Vicon Industries, Inc. (“the Company”(the "Company"), incorporated in 1967, develops video management software and also designs, assembles and markets a wide range of video systems,system components, comprised principally of cameras, network video servers/recorders, encoders and mass storage units, used in security, surveillance, safety and control applications by a broad group of end users.  A video system is typically a private (or hybrid public/private) network that can transmit and receive video, audio and data signals in accordance with the operational needs of the user.  The Company's primary business focus is the design of network video systems that it produces and sells worldwide, primarily to installingauthorized dealers, system integrators, government entities and security products distributors.

The Company operates within the electronic protection segment of the security industry which includes, among others: fire and burglar alarm systems, access control, biometric and video systems, data and asset protection.  The U.S. security industry consists of thousands of individuals and businesses (exclusive of public sector law enforcement) that provide products and services for the protection and monitoring of people, property and information. The security industry includes fire and detection systems, access control, video surveillance, asset protection, guard services and equipment, locks, safes, armored vehicles, perimeter protection, private investigations, biometric systems, software and network security, among others.  The Company’s products are typically used for crime deterrence, visual documentation, observation of inaccessible or hazardous areas, enhancing safety, mitigating liability, obtaining cost savings (such as lower insurance premiums), accumulating command and control data, managing control systems and improving the efficiency and effectiveness of personnel. The Company’s products are used in, among others, office buildings, manufacturing plants, apartment complexes, retail stores, government facilities, airports, highways, transportation operations, prisons, casinos, hotels, sports arenas, health care facilities and financial institutions.

The Company’s product line consists of various elements of a video system, beginning with aincluding cameras for image capture, stand-alone network video management system (VMS) application, which configuressoftware and manages networkvarious video recording, storage, management and output devices including cameras.and peripherals. The Company’s ViconNet branded VMS software is sold either separately or configured in a Network Video Recording (“NVR”) or Digital Video Recording (“DVR”) device. Video capture offerings include a range of analog, digital and high definition (HD) megapixel cameras for both fixed and robotic positioning applications, along with associated housing options to perform in a broad range of climatic and operating environments.   The Company also sells and/or produces other video system edge devices components

such as video encoders decoders network and/or digital video recorders (NVR’s and DVR’s), analog and/or IP fixed position or robotic cameras, HD (high definition) digital cameras,monitors, camera lenses, housings and mounts, matrix video switchers and system controls.controls and various video transmission devices. The addition of IQinVision's IQeye line of cameras provides the Company provideswith a proprietary and broader range of cameras due to the many varied climatic and operational environments in which the products are expected to perform.HD megapixel camera solutions.

The Company’s products range from a simple camera mounting bracket to a large IP based video camera control, transmission, recording, storage and virtual matrix switching system.  The Company’s sales are concentrated principally among its network video products (ViconNet™ (VMS) and Kollector™ (NVR’s and DVR’s)), Surveyor™ (robotic dome cameras) and Roughneck™ (fixed position cameras) product lines. IQinVision's branded camera product offering will contribute to the Company’s historical camera sale concentration.

The Company’s marketing emphasizes video system solution capability which includes system and network design, pre-ship configuration, project management, technical training and pre and post salespost-sales support. The Company promotes and markets its products through industry trade shows worldwide, product brochures, catalogs, direct marketing and electronic mailings to existing and prospective customers, webinars, technical seminars for system designers, customers and end users, road shows which preview new systems and system components, and advertising through trade and end user magazines and the Company's web site (www.vicon-security.com). The Company’s products are sold principally to independent dealers, system integrators and security products distributors.  Sales are made principally by Company field sales engineers supported by inside customer service representatives.  The Company’s sales effort is supported by field or in-house professional and technical services staff whichwho provide product information, system and network design, project management, and hardware and software pre-configuration and support.

The Company’s products are utilized in video surveillance applications by: (1) commercial and industrial users, such as office buildings, manufacturing plants, warehouses, apartment complexes, shopping malls and retail stores;  (2) federal, state, and local governments for national security purposes, agency facilities, prisons, and military installations; (3) financial institutions, such as banks, clearing houses, brokerage firms and depositories, for security purposes; (4) transportation departments for highway traffic control, bridge and tunnel monitoring, and airport, subway, bus and seaport security and surveillance; (5) gaming casinos, where

The Company’s principal sales offices are located in Edgewood (Brentwood), New York; San Juan Capistrano, California; Fareham, England; and Neumunster, Germany.

The Company sells its products in Europe, the Middle East and Africa (EMEA) through its European based subsidiaries and elsewhere outside the U.S. principally by direct export from its U.S. headquarters.  The Company has a few territorial exclusivity agreements with customers but primarily uses a wide range of installation companies and security product distributors in international markets.

Export sales and sales from the Company’s foreign subsidiaries amounted to $15.0 million and $14.4 million, or 43% and $18.0 million, or 36% of consolidated net sales in fiscal years 20132014 and 2012,2013, respectively.  The Company’s principal foreign markets are the U.K., Europe, Middle East and the Pacific Rim, which together accounted for approximately 81%77% of international sales in fiscal 2013.2014.

The Company operates in a highly competitive marketplace both domestically and internationally.  The Company competes by providing a value added video system solution combined with a high level of professional and technical support. The Company is also well known in the security field having specialized in video security applications since its founding in 1967.  Generally, the Company does not compete based on price alone.

Many of the Company’s principal competitors are larger companies whose financial resources and scope of operations are substantially greater than the Company’s. Such competitors include security divisions of the Bosch Group, Honeywell International, Schneider Electric, Tyco International, Samsung Group and United Technologies, among others. The Company also competes

with many VMS producers such as Avigilon Corporation, Exacq Technologies, Genetec Inc. and Milestone Systems and for cameras with companies such as Axis Communications, Matsushita (Panasonic), Mobotix Corp. and Sony Corporation, among others.  Many additional companies, both domestic and international, produce products that compete against one or more of the Company’s product lines.  

The Company’s principal engineering and development is directedactivities have been conducted out of its Israeli based subsidiary. These efforts have focused principally at enhancedon the enhancement of existing ViconNet VMS software and development of next generation video system capability.management software systems, along with certain camera line development.  In recent years, the trend of product development and demand within the video security and surveillance market has been toward enhanced software applications involving the compression, analysis, transmission, storage, manipulation, imaging and display of digital video over IP networks.  Since the Company’s target market segment (enterprise applications) requires it to keep pace with changes in technology, the Company has focused its engineering effort in these developing areas.  Development projects are chosen and prioritized based on competitor threats, focus group feedback, the Company’s analysis as to the needs of the marketplace, anticipated technological advances and market research.

At September 30, 2013,Since the Company employed a totalMerger, the Company’s camera development activities have been assumed by IQinVision’s California based engineering team. These activities will focus on the enhancement and repositioning of 28 engineers in the following areas: softwareexisting product offerings and development mechanical design, manufacturing/testingof higher resolution and electrical and circuit design.  specialty cameras.

Engineering and development expense amounted to approximately 11%$4.6 million and 10%$4.2 million, or 13% and 11% of net sales, in fiscal years 20132014 and 2012,2013, respectively.

The Company relies principally upon independent contract manufacturers and suppliers to produce and assemble its products and expects to continue to rely on such entities in the future.  The Company’s relationships with its independent manufacturers, assemblers and suppliers are not covered by formal contractual agreements allowing it to move freely to wherever the best quality and price can be obtained.

Raw materials and components purchased by the Company and its suppliers are generally readily available in the market, subject to market lead times at the time of order.  The Company is generally not dependent upon any single source for a significant amount of its raw materials or components.

The Company owns certain trademarksa very limited number of patents and several other trademark applications are pending both in the United States and in Europe.trademarks. Most of the Company’s key products utilize proprietary software which is protected by copyright.  The Company considers its software to be unique and is a principal element in the differentiation of the Company’s products from its competition.  However, the laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as the laws of the U.S.  The Company has no significant licenses, franchises or concessions with respect to any of its products or business dealings.  In addition, the Company does not believe its limited number of patents or its lack of licenses, franchises and concessions to be of substantial significance.  

The Company generally maintains sufficient finished goods inventory levels to respond to customer demand, since most sales are to installing dealers and system integrators who normally do not carry any significant inventory.  The Company principally builds inventory to known or anticipated customer demand.  In addition to normal safety stock levels, certain additional inventory levels may be maintained for products with long purchase and manufacturing lead times. The Company believes that it is important to carry adequate inventory levels of parts, components and products to avoid production and delivery delays that may detract from theits sales effort.

The backlog of orders believed to be firm as of September 30, 20132014 and 20122013 was approximately $2.6$2.5 million and $3.1$2.6 million, respectively.  Orders are generally cancelable without penalty at the option of the customer.  The Company prefers that its backlog of orders not exceed its ability to fulfill such orders on a timely basis, since experience shows that long delivery schedules only encourage the Company’s customers to look elsewhere for product availability.

At September 30, 2014, the Company employed 168 full-time employees, which includes a total of 41 new employees assumed by the Company in the IQinVision merger.  At September 30, 2013, the Company employed 136 full-time employees, of whom 7 are officers, 58 are in sales and technical service capacities, 28 are in engineering and test, 25 are in operations and production and 18 are in administration.  At September 30, 2012, the Company employed 160 persons.  There are no collective bargaining agreements with any of the Company’s employees and the Company considers its relations with its employees to be good.

The Company operates from a 35,000 square-foot headquarters facility located at 131 Heartland Blvd., Edgewood, New York, which it owns. In November 2014, the Company entered into a contract for the sale of this facility at a price of $3.5 million, excluding sales commission and closing costs. The transaction is expected to close in the second fiscal quarter of 2015 and is contingent upon certain buyer conditions and customary closing provisions. At the same time, the Company entered into a lease for a new 30,000 square foot headquarters facility located in Hauppauge, New York.   

The Company also owns a 14,000 square-foot sales, service and warehouse facility in southern England which services Europe, the Middle East and Africa. This facility is presently being marketed for sale and will ultimately be replaced by a smaller leased facility in the event of a sale transaction. At the time of the IQinVision Merger, IQinVision leased an 11,000 square-foot office and warehouse facility in San Juan Capistrano, California. In September 2014, this lease was terminated effective December 31, 2014. In November 2014, the Company entered into a new 5,393 square-foot office lease in San Juan Capistrano to replace the terminated lease. In addition, the Company operates under leases from offices in Yavne, Israel; Neumunster, Germany; and various local sales offices throughout Europe.

The Company believes that its facilities are adequate to meet its current and foreseeable operating needs.

None.

The Company’s stock is traded on the NYSE AmexMKT under the symbol (VII).  The following table sets forth for the periods indicated, the range of high and low prices for the Company's Common Stock:common stock:

The last sale price of the Company’s Common Stockcommon stock on December 16, 201322, 2014 as reported on the NYSE AmexMKT was $2.74$1.48 per share.  As of December 16, 2013,22, 2014, there were approximately 137175 shareholders of record.

In connection with the IQinVision merger, on September 12, 2014, the Company paid a special cash dividend of $0.55 per share ($2.5 million in the aggregate) to Company shareholders of record as of July 11, 2014. The Company has never declared or paid any prior cash dividends on its Common Stockcommon stock and anticipates that any earnings in the foreseeable future will be retained to finance the growth and development of its business.

In December 2008, the Company’s Board of Directors authorized the purchase of up to $1 million worth of shares of the Company’s outstanding common stock.  In December 2009, the Board of Directors authorized the purchase of an additional $1.5 million worth of shares of the Company’s outstanding common stock.  The Company did not repurchase any of its common stock during the three month period ended September 30, 2013.2014. The approximate dollar value of shares that may yet be purchased under the program was $972,679 as of September 30, 2013.

 

 

The Company designs, assembles and markets video management systems and system components for use in security, surveillance, safety and communication applications by a broad group of end users worldwide. The Company’s product line consists of various elements of a video system, including DVR's, NVR's, video encoders, decoders, servers and related video management software, data storage units, analog, digital and HD and IPmegapixel fixed and robotic cameras, virtual and analogueanalog matrix video switchers and controls, and system peripherals.

 

The Company sells video surveillance system components in a highly competitive worldwide marketplace principally to authorized security dealers and system integrators. Such dealers and integrators typically resell and install the Company’s products directly to end users, among other services. The Company’s sales are principally project based and are largely dependent upon winning projects, construction activities and the timing of funding.  Sales will vary from period to period depending upon many factors including seasonal and geographic trends in construction activities and the timing of deliveries due to changes in project schedules and funding. The Company usually does not have a large backlog as its customer orders are typically deliverable within three months or often upon receipt of order.

The Company competes in a market of rapid technology shifts which enhance the performance capability of security systems.  As a result, the Company spends a significant amount on new product development. In fiscal 20132014 and 2012,2013, the Company incurred $4.2$4.6 million and $5.2$4.2 million of engineering and development expense or 11%13% and 10%11% of net sales, respectively. The Company’s expenditures for product development are substantially less than its major competitors.  The ongoing market shift to IP based products and network technologies will continue to burden the Company’s development resources and increase ongoing annual expense for product development.  Further, the Company’s sales effort requires a high level of customer service and technical support for its products.  The Company routinely considers various strategic options that may augment or supplement its present product offerings and technology platforms, among other benefits.platforms.

The Company has a foreign sales and distribution subsidiary in Europe that conducts business in British pounds and Euros that represented approximately 25%30% of the Company’s consolidated sales for fiscal 2013.2014. It also has an Israel based engineering and development subsidiary that incurs a majority of its operating expenses in Shekels that represented approximately 20%21% of the Company’s operating expenses for fiscal 2013.2014. The Company has historically entered into selected forward currency exchange contracts during favorable exchange rate conditions to help stabilize the impact of changing exchange rates and will continue to doconsider doing so in fiscal 2014.the future, financing permitted. However, nothing can totallysuch hedging activities cannot entirely eliminate the long term effects of foreign currency exchange movements.

Net sales for 20132014 decreased $9.8by $5.0 million (20%(12%) to $39.8$34.9 million compared with $49.7$39.9 million in 2012.  North America2013. Sales of IQinVision products for the period from the merger closing date of August 29, 2014 through September 30, 2014 were $1.8 million. The Company net sales for 2014, exclusive of IQinVision sales, decreased $8.8by $6.8 million (23%or 17% for the period. Sales in the America’s decreased $5.7 million (19%) to $30.1$24.4 million compared with $38.9$30.1 million in 20122013, while Europe, Middle East and Africa (EMEA) sales decreased $1.0 million (9%increased $734,000 (8%) to $9.8$10.5 million compared with $10.8$9.8 million in 2012.2013.  Order intake for 20132014 decreased 18%14% to $39.3$33.7 million compared with $48.1$39.3 million in 2012.2013. North America order intake decreased 21%19% to $29.2$23.8 million compared with $36.9$29.2 million in 20122013 while EMEA order intake decreased 9%2% to $10.1$9.9 million compared with $11.2$10.1 million in 2012.2013. The Company's 2013 North American2014 America’s sales and order rates were negatively affected by, among other things, reduced government infrastructure spending in market channels served, a general increase in market competition and the remnants of a technical matterissue relating to a prior release of itsyear ViconNet video management software application. The Company believes that the technical matter was substantially resolved by the end of its third quarter ended June 30, 2013. The financial effect of the technical matter on future periods is presently unquantifiable.release. The backlog of unfilled orders was $2.5 million at September 30, 2014 compared with $2.6 million at September 30, 2013 compared with $3.1 million at September 30, 2012.2013.

Gross profit margins for 20132014 decreased to 38.0%34.9% compared with 39.5%38.0% in 2012.2013. Current profit margins were negatively impacted by $519,000 (1.5%) of inventory provisions related to restructuring initiatives. Excluding the effects of restructuring inventory provisions, 2014 margins would have been 36.3%. The decrease in current year margins2014 margin decline was due principally to a combination of less favorable product mix and increased system discounting due to a .9% increase in fixed indirect expenses relating to lower sales in the current year and a $250,000 (.6%) additional inventory provision on certain discontinued manufactured products and credit return inventories taken in the June 30, 2013 quarter.market competition.

Operating expenses for 2013 decreased $1.82014 increased $834,000 to $20.0 million toor 57.5% of net sales compared with $19.2 million or 48.2% of net sales compared with $21.0 million or 42.3%in 2013. Operating expenses of net sales in 2012.IQinVision for the period from the merger closing date of August 29, 2014 through September 30, 2014 were $880,000. Operating expenses for 2014, exclusive of IQinVision, were similar to 2013 at $19.2 million. Selling, general and administrative (SG&A) expenses decreased $798,000$1.2 million to $13.8 million for 2014 compared with $15.0 million in 2013. Exclusive of $480,000 of IQinVision expenses, SG&A expenses for 2013 compared with $15.82014 decreased $1.6 million in 2012. Engineering and development expenses decreased $1.0 millionrelating principally to $4.2 million for 2013 compared with $5.2 million for 2012. Operating expense reductions principally resulted from reduced personnel and lower variable selling costs associated with reduced sales.sales and overall workforce reductions. Engineering and development expenses increased $406,000 to $4.6 million for 2014 compared with $4.2 million for 2013. Exclusive of $141,000 of IQinVision expenses, engineering and development expenses for 2014 increased $265,000 relating principally to new product development activities. In 2014, the Company incurred $1.1 million of merger related costs in connection with the August 29, 2014 combination. In the fourth quarter of 2014, the Company recognized $520,000 of severance charges in connection with a merger related integration and restructuring plan. Further restructuring charges are anticipated through the balance of fiscal 2015 as planned initiatives are phased in. Exclusive of $621,000 of IQinVision expense, $520,000 of restructuring charges and $1.1 million of merger costs, operating expenses for 2014 decreased $1.4 million to $17.8 million compared with $19.2 million in 2013.

The Company incurred an operating loss of $4.1$7.9 million for fiscal 20132014 compared with an operating loss of $1.4$4.1 million for fiscal 2012.2013. Excluding non-recurring merger-related expenses of $1.1 million and restructuring charges of $1.0 million, the Company would have reported an operating loss of $5.8 million for 2014.

DuringOn November 12, 2014, the Company entered into a contract to sell its Edgewood, New York headquarters facility for a price of $3.5 million. The transaction is expected to close in the second fiscal quarter of 2015 and is contingent upon certain Buyer conditions and customary closing provisions. An estimated loss of $52,000 has been reflected in 2014 on the sale after factoring in estimated selling and transaction costs. In the fourth quarter of 2013, the Company realizedrecorded a $3.5 million gain on the sale of its previously owned Hauppauge, New York headquarters facility in August 2013. facility.

Interest and other income decreased $23,000$27,000 to $14,000 for 2014 compared with $41,000 for 2013 compared with $64,000 for 2012 due principally to the liquidation of certain marketable security investments in the current year.reduced cash balances.  

The Company recorded anNo income tax benefit was recognized on losses reported for the years presented due to uncertainty of $543,000 for fiscal 2013 compared with income tax expense of $57,000 for fiscal 2012. In the current year, the Company recorded $575,000 of tax benefits relating to the expiration of previously recognized income tax exposures (FIN 48). Both year's income tax expense balances represent minimum foreign subsidiary income taxes.realization. In fiscal 2011, the Company provided a valuation allowance against its deferred tax assets due to the uncertainty of future realization and, thus,

no tax benefit has been recognized on subsequent reported pretax losses for both periods (see Note 2:3: Income Taxes). The Company recorded an income tax benefit of $543,000 for fiscal 2013 relating to the expiration of previously recognized income tax exposures, offset by minimum foreign subsidiary income taxes.

As a result of the foregoing, the Company reported a net loss of $7.9 million for 2014 compared with net income of $19,000 for 2013 compared with a net loss of $1.4 million for 2012.2013.

Net cash used in operating activities was $307,000$2.7 million for fiscal 2013.2014. The Company incurred $3.3$7.3 million of cash operating losses for the year after adjustments for a $3.5 million gain on sale of building, a $575,000 change in uncertain tax positions and $719,000$646,000 of non-cash charges. Such cash losses were substantially offset in part by reductions in accounts receivable and inventories of $2.5$1.3 million and $1.1$2.1 million, respectively, offset in part bytogether with a $543,000 reduction$957,000 increase in accounts payable and accrued liabilities. Net cash provided by investing activities was $2.4$1.7 million in 2013, consisting of $5.92014, which included $1.9 million of proceeds fromcash assumed in the sale of the Company's Hauppauge, New York headquarters facility and $279,000 of marketable security liquidations,IQinVision merger, offset in part by $3.3 million expended on the purchase of a new headquarters facility and $572,000$140,000 of general capital expenditures. The marketable security liquidations consisted of mutual fund investments principallyNet cash used in federal, state and local government debt securities.   There were no cash flow effects from financing activities was $2.5 million for fiscal 2013.2013 relating to a one time dividend paid to the Company’s pre-merger shareholders in connection with the Merger. As a result of the foregoing, cash (exclusive of marketable securities) increaseddecreased by $2.0$3.5 million in 20132014 after the minimal effect of exchange rate changes on the cash position of the Company.

On August 29, 2014, the Company completed its merger with IQinVision, Inc. and subsequently began execution of a global integration and restructuring plan (the "Plan") targeted to, among other things, reduce operating costs and maximize operating cash flow. The Company incurred certain related restructuring costs that have been reflected in its fourth quarter of fiscal year 2014 results and anticipates incurring additional charges during fiscal year 2015 as planned initiatives are phased in. Pursuant to the Plan, in November 2014, the Company entered into a contract for the sale of its Edgewood, New York headquarters facility at a price of $3.5 million, excluding sales commission and closing costs. The transaction is expected to close in the second fiscal quarter of 2015 and is contingent upon certain buyer conditions and customary closing provisions. At the same time, the Company entered into a lease for a replacement headquarters facility located in Hauppauge, New York. The Company is also marketing its 14,000 square-foot United Kingdom based operating facility for sale, which is expected to be replaced by a smaller leased facility in the event of a sale transaction. These measures were taken in part to support anticipated cash flow requirements during 2015. These assets are presented as held for sale in the accompanying balance sheets.

The Company presently believes that it haswill have sufficient cash to meet its anticipated operating costs and capital expenditure requirements for at least the next twelve months.

The Company does not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a material effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.

The Company’s significant accounting policies are fully described in Note 1 to the consolidated financial statements included in Part IV.  Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue is generally recognized when products are sold and title is passed to the customer.  Advance service billings are deferred and recognized as revenues on a pro rata basis over the term of the service agreement.  Pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25-05, the Company evaluates multiple-element revenue arrangements for separate units of accounting, and follows appropriate revenue recognition policies for each separate unit.  Elements are considered separate units of accounting provided that (i) the delivered item has stand-alone value to the customer, (ii) there is objective and reliable evidence of the fair value of the undelivered item, and (iii) if a general right of return exists relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially within the control of the Company.  As applied to the Company, under arrangements involving the sale of product and the provision of services, product sales are recognized as revenue when the products are sold and title is passed to the customer, and service revenue is recognized as services are performed. 

For products that include software and for separate licenses of the Company’s software products, the Company recognizes revenue in accordance with the provisions of FASB Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605) —- Multiple-Deliverable Revenue Arrangements” (ASU 2009-13).  ASU 2009-13 provides revenue recognition guidance for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement

consideration to each deliverable in the arrangement based on the fair value of the elements.  The fair value for each deliverable is based on vendor-specific objective evidence ("VSOE") if available, third-party evidence ("TPE") if VSOE is not available, or best estimate of selling price ("BESP") if neither VSOE nor TPE is available.  BESP must be determined in a manner that is consistent with that used to determine the price to sell the specific elements on a standalone basis.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.  If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The Company provides for the estimated cost of product warranties at the time revenue is recognized.  While the Company engages in product quality programs and processes, including monitoring and evaluating the quality of its component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure.  Should actual product failure rates, material usage or service delivery costs differ from its estimates, revisions to the estimated warranty liability may be required.

The Company writes down its inventory for estimated obsolescence and slow moving inventory equal to the difference between the carrying cost of inventory and the estimated net realizable market value based upon assumptions about future demand and market conditions.  Technology changes and market conditions may render some of the Company’s products obsolete and additional inventory write-downs may be required.  If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

The Company evaluates the establishment of technological feasibility of its software in accordance with ASC 985 ("Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"). The Company has determined that technological feasibility for its new products is reached shortly before products are released for field testing. Costs incurred after technological feasibility has been established have not been material and are expensed as incurred.

The Company assesses the recoverability of the carrying value of its long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets.  If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount.

The Company’s goodwill represents the excess of the purchase price over the fair value of net identifiable assets acquired in the recent business combination. Goodwill is not amortized and is tested for impairment at least annually. When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. If, based on the review of the qualitative factors, the Company determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, the required two-step impairment test can be bypassed. If the Company does not perform a qualitative assessment or if the fair value of the reporting unit is not more-likely-than-not greater than its carrying value, the Company must perform the first step of the two-step impairment test, and calculate the estimated fair value of the reporting unit. If the carrying value of goodwill exceeds the estimated fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment for goodwill is measured as the excess of its carrying amount over its fair value.

The Company's ability to recover the reported amounts of deferred income tax assets is dependent upon its ability to generate sufficient taxable income during the periods over which net temporary tax differences become deductible. The Company

The Company accrues liabilities for identified tax contingencies that result from positions that are being challenged or could be challenged by tax authorities. The Company believes that its accrual for tax liabilities is adequate for all open years, based on Management’s assessment of many factors, including its interpretations of the tax law and judgments about potential actions by tax authorities. However, it is possible that the ultimate resolution of any tax audit may be materially greater or lower than the amount accrued.

The Company is subject to proceedings, lawsuits and other claims related to labor, product and other matters.  The Company assesses the likelihood of an adverse judgment or outcomes for these matters, as well as the range of potential losses.  A determination of the reserves required, if any, is made after careful analysis.  The required reserves may change in the future due to new developments.

In May 2014, the FASB issued guidance on revenue from contracts with customers. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved, in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. This guidance permits the use of either the retrospective or cumulative effect transition method and is effective for the Company beginning in 2017; early adoption is not permitted. The Company doeshas not expectyet evaluated the adoptionimpact of any recentlythis guidance on the Company's financial condition, results of operations and related disclosures.

In August 2014, the FASB issued accounting pronouncementsguidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to havecontinue as a materialgoing concern and related footnote disclosures. Management will be required to evaluate, at each reporting period, whether there are conditions or events that raise substantial doubt about a company's ability to continue as a going concern within one year from the date the financial statements are issued. This guidance is effective prospectively for annual and interim reporting period beginning in 2017. The Company has not yet evaluated the impact of this guidance on its consolidatedthe Company’s financial statements.condition, results of operations and related disclosures.

The Company’s foreign exchange exposure is principally limited to the relationship of the U.S. dollar to the British pound sterling, the Euro and the Israeli shekel. The Company has historically entered into forward exchange contracts to help mitigate short-term exchange rate exposures during favorable exchange rate conditions. The Company also attempts to reduce the impact of an unfavorable exchange rate condition through cost reductions from its suppliers and shifting product sourcing to suppliers transacting in more stable and favorable currencies. However, there can be no assurance that forward exchange contracts will be obtainable in the future or that the Company will otherwise be effective in limiting long-term foreign currency exposure.

Sales by the Company’s U.K. and German based subsidiaries to customers in Europe are made in British pounds or Euros.  In fiscal 2013,2014, approximately $2.3$1.9 million of products were sold by the Company to its U.K. based subsidiary for resale.  The Company has also entered into certain engineering cost sharing agreements with its U.K. based subsidiary that are denominated in U.S. dollars.  The Company attemptshas historically attempted to minimize its currency exposure on these intercompany transactions through the purchase of forward exchange contracts during favorable exchange rate conditions. No foreign exchange contracts were entered into during fiscal years 2014 and 2013.

The Company’s Israeli based subsidiary incurs shekel based operating expenses which are funded by the Company in U.S. dollars.  In fiscal 2013, and 2012, the Company purchased forward exchange contracts to hedge its currency exposure on certain of these expenses.

Statements in this Report on Form 10-K and other statements made by the Company or its representatives that are not strictly historical facts including, without limitation, statements included herein under the Management’s“Business” and “Management’s Discussion and AnalysisAnalysis” captions, “Overview”, “Results of Operations” and “Liquidity and Capital Resources” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.  The Company also assumes no obligation to publicly update or revise its forward-looking statements or to advise of changes in the assumptions and factors on which they are based.

The Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as required by Exchange Act Rule 13a-15.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

  

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management evaluates the effectiveness of the Company's internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 1992 framework (COSO) in Internal Control—IntegratedControl-Integrated Framework. Management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 20132014 and concluded that it is effective at a reasonable assurance level.

 

 

There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation referred to above that occurred during the fourth quarter of the fiscal year ended September 30, 20132014 that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.reporting, except for the Company's merger with IQinVision, Inc. which was completed on August 29, 2014.

The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a Company have been detected. The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective at the "reasonable assurance" level.

The business experience, principal occupations and employment, as well as period of service, of each of the officers and directors of the Company during at least the last five years are set forth below.

There are no family relationships between any director, executive officer or person nominated or chosen by the Company to become a director or officer.

All named directors other than Mr. DarbyFullerton are independent directors and members of the Audit Committee. The Board of Directors has determined that Arthur D. Roche, Chairman of the Audit Committee, qualifies as an “Audit Committee Financial Expert”, as defined by Securities and Exchange Commission Rules, based on his education, experience and background.  Mr. Roche is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

The Company has adopted a Code of Ethics and Business Conduct that applies to all its employees, including its chief executive officer, chief financial and accounting officer, controller, and any persons performing similar functions.  Such Code of Ethics and Business Conduct is published on the Company’s internet website (www.vicon-security.com).

 

 

The Company’s compensation programs are intended to enable it to attract, motivate, reward and retain the management talent required to achieve corporate objectives, and thereby increase stockholder value. It is the Company’s policy to provide incentives to senior management to achieve both short-term and long-term objectives and to reward exceptional performance and contributions to the development of the business. To attain these objectives, the executive compensation program includes four key components:

  

 

For fiscal 2014, no incentive bonus programs were instituted due to financial constraints and the pending merger with IQinVision. For fiscal 2013, a performance based bonus plan was established for certain of the Company’s executive officers, including among others Kenneth M. Darby, the Company's former Chief Executive Officer, and John M. Badke, Chief Financial Officer, whereby the participants would share a bonus pool equal to 25% of consolidated pretax earnings, subject to certain adjustments. Messrs. Darby and Badke earned no bonuses under such plan for fiscal 2013. In addition, a performance based bonus plan was established for Bret M. McGowan, Senior Vice President, Sales and Marketing (Americas), whereby he could earn an amount up to $100,000 for the achievement of certain U.S. and export sales targets. Mr. McGowan earned no bonus under such plan for fiscal 2013. However, Messrs. Darby, Badke and McGowan were granted discretionary bonuses of $50,000, $40,000 and $30,000, respectively, for fiscal 2013. Such bonuses were approved by the Company's Board of Directors upon the recommendation of its Compensation Committee.

 

In March 2007, the Board of Directors adopted the Company’s 2007 Stock Incentive Plan, which was approved by the Company’s stockholders at its Annual Meeting of Stockholders held on May 18, 2007. Under such plan, a total of 500,000 shares of Common Stockcommon stock were reserved for issuance and include the grant of stock options, restricted stock and other stock awards as determined by the Compensation Committee. The purpose of the Stock Incentive Plan is to attract and retain executive management by providing them with appropriate equity-based incentives and rewards for superior performance and to provide incentive to a broader range of employees.  In fiscal 2013, the Compensation Committee awarded a total of 15,000 stock options to named executive officers, consisting of 10,000 to Mr. Badke and 5,000 to Mr. McGowan.  In fiscal 2012, the Compensation Committee awarded a total of 13,000 stock optionsNo option awards were made to named executive officers consisting of 6,500 each to Mr. Badke and Mr. McGowan.in fiscal 2014.

 

In addition, the executive officers are entitled to participate in all of the Company’s employee benefit plans, including medical, dental, group life, disability, accidental death and dismemberment insurance and the Company’s sponsored 401(k). The Company also provideshas provided its former Chief Executive Officer with a country club membership and certain additional insurances not covered by primary insurance plans available to other employees and the Company’s named executive officers are provided either a leased car or auto allowance.

 

 

The Company has entered into employment agreements with certain of its named executive officers that provide certain benefits upon termination of employment or change in control of the Company without Board of Director approval. All such agreements provide the named executive officer with a payment of three times their average annual compensation for the previous five year period if there is a change in control of the Company without Board of Director approval, as defined. Such payment can be taken in a present value lump sum or equal installments over a three year period. The agreements also provide the named executive officers with certain severance/retirement benefits upon certain occurrences including termination of employment without cause as defined, termination of employment due to the Company’s breach of specified employment conditions (good reason termination), death, disability or retirement at a specified age. Such severance/retirement benefit provisions survive the expiration of the agreements and include a fixed stated benefit of $350,000 for Mr. Badke, $324,000 for Mr. Chestnutt and $290,000 for Mr. McGowan.  In addition, Mr. Badke receives an additional deferred compensation benefit upon suchtermination of employment termination occurrencesin certain circumstances in the form of 6,561 shares of the Company’s common stock.

 

 

The following table sets forth all compensation for the fiscal year ended September 30, 20132014 awarded to or earned by the Company’s Chief Executive Officer and by each of ourits other named executive officers whose total compensation exceeded $100,000 during such period.

 

  

Directors who are not employees of the Company (named directors other than Mr. Darby)Fullerton) receive an annual fee of $22,400 for regular Board meetings and $1,600 per committee meeting attended in person or by teleconference.  The Chairman of the Audit Committee also receives an additional annual retainer of $8,000.  Employee directors are not compensated for Board or committee meetings.  Directors may not stand for reelection after age 70, except that any director may serve additional three-year terms after age 70 with the unanimous consent of the Board of Directors.

The Compensation Committee of the Board of Directors consists of Messrs. Reynolds, Robertson,Mr. Budano, Ms. Messinger, Mr. Roche Tiedemann and Wright,Mr. Tiedemann, none of whom has ever been an officer of the Company except for Mr. Roche, who served as Executive Vice President from August 1993 until his retirement in November 1999.

The following table sets forth the beneficial ownership of the Company’s Common Stockcommon stock as of December 16, 201322, 2014 by (i) those persons known by the Company to be beneficial owners of more than 5% of the Company’s outstanding Common Stock;common stock; (ii) each current executive officer named in the Summary Compensation Table; (iii) each director; and (iv) all directors and executive officers as a group.

The Company and CBC Co., Ltd. (CBC), a Japanese corporation which beneficially owned 11.4%5.9% of the outstanding shares of the Company as of September 30, 2013,2014, have been conducting business with each other since 1979.  During this period, CBC has served as a lender, a product supplier and a private label reseller of the Company’s products. In fiscal 2013,2014, the Company purchased approximately $2.4 million$727,000 of products from or through CBC. CBC competes with the Company in various markets, principally in the sale of video products and systems.  Sales of Vicon products to CBC were $12,000$4,000 in 2013.2014.

The Company entered into an agreement with TM Capital Corporation in June 2013 to provideserve as its financial advisory services. The agreement provides for a contingent success fee of $250,000 uponadvisor in connection with the close of a transaction, non-refundable retainer fees aggregating $125,000 through the first three months of the agreement, and $10,000 monthly retainer fees thereafter. Retainer fees in excess of $125,000 will be credited against any earned success fee. Under the agreement, the Company is also required to reimburse TM Capital for its out-of-pocket expenses, which are not to exceed $20,000 in the aggregate without the Company’s prior consent. The agreement also provides the Company with an option to request a fairness opinion relating to any proposed transaction for a fee of $50,000. The Company has paid TM Capital total fees aggregating $105,000 through September 30, 2013 under this agreement.IQinVision merger, among other things. Mr. W. Gregory Robertson, who iswas a member of the Company’s Board of Directors, is the Chairman and holder of 10.32% of the capital stock of TM Capital. Mr. Robertson did not vote on the retention of TM Capital, and has agreed to abstain on any Board vote with respect to any such strategic transaction.

The following table details: the aggregate fee arrangements withfees billed by BDO USA, LLP for professional services rendered for the audit of the Company’s consolidated annual financial statements and review of the financial statements included in the Company’s quarterly reports on Form 10-Q; the aggregate fees billed by BDO USA, LLP for audit related matters and; the aggregate fees billed by BDO USA, LLP for tax compliance, tax advice and tax planning during fiscal years ended September 30, 20132014 and 2012:2013:

The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors.  These services may include audit services, audit related services, tax services and other services.  The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors.  Under the policy, pre-approval generally is provided for an annual period and any pre-approval is detailed as to the particular service or category of services and is subject to a specific limit.  In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis, which must be accompanied by a detailed explanation for each proposed service.  The Audit Committee may delegate pre-approval authority to one or more of its members. Such member must report any decisions to the Audit Committee at the next scheduled meeting.

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted.

We have audited the accompanying consolidated balance sheets of Vicon Industries, Inc. as of September 30, 20132014 and 20122013 and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended.  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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  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. at September 30, 20132014 and 2012,2013, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.