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, 20022003 Commission File No. 1-7939
- ---------------------------------------------- -------------------
VICON INDUSTRIES, INC.
- ----------------------------------------------------------------------------------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 11-2160665
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
- --------------------------------------------------------------------------------
(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
No
-------------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
------ ------
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of December 13, 200231, 2003 was approximately $17,200,000.$14,170,000.
The number of shares outstanding of the registrant's Common Stock as of December
13, 200231, 2003 was 4,642,062.4,596,259.
PART I
------
ITEM 1 - BUSINESS
- -----------------
General
- -------
Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs,
manufactures, assembles and markets a wide range of video systems and system
components used for security, surveillance, safety and control purposes by a
broad group of end users. A video system is 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 article surveillance. 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, article
surveillance, 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 personal liability, obtaining cost savings (such as lower insurance
premiums), managing control systems and improving the efficiency and
effectiveness of personnel. The Company's products are used in, among others,
office buildings, manufacturing plants, apartment complexes, retail stores,
government facilities, airports, transportation operations, prisons, casinos,
hotels, sports arenas, health care facilities and financial institutions.
Products
- --------
The Company's product line consists of approximately 700 products, of which
about half represent model variations. The Company's product line consists of
various elements of a video system, including digital video (network)
transmission and recording systems, video cameras, display units (monitors),
video recorders, matrix switching equipment for video distribution, digital
video and signal processing units (which perform character generation, video
encoding, multi screen display, video insertion, intrusion detection, source
identification and alarm processing), motorized zoom lenses, remote robotic
cameras, system controls, environmental camera enclosures 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 $10 for a simple camera mounting
bracket to several hundred thousand dollars (depending upon configuration) for a
large digital control, transmission, recording, storage and video matrix
switching system.
- 2 -
Marketing
- ---------
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 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 internet web site.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.
In fiscal 2002, 2001
and 2000, indirect sales to the United States Postal Service approximated $3.5
million, $15.2 million and $22.8 million, respectively.
The Company's principal sales offices are located in Hauppauge, New York;
Fareham, England; Zaventem, Belgium; and New Territories, Hong Kong.
International Sales
- -------------------
The Company sells its products in Europe and the Middle East through its U.K.
based subsidiary, in China through its Hong Kong subsidiary and elsewhere
outside the U.S. principally by direct export from its U.S. based parent
company. Sales are made to installing dealers or independent distributors which,
outside of Europe and China, typically assume the responsibility for warranty
repair as well as sales and marketing costs to promote the Company's product
line. 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 $21.1 million, $18.3 million and $20.5 million or 41%, 34% and $19.6 million or 34%, 31% and 26% of
consolidated net sales in fiscal years 2003, 2002, and 2001, and 2000, respectively.
Export sales are generally made through a wholly owned subsidiary, Vicon
Industries Foreign Sales Corporation, a tax advantaged foreign sales
corporation. The
Company's principal foreign markets are Europe, the Middle East and the Pacific
Rim, which together accounted for approximately 8887 percent of international
sales in fiscal 2002.2003.
- 3 -
Competition
- -----------
The Company operates in a highly competitive marketplace both domestically and
internationally. The Company competes by providing high-end video systems and
system components that incorporate broad capability together with high levels of
customer service and technical support. Generally, the Company does not compete
based on price alone.
The Company's principal engineered video systems competitors include the
following companies or their affiliates: Checkpoint Systems, Inc., Matsushita
(Panasonic), Pelco Sales Company, Philips Communications andBosch Security Systems, Inc., the Tyco Fire and SecuritySensormatic
Electronics Corp. division of Tyco International, GE Interlogix, Inc. and
Honeywell's Ultrak, Inc. division. Many additional companies, both domestic and
international, produce products that compete against one or more of the
Company's system components. In addition, some 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 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 toward the compression,
transmission, storage, imaging and display of digital video. As the demands of
the Company's target market segment requires 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.
TheAt September 30, 2003, the Company employsemployed a total of 4641 engineers in the
following areas: software development, mechanical design, manufacturing/testing
and electrical and circuit design. Engineering and development expense amounted
to approximately 8%9%, 6%8% and 5%6% of net sales in fiscal 2003, 2002 2001 and 2000,2001,
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 generally 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 and components.
- 4 -
Intellectual Property
- ---------------------
The Company owns, and has pending, a limited number of design and utility
patents expiring at various times. The Company has certain trademarks registered
and several other trademark applications pending both in the United States and
in Europe. Most of the Company's key products employ proprietary software which
is protected by copyright. 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 or to have a material effect on
its business. The Company does, however, consider its proprietary software to be
unique and is a principal element in the differentiation of the Company's
products from its competition.
Inventories
- -----------
The Company generally maintains sufficient finished goods inventory levels to
respond to unanticipated customer demand, since most sales are to installing
dealers and contractors who normally do not carry any significant inventory. The
Company principally builds inventory to known or anticipated customer demand. In
addition to normal safety stock levels, certain additional inventory levels may
be maintained for products with long purchase and manufacturing lead times. The
Company believes that it is important to carry adequate inventory levels of
parts, components and products to avoid production and delivery delays that
detract from its sales effort.
Backlog
- -------
The backlog of orders believed to be firm as of September 30, 20022003 and 20012002 was
approximately $4.2$7.4 million and $6.3$4.2 million, respectively. Orders are generally
cancelable without penalty at the option of the customer. The Company prefers
that its backlog of orders not exceed its ability to fulfill such orders on a
timely basis, since experience shows that long delivery schedules only encourage
the Company's customers to look elsewhere for product availability.
Employees
- ---------
At September 30, 2002,2003, the Company employed 235215 full-time employees, of whom 6
are officers, 5542 administrative, 10193 in sales and technical service capacities,
4641 in engineering, and 2733 production employees. At September 30, 2001,2002, the
Company employed 251235 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.
- 5 -
ITEM 2 - PROPERTIES
- -------------------
The Company principally operates from an 80,000 square-foot facility located at
89 Arkay Drive, Hauppauge, New York, which it owns. The Company also owns a
14,000 square-foot sales, service and warehouse facility in southern England
which services the U.K., Europe and the Middle East. In addition, the Company
operates under leases from offices in Manchester, England; Zaventem, Belgium;
Yavne, Israel; Hong Kong and various offices in mainland China.
- 5 -
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
NoneIn May 2003, the Company was served with a summons and complaint in a patent
infringement suit that named the Company and thirteen other defendants. The
alleged infringement relates to the Company's 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 is without merit and the Company intends to vigorously defend
itself in this matter. The Company is unable to reasonably estimate a range of
possible loss, if any, at this time. Although the Company believes that it has
meritorious defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial position. The Company plans
to present a joint defense with certain other named defendants in the suit.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
- 6 -
PART II
-------
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
- ---------------------------------------------------------------------------------------------------------------------------------------------------------
MATTERS
-------
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 2003
-----------
December 3.90 2.40
March 3.55 2.79
June 3.55 2.44
September 4.60 3.15
Fiscal 2002
-----------
December 5.0100 2.75005.01 2.75
March 6.0500 3.70006.05 3.70
June 4.1500 3.26004.15 3.26
September 3.8000 2.5200
Fiscal 2001
-----------
December 3.3125 1.6875
March 2.7500 1.8125
June 2.7000 1.7000
September 6.5000 2.02003.80 2.52
The last sale price of the Company's Common Stock on December 13, 200231, 2003 as
reported on AMEX was $3.70$4.68 per share. As of December 13, 2002,31, 2003, there were
approximately 300235 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.
- 76 -
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
FISCAL YEAR 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $54,168 $65,365 $74,624 $73,414 $63,310
Gross profit 18,218 21,686 23,054 25,779 21,960
Operating income (loss) (2,180) (418) 1,993 7,893 6,869
Income (loss) before
income taxes (2,349) 2,307 1,589 7,442 5,810
Net income (loss) (1,579) 1,497 961 4,760 5,810
Earnings (loss) per share:
FISCAL YEAR 2003 2002 2001 2000 1999
---- ---- ---- ----- ----
(in thousands, except per share data)
Net sales $51,954 $54,168 $65,365 $74,624 $73,414
Gross profit 19,091 18,218 21,686 23,054 25,779
Operating income (loss) (1,677) (2,180) (418) 1,993 7,893
Income (loss) before
income taxes (1,739) (2,349) 2,307 1,589 7,442
Net income (loss) (1) (4,874) (1,579) 1,497 961 4,760
Earnings (loss) per share (1):
Basic (1.05) (.34) .32 .21 1.05 1.61
Diluted (1.05) (.34) .32 .21 1.01 1.50
Total assets 41,893 47,426 51,926 53,918 49,899 44,386
Long-term debt 2,732 3,040 3,498 7,090 5,799 7,002
Working capital 25,333 27,827 30,005 33,365 29,049 27,642
Property, plant and
equipment (net) 7,286 7,666 8,139 8,502 8,053
7,137
(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.
- 87 -
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------------------------------------------------------------------------------
OF OPERATIONS
-------------
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
current 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. Current 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 $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.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 2002 Compared with 2001
- -----------------------------------
Net sales for 2002 decreased $11.2 million or 17% to $54.2 million compared with
$65.4 million in 2001. Domestic sales decreased $9.0 million or 20% to $35.9
million compared with $44.9 million in 2001. Indirect sales to the United States
Postal Service (USPS) decreased $11.7 million to $3.5 million in 2002 compared
with $15.2 million in 2001. Other domestic sales for 2002 increased by $2.7
million or 9% to $32.4 million compared with $29.7 million in 2001. Current year
sales included $1.6 million of shipments in connection with a $2.3 million
system order received in February 2002 for New York's JFK International Airport.
International sales decreased $2.2 million or 11% to $18.3 million compared with
$20.5 million in 2001 principally as a result of lower sales in Europe and the
Middle East. The backlog of unfilled orders was $4.2 million at September 30,
2002 compared with $6.3 million at September 30, 2001.
Gross profit margins for 2002 increased slightly to 33.6% compared with 33.2% in
2001. The margin increase was principally the result of ongoing product cost
reduction efforts offset by the effect of fixed production costs relative to the
current year's lower sales.
Operating expenses for 2002 were $20.4 million or 37.7% of net sales compared
with $22.1 million or 33.8% of net sales in 2001. Selling, general and
administrative expenses decreased by $2.0 million, including $1.2 million of
selling costs and $.8 million of administrative expenses. The Company continued
to invest in new product development in 2002, incurring $4.4 million of
engineering and development expenses compared with $4.1 million in 2001.
The Company incurred an operating loss of $2.2 million in 2002 compared with a
loss of $418,000 in 2001 principally as a result of lower sales.
Interest expense decreased $158,000 to $340,000 for 2002 compared with $498,000
in 2001 principally as a result of the paydown of bank borrowings. Interest
income decreased by $30,000 in 2002 as a result of decreases in market interest
rates.
In the prior year, the Company realized a $3.0 million gain ($2.0 million net of
tax effect) on the sale of its remaining equity interest in Chun Shin
Electronics, Inc. (CSE), a South Korean company which, among other things,
manufactures certain of the Company's proprietary products.
The Company recorded an income tax benefit of $770,000 for 2002 compared with
income tax expense of $810,000 in 2001.
As a result of the foregoing, the Company incurred a net loss of $1.6 million
for 2002 compared with net income of $1.5 million in 2001.
- 9 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 2001 Compared with 2000
- -----------------------------------
Net sales for 2001 decreased $9.2 million or 12% to $65.4 million compared with
$74.6 million in 2000. Domestic sales decreased $10.1 million or 18% to $44.9
million principally as a result of a $7.6 million decline in indirect sales to
the United States Postal Service (USPS) under a national supply contract.
Indirect sales to the USPS decreased 33% to $15.2 million in 2001 compared with
$22.8 million in 2000. In March 2001, the USPS announced an immediate freeze on
all its capital spending due to a severe projected budget deficit. As a result,
the Company has since experienced a material reduction in its USPS order rate.
In addition, the USPS supply contract had expired on June 30, 2001 with no new
contract being awarded. The Company has since been named as a pre-approved
supplier in the latest USPS published specification for video systems.
International sales increased $.9 million or 5% to $20.5 million primarily as a
result of increased sales in Europe. The backlog of unfilled orders was $6.3
million at September 30, 2001 compared with $8.4 million at September 30, 2000.
Gross profit margins for 2001 increased to 33.2% compared with 30.9% in 2000.
The margin increase was principally attributable to the effects of a $1.3
million charge for warranty costs incurred in the prior year.
Operating expenses for 2001 were $22.1 million or 33.8% of net sales compared
with $21.1 million or 28.2% of net sales in 2000. The increase in operating
expenses included the write-down of certain foreign assets, certain severance
and payroll related costs and costs incurred in the development of new product
lines.
The Company incurred an operating loss of $418,000 for 2001 compared with
operating income of $2.0 million for 2000 principally as a result of lower sales
and increased operating expenses during 2001.
Interest expense decreased $318,000 to $498,000 for 2001 compared with $816,000
in 2000 principally as a result of the paydown of bank borrowings.
The Company realized a $3.0 million gain ($2.0 million net of tax effect) on the
sale of its remaining equity interest in Chun Shin Electronics, Inc. (CSE), a
South Korean company which, among other things, manufactures certain of the
Company's proprietary products.
Income tax expense for 2001 was $810,000 compared with $628,000 in 2000.
As a result of the foregoing, net income increased to $1.5 million for 2001
compared with $961,000 for 2000.
- 10 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
LIQUIDITY AND FINANCIAL CONDITIONCAPITAL RESOURCES
- ----------------------------------------------------------------
Net cash provided by operating activities was $543,000 for 2003. The net loss of
$4.9 million for the period included non-cash charges of $1.9 million for 2002 due
primarily to a $1.2the
write-off of deferred income taxes, $1.4 million decrease in accounts receivablefor goodwill impairment and
a $3.7$1.1 million decrease in inventories as a result of lower sales. Such increases in cash were
offset, in part, by the $1.6 million net loss for the yeardepreciation and the reduction of
certain operating liabilities.amortization. Net cash used in investing
activities was $477,000$4.0 million for 2002 principally2003 relating to the purchase of $3.3 million of
marketable securities, which consist of mutual fund investments in U.S.
government securities, and $674,000 of general capital expenditures. Net cash
used in financing activities was $1.3$1.4 million in 2002,2003, which primarily
represented scheduled repayments of bank mortgage and term loans. As a result of
the foregoing, cash decreased by $23,000$4.9 million for 20022003 after the effect of
exchange rate changes on the cash position of the Company. On February 12, 2002,Cash and marketable
securities decreased $1.6 million to $8.2 million at September 30, 2003 compared
with $9.8 million at September 30, 2002. At September 30, 2003, the Company executed an amendment agreement withhad
available tax effected net operating loss carryback claims of $2.1 million, of
which $1.8 million was refunded subsequent to September 30, 2003 pertaining to
its bank
that modified its unsecured revolving credit and term loan agreement to provide
for2002 fiscal year.
The Company has a $5 million secured revolving credit facility throughwith a bank that
expires in July 2004. Borrowings under suchthis facility bear interest at the bank's
prime rate or, at the Company's option, LIBOR plus 190 basis points (4.75%(4.00% and
3.71%3.06%, respectively, at September 30, 2002)2003). The amendment agreement grants the bank a security interest in all
the assets of the Company and, among other things, effectively modified the
financial covenants contained in all the existing loan and mortgage agreements
with the bank. These covenants require the Company to, among other things,
maintain certain levels of earnings, working capital and ratios of debt service
coverage and debt to tangible net worth.
On September 30, 2002, the Company executed a second amendment to its credit
agreement which, among other things, waives the Company's obligation to comply
with all financial covenants contained in the agreements so long as there are no
outstanding borrowings under the revolving credit facility and the Company
maintains a compensating balance equal to the sum of the then outstanding term
loan principal balance and outstanding banker acceptances. At this time, the
Company does not anticipate that it will be obligated to comply with these
amended covenants in the near term. The amendment agreement further waived the
Company's obligation to comply with all financial covenants contained in
mortgage loans with the same bank. At September 30, 20022003 and 2001,2002,
there were no outstanding borrowings under this facility. The Company does not
anticipate the need to draw on such facility through its expiration in July
2004.
The Company also maintains a bank overdraft facility of 1 million Pounds
Sterling (approximately $1,570,000)$1,660,000) in the U.K. to support local working capital
requirements of Vicon Industries, Limited. This facility expires in March 2003.2004.
At September 30, 2002,2003, there were no outstanding borrowings under this facility.
Current and long-term debt maturing in each of the fiscal years subsequent to
September 30, 20022003 approximates $1,304,000 in 2003, $320,000$325,000 in 2004, $329,000$334,000 in 2005, $335,000$340,000 in
2006, $316,000$318,000 in 2007 and $1,740,000 thereafter.$1,741,000 in 2008.
The Company occupies certain facilities, or is contingently liable, under
operating leases that expire at various dates through 2008.2009. The leases, which
cover periods from three to eight years, generally provide for renewal options
at specified rental amounts. The aggregate operating lease commitment at
September 30, 20022003 was $746,000$589,000 with minimum rentals for the fiscal years shown
as follows: 2003 - $313,000; 2004 - $272,000;$335,000; 2005 - $97,000;$148,000; 2006 - $24,000;$34,000; 2007 - $24,000;$28,000;
2008 - $25,000; 2009 and thereafter - $16,000.
- 11 -
The Company entered into certain consulting and incentive compensation
agreements that provide for the payout of up to $810,000 of fees and
compensation upon the completion and sale of a specified number of units of a
newly developed product line.$19,000.
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 experienced reduced sales levels and
incurred operating losses in recent periods which, if continued, could limit the
Company's ability to draw upon its bank credit facilities 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 -
In May 2003, the Company was served with a summons and complaint in a patent
infringement suit that named the Company and thirteen other defendants. The
alleged infringement relates to the Company's 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 is without merit and the Company intends to vigorously defend
itself in this matter. The Company is unable to reasonably estimate a range of
possible loss, if any, at this time. Although the Company believes that it has
meritorious defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial position. The Company plans
to present a joint defense with certain other named defendants in the suit.
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 (including shipping
and handling fees) is generally
recognized when products are sold and title is passed to the customer. Under arrangements that involve the saleShipping
and handling costs are included in cost of product
combined with the provision of services, revenue is generally recognized for
each element of the arrangement upon delivery or performance provided that (i)
the undelivered element is not essential to the functionality of the delivered
element and (ii) there is objective evidence of the fair value of the
undelivered elements.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. ShippingPursuant 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 handling costsfollows appropriate
revenue recognition policies for each separate unit. Elements are includedconsidered
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 costaccordance with the provisions of
sales.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.
- 1211 -
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 Company has incurredestablishment 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 recent years and the past two fiscal years. Shouldinherent
uncertainties of predicting future operating results in periods over which such
losses continuenet 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 the Company may determine that it is not
likely it will be abledue to
realize the benefits of recorded deferred tax assets,
and a valuation allowance will need to be established that would result in the
charge-off of previously reported tax benefits.
As further described in Note 1, the Company has not yet adopted the provisions
of SFAS No. 142 as of September 30,new developments.
Recent Accounting Pronouncements
- --------------------------------
In November 2002, and determined its possible effects on
the Company's financial condition or results of operations. The Company
continued to amortize its recorded goodwill over its original 10-year period as
of September 30, 2002 and also evaluated impairment through that same period
using undiscounted cash flows.
New Accounting Standards Not Yet Adopted
- ----------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized but, instead, tested for
impairment at least annually in accordance with the provisions of the Statement.
SFAS No. 142 will also require that intangible assets with finite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets", as discussed
below.
- 13 -
The Company adopted SFAS No. 142 on October 1, 2002 and is required to assign
its goodwill ($1.4 million at September 30, 2002, which relates to its
acquisition of TeleSite U.S.A., Inc. in 1999) to "reporting units" as defined
under SFAS No. 142. Goodwill assigned to each of the reporting units will be
tested for impairment as of October 1, 2002 by comparing the carrying amount of
the reporting units' net assets (including goodwill) to its fair value. The
Company has six months from October 1, 2002 to complete this "first step" of
this transitional goodwill impairment test. If the carrying amount of the net
assets of a reporting unit (including goodwill) exceeds the fair value of that
reporting unit, a "second step" of the transitional goodwill impairment test
must be completed as soon as possible, but not later than September 30, 2003.
Due to the complexities involved with the transitional provisions of SFAS No.
142, the Company has not yet completed its evaluation of the possible effects of
its adoption of SFAS No. 142 on the Company's financial condition or results of
operations. However, it is reasonably possible that the adoption of SFAS No. 142
will result in an impairment charge to goodwill of up to $1.4 million, which
would be reported as a cumulative effect change in accounting principle.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. Unlike SFAS No. 121, an impairment assessment
under SFAS No. 144 will never result in a write-down of goodwill. Rather,
goodwill will be evaluated for impairment under SFAS No. 142, as discussed
above. The Company adopted SFAS No. 144 on October 1, 2002, which did not have
an impact on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company believes that the adoption of SFAS No. 146 will
not have a material impact on its consolidated financial statements.
In November 2002, theBoard's Emerging Issues
Task Force (EITF) finalized its tentative consensus on EITF Issue 00-21 (EITF
00-21), "Revenue Arrangements with Multiple Deliverables", which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is
currently analyzing theadoption of EITF 00-21 on July 1, 2003 did
not have an impact of its adoption on the Company'sresults of operations or financial statements.position of the
Company.
In August 2003, the Emerging Issues Task Force reached consensus on EITF Issue
No. 03-5 ("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2,
"Software Revenue Recognition," to Non-Software Deliverables in an Arrangement
Containing More-than-Incidental Software". EITF 03-5, which became effective for
the Company on October 1, 2003, provides guidance on determining whether
non-software deliverables are included within the scope of SOP 97-2 and,
accordingly, whether multiple element arrangements are to be accounted for in
accordance with EITF Issue No. 00-21 or SOP 97-2. The Company does not believe
that the provisions of EITF 03-5 will have a material impact on its results of
operations or financial position.
- 1412 -
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 and the Japanese yen.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 2002,2003, approximately $5.7$5.0 million of products were sold by the Company
to its U.K. based subsidiary for resale. In past years, the Pound and the Euro
have weakened against the U.S. dollar, thus increasing the cost of U.S. sourced
product sold by this subsidiary. 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, in recent years, have been funded by the Company in U.S. dollars. In
the
recent year,years, the Company has purchased forward exchange contracts to minimize
its currency exposure on these expenses.
Japanese sourced products denominated in Japanese yen accounted for
approximately 2% and 6%As of component and finished product purchases in fiscal
2002 and 2001, respectively. TheSeptember 30, 2003, the Company attempts to minimize its currency
exposure on these purchases through the purchase ofhad forward exchange contracts.contracts outstanding
with notional amounts aggregating $1.6 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.
As of September 30, 2002, the Company had interest rate swaps and forward
exchange contracts outstanding with notional amounts aggregating $3.0 million
and $2.6 million, respectively, whose aggregate fair value was a liability of
approximately $304,000.
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.
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, 2002,2003, the Company's foreign currency
exchange risks included a $1.9$1.8 million intercompany accounts receivable balance
due from the Company's U.K. based subsidiary, and a nominal Japanese Yen
denominated trade accounts payable liability due to inventory suppliers. Such
assets and liabilities arewhich is short term and will be
settled in fiscal 2003.2004. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant.
- 15 -
At September 30, 2002,2003, a 10% strengthening or weakening of the U.S. dollar
versus the British Pound would result in a $186,000$181,000 decrease or increase,
respectively, in the intercompany accounts receivable balance. Such foreign
currency exchange risk at September 30, 20022003 has been substantially hedged by
forward exchange contracts.
At September 30, 2002,2003, the Company had $3.0$1.9 million of outstanding floating rate
bank debt which was covered by interest rate swap agreements that effectively
convert the foregoing floating rate debt to stated fixed rates (see "Note 6.7.
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 $979,000$870,000 of floating rate bank debt that is subject to
interest rate risk as it was not covered by interest rate swap agreements. The
Company does not believe that a 10% fluctuation in interest rates would have a
material effect on its consolidated financial position and results of
operations.
- 13 -
Related Party Transactions
- --------------------------
Refer to Item 13 and "Note 11.15. 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
seeks price increases to its customers to the extent permitted by market
conditions.
"Safe Harbor"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
--------------------
None
ITEM 9A - 16CONTROLS 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 the Company's
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms.
- 14 -
Changes in Internal Controls
- ----------------------------
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
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.
PART III
--------
ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT
- --------------------------------------------------
The Officers and Directors of the Company are as follows:
Name Age Position
---- --- --------
Kenneth M. Darby 5657 Chairman of the Board, President and
Chief Executive Officer
John M. Badke 4344 Vice President, Finance and
Chief Financial Officer
John L. Eckman 53 Vice President, Sales
Peter A. Horn 4748 Vice President, Operations
Bret M. McGowan 3738 Vice President, Marketing
Yacov A. Pshtissky 5152 Vice President, Technology and Development
John F. Whiteman, Jr. 45 Vice President, Sales
Joan L. Wolf 49 Executive Administrator and
Corporate Secretary
Milton F. Gidge 7374 Director
Peter F. Neumann 6869 Director
W. Gregory Robertson 5960 Director
Arthur D. Roche 64 Director
Kazuyoshi Sudo 6065 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.
John M. Badke - Vice President, Finance and Chief Financial Officer. Mr. Badke
has been Chief Financial Officer since December 1999 and Vice President, Finance
since October 1998. Previously, he 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.
John L. Eckman - Vice President, U.S. Sales. Mr. Eckman rejoined the Company in
April 2001 as Vice President, U.S. Sales after serving as District General
Manager with Honeywell from June 2000 to April 2001. From July 1996 to June
2000, he served as Vice President, U.S. Sales of the Company after joining the
Company in August 1995 as Eastern Regional Manager. Prior to that time, he was
Director of Field Operations for Cardkey Systems, Inc., an access control
security products manufacturer with whom he was employed for 12 years.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.
- 17 -
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 developmentElectrical 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.
Milton F. Gidge - Director. Mr. Gidge has been a director of the Company since
1987. He is a retired director and executive officer of Lincoln Savings Bank for
which he served from 1976 to 1994 as Chairman, Credit Policy. He also served as
a director of Interboro Mutual Indemnity Insurance Co., a general casualty
insurance company, from 1980 to 2001 and as a director of Intervest Bancshares
Corporation, a regional bank holding company, from 1988 to 2001. His current
term on the Board ends in May 2004.
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
2003.2006.
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 2004.
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.
Kazuyoshi Sudo - Director. Mr. Sudo has been a director of the Company since
1987. Mr. Sudo is President and Chief Executive Officer of Toyo Management,
Inc., a consulting firm which he founded in 2001. Previously, Mr. Sudo was Chief
Executive Officer of CBC (America) Corp., a distributor of electronic, chemical
and optical products, from 1996 to 2001 and a director of its parent company,
CBC Co., Ltd. Mr. Sudo's current term on the Board ends in May 2003.
There are no family relationships between any director, executive officer,
officer or person nominated or chosen by the Company to become a director or
officer.
- 16 -
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
provided in Exhibit 14 and 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, 20022003 and certain written
representations that no Form 5 is required, no person who, at any time during
the year ended September 30, 20022003 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, 2002.
- 18 -
2003, except that all of the preceding
listed directors and operating officers filed one late report on Form 4 as to a
grant of stock options to such individuals.
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 2003, 2002 2001 and 20002001 by the Chief
Executive Officer and the Company's most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during any such year.
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term Compensation
-------------------------------------------------------
Awards Payouts
------------------------ -------------- -------
Annual Compensation Restricted Securities
Name and All Other Stock Underlying LTIP
Principal Position Year Salary ($) Bonus ($) Compensation Award Options (#) Payouts
- ------------------ ---- ---------- ------------------- ------------ ---------- ----------------- ----------- -------
Kenneth M. Darby 20022003 $310,000 $ 75,000 (1) $ 3,000 (3)(2) - 100,000 -
Chairman and 2002 310,000 75,000 (1) 3,000 (2) - - -
Chairman andChief Executive 2001 285,000 75,000 (1) 3,000 (3)(2) - - -
Chief Executive 2000 285,000 42,271 (1) 3,000 (3) 50,813 (4) - -
Officer
Henry B. Murray 20022003 $ - $ - $ - - - -
Executive 2001 184,6152002 - 87,179 (5)- - - - -
Vice President 2000 100,000 40,000 (2)2001 184,615 - -87,179 (3) - - -
(1) Represents cash bonus which was approved by the Board of Directors upon
the recommendation of its Compensation Committee.
(2) Represents life insurance policy payment.
(3) Represents lump-sum severance payout pursuant to Mr. Murray's
separation from the Company effective August 31, 2001.
- 17 -
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Individual Grants Value at Assumed
-----------------
Annual Rates of Directors upon
the recommendationStock
% of its Compensation Committee.
(2) Represents minimum guaranteed bonusTotal Price Appreciation
No. of Granted to Exercise for fiscal 2000.
(3) Represents life insurance policy payment.
(4) Represents deferred compensation benefit of 8,130 shares of Common Stock
which is being held by the CompanyOption Term
---------------------
Options Employees in Treasury and which vest upon the
expiration of Mr. Darby's employment agreement in October 2004, or earlier
upon certain occurrences including his death, involuntary termination or a
change in control of the Company. The value of such stock is based on the
fair market valuePrice Expiration
Name Granted Fiscal Year Per Share Date 5% 10%
- ------------- ------- ------------- ---------- ----------- -------- --------
Kenneth M. Darby 1,683 0.4% 2.80 11/07 $ 1,302 $ 2,877
48,317 12.0% 2.80 11/08 $46,011 $104,383
9,678 2.4% 3.95 8/08 $10,562 $ 23,339
40,322 10.1% 3.95 8/09 $54,168 $122,888
Options granted in the year ended September 30, 2003 were issued under the
following stock option plans: (1) the 1994 Non-Qualified Stock Option Plan; (2)
the 1996 Incentive Stock Option Plan; (3) the 1996 Non-Qualified Stock Option
Plan; (4) the 1999 Incentive Stock Option Plan; (5) the 2002 Incentive Stock
Option Plan and (6) the 2002 Non-Qualified Stock Option Plan. The options
granted under the first three above listed plans are exercisable as follows: up
to 30% of the shares on the grant date, an additional 30% of the shares on the
first anniversary of the grant date and the balance of the shares on the second
anniversary of the grant date, except that no option is exercisable after the
expiration of five years from the date of grant. The options granted under the
last three above listed plans are exercisable as follows: up to 30% of the
shares on the second anniversary of the grant date, an additional 30% of the
shares on the third anniversary of the grant date, and the balance of the shares
on the fourth anniversary of the grant date, except that no option is
exercisable after the expiration of six years from the date of grant. At September 30, 2002, the quoted
market value of such shares approximated $25,000. No dividends can be paid
on such shares.
(5) Represents lump-sum severance payout pursuant to Mr. Murray's separation
from the Company effective August 31, 2001.
- 19 -
Stock Options
- -------------
There were no options granted to the aforementioned executive officers during
fiscal 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
-----------------------------------------------
AND FISCAL YEAR-END OPTION VALUES
---------------------------------
At September 30, 2002
----------------------------2003
---------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options Options (2)
Shares------- -----------
------------Shares
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized (1) Unexercisable Unexercisable
- --------------------------------- ----------- ------------ ------------- ---------------------------
Kenneth M. Darby -0- -0- 6,462/15,077 -0-/-0-
Henry B. Murray -0- -0- -0-/-0- -0-/-0-15,905/105,634 $13,775/$85,671
(1) Calculated based on the difference between the closing quoted market prices
per share at the dates of exercise and the exercise prices.
(2) Calculated based on the difference between the closing quoted market price
($3.10)4.16) and the exercise price.
- 2018 -
Employment Agreements
- ---------------------
Mr. Darby has entered intois a party to an employment agreement with the Company that provides
for an annual salary of $310,000 through fiscal year 2004.2005. This agreement
provides for payment in an amount up to three times his average annual
compensation for the previous five years if there is a change in control of the
Company without BoardCompany. In addition, the agreement provides for a severance benefit of Director approval (as defined in the agreement).$620,000
upon its expiration, or earlier under certain occurrences.
Directors' Compensation and Term
- --------------------------------
Non-employee directorsDirectors 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.
- 21 -
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee of the Board of Directors consists of Messrs. Gidge,
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 20022003 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 in the security
industry and the Long Island area
for similarly situated officers at comparable companies. The overall level of
performance of the Company is taken into account but is not specifically related
to the base salary of these officers. Also, the Company has established an
incentive compensation plan for all of thecertain officers, which provides for a specified
bonus to each officer upon the Company's achievement of certain annual sales and profitability
targets and strategic initiatives.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
for service as Chief Executive Officer, the committee consideredconsiders the
responsibility assumed by him in formulating, implementing and implementing a managementmanaging the
operational and long-term strategic plan.objectives of the Company.
- 2219 -
This graph compares the return of $100 invested in the Company's stock on
October 1, 1997,1998, 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. AmexAMEX Technology
Date Industries, Inc. Market Index Index
- ---- ---------------- ------------ ---------------
10/01/9798 100 100 100
10/01/99 98 85 94 121
10/01/99 84 121 206129 170
10/01/00 39 149 24146 159 199
10/01/01 41 108 19548 115 161
10/01/02 3744 101 12199
10/01/03 58 130 144
- 2320 -
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following sets forth information as to each person, known to the Company to
be a "beneficial owner" (as defined in regulations of the Securities and
Exchange Commission) of more than five percent of the Company's Common Stock
outstanding as of December 13, 200231, 2003 and the shares beneficially owned by the
Company's Executive Officers and Directors and by all Executive Officers and
Directors 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 11.5%11.4%
Dimensional Fund Advisors
1299 Ocean Avenue
Santa Monica, CA 90401 320,900273,300 (7) 6.8%
Chu S. Chun
C/O I.I.I. Companies, Inc.
915 Hartford Turnpike
Shrewsbury, MA 01545 299,457 (2) 6.3%5.7%
Leviticus Partners, L.P.
30 Park Avenue, Suite 12F
New York, NY 10016 240,000 5.0%
******************************************************************************
C/O Vicon Industries, Inc.
Kenneth M. Darby 257,059 (3) 5.4%266,502 (2) 5.6%
Arthur D. Roche 146,601 (4) 3.1%156,601 (3) 3.3%
Peter F. Neumann 17,072 (5)27,072 (4) *
W. Gregory Robertson 13,84723,847 (5) *
Milton F. Gidge 13,69823,698 (5) *
Kazuyoshi Sudo 9,000 *
Total all Executive Officers and
Directors as a group (6(5 persons) 457,277497,720 (6) 9.7%10.5%
* 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) Mr. Chun has voting and dispositive control over 299,457 shares but
disclaims beneficial ownership as to all but 48,400 shares. 195,657 shares
are owned by the International Industries, Inc. Profit Sharing Plan and
103,800 shares are owned by Mr. Chun and immediate family members.
(3) Includes currently exercisable options to purchase 6,96716,410 shares.
(4)(3) Includes 50,000 shares held by Mr. Roche's wife, 15,000 shares held by
their children and currently exercisable options to purchase 1,94711,947 shares.
(4) Includes currently exercisable options to purchase 10,000 shares.
(5) Includes currently exercisable options to purchase 1,94711,947 shares.
(6) Includes currently exercisable options to purchase 14,75562,251 shares.
(7) Dimensional Fund Advisors had voting and investment control over 320,900273,300
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.
- 2421 -
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------
at September 30, 2003
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------
At September 30, 2002
Number of securities
Number of securities Weighted average remaining available for
to be issued upon exercise price future issuance under
exercise of of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan category (a) (b) (c)
- ------------------ ------------------- ---------------- -------------------------------------------------
Equity compensation
plans approved by
security holders 218,172 $3.24 438,141562,537 $3.34 85,179
Equity compensation
plans not approved
by security holders - - -
Total 218,172 $3.24 438,141562,537 $3.34 85,179
EQUITY COMPENSATION GRANTGRANTS NOT APPROVED BY SECURITY HOLDERS
- ---------------------------------------------------------------------------------------------------------------------
Through September 30, 2002,2003, the Company's Chief Executive Officer was provided aCompany had granted certain of its officers with
deferred compensation benefitbenefits aggregating 70,64797,337 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 the executive'sone officer's employment
agreement in October 2004, or2005. All shares vest earlier under certain occurrences
including his death, involuntary termination or a change in control of the Company.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company and CBC Company, Ltd.(CBC), a Japanese corporation which
beneficially owns 11.5%11.4% of the outstanding shares of the Company, have been
conducting business with each other for approximately twenty-threetwenty-four 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 2002,2003, the Company purchased approximately $1.3 million$832,000 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 $409,000$370,000 in 2002. Kazuyoshi Sudo is a director of2003. In fiscal 2003, the Company and a former directorrecognized
$180,000 of revenues received from CBC and Chief Executive Officer of CBC
(America) Corp., a U.S. subsidiary of CBC.
During fiscal year 2002, the Company entered into a royalty arrangement with CBC
whereby CBC will license certain technology from the Company. The total amount
of the arrangement is $200,000 and, as of September 30, 2002, the Company had
not received any payments under this arrangement.
Mr. Chu S. Chun, who has beneficial voting control over 6.3% of the Common Stock
of the Company, also beneficially owns a minority interest in Chun Shin
Electronics, Inc., (CSE), a South Korean public company that manufactures
certain of the Company's proprietary products. CSE also sells various security
products, including the Company's products, principally within the South Korean
market. In 2002, CSE sold approximately $2.1 million of productspursuant to the Company
through International Industries, Inc. (I.I.I.), a U.S. based company controlled
by Mr. Chun. I.I.I. arranges the importation of all the Company's product
purchases from CSE. In addition, I.I.I. purchased approximately $399,000 of
products directly from the Company during 2002 for resale to CSE.
- 25 -
ITEM 14 - CONTROLS AND PROCEDURES
- ---------------------------------
(a) Based on their evaluation ascompletion of a date within 90 days of the filing date of
this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act)
are effectivecontract
to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.develop certain new product technology.
- 22 -
PART IV
-------
ITEM 15 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
- ----------------------------------------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) (1) Financial Statements
--------------------
Included in Part IV, Item 15:
Independent Auditors' Report
Financial Statements:
Consolidated Statements of Operations, fiscal years ended
September 30, 2003, 2002, 2001, and 20002001
Consolidated Balance Sheets at September 30, 20022003 and 20012002
Consolidated Statements of Shareholders' Equity, fiscal years
ended September 30, 2003, 2002, 2001, and 20002001
Consolidated Statements of Cash Flows, fiscal years ended
September 30, 2003, 2002, 2001, and 20002001
Notes to Consolidated Financial Statements, fiscal years ended
September 30, 2003, 2002, 2001, and 20002001
(a) (2) Financial Statement Schedule
----------------------------
Included in Part IV, Item 15:
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 2003, 2002, 2001, and 20002001
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.
- 2623 -
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.33-10435No. 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 3.2on 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
and
Computershare Investor Services on Form 10-K
10 Material Contracts
(.1) Employment Contract dated
Incorporated by reference
October 1, 19992002 between the to the 1999 Annual Report
Registrant and Kenneth M. Darby on Form 10-K10.1
(.2) Employment Contract dated April Incorporated by reference
1, 2001 between Registrant to the 2001 Annual Report
and John M. Badke on Form 10-K
(.3) Employment Agreement dated October Incorporated by reference
1, 2001 between Registrant and to the 2001 Annual Report
Peter Horn on Form 10-K
(.4) Employment Agreement dated October
1, 2001 between the Registrant and
Yacov Pshtissky 10.4
(.5) Employment Agreement dated April Incorporated by reference
1, 2001 between Registrant and to the 2001 Annual Report
John L.Eckman on Form 10-K
(.6) Employment Agreement dated October Incorporated by reference
1, 2001 between the Registrant and to the 2001 Annual Report
Yigal Abiri on Form 10-K
(.7) Deferred Compensation Agreement Incorporated by reference
dated November 1, 1986 between the to the 1992 Annual Report
Registrant and Donald N. Horn on Form 10-K
(.8) 1994 Incentive Stock Option Plan Incorporated by
reference to the
1994 Annual Report
on Form 10-K
(.9)(.3) 1994 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1994 Annual Report
on Form 10-K
- 27 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -----------------
(.10)(.4) 1996 Incentive Stock Option Plan Incorporated by
reference to the
1997 Annual Report
on Form 10-K
(.11)(.5) 1996 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1997 Annual Report
on Form 10-K
(.12)(.6) Commercial fixed rate loan Incorporated by
agreement between the Registrant reference to the
and National Westminster Bank PLC June 30, 1997 filing
PLC dated April 8, 1997 on Form 10-Q
(.13)(.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
(.14)- 24 -
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
(.15) Term Loan 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
(.16)(.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
(.17) Mortgage and Security Agreement Incorporated by
in the amount of $388,000 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
(.18)(.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
(.19)(.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
- 28 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -----------------
(.20)(.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
(.21) Swap transaction confirmation with Incorporated by
a notional amount of $388,000 reference to the
between the Registrant and KeyBank December 31, 1997
National Association dated filing on Form 10-Q
December 30, 1997
(.22)(.13) Advice of borrowing terms Incorporated by
between the Registrant and reference to the
National Westminster Bank PLC March 31, 20022003
dated April 22, 2003 filing
dated March 25, 2002 on Form 10-Q
(.23)(.14) Credit Agreement between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated June 30, 1998
filing
July 20, 1998 filing on Form 10-Q
(.24) Swap transaction confirmation with Incorporated by
a notional amount of $4,425,000 reference to the
between the Registrant and KeyBank 1998 Annual Report
National Association dated on Form 10-K
September 9, 1998
(.25) Stock purchase agreement between Incorporated by reference
the Registrant and Isaac Gershoni to the 1999 Annual Report
dated August 12, 1999 on Form 10-K
(.26) Escrow agreement among the Incorporated by reference
Registrant, Isaac Gershoni and to the 1999 Annual Report
European American Bank dated on Form 10-K
August 12, 1999
(.27)(.15) Loan Agreement between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.28)(.16) Mortgage Note between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.29)(.17) Mortgage and Security Agreement Incorporated by reference
in the amount of $1,200,000 between to the 1999 Annual Report
the Registrant and The Dime Savings on Form 10-K
Bank of New York, FSB dated
October 12, 1999
- 29 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -----------------
(.30)(.18) Amendment No. 1 to the Credit Incorporated by reference
Agreement between the Registrant to the December 31, 2001
and Washington Mutual Bank, FA filing on Form 10-Q
dated February 12, 2002
(.31)- 25 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- ------------
(.19) Security Agreement between the Incorporated by reference
Registrant and Washington Mutual to the December 31, 2001
Bank, FA dated February 12, 2002 filing on Form 10-Q
(.32)(.20) Amendment No. 2 to the Credit Incorporated by reference
Agreement between the Registrant to the 2002 Annual Report
and Washington Mutual Bank, FA on Form 10-K
dated September 30, 2002
10.32
(.33)(.21) 1999 Incentive Stock Option Plan Incorporated by reference
to the 1999 Annual Report
on Form 10-K
(.34)(.22) 1999 Non-Qualified Stock Incorporated by reference
Option Plan to the 1999 Annual Report
on Form 10-K
(.23) 2002 Incentive Stock Option Plan Incorporated by reference
to the 19992002 Annual Report
on Form 10-K
(.35) 2002 Incentive Stock Option Plan 10.35
(.36)(.24) 2002 Non-Qualified Stock Incorporated by reference
Option Plan 10.36to the 2002 Annual Report
on Form 10-K
14 Code of Ethics 14
21 Subsidiaries of the Registrant Incorporated by
reference to the Notes
to the Consolidated
Financial Statements
23 Independent Auditors' Consent 23
99 Additional Exhibits31 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 99.132.1
(.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 99.232.2
No other exhibits are required to be filed.
- 26 -
15(b) - REPORTS ON FORM 8-K
- ---------------------------
No reportsOn August 14, 2003, the Company filed a Current Report on Form 8-K were required to be filed duringfiling its
August 14, 2003 press release announcing the last quarter of the
period covered by this report.
-Company's June 30, -
2003 financial
results.
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) and 333-71410 (filed October 11,
2001) 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.
- 3127 -
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Vicon Industries, Inc.:
We have audited the consolidated financial statements of Vicon Industries, Inc.
and subsidiaries (the "Company") as listed in Part IV, item 15(a)(1). In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in Part IV, item
15(a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 20022003 and 2001,2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2002,2003, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 1 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
December 10, 2002January 14, 2004
- 3228 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30, 2003, 2002 and 2001
2003 2002 2001 and 2000
2002 2001 2000
---- ---- ----
Net sales $51,953,650 $54,168,110 $65,364,558 $74,624,065
Cost of sales 32,862,590 35,950,038 43,678,775 51,570,001
------------ ------------ ------------
Gross profit 19,091,060 18,218,072 21,685,783 23,054,064
Operating expenses:
Selling, expense 11,833,103 13,025,115 13,117,039
Generalgeneral and
administrative expense 4,194,358 4,973,816 4,190,85615,889,164 16,027,461 17,998,931
Engineering and development expense 4,879,294 4,370,230 4,105,282 3,753,653
------------ ------------ ------------
20,768,458 20,397,691 22,104,213 21,061,548
------------ ------------ ------------
Operating income (loss)loss (1,677,398) (2,179,619) (418,430) 1,992,516
Other expense (income):
Interest expense 240,843 339,587 497,597
816,017Interest and other income (179,716) (170,178) (200,596)
Gain on sale of securities - - (3,022,579) (315,955)
Interest and other income (170,178) (200,596) (96,751)
------------ ------------ ------------
Income (loss) before income taxes (1,738,525) (2,349,028) 2,307,148 1,589,205
Income tax expense (benefit) 1,763,023 (770,000) 810,000
628,000------------ ------------ ------------
Income (loss) before cumulative
effect of a change in
accounting principle (3,501,548) (1,579,028) 1,497,148
Cumulative effect of a change in
accounting principle (Note 3) (1,372,606) - -
------------ ------------ ------------
Net income (loss) $(4,874,154) $(1,579,028) $ 1,497,148
$ 961,205
============ ============ ============
EarningsBasic and diluted earnings (loss) per share:
BasicIncome (loss) before cumulative
effect of a change in
accounting principle $( .75) $(.34) $ .32
$ .21
====== ===== =====
DilutedCumulative effect of a change in
accounting principle ( .30) - -
------- ------ -----
Net income $(1.05) $(.34) $ .32
$ .21======= ====== ===== =====
See accompanying notes to consolidated financial statements.
- 3329 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and 2002
and 2001
ASSETS 2003 2002 2001
- ------ ---- ----
Current Assets:
Cash and cash equivalents $ 4,836,148 $ 9,771,804
$ 9,795,148Marketable securities 3,325,773 -
Accounts receivable (less allowance of
$1,135,000 in 2003 and $1,077,000 in 2002 and $1,115,000 in 2001)2002) 11,056,300 10,400,990 11,438,334
Inventories:
Parts, components, and materials 2,071,092 2,802,779
2,518,782
Work-in-process 2,881,592 1,275,057 2,777,211
Finished products 7,141,470 9,470,823 11,800,197
----------- -----------
12,094,154 13,548,659 17,096,190
Recoverable income taxes 2,052,662 1,712,728 -
Deferred income taxes - 673,574 1,420,372
Prepaid expenses and other current assets 701,779 496,399 566,861
----------- -----------
Total current assets 34,066,816 36,604,154 40,316,905
Property, plant and equipment:
Land 1,197,100 1,180,448 1,161,948
Buildings and improvements 5,620,495 5,509,211 5,394,076
Machinery, equipment, and vehicles 10,854,652 10,307,470 9,815,829
----------- -----------
17,672,247 16,997,129 16,371,853
Less accumulated depreciation and amortization 10,386,406 9,331,102 8,232,536
----------- -----------
7,285,841 7,666,027
8,139,317
Goodwill net of accumulated amortization- 1,372,606 1,571,058
Deferred income taxes - 1,283,784 1,366,625
Other assets 540,407 499,918 531,660
----------- -----------
$41,893,064 $47,426,489 $51,925,565
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current maturities of long-term debt $ 1,304,227325,294 $ 2,144,7271,304,227
Accounts payable 2,527,946 2,384,012 2,375,825
Accrued compensation and employee benefits 2,023,087 1,837,519 1,789,401
Accrued expenses 2,524,858 1,596,288 2,227,825
Unearned service revenue 1,238,944 1,514,121 1,294,576
Income taxes payable 94,174 140,741 479,361
----------- -----------
Total current liabilities 8,734,303 8,776,908 10,311,715
Long-term debt 2,732,275 3,040,061 3,498,099
Unearned service revenue 547,871 1,267,337 2,334,348
Other long-term liabilities 643,884 803,476 883,356
Commitments and contingencies - Note 1013
Shareholders' equity:
Common stock, par value $.01 per share
authorized - 25,000,000 and 10,000,000 shares
issued - 4,832,576 and 4,823,979 and 4,756,532 shares 48,326 48,239 47,565
Capital in excess of par value 22,439,637 21,760,002 21,542,541
Retained earnings 7,856,260 12,730,414 14,309,442
----------- -----------
30,344,223 34,538,655 35,899,548
Treasury stock at cost, 218,917 shares
in 2003 and 172,417 shares in 2002 and 118,249 shares in 2001(980,199) (842,024) (633,422)
Accumulated other comprehensive income (loss) 91,700 (157,924)
(368,079)Deferred compensation (220,993) -
----------- -----------
Total shareholders' equity 29,234,731 33,538,707 34,898,047
----------- -----------
$41,893,064 $47,426,489 $51,925,565
=========== ===========
See accompanying notes to consolidated financial statements.
- 3430 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended September 30, 2003, 2002, and 2001
and 2000
Accumulated Total
Capital in other share-Total
Common excess of Retained Treasury comprehensive holders'Deferred Shareholders'
Shares Stock par value earnings Stock income compensation equity
------ ------------- ----------- ---------- -------- -------- ------------- -------------------- ------------ ------------ ------------
Balance September 30, 1999 4,654,760 $46,547 $21,343,676 $11,851,089 $(508,745)2000 4,710,635 $47,106 $21,444,638 $12,812,294 $(555,097) $1,249,442 $ 15,784 $32,748,351- $34,998,383
Comprehensive income:
Net income - - - 961,2051,497,148 - - 961,205
Foreign currency
translation adjustment - - - - - (321,304) (321,304)
Unrealized gain on
securities - - - - - 1,554,962 1,554,962
Total comprehensive income - - - - - - 2,194,863
Exercise of stock options 55,875 559 100,962 - (46,352) - 55,169
--------- ------ ---------- ---------- -------- ---------- -----------
Balance September 30, 2000 4,710,635 47,106 21,444,638 12,812,294 (555,097) 1,249,442 34,998,383
Comprehensive income:
Net income - - - 1,497,148 - - 1,497,148
Foreign currency
translation adjustment - - - - - 113,344 - 113,344
Reclassification adjustment
for gains on securities
included in net income - - - - - (1,554,962) - (1,554,962)
Unrealized loss on derivatives - - - - - (175,903) - (175,903)
Total comprehensive income - - - - - - - (120,373)
Repurchases of common stock
(13,700 shares) - - - - (30,966) - - (30,966)
Exercise of stock options 45,897 459 83,077 - (47,359) - - 36,177
Tax benefit from exercise of
stock options - - 14,826 - - - - 14,826
--------- ------ ---------- ---------- -------- ---------- ---------- ----------- -----------
Balance September 30, 2001 4,756,532 47,565 21,542,541 14,309,442 (633,422) (368,079) - 34,898,047
Comprehensive income:
Net loss - - - (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 - - - - - - - (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 $12,730,41448,239 21,760,002 12,730,414 (842,024) (157,924) - 33,538,707
Comprehensive income:
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 - - - - - - - (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 - - 610,289 - - - (220,993) 389,296
--------- ------- ----------- ----------- ---------- ---------- ---------- -----------
Balance September 30, 2003 4,832,576 $48,326 $22,439,637 $ (842,024)7,856,260 $ (157,924) $33,538,707(980,199) $ 91,700 $(220,993) $29,234,731
========= ======= =========== =========== ========== ========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
- 3531 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 30, 2003, 2002 and 2001
2003 2002 2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(4,874,154) $(1,579,028) $ 1,497,148 $961,205
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,133,110 1,039,072 1,062,167
1,019,441
Goodwill amortization - 198,452 193,543
200,659Stock compensation expense 43,345 - -
Deferred income taxes 1,853,957 842,423 16,710 (1,145,081)
Gain on sale of securities - - (3,022,579)
(315,955)Cumulative effect of a change in
accounting principle 1,372,606 - -
Change in assets and liabilities:
Accounts receivable (431,820) 1,249,601 5,703,378
(3,667,310)
Inventories 1,563,024 3,677,449 1,594,450 2,495,615
Recoverable income taxes (339,934) (1,712,728) - -
Prepaid expenses and other current assets (197,284) 76,946 331,955
(283,892)
Other assets (40,489) 31,742 (65,070)
(57,594)
Accounts payable 111,802 (10,842) (566,837) (1,060,362)
Accrued compensation and employee benefits 173,842 41,304 (107,988)
(324,918)
Accrued expenses 904,714 (650,517) 509,229 (6,536)
Unearned service revenue (994,643) (847,466) 782,756 1,982,288
Income taxes payable (51,981) (322,795) 157,723
147,195
Other liabilities 317,096 (117,482) (60,939)
(50,509)
---------- --------- -------------------- ------------ ------------
Net cash provided by
(used in)
operating activities 543,191 1,916,131 8,025,646
(105,754)
---------- --------- -------------------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (674,429) (477,041) (689,427)
(1,640,802)Purchases of marketable securities (3,332,328) - -
Proceeds from sale of securities - - 3,289,813 347,473
Acquisition, net of cash acquired - - (124,923)
-
---------- --------- -------------------- ----------- ------------
Net cash provided by (used in)
investing activities (4,006,757) (477,041) 2,475,463
(1,293,329)
---------- --------- -------------------- ----------- ------------
Cash flows from financing activities:
Repayments of U.S. term loan (825,000) (900,000) (900,000) (900,000)
Proceeds from exercise of stock options 42,891 51,004 75,518
Decrease in borrowings under short-term
revolving credit agreement - - (127,655) (216,072)
Repayments of long-term debt (479,346) (421,453) (360,605)
(342,274)
Borrowings under mortgage loans - - 1,200,000
Increase (decrease)Decrease in borrowings under U.S. bank
credit agreement - - (1,500,000)
1,500,000Proceeds from exercise of stock options 26,088 42,891 51,004
Repurchases of common stock (138,175) (57,192) (30,966)
-
----------- ----------- -----------------------
Net cash provided by (used in)used in financing activities (1,416,433) (1,335,754) (2,868,222)
1,317,172
----------- ----------- -----------------------
Effect of exchange rate changes on cash (55,657) (126,680) 47,143
198,262
----------- ----------- ----------------------- ------------ ------------
Net increase (decrease) in cash (4,935,656) (23,344) 7,680,030 116,351
Cash at beginning of year 9,771,804 9,795,148 2,115,118 1,998,767
----------- ----------- -----------
Cash at end of year $ 4,836,148 $ 9,771,804 $ 9,795,148 $ 2,115,118
=========== =========== ===========
Cash paid during the fiscal
year for:
Income taxes $ 328,566 $ 676,857 $ 435,566
$ 1,673,100
Interest $ 356,022245,892 $ 512,354356,022 $ 717,355
See accompanying notes to consolidated financial statements.
512,354
See accompanying notes to consolidated financial statements.
- 3632 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 2003, 2002, 2001, and 20002001
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 (Q.S.R.(Vicon Systems Ltd.); and
Vicon Industries Foreign Sales Corp.; and its majority owned (60%) subsidiary,
Vicon Industries (H.K.) Ltd., after elimination of intercompany accounts and
transactions.
Revenue Recognition
- -------------------
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue (including shipping
and handling fees) is generally
recognized when products are sold and title is passed to the customer. Under arrangements that involve the saleShipping
and handling costs are included in cost of product
combined with the provision of services, revenue is generally recognized for
each element of the arrangement upon delivery or performance provided that (i)
the undelivered element is not essential to the functionality of the delivered
element and (ii) there is objective evidence of the fair value of the
undelivered elements.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. ShippingPursuant 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 handling costsfollows appropriate
revenue recognition policies for each separate unit. Elements are includedconsidered
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 costaccordance with the provisions of
sales.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 at September 30, 2003 was $3,332,328, with
$6,555 of unrealized losses reported for fiscal 2003.
- 33 -
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 costcost. Depreciation and include expenditures for
replacements or major improvements. Depreciation, which includes
amortization of assets under capital leases, is computed by the straight-line
method over the estimated useful lives of the related assets. 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.
- 37 -
Goodwill
- --------
Goodwill representsrepresented the excess of the purchase price over the fair value
assigned to net assets acquired in connection with the Company's acquisition of
TeleSite U.S.A., Inc. in fiscal 1999. SuchPrior to October 1, 2002, such amount iswas
being amortized on a straight-line basis over 10 years. Accumulatedyears with accumulated
amortization amountedamounting to $634,322 and $435,870 atas of September 30, 2002. On October 1, 2002,
the Company adopted SFAS No. 142 and, 2001, respectively.accordingly, had discontinued amortization
of goodwill as of that date. In fiscal 2003, the Company recognized an
impairment charge against its entire goodwill balance 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. See Note 3 for further discussion of goodwill.
Engineering and Development
- ---------------------------
Product engineering and development costs are charged to expense as incurred,
and amounted to approximately $4,900,000, $4,400,000 $4,100,000 and $3,800,000$4,100,000 in fiscal
2003, 2002, 2001, and 2000,2001, respectively.
Earnings Per Share
- ------------------
The Financial Accounting Standards Board SFAS No. 128, "Earnings per Share"
requires companies to present basic and diluted earnings per share (EPS).
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 9)12). 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 $43,000$315,000
and $(192,000)$43,000 at September 30, 20022003 and 2001,2002, respectively, is recorded as a
component of shareholders' equity in accumulated other comprehensive income.
- 34 -
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 be recovered or settled (see Note 4).settled. Deferred U.S. income taxes
are not provided on undistributed earnings of foreign subsidiaries as the
Company intends to reinvest such earnings indefinitely. In fiscal 2003, the
Company recognized a valuation allowance against its entire net deferred tax
asset balance due to the uncertainty of future realization (see Note 6 for
further discussion).
Product Warranties
- ------------------
The Company provides for the estimated cost of product warranties at the time
revenue is recognized.recognized (see Note 5). 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.
- 38 -
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 (i) transactions denominated in Japanese Yen, (ii) transactions with the Company's Europe and Israel based subsidiaries and
(iii) 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, 2002,2003, the Company had interest rate swaps and currency
forwards outstanding with notional amounts aggregating $3.0$1.9 million and $2.6$1.6
million, respectively, whose aggregate fair value was a liability of
approximately $304,000.$217,000. The change in the fair value of these derivatives for
the year ended September 30, 2002,2003, is reflected in other comprehensive income in
the accompanying statement of shareholders' equity, net of tax. 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 only 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, 2003. The Company does not expect the
amounts that are currently classified in accumulated other comprehensive income
(loss) that are expected to be recognized in operations in the next fiscal year
to be material.
- 35 -
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 agreements
are carried at their fair market values (which was a liability of approximately
$287,000$238,000 at September 30, 2002)2003). This value represents the estimated amount the
Company would need to pay if such agreements were 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 exceededwas approximately $21,000 more favorable than the market
rates for similar term contracts by
approximately $17,000 at September 30, 2002 (see Note 10).2003.
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.
- 39 -
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company has elected to followfollows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations in
accounting for its employee stock options.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 Statement of Financial Accounting StandardsSFAS
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 presentshas presented the disclosure
information prescribed by SFAS No. 123 and SFAS No. 148 below.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of this Statement. The fair
value for options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 2003,
2002 and 2001:
2003 2002 2001
---- ---- ----
Risk-free interest rate 2.7% 2.5% 4.0%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 68.0% 68.8% 66.9%
Weighted average expected life 4 years 4 years 4 years
The Black-Scholes option valuation model was developed for use in Note 7 toestimating 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.
- 36 -
In the Company's consolidated financial statements.statements, no compensation expense has
been recognized for stock option grants issued under any of the Company's stock
option plans. Had compensation expense for stock option grants issued been
determined under the fair value method of SFAS No. 123, the Company's net income
(loss) and earnings (loss) per share (EPS) for the fiscal years ended September
30, 2003, 2002 and 2001 would have been:
2003 2002 2001
---------- --------- ---------
Reported net income (loss) $(4,874,154) $(1,579,028) $1,497,148
Stock-based compensation cost,
net of tax (351,138) (96,796) (72,885)
----------- ----------- ----------
Pro forma net income (loss) $(5,225,292) $(1,675,824) $1,424,263
============ ============ ===========
Reported basic and diluted EPS $(1.05) $ (.34) $ .32
Pro forma basic and diluted EPS $(1.13) $ (.36) $ .31
Weighted average fair value
of options granted $ 1.79 $ 1.62 $1.30
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 deferred tax assets and
long-lived assets (including goodwill). Actual results could differ from those
estimates.
Reclassifications
- -----------------
Certain prior year amounts have been reclassified to conform to current year
presentation.
NewRecent Accounting Standards Not Yet AdoptedPronouncements
- ------------------------------------------------------------------------
In July 2001,November 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized but, instead, tested for
impairment at least annually in accordance with the provisions of the Statement.
SFAS No. 142 will also require that intangible assets with finite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets and for
Long-Lived Assets", as discussed below.
The Company adopted SFAS No. 142 on October 1, 2002 and is required to assign
its goodwill ($1.4 million at September 30, 2002, which relates to its
acquisition of TeleSite U.S.A., Inc. in 1999) to "reporting units" as defined
under SFAS No. 142. Goodwill assigned to each of the reporting units will be
tested for impairment as of October 1, 2002 by comparing the carrying amount of
the reporting units' net assets (including goodwill) to its fair value. The
Company has six months from October 1, 2002 to complete this "first step" of
this transitional goodwill impairment test. If the carrying amount of the net
assets of a reporting unit (including goodwill) exceeds the fair value of that
reporting unit, a "second step" of the transitional goodwill impairment test
must be completed as soon as possible, but not later than September 30, 2003.
Due to the complexities involved with the transitional provisions of SFAS No.
142, the Company has not yet completed its evaluation of the possible effects of
its adoption of SFAS No. 142 on the Company's financial condition or results of
operations. However, it is reasonably possible that the adoption of SFAS No. 142
will result in an impairment charge to goodwill of up to $1.4 million, which
would be reported as a cumulative effect change in accounting principle.
- 40 -
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. Unlike SFAS No. 121, an impairment assessment
under SFAS No. 144 will never result in a write-down of goodwill. Rather,
goodwill will be evaluated for impairment under SFAS No. 142, as discussed
above. The Company adopted SFAS No. 144 on October 1, 2002, which did not have
an impact on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company believes that the adoption of SFAS No. 146 will
not have a material impact on the Company's consolidated financial statements.
In November 2002, theBoard's Emerging Issues
Task Force (EITF) finalized its tentative consensus on EITF Issue 00-21 (EITF
00-21), "Revenue Arrangements with Multiple Deliverables", which provides
guidance on the timing and method of revenue recognition for sales arrangements
that include the delivery of more than one product or service. EITF 00-21 is
effective prospectively for arrangements entered into in fiscal periods
beginning after June 15, 2003. The Company is
currently analyzing theadoption of EITF 00-21 on July 1, 2003 did
not have an impact of its adoption on the Company'sresults of operations or financial statements.position of the
Company.
In August 2003, the Emerging Issues Task Force reached consensus on EITF Issue
No. 03-5 ("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2,
"Software Revenue Recognition," to Non-Software Deliverables in an Arrangement
Containing More-than-Incidental Software". EITF 03-5, which became effective for
the Company on October 1, 2003, provides guidance on determining whether
non-software deliverables are included within the scope of SOP 97-2 and,
accordingly, whether multiple element arrangements are to be accounted for in
accordance with EITF Issue No. 00-21 or SOP 97-2. The Company does not believe
that the provisions of EITF 03-5 will have a material impact on its results of
operations or financial position.
- 37 -
NOTE 2. Sale of Marketable Securities
- --------------------------------------
During fiscal yearsyear 2001, and 2000, the Company soldrealized gains of approximately $3,023,000
from the sale of its remaining minority ownership interest in Chun Shin
Electronics, Inc. (CSE), a South Korean company which, among other things,
manufactures certain of the Company's proprietary products.
Realized gainsNOTE 3. 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 income (loss) and earnings (loss) per share
data, adjusted to exclude amortization expense for periods prior to the saleadoption
of these securities were approximately $3,023,000SFAS No. 142:
2003 2002 2001
---- ---- ----
Reported net income (loss) $(4,874,154) $(1,579,028) $1,497,148
Add back: goodwill amortization - 198,452 193,543
----------- ----------- ----------
Adjusted net income (loss) $(4,874,154) $(1,380,576) $1,690,691
=========== =========== ==========
Basic and $316,000 in fiscal years 2001 and 2000, respectively.diluted earnings (loss) per share:
Reported earnings (loss) per share $ (1.05) $ (.34) $ .32
Goodwill amortization - .04 .04
-------- -------- --------
Adjusted earnings (loss) per share $ (1.05) $ (.30) $ .36
======== ======== ========
NOTE 3.4. Short-Term Borrowings
- ------------------------------
The Company's EuropeEuropean based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of 1 million Pounds Sterling ($1,570,000)1,660,000) and is
secured by all the assets of the subsidiary. This facility expires in March
2003.2004. At September 30, 20022003 and 2001,2002, there were no outstanding borrowings under
this facility andfacility. During fiscal 2003, there were no borrowings under this
agreement, while maximum borrowings during 2002 and 2001 amounted to approximately
$915,000 and $618,000, respectively.$915,000. The weighted-average interest rate on borrowings during these years2002 was
4.05%.
NOTE 5. Accrued Warranty Obligation
- ------------------------------------
The Company recognizes the estimated cost associated with its standard warranty
on products at the time of sale. The estimate is based on historical warranty
claim cost experience. The following is a summary of the changes in the
Company's accrued warranty obligation (which is included in accrued expenses)
for the year ended September 30, 2003:
Beginning balance as of September 30, 2002 and 5.30% in 2001.$ 190,000
Deduct: Expenditures (261,000)
Add: Provision 396,000
---------
Ending balance as of September 30, 2003 $ 325,000
=========
- 38 -
NOTE 4.6. Income Taxes
- ---------------------
The components of income tax expense (benefit) for the fiscal years indicated
are as follows:
2002 2001 2000
---- ---- ----
Federal:
Current $ (1,713,000) $ 353,000 $ 1,411,000
Deferred 729,000 43,000 (1,043,000)
------------- ----------- ------------
(984,000) 396,000 368,000
State (179,000) (19,000) 40,000
Foreign 393,000 433,000 220,000
------------- ----------- ------------
Total income tax
expense(benefit) $ (770,000) $ 810,000 $ 628,000
============= ===========
2003 2002 2001
---- ---- ----
Federal:
Current $ (339,934) $(1,713,000) $ 353,000
Deferred 1,853,957 729,000 43,000
------------- ----------- ------------
1,514,023 (984,000) 396,000
State - (179,000) (19,000)
Foreign 249,000 393,000 433,000
------------- ----------- ------------
Total income tax expense (benefit) $ 1,763,023 $ (770,000) $ 810,000
============= ============ ============
- 41 -
A reconciliation of the U.S. statutory tax rate to the Company's effective tax
rate follows:
2003 2002 2001 2000
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Amount Percent Amount Percent Amount Percent
U.S. statutory tax $ (591,000) (34.0)% $ (799,000) 34.0%(34.0)% $ 784,000 34.0%
$ 540,000 34.0%Increase in valuation
allowance 2,436,000 140.1 - - - -
Prior year loss
carryback refund (115,000) (6.6) - - - -
State tax, net of
federal benefit (56,000) 2.4 - - 26,000 1.6(56,000) (2.4) - -
Goodwill amortization - - 67,000 (2.8)2.8 65,000 2.8
68,000 4.3
Other 33,000 1.9 18,000 (0.8)0.8 (39,000) (1.7)
(6,000) (0.4)
----------- ------ --------------------- ------ ---------- ------
Effective Tax Rate $ 1,763,000 101.4% $ (770,000) 32.8%(32.8)% $ 810,000 35.1%
$ 628,000 39.5%
=========== ====== ===================== ====== ========== ======
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at September 30, 20022003 and 20012002 are presented below:
2003 2002 2001
---- ----
Deferred tax assets:
Inventories $ 554,000 $ 247,000 $1,001,000
Deferred compensation accruals 152,000 161,000
152,000Severance accruals 81,000 -
Warranty accrual 119,000 65,000
Depreciation 178,000 99,000
Allowance for doubtful
accounts receivable 329,000 469,000 462,000
Unearned service revenue 627,000 886,000
1,030,000Net operating loss carryforwards 339,000 -
Unrealized loss on derivatives 79,000 113,000
92,000
Other 224,000 184,000146,000 60,000
----------- ----------
----------
TotalGross deferred tax assets 2,604,000 2,100,000 2,921,000
Deferred tax liabilities:
Cash surrender value of officers'
life insurance 101,000 83,000
81,000
Other 67,000 60,000
53,000
--------------------- -----------
Gross deferred tax liabilities 168,000 143,000
----------- -----------
Total deferred tax assets and liabilities 143,000 134,000
----------$ 2,436,000 $ 1,957,000
Less valuation allowance (2,436,000) -
----------- -----------
Net deferred tax assets and liabilities $1,957,000 $ 2,787,000
---------- ------------ $ 1,957,000
=========== ===========
- 39 -
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 current and 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.
For income tax purposes, the Company had available at September 30, 2002, a tax effected net operating loss
carryback of approximately $1.7$2.1 million at September 30, 2003, which was
included in recoverable income taxes, whichtaxes. Subsequent to year-end, the Company
anticipates carrying back to offset
taxable income reported in the allowable carryback periods.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
The Company has incurred operating losses in the past two fiscal years. Should
such losses continue in the future, the Company may determine that it is not
likely it will be able to realize the benefits of recorded deferred tax assets,
andreceived a valuation allowance will need to be established that would result in the
charge-offrefund of previously reported tax benefits. However, at this time,
management believes (although there can be no assurance) that it is more likely
than not that the Company will realize the benefits of reported deferred tax
assets.paid taxes totaling $1.8 million under a
carryback claim filed during 2003.
Pretax domestic income (loss) amounted to approximately $(2,845,000)$(2,458,000),
1,383,000$(3,245,000) and $1,079,0001,182,000 in fiscal years 2003, 2002 2001 and 2000,2001, respectively.
Pretax foreign income amounted to approximately $496,000, $924,000$719,000, $896,000 and
$510,000$1,125,000 in fiscal years 2003, 2002 and 2001, and 2000, respectively.
- 42 -
NOTE 5.7. Long-Term Debt
- -----------------------
Long-term debt is comprised of the following
at September 30, 2003 and 2002:
2003 2002
and 2001:
2002 2001
---------- -------------- ----
U.S. bank term loan $ - $ 825,000 $1,725,000
U.S. bank mortgage loans 2,743,331 3,123,597 3,393,462
U.K. bank term loan 297,416 359,789
410,373
Other 16,822 35,902
113,991
---------- ---------------------
3,057,569 4,344,288 5,642,826
Less current maturities 325,294 1,304,227 2,144,727
---------- ----------
$2,732,275 $3,040,061 $3,498,099
========== ==========
In July 1998, theThe Company entered into a $14 million unsecured revolving credit
and term loan agreement with a bank that included a $9.5 million revolving
credit facility that was scheduled to expire in July 2002. On February 12, 2002,
the Company executed an amendment agreement with its bank that modified its
unsecured revolving credit and term loan agreement to provide forhas a $5 million secured revolving credit facility throughwith a bank that
expires in July 2004. Borrowings under suchthis facility bear interest at the bank's
prime rate or, at the Company's option, LIBOR plus 190 basis points (4.75%(4.00% and
3.71%3.06%, respectively, at September 30, 2002)2003). The amendment agreement grants the bank a security interest in all the
assets of the Company and, among other things, effectively modified the
financial covenants contained in all the existing loan and mortgage agreements
with the bank. These covenants require the Company to, among other things,
maintain certain levels of earnings, working capital and ratios of debt service
coverage and debt to tangible net worth.
On September 30, 2002, the Company executed a second amendment to its credit agreement which, among other things,includes a
provision that waives the Company's obligation to comply with all financial
covenants contained in the agreements so long as there are no outstanding
borrowings under the revolving credit facility and the Company maintains acertain
compensating balance equal to the sum of the then outstanding term
loan principal balance and outstanding banker acceptances. The amendment
agreement further waived the Company's obligation to comply with all financial
covenants contained in mortgage loans with the same bank.balances. At September 30, 20022003 and 2001,2002, there were no outstanding
borrowings under this facility. The agreementCompany also providedhad a $4.5 million five-year
term loan payablethat was repaid in equal monthly installments through July 2003, with interest at LIBOR plus 100 basis
points. In September 1998, the Company entered into an interest rate swap
agreement with the same bank at the time to effectively convert the foregoing
floating rate long-term loan to a fixed rate loan. Subsequently, such bank sold
its local operations, including the Company's loans, to another bank while
retaining the Company's interest rate swap agreement. This agreement effectively
fixes the Company's interest rate on its $4.5 million term loan at 6.74%. The
interest rate swap agreement matures in the same amounts and over the same
periods as the related term loan.2003.
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 providesprovided a $388,000 five-year
term loan payablethat was repaid in monthly installments through January 2003 with a
$138,500 payment duethat was made at the end of the term. Both loans bearterm in February 2003. The
mortgage loan bears interest at the bank's prime rate minus 1.35%. The loans are and is secured
by a first mortgage onall the property and
fixtures.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 fix the Company's interest rate on its
$2,512,000 mortgage loan at 7.79% and its $388,000 term loan at 7.70%. The interest rate swap agreements
matureagreement matures in
the same amounts and over the same periods as the related mortgage and
term loans.loan.
- 4340 -
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%(2.40% and 4.40%3.15% at September 30,
20022003 and 2001,2002, respectively) or, at the Company's option, LIBOR plus 100 basis
points (2.81%(2.16% and 3.60%2.81% at September 30, 20022003 and 2001,2002, respectively).
In April 1997, the Company's Europe based subsidiary entered into a ten-year
500,000 pound sterling (approximately $785,000)$830,000) bank term loan. The term loan is
payable in equal monthly installments with interest at a fixed rate of 9%. The
loan is secured by a first mortgage on the subsidiary's property and contains
restrictive covenants which,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, 20022003 approximates $1,304,000 in 2003, $320,000$325,000 in 2004, $329,000$334,000 in 2005, $335,000$340,000 in
2006, $316,000$318,000 in 2007 and $1,740,000 thereafter.$1,741,000 in 2008.
NOTE 6.8. Other Comprehensive Income (Loss)
- ------------------------------------------
The accumulated other comprehensive income (loss) balances at September 30, 2003
and 2002 consisted of the following:
2003 2002
----------- -----------
Foreign currency translation adjustment $ 314,985 $ 42,797
Unrealized loss on derivatives (216,730) (200,721)
Unrealized loss on securities (6,555) -
---------- ----------
Accumulated other comprehensive income (loss) $ 91,700 $(157,924)
=========== ===========
NOTE 9. 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 include the operations of Vicon Industries (H.K.), Ltd., a Hong
Kong based majority owned subsidiary which markets and distributes the Company's
products principally within Hong Kong and mainland China and TeleSite U.S.A.,
Inc. and subsidiary, a U.S. and Israeli based developer and producer of digital
video systems.
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, 2003, 2002
2001
and 20002001 is as follows:
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
- 41 -
2002 U.S. Europe Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $38,726,000 $13,078,000 $ 2,364,000$2,364,000 $ - $54,168,000
Intersegment
net sales 6,432,000 - 403,000 (6,835,000) - 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
- 44 -
2001 U.S. Europe Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $47,409,000 $14,572,000 $3,384,000 $ - $65,365,000
Intersegment
net sales 8,160,000 - 736,000 (8,896,000) - 8,896,000
Net income (loss) 1,749,000 979,000 (1,041,000) (190,000) 1,497,000
Interest expense 440,000 208,000 18,000 (168,000) 498,000
Interest income 348,000 - - (147,000) 201,000
Depreciation and
amortization 780,000 158,000 124,000 194,000 1,256,000
Total assets 44,996,000 8,841,000 3,691,000 (5,602,000) 51,926,000
Capital expenditures $ 296,000 $ 227,000 $ 166,000 - $ 689,000
2000 U.S. Europe Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $59,488,000 $10,846,000 $4,290,000 $ - $74,624,000
Intersegment
net sales 6,301,000 - 1,248,000 - 7,549,000
Net income (loss) 1,241,000 461,000 (540,000) (201,000) 961,000
Interest expense 672,000 205,000 62,000 (123,000) 816,000
Interest income 243,000 - - (146,000) 97,000
Depreciation and
amortization 766,000 168,000 85,000 201,000 1,220,000
Total assets 48,277,000 5,813,000 3,598,000 (3,770,000) 53,918,000
Capital expenditures $ 1,094,000 $ 115,000 $ 432,000 - $ 1,641,000
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, 2003, 2002, 2001, and
20002001 are as follows:
2003 2002 2001 2000
---- ---- ----
Net sales
U.S. $34,909,000 $39,255,000 $48,339,000 $61,096,000
Foreign 17,045,000 14,913,000 17,026,000 13,528,000
----------- ----------- -----------
Total $54,168,000 $65,365,000 $74,624,000
Long-lived assets
U.S. $ 5,609,000 $ 6,076,000 $ 6,561,000
Foreign 2,057,000 2,063,000 1,941,000
---------- ----------- -----------
Total $51,954,000 $54,168,000 $65,365,000
Long-lived assets
U.S. $ 5,324,000 $ 5,609,000 $ 6,076,000
Foreign 1,962,000 2,057,000 2,063,000
---------- ----------- -----------
Total $ 7,286,000 $ 7,666,000 $ 8,139,000
$ 8,502,000
U.S. sales include $4,030,000, $3,413,000 $3,455,000 and $6,039,000$3,455,000 for export in fiscal
years 2003, 2002, 2001, and 2000,2001, respectively. Indirect sales to the United States
Postal Service approximated $2.7 million, $3.5 million $15.2 million and $22.8$15.2 million in
fiscal 2003, 2002 and 2001, and 2000, respectively.
NOTE 10. Stock Option Plans
- 45 -
NOTE 7. Stock Options and Stock Purchase Warrants
- ------------------------------------------------------------------------------
The Company maintains stock option plans which include both incentive and
non-qualified options covering a total of 656,313647,716 shares of common stock
reserved for issuance to key employees, including officers and directors. Such
amount includes a total of 200,000 options reserved for issuance under the 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 2001 and 2000,2001, a total of 34,968 18,988 and 10,61318,988
common shares, respectively, were surrendered pursuant to stock option
exercises, which are held in treasury. There were 438,14185,179 shares available for
grant at September 30, 2002.2003.
- 42 -
Changes in outstanding stock options for the three years ended September 30,
20022003 are as follows:
Weighted
Number Average
of Exercise
Shares Price
- -------------------------------------------------------------------
Balance - September 30, 1999 370,647 $4.89
Options granted 129,823 $3.50
Options exercised (55,875) $2.18
Options forfeited (168,611) $7.33
- -------------------------------------------------------------------
Balance - September 30, 2000 275,984 $3.30
Options granted 86,301 $2.39
Options exercised (45,897) $1.81
Options forfeited (64,517) $3.49
- -------------------------------------------------------------------
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
Price range $2.20 - $3.05
(weighted-average contractual 123,000 $2.59283,450 $2.73
life of 4.5 years)
Price range $3.06 - $7.44
(weighted-average contractual 95,172 $4.07279,087 $3.97
life of 3.24.8 years)
- -------------------------------------------------------------------------------------------------------------------------------
Exercisable options -
September 30, 2000 140,239 $2.66
September 30, 2001 107,643 $3.30
September 30, 2002 60,020 $4.12
September 30, 2003 93,546 $3.71
- -------------------------------------------------------------------
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) will beis recorded for any
changes in the Company's stock price above the price of $3.18. In fiscal 2002, 2001 and 2000, such2003,
compensation expense related to these repriced options was $43,345. In fiscal
2002 and 2001, compensation expense related to these repriced options was not
material.
- 46 -
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of this Statement. The fair
value for options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 2002,
2001 and 2000:
2002 2001 2000
---- ---- ----
Risk-free interest rate 2.5% 4.0% 5.0%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 68.8% 66.9% 59.5%
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.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income (loss) and earnings (loss) per share are as follows:
2002 2001 2000
---- ---- ----
Net income(loss):
As reported $(1,579,028) $1,497,148 $ 961,205
Pro forma $(1,675,824) $1,424,263 $ 773,082
Earnings (loss) per share:
As reported
Basic $(.34) $ .32 $ .21
Diluted $(.34) $ .32 $ .21
Pro forma
Basic $(.36) $ .31 $ .17
Diluted $(.36) $ .31 $ .17
Weighted average fair value
of options granted $1.62 $1.30 $1.76
In connection with the public offering during fiscal 1998, the Company granted
the Underwriters warrants to purchase up to 145,000 shares of Common Stock. The
warrants are exercisable at any time through May 2003 at a price of $10.50 per
share.
NOTE 8.11. 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.
- 47 -
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
- 43 -
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 9.12. Earnings Per Share
- -------------------------------------------------------
The following table provides the components of the basic and diluted earnings
(loss) per share (EPS) computations:
2003 2002 2001 2000
---- ---- ----
Basic EPS Computation
- ---------------------
Net income (loss) $(4,874,154) $(1,579,028) $1,497,148 $ 961,205
Weighted average shares
outstanding 4,630,745 4,658,612 4,645,154 4,600,447
Basic earnings (loss) per share $ (1.05) $ (.34) $ .32
$ .21============ =========== ========== ==========
Diluted EPS Computation
- -----------------------
Net income (loss) $(4,874,154) $(1,579,028) $1,497,148 $ 961,205
Weighted average shares
outstanding 4,630,745 4,658,612 4,645,154 4,600,447
Stock options - - 6,403 70,808
Stock compensation arrangement - - 1,510-
----------- ---------- ----------
Diluted shares outstanding 4,630,745 4,658,612 4,651,557 4,672,765
Diluted earnings (loss) per share $ (1.05) $ (.34) $ .32
$ .21============ =========== ==========
==========
In 2003 and 2002, 70,718 and 60,330 shares, respectively, have been omitted from
the calculation of diluted EPS as their effect would have been antidilutive.
NOTE 10.13. Commitments and Contingencies
- ---------------------------------------
The Company occupies certain facilities, or is contingently liable, 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, 20022003 was $746,000$589,000 with minimum rentals for the fiscal years shown
as follows: 2003 - $313,000; 2004 - $272,000;$335,000; 2005 - $97,000;$148,000; 2006 - $24,000;$34,000; 2007 - $24,000;$28,000;
2008 - $25,000; 2009 and thereafter - $16,000.$19,000.
The Company is a party to employment agreements with sevensix 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,
20022003 was approximately $2.7$2.5 million. The total compensation
payable under theseCertain 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, aggregated $1.9
million at September 30, 2002.aggregating $1.3
million. The Company is also a partyamortizing such obligation to an insuredexpense on the
straight-line method over the term of the employment agreement or through the
specified dates of retirement. Such expense amounted to approximately $146,000
and $75,000 in fiscal 2003 and 2002, respetively.
The Company has granted certain of its officers with deferred compensation
agreement with a retired officer. The aggregate remaining
compensation payments of approximately $130,000 as of September 30, 2002 are
subject to the individual's adherence to certain non-compete covenants, and are
payable in monthly installments through December 2003.
- 48 -
The Company entered into certain consulting and incentive compensation
agreements that provide for the payout of up to $810,000 of fees and
compensation upon the completion and sale of a specified number of units of a
newly developed product line.
In October 1997, 1998 and 1999, the Company's Chief Executive Officer was
provided a deferred compensation benefit of 45,952, 16,565 and 8,130benefits aggregating 97,337 shares
respectively, 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 the executive'sone officer's employment agreement in October 2004, or2005. All shares
vest earlier under certain occurrences including his death, involuntary termination
or a change in control of the Company. The market value of such shares
approximated $507,000$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.
Sales- 44 -
NOTE 14. Litigation
- --------------------
In May 2003, the Company was served with a summons and complaint in a patent
infringement suit that named the Company and thirteen other defendants. The
alleged infringement relates to customers from the Company's Europe based subsidiary are denominated in
British Pounds Sterlingcamera dome systems, which is a
significant product line. Among other things, the suit seeks injunctive relief
and Eurodollars.unspecified damages. The Company attempts to minimizeand its currency exposure on these sales throughoutside patent counsel believe that
the purchase of forward exchange
contracts to cover its billings to this subsidiary. These contracts generally
involve the exchange of one currency for another at a future datecomplaint is without merit and specified
exchange rate. At September 30, 2002 and 2001, the Company had approximately
$2,500,000 and $1,600,000, respectively,intends to vigorously defend
itself in this matter. The Company is unable to reasonably estimate a range of
outstanding forward exchange
contracts to sell British pounds. Such contracts have maturities of less than
one year.
The Company's purchases of Japanese sourced products through CBC Company, Ltd.,
a related party, are denominated in Japanese yen. At September 30, 2001,possible loss, if any, at this time. Although the
Company had approximately $395,000 of outstanding forward exchange contracts to
purchase Japanese yen.
In fiscal 1999, the Company received notice from a competitor asserting that
certain of the Company's products infringe upon a patent it allegedly owns and
is seeking royalties on the Company's sales of such products. The Company believes that it has
goodmeritorious defenses in this matter. Although the Company does not
believeto such claims, there is a possibility that this matter willan unfavorable
outcome could ultimately occur that could result in a liability that is material
exposure at this time, no
assurance can be given that this matter will be resolvedto the Company's results of operations and financial position. The Company plans
to present a joint defense with certain other named defendants in the suit.
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 favor.financial position and results of operations.
NOTE 11.15. Related Party Transactions
- ------------------------------------
As of September 30, 2002,2003, CBC Company, Ltd. and affiliates ("CBC") owned
approximately 11.7%11.8% of the Company's outstanding common stock. The Company,
which has been conducting business with CBC for approximately 2324 years, imports
certain finished products and components through CBC and also sells its products
to CBC. The Company purchased approximately $832,000, $1.3 million $3.5 million and $4.4$3.5
million of products and components from CBC in fiscal years 2003, 2002, 2001, and
2000,2001, respectively, and the Company sold $370,000, $409,000 $303,000 and $303,000 of
products to CBC for distribution in fiscal years 2003, 2002, 2001, and 2000,2001,
respectively. At September 30, 20022003 and 2001,2002, the Company owed $223,000$69,000 and
$243,000,$223,000, respectively, to CBC and CBC owed $79,000$7,000 and $58,000,$79,000, respectively, to
the Company resulting from purchases of products.
DuringIn fiscal year 2002,2003, the Company entered intorecognized $180,000 of revenues received from CBC
pursuant to the completion of a royalty arrangement with CBC
whereby CBC will licensecontract to develop certain technology from the Company. The total amount
of the arrangement is $200,000 and, as of September 30, 2002, the Company had
not received any payments under this arrangement.
As of September 30, 2002, Mr. Chu S. Chun had beneficial voting control over
approximately 6.4% of the Company's outstanding common stock. Mr. Chun controls
and beneficially owns a minority interest in Chun Shin Electronics, Inc. (CSE),
a South Korean manufacturer of certain of the Company's proprietary products
(see Note 3). Mr. Chun also controls International Industries, Inc. (I.I.I.), a
U.S. based company which arranges the importation of all the Company's products
purchased directly or indirectly from CSE. During fiscal years 2002, 2001 and
2000, the Company purchased approximately $2.1 million, $4.1 million and $5.0
million, respectively, of products from CSE through I.I.I. under this agreement.
In addition, the Company sold approximately $399,000, $276,000 and $663,000 of
its products to I.I.I. in 2002, 2001 and 2000, respectively, for resale to CSE.
At September 30, 2002, the Company owed I.I.I. $420,000 and at September 30,
2002 and 2001, I.I.I. owed the Company approximately $195,000 and $10,000,
respectively.
- 49 -
Note 12.new product
technology.
NOTE 16. Quarterly Financial Data (unaudited)
- ----------------------------------------------
Earnings (Loss)
Net Per Share
Net -------------
Quarter Net Gross Income
Ended Sales Profit (Loss) Basic Diluted
------- -----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)
=========== =========== =========== ====== ======
Fiscal 2002
- -----------
December $13,551,000 $4,472,000$ 4,472,000 $ (347,000) $(.07) $(.07)$ (.07) $ (.07)
March 12,846,000 4,235,000 (467,000) (.10) (.10)
June 14,274,000 5,062,000 28,000 .01 .01
September 13,497,000 4,449,000 (793,000) (.17) (.17)
----------- ----------- ----------- ----- ----------- ------
Total $54,168,000 $18,218,000 $(1,579,000) $(.34) $(.34)$ (.34) $ (.34)
=========== =========== =========== ===== =====
Fiscal 2001
- -----------
December $17,377,000 $ 5,901,000 $ 1,722,000 $ .37 $ .37
March 17,160,000 5,706,000 418,000 .09 .09
June 16,081,000 5,465,000 (374,000) (.08) (.08)
September 14,747,000 4,614,000 (269,000) (.06) (.06)
----------- ----------- ----------- ----- -----
Total $65,365,000 $21,686,000 $ 1,497,000 $ .32 $ .32
=========== =========== =========== ===== =========== ======
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.
- 5045 -
SCHEDULE II
-----------
VICON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 2003, 2002, 2001, and 20002001
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
----------- --------- ----------------- ---------- ---------
Allowance for uncollectible
accounts:
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
========== ======== ======== ==========
September 30, 2001 $1,063,000 $436,000 $384,000 $1,115,000
========== ======== ======== ==========
September 30, 2000 $ 818,000 $291,000 $ 46,000 $1,063,000
========== ======== ======== ==========
- 5146 -
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.DarbyM. Darby John M. Badke
Chairman and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
December 30, 2002January 14, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
VICON INDUSTRIES, INC.
/s/ Kenneth M. Darby December 30, 2002January 14, 2004
- --------------------- -----------------------------------------
Kenneth M. Darby Chairman and CEO Date
/s/ Milton F. Gidge December 30, 2002January 14, 2004
- --------------------- -----------------------------------------
Milton F. Gidge Director Date
/s/ Peter F. Neumann December 30, 2002January 14, 2004
- --------------------- -----------------------------------------
Peter F. Neumann Director Date
/s/ W. Gregory Robertson December 30, 2002January 14, 2004
- ------------------------ -----------------------------------------
W. Gregory Robertson Director Date
/s/ Arthur D. Roche December 30, 2002January 14, 2004
- --------------------- -----------------------------------------
Arthur D. Roche Director Date
/s/ Kazuyoshi Sudo December 30, 2002
- --------------------- ---------------------
Kazuyoshi Sudo Director Date
- 52 -
SIGNATURES
----------
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By By
------------------------- -------------------------
Kenneth M.Darby John M. Badke
Chairman and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
December 30, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
VICON INDUSTRIES, INC.
December 30, 2002
- --------------------- -------------------
Kenneth M. Darby Chairman and CEO Date
December 30, 2002
- --------------------- ------------------
Milton F.Gidge Director Date
December 30, 2002
- --------------------- ------------------
Peter F. Neumann Director Date
December 30, 2002
- --------------------- ------------------
W. Gregory Robertson Director Date
_____________________ December 30, 2002
-------------------
Arthur D. Roche Director Date
December 30, 2002
- --------------------- -----------------
Kazuyoshi Sudo Director Date
- 52 -
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
- ----------------------------------------
I, Kenneth M. Darby, certify that:
1. I have reviewed this annual report on Form 10-K of Vicon Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 30, 2002
/s/Kenneth M. Darby
- -------------------
Kenneth M. Darby
Chairman and
Chief Executive Officer
- 53 -
CERTIFICATION OF CHIEF FINANCIAL OFFICER
- ----------------------------------------
I, John M. Badke, certify that:
1. I have reviewed this annual report on Form 10-K of Vicon Industries, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: December 30, 2002
/s/John M. Badke
- ----------------
John M. Badke
Vice President, Finance and
Chief Financial Officer
- 5447 -