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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, 1999 Commission File No. 1-7939
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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: (516) 952-2288
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01
(Title of class)
American Stock Exchange
(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of December 15, 1999 was approximately $24,700,000.
The number of shares outstanding of the registrant's Common Stock as of December
15, 1999 was 4,586,512.
PART I
ITEM 1 - BUSINESS
General
Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs,
manufactures, assembles and markets a wide range of closed circuit video systems
("CCVS") and system components used for security, surveillance, safety and
control purposes by a broad group of end users. A CCVS system is a private video
system that can transmit and receive video, audio and data signals in accordance
with the operational needs of the user. The Company's primary focus is the
design of software-based engineered CCVS and components that it 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, CCVS 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, CCVS, article surveillance,
guard services and equipment, locks, safes, armored vehicles, security fencing,
private investigations and others. The Company's products are typically used for
crime deterrence, visual documentation, observation of inaccessible or hazardous
areas, enhancing safety, 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 office buildings,
manufacturing plants, apartment complexes, large retail stores, government
facilities, transportation operations, prisons, casinos, sports arenas, health
care facilities and financial institutions.
Products
The Company's product line consists of approximately 600 products, of which
about a third represent model variations. The Company's product line consists of
various elements of a video system, including video cameras, display units
(monitors), video recorders, 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. In August 1999, the Company acquired TeleSite U.S.A., Inc.
("TeleSite"), which designs, produces and sells remote video surveillance
systems. The Company intends to substantially increase the product development
efforts of TeleSite in order to maximize the potential of its core digital video
compression technology. The Company provides a full line of products due to the
many varied climatic and operational environments under 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 approximately one hundred thousand
dollars (depending upon configuration) for a large digital control and video
switching system.
- 2 -
Marketing
The Company's marketing emphasizes engineered CCVS solutions which incorporate
system design, project management and technical training and support. The
Company markets its products through industry trade shows worldwide, product
brochures and catalogues, direct mailings to existing and prospective customers,
product videos, in-house training seminars for customers and end users, road
shows which preview new systems and system components, and advertising through
trade and end user magazines and the Company's internet web site. The Company's
products are sold principally to approximately 2,000 independent dealers, system
integrators and distributors. Sales are made principally by field sales
engineers, independent sales representatives and customer service
representatives. The Company's sales effort is supported by in-house customer
service and technical support groups which provide product information,
application engineering, 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 surveillance; (5) gaming
casinos, where video surveillance is often mandated by local regulation; and (6)
health care facilities, such as hospitals, particularly psychiatric wards and
intensive care units. In fiscal 1999 and 1998, indirect sales to the United
States Postal Service under a national supply contract approximated $22.7
million and $12.0 million, respectively.
The Company's principal sales offices are located in Hauppauge, New York;
Atlanta, Georgia; Fareham, England; Zaventem, Belgium; New Territories, Hong
Kong; and Shanghai, China.
International Sales
The Company sells its products in Europe through its U.K. based subsidiary, in
China through its Hong Kong subsidiary and elsewhere outside the U.S. by direct
export. 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, Norway and South Korea, the Company
permits independent sales representatives to use the Company's name for
marketing purposes.
- 3 -
Direct export sales and sales from the Company's foreign subsidiaries amounted
to $15.4 million, $19.0 million and $18.7 million or 21%, 30% and 36% of
consolidated net sales in fiscal years 1999, 1998, and 1997, 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 and the Pacific
Rim, which together accounted for approximately 85 percent of international
sales in fiscal 1999. Since fiscal 1998, the Company has experienced a decrease
in demand for its products in certain Asian and European countries, due
principally to the deterioration of local economies. For more information
regarding foreign operations, see Note 8 of Notes to Consolidated Financial
Statements included in Item 14.
Competition
The Company operates in a highly competitive marketplace both domestically and
internationally. The Company competes by providing engineered systems and system
components that incorporate broad capability together with high levels of
customer service and technical support. Generally, the Company does not compete
based on price alone.
The Company's principal engineered CCVS competitors include the following
companies or their affiliates: Checkpoint Systems, Inc., Matsushita (Panasonic),
Pelco Sales Company, Philips Communications and Security Systems, Inc.,
Sensormatic Electronics Corporation, and Ultrak, Inc. Many additional companies,
both domestic and international, produce products that compete against one or
more of the Company's product lines. In addition, some consumer video electronic
companies or their affiliates, including Matsushita (Panasonic), Mitsubishi
Electric Corporation, Sanyo Electric Co., Ltd. and Sony Corporation, compete
with the Company for the sale of video products and systems. Most of the
Company's competitors are larger companies whose financial resources and scope
of operations are substantially greater than the Company's.
Research and Development
The Company's research and development ("R&D") is focused on new and improved
CCVS and system components. In recent years, a trend of product development and
demand within the video security and surveillance market has been toward the
application of digital technology, specifically toward the compression, storage
and display of digitized video signals. As the demands of the Company's target
market segment requires the Company to keep pace with changes in technology, the
Company intends to focus its R&D effort in these developing areas. R&D projects
are chosen and prioritized based on direct customer feedback, the Company's
analysis as to the needs of the marketplace and technological advances and
marketing research.
The Company employs a total of 43 engineers in the following areas: 12 in
software development, 10 in mechanical design, 9 in manufacturing/testing and 12
in electrical and circuit design. R&D expenditures have averaged approximately
4% of net sales for each of the past three years.
- 4 -
Source and Availability of Raw Materials
The Company is substantially dependent upon outside manufacturers and suppliers
to manufacture and assemble its products and will continue to be dependent on
such entities in the future. In fiscal 1999, approximately 13% of the Company's
purchases of components and finished products were from Chun Shin Electronics,
Inc. ("CSE"), a 34% owned South Korean company (see Item 13). Additionally, in
1999, the Company purchased approximately 13% of its components and finished
products from CBC Company, Ltd., a supplier and sourcing agent for the Company
(see Item 13). The Company's relationships with outside 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.
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. Many of the Company's 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
its lack of patents, 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 valuable and is a
principal element in the differentiation of the Company's products from its
competition.
Inventories
The Company carries substantial finished goods inventory levels to respond to
unanticipated customer demand, since most sales are to installing dealers and
contractors who normally do not carry large inventory stocks. The Company
principally builds inventory to known and anticipated customer demand. In
addition to normal safety stock levels, certain additional inventory levels are
maintained for products with long purchase and manufacturing lead times. The
Company has also increased its raw material and work-in-process inventory as it
has shifted certain of its production from contract manufacturers to labor
subcontractors. 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.
- 5 -
Backlog
The backlog of orders believed to be firm as of September 30, 1999 and 1998 was
approximately $11.3 million and $12.4 million, respectively. Orders are
generally cancelable without penalty at the option of the customer. The Company
prefers that its backlog of orders not exceed its ability to fulfill such orders
on a timely basis, since experience shows that long delivery schedules only
encourage the Company's customers to look elsewhere for product availability.
Employees
At September 30, 1999, the Company employed 252 full-time employees, of whom 7
are officers, 61 administrative, 101 in sales and technical service capacities,
42 in engineering, and 41 production employees. At September 30, 1998, the
Company employed 217 persons. There are no collective bargaining agreements with
any of the Company's employees and the Company considers its relations with its
employees to be good.
ITEM 2 - PROPERTIES
The Company owns and operates an 80,000 square-foot facility located at 89 Arkay
Drive, Hauppauge, New York, which it purchased in January 1998. The Company also
owns and operates a 14,000 square-foot sales, service and warehouse facility in
southern England which services the U.K. and Europe. In addition, the Company
operates, under short-term leases, sales offices in Atlanta, Georgia and
Zaventem, Belgium. The Company also leases sales, service and warehouse
facilities in Tenafly, New Jersey; Yavne, Israel; Hong Kong and Shanghai, China.
ITEM 3 - LEGAL PROCEEDINGS
None
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 1999
December 8-13/16 4-5/8
March 9-9/16 6-3/4
June 10-3/8 6-1/2
September 9-7/16 6-3/4
Fiscal 1998
December 8-11/16 5-9/16
March 13-15/16 6-3/16
June 12-1/8 6-3/16
September 9-1/4 6
The last sale price of the Company's Common Stock on December 15, 1999 as
reported on AMEX was $5-3/8 per share. As of December 15, 1999, there were
approximately 300 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. In addition, the Company's
bank credit agreements prohibit the payment of cash dividends on its Common
Stock.
- 7 -
ITEM 6 - SELECTED FINANCIAL DATA
FISCAL YEAR 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $73,414 $63,310 $51,519 $43,191 $43,847
Gross profit 24,699 20,832 14,475 10,957 9,546
Income (loss) before
income taxes 7,442 5,810 1,647 385 (1,267)
Net income (loss) 4,760 5,810 1,565 300 (1,347)
Earnings (loss) per share:
Basic 1.05 1.61 .56 .11 (.49)
Diluted 1.01 1.50 .52 .11 (.49)
Total assets 49,899 44,386 31,200 28,085 26,423
Long-term debt 5,799 7,002 8,344 6,429 5,339
Working capital 29,049 27,642 15,351 12,064 10,721
Property, plant and
equipment (net) 8,053 7,137 3,492 3,034 3,262
- 8 -
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared with 1998
Net sales for 1999 increased $10.1 million or 16% to $73.4 million compared with
$63.3 million in 1998. The sales growth was experienced principally in the U.S.
as domestic sales increased $13.7 million or 31% to $58.0 million principally as
a result of increased system sales supplied under a contract with the U.S.
Postal Service. International sales decreased 19% to $15.4 million principally
as a result of the discontinuation of sales to a private label European reseller
and lower sales in Asia. The backlog of unfilled orders was $11.3 million at
September 30, 1999 compared with $12.4 million at September 30, 1998.
Gross profit margins for 1999 increased to 33.6% compared with 32.9% in 1998.
The margin improvement was primarily the result of a favorable sales mix of
higher margin products, lower procurement costs and greater fixed cost
absorption associated with the sales growth.
Operating expenses for 1999 were $16.8 million or 22.9% of net sales compared
with $14.0 million or 22.1% of net sales in 1998. The increase in operating
expenses was principally the result of higher selling expenses associated with
the sales growth.
Operating income increased to $7.9 million for 1999 compared with $6.9 million
for 1998 principally as a result of increased sales.
Interest expense decreased $515,000 to $592,000 for 1999 compared with $1.1
million in 1998 as $9.3 million of interest-bearing debt was repaid in May 1998
with the net proceeds from a secondary stock offering.
Income tax expense for 1999 was $2.7 million, or a 36% effective tax rate. There
was no income tax expense for 1998 due to the utilization of available U.S.
federal and state net operating tax loss carryforwards and the reinstatement of
previously reserved deferred income tax assets.
As a result of the foregoing, net income decreased to $4.8 million for 1999
compared with net income of $5.8 million for 1998. However, results for 1998
benefitted from the utilization of net operating tax loss carryforwards which
affect the comparability of operating results. Assuming that income taxes had
been incurred in 1998 at the same effective tax rate as in 1999, net income for
1998 would have been $3.7 million ($.96 per share diluted) compared with $4.8
million ($1.01 per share diluted) reported for 1999.
- 9 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared with 1997
Net sales for 1998 increased $11.8 million or 23% to $63.3 million compared with
$51.5 million in 1997. The sales growth was experienced principally in the U.S.
as domestic sales increased $11.5 million or 35% to $44.3 million principally as
a result of system sales supplied under a contract with the U.S. Postal Service
entered into in July 1997 and sales from a new line of dome cameras introduced
in February 1997. International sales increased 2% to $19.0 million.
International growth was limited as a result of lower sales in Asia offset by
higher sales in Europe, including sales to a private label reseller. The backlog
of unfilled orders was $12.4 million at September 30, 1998 compared with $7.0
million at September 30, 1997.
Gross profit margins for 1998 increased to 32.9% compared with 28.1% in 1997.
The margin improvement was primarily the result of a favorable sales mix of
higher margin products, lower procurement costs and greater fixed cost
absorption associated with the sales growth.
Operating expenses for 1998 were $14.0 million or 22.1% of net sales compared
with $11.7 million or 22.8% of net sales in 1997. The increase in operating
expenses was principally the result of higher selling expenses associated with
the sales growth and profit related bonus expense.
Operating income rose to $6.9 million for 1998 compared with $2.8 million for
1997 as a result of increased sales, higher gross margins and greater absorption
of fixed operating expenses.
Interest expense decreased slightly to $1.1 million in 1998. Such decrease
occurred subsequent to the public offering as $9.3 million of interest bearing
debt was repaid.
There was no income tax expense for 1998 due to the full utilization of a U.S.
net operating loss carryforward (NOL) and the reinstatement of previously
reserved deferred income tax assets. Beginning with the first quarter of 1999,
the Company will incur income taxes at a normal effective rate. In 1997, income
tax expense was $82,000 relating primarily to foreign subsidiary income. As a
result of the foregoing, net income increased to $5.8 million for 1998 compared
with net income of $1.6 million for 1997.
- 10 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
Net cash provided by operating activities was $2.2 million for 1999 due
primarily to the $4.8 million net income reported for the year, offset in part
by an increase in inventories to support higher sales activity. Net cash used in
investing activities was $3.8 million for 1999 due primarily to the Company's
acquisition of TeleSite U.S.A., Inc. for $2.1 million, the expenditure of $1.0
million for expansion of the Company's principal operating facility and other
general capital expenditures. Net cash used in financing activities was $1.2
million due primarily to the scheduled repayments of U.S. bank term and mortgage
loans and a decrease in borrowings under the Company's short-term revolving
credit agreement. As a result of the foregoing, the net decrease in cash was
$2.9 million for 1999 after the nominal effect of exchange rate changes on the
cash position of the Company.
In July 1998, the Company entered into a $14 million unsecured revolving credit
and term loan agreement with a bank. Such agreement includes a $7.5 million
revolving credit facility that expires in July 2002, with an option to increase
the facility to $9.5 million at any time through July 2000. Borrowings under the
facility bear interest at the bank's prime rate minus 2% or, at the Company's
option, LIBOR plus 90 basis points (6.25% and 6.30%, respectively, at September
30, 1999). At September 30, 1999, there were no revolving credit borrowings
outstanding under this agreement. The agreement also provides for a $4.5 million
five-year term loan payable in equal monthly installments through July 2003 with
interest at 6.74%.
The Company maintains a bank overdraft facility of 600,000 Pounds Sterling
(approximately $990,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. At September 30, 1999, borrowings
under this facility amounted to approximately $375,000.
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 or, at the Company's option, LIBOR
plus 100 basis points and contains the same covenants as included in the
existing mortgage loans.
The Company believes that cash flow from operations and funds available under
its credit agreements will be sufficient to meet its anticipated operating,
capital expenditures and debt service requirements for at least the next twelve
months.
Year 2000
The Company's software-based products have been tested for year 2000 compliance
and the Company believes that such products are year 2000 compatible. With
respect to its own computer operating systems, the Company has completed the
upgrade of its principal operating computer software to the most recent
available revisions sold by its software suppliers, which the suppliers have
represented to be year 2000 compliant. The Company believes that such upgrades
- 11 -
will solve those year 2000 problems that could affect its operating software.
The costs for such upgrades were not material. It is possible that certain
computer systems or software products of the Company's customers or suppliers
may experience year 2000 problems and that such problems could adversely affect
the Company. The Company continues to assess the status of its principal
suppliers' year 2000 readiness and their plans to address problems that their
computer systems may face in correctly processing date information as the year
2000 approaches. However, since the ultimate success of the Company's customers
and suppliers to become compliant is largely outside of the Company's control,
no assurances can be made that the Company will be unaffected by the year 2000.
Should the Company's suppliers fail to achieve year 2000 compliance, the supply
of product to the Company may be interrupted resulting in possible lost revenue
to the Company due to its inability to supply finished product to its customers.
If such interruptions are prolonged, the Company will seek alternative
suppliers. However, delays may occur which could have a material adverse effect
on the Company.
New Accounting Standard Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." This statement establishes comprehensive
accounting and reporting standards for derivative instruments and hedging
activities. In June 1999, the FASB issued SFAS No. 137, deferring the required
implementation of SFAS No. 133. This SFAS will be adopted by the Company in the
first quarter of fiscal 2001. Implementation of this statement is not expected
to affect the Company's financial position or results of operations.
Foreign Currency Activity
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. dollar to the Japanese yen and the British pound
sterling.
Japanese sourced products denominated in Japanese yen accounted for
approximately 9% and 11% of product purchases in fiscal 1999 and 1998,
respectively. In 1999, the U.S. dollar had significantly weakened in relation to
the yen, resulting in increased costs for such products. The Company attempts to
minimize its currency exposure on these purchases through the purchase of
foreign exchange contracts. The Company also attempts to reduce the impact of an
unfavorable exchange rate condition through cost reductions from its suppliers,
lowering production cost through product redesign, and shifting product sourcing
to suppliers transacting in more stable and favorable currencies.
Sales by the Company's U.K. based subsidiary to customers in Europe are
made in pounds sterling and euros. In fiscal 1999, approximately $4.0 million of
products were sold by the Company to its U.K. based subsidiary for resale. The
U.S. dollar was relatively stable against the pound sterling in 1999. In years
when the pound weakened significantly against the U.S. dollar, the cost of U.S.
sourced product sold by this subsidiary increased. The Company attempts to
minimize its currency exposure on intercompany sales through the purchase of
forward exchange contracts.
- 12 -
In general, the Company seeks lower costs from suppliers and enters into forward
exchange contracts to mitigate exchange rate exposures. However, there can be no
assurance that such steps will be effective in limiting 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" and Note 1 "Derivative
Instruments" and "Fair Value of Financial Instruments" to the accompanying
financial statements). At September 30, 1999, the Company's foreign currency
exchange risks included a $1.8 million intercompany accounts receivable balance
due from the Company's U.K. based subsidiary and a $534,000 Japanese Yen
denominated trade accounts payable liability due to inventory suppliers. Such
assets and liabilities are short term and will be settled in fiscal 2000. The
following sensitivity analysis assumes an instantaneous 10% change in foreign
currency exchange rates from year-end levels, with all other variables held
constant.
At September 30, 1999, a 10% strengthening or weakening of the U.S. dollar
versus the British Pound would result in a $179,000 decrease or increase,
respectively, in the intercompany accounts receivable balance. Such foreign
currency exchange risk at September 30, 1999 has been substantially hedged by
forward exchange contracts. A 10% strengthening of the U.S. dollar versus the
Japanese Yen would result in a $49,000 decrease in the trade accounts payable
liability, while a 10% weakening of the dollar would result in a $59,000
increase in such liability.
At September 30, 1999, the Company had $6.2 million of outstanding floating rate
bank debt and corresponding interest rate swap agreements which effectively
convert the foregoing floating rate debt to stated fixed rates (see "Note 7.
Long-Term Debt" to the accompanying financial statements). Thus, the Company has
substantially no net interest rate exposures on these instruments.
Inflation
The impact of inflation on the Company has lessened 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.
- 13 -
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
Statements in this Report on Form 10-K and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Liquidity and
Financial Condition" and "Year 2000" 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 update 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 14, 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
- 14 -
PART III
ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT
The Directors and Officers of the Company are as follows:
Name Age Position
Kenneth M. Darby 53 Chairman of the Board, President and
Chief Executive Officer
John M. Badke 40 Vice President, Finance and Chief
Financial Officer
John L. Eckman 50 Vice President, Sales
Robert D. Grossman 39 Vice President, Customer and
Technical Services
Peter A. Horn 44 Vice President, Operations
Yacov A. Pshtissky 48 Vice President, Technology and Development
Chu S. Chun 64 Director
Milton F. Gidge 70 Director
Peter F. Neumann 65 Director
W. Gregory Robertson 55 Director
Arthur D. Roche 61 Director
Kazuyoshi Sudo 57 Director
The business experience, principal occupations and employment, as well as period
of service, of each of the directors and officers 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 April 2002.
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, Sales. Mr. Eckman has been Vice President,
Sales since April 1999. He joined the Company in August 1995 as Eastern Regional
Manager and was promoted to Vice President, U.S. Sales in July 1996. Prior to
joining the Company, he was Director of Field Operations for Cardkey Systems,
Inc., an access control security products manufacturer for which he was employed
for 12 years.
- 15 -
Robert D. Grossman - Vice President, Customer and Technical Services. Mr.
Grossman has been Vice President, Customer and Technical Services since June
1999. He joined the Company in 1996 as Director of Technical Services. Prior to
joining the Company, he was Senior Project Manager for Sensormatic Electronics
Corporation, a CCTV and electronic article surveillance products manufacturer,
for which he was employed for 6 years.
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.
Yacov A. Pshtissky - Vice President, Technology and Development. Mr. Pshtissky
has been Vice President, Technology and Development since May 1990. Mr.
Pshtissky was Director of Electrical Product Development from March 1988 through
April 1990. Prior to that time he was an Electrical Design Engineer.
Chu S. Chun - Director. Mr. Chun has been a director of the Company since
April 1998. He has been the President of CSI, Chairman of the Board and Chief
Executive Officer of International Industries, Inc. ("I.I.I.") and President of
Chun Shin Electronics, Inc. since at least 1988 (see Item 13). Mr. Chun's
current term on the Board ends in April 2001.
Milton F. Gidge - Director. Mr. Gidge has been a director of the Company since
1987. He is a retired director and executive officer of Lincoln Savings Bank for
which he served from 1976 to 1994 as Chairman, Credit Policy. He has also been a
director since 1980 of Interboro Mutual Indemnity Insurance Co., a general
insurance mutual company, and a director of Intervest Bancshares Corporation of
New York, a mortgage banking holding company, and another affiliated company of
Intervest since 1988. His current term on the Board ends in April 2001.
Peter F. Neumann - Director. Mr. Neumann has been a director of the Company
since 1987. He is the retired President of Flynn-Neumann Agency, Inc., an
insurance brokerage firm. Since 1978, Mr. Neumann has been serving as a director
of Reliance Federal Savings Bank.
Mr. Neumann's current term on the Board ends in April 2000.
W. Gregory Robertson - Director. Mr. Robertson has been a director of the
Company since 1991. He is President of TM Capital Corporation, a financial
services company which he founded in 1989. From 1985 to 1989, he was employed by
Thomas McKinnon Securities, Inc. as head of investment banking and public
finance. Mr. Robertson's current term on the Board ends in April 2001.
- 16 -
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 April 2002.
Kazuyoshi Sudo - Director. Mr. Sudo has been a director of the Company since
1987. Mr. Sudo is Chief Executive Officer of CBC (America) Corp., a distributor
of electronic, chemical and optical products. From 1981 to 1996, he was
Treasurer of such company. He has also been a director of CBC Company, Ltd.
since 1997. Mr. Sudo's current term on the Board ends in April 2000.
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.
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, 1999 and certain written
representations, no person, who, at any time during the year ended September 30,
1999 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, 1999.
- 17 -
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to the Company during 1999, 1998 and 1997 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 1999 $275,000 $261,690 (1) $ 3,000 (3) $111,814 (4) - -
Chief Executive 1998 225,000 297,525 (2) 3,000 (3) $344,640 (5) - -
Officer 1997 225,000 84,017 (2) 3,000 (3) - 58,000 -
Arthur D. Roche 1999 180,000 140,910 (1) - - - -
Executive 1998 170,000 160,206 (2) - - - -
Vice President 1997 170,000 45,240 (2) - - 35,000 -
(1) Represents cash bonus equal to 3.25% and 1.75% of the sum of consolidated
pre-tax income and provision for officers' bonuses for Mr. Darby and Mr.
Roche, respectively, which bonus formula was adopted for 1999 by the Board
of Directors upon the recommendation of its Compensation Committee.
(2) Represents cash bonus equal to 4.55% and 2.45% of the sum of consolidated
pre-tax income and provision for officers' bonuses for Mr. Darby and Mr.
Roche, respectively, which bonus formula was adopted for years 1998 and
1997 by the Board of Directors upon the recommendation of its Compensation
Committee.
(3) Represents life insurance policy payment.
(4) Represents deferred compensation benefit of 16,565 shares of Common Stock
held by the Company in Treasury which vests 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
value on the date of grant. At September 30, 1999, the quoted market value
of such shares approximated $116,000. No dividends can be paid on such
shares.
(5) Represents deferred compensation benefit of 45,952 shares of Common Stock
held by the Company in Treasury which vests 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
value on the date of grant. At September 30, 1999, the quoted market value
of such shares approximated $322,000. No dividends can be paid on such
shares.
- 18 -
Stock Options
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------ Annual Rates of Stock
% of Total Price Appreciation
No. of Granted to Exercise for Option Term
Options Employees in Price Expiration
Name Granted Fiscal Year Per Share Date 5% 10%
- ------------- ------- ------------- ---------- ----------- -------- ---------
Kenneth M. Darby 25,000 17% 6.7500 4/05 $57,400 $130,200
25,000 17% 8.1875 6/05 $69,600 $157,900
Arthur D. Roche 5,000 3% 8.1875 6/05 $13,900 $ 31,600
Options granted in the year ended September 30, 1999 were issued under the 1999
Incentive Stock Option Plan and the 1999 Non-Qualified Stock Option Plan. The
options granted above are exercisable as follows: up to 30% of the shares on the
second anniversary of the grant date, an additional 30% of the shares on the
third anniversary of the grant date, and the balance of the shares on the fourth
anniversary of the grant date, except that no option is exercisable after the
expiration of six years from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
At September 30, 1999
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options (2) Options (2)
Shares
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized (1) Unexercisable Unexercisable
- ---------------- ----------- ------------- ------------- -------------
Kenneth M. Darby 23,200 $115,850 -0- /50,000 -0-/$6,250
Arthur D. Roche - - 14,000/5,000 $60,750/-0-
(1) Calculated based on the difference between the closing quoted market prices
per share at the dates of exercise and the exercise prices.
(2) Calculated based on the difference between the closing quoted market price
($7.00) and the exercise price.
- 19 -
Employment Agreements
Mr. Darby has entered into an employment agreement with the Company that
provides for an annual salary of $285,000 through fiscal 2004. 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 Board of Director approval (as defined in the agreement). In
addition, Mr. Darby is eligible to receive cash bonuses based on performance of
the Company. In 2000, his bonus arrangement provides for a cash bonus equal to
3.25% of the sum of consolidated pre-tax income and provision for officers'
bonuses, which bonus formula was adopted by the Board of Directors upon the
recommendation of its Compensation Committee. Mr. Darby's agreement also
provides for an additional deferred compensation benefit of 8,130 shares of
Common Stock held by the Company in treasury. Such benefit vests upon the
expiration of his employment agreement in October 2004, or earlier upon certain
occurrences including his death, involuntary termination or a change in control
of the Company. The market value of such benefit approximated $51,000 at the
date of grant.
Donald N. Horn and Arthur V. Wallace, both retired directors, each have deferred
compensation agreements with the Company which provide retirement benefits
totaling $917,000 and $631,000, respectively, and are payable in monthly
installments over a 10-year period from date of retirement. These payments are
subject to their adherence to certain noncompete covenants. Mr. Wallace and Mr.
Horn began receiving payments under these agreements in October 1990 and January
1994, respectively.
Directors' Compensation and Term
Non-employee directors are compensated at an annual rate of $6,000 for regular
meetings, and for committee membership, receive $500 per meeting attended in
person. Employee directors are not compensated for Board or committee meetings.
Directors may not stand for reelection after age 70.
- 20 -
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors consists of Messrs.
Neumann, Gidge and Robertson, none of whom has ever been an officer of the
Company.
Board Compensation Committee Report
The Compensation Committee's compensation policies applicable to the Company's
officers for 1999 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 CCTV industry
and the Long Island area for similarly situated officers at comparable
companies. The overall level of performance of the Company is taken into account
but is not specifically related to the base salary of these officers. Also, the
Company has established an incentive compensation plan for all of the officers,
which provides a specified bonus to each officer upon the Company's achievement
of certain annual profitability targets.
The Compensation Committee grants options to 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 considered the
responsibility assumed by him in formulating and implementing a management and
long-term strategic plan.
- 21 -
This graph compares the return of $100 invested in the Company's stock on
October 1, 1993, with the return on the same investment in the AMEX Market Value
Index.
(The following table was represented by a chart in the printed material)
Vicon AMEX Market
Date Industries, Inc. Value Index
10/01/94 100 100
10/01/95 103 119
10/01/96 138 125
10/01/97 462 152
10/01/98 393 135
10/01/99 386 172
- 22 -
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 15, 1999 and the shares beneficially owned by the
Company's Directors and by all Officers and Directors as a group.
Name and Address Amount of
of Beneficial Owner Beneficial Ownership (1) % of Class
------------------- ------------------------ ----------
CBC Company, Ltd.
and affiliates
2-15-13 Tsukishima
Chuo-ku
Tokyo, Japan 104 543,715 11.4%
******************************************************************************
C/O Vicon Industries, Inc.
Kenneth M. Darby 250,092 5.2%
Chu S. Chun 204,507 (2) 4.3%
Arthur D. Roche 153,967 (3) 3.2%
W. Gregory Robertson 19,025 (4) *
Kazuyoshi Sudo 16,125 (5) *
Milton F. Gidge 15,825 (5) *
Peter F. Neumann 15,125 (4) *
Total all Officers and
Directors as a group (12 persons) 801,115 (6) 16.7%
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power over the shares of stock
owned.
(2) Mr. Chun has voting and dispositive power over 204,507 shares but disclaims
beneficial ownership as to all but 48,400 shares. 100,707 shares are owned
by the International Industries, Inc. Profit Sharing Plan and 55,400 shares
are owned by immediate family members.
(3) Includes currently exercisable options to purchase 14,000 shares.
(4) Includes currently exercisable options to purchase 12,125 shares.
(5) Includes currently exercisable options to purchase 7,125 shares.
(6) Includes currently exercisable options to purchase 141,500 shares.
- 23 -
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and CBC Company, Ltd.(CBC), a Japanese corporation which
beneficially owns 11.4% of the outstanding shares of the Company, have been
conducting business with each other for approximately twenty 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. Historically, CBC has provided
a significant amount of funding to the Company in the form of extended accounts
payable related to product purchases. CBC has also acted as the Company's
sourcing agent for the purchase of certain video products. In 1999, the Company
purchased approximately $5.4 million of video products from or through CBC. CBC
has the exclusive right to sell Vicon brand products in Japan and competes with
the Company in various markets, principally in the sale of video products and
systems. Additionally, the Company sells certain finished products to CBC under
private label for resale in Europe and Russia. Sales of all products to CBC were
$1.3 million in 1999. Kazuyoshi Sudo, a director of the Company and of CBC, is
Chief Executive Officer of CBC (America) Corp., a U.S.
subsidiary of CBC.
Mr. Chu S. Chun, a director who has beneficial voting control over 4.3% of the
Common Stock of the Company, also beneficially owns a controlling interest in
Chun Shin Electronics, Inc., (CSE), a 34% owned South Korean company that
manufactures and assembles certain Vicon products. CSE also sells various
security products, including the Company's products, principally within the
South Korean market. Mr. Chun is the President and has operating control of CSE.
In 1999, CSE sold approximately $5.7 million of products 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 $535,000 of products
directly from the Company during 1999 for resale to CSE.
- 24 -
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) (1) Financial Statements
Included in Part IV, Item 14:
Independent Auditors' Report
Financial Statements:
Consolidated Statements of Operations, fiscal years ended
September 30, 1999, 1998, and 1997
Consolidated Balance Sheets at September 30, 1999 and 1998
Consolidated Statements of Shareholders' Equity, fiscal years ended
September 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows, fiscal years ended September
30, 1999, 1998, and 1997
Notes to Consolidated Financial Statements, fiscal years ended
September 30, 1999, 1998, and 1997
(a) (2) Financial Statement Schedule
Included in Part IV, Item 14:
Schedule I - Valuation and Qualifying Accounts for the years
ended September 30, 1999, 1998, and 1997
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and, therefore,
have been omitted.
- 25 -
14(a)(3) Exhibits Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- ----------------
3 Articles of Incorporation and Incorporated by reference
By-Laws, as amended to the 1985
Annual Report on Form 10-K;
Form S-2 filed in
Registration Statement No.
33-10435 and Exhibit A, B
and C of the 1987 Proxy
Statement
10 Material Contracts
(.1) Employment Contract dated 10.1
October 1, 1999 between the
Registrant and Kenneth M. Darby
(.2) Employment Contract dated October Incorporated by reference
1, 1996 between Registrant to the 1996 Annual Report
and Arthur D. Roche on Form 10-K
(.3) Employment Agreement dated October 10.3
1, 1999 between Registrant and
John L. Eckman
(.4) Employment Agreement dated October 10.4
1, 1999 between Registrant and
Peter Horn
(.5) Employment Agreement dated October 10.5
1, 1999 between Registrant and
Yacov Pshtissky
(.6) Deferred Compensation Agreements Incorporated by
dated November 1, 1986 between the reference to the 1992
Registrant and Donald N. Horn and Annual Report on
Arthur V. Wallace Form 10K
(.7) Amended and restated 1986 Incorporated by
Incentive Stock Option Plan reference to the 1990
Annual Report on Form
10-K
(.8) 1994 Incentive Stock Option Plan Incorporated by
reference to the
1994 Annual Report
on Form 10-K
(.9) 1994 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1994 Annual Report
on Form 10-K
- 26 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- ----------------
(.10) 1996 Incentive Stock Option Plan Incorporated by
reference to the
1997 Annual Report
on Form 10-K
(.11) 1996 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the
1997 Annual Report
on Form 10-K
(.12) Commercial fixed rate loan Incorporated by
agreement between the Registrant reference to the
and National Westminster Bank PLC June 30, 1997 filing
dated April 8, 1997 on Form 10-Q
(.13) Loan Agreement between the Incorporated by
Registrant and KeyBank National reference to the
Association dated January 29, 1998 December 31, 1997
filing on Form 10-Q
(.14) Mortgage Note between the Incorporated by
Registrant and KeyBank National reference to the
Association dated January 29, 1998 December 31, 1997
filing on Form 10-Q
(.15) Term Loan Note between the Incorporated by
Registrant and KeyBank National reference to the
Association dated January 29, 1998 December 31, 1997
filing on Form 10-Q
(.16) Mortgage and Security Agreement Incorporated by
in the amount of $2,512,000 between reference to the
the Registrant and KeyBank National December 31, 1997
Association dated January 29, 1998 filing on Form 10-Q
(.17) Mortgage and Security Agreement Incorporated by
in the amount of $388,000 between reference to the
the Registrant and KeyBank National December 31, 1997
Association dated January 29, 1998 filing on Form 10-Q
(.18) 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
- 27 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- ----------------
(.19) 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
(.20) 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) Advice of borrowing terms Incorporated by
between the Registrant and reference to the
National Westminster Bank PLC June 30, 1999 filing
dated February 22, 1999 on Form 10-Q
(.23) Credit Agreement between the Incorporated by
Registrant and KeyBank reference to the
International dated June 30, 1998 filing
July 20, 1998 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 10.25
the Registrant and Isaac Gershoni
dated August 12, 1999
(.26) Escrow agreement among the 10.26
Registrant, Isaac Gershoni and
European American Bank dated
August 12, 1999
(.27) Loan Agreement between the 10.27
Registrant and KeyBank National
Association dated October 12, 1999
(.28) Mortgage Note between the 10.28
Registrant and KeyBank National
Association dated October 12, 1999
- 28 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- ---------------
(.29) Mortgage and Security Agreement 10.29
in the amount of $1,200,000 between
the Registrant and KeyBank National
Association dated October 12, 1999
(.30) 1999 Incentive Stock Option Plan 10.30
(.31) 1999 Non-Qualified Stock Option 10.31
22 Subsidiaries of the Registrant Incorporated by
reference to the Notes
to the Consolidated
Financial Statements
24 Independent Auditors' Consent 24
No other exhibits are required to be filed.
14(b) - REPORTS ON FORM 8-K
No reports on Form 8-K were required to be filed during the last quarter of the
period covered by this report.
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) and 333-30097 (filed June 26, 1997) and on Form S-2 No. 333-46841
(effective May 1, 1998):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
- 29 -
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 as listed in Part IV, item 14(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 14(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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vicon Industries,
Inc. and subsidiaries at September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999, in conformity with generally accepted accounting
principles. 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.
KPMG LLP
Melville, New York
November 30, 1999
- 30 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Net sales $73,414,046 $63,310,466 $51,518,940
Cost of sales 48,714,749 42,478,384 37,043,750
------------ ------------ ------------
Gross profit 24,699,297 20,832,082 14,475,190
Operating expenses:
Selling expense 12,201,943 9,536,988 7,957,340
General and administrative expense 4,604,702 4,426,107 3,767,529
----------- ----------- -----------
16,806,645 13,963,095 11,724,869
----------- ----------- -----------
Operating income 7,892,652 6,868,987 2,750,321
Interest expense 591,826 1,107,196 1,143,699
Other income (141,003) (48,190) (39,896)
----------- ----------- -----------
Income before income taxes 7,441,829 5,809,981 1,646,518
Income tax expense 2,681,628 - 82,000
----------- ----------- ------------
Net income $4,760,201 $5,809,981 $ 1,564,518
=========== =========== ============
Earnings per share:
Basic $1.05 $1.61 $ .56
===== ===== =====
Diluted $1.01 $1.50 $ .52
===== ===== =====
See accompanying notes to consolidated financial statements.
- 31 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1999 and 1998
ASSETS 1999 1998
- ------ ---- ----
Current Assets:
Cash $ 1,998,767 $4,854,557
Accounts receivable (less allowance of
$818,000 in 1999 and $694,000 in 1998) 13,771,411 12,758,080
Inventories:
Parts, components, and materials 2,647,781 2,944,303
Work-in-process 5,298,862 2,374,769
Finished products 13,381,900 12,079,335
----------- -----------
21,328,543 17,398,407
Deferred income taxes 1,303,791 1,079,736
Prepaid expenses 630,716 332,241
----------- -----------
Total current assets 39,033,228 36,423,021
Property, plant and equipment:
Land 1,195,248 1,204,498
Buildings and improvements 5,156,490 4,185,298
Machinery, equipment, and vehicles 8,188,688 7,312,594
----------- -----------
14,540,426 12,702,390
Less accumulated depreciation and amortization 6,486,937 5,565,352
8,053,489 7,137,038
Goodwill, net of accumulated amortization 1,768,056 37,724
Deferred income taxes 264,218 116,973
Other assets 780,028 671,645
----------- ----------
$49,899,019 $44,386,401
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under revolving credit agreement $ 374,806 $ 634,388
Current maturities of long-term debt 1,212,316 1,179,367
Accounts payable 4,022,892 3,133,505
Accrued compensation and employee benefits 2,233,441 1,955,462
Accrued expenses 1,749,395 1,316,855
Unearned service revenue 224,711 -
Income taxes payable 167,013 561,173
----------- -----------
Total current liabilities 9,984,574 8,780,750
Long-term debt 5,798,641 7,001,819
Unearned service revenue 639,169 -
Other long-term liabilities 728,284 767,528
Commitments and contingencies - Note 11
Shareholders' equity
Common stock, par value $.01 per share
authorized - 10,000,000 shares
issued 4,654,760 and 4,534,710 shares 46,547 45,347
Capital in excess of par value 21,343,676 20,947,515
Retained earnings 11,851,089 7,090,888
----------- -----------
33,241,312 28,083,750
Less treasury stock at cost, 74,948 shares
in 1999 and 62,517 shares in 1998 (508,745) (409,687)
Accumulated other comprehensive income 15,784 162,241
----------- ------------
Total shareholders' equity 32,748,351 27,836,304
----------- -----------
$49,899,019 $44,386,401
=========== ===========
See accompanying notes to consolidated financial statements
- 32 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended September 30, 1999, 1998, and 1997
Accumulated Total
Capital in Retained other share-
Common excess of earnings Treasury comprehensive holders'
Shares Stock par value (deficit) Stock income equity
------ ------ ----------- ----------- -------- ----------- -----------
Balance September 30, 1996 2,802,728 $28,027 $9,423,089 $ (283,611) $(82,901) $ (116,449) $ 8,968,155
Comprehensive income:
Net income - - - 1,564,518 - - 1,564,518
Foreign currency
translation adjustment - - - - - 149,678 149,678
Total comprehensive income - - - - - - 1,714,196
Stock bonus awarded from
treasury - - (28,926) - 82,901 - 53,975
Exercise of stock options 244,332 2,443 473,900 - (298,686) - 177,657
------------ ------ ---------- ----------- ----------- ------- -----------
Balance September 30, 1997 3,047,060 30,470 9,868,063 1,280,907 (298,686) 33,229 10,913,983
Comprehensive income:
Net income - - - 5,809,981 - - 5,809,981
Foreign currency
translation adjustment - - - - - 129,012 129,012
Total comprehensive income - - - - - - 5,938,993
Common stock offering, net
of issuance costs 1,371,200 13,712 10,787,204 - - - 10,800,916
Exercise of stock options 116,450 1,165 253,063 - (111,001) - 143,227
Tax benefit from exercise
of stock options - - 39,185 - - - 39,185
------------ ------ ---------- ----------- ----------- ------- -----------
Balance September 30, 1998 4,534,710 45,347 20,947,515 7,090,888 (409,687) 162,241 27,836,304
Comprehensive income:
Net income - - - 4,760,201 - - 4,760,201
Foreign currency
translation adjustment - - - - - (146,457) (146,457)
Total comprehensive income - - - - - - 4,613,744
Exercise of stock options 120,050 1,200 270,036 - (99,058) - 172,178
Tax benefit from exercise
of stock options - - 126,125 - - - 126,125
----------- ------- ----------- ----------- ----------- ------- -----------
Balance September 30, 1999 4,654,760 $46,547 $21,343,676 $11,851,089 $ (508,745) $15,784 $32,748,351
=========== ======= =========== =========== =========== ======= ===========
See accompanying notes to consolidated financial statements.
- 33 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years
Ended September 30, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income $ 4,760,201 $ 5,809,981 $1,564,518
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 913,977 788,349 783,859
Amortization of deferred gain
on sale and leaseback - - (433,993)
Deferred income taxes (371,300) (1,196,709) -
Stock bonus award - - 53,975
Foreign exchange gain - - (39,896)
Change in assets and liabilities:
Accounts receivable (403,392) (3,187,475) (820,556)
Inventories (3,668,388) (382,087) (1,880,543)
Prepaid expenses (301,590) (10,068) 230,371
Other assets (108,383) 228,772 4,910
Accounts payable 399,202 (403,060) (1,355,267)
Accrued compensation and employee benefits 166,317 842,476 731,397
Accrued expenses 414,896 188,370 144,276
Unearned service revenue 863,880 - -
Income taxes payable (482,201) 450,979 14,762
Other liabilities 60,976 179,256 (19,374)
--------- --------- ----------
Net cash provided by (used in)
operating activities 2,244,195 3,308,784 (1,021,561)
--------- --------- ----------
Cash flows from investing activities:
Capital expenditures, net of
minor disposals (1,747,030) (4,231,674) (925,024)
Acquisition, net of cash acquired (2,064,857) (158,925) -
----------- ----------- ------------
Net cash used in
investing activities (3,811,887) (4,390,599) (925,024)
----------- ----------- -----------
Cash flows from financing activities:
Repayments of U.S. term loan (900,000) - -
Proceeds from exercise of stock options 172,179 143,227 177,657
Increase (decrease) in borrowings under
short-term revolving credit agreement (238,003) 443,596 (831,275)
Repayments of long-term debt (275,016) (310,692) (480,392)
Borrowings under term loans - 4,500,000 810,000
Borrowings under mortgage loans - 2,900,000 -
Repayments of term loan to related party - (1,800,000) (200,000)
Net proceeds from sale of common stock - 10,800,916 -
(Decrease) increase in borrowings under
U.S. bank credit agreement - (6,003,416) 1,860,518
(Decrease) increase in interest-bearing
accounts payable to related party - (5,031,919) 627,693
----------- ----------- -----------
Net cash (used in) provided by
financing activities (1,240,840) 5,641,712 1,964,201
----------- ----------- -----------
Effect of exchange rate changes on cash (47,258) 7,080 64,088
----------- ----------- -----------
Net (decrease) increase in cash (2,855,790) 4,566,977 81,704
Cash at beginning of year 4,854,557 287,580 205,876
----------- ----------- -----------
Cash at end of year $ 1,998,767 $ 4,854,557 $ 287,580
=========== =========== ===========
Non-cash investing and financing activities:
Capital lease obligations - - $ 276,624
Cash paid during the fiscal
year for:
Income taxes $ 3,517,498 $ 64,523 $ 29,203
Interest $ 608,673 $ 1,265,243 $ 1,118,963
See accompanying notes to consolidated financial statements.
- 34 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 1999, 1998, and 1997
NOTE 1. Summary of Significant Accounting Policies
Nature of Operations
The Company designs, manufactures, assembles and markets closed circuit
television systems for use in security, surveillance, safety and control
purposes by end users. The Company markets its products worldwide directly to
installing dealers, systems integrators, government entities and distributors.
Principles of Consolidation
The consolidated financial statements include the accounts of Vicon Industries,
Inc. (the Company) and its wholly owned subsidiaries: Vicon Industries Limited
(formerly Vicon Industries (U.K.), Ltd.), TeleSite U.S.A., Inc. and subsidiary
(Q.S.R. 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
Revenues are recognized when products are sold and title is passed to a third
party, generally at the time of shipment. 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.
Inventories
Inventories are valued at the lower of cost (on a moving average basis which
approximates a first-in, first-out method) or market. When it is determined that
a product or product line will be sold below carrying cost, affected on hand
inventories are written down to their estimated net realizable values.
Long-Lived Assets
Property, plant, and equipment are recorded at cost and include expenditures for
replacements or major improvements. Depreciation, which includes amortization of
assets under capital leases, is computed by the straight-line method over the
estimated useful lives of the related assets. 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 (property, plant and equipment) for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
- 35 -
Goodwill
Goodwill represents the excess of purchase price over the fair value assigned to
net assets acquired and is being amortized on a straight-line basis over 10
years. Periodically, the Company reviews the recoverability of goodwill. The
measurement of possible impairment is based primarily on the ability to recover
the balance of goodwill from expected future operating cash flows on an
undiscounted basis. Accumulated amortization amounted to $41,668 and $5,389 at
September 30, 1999 and 1998, respectively.
Research and Development
Product research and development costs are principally charged to cost of sales
as incurred, and amounted to approximately $2,600,000, $2,200,000 and $2,000,000
in fiscal 1999, 1998, and 1997, respectively.
Earnings Per Share
The Financial Accounting Standards Board Statement of Financial Accounting
Standards (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 shares outstanding. Diluted EPS reflects the maximum
dilution that would have resulted from the exercise of stock options, warrants
and incremental shares issuable under a deferred compensation agreement (see
Note 10).
Foreign Currency Translation
Foreign currency translation is performed utilizing the current rate method
under which assets and liabilities are translated at the exchange rate on the
balance sheet date, while revenues, costs, and expenses are translated at the
average exchange rate for the reporting period. The resulting translation
adjustment of $16,000 and $162,000 at September 30, 1999 and 1998, respectively,
is recorded as a component of shareholders' equity.
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 6).
Derivative Instruments
The Company's derivative financial instruments consist of foreign currency
forward exchange contracts and interest rate swap agreements. The Company enters
into forward exchange contracts to hedge intercompany accounts receivable with
its U.K. based subsidiary and Japanese Yen denominated trade accounts payable
liabilities due inventory suppliers. The forward exchange contracts have
maturities of less than one year and require the Company to exchange currencies
at specified dates and rates. Gains and losses on these contracts are recorded
in cost of sales generally when incurred.
- 36 -
The Company entered into interest rate swap agreements with its bank to
effectively convert its floating rate long-term debt to fixed interest rates
(see Note 7). Such agreements mature in the same amounts and over the same
periods as the related debt. Outstanding notional amounts under such agreements
approximated $6.2 million at September 30, 1999. Gains and losses on these
contracts are recorded in interest expense when incurred.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
disclosure of the fair value of certain financial instruments. The carrying
amounts for accounts and other receivables, accounts payable and accrued
expenses approximate fair value because of the short-term maturity of these
instruments. The carrying amounts of the Company's long-term debt approximate
fair value. The carrying amounts of the Company's interest rate swap agreements
approximated their fair market value at September 30, 1999. This value
represents the estimated amount the Company would have to pay or would receive
if such agreements were terminated before maturity, principally resulting from
market interest rate changes. The fair value of forward exchange contracts is
estimated by obtaining quoted market prices. The contracted exchange rates on
committed forward exchange contracts at September 30, 1999 and 1998 approximated
market rates for similar term contracts (see Note 11).
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
Segment Data
On September 30, 1999, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their business segments in financial statements. The adoption of SFAS 131
did not have an effect on the Company's primary financial statements, but did
affect the disclosure of segment information contained in Note 8 of the Notes to
the Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to current year
presentation.
- 37 -
NOTE 2. Business Acquisitions
In August 1999, the Company acquired all of the outstanding shares of TeleSite
U.S.A., Inc., a manufacturer and distributor of remote video surveillance
systems, for $2.1 million. As additional compensation, the Company is liable to
pay the sellers an amount equal to 30% of the acquired operation's yearly
incremental consolidated sales for a three-year period commencing January 1,
2000. The acquisition has been accounted for as a purchase, and the results of
the operations of the acquired business have been included in the consolidated
financial statements since the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired of approximately $1.8
million has been recorded as goodwill and is being amortized on a straight-line
basis over 10 years.
Assuming this acquisition had occurred on October 1, 1997, consolidated net
sales would have been approximately $75.9 million for 1999 and $65.6 million for
1998. Consolidated pro forma net income and earnings per share would not have
been materially different from the reported amounts for 1999 and 1998. Such
unaudited pro forma amounts are not indicative of what the actual consolidated
results of operations might have been if the acquisition had been effective at
the beginning of 1998.
In July 1998, the Company increased its interest to 60% in Vicon Industries
(H.K.) Ltd. for approximately $197,000 in cash. The acquisition was accounted
for as a purchase with the assets, liabilities and operations of the acquired
business being consolidated with those of the Company since the acquisition
date. The excess cost over the fair value of net assets acquired and the results
of operations for this subsidiary for fiscal 1999 were not material.
NOTE 3. Investment in Affiliate
In September 1999, the Company's 50% ownership interest in Chun Shin
Electronics, Inc. (CSE), a South Korean company which manufactures and assembles
certain Vicon products, decreased to 34% with the merger of Chun Shin
Industries, Inc. (CSI) into CSE. CSI is the former 50% shareholder of CSE and
sells various security products, including the Company's products, principally
within the South Korean market. The Company has not recognized its interest in
the accumulated earnings of CSE since it does not have control over the
operations of CSE and does not have the ability to repatriate any of its
accumulated earnings. Net assets of CSE were approximately $5.6 million at
September 30, 1999.
Note 4. Public Offering
In May 1998, the Company sold 1,371,200 shares of its common stock in a public
offering, the net proceeds of which were approximately $10.8 million. The
proceeds were principally used to repay certain interest bearing borrowings.
- 38 -
NOTE 5. Short-Term Borrowings
Borrowings under the Company's short-term revolving credit agreement represent
borrowings by the Company's U.K. based subsidiary under a bank overdraft
facility. Such credit agreement provides for maximum borrowings of 600,000
pounds ($990,000) and is secured by all the assets of the subsidiary. Maximum
borrowings during 1999, 1998 and 1997 amounted to approximately $852,000,
$676,000 and $1,282,000, respectively. The weighted-average interest rate on
borrowings during these years was 7.80% in 1999, 9.33% in 1998 and 8.27% in
1997.
NOTE 6. Income Taxes
The components of income tax expense for the fiscal years indicated are as
follows:
1999 1998 1997
---- ---- ----
Federal $ 2,392,000 $ (515,000) $ 24,000
State 200,000 380,000 5,000
Foreign 90,000 135,000 53,000
------------- ----------- ------------
$ 2,682,000 $ - $ 82,000
============= =========== ============
A reconciliation of the U.S. statutory tax rate to the Company's effective tax
rate follows:
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
U.S. statutory tax $ 2,530,000 34.0% $1,975,000 34.0% $ 560,000 34.0%
Change in valuation
allowance - - (2,560,000) (44.0) (467,000) (28.3)
State tax, net of
federal benefit 132,000 1.8 251,000 4.3 - -
Other 20,000 0.2 334,000 5.7 (11,000) (0.7)
----------- ------ ---------- ------ --------- ------
Effective Tax Rate $ 2,682,000 36.0% $ - - % $ 82,000 5.0%
=========== ====== ========== ====== ========= ======
- 39 -
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at September 30, 1999 and 1998 are
presented below:
1999 1998
---- ----
Deferred tax assets:
Inventory reserves $1,009,000 $ 865,000
Deferred compensation accruals 179,000 186,000
Allowance for doubtful
accounts receivable 256,000 226,000
Unearned service revenue 128,000 -
Other 88,000 9,000
---------- ----------
Total deferred tax assets 1,660,000 1,286,000
Deferred tax liabilities:
Cash surrender value of officers'
life insurance 46,000 58,000
Other 46,000 31,000
---------- -----------
Total deferred tax liabilities 92,000 89,000
---------- -----------
Net deferred tax assets and liabilities $1,568,000 $ 1,197,000
---------- -----------
During fiscal year 1998, the Company fully utilized its remaining federal net
operating loss carryforward and reversed the remaining valuation allowance based
on management's assessment that it is reasonably assured that all net deferred
income tax assets will be realized in the future given the Company's present
level of earnings. Pretax domestic income amounted to approximately $7,385,000,
$5,462,000 and $1,414,000 in fiscal years 1999, 1998 and 1997, respectively.
Pretax foreign income amounted to approximately $57,000, $348,000 and $233,000
in fiscal years 1999, 1998 and 1997, respectively.
NOTE 7. Long-Term Debt
Long-term debt is comprised of the following at September 30, 1999 and 1998:
1999 1998
---- ----
U.S. bank term loan $3,525,000 $4,425,000
U.S. bank mortgage loan 2,679,000 2,820,900
U.K. bank term loan 625,626 729,584
Other 181,331 205,702
---------- ----------
7,010,957 8,181,186
Less installments due within one year 1,212,316 1,179,367
---------- ----------
$5,798,641 $7,001,819
========== ==========
In July 1998, the Company entered into a $14 million unsecured revolving credit
and term loan agreement with a bank. Such agreement includes a $7.5 million
revolving credit facility, which expires in July 2002, with an option to
increase the facility to $9.5 million at any time through July 2000. Borrowings
under this facility bear interest at the bank's prime rate minus 2% or, at the
Company's option, LIBOR plus 90 basis points (6.25% and 6.30% at September 30,
1999). At September 30, 1999 and 1998, there were no revolving credit borrowings
outstanding under this agreement.
- 40 -
The agreement also provided for a $4.5 million five-year term loan payable in
equal monthly installments through July 2003, with interest at LIBOR plus 100
basis points. The agreement contains restrictive covenants which, among other
things, require the Company to maintain certain levels of earnings and ratios of
debt service coverage and debt to tangible net worth. In September 1998, the
Company entered into an interest rate swap agreement with the same bank to
effectively convert the foregoing floating rate long-term loan to a fixed rate
loan. This agreement 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.
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 provides a $388,000 five-year
term loan payable in monthly installments through January 2003, with a $138,500
payment due at the end of the term. Both loans bear interest at the bank's prime
rate minus 1.35%. The loans are secured by a first mortgage on the property and
fixtures and contain restrictive covenants that, among other things, require the
Company to maintain certain levels of earnings and ratios of debt service
coverage and debt to tangible net worth. At the same time, the Company entered
into interest rate swap agreements with the same bank to effectively convert the
foregoing floating rate long-term loans to fixed rate loans. These agreements
fix the Company's interest rate on its $2,512,000 mortgage loan at 7.79% and its
$388,000 term loan at 7.7%. The interest rate swap agreements mature in the same
amounts and over the same periods as the related mortgage and term loans.
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 or, at the Company's option, LIBOR
plus 100 basis points and contains the same covenants as included in the
existing mortgage loans.
In April 1997, the Company's U.K. based subsidiary entered into a ten-year
500,000 pound sterling (approximately $825,000) bank term loan. The term loan is
payable in equal monthly installments with interest at a fixed rate of 9%. The
loan is secured by a first mortgage on the subsidiary's property and contains
restrictive covenants which, among other things, require the subsidiary to
maintain certain levels of net worth, earnings and debt service coverage.
Long-term debt maturing in each of the fiscal years subsequent to September 30,
1999 approximates $1,212,000 in 2000, $1,216,000 in 2001, $1,199,000 in 2002,
$1,197,000 in 2003, $438,000 in 2004 and $1,749,000 thereafter.
At September 30, 1999, future minimum annual rental commitments under
non-cancelable capital lease obligations were as follows: $69,334 per year in
2000 and 2001, and $33,454 in 2002.
- 41 -
NOTE 8. Segment and Related Information
The Company adopted SFAS 131, "Disclosures About Segments of an Enterprise and
Related Information" in 1999, which changes the way the Company reports
information about its operating segments. The information for 1998 and 1997 has
been restated from the prior year's presentation in order to conform to the 1999
presentation.
The Company operates in one industry which encompasses the design, manufacture,
assembly and marketing of closed-circuit 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
(U.K.) based operations. Its U.S. based operations consist of Vicon Industries,
Inc., the Company's corporate headquarters and principal operating entity. Its
U.K. 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 manufacturer and
distributor of remote video surveillance 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, 1999, 1998
and 1997 is as follows:
1999 U.S. U.K. Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $62,939,000 $8,515,000 $1,960,000 $ - $73,414,000
Intersegment
net sales 5,334,000 - 36,000 - 5,370,000
Net income (loss) 4,787,000 217,000 (194,000) (50,000) 4,760,000
Interest expense 506,000 174,000 7,000 (95,000) 592,000
Interest income 227,000 - - (86,000) 141,000
Depreciation and
amortization 680,000 163,000 35,000 36,000 914,000
Total assets 45,025,000 5,912,000 2,904,000 (3,942,000) 49,899,000
Capital expenditures $ 1,469,000 $ 177,000 $ 101,000 - $ 1,747,000
1998 U.S. U.K. Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $54,184,000 $8,542,000 $ 584,000 $ - $63,310,000
Intersegment
net sales 4,668,000 - - - 4,668,000
Net income (loss) 5,597,000 349,000 41,000 (177,000) 5,810,000
Interest expense 1,024,000 187,000 - (104,000) 1,107,000
Interest income 164,000 - - (99,000) 65,000
Depreciation and
amortization 652,000 131,000 - 5,000 788,000
Total assets 40,214,000 5,575,000 1,181,000 (2,584,000) 44,386,000
Capital expenditures $ 4,037,000 $ 191,000 $ 4,000 - $ 4,232,000
- 42 -
1997 U.S. U.K. Other Consolidating Totals
- ---- ---------- ---------- --------- ------------- ------
Net sales to
external customers $43,605,000 $7,914,000 $ - $ - $51,519,000
Intersegment
net sales 3,344,000 - - - 3,344,000
Net income (loss) 1,385,000 183,000 - (3,000) 1,565,000
Interest expense 1,041,000 191,000 - (88,000) 1,144,000
Interest income 79,000 - - (79,000) -
Depreciation and
amortization 639,000 145,000 - - 784,000
Total assets 28,209,000 4,938,000 - (1,947,000) 31,200,000
Capital expenditures $ 819,000 $ 106,000 $ - - $ 925,000
The consolidating segment 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, 1999, 1998, and 1997 are as follows:
1999 1998 1997
---- ---- ----
Net sales
U.S. $63,236,000 $54,184,000 $43,605,000
Foreign 10,178,000 9,126,000 7,914,000
----------- ----------- ----------
Total $73,414,000 $63,310,000 $51,519,000
Long-lived assets
U.S. $ 6,234,000 $ 5,443,000 $ 2,059,000
Foreign 1,819,000 1,694,000 1,433,000
---------- ----------- ----------
Total $ 8,053,000 $ 7,137,000 $ 3,492,000
U.S. sales include $5,236,000, $9,853,000 and $10,747,000 for export in fiscal
years 1999, 1998, and 1997, respectively. Indirect sales to the United States
Postal Service under a national supply contract approximated $22.7 million and
$12.0 million in fiscal 1999 and 1998, respectively.
NOTE 9. Stock Options and Stock Purchase Warrants
The Company maintains stock option plans which include both incentive and
non-qualified options covering a total of 430,532 shares of common stock
reserved for issuance to key employees, including officers and directors. Such
amount includes a total of 100,000 options reserved for issuance under the 1999
Incentive Stock Option Plan, as well as a total of 100,000 options reserved for
issuance under the 1999 Non-Qualified Stock Option Plan, approved by the
shareholders in April 1999. 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 shares based on the fair market value of such shares at the
date of surrender. During fiscal 1999 and 1998, a total of 12,431 and 16,565
common shares, respectively, were surrendered pursuant to stock option
exercises, which are held in treasury. There were 59,885 shares available for
grant at September 30, 1999.
- 43 -
Changes in outstanding stock options for the three years ended September 30,
1999 are as follows:
Weighted
Number Average
of Exercise
Shares Price
- -------------------------------------------------------------------
Balance - September 30, 1996 444,649 $1.83
Options granted 241,000 $2.77
Options exercised (244,332) $1.95
Options forfeited (21,820) $2.35
- -------------------------------------------------------------------
Balance - September 30, 1997 419,497 $2.27
Options granted 48,250 $6.98
Options exercised (116,450) $2.18
Options forfeited (1,400) $6.50
- -------------------------------------------------------------------
Balance - September 30, 1998 349,897 $2.94
Options granted 143,000 $7.50
Options exercised (120,050) $2.26
Options forfeited (2,200) $7.00
- -------------------------------------------------------------------
Balance - September 30, 1999 370,647 $4.89
Price range $1.69 - $3.06
(weighted-average contractual 183,897 $2.36
life of 1.9 years)
Price range $6.75 - $8.19
(weighted-average contractual 186,750 $7.38
life of 5.2 years)
- -------------------------------------------------------------------
Exercisable options -
September 30, 1997 149,838 $1.96
September 30, 1998 253,123 $2.47
September 30, 1999 210,147 $2.94
- -------------------------------------------------------------------
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 1999,
1998 and 1997:
1999 1998 1997
---- ---- ----
- ------------------------------------------------------------------------------
Risk-free interest rate 5.0% 5.0% 6.0%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 59.0% 67.3% 52.7%
Weighted average expected life 4 years 3 years 3 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.
- 44 -
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income and earnings per share are as follows:
1999 1998 1997
---- ---- ----
Net income:
As reported $4,760,201 $5,809,981 $1,564,518
Pro forma $4,646,938 $5,638,166 $1,364,368
Earnings per share:
As reported
Basic $1.05 $1.61 $ .56
Diluted $1.01 $1.50 $ .52
Pro forma
Basic $1.03 $1.56 $ .49
Diluted $ .98 $1.46 $ .45
Weighted average fair value
of options granted $3.74 $3.34 $1.13
Pro forma earnings reflect only options granted since October 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to October 1, 1995 was
not considered.
In connection with the public offering, 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 10. Earnings Per Share
The following table provides the components of the basic and diluted earnings
per share (EPS) computations:
1999 1998 1997
---- ---- ----
Basic EPS Computation
Net income $4,760,201 $5,809,981 $1,564,518
Weighted average shares
outstanding 4,519,344 3,605,307 2,803,805
Basic earnings per share $ 1.05 $ 1.61 $ .56
========== ========== ==========
Diluted EPS Computation
Net income $4,760,201 $5,809,981 $1,564,518
Weighted average shares
outstanding 4,519,344 3,605,307 2,803,805
Stock options 185,940 260,425 218,191
Stock compensation arrangement 13,075 7,343 -
--------- --------- ---------
Diluted shares outstanding 4,718,358 3,873,075 3,021,996
Diluted earnings per share $ 1.01 $ 1.50 $ .52
========== ========== ==========
- 45 -
NOTE 11. Commitments
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 nine years, generally provide for renewal options at
specified rental amounts. The aggregate operating lease commitment at September
30, 1999 was $522,000 with minimum rentals for the fiscal years shown as
follows: 2000 - $158,000; 2001 - $136,000; 2002 - $73,000; 2003 - $27,000; 2004
- - $25,000; 2005 and thereafter - $103,000.
The Company is a party to employment agreements with four 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, 1999 was approximately $1,605,000. The total compensation payable
under these agreements, absent a change in control, aggregated $2,215,000 at
September 30, 1999. The Company is also a party to insured deferred compensation
agreements with two retired officers. The aggregate remaining compensation
payments of approximately $495,000 as of September 30, 1999 are subject to the
individuals' adherence to certain non-compete covenants, and are payable in
monthly installments through December 2003. In October 1997, 1998 and 1999, the
Company's Chief Executive Officer was provided a deferred compensation benefit
of 45,952, 16,565 and 8,130 shares, respectively, of common stock currently held
by the Company in treasury. Such shares vest upon the expiration of the
executive's employment agreement in October 2004, or 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 at the
dates of grant, which is being amortized on the straight-line method over the
term of the employment agreement.
Sales to customers from the Company's U.K. based subsidiary are denominated in
British pounds sterling. The Company attempts to minimize its currency exposure
on these sales through the purchase of forward exchange contracts to cover its
billings to this subsidiary. These contracts generally involve the exchange of
one currency for another at a future date and specified exchange rate. At
September 30, 1999 and 1998, the Company had approximately $1,550,000 and
$2,200,000, respectively, 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, 1999, the
Company had approximately $1,059,000 of outstanding forward exchange contracts
to purchase Japanese yen. At September 30, 1998, the Company did not have any
forward exchange contracts to purchase Japanese yen.
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 is reviewing
the claim and believes that it has good defenses in this matter. No assurance
can be given that this matter will be resolved in the Company's favor and no
reasonable estimate of potential loss, if any, can be made at this time.
- 46 -
NOTE 12. Related Party Transactions
As of September 30, 1999, CBC Company, Ltd. and affiliates ("CBC") owned
approximately 12.0% of the Company's outstanding common stock. The Company,
which has been conducting business with CBC for approximately 20 years, imports
certain finished products and components through CBC and also sells its products
to CBC who resells the products in certain Asian and European markets. The
Company purchased approximately $5.4 million, $5.3 million and $7.1 million of
products and components from CBC in fiscal years 1999, 1998, and 1997,
respectively, and the Company sold $1.3 million, $4.1 million and $2.7 million
of product to CBC for distribution in fiscal years 1999, 1998, and 1997,
respectively. At September 30, 1999 and 1998, the Company owed $955,000 and
$652,000, respectively, to CBC and CBC owed $27,000 and $491,000, respectively,
to the Company resulting from purchases of products.
As of September 30, 1999, Mr. Chu S. Chun had voting control over approximately
4.5% of the Company's outstanding common stock. Mr. Chun beneficially owns a
controlling interest in Chun Shin Electronics, Inc. (CSE), a South Korean
supplier of certain of the Company's 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 1999 and 1998, the Company purchased
approximately $5.7 million and $8.0 million of products from CSE through I.I.I.
under this agreement. In addition, the Company sold approximately $535,000 and
$344,000 of its products to I.I.I. in 1999 and 1998, respectively, for resale to
CSE. At September 30, 1999 and 1998, I.I.I. owed the Company approximately
$238,000 and $59,000, respectively.
- 47 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
Earnings Per Share
------------------
Quarter Net Gross Net
Ended Sales Profit Income Basic Diluted
------- ----- ------ ------ ----- -------
Fiscal 1999
December $17,128,000 $ 5,609,000 $ 1,060,000 $ .24 $ .23
March 17,500,000 5,895,000 1,161,000 .26 .25
June 19,493,000 6,614,000 1,346,000 .30 .28
September 19,293,000 6,581,000 1,193,000 .26 .25
----------- ----------- ----------- ----- -----
Total $73,414,000 $24,699,000 $ 4,760,000 $1.05 $1.01
=========== =========== =========== ===== =====
Fiscal 1998
December $14,874,000 $4,628,000 $ 1,009,000 $ .34 $ .31
March 14,731,000 4,826,000 1,154,000 .38 .35
June 16,106,000 5,451,000 1,575,000 .40 .38
September 17,599,000 5,927,000 2,072,000 .46 .44
----------- ----------- ----------- ----- -----
Total $63,310,000 $20,832,000 $ 5,810,000 $1.61 $1.50
=========== =========== =========== ===== =====
The Company has not declared or paid cash dividends on its common stock for any
of the foregoing periods. Additionally, certain loan agreements restrict the
payment of any cash dividends in future 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.
- 48 -
SCHEDULE I
VICON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 1999, 1998, and 1997
Balance at Charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
----------- --------- ---------- ---------- ---------
Reserves and allowances
deducted from asset
accounts:
Allowance for uncollectible
accounts:
September 30, 1999 $694,000 $290,000 $166,000 $818,000
======== ======== ======== ========
September 30, 1998 $493,000 $285,000 $ 84,000 $694,000
======== ======== ======== ========
September 30, 1997 $396,000 $273,000 $176,000 $493,000
======== ======== ======== ========
- 49 -
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 Kenneth M. Darby By John M. Badke
------------------------- -------------------------
Kenneth M. Darby John M. Badke
Chairman Vice President, Finance
(Chief Executive Officer) (Chief Financial Officer)
December 29, 1999
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.
Kenneth M. Darby December 29, 1999
- --------------------- ---------------------
Kenneth M. Darby Chairman and CEO Date
Chu S. Chun December 29, 1999
- --------------------- ---------------------
Chu S. Chun Director Date
Milton F. Gidge December 29, 1999
- --------------------- ---------------------
Milton F. Gidge Director Date
Peter F. Neumann December 29, 1999
- --------------------- ---------------------
Peter F. Neumann Director Date
W. Gregory Robertson December 29, 1999
- --------------------- ---------------------
W. Gregory Robertson Director Date
Arthur D. Roche December 29, 1999
- --------------------- ---------------------
Arthur D. Roche Director Date
Kazuyoshi Sudo December 29, 1999
- --------------------- ---------------------
Kazuyoshi Sudo Director Date
- 50 -
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 Vice President, Finance
(Chief Executive Officer) (Chief Financial Officer)
December 29, 1999
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 29, 1999
- --------------------- ---------------------
Kenneth M. Darby Chairman and CEO Date
December 29, 1999
- --------------------- ---------------------
Chu S. Chun Director Date
December 29, 1999
- --------------------- ---------------------
Milton F. Gidge Director Date
December 29, 1999
- --------------------- ---------------------
Peter F. Neumann Director Date
December 29, 1999
- --------------------- ---------------------
W. Gregory Robertson Director Date
December 29, 1999
- --------------------- ---------------------
Arthur D. Roche Director Date
December 29, 1999
- --------------------- ---------------------
Kazuyoshi Sudo Director Date
- 50 -