100,000,
such value being determined at the time the options are granted, plus certain
carryover amounts. No option granted under the Incentive Plans will be
exercisable after the date on which the optionee ceases to perform services for
the Company except that, in the event of death, options may be exercised for up
to one year thereafter, and upon retirement, for up to three months after the
date an optionee ceases to perform services.
The exercise price payable for Common Stock purchased under the Incentive
Plans may be paid in cash, through the surrender of previously held shares of
Common Stock valued at the fair market value on the date of exercise, or a
combination of cash and Common Stock. An aggregate of 46,935 additional options
may be issued under the Incentive Plans.
EMPLOYMENT AGREEMENTS
Mr. Darby and Mr. Roche have each entered into employment agreements with
the Company that provide for annual salaries of $225,000 and $170,000,
respectively, through 2002 and 1999, respectively. Each of these agreements
provides for payment in an amount up to three times their average annual
compensation for the previous five years if there is a change in control of the
Company without Board of Director approval (as defined in the agreements). In
addition, Messrs. Darby and Roche are eligible to receive cash bonuses based on
performance of the Company. In 1997, they received a cash bonus equal to 4.55%
and 2.45%, respectively, of the sum of consolidated pre-tax income and provision
for officers' bonuses, which bonus formula was adopted for years 1997 and 1998
by the Board of Directors upon the recommendation of its Compensation Committee.
Mr. Darby's agreement also provides for a deferred compensation benefit of
45,952 shares of Common Stock held by the Company in treasury. Such benefit
vests upon his retirement, or earlier under certain conditions. The market value
of such benefit approximated $345,000 at the date of grant.
Donald N. Horn and Arthur V. Wallace (current directors of the Company) each
have deferred compensation agreements with the Company which provide that upon
reaching retirement age total payments of $917,000 and $631,000, respectively,
will be made in monthly installments over a 10-year period. The full deferred
compensation payment is subject to such individuals' adherence to certain
noncompete covenants. Mr. Wallace, who retired in September 1990, began
receiving payments under the agreement in October 1990 and Mr. Horn began
receiving payments under the agreement in January 1994.
DIRECTORS' COMPENSATION
Directors, except the Chairman of the Board and employee directors, were
each compensated at the rate of $600 per Board meeting and $300 per committee
meeting attended in person while the Chairman of the Board was compensated at
the rate of $1,000 per Board meeting and $300 per committee meeting attended in
person through December 31, 1996. Since January 1, 1997, the directors and the
Chairman of the Board have been compensated at annual rates of $6,000 and
$10,000, respectively, while committee fees have been $500 per meeting attended
in person. Employee directors are not compensated for Board or committee
meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
Neumann, Robertson and Wallace. Mr. Wallace retired in 1990 as Executive Vice
President. Neither of Messrs. Neumann or Robertson has ever been an officer of
the Company. See the section entitled "Certain Transactions"
39
<PAGE>
included elsewhere herein for a discussion of certain other relationships
maintained by Mr. Neumann with the Company.
BOARD COMPENSATION COMMITTEE REPORT
The Compensation Committee's compensation policies applicable to the
Company's executive officers for 1997 were to pay a competitive market price for
the services of such officers, taking into account the overall performance and
financial capabilities of the Company and the officer's individual level of
performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base
salary and incentive compensation of all executive officers other than himself.
The Committee reviews these recommendations with Mr. Darby and, after such
review, determines compensation. In the case of Mr. Darby, the Compensation
Committee makes its determination after direct negotiation with him. For each
executive officer, the committee's determinations are based on its conclusions
concerning each officer's performance and comparable compensation levels in the
CCTV industry and the Long Island area for similarly situated officers at
comparable companies. The overall level of performance of the Company is taken
into account but is not specifically related to the base salary of these
executive officers. Also, the Company has established an incentive compensation
plan for all of the executive officers, which provides a specified bonus to each
officer upon the Company's achievement of certain annual profitability targets.
The Compensation Committee grants options to executive officers to link
compensation to the performance of the Company. Options are exercisable in the
future at the fair market value at the time of grant, so that an officer granted
an option is rewarded by the increase in the price of the Company's stock. The
committee grants options to executive officers based on significant
contributions of such officer to the performance of the Company. In addition, in
determining Mr. Darby's salary for service as Chief Executive Officer, the
committee considered the responsibility assumed by him in formulating and
implementing a management and operating restructuring plan.
40
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of the date of this Prospectus, and as
adjusted to reflect the sale of 1,575,000 shares of Common Stock offered by the
Company and the Selling Shareholders hereby, information regarding the
beneficial ownership of Common Stock by (i) Selling Shareholders and each
shareholder known by the Company to be the beneficial owner of more than 5% of
the Company's outstanding Common Stock, (ii) each director, (iii) each executive
officer named in the Summary Compensation Table and (iv) all directors,
executive officers and officers of the Company as a group. The information set
forth below includes 201,700 shares of Common Stock issuable under presently
exercisable options granted to directors, executive officers and officers of the
Company pursuant to the Stock Option Plans. The information set forth in the
table does not include (a) 52,000 shares of Common Stock issuable under the
Company's stock option plans (the "Stock Option Plans") under options that are
not currently exercisable or (b) 157,500 shares of Common Stock issuable upon
the exercise of the Underwriters' Warrants granted in connection with this
Offering. See "Underwriting." Donald N. Horn, Michael D. Katz and Arthur V.
Wallace will sell 56,305, 250,000 and 18,695 shares of Common Stock,
respectively, in this Offering. See "Certain Transactions."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL
PRIOR TO THE OWNERSHIP
OFFERING(2) AFTER THE OFFERING
--------------------- -------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF
SHARES TO BE SOLD
NAME AND ADDRESS(1) SHARES PERCENTAGE IN THIS OFFERING SHARES PERCENTAGE
- ----------------------------------------------------------------- ------- ------------ ----------------- ------- ----------
Chugai Boyeki Company, Ltd. and affiliates....................... 548,715 16.4% -- 548,715 11.9%
Chu S. Chun...................................................... 204,507(3) 6.1 -- 204,507 4.5
Michael D. Katz.................................................. 264,825(4) 7.9 250,000 14,825 *
Kenneth M. Darby................................................. 237,837(5) 7.1 -- 237,837 5.2
Arthur D. Roche.................................................. 139,967(6) 4.2 -- 139,967 3.0
Donald N. Horn................................................... 108,128(7) 3.2 56,305 51,823 1.1
Arthur V. Wallace................................................ 25,820(8) * 18,695 7,125 *
Kazuyoshi Sudo................................................... 21,125(7) * -- 21,125 *
Milton F. Gidge.................................................. 17,125(9) * -- 17,125 *
Peter F. Neumann................................................. 15,125(7) * -- 15,125 *
Peter F. Barry................................................... 12,725(7) * -- 12,725 *
W. Gregory Robertson............................................. 12,125(7) * -- 12,125 *
All executive officers, officers and directors as a group (13
individuals)................................................... 945,752(10) 28.3% 325,000 620,752 13.5%
</TABLE>
- ------------------------
* Less than 1%.
(1) The address of Chugai Boyeki Company, Ltd. is 2-15-13 Tsukishima, Chuo-ku,
Tokyo, Japan 104. The address of Chu S. Chun is c/o I.I.I. Companies, Inc.,
915 Hartford Turnpike, Shrewsbury, Massachusetts 01545. The address of each
of the other beneficial owners identified is c/o Vicon Industries, Inc., 89
Arkay Drive, Hauppauge, N.Y. 11788.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole investment and voting power over the shares of capital
stock owned.
(3) Mr. Chun has voting and dispositive power over 204,507 shares but disclaims
beneficial ownership as to all but 48,400 shares. 100,707 shares are owned
by the International Industries, Inc. Profit Sharing Plan and 55,400 shares
are owned by immediate family members.
(4) Includes currently exercisable options to purchase 12,125 shares and 252,700
shares owned jointly by Mr. Katz and his wife.
(5) Includes currently exercisable options to purchase 6,000 shares.
(6) Includes currently exercisable options to purchase 10,500 shares and 124,467
shares owned jointly by Mr. Roche and his wife.
(7) Includes currently exercisable options to purchase 12,125 shares.
(8) Includes currently exercisable options to purchase 7,125 shares.
(9) Includes currently exercisable options to purchase 15,125 shares.
(10) Includes currently exercisable options to purchase 201,700 shares.
41
<PAGE>
CERTAIN TRANSACTIONS
CBC beneficially owns 16.4% of the Common Stock of the Company. The business
relationship between the Company and CBC has continued for 18 years, during
which period CBC has served as (i) a lender, (ii) a product supplier and
sourcing agent, and (iii) a private label reseller of the Company's products.
Historically, CBC has provided a significant amount of funding to the Company in
the form of extended accounts payable related to product purchases. In 1997, the
Company incurred approximately $383,000 in interest expense on amounts it owed
to CBC in respect of extended accounts payable. CBC also acts as the Company's
sourcing agent for the purchase of certain video products. In 1997, the Company
purchased approximately $7.1 million of video products from or through CBC,
which includes approximately $286,000 in commissions on purchases of such
products. Additionally, the Company sells finished products to CBC under CBC's
private label for resale in Europe and Russia. Sales to CBC were $2.7 million in
1997. CBC also has the exclusive right to sell Vicon brand products in Japan. In
addition, CBC competes with the Company in various markets, principally in the
sale of video products and systems. CBC has agreed to use its best efforts to
ensure that the Company's intellectual property rights in respect of the
Company's products acquired by CBC and then resold by it are not
misappropriated, copied or used in any manner other than their intended purpose
without the written consent of the Company. Similarly, the Company has agreed to
use its best efforts to ensure that CBC's intellectual property rights in
respect of CBC's products acquired by the Company and then integrated into the
Company's products are not misappropriated, copied or used in any manner other
than their intended purpose without the consent of CBC. See "Risk
Factors--Dependence on Manufacturers and Suppliers" and "Business--Marketing and
Sales." In April 1997, the Company repaid $236,000 of mortgage loan indebtedness
of Vicon U.K. to CBC with the proceeds of a new 10-year bank term loan. See
"Statement of Cash Flow in Consolidated Financial Statements." Although
management believes that the CBC relationship has been beneficial to the Company
on an overall basis, the terms provided to the Company by CBC for the foregoing
may be less favorable than those the Company may be able to obtain from
unaffiliated third parties. Kazuyoshi Sudo, a director of the Company and of
CBC, is Chief Executive Officer of Chugai Boyeki (America) Corp., a U.S.
subsidiary of CBC. See "Risk Factors--Proceeds to Benefit Principal
Shareholders; Potential Conflicts of Interest."
Mr. Chu S. Chun, who beneficially owns 6.1% of the Common Stock of the
Company, also owns CSI, a 50% partner with the Company in CSE. Mr. Chun is the
President of CSE and has operating control of CSE. In 1997, CSE sold
approximately $7.0 million of products to the Company through I.I.I., a
U.S.-based company controlled by Mr. Chun. I.I.I. arranges the importation of,
and provides short-term financing on, all the Company's product purchases from
CSE which in 1997, included approximately $137,000 in connection with such
services. CSE also sold approximately $1.7 million of products to CSI, which
resells the Company's products in South Korea. In addition, I.I.I. purchased
approximately $1.1 million of products directly from the Company during 1997 for
resale to CSI. Although the Company believes its relationships with CSE, CSI and
I.I.I. have been beneficial to the Company on an overall basis, the terms
provided to the Company by I.I.I. for import financing may be less favorable
than those the Company may be able to obtain from unaffiliated third parties. In
addition, the Company does not anticipate receiving any material financial
benefit as a result of the depreciation of the Korean Won versus the U.S.
Dollar. See "Risk Factors--Dependence on Manufacturers and Suppliers" and
"--Proceeds to Benefit Principal Shareholders; Potential Conflicts of Interest."
In March 1998, the Company and Mr. Chun held preliminary discussions
concerning the possible acquisition by the Company of CSI. CSI and the Company
each own 50% of CSE, a joint venture manufacturing operation in South Korea. In
addition, CSI owns and operates a sales company that sells various security
products, including the Company's products, principally within the South Korean
market. No terms of such an acquisition were agreed upon, but the Company
intends to continue the discussions with Mr. Chun. There can be no assurance
that the Company and Mr. Chun will agree upon the terms of such an acquisition
or that such an acquisition will be consummated. Further, if such an acquisition
is
42
<PAGE>
consummated, there can be no assurance as to the effect upon the future
financial condition or operations of the Company. See "Risk Factors--Risks
Associated with Future Strategic Initiatives."
Peter F. Neumann, a director of the Company, is a former principal in the
insurance brokerage firm of Bradley & Parker, Inc., which is the agent for
certain of the Company's commercial insurance. The premium paid for such
insurance amounted to approximately $61,000 in 1997.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 10,000,000
authorized shares of Common Stock, $.01 par value per share, 3,061,658 shares of
which were outstanding as of March 27, 1998.
Subject to the rights of the holders of any then outstanding preferred stock
(none are authorized as of the date of this Prospectus), each holder of Common
Stock on the applicable record date is entitled to receive such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
Upon liquidation or dissolution of the Company, each holder of Common Stock will
be entitled to share pro rata in any distribution of the Company's assets after
the payment of all debts and other liabilities, subject to the rights of the
holders of then outstanding preferred stock, if any. Each holder of Common Stock
is entitled to one vote per share owned of record on the applicable record date
on all matters presented to a vote of the holders of Common Stock, including the
election of directors. Holders of Common Stock have no cumulative voting rights
and, therefore, the holders of a majority of the shares voting for the election
of a class of directors can elect all the directors of such class and in such
event the holders of the remaining shares will not be able to elect any of such
directors. The holders of Common Stock have no preemptive rights to purchase or
subscribe for any stock or other securities and there are no conversion rights
or redemption or sinking fund provisions with respect to such stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and nonassessable.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S GOVERNING DOCUMENTS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may be deemed to have anti-takeover effects and may discourage, delay or prevent
a third party from acquiring control of the Company by means of a tender offer,
a proxy contest for a majority of the Board of Directors or otherwise, including
such an action as might result in payment of a premium over the market price for
shares held by shareholders. These provisions (i) classify the Company's Board
of Directors into three classes, each of which serves for a different three-year
period, (ii) provide that only the Board of Directors and the Chairman of the
Board may call special meetings of the shareholders, (iii) provide that
directors of the Company may be removed without cause only by the affirmative
vote of the holders of at least 80% of the votes entitled to be cast by all then
outstanding shares of Common Stock, (iv) require an 80% shareholder vote to
amend or repeal the provisions described in item (i) and (iii) above, and (v) do
not provide for cumulative voting. See "Risk Factors--Control by Certain
Shareholders; Impediments to Change of Control."
INDEMNIFICATION
Article 7 of the New York Business Corporation Law provides for the
indemnification of directors and officers subject to certain limitations. Among
other provisions, the statute provides that to be entitled to indemnification
under the statutory provisions, a person who is sued or threatened to be sued by
reason of being a director or officer of a New York corporation must
affirmatively establish that he acted in good faith for a purpose which he
reasonably believed to be in the best interests of the corporation. The statute
requires court approval to provide indemnification in a derivative action under
certain circumstances. Additionally, the indemnification to which directors,
officers and other persons serving the corporation are
43
<PAGE>
entitled excludes amounts payable in a derivative action where the director,
officer or other person is adjudged to be liable to the corporation.
The By-laws of the Company provide for the indemnification of its directors
and officers to the maximum extent provided by law. It is the position of the
Securities and Exchange Commission and certain state securities administrators
that any attempt to limit the liability of persons controlling an issuer under
the federal securities laws or state securities laws is contrary to public
policy and therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust
Company, New York, N. Y.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of the Offering, the Company will have
4,311,658 shares of Common Stock outstanding, of which approximately 3,139,384
will be freely tradable without restriction, except for those shares, if any,
acquired in the Offering by "affiliates" of the Company as that term is defined
in the Securities Act of 1933, as amended. Subject to the nine (9) month lock-up
arrangements described below, holders of the remaining 1,172,274 shares of
Common Stock will be eligible to sell such shares pursuant to Rule 144 ("Rule
144") under the Securities Act at prescribed times and subject to the applicable
restrictions of Rule 144. The Company's officers, directors and certain other
shareholders, who collectively own 1,172,274 shares of Common Stock and hold
options to acquire an additional 253,700 shares of Common Stock exercisable at
various dates through 2002, have agreed with the Underwriters not to offer,
sell, pledge, contract to sell, grant any option, right or warrant to purchase,
or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock of the Company or any securities convertible into or exercisable or
exchangeable for Common Stock, or in any other manner transfer all or a portion
of the economic consequences associated with the ownership of any Common Stock,
for a period of nine (9) months after the date of this Prospectus without the
prior written consent of Fahnestock.
After the expiration of the nine (9) month lock-up period, 1,146,874 shares
of Common Stock held by affiliates of the Company will become tradable, subject
to the restrictions of Rule 144 (other than the holding period restriction,
which has been satisfied). The 25,400 shares issued to Kenneth M. Darby, the
Company's President and Chief Executive Officer, and Arthur D. Roche, its
Executive Vice President, Chief Financial Officer and Secretary, as compensation
in January 1997 will become tradable under Rule 144 in January 1999. The 253,700
shares of Common Stock reserved for issuance under various stock option plans
will be freely tradeable upon issuance.
In addition to the foregoing shares, 45,952 shares of Common Stock are held
in treasury and deliverable as deferred compensation to Mr. Darby upon his
retirement or earlier under certain conditions, which shares are restricted
securities that, when issued, can be sold pursuant to the restrictions of Rule
144 (see "Management--Executive Compensation."). Also, 157,500 shares of Common
Stock have been reserved for issuance upon exercise of the Underwriters'
Warrants (see "Underwriting"). Such warrants are exercisable for Common Stock at
an exercise price of $ per share commencing one year from the date of this
Prospectus. In addition, the Company may issue shares of Common Stock in
connection with future business acquisitions and resales of such shares by the
recipients. Such shares, if registered, could be sold in the public market.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell in "broker's transactions" or to market makers within any
three-month period, a number of shares that does not exceed the greater of (i)
one percent of the number of shares of Common Stock then outstanding
(approximately 43,000 shares immediately after this Offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the required filing of a Form 144 with respect to such sale. Sales
under Rule 144 are generally subject to
44
<PAGE>
certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner, except an affiliate), is entitled to sell such shares without
having to comply with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. Affiliates of the Company remain subject to
all of the restrictions contained in Rule 144, even after the expiration of a
two-year holding period.
No predictions can be made as to the effect, if any, that market sales of
the shares described above or the availability of such shares for sale will have
on the market price for shares of Common Stock prevailing from time to time.
Sales of substantial amounts of shares of Common Stock in the public market
following the Offering could adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through an
offering of equity securities.
45
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters") have each severally
agreed, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase, and the Company and the Selling Shareholders have agreed
to sell to the Underwriters, the number of shares of Common Stock indicated
below opposite the name of such underwriter at the initial public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
Fahnestock & Co. Inc...........................................................................
Southeast Research Partners, Inc...............................................................
-----------------
TOTAL.................................................................................... 1,575,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions and that the Underwriters are committed to
purchase all of the shares (other than those covered by the over-allotment) if
any are purchased. The Underwriting Agreement provides that the Company will
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Underwriters have advised the Company that they propose to offer the
Common Stock to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not to exceed $ per share. The Underwriters may allow, and such dealers
may reallow, a concession of not more than $ to certain other dealers.
After the public offering, the offering price, the concession to certain dealers
and other selling terms may be changed by the Underwriters. The Underwriters
have agreed not to confirm sales of Common Stock offered hereby to any account
over which they exercise discretionary authority without the prior written
approval of the customer.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to a maximum of
236,250 additional shares of Common Stock solely to cover over-allotments, if
any, at the public offering price less the underwriting discount set forth on
the cover page of this Prospectus. To the extent that the Underwriters exercise
this option, each Underwriter will be committed, subject to certain conditions,
to purchase approximately the same proportion of additional Shares as the number
of shares to be purchased by it shown in the foregoing table bears to the total
number of shares of Common Stock initially offered hereby.
The Company's officers, directors and holders of 5% or more of the Company's
outstanding Common Stock as of the date of this Prospectus have agreed not to
sell, other than the over-allotment shares, if any, and shares to be sold in the
Offering by the Selling Shareholders, for a period of nine (9) months from the
date of this Prospectus, without the prior written consent of Fahnestock. The
lock-up period in respect of all officers and directors of the Company commenced
on December 15, 1997.
The Company and Fahnestock will enter into an investment banking agreement
which, among other things, will grant Fahnestock a right of first refusal for a
period of eighteen (18) months after the closing date for any public offerings
or private equity financings of the Company or any of its present or future
subsidiaries. In addition, Fahnestock shall have the right to attend Board of
Director meetings and to receive the same information as directors for one year.
The Company has also agreed to pay Fahnestock a non-accountable expense
allowance of $100,000, $40,000 of which has been paid to date.
In connection with this Offering, the Company has agreed to grant to the
Underwriters warrants to purchase up to 157,500 shares of Common Stock (the
"Underwriters' Warrants"). The Underwriters' Warrants, which warrants (and the
underlying shares of Common Stock) are being registered pursuant to the
Registration Statement filed with respect to the Common Stock offered hereby,
shall be exercisable at
46
<PAGE>
any time during a period of four (4) years commencing one year after their
issuance and provide for an exercise price equaling one hundred twenty percent
(120%) of the public offering price set forth herein. The Underwriters' Warrants
are non-transferrable during the term, except to officers or partners of the
Underwriters, and grant to the holder thereof certain registration rights for
the securities issuable upon the exercise thereof.
In connection with this Offering, the Underwriters and certain selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for and
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 236,250 shares of Common Stock, by
exercising the over-allotment option referred to above. In addition, the
Underwriters may impose "penalty bids" under contractual arrangements with
certain dealers participating in the Offering whereby the Underwriters may
reclaim from such dealers for the account of the Underwriters, the selling
concession with respect to Common Stock that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph are required, and, if they are undertaken, they may be discontinued at
any time.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Schoeman, Marsh & Updike, LLP, New York, New
York. Certain legal matters will be passed upon for the Underwriters by Whitman
Breed Abbott & Morgan LLP, New York, New York. Richard Crystal, a member of
Whitman Breed Abbott & Morgan LLP, is a director of Fahnestock Viner Holdings
Inc., the parent company of Fahnestock.
EXPERTS
The consolidated financial statements as of September 30, 1997 and 1996 and
for each of the years in the three-year period ended September 30, 1997 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
auditing and accounting.
47
<PAGE>
VICON INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets at September 30, 1996 and 1997 and December 31, 1997 (unaudited)............... F-3
Consolidated Statements of Operations, fiscal years ended September 30, 1995, 1996 and 1997 and three
months ended December 31, 1996 and 1997 (unaudited)...................................................... F-4
Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 1995, 1996 and 1997 and
three months ended December 31, 1997 (unaudited)......................................................... F-5
Consolidated Statements of Cash Flows, fiscal years ended September 30, 1995, 1996, and 1997 and the three
months ended December 31, 1996 and 1997 (unaudited)...................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Vicon Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Vicon
Industries, Inc. and subsidiaries as of September 30, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vicon Industries,
Inc. and subsidiaries at September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1997, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Jericho, New York
November 12, 1997
F-2
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------
ASSETS 1996 1997 1997
- -------------------------------------------------------------------------------------- ---------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Current Assets:
Cash................................................................................ $ 205,876 $ 287,580 $ 225,276
Accounts receivable (less allowance of $396,000, $493,000 and $603,000 at September
30, 1996 and 1997, and December 31, 1997, respectively)........................... 8,706,839 9,578,297 10,152,090
Inventories:
Parts, components, and materials.................................................. 2,175,408 3,399,133 3,356,001
Work-in-process................................................................... 1,391,552 2,046,174 1,904,228
Finished products................................................................. 11,135,798 11,188,217 10,919,277
---------- ---------- ------------
14,702,758 16,633,524 16,179,506
Prepaid expenses.................................................................... 529,631 307,580 392,154
---------- ---------- ------------
Total current assets............................................................ 24,145,104 26,806,981 26,949,026
Property, plant and equipment:
Land................................................................................ 290,448 299,698 305,248
Building and improvements........................................................... 1,507,630 1,653,503 1,677,056
Machinery, equipment, and vehicles.................................................. 11,842,120 6,409,729 6,525,922
---------- ---------- ------------
13,640,198 8,362,930 8,508,226
Less accumulated depreciation and amortization...................................... 10,606,013 4,870,717 5,048,244
---------- ---------- ------------
3,034,185 3,492,213 3,459,982
Other assets.......................................................................... 905,327 900,417 870,481
---------- ---------- ------------
$28,084,616 $31,199,611 $31,279,489
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------
Current Liabilities:
Borrowings under revolving credit agreement......................................... $ 959,583 $ 169,006 $ 471,490
Current maturities of long-term debt................................................ 203,719 515,092 501,169
Accounts payable:
Related party..................................................................... 7,457,482 7,146,985 6,902,119
Other............................................................................. 1,811,730 1,407,917 1,785,825
Accrued wages and expenses.......................................................... 1,229,087 2,111,670 1,852,334
Income taxes payable................................................................ 87,205 105,188 152,343
Deferred gain on sale and leaseback................................................. 332,100 -- --
---------- ---------- ------------
Total current liabilities....................................................... 12,080,906 11,455,858 11,665,280
Long-term debt:
Related party....................................................................... 2,262,005 1,440,000 1,440,000
Banks and other..................................................................... 4,166,881 6,904,368 5,776,092
Deferred gain on sale and leaseback................................................... 101,893 -- --
Other long-term liabilities........................................................... 504,776 485,402 466,746
Commitments and contingencies--Note 11
Shareholders' equity
Common Stock, par value $.01 per share
Authorized--10,000,000 shares
Issued 2,802,728 shares at September 30, 1996 and 3,047,060 shares at September
30, 1997 and December 31, 1997................................................... 28,027 30,470 30,470
Capital in excess of par value...................................................... 9,423,089 9,868,063 9,868,063
Retained earnings (deficit)......................................................... (283,611) 1,280,907 2,289,880
---------- ---------- ------------
9,167,505 11,179,440 12,188,413
Less treasury stock at cost, 25,400 shares at September 30, 1996 and 45,952 shares
at September 30, 1997 and December 31, 1997....................................... (82,901) (298,686) (298,686)
Foreign currency translation adjustment............................................. (116,449) 33,229 41,644
---------- ---------- ------------
Total shareholders' equity...................................................... 8,968,155 10,913,983 11,931,371
---------- ---------- ------------
$28,084,616 $31,199,611 $31,279,489
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 43,846,571 $ 43,191,446 $ 51,518,940 $ 11,297,775 $ 14,874,200
Cost of sales........................ 34,300,638 32,234,192 37,043,750 8,116,967 10,245,525
------------- ------------- ------------- ------------- -------------
Gross profit....................... 9,545,933 10,957,254 14,475,190 3,180,808 4,628,675
Operating expenses:
General and administrative
expense........................ 3,366,662 2,931,333 3,542,400 817,046 1,022,952
Selling expense.................. 6,433,483 6,800,361 7,957,340 1,904,149 2,192,954
Relocation expense............... -- -- 225,129 -- --
------------- ------------- ------------- ------------- -------------
9,800,145 9,731,694 11,724,869 2,721,195 3,215,906
------------- ------------- ------------- ------------- -------------
Operating income (loss)............ (254,212) 1,225,560 2,750,321 459,613 1,412,769
Other income......................... (550) (41,908) (39,896) (33,623) --
Interest expense..................... 1,013,383 882,290 1,143,699 263,948 338,796
------------- ------------- ------------- ------------- -------------
Income (loss) before income
taxes.......................... (1,267,045) 385,178 1,646,518 229,288 1,073,973
Income tax expense................... 80,000 85,000 82,000 14,000 65,000
------------- ------------- ------------- ------------- -------------
Net income (loss)................ $ (1,347,045) $ 300,178 $ 1,564,518 $ 215,288 $ 1,008,973
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Earnings (loss) per share:
Basic............................ $ (.49) $ .11 $ .56 $ .08 $ .34
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Diluted.......................... $ (.49) $ .11 $ .52 $ .08 $ .31
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN TOTAL
CAPITAL IN RETAINED CURRENCY SHARE-
COMMON EXCESS OF EARNINGS TREASURY TRANSLATION HOLDERS'
SHARES STOCK PAR VALUE (DEFICIT) STOCK ADJUSTMENT EQUITY
--------- ----------- ---------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1994............. 2,788,228 $ 27,882 $9,396,890 $ 763,256 $ (82,901) $ (62,595) $10,042,532
Foreign currency translation
adjustment........................... -- -- -- -- -- (62,461) (62,461)
Net loss............................... -- -- -- (1,347,045) -- -- (1,347,045)
--------- ----------- ---------- ---------- --------- ----------- -----------
Balance September 30, 1995............. 2,788,228 $ 27,882 $9,396,890 $ (583,789) $ (82,901) $(125,056) $ 8,633,026
Foreign currency translation
adjustment........................... -- -- -- -- -- 8,607 8,607
Exercise of stock options.............. 14,500 145 26,199 -- -- -- 26,344
Net income............................. -- -- -- 300,178 -- -- 300,178
--------- ----------- ---------- ---------- --------- ----------- -----------
Balance September 30, 1996............. 2,802,728 $ 28,027 $9,423,089 $ (283,611) $ (82,901) $(116,449) $ 8,968,155
Foreign currency translation
adjustment........................... -- -- -- -- -- 149,678 149,678
Stock bonus awarded from treasury...... -- -- (28,926) -- 82,901 -- 53,975
Exercise of stock options.............. 244,332 2,443 473,900 -- (298,686) -- 177,657
Net income............................. -- -- -- 1,564,518 -- -- 1,564,518
--------- ----------- ---------- ---------- --------- ----------- -----------
Balance September 30, 1997............. 3,047,060 $ 30,470 $9,868,063 $1,280,907 $(298,686) $ 33,229 $10,913,983
Foreign currency translation adjustment
(unaudited).......................... -- -- -- -- -- 8,415 8,415
Net income (unaudited)................. -- -- -- 1,008,973 -- -- 1,008,973
--------- ----------- ---------- ---------- --------- ----------- -----------
Balance December 31, 1997 (unaudited).. 3,047,060 $ 30,470 $9,868,063 $2,289,880 $(298,686) $ 41,644 $11,931,371
--------- ----------- ---------- ---------- --------- ----------- -----------
--------- ----------- ---------- ---------- --------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------------- ---------------------
1995 1996 1997 1996 1997
----------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $(1,347,045) $ 300,178 $1,564,518 $ 215,288 $1,008,973
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization......... 704,900 699,211 783,859 183,127 166,752
Amortization of deferred gain on sale
and leaseback....................... (332,100) (332,100) (433,993) (343,210) --
Stock bonus award..................... -- -- 53,975 -- --
Foreign exchange gain................. (550) (41,908) (39,896) (33,623) --
Change in assets and liabilities:
Accounts receivable................. 1,417,089 (122,162) (820,556) (27,179) (548,035)
Inventories......................... 1,358,533 (2,593,382) (1,880,543) (819,790) 487,928
Prepaid expenses.................... 13,513 (218,762) 230,371 (57,163) (83,995)
Other assets........................ (30,000) 67,780 4,910 (13,728) 29,936
Accounts payable.................... 708,591 1,045,453 (727,574) (107,485) 129,235
Accrued wages and expenses.......... 409,285 (460,350) 875,673 217,849 (262,876)
Income taxes payable................ 48,077 7,517 14,762 13,844 46,419
Other liabilities................... (63,878) (45,833) (19,374) (15,136) (18,656)
----------- ---------- ---------- --------- ----------
Net cash provided by (used in)
operating activities............ 2,886,415 (1,694,358) (393,868) (787,206) 955,681
----------- ---------- ---------- --------- ----------
Cash flows from investing activities:
Capital expenditures, net of minor
disposals............................. (608,808) (482,111) (925,024) (102,286) (107,865)
----------- ---------- ---------- --------- ----------
Net cash used in investing
activities...................... (608,808) (482,111) (925,024) (102,286) (107,865)
----------- ---------- ---------- --------- ----------
Cash flows from financing activities:
Net borrowings under U.S. credit and
security agreement.................... -- 4,142,898 1,860,518 767,426 (1,107,861)
Repayments of U.S. revolving credit
agreement............................. (1,700,000) (2,800,000) -- -- --
Proceeds from exercise of stock
options............................... -- 26,344 177,657 -- --
(Decrease) increase in borrowings under
U.K. revolving credit agreement....... (29,511) 57,251 (831,275) 302,509 301,169
Borrowings under U.K. term loan......... -- -- 810,000 -- --
Repayment of U.K. mortgage.............. (145,280) (140,846) (353,112) (139,080) --
Repayment of term loan.................. -- -- (200,000) -- --
Repayments of other debt................ (92,443) (79,779) (127,280) (19,345) (48,839)
----------- ---------- ---------- --------- ----------
Net cash (used in) provided by
financing activities............ (1,967,234) 1,205,868 1,336,508 911,510 (855,531)
----------- ---------- ---------- --------- ----------
Effect of exchange rate changes on cash... (68,923) 24,627 64,088 (102,900) (54,589)
----------- ---------- ---------- --------- ----------
Net increase (decrease) in cash........... 241,450 (945,974) 81,704 (80,882) (62,304)
Cash at beginning of period............... 910,400 1,151,850 205,876 205,876 287,580
----------- ---------- ---------- --------- ----------
Cash at end of period..................... $ 1,151,850 $ 205,876 $ 287,580 $ 124,994 $ 225,276
----------- ---------- ---------- --------- ----------
----------- ---------- ---------- --------- ----------
Non-cash investing and financing
activities:
Capital lease obligations............... $ 178,151 -- $ 276,624 -- --
Cash paid during the period for:
Income taxes............................ $ 32,097 $ 78,121 $ 29,203 -- --
Interest................................ $ 974,640 $ 888,061 $1,118,963 $ 249,483 $ 301,054
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company designs, manufactures, assembles and markets closed circuit
television systems for use in security, surveillance, safety, and control
purposes by end users. The Company markets its products worldwide directly to
installing dealers, system integrators, government entities and distributors.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vicon
Industries, Inc. (the Company) and its wholly owned subsidiaries, Vicon
Industries Foreign Sales Corp., a Foreign Sales Corporation (FSC), and Vicon
Industries (U.K.), Ltd. after elimination of intercompany accounts and
transactions.
REVENUE RECOGNITION
Revenues are recognized when products are sold and title is passed to a
third party, generally at the time of shipment.
INVENTORIES
Inventories are valued at the lower of cost (on a moving average basis which
approximates a first-in, first-out method) or market. When it is determined that
a product or product line will be sold below carrying cost, affected on hand
inventories are written down to their estimated net realizable values.
LONG-LIVED ASSETS
Property, plant, and equipment are recorded at cost and include expenditures
for replacements or major improvements. Depreciation, which includes
amortization of assets under capital leases, is computed by the straight-line
method over the estimated useful lives of the related assets for financial
reporting purposes and on an accelerated basis for income tax purposes.
Machinery, equipment and vehicles are being depreciated over periods ranging
from 2 to 10 years. The Company's building is being depreciated over a period of
40 years and leasehold improvements are amortized over the lesser of their
estimated useful lives or the remaining lease term. In connection with the
Company's move to a new principal operating facility in 1997, approximately $6.3
million of fully depreciated abandoned assets and leasehold improvements were
written off.
The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," effective October 1, 1996. The Company
reviews its long-lived assets (property, plant and equipment) for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected cash flows, undiscounted and
without interest, is less than the carrying amount of the asset, an impairment
loss is recognized as the amount by which the carrying amount of the asset
exceeds its fair value. The adoption of Statement No.121 had no impact on the
Company's financial positions or results of operations.
F-7
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Product research and development costs are principally charged to cost of
sales as incurred, and amounted to approximately $1,900,000, $1,800,000 and
$2,000,000 in fiscal 1995, 1996, and 1997, respectively.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share" which
requires companies to present basic and diluted earnings per share (EPS),
instead of primary and fully diluted EPS that was previously required. Basic
earnings per share are computed based on the weighted average number of shares
outstanding. Diluted earnings per share reflect the maximum dilution that would
have resulted from the exercise of stock options and incremental shares issuable
under a deferred compensation agreement (see Note 9).
The new standard was adopted by the Company in the first quarter ended
December 31, 1997 of fiscal year 1998. Prior period earnings per share data has
been restated to apply the provisions of SFAS 128.
FOREIGN CURRENCY TRANSLATION
Foreign currency translation is performed utilizing the current rate method
under which assets and liabilities are translated at the exchange rate on the
balance sheet date, while revenues, costs, and expenses are translated at the
average exchange rate for the reporting period. The resulting translation
adjustment of $(116,000) and $33,000 at September 30, 1996 and 1997,
respectively, is recorded as a component of shareholders' equity. Intercompany
balances not deemed long-term in nature at the balance sheet date resulted in a
translation gain of $47,000, $14,000 and $35,000 in 1995, 1996, and 1997,
respectively, which is reflected in cost of sales. Gains and losses on contracts
which hedge specific foreign currency denominated commitments, primarily
inventory purchases, are included in cost of sales.
INCOME TAXES
The Company accounts for income taxes under the provisions of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to be recovered or settled (see
Note 5).
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments", requires disclosure of the fair value of
certain financial instruments. The carrying amounts for accounts and other
receivables, accounts payable and accrued expenses approximate fair value
because of the short-term maturity of these instruments. The carrying amounts of
the Company's long-term debt and extended term related party accounts payable
approximates fair value since the interest rates are prime-based and,
accordingly, are adjusted for market rate fluctuations. The fair value of
forward
F-8
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
exchange contracts is estimated by obtaining quoted market prices. The exchange
rates on committed forward exchange contracts at September 30, 1997 approximated
market rates for similar term contracts.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is recorded.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform with current
year presentation.
NOTE 2. INVESTMENT IN AFFILIATE
The Company's 50 percent ownership interest in Chun Shin Electronics, Inc.,
a joint venture company which assembles certain Vicon products in South Korea,
is accounted for using the equity method of accounting which reflects the cost
of the Company's investment adjusted for the Company's proportionate share of
earnings or losses. Such earnings or losses were not material during each of the
three years ended September 30, 1997. Assets and sales of the joint venture were
approximately $4.9 million and $8.8 million, respectively, for the fiscal year
ended September 30, 1997. A significant portion of joint venture product sales
were to related parties including approximately $7.0 million indirectly to the
Company and approximately $1.7 million to a company owned by the other joint
venture partner (see Note 12).
NOTE 3. DEFERRED GAIN ON SALE AND LEASEBACK
In fiscal 1988, under a sale and leaseback agreement, the Company sold its
principal operating facility in Melville, New York for approximately $11 million
and leased it back under a ten-year lease agreement. The transaction resulted in
a net gain of $3,321,000 which was deferred and was amortized over the ten-year
lease period. The Company terminated this lease in 1997 and wrote off the
unamortized balance against the cost of relocation.
F-9
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 4. SHORT-TERM BORROWINGS
Borrowings under revolving credit agreement represent short term borrowings
by the Company's U.K. subsidiary under a bank overdraft facility. In April 1997,
such credit agreement was amended to provide for maximum borrowings of 600,000
pounds ($972,000) and is secured by all the assets of the subsidiary. Maximum
borrowings during 1995, 1996 and 1997 amounted to approximately $1,083,000,
$1,045,000 and $1,282,000, respectively. The weighted-average interest rate on
borrowings during these years was 8.50% in 1995, 8.00% in 1996 and 8.27% in
1997.
At September 30, 1996 and 1997 and December 31, 1997, Accounts
Payable--related party included approximately $4.4 million, $5.0 million and
$6.4 million, respectively, of extended accounts payable balances due Chugai
Boyeki Company, Ltd., a shareholder of the Company. The extended accounts
payable balances at September 30, 1996 and 1997 and December 31, 1997, includes
approximately $4.1 million, $4.7 million and $6.3 million, respectively, of
purchases denominated in U.S. dollars which bear interest at the prime rate of
the related party's U.S. bank (8.25% at September 30, 1996 and 8.50% at
September 30, 1997 and December 31, 1997). The remaining balances are
denominated in Japanese yen and bear interest at the related party's internal
lending rate (4.0% at September 30, 1996 and 1997 and December 31, 1997).
NOTE 5. INCOME TAXES
The components of income tax expense for the fiscal years indicated are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal.................................................. $ -- $ -- $ 24,000
State.................................................... -- -- 5,000
Foreign.................................................. 80,000 85,000 53,000
---------- ---------- ----------
$ 80,000 $ 85,000 $ 82,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
There were no deferred tax expenses in any of the years presented above.
A reconciliation of the U.S. statutory tax rate to the Company's effective
tax rate follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- ----------- ----------- -----------
U.S. statutory tax............................ $ (431,000) (34.0%) $ 131,000 34.0% $ 560,000 34.0%
Change in valuation allowance................. 532,000 42.0 (56,000) (14.5) (467,000) (28.3)
Foreign subsidiary operations................. (42,000) (3.3) -- -- 3,000 0.2
Officers' life insurance...................... 17,000 1.3 5,000 1.3 4,000 0.2
Other......................................... 4,000 .3 5,000 1.3 (18,000) (1.1)
----------- ----- ----------- ----- ----------- -----
Effective Tax Rate........................ $ 80,000 6.3% $ 85,000 22.1% $ 82,000 5.0%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
F-10
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1996 and
1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Deferred gain on sale and leaseback............................................... $ 146,000 $ --
Inventory obsolescence and disposition reserves................................... 418,000 457,000
Deferred compensation accruals.................................................... 206,000 199,000
Allowance for doubtful accounts receivable........................................ 123,000 162,000
Net operating loss carryforwards.................................................. 2,001,000 1,726,000
General business credit carryforwards............................................. 186,000 186,000
Other............................................................................. 8,000 8,000
------------- -------------
Total deferred tax assets....................................................... 3,088,000 2,738,000
Less valuation allowance............................................................ (2,992,000) (2,525,000)
------------- -------------
Net deferred tax assets......................................................... 96,000 213,000
------------- -------------
Deferred tax liabilities:
Cash surrender value of officers' life insurance.................................. 73,000 73,000
Other............................................................................. 23,000 140,000
------------- -------------
Total deferred tax liabilities.................................................. 96,000 213,000
------------- -------------
Net deferred tax assets and liabilities............................................. $ -0- $ -0-
------------- -------------
</TABLE>
The Company has provided a valuation allowance of $2,525,000 for deferred
tax assets since realization of these assets was not assured. At September 30,
1997, the Company had net operating loss carryforwards for federal income tax
purposes of approximately $5,100,000 which are available to offset future
federal taxable income, if any, through 2011. The Company also had general
business tax credit carryforwards for federal income tax purposes of
approximately $186,000 which are available to reduce future federal income
taxes, if any, through 2003. Pretax domestic income (loss) amounted to
approximately ($1,626,000), $136,000 and $1,414,000 in fiscal years 1995, 1996
and 1997, respectively. Pretax foreign income amounted to approximately
$291,000, $311,000 and $236,000 in fiscal years 1995, 1996 and 1997,
respectively.
F-11
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 6. LONG-TERM DEBT
Long-term debt is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER
-------------------- 31,
1996 1997 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Related party:
Mortgage loan denominated in Japanese yen at a formula
interest rate (6.3% at September 30, 1996)........... $ 393,008 $ -- $ --
Term loan with interest rate of 1% above the prevailing
prime rate (9.25% at September 30, 1996 and 9.50% at
September 30, 1997 and December 31, 1997)............ 2,000,000 1,800,000 1,800,000
--------- --------- -----------
2,393,008 1,800,000 1,800,000
Less installments due within one year.................. 131,003 360,000 360,000
--------- --------- -----------
$2,262,005 $1,440,000 $1,440,000
--------- --------- -----------
--------- --------- -----------
Banks and other:
Revolving credit loan.................................. $4,142,898 $6,003,416 $4,895,555
Bank term loan......................................... -- 776,250 770,001
Capital lease obligations.............................. 86,520 279,794 251,705
Other.................................................. 10,179 -- --
--------- --------- -----------
4,239,597 7,059,460 5,917,261
Less installments due within one year.................. 72,716 155,092 141,169
--------- --------- -----------
$4,166,881 $6,904,368 $5,776,092
--------- --------- -----------
--------- --------- -----------
</TABLE>
In October 1993, the Company issued a $2,000,000 secured promissory note to
Chugai Boyeki Company, Ltd., a related party. The note is subordinated to senior
bank debt with regard to liens and interest under certain conditions. The
remaining balance at September 30, 1997 and December 31, 1997 is due in
installments of $360,000 on July 1, 1998 and $1,440,000 on July 1, 1999.
In December 1995, the Company entered into a two year Credit and Security
Agreement with a bank which currently provides for maximum borrowings of
$6,500,000, subject to an availability formula based on accounts receivable and
inventory balances. In February 1997, the term of the agreement was extended to
January 31, 1999. Borrowings under the agreement bear interest at the bank's
prime rate plus 1.00% (9.50% at September 30, 1997 and December 31, 1997). The
Credit and Security Agreement contains restrictive covenants which, among other
things, restricts the payment of dividends and requires the Company to maintain
certain levels of net worth, earnings and ratios of interest coverage and debt
to net worth. Borrowings under this agreement are secured by substantially all
assets of the Company.
In April 1997, the Company repaid its U.K. related party mortgage loan with
the proceeds of a new ten year 500,000 pound sterling (approximately $810,000)
bank term loan. The term loan is payable in equal monthly installments with
interest at a fixed rate of 9%. The loan is secured by a first mortgage on the
subsidiary's property and contains restrictive covenants which, among other
things, require the subsidiary to maintain certain levels of net worth, earnings
and debt service coverage.
F-12
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 6. LONG-TERM DEBT (CONTINUED)
Long-term debt maturing in each of the fiscal years subsequent to September
30, 1997 approximates $515,000 in 1998, $7,577,000 in 1999, $139,000 in 2000,
$144,000 in 2001, $113,000 in 2002 and $371,000 thereafter.
At September 30, 1997, future minimum annual rental commitments under
non-cancelable capital lease obligations were as follows: $100,090 in 1998,
$69,334 per year in 1999 through 2001, and $33,454 in 2002.
NOTE 7. FOREIGN OPERATIONS
The Company operates one foreign entity, Vicon Industries (U.K.), Ltd., a
wholly owned subsidiary which markets and distributes the Company's products
principally within the United Kingdom and Europe.
The following summarizes certain information concerning the Company's
operations in the U.S. and U.K. for fiscal years 1995, 1996, and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales
U.S............................................................... $ 34,294,000 $ 35,468,000 $ 43,605,000
U.K............................................................... 9,553,000 7,723,000 7,914,000
------------- ------------- -------------
Total........................................................... $ 43,847,000 $ 43,191,000 $ 51,519,000
Operating income (loss)
U.S............................................................... $ (827,000) $ 805,000 $ 2,387,000
U.K............................................................... 573,000 421,000 363,000
------------- ------------- -------------
Total........................................................... $ (254,000) $ 1,226,000 $ 2,750,000
Identifiable assets
U.S............................................................... $ 21,213,000 $ 23,260,000 $ 26,372,000
U.K............................................................... 5,210,000 4,825,000 4,828,000
------------- ------------- -------------
Total........................................................... $ 26,423,000 $ 28,085,000 $ 31,200,000
Net assets--U.K..................................................... $ 711,000 $ 935,000 $ 1,515,000
</TABLE>
U.S. sales include $8,161,000, $8,531,000 and $10,747,000 for export in
fiscal years 1995, 1996, and 1997, respectively. Operating income (loss)
excludes foreign exchange gain/loss, interest expense and income taxes. U.S.
assets include $1,127,000, $117,000 and $162,000 in fiscal years 1995, 1996 and
1997, respectively, of cash for general corporate use.
NOTE 8. STOCK OPTIONS AND STOCK PURCHASE RIGHTS
The Company maintains stock option plans which include both incentive and
non-qualified options covering a total of 467,032 shares of common stock
reserved for issuance to key employees, including officers, and directors. Such
amount includes a total of 200,000 options reserved for issuance under the 1996
Incentive Stock Option Plan, as well as a total of 50,000 options reserved for
issuance under the 1996 Non-Qualified Stock Option Plan for Outside Directors,
approved by the shareholders in April 1997. All
F-13
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 8. STOCK OPTIONS AND STOCK PURCHASE RIGHTS (CONTINUED)
options are issued at fair market value at the grant date and are exercisable in
varying installments according to the plans. The plans allow for the payment of
option exercises through the surrender of previously owned shares based on the
fair market value of such shares at the date of surrender. During fiscal 1997, a
total of 45,952 common shares were surrendered pursuant to stock option
exercises, which are held in treasury. There were 32,935 and 47,535 shares
available for grant at September 30, 1996 and 1997, respectively. As of
September 30, 1995, 1996, and 1997, options exercisable pursuant to the plans
amounted to 198,783, 289,471 and 149,838, respectively. As of December 31, 1997,
there were 47,535 shares available for grant and 271,938 options exercisable
pursuant to the plans.
Changes in outstanding stock options are as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Balance--September 30, 1994.................................................................. 431,174 $ 2.03
Options granted.............................................................................. 25,000 $ 1.94
Options exercised............................................................................ -- --
Options forfeited............................................................................ (156,513) $ 2.07
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance--September 30, 1995.................................................................. 299,661 $ 2.01
Options granted.............................................................................. 245,397 $ 1.72
Options exercised............................................................................ (14,500) $ 1.82
Options forfeited............................................................................ (85,909) $ 2.13
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance--September 30, 1996.................................................................. 444,649 $ 1.83
Options granted.............................................................................. 241,000 $ 2.77
Options exercised............................................................................ (244,332) $ 1.95
Options forfeited............................................................................ (21,820) $ 2.35
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance--September 30, 1997.................................................................. 419,497 $ 2.27
Options granted (unaudited).................................................................. -- --
Options exercised (unaudited)................................................................ -- --
Options forfeited (unaudited)................................................................ -- --
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance--December 31, 1997 (unaudited)....................................................... 419,497 $ 2.27
Price range $1.69--$2.24 (weighted-average contractual life of 2.7 years) (unaudited)........ 206,897 $ 1.78
Price range $2.25--$3.06 (weighted-average contractual life of 4.3 years) (unaudited)........ 212,600 $ 2.76
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Exercisable options--
September 30, 1995......................................................................... 198,783 $ 2.07
September 30, 1996......................................................................... 289,471 $ 1.89
September 30, 1997......................................................................... 149,838 $ 1.96
December 31, 1997 (unaudited).............................................................. 271,938 $ 1.96
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 8. STOCK OPTIONS AND STOCK PURCHASE RIGHTS (CONTINUED)
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of this Statement.
The fair value for options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted average assumptions for
1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Risk-free interest rate...................................................................... 6.0% 6.0%
Dividend yield............................................................................... 0.0% 0.0%
Volatility factor............................................................................ 46.2% 52.7%
Weighted average expected life............................................................... 3 years 3 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income and earnings per share are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ------------
<S> <C> <C>
Net income:
As reported....................................................... $ 300,178 $ 1,564,518
Pro forma......................................................... $ 213,848 $ 1,364,368
Earnings per share:
As reported
Basic........................................................... $ .11 $ .56
Diluted......................................................... $ .11 $ .52
Pro forma
Basic........................................................... $ .08 $ .49
Diluted......................................................... $ .08 $ .45
Weighted average fair value of options granted...................... $ .64 $ 1.13
</TABLE>
Pro forma net earnings reflect only options granted in fiscal 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net earnings amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to October 1, 1995 was
not considered.
F-15
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 9. EARNINGS PER SHARE
The following table provides the components of the basic and diluted
earnings per share (EPS) computations:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------
<S> <C> <C> <C>
1995 1996 1997
------------- ------------ ------------
BASIC EPS COMPUTATION
Net income (loss)...................................................... $ (1,347,045) $ 300,178 $ 1,564,518
Weighted average shares outstanding.................................... 2,762,828 2,765,245 2,803,805
Basic earnings (loss) per share........................................ $ (.49) $ .11 $ .56
------------- ------------ ------------
------------- ------------ ------------
DILUTED EPS COMPUTATION
Net income (loss)...................................................... $ (1,347,045) $ 300,178 $ 1,564,518
Weighted average shares outstanding.................................... 2,762,828 2,765,245 2,803,805
Stock options.......................................................... -- 75,341 218,191
------------- ------------ ------------
Diluted shares outstanding............................................. 2,762,828 2,840,586 3,021,996
Diluted earnings (loss) per share...................................... $ (.49) $ .11 $ .52
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
(UNAUDITED)
BASIC EPS COMPUTATION
Net income............................................................................ $ 215,288 $ 1,008,973
Weighted average shares outstanding................................................... 2,777,328 3,001,108
Basic earnings per share.............................................................. $ .08 $ .34
------------ ------------
------------ ------------
DILUTED EPS COMPUTATION
Net income............................................................................ $ 215,288 $ 1,008,973
Weighted average shares outstanding................................................... 2,777,328 3,001,108
Stock options......................................................................... 93,104 291,264
Stock compensation arrangement........................................................ -- 353
------------ ------------
Diluted shares outstanding............................................................ 2,870,432 3,292,725
Diluted earnings per share............................................................ $ .08 $ .31
------------ ------------
------------ ------------
</TABLE>
NOTE 10. INDUSTRY SEGMENT AND MAJOR CUSTOMER
The Company operates in one industry which encompasses the design,
manufacture, assembly, and marketing of closed-circuit television ("CCTV")
equipment and systems for the CCTV segment of the
F-16
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 10. INDUSTRY SEGMENT AND MAJOR CUSTOMER (CONTINUED)
security products industry. The Company's products include all components of a
video surveillance system such as remote positioning devices, cameras, monitors,
video switchers, housings, mounting accessories, recording devices, manual and
motorized lenses, controls, video signal equipment, and consoles for system
assembly. No customer represented sales in excess of ten percent of consolidated
revenues during any of the three fiscal years presented.
NOTE 11. COMMITMENTS
In December 1996, the Company entered into a five year lease agreement for a
new principal operating facility. The aggregate remaining commitment under such
agreement amounted to $1,614,000 at September 30, 1997 with minimum rentals for
the fiscal years shown as follows: 1998--$370,000; 1999-- $377,000;
2000--385,000; 2001--$392,000; and 2002--$90,000. Additionally, the Company
occupies certain other facilities, or is contingently liable, under operating
leases which expire at various dates through 2000. The leases, which cover
periods from one to three years, generally provide for renewal options at
specified rental amounts. The aggregate operating lease commitment at September
30, 1997 was $106,000 with minimum rentals for the fiscal years shown as
follows: 1998--$79,000; 1999--$18,000; and 2000- $9,000.
The Company is a party to employment agreements with five executives which
provide for, among other things, the payment of compensation if there is a
change in control without Board of Director approval (as defined in the
agreements). The contingent liability under these change in control provisions
at September 30, 1997 was approximately $2,115,000. The total compensation
payable under these agreements aggregated $2,085,000 at September 30, 1997. The
Company is also a party to insured deferred compensation agreements with two
retired officers. The aggregate remaining compensation payments of approximately
$813,000 as of September 30, 1997 are subject to the individuals' adherence to
certain non-compete covenants, and are payable in monthly installments through
December 2003.
In October 1997, the Company's Chief Executive Officer was provided a
deferred compensation benefit of 45,952 shares of common stock currently held by
the Company in treasury. The issuance of such shares occurs upon retirement of
the executive, or earlier under certain conditions. The market value of such
shares approximated $345,000 at the date of agreement, which will be amortized
over the expected minimum service period of the executive.
Sales to customers from the Company's U.K. subsidiary are denominated in
British pounds sterling. The Company attempts to minimize its currency exposure
on these sales through the purchase of forward exchange contracts to cover its
U.S. dollar denominated product cost. These contracts generally involve the
exchange of one currency for another at a future date and specified exchange
rate. At September 30, 1997, the Company had approximately $1,350,000 of
outstanding forward exchange contracts to sell British pounds. Such contracts
expire at varying dates and exchange rates through January 26, 1998.
The Company's purchases of Japanese sourced products through Chugai Boyeki
Company, Ltd., a related party, are denominated in Japanese yen. At September
30, 1997, the Company did not have any forward exchange contracts to purchase
Japanese yen.
F-17
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION WITH RESPECT TO DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
NOTE 12. RELATED PARTY TRANSACTIONS
As of September 30, 1996 and 1997, Chugai Boyeki Company, Ltd. and
affiliates ("Chugai") owned 548,715 shares of the Company's common stock (18.3%
of the total outstanding shares). The Company, which has been conducting
business with Chugai for approximately 18 years, imports certain finished
products and components through Chugai and also sells its products to Chugai who
resells the products in certain Asian and European markets. The Company
purchased approximately $11.6, $9.2 and $7.1 million of products and components
from Chugai in fiscal years 1995, 1996, and 1997, respectively, and the Company
sold $3.4, $2.1, and $2.7 million of product to Chugai for distribution in
fiscal years 1995, 1996, and 1997, respectively. At September 30, 1996 and 1997
and December 31, 1997, the Company owed $7.5 million, $7.1 million and $6.9
million, respectively, to Chugai and Chugai owed $148,000, $276,000 and
$816,000, respectively, to the Company resulting from purchases of products. The
amounts owed to Chugai are secured by a subordinated lien on substantially all
the Company's assets. During 1997, the Company repaid a mortgage loan made by
Chugai. In October 1993, the Company borrowed $2 million from Chugai under a
promissory note agreement. See Note 6 for a further discussion of this
transaction.
As of September 30, 1997, Mr. Chu S. Chun controlled 204,507 shares of the
Company's common stock (6.8% of the total outstanding shares). Mr. Chun owns
Chun Shin Industries, Inc., the Company's 50% South Korean joint venture partner
in Chun Shin Security which purchases product from the joint venture (see Note
2). Mr. Chun also controls International Industries, Inc. (I.I.I.), a U.S. based
company, which arranges the importation and provides short term financing on all
the Company's product purchases from the joint venture company, Chun Shin
Electronics, Inc. During fiscal years 1996 and 1997, the Company purchased
approximately $5.8 million and $7.0 million of products from I.I.I. under this
agreement. In addition, the Company sold approximately $900,000 and $1,100,000
of its products to I.I.I. in 1996 and 1997, respectively. At September 30, 1996
and 1997 and December 31, 1997, I.I.I. owed the Company approximately $368,000,
$279,000 and $192,000, respectively.
NOTE 13. SUBSEQUENT EVENT (UNAUDITED)
In January 1998, the Company purchased its principal operating facility for
approximately $3.3 million. The purchase was financed with the proceeds of an
aggregate $2.9 million mortgage and term loan agreement with a bank. Such
agreement includes a $2,512,000 ten-year mortgage loan payable in monthly
installments through January 2008, with a $1,188,000 payment due at the end of
the term. The agreement also provides a $388,000 five-year term loan payable in
monthly installments through January 2003. Both loans bear interest at the
bank's prime rate minus 1.35% (7.15% at January 29, 1998).
The loans are secured by a first mortgage on the property and fixtures and
contain restrictive covenants which, among other things, requires the company to
maintain certain levels of earnings and ratios of debt service and interest
coverage and debt to net worth.
At the same time, the Company entered into interest rate swap agreements
with the same bank to effectively convert the foregoing floating rate long-term
loans to fixed rate loans. These agreements change the Company's interest rate
exposure on its $2,512,000 floating rate mortgage loan to a fixed 7.79% and its
$388,000 floating rate term loan to a fixed 7.7%. The interest rate swap
agreements mature in the same amount and over the same period as the related
mortgage and term loans.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, ANY SELLING SHAREHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER, SOLICITATION OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS FURNISHED OR
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information........................... 1
Information Incorporated by Reference........... 1
Prospectus Summary.............................. 2
Special Note Regarding Forward-Looking
Statements.................................... 6
Risk Factors.................................... 6
Use of Proceeds................................. 14
Price Range of Common Stock and Dividends....... 15
Capitalization.................................. 16
Selected Consolidated Financial and Operating
Data.......................................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business........................................ 24
Management...................................... 34
Principal and Selling Shareholders.............. 41
Certain Transactions............................ 42
Description of Capital Stock.................... 43
Shares Eligible for Future Sale................. 44
Underwriting.................................... 46
Legal Matters................................... 47
Experts......................................... 47
Index to Consolidated Financial
Statements.................................... F-1
</TABLE>
1,575,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
FAHNESTOCK & CO. INC.
SOUTHEAST RESEARCH
PARTNERS, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Registrant estimates that expenses payable by the Registrant in
connection with the Offering described in this Registration Statement (other
than underwriting discounts and commissions) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $7,486.56
American Stock Exchange filing fee.............................. $ *
NASD filing fee................................................. $3,037.82
Registrar and Transfer Agent's fees and expenses................ *
Printing and engraving expenses................................. *
Accounting fees and expenses.................................... *
Fees and expenses (including legal fees) for qualification under
state securities laws......................................... *
Miscellaneous................................................... *
Total..................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 7 of the New York Business Corporation Law provides for the
indemnification of directors and officers subject to certain limitations. Among
other matters, the statute provides that to be entitled to indemnification under
the statutory provisions, a person who is sued or threatened to be sued by
reason of being a director or officer of a New York corporation must
affirmatively establish that he acted in good faith for a purpose which he
reasonably believed to be in the best interests of the corporation. The statute
requires court approval to provide indemnification in a derivative action under
certain circumstances. Additionally, the indemnification to which directors,
officers and other persons serving the corporation are entitled excludes amounts
payable in a derivative action where the director, officer or other person is
adjudged to be liable to the corporation.
The By-laws of the Company provide for the indemnification of its directors
and officers to the maximum extent provided by law.
The Company's directors and officers are insured against certain liabilities
for actions taken in such capacities, excluding certain liabilities under the
Securities Act of 1933, the Securities Exchange Act of 1934 or similar state
laws relating to offerings of securities.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<C> <S> <C>
1 Underwriting Agreement**
3 Certificate of Incorporation and By-laws, as amended (incorporated by
reference to Exhibit 3 of the 1985 Annual Report on Form 10-K; Exhibit 4B of
Form S-2 filed in Registration Statement No. 33-10435 and Exhibit A, B and C
of the 1987 Proxy Statement)
4.1 Specimen Common Stock Certificate*
4.2 Underwriters' Warrants and Warrant Agreement**
5 Opinion of Schoeman, Marsh & Updike, LLP+
10.1 Credit and Security Agreement dated December 27, 1995 between the Registrant
and IBJ Schroder Bank & Trust Company (incorporated by reference to Exhibit 10
the 1995 Annual Report on Form 10-K)
10.2 Credit and Security Agreement between the Registrant and IBJ Schroder Bank &
Trust Company, First Amendment dated August 19, 1996 (incorporated by
reference to Exhibit 10.2 of the 1996 Annual Report on Form 10-K)
10.3 Credit and Security Agreement between the Registrant and IBJ Schroder Bank &
Trust Company, Second Amendment dated February 5, 1997 (incorporated by
reference to the Exhibit 10.1 of the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997)
10.4 Promissory Note dated October 5, 1993 between the Registrant and Chugai Boyeki
Company, Ltd., first amendment dated February 5, 1997 (incorporated by
reference to Exhibit 10.4 of the 1997 Annual Report on Form 10-K)
10.5 Employment Contract dated October 1, 1997 between the Registrant and Kenneth
M. Darby (incorporated by reference to Exhibit 10.5 of the 1997 Annual Report
on Form 10-K)
10.6 Employment Contract dated October 1, 1996 between the Registrant and Arthur D.
Roche (incorporated by reference to Exhibit 10.6 of the 1996 Annual Report on
Form 10-K)
10.7 Employment Agreement dated October 1, 1997 between the Registrant and John L.
Eckman (incorporated by reference to Exhibit 10.7 of the 1997 Annual Report on
Form 10-K)
10.8 Employment Agreement dated October 1, 1997 between the Registrant and Peter
Horn (incorporated by reference to Exhibit 10.8 of the 1997 Annual Report on
Form 10-K)
10.9 Employment Agreement dated October 1, 1997 between the Registrant and Yacov
Pshtissky (incorporated by reference to Exhibit 10.9 of the 1997 Annual Report
on Form 10-K)
10.10 Deferred Compensation Agreements dated November 1, 1986 between the Registrant
and Donald N. Horn and Arthur V. Wallace (incorporated by reference to Exhibit
10E of the 1992 Annual Report on Form 10-K)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S> <C>
10.11 Lease agreement dated December 24, 1996 between the Registrant and RREEF
MIDAMERICA/EAST-V NINE, INC. (incorporated by reference to Exhibit 10.8 of the
1996 Annual Report on Form 10-K)
10.12 Amended and restated 1986 Incentive Stock Option Plan (incorporated by
reference to Exhibit 19 of the 1990 Annual Report on Form 10-K)
10.13 1994 Incentive Stock Option Plan (incorporated by reference to Exhibit 10L of
the 1994 Annual Report on Form 10-K)
10.14 1994 Non-Qualified Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 10M of the 1994 Annual Report on Form 10-K)
10.15 1996 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.15
of the 1997 Annual Report on Form 10-K)
10.16 1996 Non-Qualified Stock Option Plan for Outside Directors (incorporated by
reference to Exhibit 10.16 of the 1997 Annual Report on Form 10-K)
10.17 Advice of borrowing terms between the Registrant and National Westminster Bank
PLC dated April 22, 1997 (incorporated by reference to Exhibit 10 of the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997)
10.18 Commercial fixed rate loan agreement between the Registrant and National
Westminster Bank PLC dated April 8, 1997 (incorporated by reference to Exhibit
10 of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997)
10.19 Agreement of Purchase and Sale dated as of January 29, 1998 between Vicon
Industries, Inc. and RREEF Midamerica/East-V, Nine, Inc. (incorporated by
reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the quarter
ended December 31, 1997)
10.20 Loan Agreement dated January 29, 1998 between Vicon Industries, Inc. and
Keybank National Association (incorporated by reference to Exhibit 10.2 of the
Quarterly Report on Form 10-Q for the quarter ended December 31, 1997)
10.21 Mortgage Note dated January 29, 1998 by Vicon Industries, Inc., as borrower,
to order of Keybank National Association in the initial principal amount of
$2,512,000 (incorporated by reference to Exhibit 10.3 of the Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997)
10.22 Term Loan Note dated January 29, 1998 by Vicon Industries, Inc., as borrower,
to order of Keybank National Association in the initial principal amount of
$388,000 (incorporated by reference to Exhibit 10.4 of the Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997)
10.23 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries,
Inc. in favor of Keybank National Association in amount of $2,512,000
(incorporated by reference to Exhibit 10.5 of the Quarterly Report on Form
10-Q for the quarter ended December 31, 1997)
10.24 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries,
Inc. in favor of Keybank National Association in amount of $388,000
(incorporated by reference to Exhibit 10.6 of the Quarterly Report on Form
10-Q for the quarter ended December 31, 1997)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S> <C>
10.25 Interest Rate Master Swap Agreement dated December 11, 1997 between the
Registrant and KeyBank National Association (incorporated by reference to
Exhibit 10.7 of the Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997)
22 Subsidiaries of the Registrant (incorporated by reference to the Notes to the
Consolidated Financial Statements)
23.1 Consent of Schoeman, Marsh & Updike, LLP (included in Exhibit 5)+
23.2 Consent of KPMG Peat Marwick LLP+
24 Power of Attorney (included in Part II of the Registration Statement)**
</TABLE>
- ------------------------
+ Filed herewith
* To be filed by amendment
** Previously Filed
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liabilities under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Hauppauge, State of New York, on March
31, 1998.
<TABLE>
<S> <C> <C>
VICON INDUSTRIES, INC.
By: /s/ KENNETH M. DARBY
-----------------------------------------
Kenneth M. Darby
PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ ARTHUR D. ROCHE
-----------------------------------------
Arthur D. Roche
EXECUTIVE VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
By: /s/ JOHN M. BADKE
-----------------------------------------
John M. Badke
CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the 31st day of March, 1998.
NAME TITLE
- ------------------------------ --------------------------
/s/ DONALD N. HORN *
- ------------------------------ Chairman of the Board
Donald N. Horn
/s/ KENNETH M. DARBY
- ------------------------------ Director
Kenneth M. Darby
/s/ ARTHUR D. ROCHE
- ------------------------------ Director
Arthur D. Roche
/s/ ARTHUR V. WALLACE *
- ------------------------------ Director
Arthur V. Wallace
II-5
<PAGE>
<TABLE>
<C> <S> <C>
- ------------------------------ Director
Peter F. Barry
- ------------------------------ Director
Milton F. Gidge
/s/ MICHAEL D. KATZ *
- ------------------------------ Director
Michael D. Katz
- ------------------------------ Director
Peter F. Neumann
/s/ W. GREGORY ROBERTSON *
- ------------------------------ Director
W. Gregory Robertson
- ------------------------------ Director
Kazuyoshi Sudo
</TABLE>
- ------------------------
* The undersigned, pursuant to a Power of Attorney executed by each of the
directors and officers noted above, and filed with the Securities and
Exchange Commission, by signing his name hereto, does hereby sign and
execute this Amendment No. 1 to the Registration Statement on Form S-2 on
behalf of each of the persons noted above, all in the capacities and on the
date indicated.
/s/ KENNETH M. DARBY
---------------------------------------------------------------------------
Kenneth M. Darby
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE NO.
-----------
<C> <S> <C>
1 Underwriting Agreement**
3 Certificate of Incorporation and By-laws, as amended (incorporated by reference to Exhibit 3 of
the 1985 Annual Report on Form 10-K; Exhibit 4B of Form S-2 filed in Registration Statement No.
33-10435 and Exhibit A, B and C of the 1987 Proxy Statement)
4.1 Specimen Common Stock Certificate*
4.2 Underwriters' Warrants and Warrant Agreement**
5 Opinion of Schoeman, Marsh & Updike, LLP+
10.1 Credit and Security Agreement dated December 27, 1995 between the Registrant and IBJ Schroder
Bank & Trust Company (incorporated by reference to Exhibit 10 the 1995 Annual Report on Form
10-K)
10.2 Credit and Security Agreement between the Registrant and IBJ Schroder Bank & Trust Company,
First Amendment dated August 19, 1996 (incorporated by reference to Exhibit 10.2 of the 1996
Annual Report on Form 10-K)
10.3 Credit and Security Agreement between the Registrant and IBJ Schroder Bank & Trust Company,
Second Amendment dated February 5, 1997 (incorporated by reference to the Exhibit 10.1 of the
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997)
10.4 Promissory Note dated October 5, 1993 between the Registrant and Chugai Boyeki Company, Ltd.,
first amendment dated February 5, 1997 (incorporated by reference to Exhibit 10.4 of the 1997
Annual Report on Form 10-K)
10.5 Employment Contract dated October 1, 1997 between the Registrant and Kenneth M. Darby
(incorporated by reference to Exhibit 10.5 of the 1997 Annual Report on Form 10-K)
10.6 Employment Contract dated October 1, 1996 between the Registrant and Arthur D. Roche
(incorporated by reference to Exhibit 10.6 of the 1996 Annual Report on Form 10-K)
10.7 Employment Agreement dated October 1, 1997 between the Registrant and John L. Eckman
(incorporated by reference to Exhibit 10.7 of the 1997 Annual Report on Form 10-K)
10.8 Employment Agreement dated October 1, 1997 between the Registrant and Peter Horn (incorporated
by reference to Exhibit 10.8 of the 1997 Annual Report on Form 10-K)
10.9 Employment Agreement dated October 1, 1997 between the Registrant and Yacov Pshtissky
(incorporated by reference to Exhibit 10.9 of the 1997 Annual Report on Form 10-K)
10.10 Deferred Compensation Agreements dated November 1, 1986 between the Registrant and Donald N.
Horn and Arthur V. Wallace (incorporated by reference to Exhibit 10E of the 1992 Annual Report
on Form 10-K)
10.11 Lease agreement dated December 24, 1996 between the Registrant and RREEF MIDAMERICA/EAST-V
NINE, INC. (incorporated by reference to Exhibit 10.8 of the 1996 Annual Report on Form 10-K)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
-----------
<C> <S> <C>
10.12 Amended and restated 1986 Incentive Stock Option Plan (incorporated by reference to Exhibit 19
of the 1990 Annual Report on Form 10-K)
10.13 1994 Incentive Stock Option Plan (incorporated by reference to Exhibit 10L of the 1994 Annual
Report on Form 10-K)
10.14 1994 Non-Qualified Stock Option Plan for Outside Directors (incorporated by reference to
Exhibit 10M of the 1994 Annual Report on Form 10-K)
10.15 1996 Incentive Stock Option Plan (incorporated by reference to Exhibit 10.15 of the 1997 Annual
Report on Form 10-K)
10.16 1996 Non-Qualified Stock Option Plan for Outside Directors (incorporated by reference to
Exhibit 10.16 of the 1997 Annual Report on Form 10-K)
10.17 Advice of borrowing terms between the Registrant and National Westminster Bank PLC dated April
22, 1997 (incorporated by reference to Exhibit 10 of the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997)
10.18 Commercial fixed rate loan agreement between the Registrant and National Westminster Bank PLC
dated April 8, 1997 (incorporated by reference to Exhibit 10 of the Quarterly Report on Form
10-Q for the quarter ended June 30, 1997)
10.19 Agreement of Purchase and Sale dated as of January 29, 1998 between Vicon Industries, Inc. and
RREEF Midamerica/East-V, Nine, Inc. (incorporated by reference to Exhibit 10.1 of the Quarterly
Report on Form 10-Q for the quarter ended December 31, 1997)
10.20 Loan Agreement dated January 29, 1998 between Vicon Industries, Inc. and Keybank National
Association (incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q for
the quarter ended December 31, 1997)
10.21 Mortgage Note dated January 29, 1998 by Vicon Industries, Inc., as borrower, to order of
Keybank National Association in the initial principal amount of $2,512,000 (incorporated by
reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q for the quarter ended December
31, 1997)
10.22 Term Loan Note dated January 29, 1998 by Vicon Industries, Inc., as borrower, to order of
Keybank National Association in the initial principal amount of $388,000 (incorporated by
reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q for the quarter ended December
31, 1997)
10.23 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries, Inc. in favor of
Keybank National Association in amount of $2,512,000 (incorporated by reference to Exhibit 10.5
of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997)
10.24 Mortgage and Security Agreement dated January 29, 1998 by Vicon Industries, Inc. in favor of
Keybank National Association in amount of $388,000 (incorporated by reference to Exhibit 10.6
of the Quarterly Report on Form 10-Q for the quarter ended December 31, 1997)
10.25 Interest Rate Master Swap Agreement dated December 11, 1997 between the Registrant and KeyBank
National Association (incorporated by reference to Exhibit 10.7 of the Quarterly Report on Form
10-Q for the quarter ended December 31, 1997)
22 Subsidiaries of the Registrant (incorporated by reference to the Notes to the Consolidated
Financial Statements)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
-----------
<C> <S> <C>
23.1 Consent of Schoeman, Marsh & Updike, LLP (included in Exhibit 5)+
23.2 Consent of KPMG Peat Marwick LLP+
24 Power of Attorney (included in Part II of the Registration Statement)**
</TABLE>
- ------------------------
+ Filed herewith
* To be filed by amendment
** Previously Filed
<PAGE>
EXHIBIT 5
[THIS OPINION LETTER WILL BE DATED AND SIGNED UPON THE EXECUTION OF THE
UNDERWRITING AGREEMENT AND IS SUBJECT TO ANY CHANGES IN THE DOCUMENTS OR THE
LAWS CONCERNED, WHICH MAY OCCUR BEFORE SUCH DATE]
___________________, 1998
Vicon Industries, Inc.
89 Arkay Drive
Hauppauge, New York 11788
Re: Registration Statement on Form S-2
Gentlemen:
We have acted as counsel to Vicon Industries, Inc., a New York
corporation (the "Company"), in connection with (a) the proposed public offering
by the Company of up to 1,250,000 shares of Common Stock, $.01 par value (the
"Common Stock"), including up to 236,250 shares of Common Stock solely to cover
over-allotments; and (b) the issuance by the Company to Fahnestock & Co. Inc.
and Southeast Research Partners Inc. (the "Underwriters") of warrants (the
"Underwriters' Warrants") to purchase up to 157,500 share of Common Stock,
pursuant to a registration statement on Form S-2, as amended (the "Registration
Statement"), originally filed by the Company with the Securities and Exchange
Commission on February 25, 1998, pursuant to the Securities Act of 1933, as
amended.
The shares of Common Stock issuable pursuant to the above proposed
public offering are hereinafter referred to as the "Company Shares." The shares
of Common Stock issuable upon exercise of the Underwriters' Warrants are
hereinafter referred to as the "Underwriters' Warrant Shares." The Company
Shares, the Underwriters' Warrants and the Underwriters' Warrant Shares are
hereinafter referred to as the "Securities."
<PAGE>
In connection with the foregoing, we have examined originals or
copies, certified or otherwise identified to our satisfaction, of the
Certificate of Incorporation and By-Laws of the Company, as amended, the form of
Underwriting Agreement, and the form of Underwriters' Warrant filed as exhibits
to the Registration Statement, your records of corporate proceedings, and such
other documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below. In such examination, we have assumed the genuineness
of all signatures, the authenticity of all documents submitted to us as
originals, the accuracy and completeness of all documents submitted to us as
copies and the authenticity of the originals of such latter documents. As to
any facts material to such opinions which we did not independently establish or
verify, we have relied upon statements or representations of officers and other
representatives of the Company, public officials or others.
Based upon the foregoing, we are of the opinion that:
1. The Company has been duly organized and is validly existing and in
good standing under the laws of the State of New York.
2. The sale and issuance of the Securities have been duly authorized
by the Board of Directors of the Company, and the Company Shares and the
Underwriters' Warrant Shares, when issued and paid for, as contemplated by the
Registration Statement and as provided for in the Underwriters' Warrants, as the
case may be, will be validly issued, fully paid and non-assessable, and no
personal liability will attach to the ownership thereof, except as provided in
Section 630 of the New York Business Corporation Law.
We hereby consent to the reference of our name in the Registration
Statement under the caption "Legal Matters" and further consent to the inclusion
of this opinion as Exhibit 5 to the Registration Statement. In giving such
consent, we do not thereby concede that we are in the category of persons whose
consent is required under Section 7 of the Securities Act, or the rules and
regulations thereunder, or that we are "experts" within the meaning of the
Securities Act or such rules and regulations.
Very truly yours,
Schoeman, Marsh & Updike, LLP
2
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
Vicon Industries, Inc.:
We consent to the use of our report included herein and incorporated herein by
reference and to the reference to our firm under the heading "Experts" and
"Selected Consolidated Financial and Operating Data" in the prospectus.
KPMG PEAT MARWICK LLP
Jericho, New York
March 31, 1998
