SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
---------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
September 30, 2004 Commission File No. 1-7939
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VICON INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-2160665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
- --------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01
----------------------------
(Title of class)
American Stock Exchange
-----------------------
(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
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The aggregate market value of voting and non-voting Common Stock held by
non-affiliates of the registrant based upon the closing price of $4.68 per share
as of March 31, 2004 was approximately $12,638,000.
The number of shares outstanding of the registrant's Common Stock as of December
15, 2004 was 4,562,429.
PART I
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ITEM 1 - BUSINESS
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General
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Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs,
manufactures, assembles and markets a wide range of video systems and system
components used for security, surveillance, safety and control purposes by a
broad group of end users. A video system is typically a private network that can
transmit and receive video, audio and data signals in accordance with the
operational needs of the user. The Company's primary business focus is the
design of digital video systems and components that it produces and sells
worldwide, primarily to installing dealers, system integrators, government
entities and distributors.
The Company operates within the electronic protection segment of the security
industry that includes, among others: fire and burglar alarm systems, access
control, video systems and asset protection. The U.S. security industry consists
of thousands of individuals and businesses (exclusive of public sector law
enforcement) that provide products and services for the protection and
monitoring of life, property and information. The security industry includes
fire and burglar alarm systems, access control, video systems, asset protection,
guard services and equipment, locks, safes, armored vehicles, security fencing,
private investigations, biometric systems and others. The Company's products are
typically used for crime deterrence, visual documentation, observation of
inaccessible or hazardous areas, enhancing safety, managing liability, obtaining
cost savings (such as lower insurance premiums), managing control systems and
improving the efficiency and effectiveness of personnel. The Company's products
are used in, among others, office buildings, manufacturing plants, apartment
complexes, retail stores, government facilities, airports, transportation
operations, prisons, casinos, hotels, sports arenas, health care facilities and
financial institutions.
Products
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The Company's product line consists of approximately 700 products, of which
about half represent model variations. The Company's product line consists of
various elements of a video system, including network video servers and related
video management software, analog and IP cameras, digital recorders, display
units (monitors), matrix switching equipment for video distribution, robotic
camera dome systems, system controls, and consoles for system assembly. The
Company provides a full line of products due to the many varied climatic and
operational environments in which the products are expected to perform. In
addition to selling from a standard catalog line, the Company at times produces
to specification or will modify an existing product to meet a customer's
requirements.
The Company's products range in price from a simple camera mounting bracket to
several hundred thousand dollars (depending upon configuration) for a large
digital control, transmission, recording, storage and video matrix switching
system.
- 2 -
Marketing
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The Company's marketing emphasizes engineered video system solutions which
includes system design, project management, technical training and support. The
Company promotes and markets its products through industry trade shows
worldwide, product brochures and catalogues, direct marketing and electronic
mailings to existing and prospective customers, product videos, website
promotions, in-house training seminars for customers and end users, road shows
which preview new systems and system components, and advertising through trade
and end user magazines and the Company's web site (www.vicon-cctv.com). The
Company's products are sold principally to over 1,000 independent dealers,
system integrators and distributors. Sales are made principally by field sales
engineers and inside customer service representatives. The Company's sales
effort is supported by in-house customer service coordinators and technical
support groups which provide product information, application engineering,
design detail, field project management, and hardware and software technical
support.
The Company's products are employed in video system installations by: (1)
commercial and industrial users, such as office buildings, manufacturing plants,
warehouses, apartment complexes, shopping malls and retail stores; (2) federal,
state, and local governments for national security purposes, municipal
facilities, prisons, and military installations; (3) financial institutions,
such as banks, clearing houses, brokerage firms and depositories, for security
purposes; (4) transportation departments for highway traffic control, bridge and
tunnel monitoring, and airport, subway, bus and seaport security and
surveillance; (5) gaming casinos, where video surveillance is often mandated by
regulatory authorities; and (6) health care facilities, such as hospitals,
particularly psychiatric wards and intensive care units.
The Company's principal sales offices are located in Hauppauge, New York;
Fareham, England; Zaventem, Belgium; and Neumunster, Germany.
International Sales
- -------------------
The Company sells its products in Europe and the Middle East through its U.K.
based subsidiary and elsewhere outside the U.S. principally by direct export
from its U.S. based parent company. In October 2004, the Company acquired all of
the operating assets of Videotronic Infosystems GmbH, a 30-year old German based
video system supplier, to expand its presence into the sizable German video
security market. The Company has a few territorial exclusivity agreements with
customers but primarily uses a wide range of installation companies and
distributors in international markets. In Australia, Japan and Norway, the
Company permits independent sales representatives to use the Company's name for
marketing purposes.
Direct export sales and sales from the Company's foreign subsidiaries amounted
to $22.3 million, $21.1 million and $18.3 million or 42%, 41% and 34% of
consolidated net sales in fiscal years 2004, 2003, and 2002, respectively. The
Company's principal foreign markets are Europe, the Middle East and the Pacific
Rim, which together accounted for approximately 85 percent of international
sales in fiscal 2004.
- 3 -
Competition
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The Company operates in a highly competitive marketplace both domestically and
internationally. The Company competes by providing high-end video systems and
system components that incorporate broad capability together with high levels of
customer service and technical support. Generally, the Company does not compete
based on price alone.
The Company's principal engineered video systems competitors include the
following companies or their affiliates: Matsushita (Panasonic), Pelco Sales
Company, Bosch Security Systems, Inc., Sensormatic Electronics Corp. division of
Tyco International, GE Security Systems and Honeywell Security Systems. Many
additional companies, both domestic and international, produce products that
compete against one or more of the Company's system components. In addition,
many consumer video electronic companies or their affiliates, including
Matsushita Electric Corp. (Panasonic), Mitsubishi Electric Corporation, Sanyo
Electric Co., Ltd. and Sony Corporation, compete with the Company for the sale
of video products and systems. Almost all of the Company's principal competitors
are larger companies whose financial resources and scope of operations are
substantially greater than the Company's.
Engineering and Development
- ---------------------------
The Company's engineering and development is focused on new and improved video
systems and system components. In recent years, the trend of product development
and demand within the video security and surveillance market has been toward the
application of digital video technology, specifically the compression,
transmission, storage, manipulation, imaging and display of digital video. As
the demands of the Company's target market segment require the Company to keep
pace with changes in technology, the Company has focused its engineering effort
in these developing areas. During the past three years, the Company
substantially increased its product development expenditures to meet the
accelerating market shift to network capable (digital) video systems.
Development projects are chosen and prioritized based on direct customer
feedback, the Company's analysis as to the needs of the marketplace, anticipated
technological advances and market research.
At September 30, 2004, the Company employed a total of 50 engineers in the
following areas: software development, mechanical design, manufacturing/testing
and electrical and circuit design. Engineering and development expense amounted
to approximately 9%, 9% and 8% of net sales in fiscal 2004, 2003 and 2002,
respectively.
Source and Availability of Raw Materials
- ----------------------------------------
The Company relies upon independent manufacturers and suppliers to manufacture
and assemble certain of its proprietary products and expects to continue to rely
on such entities in the future. The Company's relationships with independent
manufacturers, assemblers and suppliers are not covered by formal contractual
agreements.
Raw materials and components purchased by the Company and its suppliers are
generally readily available in the market, subject to market lead times at the
time of order. The Company is not dependent upon any single source for a
significant amount of its raw materials or components.
- 4 -
Intellectual Property
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The Company owns, and has pending, a limited number of design and utility
patents expiring at various times. The Company owns certain trademarks and
several other trademark applications are pending both in the United States and
in Europe. Most of the Company's key products employ proprietary software which
is protected by copyright. The Company considers its software products to be
unique and is a principal element in the differentiation of the Company's
products from its competition. However, the laws of certain foreign countries do
not protect intellectual property rights to the same extent or in the same
manner as the laws of the U.S. The Company has no licenses, franchises or
concessions with respect to any of its products or business dealings. The
Company does not deem the limited number of its patents or its lack of licenses,
franchises and concessions to be of substantial significance. However, the
Company is a defendant in a patent infringement suit as discussed in "Item 3 -
Legal Proceedings", the outcome of which could possibly have a material effect
on the Company's business.
Inventories
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The Company generally maintains sufficient finished goods inventory levels to
respond to unanticipated customer demand, since most sales are to installing
dealers and contractors who normally do not carry any significant inventory. The
Company principally builds inventory to known or anticipated customer demand. In
addition to normal safety stock levels, certain additional inventory levels may
be maintained for products with long purchase and manufacturing lead times. The
Company believes that it is important to carry adequate inventory levels of
parts, components and products to avoid production and delivery delays that
detract from its sales effort.
Backlog
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The backlog of orders believed to be firm as of September 30, 2004 and 2003 was
approximately $4.7 million and $7.4 million, respectively. Orders are generally
cancelable without penalty at the option of the customer. The Company prefers
that its backlog of orders not exceed its ability to fulfill such orders on a
timely basis, since experience shows that long delivery schedules only encourage
the Company's customers to look elsewhere for product availability.
Employees
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At September 30, 2004, the Company employed 219 full-time employees, of whom 8
are officers, 43 are in administration, 81 are in sales and technical service
capacities, 50 are in engineering and 38 are production employees. At September
30, 2003, the Company employed 215 persons. There are no collective bargaining
agreements with any of the Company's employees and the Company considers its
relations with its employees to be good.
ITEM 2 - PROPERTIES
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The Company principally operates from an 80,000 square-foot facility located at
89 Arkay Drive, Hauppauge, New York, which it owns. The Company also owns a
14,000 square-foot sales, service and warehouse facility in southern England
which services the U.K., Europe and the Middle East. In addition, the Company
operates under leases from offices in Manchester, England; Zaventem, Belgium;
Yavne, Israel; and Neumunster, Germany.
- 5 -
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company believes that it has meritorious defenses to
such claims, there is a possibility that an unfavorable outcome could ultimately
occur that could result in a liability that is material to the Company's results
of operations and financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
PART II
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
----------------------------------------------------------------------
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------
The Company's stock is traded on the American Stock Exchange (AMEX) under the
symbol (VII). The following table sets forth for the periods indicated, the
range of high and low prices for the Company's Common Stock on AMEX:
Quarter
Ended High Low
----- ---- ---
Fiscal 2004
-----------
December 4.74 3.90
March 5.25 4.53
June 11.49 4.00
September 5.15 4.47
Fiscal 2003
-----------
December 3.90 2.40
March 3.55 2.79
June 3.55 2.44
September 4.60 3.15
The last sale price of the Company's Common Stock on December 15, 2004 as
reported on AMEX was $4.98 per share. As of December 15, 2004, there were
approximately 206 shareholders of record.
The Company has never declared or paid cash dividends on its Common Stock and
anticipates that any earnings in the foreseeable future will be retained to
finance the growth and development of its business.
- 6 -
On April 26, 2001, the Company announced that its Board of Directors authorized
the repurchase of up to $1 million of shares of the Company's common stock,
which represented approximately 9.8% of shares outstanding on the announcement
date. The following table summarizes repurchases of common stock for the three
month period ended September 30, 2004:
Total
Number Average Approximate Dollar Value
of Shares Price Paid of Shares that May Yet Be
Period Purchased (1) per Share Purchased Under the Program
------ ------------- --------- ----------------------------
07/01/04-07/31/04 20,300 $4.88 $526,629
08/01/04-08/31/04 3,700 $4.71 $509,209
09/01/04-09/30/04 6,100 $4.69 $480,598
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Total 30,100 $4.82
====== =====
(1) All repurchases were executed in open market transactions.
ITEM 6 - SELECTED FINANCIAL DATA
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FISCAL YEAR 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $53,533 $51,954 $54,168 $65,365 $74,624
Gross profit 19,711 19,091 18,218 21,686 23,054
Operating income (loss) (2,226) (1,677) (2,180) (418) 1,993
Income (loss) before
income taxes (2,210) (1,739) (2,349) 2,307 1,589
Net income (loss) (1) (2,691) (4,874) (1,579) 1,497 961
Earnings (loss) per share (1):
Basic (.59) (1.05) (.34) .32 .21
Diluted (.59) (1.05) (.34) .32 .21
Total assets 38,867 41,893 47,426 51,916 53,918
Long-term debt 2,410 2,732 3,040 3,498 7,090
Working capital 22,793 25,333 27,827 30,005 33,365
Property, plant and
equipment (net) 7,090 7,286 7,666 8,139 8,502
(1) Fiscal 2003 includes the effects of the Company's adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
on October 1, 2002.
- 7 -
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 2004 Compared with 2003
- -----------------------------------
Net sales for 2004 increased $1.5 million or 3% to $53.5 million compared with
$52.0 million in 2003. Domestic sales increased $.3 million or 1% to $31.2
million compared with $30.9 million in 2003. International sales increased $1.2
million or 6% to $22.3 million compared with $21.1 million in 2003. The increase
in international sales was due principally to the effects of favorable exchange
rate changes as the British pound and Eurodollar strengthened against the U.S.
dollar in the current year. The backlog of unfilled orders was $4.7 million at
September 30, 2004 compared with $7.4 million at September 30, 2003.
Gross profit margins for 2004 remained relatively unchanged from 2003 levels at
36.8%. In the current year, the Company recognized $1.1 million of charges for
the phase out of discontinued product lines with the introductions of the
Company's new network video servers/recorders and dome camera product lines.
Such inventory provisions were largely offset by increased profit margins from
the Company's European based operations due to the effects of favorable exchange
rate changes.
Operating expenses for 2004 were $21.9 million or 41.0% of net sales compared
with $20.8 million or 40.0% of net sales in 2003 principally as a result of
increased foreign sales office costs largely due to unfavorable currency
translation and legal fees associated with the defense of a patent infringement
suit. The Company continued to invest in new product development in 2004,
incurring $4.9 million of engineering and development expenses, virtually
unchanged from 2003 levels. Prior year operating expenses included a performance
based compensation charge of $620,000 associated with the introduction of the
Company's new digital video product line.
The Company incurred an operating loss of $2.2 million in 2004 compared with a
loss of $1.7 million in 2003.
Interest expense decreased $54,000 to $187,000 for 2004 compared with $241,000
in 2003 principally as a result of the paydown of bank borrowings.
Income tax expense for fiscal 2004 was $481,000 compared with $1.8 million in
2003. In fiscal 2003, the Company recognized a $1.9 million income tax charge to
provide a valuation allowance against its deferred tax assets due to the
uncertainty of future realization. Such charge was reduced by the recognition of
an available tax effected net operating loss carryback of $225,000. Income tax
expense for fiscal 2004 and 2003 included $469,000 and $249,000, respectively,
relating to taxes on profits reported by the Company's European operations.
During the six months ended March 31, 2003, the Company completed its required
goodwill impairment tests as of October 1, 2002 and determined that the entire
carrying amount of goodwill was impaired when tested pursuant to the
requirements of a new accounting standard. As a result, a goodwill impairment
charge of $1.4 million was recognized as the cumulative effect of a change in
accounting principle for 2003.
As a result of the foregoing, the Company incurred a net loss of $2.7 million in
2004 compared with a net loss of $4.9 million in 2003.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 2003 Compared with 2002
- -----------------------------------
Net sales for 2003 decreased $2.2 million or 4% to $52.0 million compared with
$54.2 million in 2002. Domestic sales decreased $5.0 million or 14% to $30.9
million compared with $35.9 million in 2002. Such decrease was due principally
to the current year slowdown in the U.S. economy and a reorganization of the
Company's domestic sales force to properly sell its new digital (network) video
products. International sales increased $2.8 million or 15% to $21.1 million
compared with $18.3 million in 2002. The increase was due in part to the effects
of favorable exchange rate changes as the British pound and Eurodollar
strengthened against the U.S. dollar in the current year. The Company's European
based operations further experienced an increase in large system orders in the
2003 fiscal year.
Gross profit margins for 2003 increased to 36.7% compared with 33.6% in 2002.
The margin increase was principally due to the introduction of the Company's new
digital video product line in the second half of 2003. The Company experienced
increased profit margins from its European based operations due to the effects
of favorable exchange rate changes as the cost of U.S. dollar sourced products
declined.
Operating expenses for 2003 were $20.8 million or 40.0% of net sales compared
with $20.4 million or 37.7% of net sales in 2002. The Company continued to
invest in new product development in 2003, incurring $4.9 million of engineering
and development expenses compared with $4.4 million in 2002. Fiscal 2003
operating expenses included a performance based compensation charge of $620,000
associated with the introduction of the Company's new digital video product
line.
The Company incurred an operating loss of $1.7 million in 2003 compared with a
loss of $2.2 million in 2002.
Interest expense decreased $99,000 to $241,000 for 2003 compared with $340,000
in 2002 principally as a result of the paydown of bank borrowings.
Income tax expense for fiscal 2003 was $1.8 million compared with an income tax
benefit of $770,000 in 2002. In fiscal 2003, the Company recognized a $1.9
million income tax charge to provide a valuation allowance against its deferred
tax assets due to the uncertainty of future realization. Such charge was reduced
by the recognition of an available tax effected net operating loss carryback of
$225,000.
During the six months ended March 31, 2003, the Company completed its required
goodwill impairment tests as of October 1, 2002 and determined that the carrying
amount of goodwill was impaired when tested pursuant to the requirements of a
new accounting standard. As a result, a goodwill impairment charge of $1.4
million was recognized as the cumulative effect of a change in accounting
principle for 2003.
As a result of the foregoing, the Company incurred a net loss of $4.9 million in
2003 compared with a net loss of $1.6 million in 2002.
- 9 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $1.4 million for 2004 due
primarily to the receipt of a $1.8 million federal income tax refund. The net
loss of $2.7 million for the period was offset by $1.0 million of non-cash
charges for depreciation and amortization and a $1.7 million reduction in
accounts receivable. Net cash provided by investing activities was $435,000 for
2004 relating to a reduction in marketable securities of $1.2 million, offset in
part by $730,000 of general capital expenditures. Net cash used in financing
activities was $585,000 in 2004, which included $325,000 of scheduled repayments
of bank mortgage loans and $299,000 of stock repurchases. As a result of the
foregoing, cash increased by $1.2 million for 2004 after the effect of exchange
rate changes on the cash position of the Company.
The Company had a $5 million secured revolving credit facility with a bank that
expired in July 2004 without renewal. At September 30, 2003 through expiration
of this facility, there were no outstanding borrowings under this facility.
The Company's European based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of 1 million Pounds Sterling (approximately
$1,810,000) to support its local working capital requirements. This facility
expires in March 2005. At September 30, 2004, there were no outstanding
borrowings under this facility.
The following is a summary of the Company's long-term debt and material lease
obligations as of September 30, 2004:
Debt Lease
Year Repayments Commitments Total
- ---- ---------- ----------- -----
2005 $ 349,000 $294,000 $ 643,000
2006 347,000 276,000 623,000
2007 323,000 227,000 550,000
2008 1,740,000 32,000 1,772,000
The Company believes that it has sufficient cash to meet its anticipated
operating, capital expenditures and debt service requirements for at least the
next twelve months. The Company has incurred operating losses in recent periods
which, if continued, could limit the Company's ability to secure additional bank
financing if needed.
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.
- 10 -
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company believes that it has meritorious defenses to
such claims, there is a possibility that an unfavorable outcome could ultimately
occur that could result in a liability that is material to the Company's results
of operations and financial position.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are fully described in Note 1 to
the consolidated financial statements included in Part IV. Management believes
the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue is generally
recognized when products are sold and title is passed to the customer. Shipping
and handling costs are included in cost of sales. Advance service billings under
a national supply contract with one customer are deferred and recognized as
revenues on a pro rata basis over the term of the service agreement. Pursuant to
the adoption of EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables", effective July 1, 2003, the Company evaluates multiple-element
revenue arrangements for separate units of accounting, and follows appropriate
revenue recognition policies for each separate unit. Elements are considered
separate units of accounting provided that (i) the delivered item has
stand-alone value to the customer, (ii) there is objective and reliable evidence
of the fair value of the delivered item, and (iii) if a general right of return
exists relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially within the control of
the Company. As applied to the Company, under arrangements involving the sale of
product and the provision of services, product sales are recognized as revenue
when the products are sold and title is passed to the customer, and service
revenue is recognized as services are performed. For products that include more
than incidental software, and for separate licenses of the Company's software
products, the Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition", as amended.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
- 11 -
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 assesses the recoverability of the carrying value of its long-lived
assets, including identifiable intangible assets with finite useful lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company evaluates the recoverability of
such assets based upon the expectations of undiscounted cash flows from such
assets. If the sum of the expected future undiscounted cash flows were less than
the carrying amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
In fiscal 2003, the Company recognized a $1.9 million charge to provide a
valuation allowance against its deferred tax assets due to the uncertainty of
future realization. The establishment of such valuation allowance was determined
to be appropriate during that period due to updated judgments in light of the
Company's operating losses in current and past years and the inherent
uncertainties of predicting future operating results in periods over which such
net tax differences become deductible. The Company plans to provide a full
valuation allowance against its deferred tax assets until such time that it can
achieve a sustained level of profitability or other positive evidence arises
that would demonstrate an ability to recover such assets.
The Company is subject to proceedings, lawsuits and other claims related to
labor, product and other matters. The Company assesses the likelihood of an
adverse judgment or outcomes for these matters, as well as the range of
potential losses. A determination of the reserves required, if any, is made
after careful analysis. The required reserves may change in the future due to
new developments.
Foreign Currency Activity
- -------------------------
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. dollar to the British pound sterling, the Euro and the
Israeli shekel.
Sales by the Company's U.K. based subsidiary to customers in Europe and the
Middle East are made in British Pounds Sterling (Pounds) or Eurodollars (Euros).
In fiscal 2004, approximately $4.7 million of products were sold by the Company
to its U.K. based subsidiary for resale. The Company attempts to minimize its
currency exposure on intercompany sales through the purchase of forward exchange
contracts.
The Company's Israeli based subsidiary incurs Shekel based operating expenses
which are funded by the Company in U.S. dollars. In past years, the Company had
purchased forward exchange contracts to minimize its currency exposure on these
expenses during periods of favorable fluctuating exchange rates.
As of September 30, 2004, the Company had forward exchange contracts outstanding
with notional amounts aggregating $2.3 million. 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.
- 12 -
In general, the Company seeks lower costs from suppliers and enters into forward
exchange contracts to mitigate short-term exchange rate exposures. However,
there can be no assurance that such steps will be effective in limiting
long-term foreign currency exposure.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Market Risk Factors
- -------------------
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. The Company has a policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes.
The Company enters into forward exchange contracts to hedge certain foreign
currency exposures and minimize the effect of such fluctuations on reported
earnings and cash flow (see "Foreign Currency Activity", Note 1 "Derivative
Instruments" and "Fair Value of Financial Instruments" to the accompanying
financial statements). At September 30, 2004, the Company's foreign currency
exchange risks included an aggregate $2.4 million of intercompany account
balances between the Company and its subsidiaries, which are short term and will
be settled in fiscal 2005. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant.
At September 30, 2004, a 10% strengthening or weakening of the U.S. dollar
versus the British Pound would result in a $237,000 decrease or increase,
respectively, in the intercompany accounts receivable balance. Such foreign
currency exchange risk at September 30, 2004 has been substantially hedged by
forward exchange contracts.
At September 30, 2004, the Company had $1.7 million of outstanding floating rate
bank debt which was covered by an interest rate swap agreement that effectively
converts the foregoing floating rate debt to stated fixed rates (see "Note 6.
Long-Term Debt" to the accompanying financial statements). Thus, the Company has
substantially no net interest rate exposures on these instruments. However, the
Company had approximately $776,000 of floating rate bank debt that is subject to
interest rate risk as it was not covered by an interest rate swap agreement. The
Company does not believe that a 10% fluctuation in interest rates would have a
material effect on its consolidated financial position and results of
operations.
Related Party Transactions
- --------------------------
Refer to Item 13 and "Note 14. Related Party Transactions" to the accompanying
financial statements.
Inflation
- ---------
The impact of inflation on the Company has been minimal in recent years as the
rate of inflation remains low. However, inflation continues to increase costs to
the Company. As operating expenses and production costs increase, the Company
principally seeks to increase sales and lower its product cost where possible.
- 13 -
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
- --------------------------------------------------------------------------------
1995
----
Statements in this Report on Form 10-K and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Results of
Operations" and "Liquidity and Financial Condition" are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that should be considered as subject to the many risks and uncertainties
that exist in the Company's operations and business environment. The
forward-looking statements are based on current expectations and involve a
number of known and unknown risks and uncertainties that could cause the actual
results, performance and/or achievements of the Company to differ materially
from any future results, performance or achievements, express or implied, by the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, and that in light of the significant
uncertainties inherent in forward-looking statements, the inclusion of such
statements should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved. The
Company also assumes no obligation to publicly update or revise its
forward-looking statements or to advise of changes in the assumptions and
factors on which they are based.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Part IV, Item 15, for an index to consolidated financial statements and
financial statement schedules.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
The information in response to this Item has been previously reported in the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 10, 2004.
ITEM 9A - CONTROLS AND PROCEDURES
- ---------------------------------
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission's rules and forms.
Changes in Internal Controls
- ----------------------------
There were no changes in the Company's internal control over financial reporting
identified in connection with the evaluation referred to above that occurred
during the fourth quarter of the fiscal year ended September 30, 2004 that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Limitations on the Effectiveness of Controls
- --------------------------------------------
The Company believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
- 14 -
ITEM 9B - OTHER INFORMATION
- ---------------------------
None.
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The Executive Officers and Directors of the Company are as follows:
Name Age Position
---- --- --------
Kenneth M. Darby 58 Chairman of the Board, President and
Chief Executive Officer
Thomas Finstein 47 Executive Vice President, Products
and Operations
John M. Badke 45 Senior Vice President, Finance and
Chief Financial Officer
Peter A. Horn 49 Vice President, Operations
Bret M. McGowan 39 Vice President, Marketing
Yacov A. Pshtissky 53 Vice President,Technology and Development
John F. Whiteman, Jr. 46 Vice President, Sales
Joan L. Wolf 50 Executive Administrator and
Corporate Secretary
Christopher J. Wall 51 Managing Director, Vicon Industries Ltd.
Yigal Abiri 55 General Manager, Vicon Systems Ltd.
Clifton H.W. Maloney 67 Director
Peter F. Neumann 70 Director
W. Gregory Robertson 61 Director
Arthur D. Roche 66 Director
The business experience, principal occupations and employment, as well as period
of service, of each of the officers and directors of the Company during at least
the last five years are set forth below.
Kenneth M. Darby - Chairman of the Board, President and Chief Executive Officer.
Mr. Darby has served as Chairman of the Board since April 1999, as Chief
Executive Officer since April 1992 and as President since October 1991. He has
served as a director since 1987. Mr. Darby also served as Chief Operating
Officer and as Executive Vice President, Vice President, Finance and Treasurer
of the Company. He joined the Company in 1978 as Controller after more than nine
years at Peat Marwick Mitchell & Co., a public accounting firm. Mr. Darby's
current term on the Board ends in May 2005.
Thomas Finstein - Executive Vice President, Products and Operations. Mr.
Finstein joined the Company in May 2004 as Executive Vice President, Products
and Operations. Prior to joining the Company, Mr. Finstein served as President
and CEO of ProAct Technologies, an HR and Benefits Software Solutions Company
with whom he was employed from October 2001 until May 2004. Prior to that, he
served as Vice President and General Manager of Hyperion Solutions, a Business
Intelligence Software Solutions Company with whom he was employed from January
1996 until October 2001.
John M. Badke - Senior Vice President, Finance and Chief Financial Officer. Mr.
Badke has been Senior Vice President, Finance since May 2004 and Chief Financial
Officer since December 1999. Previously, he was Vice President, Finance since
October 1998 and served as Controller since joining the Company in 1992. Prior
to joining the Company, Mr. Badke was Controller for NEK Cable, Inc. and an
audit manager with the international accounting firms of Arthur Andersen & Co.
and Peat Marwick Main & Co.
- 15 -
Peter A. Horn - Vice President, Operations. Mr. Horn has been Vice President,
Operations since June 1999. From 1995 to 1999, he was Vice President, Compliance
and Quality Assurance. Prior to that time, he served as Vice President in
various capacities since his promotion in May 1990.
Bret M. McGowan - Vice President, Marketing. Mr. McGowan was promoted to Vice
President, Marketing in October 2001. Previously, he served as Director of
Marketing since 1998 and as Marketing Manager since 1994. He joined the Company
in 1993 as a Marketing Specialist.
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.
John F. Whiteman, Jr. - Vice President, Sales. Mr. Whiteman joined the Company
in December 2002 as Director of Sales and was promoted to Vice President, Sales
in March 2003. Prior to joining the Company, Mr. Whiteman was Senior Vice
President-Sales and Marketing for Sentry Technology Corporation, an electronic
security products manufacturer with whom he was employed for 16 years.
Joan L. Wolf - Executive Administrator and Corporate Secretary. Ms. Wolf has
been Executive Administrator since she joined the Company in 1990 and was
appointed to the non-operating officer position of Corporate Secretary in May
2002.
Christopher J. Wall - Managing Director, Vicon Industries, Ltd. Mr Wall has been
Managing Director, Vicon Industries, Ltd. since February 1996. Previously he
served as Financial Director, Vicon Industries, Ltd. since joining the Company
in 1989. Prior to joining the Company he held a variety of senior financial
positions within Westland plc, a UK aerospace company.
Yigal Abiri - General Manager, Vicon Systems Ltd. Mr. Abiri has been General
Manager, Vicon Systems Ltd. since joining the Company in August 1999.
Previously, he served as President of QSR, Ltd., a developer and manufacturer of
remote video surveillance equipment.
Clifton H.W. Maloney - Director. Mr. Maloney has been a director of the Company
since May 2004. Mr. Maloney is the President of C.H.W. Maloney & Co., Inc., a
private investment firm that he founded in 1981. From 1974 to 1984, he was a
Vice President in investment banking at Goldman, Sachs & Co. Mr. Maloney is a
Director of Interpool, Inc., Chromium Industries, Inc. and The Wall Street Fund.
His current term on the Board ends in May 2007.
Peter F. Neumann - Director. Mr. Neumann has been a director of the Company
since 1987. He is the retired President of Flynn-Neumann Agency, Inc., an
insurance brokerage firm. Mr. Neumann's current term on the Board ends in May
2006.
W. Gregory Robertson - Director. Mr. Robertson has been a director of the
Company since 1991. He is President of TM Capital Corporation, a financial
services company which he founded in 1989. From 1985 to 1989, he was employed by
Thomson McKinnon Securities, Inc. as head of investment banking and public
finance. Mr. Robertson's current term on the Board ends in May 2007.
Arthur D. Roche - Director. Mr. Roche has been a director of the Company since
1992. He served as Executive Vice President and co-participant in the Office of
the President of the Company from August 1993 until his retirement in November
1999. For the six months prior to that time, Mr. Roche provided consulting
services to the Company. In October 1991, Mr. Roche retired as a partner of
Arthur Andersen & Co., an international accounting firm which he joined in 1960.
His current term on the Board ends in May 2005.
- 16 -
There are no family relationships between any director, executive officer or
person nominated or chosen by the Company to become a director or officer.
Audit Committee Financial Expert
- --------------------------------
The Board of Directors has determined that Arthur D. Roche, the Chairman of the
Audit Committee of the Board of Directors, qualifies as an "Audit Committee
Financial Expert", as defined by Securities and Exchange Commission Rules, based
on his education, experience and background. Mr. Roche is independent as that
term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Code of Ethics
- --------------
The Company has adopted a Code of Ethics that applies to all its employees,
including its chief executive officer, chief financial and accounting officer,
controller, and any persons performing similar functions. Such Code of Ethics is
published on the Company's internet website (www.vicon-cctv.com).
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during the year ended September 30, 2004 and certain written
representations that no Form 5 is required, no person who, at any time during
the year ended September 30, 2004 was a director, officer or beneficial owner of
more than 10 percent of any class of equity securities of the Company registered
pursuant to Section 12 of the Exchange Act failed to file on a timely basis, as
disclosed in the above forms, reports required by Section 16(a) of the Exchange
Act during the year ended September 30, 2004, except that a director and three
officers each filed one late report on Form 3 as to their director and officer
appointments, respectively, and as to grants of stock options to such
individuals.
- 17 -
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to the Company during 2004, 2003 and 2002 by the Chief
Executive Officer and the Company's most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during any such year.
SUMMARY COMPENSATION TABLE
--------------------------
<table>
<caption>
Long-Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other All
Annual Restricted Securities Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Position Year Salary Bonus sation Award Options (#) Payouts sation
- ------------------ ---- ------- ------- ------ ---------- ----------- ------- ------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Kenneth M. Darby 2004 $310,000 $ 75,000 (1) - - - - -
Chairman and 2003 310,000 75,000 (1) - - 100,000 - -
Chief Executive 2002 310,000 75,000 (1) - - - - -
Officer
Thomas Finstein 2004 $ 90,000 $ 20,000 (2) - - 20,000 - -
Executive 2003 - - - - - - -
Vice President 2002 - - - - - - -
John M. Badke 2004 $152,000 $ 35,000 (1) - - - - -
Senior Vice President 2003 $145,000 $ 35,000 (1) - - 25,000 - -
and Chief Financial 2002 $140,000 $ 35,000 (1) - - 16,000 - -
Officer
Christopher J. Wall 2004 $148,000 $113,000 (3) - - - - -
Managing Director 2003 $129,000 $ 89,000 (3) - - 20,000 - -
Vicon Industries Ltd. 2002 $115,000 $ 27,000 (3) - - - - -
Yigal Abiri 2004 $160,000 - - - - - $ 66,946 (5)
General Manager 2003 $125,000 $ 25,000 (4) - - 10,000 - $620,000 (6)
Vicon Systems Ltd. 2002 $125,000 - - - - - -
</table>
(1) Represents cash bonus approved by the Board of Directors upon the
recommendation of its Compensation Committee.
(2) Represents an incentive sign-on bonus.
(3) Represents sales and profit related bonus based on financial results of
Vicon Industries, Ltd.
(4) Represents discretionary bonus.
(5) Represents $43,938 of severance pay paid into a management insurance
policy and $23,008 paid as compensation for accrued vacation.
(6) Represents performance based compensation associated with the
introduction of the Company's new digital video product line.
- 18 -
OPTION GRANTS IN LAST FISCAL YEAR
- ---------------------------------
<table>
<caption>
Individual Grants
-----------------
Potential Realizable
Value at Assumed
Annual Rates of Stock
% of Total Price Appreciation
No. of Granted to Exercise for Option Term
Options Employees in Price Expiration
Name Granted Fiscal Year Per Share Date 5% 10%
- ------------- ------- ------------- ---------- ----------- -------- -----------
<s> <c> <c> <c> <c> <c> <c>
Thomas Finstein 20,000 57.1% 5.40 5/10 $36,730 $ 83,329
</table>
Options granted in the year ended September 30, 2004 were issued under the 2002
Incentive Stock Option Plan and are exercisable as follows: up to 30% of the
shares on the second anniversary of the grant date, an additional 30% of the
shares on the third anniversary of the grant date, and the balance of the shares
on the fourth anniversary of the grant date, except that no option is
exercisable after the expiration of six years from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
-----------------------------------------------
AND FISCAL YEAR-END OPTION VALUES
---------------------------------
At September 30, 2004
---------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options Options (2)
------- -----------
Shares
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized (1) Unexercisable Unexercisable
- ---------------- ----------- ------------ ------------- -------------
Kenneth M. Darby -0- -0- 28,356/93,183 $38,852/$126,226
Thomas Finstein -0- -0- -0- /20,000 -0-/-0-
John M. Badke -0- -0- 15,911/27,450 25,929/40,043
Christopher J. Wall -0- -0- -0- /20,000 -0-/26,500
Yigal Abiri -0- -0- 22,000/18,000 21,480/21,820
(1) Calculated based on the difference between the closing quoted market prices
per share at the dates of exercise and the exercise prices.
(2) Calculated based on the difference between the closing quoted market
price($4.70) and the exercise price.
- 19 -
Employment Agreements
- ---------------------
Mr. Darby is a party to an employment agreement with the Company that provides
for an annual salary of $310,000 through fiscal year 2005. Messrs. Finstein and
Badke are parties to employment agreements that provide for annual salaries of
$225,000 and $150,000, respectively, through fiscal year 2006. Each of these
agreements provide for payment in an amount up to three times the average annual
compensation for the previous five years if there is a change in control of the
Company without Board of Director approval. Messrs. Wall and Abiri are parties
to employment agreements that provide for annual salaries of $172,000 and
$160,000, respectively, through fiscal year 2005. Mr. Wall's agreement was
executed in November 2004, the terms of which are disclosed in Item 15(a)(3). In
addition, the agreements provide for severance benefits of $620,000, $112,500
and $300,000 for Messrs. Darby, Finstein and Badke, respectively, under certain
occurrences.
Directors' Compensation and Term
- --------------------------------
Directors are compensated at an annual rate of $16,000 for regular Board
meetings and $1,000 per committee meeting attended in person or by
teleconference. The Chairman of the Audit Committee also receives an annual
retainer of $8,000. Employee directors are not compensated for Board or
committee meetings. Directors may not stand for reelection after age 70, except
that any director may serve one additional three-year term after age 70 with the
unanimous consent of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee of the Board of Directors consists of Messrs.
Maloney, Neumann, Robertson and Roche, none of whom has ever been an officer of
the Company except for Mr. Roche, who served as Executive Vice President from
August 1993 until his retirement in November 1999.
Board Compensation Committee Report
-----------------------------------
The Compensation Committee's compensation policies applicable to the Company's
officers for 2004 were to pay a competitive market price for the services of
such officers, taking into account the overall performance and financial
capabilities of the Company and the officer's individual level of performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base
salary and incentive compensation of all officers other than himself. The
Committee reviews these recommendations with Mr. Darby and, after such review,
determines compensation. In the case of Mr. Darby, the Compensation Committee
makes its determination after direct negotiation with him. For each officer, the
committee's determinations are based on its conclusions concerning each
officer's performance and comparable compensation levels for similarly situated
officers at comparable companies. The overall level of performance of the
Company is taken into account but is not specifically related to the base salary
of these officers. Also, the Company has established an incentive compensation
plan for certain officers, which provides for a specified bonus upon the
Company's achievement of certain annual sales and profitability targets.
The Compensation Committee grants options to officers to link compensation to
the performance of the Company. Options are exercisable in the future at the
fair market value at the time of grant, so that an officer granted an option is
rewarded by the increase in the price of the Company's stock. The committee
grants options to officers based on significant contributions of such officer to
the performance of the Company. In addition, in determining Mr. Darby's salary
and bonus for service as Chief Executive Officer, the committee considers the
responsibility assumed by him in formulating, implementing and managing the
operational and strategic objectives of the Company.
- 20 -
This graph compares the return of $100 invested in the Company's stock on
October 1, 1999, with the return on the same investment in the AMEX U.S. Market
Index and the AMEX Technology Index.
(The following table was represented by a chart in the printed material)
Vicon AMEX U.S. AMEX Technology
Date Industries, Inc. Market Index Index
- ---- ---------------- ------------ ---------------
10/01/99 100 100 100
10/01/00 46 123 117
10/01/01 49 89 95
10/01/02 44 78 59
10/01/03 59 100 85
10/01/04 67 116 96
- 21 -
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth the beneficial ownership of the Company's Common
Stock as of December 15, 2004 by (i) those persons known by the Company to be
beneficial owners of more than 5% of the Company's outstanding Common Stock;
(ii) each current executive officer named in the Summary Compensation Table;
(iii) each director; and (iv) all directors and executive officers as a group.
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned (1) % of Class
------------------- ---------------------- ----------
CBC Co., Ltd.
and affiliates
2-15-13 Tsukishima
Chuo-ku
Tokyo, Japan 104 543,715 11.3%
Al Frank Asset Management, Inc.
32392 Coast Highway, Suite 260
Laguna Beach, CA 92651 291,995 (10) 6.1%
Dimensional Fund Advisors
1299 Ocean Avenue
Santa Monica, CA 90401 273,200 (11) 5.7%
Leviticus Partners, L.P.
30 Park Avenue, Suite 12F
New York, NY 10016 250,000 5.2%
******************************************************************************
C/O Vicon Industries, Inc.
Kenneth M. Darby 293,616 (2) 6.1%
Arthur D. Roche 151,601 (3) 3.2%
Peter F. Neumann 37,072 (4) *
W. Gregory Robertson 33,847 (5) *
John M. Badke 32,900 (6) *
Yigal Abiri 26,000 (7) *
Christopher J. Wall 15,300 (8) *
Thomas Finstein - *
Clifton H.W. Maloney - *
Total all Executive Officers and
Directors as a group (14 persons) 681,037 (9) 14.2%
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment control over the shares of stock
owned.
(2) Includes currently exercisable options to purchase 43,524 shares.
(3) Includes 50,000 shares held by Mr. Roche's wife and currently exercisable
options to purchase 21,947 shares.
(4) Includes currently exercisable options to purchase 20,000 shares.
(5) Includes currently exercisable options to purchase 21,947 shares.
(6) Includes currently exercisable options to purchase 21,461 shares.
(7) Includes currently exercisable options to purchase 26,000 shares.
(8) Includes currently exercisable options to purchase 3,000 shares.
(9) Includes currently exercisable options to purchase 183,939 shares.
(10) Al Frank Asset Management, Inc. had voting control over 126,721 shares and
investment control over 291,995 shares.
(11) Dimensional Fund Advisors had voting and investment control over 273,200
shares as investment advisor and manager for various mutual funds and other
clients. These shares are beneficially owned by such mutual funds or other
clients.
- 22 -
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------
at September 30, 2004
Number of securities
Number of securities Weighted average remaining available
to be issued upon exercise price for future issuance
exercise of of outstanding under equity
outstanding options, options, warrants compensation plans
warrants and rights and rights (excluding securities
reflected in column
(a) )
Plan category (a) (b) (c)
- ------------------ ------------------- ---------------- -------------------
Equity compensation
plans approved by
security holders 555,320 $3.50 75,751
Equity compensation
plans not approved
by security holders - - -
Total 555,320 $3.50 75,751
EQUITY COMPENSATION GRANTS NOT APPROVED BY SECURITY HOLDERS
- -----------------------------------------------------------
Through September 30, 2004, the Company had granted certain of its officers with
deferred compensation benefits aggregating 97,337 shares of common stock
currently held by the Company in treasury. Such shares vest upon retirement or,
in the case of 70,647 shares, the expiration of one officer's employment
agreement in October 2005. All shares vest earlier under certain occurrences
including death, involuntary termination or a change in control of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company and CBC Co., Ltd.(CBC), a Japanese corporation which beneficially
owns 11.3% of the outstanding shares of the Company, have been conducting
business with each other for approximately twenty-five years. During this
period, CBC has served as a lender, a product supplier and sourcing agent, and a
private label reseller of the Company's products. CBC has also acted as the
Company's sourcing agent for the purchase of certain video products. In fiscal
2004, the Company purchased approximately $651,000 of products and components
from or through CBC. CBC competes with the Company in various markets,
principally in the sale of video products and systems. Sales of all products to
CBC were $712,000 in 2004. In fiscal 2003, the Company recognized $180,000 of
revenues received from CBC pursuant to the completion of a contract to develop
certain new product technology.
- 23 -
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
- ------------------------------------------------
Audit Fees
- ----------
The aggregate fees billed by BDO Seidman, LLP for professional services
rendered for the audit of the Company's consolidated annual financial statements
and the review of the financial statements included in the Company's quarterly
reports on Form 10-Q for fiscal year 2004 were approximately $143,000. The
aggregate fees billed by KPMG LLP for such services for fiscal year 2003 were
$352,000.
Tax Fees
- --------
The aggregate fees billed by BDO Seidman, LLP for tax compliance, tax
advice and tax planning during fiscal year 2004 were approximately $41,000. The
aggregate fees billed by KPMG LLP for such tax services for fiscal year 2003
were $50,000. All these fees were pre-approved by the Audit Committee.
Audit Related Fees
- ------------------
Fees billed by KPMG LLP for professional services on audit related matters
were $8,500 during fiscal year 2003.
All Other Fees
- --------------
None.
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
- --------------------------------------------------------------------------------
Independent Auditors
- --------------------
The Audit Committee pre-approves all audit and permissible non-audit
services provided by the independent auditors. These services may include audit
services, audit related services, tax services and other services. The Audit
Committee has adopted a policy for the pre-approval of services provided by the
independent auditors. Under the policy, pre-approval generally is provided for
an annual period and any pre-approval is detailed as to the particular service
or category of services and is subject to a specific limit. In addition, the
Audit Committee may also pre-approve particular services on a case-by-case
basis, which must be accompanied by a detailed explanation for each proposed
service. The Audit Committee may delegate pre-approval authority to one or more
of its members. Such member must report any decisions to the Audit Committee at
the next scheduled meeting.
- 24 -
PART IV
-------
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
- -------------------------------------------------
(a) (1) Financial Statements
--------------------
Included in Part IV, Item 15:
Reports of Independent Registered Public Accounting Firms
Financial Statements:
Consolidated Statements of Operations, fiscal years ended
September 30, 2004, 2003, and 2002
Consolidated Balance Sheets at September 30, 2004 and 2003
Consolidated Statements of Shareholders' Equity, fiscal years
ended September 30, 2004, 2003, and 2002
Consolidated Statements of Cash Flows, fiscal years ended
September 30, 2004, 2003, and 2002
Notes to Consolidated Financial Statements, fiscal years ended
September 30, 2004, 2003, and 2002
(a) (2) Financial Statement Schedule
----------------------------
Included in Part IV, Item 15:
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 2004, 2003, and 2002
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and, therefore,
have been omitted.
- 25 -
15(a)(3) Exhibits
- -------- --------
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -------------------------
3 (.1) Articles of Incorporation and Incorporated by reference
By-Laws, as amended to the 1985 Annual Report
on Form 10-K; Form S-2
filed in Registration
Statement No. 33-10435
and Exhibit A, B and C of
the 1987 Proxy Statement
(.2) Amendment of the Certificate Incorporated by reference
of Incorporation dated to the 2002 Annual Report
May 7, 2002 on Form 10-K
4 Instruments defining the rights of
security holders
(.1) Rights Agreement dated December Incorporated by reference
4, 2001 between the Registrant and to the 2001 Annual Report
Computershare Investor Services on Form 10-K
10 Material Contracts
(.1) Employment Contract dated Incorporated by
October 1, 2002 between the reference to the
Registrant and Kenneth M. Darby 2004 Annual Report
on Form 10-K
(.2) 1994 Incentive Stock Option Plan Incorporated by
reference to the
1994 Annual Report
on Form 10-K
(.3) 1994 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1994 Annual Report
on Form 10-K
(.4) 1996 Incentive Stock Option Plan Incorporated by
reference to the
1997 Annual Report
on Form 10-K
(.5) 1996 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1997 Annual Report
on Form 10-K
(.6) Commercial fixed rate loan Incorporated by
agreement between the Registrant reference to the
and National Westminster Bank PLC June 30, 1997 filing
dated April 8, 1997 on Form 10-Q
(.7) Loan Agreement between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated December 31, 1997
January 29, 1998 filing on Form 10-Q
- 26 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- ------------
(.8) Mortgage Note between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated December 31, 1997
January 29, 1998 filing on Form 10-Q
(.9) Mortgage and Security Agreement Incorporated by
in the amount of $2,512,000 between reference to the
the Registrant and The Dime Savings December 31, 1997
Bank of New York, FSB dated filing on Form 10-Q
January 29, 1998
(.10) Interest rate master swap agreement Incorporated by
between the Registrant and KeyBank reference to the
National Association dated December 31, 1997
December 11, 1997 filing on Form 10-Q
(.11) Schedule to the master agreement Incorporated by
between the Registrant and KeyBank reference to the
National Association dated December 31, 1997
December 11, 1997 filing on Form 10-Q
(.12) Swap transaction confirmation with Incorporated by
a notional amount of $2,512,000 reference to the
between the Registrant and KeyBank December 31, 1997
National Association dated filing on Form 10-Q
December 30, 1997
(.13) Advice of borrowing terms Incorporated by
between the Registrant and reference to the
National Westminster Bank PLC March 31, 2004 filing
dated April 15, 2004 on Form 10-Q
(.14) Loan Agreement between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.15) Mortgage Note between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.16) Mortgage and Security Agreement Incorporated by reference
in the amount of $1,200,000 between to the 1999 Annual Report
the Registrant and The Dime Savings on Form 10-K
Bank of New York, FSB dated
October 12, 1999
(.17) 1999 Incentive Stock Option Plan Incorporated by reference
to the 1999 Annual Report
on Form 10-K
(.18) 1999 Non-Qualified Stock Incorporated by reference
Option Plan to the 1999 Annual Report
on Form 10-K
(.19) 2002 Incentive Stock Option Plan Incorporated by reference
to the 2002 Annual Report
on Form 10-K
- 27 -
<page>
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- ------------
(.20) 2002 Non-Qualified Stock Incorporated by reference
Option Plan to the 2002 Annual Report
on Form 10-K
(.21) Employment Agreement dated 10.21
May 3, 2004 between the
Registrant and Thomas Finstein
(.22) Employment Agreement dated 10.22
January 1, 2004 between the
Registrant and John M. Badke
(.23) Employment Agreement dated 10.23
October 1, 2003 between the
Registrant and Yigal Abiri
(.24) Employment Agreement dated 10.24
February 8, 1996 between the
Registrant and Christopher J. Wall
(.25) Side Letter to the Employment 10.25
Agreement between the Registrant
and Christopher J. Wall dated
November 18, 2004
21 Subsidiaries of the Registrant Incorporated by
reference to the Notes
to the Consolidated
Financial Statements
23 Consents
(.1) Consent of BDO Seidman, LLP 23.1
(.2) Consent of KPMG LLP 23.2
31 Rule 13a-14(a)/15d-14(a)
Certifications
(.1) Certification of Chief Executive
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 31.1
(.2) Certification of Chief Financial
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 31.2
32 Section 1350 Certifications
(.1) Certification of Chief Executive
Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 32.1
(.2) Certification of Chief Financial
Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 32.2
- 28 -
No other exhibits are required to be filed.
Other Matters - Form S-8 and S-2 Undertaking
- --------------------------------------------
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892
(filed June 30, 1986), 33-34349 (filed April 1, 1990), 33-90038 (filed February
24, 1995), 333-30097 (filed June 26, 1997), 333-71410 (filed October 11, 2001)
and 333-116361 (filed June 10, 2004) and on Form S-2 No. 333-46841 (effective
May 1, 1998):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
- 29 -
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Stockholders
Vicon Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Vicon Industries,
Inc. as of September 30, 2004 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year ended September
30, 2004. In connection with our audit of the consolidated financial statements,
we also have audited the financial statement schedule as listed in Part IV, item
15(a)(2) for the fiscal year ended September 30, 2004. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation and schedule. We
believe that our audit provides 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, 2004, and the results of its operations and its cash flows
for the year ended September 30, 2004, in conformity with accounting principles
generally accepted in the United States of America.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Melville, New York
December 6, 2004
- 30 -
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Vicon Industries, Inc.:
We have audited the consolidated balance sheet of Vicon Industries, Inc. and
subsidiaries (the "Company") as of September 30, 2003, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the fiscal years ended September 30, 2003 and 2002. In connection with
our audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in Part IV, item 15(a)(2) for the fiscal
years ended September 30, 2003 and 2002. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with 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. 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, 2003, and the results of their operations
and their cash flows for each of the fiscal years ended September 30, 2003 and
2002, in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial statement schedule
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", effective October 1, 2002.
/s/ KPMG LLP
Melville, New York
January 14, 2004
- 31 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30, 2004, 2003 and 2002
2004 2003 2002
---- ---- ----
Net sales $53,532,631 $51,953,650 $54,168,110
Cost of sales 33,821,618 32,862,590 35,950,038
------------ ------------ ------------
Gross profit 19,711,013 19,091,060 18,218,072
Operating expenses:
Selling, general and
administrative expense 17,058,460 15,889,164 16,027,461
Engineering and development expense 4,878,981 4,879,294 4,370,230
------------ ------------ ------------
21,937,441 20,768,458 20,397,691
------------ ------------ ------------
Operating loss (2,226,428) (1,677,398) (2,179,619)
Other expense (income):
Interest expense 187,390 240,843 339,587
Interest and other income (204,224) (179,716) (170,178)
------------ ------------ ------------
Loss before income taxes (2,209,594) (1,738,525) (2,349,028)
Income tax expense (benefit) 481,000 1,763,023 (770,000)
------------ ------------ ------------
Loss before cumulative
effect of a change in
accounting principle (2,690,594) (3,501,548) (1,579,028)
Cumulative effect of a change in
accounting principle (Note 2) - (1,372,606) -
------------ ------------ ------------
Net loss $(2,690,594) $(4,874,154) $(1,579,028)
============ ============ ============
Basic and diluted loss
per share:
Loss before cumulative
effect of a change in
accounting principle $( .59) $( .75) $(.34)
Cumulative effect of a change in
accounting principle - ( .30) -
------- ------- ------
Net loss $( .59) $(1.05) $(.34)
======= ======= ======
See accompanying notes to consolidated financial statements.
- 32 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and 2003
ASSETS 2004 2003
- ------ ---- ----
Current Assets:
Cash and cash equivalents $ 6,063,198 $ 4,836,148
Marketable securities 2,118,698 3,325,773
Accounts receivable (less allowance of
$1,162,000 in 2004 and $1,135,000 in 2003) 9,661,563 11,056,300
Inventories:
Parts, components, and materials 3,239,461 2,071,092
Work-in-process 3,675,122 2,881,592
Finished products 5,758,990 7,141,470
----------- -----------
12,673,573 12,094,154
Recoverable income taxes 239,402 2,052,662
Prepaid expenses and other current assets 388,347 701,779
----------- -----------
Total current assets 31,144,781 34,066,816
Property, plant and equipment:
Land 1,224,850 1,197,100
Buildings and improvements 5,720,721 5,620,495
Machinery, equipment, and vehicles 11,379,032 10,854,652
----------- -----------
18,324,603 17,672,247
Less accumulated depreciation and amortization 11,234,174 10,386,406
----------- -----------
7,090,429 7,285,841
Other assets 631,807 540,407
----------- -----------
$38,867,017 $41,893,064
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 348,615 $ 325,294
Accounts payable 3,282,671 2,527,946
Accrued compensation and employee benefits 2,048,417 2,023,087
Accrued expenses 1,541,888 2,524,858
Unearned service revenue 792,073 1,238,944
Income taxes payable 337,632 94,174
----------- -----------
Total current liabilities 8,351,296 8,734,303
Long-term debt 2,410,190 2,732,275
Unearned service revenue 401,352 547,871
Other long-term liabilities 790,834 643,884
Commitments and contingencies - Note 12
Shareholders' equity:
Common stock, par value $.01 per share
authorized - 25,000,000 shares
issued - 4,849,046 and 4,832,576 shares 48,490 48,326
Capital in excess of par value 22,505,100 22,439,637
Retained earnings 5,165,666 7,856,260
----------- -----------
27,719,256 30,344,223
Treasury stock at cost, 283,317 shares
in 2004 and 218,917 shares in 2003 (1,278,884) (980,199)
Accumulated other comprehensive income 617,239 91,700
Deferred compensation (144,266) (220,993)
----------- -----------
Total shareholders' equity 26,913,345 29,234,731
----------- -----------
$38,867,017 $41,893,064
=========== ===========
See accompanying notes to consolidated financial statements.
- 33 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended September 30, 2004, 2003, and 2002
<table>
<caption>
Accumulated
Capital in other Deferred Total
Common excess of Retained Treasury comprehensive compen- shareholders'
Shares Stock par value earnings Stock income sation equity
------ ------- ----------- ---------- --------- ----------- --------- ----------
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance September 30, 2001 4,756,532 $47,565 $21,542,541 $14,309,442 $(633,422) $ (368,079) $ - $34,898,047
Comprehensive income (loss):
Net income - - - (1,579,028) - - - (1,579,028)
Foreign currency translation
adjustment - - - - - 234,973 - 234,973
Unrealized loss on derivatives - - - - - (24,818) - (24,818)
Total comprehensive income (loss) - - - - - - - (1,368,873)
Repurchases of common
stock (19,200 shares) - - - - (57,192) - - (57,192)
Exercise of stock options 67,447 674 193,627 - (151,410) - - 42,891
Tax benefit from exercise
of stock options - - 23,834 - - - - 23,834
--------- ------ ---------- ---------- ----------- ----------- --------- ---------
Balance September 30, 2002 4,823,979 48,239 21,760,002 12,730,414 (842,024) (157,924) - 33,538,707
Comprehensive income (loss):
Net loss - - - (4,874,154) - - - (4,874,154)
Foreign currency translation
adjustment - - - - - 272,188 - 272,188
Unrealized loss on derivatives - - - - - (16,009) - (16,009)
Unrealized loss on marketable
securities - - - - - (6,555) - (6,555)
Total comprehensive income (loss) - - - - - - - (4,624,530)
Repurchases of common
stock (46,500 shares) - - - - (138,175) - - (138,175)
Exercise of stock options 8,597 87 26,001 - - - - 26,088
Stock-based compensation - - 43,345 - - - - 43,345
Deferred compensation awards
and amortization - - 610,289 - - - (220,993) 389,296
--------- ------- ----------- ----------- ----------- ---------- -------- -----------
Balance September 30, 2003 4,832,576 48,326 22,439,637 7,856,260 (980,199) 91,700 (220,993) 29,234,731
Comprehensive income (loss):
Net loss - - - (2,690,594) - - - (2,690,594)
Foreign currency translation
adjustment - - - - - 459,779 - 459,779
Unrealized gain on derivatives - - - - - 107,782 - 107,782
Unrealized loss on marketable
securities - - - - - (42,022) - (42,022)
Total comprehensive income (loss) - - - - - - - (2,165,055)
Repurchases of common
stock (64,400 shares) - - - - (298,685) - - (298,685)
Exercise of stock options 16,470 164 38,359 - - - - 38,523
Stock-based compensation - - 27,104 - - - - 27,104
Deferred compensation amortization - - - - - - 76,727 76,727
--------- ------- ----------- ----------- ----------- ---------- --------- -----------
Balance September 30, 2004 4,849,046 $48,490 $22,505,100 $ 5,165,666 $(1,278,884) $ 617,239 $(144,266) $26,913,345
========= ======= =========== =========== =========== ========== ========= ===========
</table>
See accompanying notes to consolidated financial statements.
- 34 -
<page>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 30, 2004, 2003 and 2002
<table>
<caption>
2004 2003 2002
---- ---- ----
<s> <c> <c> <c>
Cash flows from operating activities:
Net loss $(2,690,594) $(4,874,154) $(1,579,028)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,046,553 1,133,110 1,039,072
Goodwill amortization - - 198,452
Amortization of deferred compensation 76,727 - -
Stock compensation expense 27,104 43,345 -
Deferred income taxes - 1,853,957 842,423
Cumulative effect of a change in
accounting principle - 1,372,606 -
Change in assets and liabilities:
Accounts receivable, net 1,728,523 (431,820) 1,249,601
Inventories (470,812) 1,563,024 3,677,449
Recoverable income taxes 1,813,260 (339,934) (1,712,728)
Prepaid expenses and other current assets 325,889 (197,284) 76,946
Other assets (98,919) (40,489) 31,742
Accounts payable 688,172 111,802 (10,842)
Accrued compensation and employee benefits 4,462 173,842 41,304
Accrued expenses (900,647) 904,714 (650,517)
Unearned service revenue (595,074) (994,643) (847,466)
Income taxes payable 233,309 (51,981) (322,795)
Other liabilities 254,731 317,096 (117,482)
Net cash provided by ----------- ----------- ------------
operating activities 1,442,684 543,191 1,916,131
----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (730,102) (674,429) (477,041)
Net decrease (increase) in
marketable securities 1,165,053 (3,332,328) -
Net cash provided by (used in) ----------- ------------ ------------
investing activities 434,951 (4,006,757) (477,041)
----------- ----------- ------------
Cash flows from financing activities:
Repayments of U.S. term loan - (825,000) (900,000)
Repayments of long-term debt (324,639) (479,346) (421,453)
Proceeds from exercise of stock options 38,523 26,088 42,891
Repurchases of common stock (298,685) (138,175) (57,192)
----------- ----------- ------------
Net cash used in financing activities (584,801) (1,416,433) (1,335,754)
----------- ----------- ------------
Effect of exchange rate changes on cash (65,784) (55,657) (126,680)
----------- ----------- ------------
Net increase (decrease) in cash 1,227,050 (4,935,656) (23,344)
Cash at beginning of year 4,836,148 9,771,804 9,795,148
----------- ----------- -------------
Cash at end of year $ 6,063,198 $ 4,836,148 $ 9,771,804
=========== =========== ============
Cash paid during the fiscal
year for:
Income taxes $ 309,780 $ 328,566 $ 676,857
Interest $ 233,898 $ 245,892 $ 356,022
</table>
See accompanying notes to consolidated financial statements.
- 35 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 2004, 2003, and 2002
NOTE 1. Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Business
- ------------------
The Company designs, manufactures, assembles and markets video systems and
system components for use in security, surveillance, safety and control purposes
by end users. The Company markets its products worldwide primarily to installing
dealers, systems integrators, government entities and distributors.
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the accounts of Vicon
Industries, Inc. (the Company) and its wholly owned subsidiaries: Vicon
Industries, Limited; TeleSite U.S.A., Inc. and subsidiary (Vicon Systems Ltd.);
and Vicon Industries Foreign Sales Corp., after elimination of intercompany
accounts and transactions.
Revenue Recognition
- -------------------
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue is generally
recognized when products are sold and title is passed to the customer. Shipping
and handling costs are included in cost of sales. Advance service billings under
a national supply contract with one customer are deferred and recognized as
revenues on a pro rata basis over the term of the service agreement. Pursuant to
the adoption of EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables", effective July 1, 2003, the Company evaluates multiple-element
revenue arrangements for separate units of accounting, and follows appropriate
revenue recognition policies for each separate unit. Elements are considered
separate units of accounting provided that (i) the delivered item has
stand-alone value to the customer, (ii) there is objective and reliable evidence
of the fair value of the delivered item, and (iii) if a general right of return
exists relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially within the control of
the Company. As applied to the Company, under arrangements involving the sale of
product and the provision of services, product sales are recognized as revenue
when the products are sold and title is passed to the customer, and service
revenue is recognized as services are performed. For products that include more
than incidental software, and for separate licenses of the Company's software
products, the Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition", as amended.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on deposit and amounts invested in highly
liquid money market funds.
Marketable Securities
- ---------------------
Marketable securities consist of mutual fund investments in U.S. government debt
securities. Such securities are stated at market value and are classified as
available-for-sale under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 115, with unrealized gains and
losses reported in other comprehensive income as a component of shareholders'
equity. The cost of such securities was $2,167,275 and $3,332,328 at September
30, 2004 and 2003, respectively, with $48,577 and $6,555 of unrealized losses
included in the carrying amounts at September 30, 2004 and 2003, respectively.
- 36 -
Allowances for Doubtful Accounts
- --------------------------------
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Inventories
- -----------
Inventories are valued at the lower of cost (on a moving average basis which
approximates a first-in, first-out method) or market. When it is determined that
a product or product line will be sold below carrying cost, affected on hand
inventories are written down to their estimated net realizable values.
Long-Lived Assets
- -----------------
Property, plant, and equipment are recorded at cost. Depreciation and
amortization of assets under capital leases, is computed by the straight-line
method over the estimated useful lives of the related assets. Machinery,
equipment and vehicles are being depreciated over periods ranging from 2 to 10
years. The Company's buildings are being depreciated over periods ranging from
25 to 40 years and leasehold improvements are amortized over the lesser of their
estimated useful lives or the remaining lease term.
The Company reviews its long-lived assets for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value.
Engineering and Development
- ---------------------------
Product engineering and development costs are charged to expense as incurred,
and amounted to approximately $4,900,000, $4,900,000 and $4,400,000 in fiscal
2004, 2003, and 2002, respectively.
Earnings (Loss) Per Share
- -------------------------
Basic EPS is computed based on the weighted average number of common shares
outstanding. Diluted EPS reflects the maximum dilution that would have resulted
from the exercise of stock options, warrants and incremental shares issuable
under a deferred compensation agreement (see Note 11). In periods when losses
are incurred, the effects of these securities would be antidilutive and,
therefore, excluded from the computation of diluted EPS.
Foreign Currency Translation
- ----------------------------
The Company translates the financial statements of its foreign subsidiaries by
applying the current rate method under which assets and liabilities are
translated at the exchange rate on the balance sheet date, while revenues,
costs, and expenses are translated at the average exchange rate for the
reporting period. The resulting cumulative translation adjustment of $775,000
and $315,000 at September 30, 2004 and 2003, respectively, is recorded as a
component of shareholders' equity in accumulated other comprehensive income
(loss).
- 37 -
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred U.S. income taxes are not provided
on undistributed earnings of foreign subsidiaries as the Company presently
intends to reinvest such earnings indefinitely, and any plan to repatriate any
of such earnings in the future is not expected to result in a material
incremental tax liability to the Company. In fiscal 2003 and 2004, the Company
recognized a valuation allowance against its entire net deferred tax asset
balance due to the uncertainty of future realization (see Note 5 for further
discussion).
Product Warranties
- ------------------
The Company provides for the estimated cost of product warranties at the time
revenue is recognized (see Note 4). While the Company engages in product quality
programs and processes, including monitoring and evaluating the quality of its
component suppliers, its warranty obligation is affected by product failure
rates, material usage and service delivery costs incurred in correcting a
product failure. Should actual product failure rates, material usage or service
delivery costs differ from its estimates, revisions to the estimated warranty
liability may be required.
Derivative Instruments
- ----------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
establishes accounting and reporting standards for derivative instruments as
either assets or liabilities in the statement of financial position based on
their fair values. Changes in the fair values are required to be reported in
earnings or other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. Derivative instruments are
designated and accounted for as either a hedge of a recognized asset or
liability (fair value hedge) or a hedge of a forecasted transaction (cash flow
hedge). For derivatives designated as effective cash flow hedges, changes in
fair values are recognized in other comprehensive income. Changes in fair values
related to fair value hedges as well as the ineffective portion of cash flow
hedges are recognized in earnings.
The Company does not use derivative instruments for speculative or trading
purposes. Derivative instruments are primarily used to manage exposures related
to transactions with the Company's Europe and Israel based subsidiaries and
interest rate risk on certain variable rate bank indebtedness. To accomplish
this, the Company uses certain contracts, primarily foreign currency forward
contracts ("forwards") and interest rate swaps, which minimize cash flow risks
from changes in foreign currency exchange rates and interest rates,
respectively. These derivatives have been designated as cash flow hedges for
accounting purposes.
As of September 30, 2004, the Company had an interest rate swap and currency
forwards outstanding with notional amounts aggregating $1.7 million and $2.3
million, respectively, whose aggregate fair value was a liability of
approximately $109,000. The change in the fair value of these derivatives is
reflected in other comprehensive income in the accompanying statement of
shareholders' equity, net of tax where applicable. The forwards have maturities
of less than one year and require the Company to exchange currencies at
specified dates and rates. The interest rate swaps mature in the same amounts
and over the same periods as the related debt. The Company considers the credit
risk related to the interest rate swaps and the forwards to be low because such
instruments are entered into with financial institutions having high credit
ratings and are generally settled on a net basis. There were no gains or losses
recognized in operations due to hedge ineffectiveness during the three-year
period ended September 30, 2004. The Company does not expect the amounts that
are currently classified in accumulated other comprehensive income that are
expected to be recognized in operations in the next fiscal year to be material.
- 38 -
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts for trade accounts and other receivables, accounts payable
and accrued expenses approximate fair value due to the short-term maturity of
these instruments. The carrying amounts of the Company's long-term debt
instruments approximate fair value. The Company's interest rate swap agreement
is carried at its fair market value (which was a liability of approximately
$150,000 at September 30, 2004). This value represents the estimated amount the
Company would need to pay if such agreement was terminated before maturity,
principally resulting from market interest rate decreases. The fair value of the
Company's foreign currency forward exchange contracts is estimated by obtaining
quoted market prices. The contracted exchange rates on committed forward
exchange contracts was approximately $41,000 more favorable than the market
rates for similar term contracts at September 30, 2004.
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations in
accounting for its employee stock-based compensation. Under APB No. 25,
compensation expense would be recorded if, on the date of grant, the market
price of the underlying stock exceeded its exercise price. As permitted by SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" ("SFAS No. 148"), the Company has retained
the accounting prescribed by APB No. 25 and has presented the disclosure
information prescribed by SFAS No. 123 and SFAS No. 148 below.
Pro forma information regarding net income (loss) and earnings (loss) 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 2004, 2003 and 2002:
2004 2003 2002
---- ---- ----
Risk-free interest rate 3.5% 2.7% 2.5%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 67.9% 68.0% 68.8%
Weighted average expected life 4 years 4 years 4 years
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.
- 39 -
In the Company's consolidated financial statements, no compensation expense has
been recognized for stock option grants issued under any of the Company's fixed
stock option plans. See Note 9 for discussion of variable stock option plans.
Had compensation expense for fixed stock option grants issued been determined
under the fair value method of SFAS No. 123, the Company's net loss and loss per
share (EPS) for the fiscal years ended September 30, 2004, 2003 and 2002 would
have been:
2004 2003 2002
---------- -------- --------
Reported net loss $(2,690,594) $(4,874,154) $(1,579,028)
Stock-based compensation cost,
net of tax (127,546) (351,138) (96,796)
------------ ------------ -----------
Pro forma net loss $(2,818,140) $(5,225,292) $(1,675,824)
============ ============ ============
Reported basic and diluted EPS $ (.59) $ (1.05) $ (.34)
Pro forma basic and diluted EPS $ (.61) $ (1.13) $ (.36)
Weighted average fair value
of options granted $2.90 $ 1.79 $ 1.62
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. Such
estimates include, but are not limited to, provisions for doubtful accounts
receivable, net realizable value of inventory, warranty obligations and
assessments of the recoverability of the Company's long-lived assets. Actual
results could differ from those estimates.
NOTE 2. Goodwill
- -----------------
The Company adopted SFAS No. 142 on October 1, 2002 and, accordingly,
discontinued amortization of goodwill as of that date. In the second quarter
ended March 31, 2003, the Company completed the transitional goodwill impairment
testing required under SFAS No. 142. In accordance with SFAS No. 142, such
testing included a comparison of the fair value of each of the Company's
reporting units to the carrying amounts of each unit's net assets, and a
determination of the implied fair value of each reporting unit's goodwill. Based
upon an independent valuation conducted as of October 1, 2002, and the results
of the transitional impairment testing, the Company recognized an impairment
charge of approximately $1.4 million (primarily resulting from a change in
measurement from undiscounted to discounted cash flows), as a cumulative effect
of a change in accounting principle in 2003.
The following table presents net loss and loss per share data, adjusted to
exclude amortization expense for periods prior to the adoption of SFAS No. 142:
2004 2003 2002
---- ---- ----
Reported net loss $(2,690,594) $(4,874,154) $(1,579,028)
Add back: goodwill amortization - - 198,452
----------- ----------- -----------
Adjusted net loss $(2,690,594) $(4,874,154) $(1,380,576)
=========== =========== ===========
Basic and diluted loss per share:
Reported loss per share $ (.59) $ (1.05) $ (.34)
Goodwill amortization - - .04
-------- -------- --------
Adjusted loss per share $ (.59) $ (1.05) $ (.30)
======== ======== ========
- 40 -
NOTE 3. Short-Term Borrowings
- ------------------------------
The Company's European based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of 1 million Pounds Sterling ($1,810,000) and is
secured by all the assets of the subsidiary. This facility expires in March
2005. During fiscal 2004 and 2003, there were no outstanding borrowings under
this facility.
NOTE 4. Accrued Warranty Obligation
- ------------------------------------
The Company recognizes the estimated cost associated with its standard warranty
on products at the time of sale. The estimate is based on historical warranty
claim cost experience. The following is a summary of the changes in the
Company's accrued warranty obligation (which is included in accrued expenses)
for the years ended September 30, 2004 and 2003:
Balance as of September 30, 2002 $ 190,000
Deduct: Expenditures (261,000)
Add: Provision 396,000
---------
Balance as of September 30, 2003 $ 325,000
Deduct: Expenditures (295,000)
Add: Provision 511,000
---------
Balance as of September 30, 2004 $ 541,000
=========
NOTE 5. Income Taxes
- ---------------------
The components of income tax expense (benefit) for the fiscal years indicated
are as follows:
2004 2003 2002
---- ---- ----
Federal:
Current $ - $ (339,934) $ (1,713,000)
Deferred - 1,853,957 729,000
------------- ----------- ------------
- 1,514,023 (984,000)
State 12,015 - (179,000)
Foreign 468,985 249,000 393,000
------------- ----------- ------------
Total income tax
expense (benefit) $ 481,000 $ 1,763,023 $ (770,000)
============= =========== ============
A reconciliation of the U.S. statutory tax rate to the Company's effective tax
rate follows:
<table>
<caption>
2004 2003 2002
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<s> <c> <c> <c> <c> <c> <c>
U.S. statutory tax $ (751,000) (34.0)% $ (591,000) (34.0)% $(799,000) (34.0)%
Increase in valuation
allowance 1,408,000 63.7 2,436,000 140.1 - -
Prior year loss
carryback refund - - (115,000) (6.6) - -
State tax, net of
federal benefit 8,000 0.4 - - (56,000) (2.4)
Goodwill amortization - - - - 67,000 2.8
Dissolution of
subsidiary (192,000) (8.7) - - - -
Other 8,000 0.4 33,000 1.9 18,000 0.8
----------- ------ ---------- ------ --------- -------
Effective Tax Rate $ 481,000 21.8% $1,763,000 101.4% $(770,000) (32.8)%
=========== ====== ========== ====== ========= =======
</table>
- 41 -
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at September 30, 2004 and 2003 are presented below:
2004 2003
---- ----
Deferred tax assets:
Inventories $ 902,000 $ 554,000
Deferred compensation accruals 171,000 152,000
Severance accruals 183,000 81,000
Warranty accrual 198,000 119,000
Depreciation 224,000 178,000
Allowance for doubtful
accounts receivable 356,000 329,000
Unearned service revenue 307,000 627,000
Net operating loss carryforwards 1,614,000 339,000
Unrealized loss on derivatives 40,000 79,000
Other 18,000 146,000
----------- -----------
Gross deferred tax assets 4,013,000 2,604,000
Deferred tax liabilities:
Other 169,000 168,000
----------- -----------
Gross deferred tax liabilities 169,000 168,000
----------- -----------
Total deferred tax assets and liabilities $ 3,844,000 $ 2,436,000
Less valuation allowance (3,844,000) (2,436,000)
----------- -----------
Net deferred tax assets and liabilities $ - $ -
=========== ============
In 2003, the Company recognized a $1.9 million charge to provide a valuation
allowance against its deferred tax assets due to the uncertainty of future
realization. The establishment of such valuation allowance was determined to be
appropriate during that period due to updated judgments of future results in
light of the Company's operating losses in recent years and the inherent
uncertainties of predicting future operating results in periods over which such
net tax differences become deductible. Income tax expense for 2003 includes the
recognition of an available tax effected net operating loss carryback of
$225,000. Deferred U.S. income taxes are not provided on undistributed earnings
of foreign subsidiaries as the Company presently intends to reinvest such
earnings indefinitely, and any plan to repatriate any of such earnings in the
future is not expected to result in a material incremental tax liability to the
Company.
For income tax purposes, the Company had a tax effected net operating loss
carryback of approximately $2.1 million at September 30, 2003, which was
included in recoverable income taxes. In fiscal 2004, the Company received a
refund of previously paid taxes totaling $1.8 million under a carryback claim
filed during 2003. The Company has approximately $4.7 million of U.S. federal
income tax loss carryforwards that expire in 2023 through 2024.
Pretax domestic loss amounted to approximately $(3,856,000), $(2,458,000) and
$(3,245,000) in fiscal years 2004, 2003 and 2002, respectively. Pretax foreign
income amounted to approximately $1,646,000, $719,000 and $896,000 in fiscal
years 2004, 2003 and 2002, respectively.
NOTE 6. Long-Term Debt
- -----------------------
Long-term debt is comprised of the following
at September 30, 2004 and 2003:
2004 2003
---- ----
U.S. bank mortgage loans $2,510,865 $2,743,331
U.K. bank term loan 233,791 297,416
Other 14,149 16,822
---------- ----------
2,758,805 3,057,569
Less current maturities 348,615 325,294
---------- ----------
$2,410,190 $2,732,275
========== ==========
- 42 -
In January 1998, the Company entered into an aggregate $2.9 million mortgage and
term loan agreement with a bank to finance the purchase of its principal
operating facility. Such agreement 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 provided a $388,000 five-year
term loan that was repaid in monthly installments through January 2003 with a
$138,500 payment that was made at the end of the term in February 2003. The
mortgage loan bears interest at the bank's prime rate minus 1.35% and is secured
by all the assets of the Company. At the same time, the Company entered into
interest rate swap agreements with the same bank at the time to effectively
convert the foregoing floating rate long-term loans to fixed rate loans.
Subsequently, such bank sold its local operations, including the Company's
loans, to another bank while retaining the Company's interest rate swap
agreements. These agreements effectively fixed the Company's interest rate on
its $2,512,000 mortgage loan at 7.79%. The interest rate swap agreement matures
in the same amounts and over the same periods as the related mortgage loan.
In October 1999, the Company entered into a $1.2 million mortgage loan agreement
with its bank to finance the expansion of its principal operating facility. The
loan is payable in equal monthly principal installments through January 2008,
with a $460,000 payment due at the end of the term. The loan bears interest at
the bank's prime rate minus 160 basis points (3.15% and 2.40% at September 30,
2004 and 2003, respectively) or, at the Company's option, LIBOR plus 100 basis
points (3.01% and 2.16% at September 30, 2004 and 2003, respectively).
In April 1997, the Company's Europe based subsidiary entered into a ten-year
500,000 pound sterling (approximately $905,000) bank term loan. The term loan is
payable in equal monthly installments with interest at a fixed rate of 9%. The
loan is secured by a first mortgage on the subsidiary's property and contains
restrictive covenants that, among other things, require the subsidiary to
maintain certain levels of net worth, earnings and debt service coverage.
Current and long-term debt maturing in each of the fiscal years subsequent to
September 30, 2004 approximates $349,000 in 2005, $347,000 in 2006, $323,000 in
2007 and $1,740,000 in 2008.
NOTE 7. Other Comprehensive Income
- -----------------------------------
The accumulated other comprehensive income balances at September 30, 2004 and
2003 consisted of the following:
2004 2003
---------- ----------
Foreign currency translation adjustment $ 774,764 $ 314,985
Unrealized loss on derivatives (108,948) (216,730)
Unrealized loss on securities (48,577) (6,555)
---------- ----------
Accumulated other comprehensive income $ 617,239 $ 91,700
=========== ==========
NOTE 8. Segment and Related Information
- ----------------------------------------
The Company operates in one industry which encompasses the design, manufacture,
assembly and marketing of video systems and system components for the electronic
protection segment of the security industry. The Company manages its business
segments primarily on a geographic basis. The Company's principal reportable
segments are comprised of its United States (U.S.) and United Kingdom (Europe)
based operations. Its U.S. based operations consist of Vicon Industries, Inc.,
the Company's corporate headquarters and principal operating entity. Its Europe
based operations consist of Vicon Industries Limited, a wholly owned subsidiary
which markets and distributes the Company's products principally within Europe.
Other segments principally include the operations of Vicon Systems Ltd., an
Israeli based wholly owned subsidiary which designs and produces the Company's
principal digital video systems.
- 43 -
The Company evaluates performance and allocates resources based on, among other
things, the net profit for each segment, which excludes intersegment sales and
profits. Segment information for the fiscal years ended September 30, 2004, 2003
and 2002 is as follows:
<table>
<caption>
2004 U.S. Europe Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
<s> <c> <c> <c> <c> <c>
Net sales to
external customers $36,451,000 $16,637,000 $ 445,000 $ - $53,533,000
Intersegment
net sales 4,820,000 - 6,456,000 (11,276,000) -
Net income (loss) (3,639,000) 1,177,000 (261,000) 32,000 (2,691,000)
Interest expense 162,000 147,000 2,000 (124,000) 187,000
Interest income 269,000 45,000 4,000 (114,000) 204,000
Depreciation and
amortization 721,000 209,000 117,000 - 1,047,000
Total assets 27,438,000 10,744,000 3,503,000 (2,818,000) 38,867,000
Capital expenditures $ 456,000 $ 174,000 $ 100,000 $ - $ 730,000
2003 U.S. Europe Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $34,745,000 $15,486,000 $ 1,723,000 $ - $51,954,000
Intersegment
net sales 6,043,000 - 3,870,000 (9,913,000) -
Net income (loss) (4,880,000) 471,000 (346,000) (119,000) (4,874,000)
Interest expense 204,000 158,000 7,000 (128,000) 241,000
Interest income 282,000 21,000 - (123,000) 180,000
Depreciation and
amortization 744,000 169,000 220,000 - 1,133,000
Total assets 32,007,000 8,594,000 5,033,000 (3,741,000) 41,893,000
Capital expenditures $ 459,000 $ 132,000 $ 83,000 $ - $ 674,000
2002 U.S. Europe Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $38,726,000 $13,078,000 $2,364,000 $ - $54,168,000
Intersegment
net sales 6,432,000 - 403,000 (6,835,000) -
Net income (loss) (1,155,000) 593,000 (649,000) (368,000) (1,579,000)
Interest expense 263,000 218,000 24,000 (165,000) 340,000
Interest income 355,000 - - (185,000) 170,000
Depreciation and
amortization 760,000 103,000 176,000 199,000 1,238,000
Total assets 40,785,000 7,196,000 3,278,000 (3,833,000) 47,426,000
Capital expenditures $ 293,000 $ 21,000 $ 163,000 $ - $ 477,000
</table>
The consolidating segment information presented above includes the elimination
and consolidation of intersegment transactions.
Net sales and long-lived assets related to operations in the United States and
other foreign countries for the fiscal years ended September 30, 2004, 2003, and
2002 are as follows:
2004 2003 2002
---- ---- ----
Net sales
U.S. $36,530,000 $34,909,000 $39,255,000
Foreign 17,003,000 17,045,000 14,913,000
---------- ---------- ----------
Total $53,533,000 $51,954,000 $54,168,000
Long-lived assets
U.S. $ 5,059,000 $ 5,324,000 $ 5,609,000
Foreign 2,031,000 1,962,000 2,057,000
---------- ----------- -----------
Total $ 7,090,000 $ 7,286,000 $ 7,666,000
U.S. sales include $5,310,000, $4,030,000 and $3,413,000 for export in fiscal
years 2004, 2003, and 2002, respectively. Foreign sales principally represent
sales from the Company's Europe based subsidiary.
- 44 -
<page>
NOTE 9. Stock Option Plans
- ---------------------------
The Company maintains stock option plans which include both incentive and
non-qualified options covering a total of 628,736 shares of common stock
reserved for issuance to key employees, including officers and directors, as of
September 30, 2004. Such amount includes a total of 200,000 options reserved for
issuance under the 2002 Incentive Stock Option Plan, as well as a total of
200,000 options reserved for issuance under the 2002 Non-Qualified Stock Option
Plan, approved by the shareholders in May 2002. All options are issued at fair
market value at the grant date and are exercisable in varying installments
according to the plans. The plans allow for the payment of option exercises
through the surrender of previously owned mature shares based on the fair market
value of such shares at the date of surrender. During fiscal 2002, a total of
34,968 common shares were surrendered pursuant to stock option exercises, which
are held in treasury. There were 75,751 shares available for grant at September
30, 2004.
Changes in outstanding stock options for the three years ended September 30,
2004 are as follows:
Weighted
Number Average
of Exercise
Shares Price
- -------------------------------------------------------------------
Balance - September 30, 2001 251,871 $3.15
Options granted 50,000 $3.05
Options exercised (67,447) $2.88
Options forfeited (16,252) $2.83
- -------------------------------------------------------------------
Balance - September 30, 2002 218,172 $3.24
Options granted 401,508 $3.37
Options exercised (8,597) $3.03
Options forfeited (48,546) $3.18
- -------------------------------------------------------------------
Balance - September 30, 2003 562,537 $3.34
Options granted 35,000 $5.40
Options exercised (16,470) $2.34
Options forfeited (25,747) $3.33
- -------------------------------------------------------------------
Balance - September 30, 2004 555,320 $3.50
Price range $2.20 - $3.05
(weighted-average contractual 257,000 $2.76
life of 3.6 years)
Price range $3.06 - $7.44
(weighted-average contractual 298,320 $4.15
life of 4.0 years)
- -------------------------------------------------------------------
Exercisable options -
September 30, 2002 60,020 $4.12
September 30, 2003 93,546 $3.71
September 30, 2004 189,529 $3.49
- -------------------------------------------------------------------
On April 20, 2000, the Board of Directors granted holders of stock options the
right to surrender their underwater options by May 31, 2000 in exchange for a
reduced option grant at an exercise price of $3.18 per share, based on the
closing market price of the Company's common stock on such date. On May 31,
2000, the Company granted 67,823 new options and cancelled 156,750 options with
exercise prices ranging from $6.75 to $8.19 per share. These new grants were
treated as repricings and are subject to variable plan accounting pursuant to
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation." Accordingly, compensation expense (benefit) is recorded for any
changes in the Company's stock price above the price of $3.18. In fiscal 2004
and 2003, compensation expense related to these repriced options was $27,104 and
$43,345, respectively.
- 45 -
NOTE 10. Shareholder Rights Plan
- ---------------------------------
On November 14, 2001, the Company's Board of Directors adopted a Shareholder
Rights Plan, which declared a dividend of one Common Stock Purchase Right (a
Right) for each outstanding share of common stock of the Company to shareholders
of record on December 21, 2001. Each Right entitles the holder to purchase from
the Company one share of common stock at a purchase price of $15 per share. In
the event of the acquisition of or tender offer for 20% or more of the Company's
outstanding common stock by certain persons or group without the Board of
Directors' consent, such purchase price will be adjusted to equal fifty percent
of the average market price of the Company's common stock for a period of thirty
consecutive trading days immediately prior to the event. Until the Rights become
exercisable, they have no dilutive effect on the Company's earnings per share.
The Rights, which are non-voting and exercisable until November 30, 2011, can be
redeemed by the Company in whole at a price of $.001 per Right at any time prior
to the acquisition by certain persons or group of 50% of the Company's common
stock. Separate certificates for the Rights will not be distributed, nor will
the Rights be exercisable, until either (i) a person or group acquires
beneficial ownership of 20% or more of the Company's common stock or (ii) the
tenth day after the commencement of a tender or exchange offer for 20% or more
of the Company's common stock. Following an acquisition of 20% or more of the
Company's common shares, each Right holder, except for the 20% or more
stockholder, can exercise their Right(s), unless the 20% or more stockholder has
offered to acquire all of the outstanding shares of the Company under terms that
a majority of the independent Directors of the Company have determined to be
fair and in the best interest of the Company and its stockholders. On May 7,
2002, the Company's shareholders approved an amendment of the Company's
Certificate of Incorporation to increase the total number of shares of common
stock authorized to issue from 10,000,000 to 25,000,000 shares.
NOTE 11. Earnings (Loss) Per Share
- -----------------------------------
The following table provides the components of the basic and diluted loss per
share (EPS) computations:
2004 2003 2002
---- ---- ----
Basic and Diluted EPS Computation
- ---------------------------------
Net loss $(2,690,594) $(4,874,154) $(1,579,028)
Weighted average shares
outstanding 4,597,961 4,630,745 4,658,612
Basic and diluted loss per share $ (.59) $ (1.05) $ (.34)
============ =========== ===========
In 2004, 2003 and 2002, 238,717, 70,718 and 60,330 shares, respectively, have
been omitted from the calculation of diluted EPS as their effect would have been
antidilutive.
NOTE 12. Commitments and Contingencies
- ---------------------------------------
The Company occupies certain facilities under operating leases that expire at
various dates through 2008. The leases, which cover periods from three to eight
years, generally provide for renewal options at specified rental amounts. The
aggregate operating lease commitment at September 30, 2004 was $829,000 with
minimum rentals for the fiscal years shown as follows: 2005 - $294,000; 2006 -
$276,000; 2007 - $227,000; and 2008 - $32,000.
- 46 -
The Company is a party to employment agreements with eight executives that
provide for, among other things, the payment of compensation if there is a
change in control without Board of Director approval (as defined in the
agreements). The contingent liability under such change in control provisions at
September 30, 2004 was approximately $3.6 million. Certain of the employment
agreements provide for a severance benefit at the expiration of the agreement or
at a specified date of retirement, absent a change in control, aggregating $1.5
million. The Company is amortizing such obligation to expense on the
straight-line method over the term of the employment agreement or through the
specified dates of retirement. Such expense amounted to approximately $279,000
and $146,000 in fiscal 2004 and 2003, respectively.
The Company has agreements with certain of its officers to provide a deferred
compensation benefit in the form of 97,337 shares of common stock currently held
by the Company in treasury. Such shares vest upon retirement or, in the case of
70,647 shares, the expiration of one officer's employment agreement in October
2005. All shares vest earlier under certain occurrences including death,
involuntary termination or a change in control of the Company. The market value
of such shares approximated $610,000 at the dates of grant, which is being
amortized on the straight-line method through the specified dates of retirement
or over the term of the employment agreement.
In October 1, 2004, the Company entered into an agreement to purchase all of the
operating assets of Videotronic Infosystems GmbH ("Videotronic"), a German based
video system supplier operating under insolvency protection, for 700,000
Eurodollars (approximately $868,000). The purchase was ratified by Videotronic's
Creditors on November 26, 2004.
NOTE 13. Litigation
- --------------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company believes that it has meritorious defenses to
such claims, there is a possibility that an unfavorable outcome could ultimately
occur that could result in a liability that is material to the Company's results
of operations and financial position.
In the normal course of business, the Company is a party to certain other claims
and litigation. Management believes that the settlement of such claims and
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.
NOTE 14. Related Party Transactions
- ------------------------------------
As of September 30, 2004, CBC Co., Ltd. and affiliates ("CBC") owned
approximately 11.9% of the Company's outstanding common stock. The Company,
which has been conducting business with CBC for approximately 25 years, imports
certain finished products and components through CBC and also sells its products
to CBC. The Company purchased approximately $651,000, $832,000 and $1.3 million
of products and components from CBC in fiscal years 2004, 2003, and 2002,
respectively, and the Company sold $712,000, $370,000 and $409,000 of products
to CBC for distribution in fiscal years 2004, 2003, and 2002, respectively. At
September 30, 2004 and 2003, the Company owed $62,000 and $69,000, respectively,
to CBC and CBC owed $55,000 and $7,000, respectively, to the Company resulting
from purchases of products.
In fiscal 2003, the Company recognized $180,000 of revenues received from CBC
pursuant to the completion of a contract to develop certain new product
technology.
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NOTE 15. Quarterly Financial Data (unaudited)
- ----------------------------------------------
Earnings (Loss)
Per Share
---------
Net
Quarter Net Gross Income
Ended Sales Profit (Loss) Basic Diluted
----- ----- ------ ------ ----- -------
Fiscal 2004
- -----------
December $14,338,000 $5,847,000 $ 122,000 $ .03 $ .03
March 12,235,000 4,525,000 (901,000) (.20) (.20)
June 13,573,000 5,004,000 (425,000) (.09) (.09)
September 13,387,000 4,335,000 (1,487,000) (.32) (.32)
----------- ----------- ----------- ------ ------
Total $53,533,000 $19,711,000 $(2,691,000) $ (.59) $ (.59)
=========== =========== =========== ====== ======
Fiscal 2003
- -----------
December $12,018,000 $3,900,000 $(2,071,000) $ (.45) $ (.45)
March 13,082,000 4,641,000 (2,735,000) (.59) (.59)
June 13,051,000 5,257,000 30,000 .01 .01
September 13,803,000 5,293,000 (98,000) (.02) (.02)
----------- ----------- ----------- ------ ------
Total $51,954,000 $19,091,000 $(4,874,000) $(1.05) $(1.05)
=========== =========== =========== ====== ======
In the quarter ended September 30, 2004, the Company recognized a $638,000
charge for the phase out of a discontinued product line, which was an addition
to an initial assessment charge of $316,000 taken in the previous quarter ended
June 30, 2004.
The Company has not declared or paid cash dividends on its common stock for any
of the foregoing periods.
Because of changes in the number of common shares outstanding and market price
fluctuations affecting outstanding stock options, the sum of quarterly earnings
per share may not equal the earnings per share for the full year.
SCHEDULE II
VICON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 2004, 2003, and 2002
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
----------- --------- -------- ---------- ---------
Allowance for uncollectible
accounts:
September 30, 2004 $1,135,000 $192,000 $165,000 $1,162,000
========== ======== ======== ==========
September 30, 2003 $1,077,000 $546,000 $488,000 $1,135,000
========== ======== ======== ==========
September 30, 2002 $1,115,000 $353,000 $391,000 $1,077,000
========== ======== ======== ==========
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SIGNATURES
----------
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By /s/ Kenneth M. Darby By /s/ John M. Badke
- ----------------------- --------------------
Kenneth M. Darby John M. Badke
Chairman and Senior Vice President, Finance
Chief Executive Officer and Chief Financial Officer
January 11, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
VICON INDUSTRIES, INC.
/s/ Kenneth M. Darby January 11, 2005
- --------------------- --------------------
Kenneth M. Darby Chairman and CEO Date
/s/ Clifton H.W. Maloney January 11, 2005
- ------------------------ --------------------
Clifton H.W. Maloney Director Date
/s/ Peter F. Neumann January 11, 2005
- --------------------- --------------------
Peter F. Neumann Director Date
/s/ W. Gregory Robertson January 11, 2005
- ------------------------ --------------------
W. Gregory Robertson Director Date
/s/ Arthur D. Roche January 11, 2005
- --------------------- --------------------
Arthur D. Roche Director Date
- 49 -