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EX-23 - EXHIBIT 23 - VICON INDUSTRIES INC /NY/f10k-ex23.htm
EX-31.2 - EXHIBIT 31.2 - VICON INDUSTRIES INC /NY/f10k_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - VICON INDUSTRIES INC /NY/f10k_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - VICON INDUSTRIES INC /NY/f10k_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - VICON INDUSTRIES INC /NY/f10k_ex32-2.htm
EX-10.10 - EXHIBIT 10.10 - VICON INDUSTRIES INC /NY/f10k_ex10-10.htm

 
 

 

UNITED STATES
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, 2010

Commission File No.  1-7939
 

 
VICON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

NEW YORK
11-2160665
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer identification No.)
   
89 Arkay Drive, Hauppauge, New York
11788
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:  (631) 952-2288

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:
 
 
Common Stock, Par Value $.01
NYSE Amex
(Title of class)
(Name of each exchange on which registered)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
     Yes      No   X   
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                                                                               
 
Yes      No    X  
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)                             
 
Yes      No     
 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
Large Accelerated Filer        Accelerated Filer        Non-Accelerated Filer         Smaller reporting company     X  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)                                      
 
Yes      No   X  
                                                                     
The aggregate market value of voting and non-voting Common Stock held by non-affiliates of the registrant based upon the closing price of $5.07 per share as of March 31, 2010 was approximately $11,099,000.

The number of shares outstanding of the registrant's Common Stock as of December 15, 2010 was 4,480,836.

 
 

 

PART I
ITEM 1 - BUSINESS

General

Vicon Industries, Inc. (“the Company”), incorporated in 1967, designs, manufactures, assembles and markets a wide range of video systems and system components used for security, surveillance, safety and control purposes by a broad group of end users.  A video system is typically a private network that can transmit and receive video, audio and data signals in accordance with the operational needs of the user.  The Company's primary business focus is the design of network video systems that it produces and sells worldwide, primarily to installing dealers, system integrators, government entities and security products distributors.

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

Products

The Company’s product line consists of various elements of a video system, beginning with a physical security information management application (PSIM) which manages network devices including cameras.  The Company also produces video system edge devices such as video encoders, decoders, network/digital/hybrid video recorders (NVR’s and DVR’s), analog and IP fixed position or robotic cameras, megapixel digital cameras, matrix video switchers and system controls.  The Company provides a comprehensive line of products due to the many varied climatic and operational environments in which the products are expected to perform.  In addition to selling from a standard catalog line, the Company at times produces to specification or will modify an existing product to meet customer requirements.  The Company maintains an OEM agreement with an access control producer to supply such products on an integrated basis with its video systems.

The Company’s products range from a simple camera mounting bracket to a large network camera control, transmission, recording, storage and virtual matrix switching system.  The Company’s sales are concentrated principally among its network video products (ViconNet-software application and Kollector-NVR’s and DVR’s) and dome camera (Surveyor) product lines.

Marketing

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

 
2

 
The Company’s products are utilized 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, agency facilities, prisons, and military installations; (3) financial institutions, such as banks, clearing houses, brokerage firms and depositories, for security purposes; (4) transportation departments for highway traffic control, bridge and tunnel monitoring, and airport, subway, bus and seaport security and surveillance; (5) gaming casinos, where video surveillance is often mandated by regulatory authorities; (6) health care facilities, such as hospitals; and (7) institutions of education, such as schools and universities.

The Company’s principal sales offices are located in Hauppauge, New York; Fareham, England; Zaventem, Belgium; and Neumunster, Germany.

International Sales

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

Export sales and sales from the Company’s foreign subsidiaries amounted to $20.0 million, $28.4 million and $32.0 million or 41%, 47% and 48% of consolidated net sales in fiscal years 2010, 2009, and 2008, respectively.  The Company’s principal foreign markets are the U.K., Europe, Middle East and the Pacific Rim, which together accounted for approximately 83% of international sales in fiscal 2010.

Competition

The Company operates in a highly competitive marketplace both domestically and internationally.  The Company competes by providing high-end video systems and system components that incorporate broad capability together with high levels of customer service and technical support.  Generally, the Company does not compete based on price alone.

The Company’s principal video systems competitors include the following companies or their affiliates: Matsushita Electric Corp. (Panasonic), Sony Corporation, Samsung, Pelco Sales Company (a division of Schneider Electric), Bosch Security Systems, Inc., Sensormatic Electronics Corp. (a division of Tyco International), UTC Fire & Security (a division of United Technologies), AXIS Communications, On-Net Surveillance Systems, Inc., Milestone Systems and Honeywell Security Systems.  Many additional companies, both domestic and international, produce products that compete against one or more of the Company’s product lines.  Many of the Company’s principal competitors are larger companies whose financial resources and scope of operations are substantially greater than the Company’s.

Engineering and Development

The Company’s engineering and development is directed principally on new and improved video systems and system components.  In recent years, the trend of product development and demand within the video security and surveillance market has been toward enhanced software applications involving the compression, analysis, transmission, storage, manipulation, imaging and display of digital video over IP networks.  As the demands of the Company’s target market segment require the Company to keep pace with changes in technology, the Company has focused its engineering effort in these developing areas.  Development projects are chosen and prioritized based on competitor threats, focus group feedback, the Company’s analysis as to the needs of the marketplace, anticipated technological advances and market research.

 
3

 
At September 30, 2010, the Company employed a total of 34 engineers in the following areas: software development, mechanical design, manufacturing/testing and electrical and circuit design.  Engineering and development expense amounted to approximately 11%, 9% and 8% of net sales in fiscal years 2010, 2009 and 2008, respectively.

Source and Availability of Raw Materials

The Company relies upon independent manufacturers and suppliers to manufacture and assemble most of its proprietary products and expects to continue to rely on such entities in the future.  The Company’s relationships with certain of its independent manufacturers, assemblers and suppliers are not covered by formal contractual agreements.

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

Intellectual Property

The Company owns a limited number of design and utility patents expiring at various times.  The Company owns certain trademarks and several other trademark applications are pending both in the United States and in Europe.  Most of the Company’s key products utilize proprietary software which is protected by copyright.  The Company considers its software to be unique and is a principal element in the differentiation of the Company’s products from its competition.  However, the laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as the laws of the U.S.  The Company has no significant licenses, franchises or concessions with respect to any of its products or business dealings.  In addition, the Company does not believe its limited number of patents or its lack of licenses, franchises and concessions to be of substantial significance.  The Company is a defendant in a patent infringement suit as discussed in “Item 3 - Legal Proceedings”, the outcome of which could possibly have a material effect on the Company’s business.

Inventories

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

Backlog

The backlog of orders believed to be firm as of September 30, 2010 and 2009 was approximately $3.0 million and $2.8 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.

 
4

 

Employees

At September 30, 2010, the Company employed 180 full-time employees, of whom 8 are officers, 73 are in sales and technical service capacities, 34 are in engineering and test, 42 are in operations and production and 23 are in administration.  At September 30, 2009, the Company employed 192 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 1A – RISK FACTORS

The Company designs, manufactures and markets a wide range of video systems and components worldwide and is subject to all business risks that similar technology companies and all other companies encounter in their operations.  Market risks that pertain particularly to the Company are discussed elsewhere in this Form 10-K under Item 1 – Business; Item 3 – Legal Proceedings; Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Item 7A – Quantitative and Qualitative Disclosures about Market Risk.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

ITEM 2 - PROPERTIES

The Company principally operates from an 80,000 square-foot facility located at 89 Arkay Drive, Hauppauge, New York, which it owns.  The Company also owns a 14,000 square-foot sales, service and warehouse facility in southern England which services the U.K., Europe and the Middle East.  In addition, the Company operates under leases from offices in Yavne, Israel; Neumunster, Germany; and various local sales offices throughout Europe.  The Company believes that its facilities are adequate to meet its current and foreseeable operating needs.

ITEM 3 - LEGAL PROCEEDINGS

The Company is one of several defendants in a patent infringement suit commenced by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District Court for the Western District of Tennessee.  The alleged infringement by the Company relates to its dome camera and system controller product lines, among other products that collectively represent significant sales to the Company.  Among other things, the suit seeks past damages, enhanced damages and attorney’s fees. The Company and its outside patent counsel believe that the complaint against the Company is without merit and is vigorously defending itself in a joint defense with certain other named defendants. In January 2006, the Company received the plaintiff’s claim for past damages through December 31, 2005 that approximated $11.7 million plus pre-judgment interest. Such damages claim was based upon $233 million of alleged infringing product sales for the period at a royalty rate of 5%.

In January 2005, the Company petitioned the U.S. Patent and Trademark Office (USPTO) to reexamine the plaintiff’s patent, believing it to be invalid.  In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff’s patent claims asserted against the Company citing the existence of prior art of the Company and another defendant.  On June 30, 2006, the Federal District Court granted the defendants’ motion for continuance (delay) of the trial, pending the outcome of the USPTO’s reexamination proceedings.  In February 2007, the USPTO issued a Final Rejection of the six claims in the plaintiff’s patent asserted against the Company and in May 2007, the plaintiff appealed the examiner’s decision to the USPTO Board of Patent Appeals and Interferences (BPAI). On August 16, 2010, the BPAI issued its decision to affirm the USPTO examiner’s finding of invalidity of two of the asserted claims and reversed the examiner’s finding of invalidity of the other three claims. In August 2010, Federal District Court granted the plaintiff’s motion to reopen the case, which has been scheduled for trial in early 2012. The Company believes that it has substantial non-infringement and invalidity defenses to the plaintiff’s remaining claims and has recently filed a petition with the USPTO to reexamine such claims based upon newly discovered prior art.

 
5

 
The Company believes that the plaintiff’s damages claims through 2005 are without merit and has not yet received their subsequent damages claims through the expiration of their patent in May 2009.  Due to the inherent uncertainty of a jury trial and technical nature of this matter, the Company has been unable to reasonably estimate a range of possible loss, if any, at this time.  The Company has held settlement discussions with the plaintiff in the past with no result and may continue to do so in the future. However, there is no assurance that any settlement can be reached.

Notwithstanding any of the foregoing, the matter could ultimately result in a liability that is material to the Company’s results of operations and financial position. The Company has been informed by its legal counsel that the estimated future cost of this litigation could approximate $1.7 million through trial, including legal and expert witness representation.

ITEM 4 – REMOVED AND RESERVED


PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s stock is traded on the NYSE 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:


Quarter Ended
 
High
   
Low
 
             
Fiscal 2010
           
   December
    7.50       5.23  
   March
    5.95       5.00  
   June
    5.50       4.01  
   September
    4.77       3.60  
                 
Fiscal 2009
               
   December
    6.00       3.54  
   March
    6.45       4.40  
   June
    6.07       4.52  
   September
    6.76       5.11  
                 

The last sale price of the Company’s Common Stock on December 15, 2010 as reported on the NYSE Amex was $4.22 per share.  As of December 15, 2010, there were approximately 145 shareholders of record.

The Company has never declared or paid cash dividends on its Common Stock and anticipates that any earnings in the foreseeable future will be retained to finance the growth and development of its business.

 
6

 
In December 2008, the Company’s Board of Directors authorized the purchase of up to $1 million worth of shares of the Company’s outstanding common stock.  In December 2009, the Board of Directors authorized the purchase of an additional $1.5 million worth of shares of the Company’s outstanding common stock.  The following table summarizes repurchases of common stock for the three month period ended September 30, 2010:

   
Total
             
   
Number
   
Average
   
Approximate Dollar Value
 
   
of Shares
   
Price Paid
   
Of Shares that May Yet Be
 
Period
 
Purchased (1)
   
Per Share
   
Purchased Under the Programs
 
                   
07/01/10-07/31/10
    5,700     $ 4.20     $ 1,329,837  
08/01/10-08/31/10
    -     $ -     $ 1,329,837  
09/01/10-09/30/10
    11,000     $ 4.01     $ 1,285,762  
Total
    16,700     $ 4.07          
 
 

(1)  All repurchases were executed in open market transactions.



ITEM 6 - SELECTED FINANCIAL DATA
(in thousands, except per share data)

FISCAL YEAR
 
2010
   
2009
   
2008
   
2007
   
2006
 
                               
Net sales
  $ 48,681     $ 60,445     $ 66,911     $ 69,073     $ 56,279  
Gross profit
    20,498       27,293       30,422       29,386       22,094  
Operating income (loss)
    (1,932 )     3,031       4,389       4,682       (367 )
Income (loss) before income taxes
    (1,743 )     3,219       4,589       4,921       (397 )
Net income (loss)
    (1,250 )     2,017       2,839       7,886       (547 )
Net income (loss) per share:
                                       
     Basic
    (.28 )     .44       .59       1.67       (.12 )
     Diluted
    (.28 )     .43       .57       1.59       (.12 )
Total assets
    44,016       47,316       46,964       45,841       35,955  
Long-term debt
    -       -       -       -       1,740  
Working capital
    28,950       30,845       29,181       26,041       20,181  
Property, plant and equipment (net)
    4,624       5,018       5,301       5,762       6,229  




 
7

 

 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
General
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements for the periods indicated, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, bad debts, product warranties, inventories, long lived assets, income taxes and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors including general market conditions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Results for the periods reported herein are not necessarily indicative of results that may be expected in future periods.
 
 
Overview
 
 
The Company designs, manufactures, assembles and markets a wide range of video systems and system components used for security, surveillance, safety and communication purposes by a broad group of end users worldwide. The Company’s product line consists of various elements of a video system, including digital video and network video recorders, video encoders, decoders, servers and related physical security information management software, analog, megapixel and IP fixed and robotic cameras, virtual and analogue matrix video switchers and controls, and system peripherals.
 
 
The Company sells high-end video systems and system components in a highly competitive worldwide marketplace principally to authorized security dealers and system integrators. Such dealers and integrators typically resell the Company’s products directly to end users, among other services. The Company’s sales are principally project based and are largely dependent upon winning projects, construction activities and the timing of funding.  Sales will vary from period to period depending upon many factors including seasonal and geographic trends in construction activities and the timing of deliveries due to changes in project schedules and funding. The Company does not maintain a sizable backlog as its customer orders are typically deliverable within three months or often upon receipt of order. The Company’s operating cost structure is principally fixed and therefore profitability is largely dependent upon sales levels. In fiscal 2010 and 2009, the Company’s sales levels were impacted by the worldwide economic downturn as capital expenditure projects were cancelled and funding for new construction and renovation projects weakened.  The impact of such sales declines has had an adverse impact on the Company’s financial results for these periods.
 
 
The Company competes in a market of rapid technology shifts which influence the performance capability of security systems.  As a result, the Company spends a significant amount on new product development. In fiscal 2010 and 2009, the Company incurred $5.5 million and $5.4 million of engineering and development expense or 11% and 9% of net sales, respectively. The Company’s expenditures for product development are substantially less than its larger competitors.  In recent years, the rapid pace of technology changes has placed increased burden on the Company’s development resources which has necessitated an increase in annual expense for product development.  Further, the Company’s sales effort requires a high level of customer service and technical support for its products.  Customer support levels were maintained during fiscal 2010 despite a reduction in sales and such expenditure levels are expected to continue in fiscal 2011.  The Company has considered various strategic initiatives that may augment or supplement its present product offerings and technology platforms, among other benefits.
 
 
 
8

 
The Company has a foreign sales and distribution subsidiary in Europe that conducts business in British pounds and Euros that represented approximately 31% of the Company’s consolidated sales for fiscal 2010. It also has an Israel based engineering and development subsidiary that incurs a majority of its operating expenses in Shekels that represented approximately 18% of the Company’s operating expenses for fiscal 2010. During fiscal 2009, there were material changes in exchange rates between world currencies that affected the Company’s financial statements. In 2009, U.S. dollar gained on average 21% against the British pound, 10% against the Euro and 8% against the Shekel compared with 2008. This served to reduce the Company’s consolidated reported sales and costs in these currencies on a translation basis, increase the cost of European subsidiaries U.S. dollar based sourced product costs and incur company-wide negative result impacts on the settlements of transactional balances between companies. During fiscal 2010, such world currency exchange rate changes moderated, which significantly lessened the Company’s currency impacts compared with 2009. The Company has also historically secured selected forward currency exchange contracts to help stabilize the impact of changing exchange rates and will continue to do so in fiscal 2011.
 

RESULTS OF OPERATIONS

Fiscal Year 2010 Compared with 2009

Net sales for 2010 decreased $11.7 million (19%) to $48.7 million compared with $60.4 million in 2009.  Domestic sales decreased $3.3 million (11%) to $28.7 million compared with $32.0 million in 2009 while international sales decreased $8.4 million (30%) to $20.0 million compared with $28.4 million in 2009.  Order intake for 2010 decreased $10.4 million (18%) to $48.9 million compared with $59.3 million in 2009.  The sales and order intake decreases across all business segments was due to weakening worldwide economic conditions as funding for new construction and renovation projects slowed during 2010.  The backlog of unfilled orders was $3.0 million at September 30, 2010 compared with $2.8 million at September 30, 2009.

Gross profit margins for 2010 decreased to 42.1% compared with 45.2% in 2009.  The decrease in margins includes the impact of largely fixed indirect production costs relative to the current year’s reduced sales levels.  In addition, the current year reflects reduced margins as a result of competitive pressures and less favorable product mix on certain large project sales.

Operating expenses for 2010 decreased to $22.4 million or 46.1% of net sales compared with $24.3 million or 40.1% of net sales in 2009.  Selling, general and administrative expenses decreased $2.0 million to $16.9 million for 2010 compared with $18.9 million in 2009.  The decrease included reductions in all operating costs due principally to the reduced sales levels.  In addition, the Company continued to invest in new product development, incurring $5.5 million of engineering and development expenses in 2010 compared with $5.4 million in 2009.  Despite reduced sales levels for the current year, the Company has maintained certain of its variable selling, general and administrative cost structure in anticipation of improving market conditions.

The Company incurred an operating loss of $1.9 million for fiscal 2010 compared with operating income of $3.0 million for fiscal 2009.

Interest and other income decreased slightly to $189,000 for 2010 compared with $190,000 for 2009.  During 2010, the Company increased its investment in marketable securities by $5.1 million in an effort to improve its yields on invested cash balances.  Such marketable securities consisted of mutual fund investments principally in federal, state and local government debt securities.  The improved yields on such securities were principally offset by a loss of yields on $2.8 million of cash used by the Company in its operating, investing and financing activities during 2010.

 
9

 
The Company recorded an income tax benefit of $493,000 for 2010 compared with income tax expense of $1.2 million in 2009 as a result of pretax losses incurred in the current year by both U.S. and foreign operating entities.
 
 
As a result of the foregoing, the Company reported a net loss of $1.2 million for 2010 compared with net income of $2.0 million for 2009.

RESULTS OF OPERATIONS

Fiscal Year 2009 Compared with 2008

Net sales for 2009 decreased $6.5 million (10%) to $60.4 million compared with $66.9 million in 2008.  Domestic sales decreased $2.9 million (8%) to $32.0 million compared with $34.9 million in 2008 while international sales decreased $3.6 million (11%) to $28.4 million compared with $32.0 million in 2008.  Approximately $2.8 million of the decrease in international sales was due to negative currency exchange rate changes in the current year as European currencies significantly weakened against the U.S. dollar.  The remaining sales decreases across all business segments was due to weakening worldwide economic conditions as funding for new construction and renovation projects slowed during 2009.  Order intake for 2009 decreased $7.7 million to $59.3 million compared with $67.0 million in 2008 and was similarly impacted by negative exchange rate changes in the current year.  The backlog of unfilled orders was $2.8 million at September 30, 2009 compared with $3.9 million at September 30, 2008.

Gross profit margins for 2009 decreased slightly to 45.2% compared with 45.5% in 2008.  The decrease included reduced European margins caused by weakening European currencies during 2009.  The Company’s Europe based subsidiaries experienced increased costs on U.S. dollar denominated product purchases as a result of unfavorable currency exchange rate changes.

Operating expenses for 2009 decreased to $24.3 million or 40.1% of net sales compared with $26.0 million or 38.9% of net sales in 2008.  Selling, general and administrative expenses decreased $1.5 million to $18.9 million for 2009 compared with $20.4 million in 2008.  The decrease included a $1.1 million reduction in European subsidiary operating costs due principally to currency translation.  In addition, the Company continued to invest in new product development, incurring $5.4 million of engineering and development expenses in 2009 compared with $5.6 million in 2008.  Lower expenses were incurred by the Company’s Israel based engineering and development operation as a result of a stronger U.S. dollar in 2009.

The Company generated operating income of $3.0 million for fiscal 2009 compared with $4.4 million for 2008.

Interest expense decreased to $2,000 for 2009 compared with $45,000 in 2008 principally as a result of the repayment of bank borrowings in January 2008.  Interest and other income decreased to $190,000 for 2009 compared with $244,000 in 2008.  Although the Company generated $7.1 million of cash in 2009, its interest income decreased as a result of reduced yields on investments.

Income tax expense for 2009 decreased to $1.2 million compared with $1.8 million in 2008 as a result of decreased taxable income.  The current year tax expense includes a $1.1 million provision for U.S. income taxes compared with a $1.2 million provision in 2008.  The balance of tax expense for the years presented represents foreign taxes on profits reported by the Company’s U.K. subsidiary.
 
 
As a result of the foregoing, the Company generated net income of $2.0 million in 2009 compared with $2.8 million in 2008.


 
10

 


LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $1.6 million for 2010, which included $614,000 of losses net of non-cash charges and a net decrease in operating assets and liabilities of $944,000.  Net cash used in investing activities was $5.4 million in 2010 consisting of $5.1 million of marketable securities purchases and $335,000 of general capital expenditures.  The marketable security purchases consisted of mutual fund investments principally in federal, state and local government debt securities.  Net cash used in financing activities was $853,000 in 2010, which included $858,000 of common stock repurchases offset in part by $5,000 of net proceeds received from the exercise of stock options.  As a result of the foregoing, cash (exclusive of marketable securities) decreased by $7.9 million in 2010 after the effect of exchange rate changes on the cash position of the Company.

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

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

The Company is one of several defendants in a patent infringement suit commenced by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District Court for the Western District of Tennessee.  The alleged infringement by the Company relates to its dome camera and system controller product lines, among other products that collectively represent significant sales to the Company.  Among other things, the suit seeks past damages, enhanced damages and attorney’s fees. The Company and its outside patent counsel believe that the complaint against the Company is without merit and is vigorously defending itself in a joint defense with certain other named defendants. In January 2006, the Company received the plaintiff’s claim for past damages through December 31, 2005 that approximated $11.7 million plus pre-judgment interest. Such damages claim was based upon $233 million of alleged infringing product sales for the period at a royalty rate of 5%.

In January 2005, the Company petitioned the U.S. Patent and Trademark Office (USPTO) to reexamine the plaintiff’s patent, believing it to be invalid.  In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff’s patent claims asserted against the Company citing the existence of prior art of the Company and another defendant.  On June 30, 2006, the Federal District Court granted the defendants’ motion for continuance (delay) of the trial, pending the outcome of the USPTO’s reexamination proceedings.  In February 2007, the USPTO issued a Final Rejection of the six claims in the plaintiff’s patent asserted against the Company and in May 2007, the plaintiff appealed the examiner’s decision to the USPTO Board of Patent Appeals and Interferences (BPAI). On August 16, 2010, the BPAI issued its decision to affirm the USPTO examiner’s finding of invalidity of two of the asserted claims and reversed the examiner’s finding of invalidity of the other three claims. In August 2010, Federal District Court granted the plaintiff’s motion to reopen the case, which has been scheduled for trial in early 2012. The Company believes that it has substantial non-infringement and invalidity defenses to the plaintiff’s remaining claims and has recently filed a petition with the USPTO to reexamine such claims based upon newly discovered prior art.

The Company believes that the plaintiff’s damages claims through 2005 are without merit and has not yet received their subsequent damages claims through the expiration of their patent in May 2009.  Due to the inherent uncertainty of a jury trial and technical nature of this matter, the Company has been unable to reasonably estimate a range of possible loss, if any, at this time.  The Company has held settlement discussions with the plaintiff in the past with no result and may continue to do so in the future. However, there is no assurance that any settlement can be reached.

Notwithstanding any of the foregoing, the matter could ultimately result in a liability that is material to the Company’s results of operations and financial position. The Company has been informed by its legal counsel that the estimated future cost of this litigation could approximate $1.7 million through trial, including legal and expert witness representation.

 
11

 
Critical Accounting Policies

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

Revenue is generally recognized when products are sold and title is passed to the customer.  Advance service billings are deferred and recognized as revenues on a pro rata basis over the term of the service agreement.  Pursuant to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 605-25-05 (EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”), the Company evaluates multiple-element revenue arrangements for separate units of accounting, and follows appropriate revenue recognition policies for each separate unit.  Elements are considered separate units of accounting provided that (i) the delivered item has stand-alone value to the customer, (ii) there is objective and reliable evidence of the fair value of the undelivered item, and (iii) if a general right of return exists relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially within the control of the Company.  As applied to the Company, under arrangements involving the sale of product and the provision of services, product sales are recognized as revenue when the products are sold and title is passed to the customer, and service revenue is recognized as services are performed.  For products that include more than incidental software, and for separate licenses of the Company’s software products, the Company recognizes revenue in accordance with the provisions of ASC 985-605 (Statement of Position 97-2, “Software Revenue Recognition”), as amended.

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

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

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

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

 
12

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

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

In October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements” (ASU 2009-13) and ASU 2009-14, “Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements” (ASU 2009-14).  ASU 2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered.  ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality.  These new updates become effective on a prospective basis for the Company’s fiscal year ended September 30, 2011.  The Company does not expect that the adoption of these updates will have a material impact on its consolidated financial position, results of operations or cash flows.

Foreign Currency Activity

The Company’s foreign exchange exposure is principally limited to the relationship of the U.S. dollar to the British pound sterling, the Euro and the Israeli shekel.

Sales by the Company’s U.K. and German based subsidiaries to customers in Europe are made in British pounds or Euros.  In fiscal 2010, approximately $3.9 million of products were sold by the Company to its U.K. based subsidiary for resale.  The Company has also entered into certain engineering cost sharing agreements with its U.K. based subsidiary that are denominated in U.S. dollars.  The Company attempts to minimize its currency exposure on these intercompany transactions through the purchase of forward exchange contracts.

The Company’s Israeli based subsidiary incurs shekel based operating expenses which are funded by the Company in U.S. dollars.  In fiscal 2009, the Company purchased forward exchange contracts to hedge its currency exposure on certain of these expenses.

As of September 30, 2010, the Company had forward exchange contracts outstanding with notional amounts aggregating $4.4 million.  The Company also attempts to reduce the impact of an unfavorable exchange rate condition through cost reductions from its suppliers and shifting product sourcing to suppliers transacting in more stable and favorable currencies.

In general, the Company enters into forward exchange contracts to help mitigate short-term exchange rate exposures.  However, there can be no assurance that such steps will be effective in limiting long-term foreign currency exposure.

 
13

 

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Factors

The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates.  The Company has a policy that prohibits the use of currency derivatives or other financial instruments for trading or speculative purposes.

The Company enters into forward exchange contracts to hedge certain foreign currency exposures and minimize the effect of such fluctuations on reported earnings and cash flow (see “Foreign Currency Activity”, Note 1 “Derivative Instruments” and “Fair Value of Financial Instruments” to the accompanying financial statements).  At September 30, 2010, the Company’s foreign currency exchange risks included an aggregate $2.8 million of intercompany account balances between the Company and its subsidiaries, which are short term and will be settled in fiscal 2011.

Related Party Transactions

Refer to Item 13 and “Note 10. Related Party Transactions” to the accompanying financial statements.

Inflation

Inflation has increased the Company’s operating costs in recent years.  To offset the effects of inflation, the Company seeks to increase sales and lower its costs where possible.

“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 Management’s Discussion and Analysis captions “Overview”, “Results of Operations” and “Liquidity and Capital Resources” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.  The Company also assumes no obligation to publicly update or revise its forward-looking statements or to advise of changes in the assumptions and factors on which they are based.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Part IV, Item 15, for an index to consolidated financial statements and financial statement schedules.

ITEM 9A – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

 
14

 
 
Management's Report on Internal Control over Financial Reporting
 
 
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management evaluates the effectiveness of the Company's internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2010 and concluded that it is effective at a reasonable assurance level.
 
 
This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
 
Changes in Internal Controls
 
 
There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation referred to above that occurred during the fourth quarter of the fiscal year ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.
 
 
Limitations on the Effectiveness of Controls
 
 
The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, within a Company have been detected. The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company's Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures are effective at the "reasonable assurance" level.
 

ITEM 9B – OTHER INFORMATION

None.

 
15

 

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Executive Officers and Directors of the Company are as follows:

Name
 
Age
 
Position
         
Kenneth M. Darby
    64  
Chairman of the Board, President and
         
     Chief Executive Officer
John M. Badke
    51  
Senior Vice President, Finance and
         
     Chief Financial Officer
Peter A. Horn
    55  
Vice President, Operations
Frank L. Jacovino
    51  
Vice President, Technology and Development
Bret M. McGowan
    45  
Vice President, Sales
Mark S. Provinsal
    44  
Vice President, Marketing and Product Management
Christopher J. Wall
    57  
Managing Director, Vicon Industries Ltd.
Yigal Abiri
    61  
General Manager, Vicon Systems Ltd.
Peter F. Neumann
    76  
Director
Bernard F. Reynolds
    68  
Director
W. Gregory Robertson
    67  
Director
Arthur D. Roche
    72  
Director

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

 
Kenneth M. Darby - Chairman of the Board, President and Chief Executive Officer. Mr. Darby has served as Chairman of the Board since April 1999, as Chief Executive Officer since April 1992 and as President since October 1991. He has served as a director since 1987.  Mr. Darby also served as Chief Operating Officer and as Executive Vice President, Vice President, Finance and Treasurer of the Company.  Mr. Darby brings extensive knowledge of the Company and industry experience having joined the Company in 1978 and having served in various capacities prior to becoming Chairman of the Board and Chief Executive Officer.  Mr. Darby's current term on the Board ends in May 2011.

John M. Badke – Senior Vice President, Finance and Chief Financial Officer.  Mr. Badke has been Senior Vice President, Finance since May 2004 and Chief Financial Officer since December 1999.  Previously, he was Vice President, Finance since October 1998 and served as Controller since joining the Company in 1992.  Prior to joining the Company, Mr. Badke was Controller for NEK Cable, Inc. and an audit manager with the international accounting firms of Arthur Andersen & Co. and Peat Marwick Main & Co.

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.

Frank L. Jacovino – Vice President, Technology and Development.  Mr. Jacovino has been Vice President, Technology and Development since February 2010.  Prior to joining the Company, Mr. Jacovino served as Vice President of Engineering of Tactronics International, LLC since 2008.  From 2005 to 2008, Mr. Jacovino served as Vice President Technology & Operations of RVSI Inspection, and from 2001 to 2005 he served as Vice President/General Manager of Inspection Products for Robotic Vision Systems, Inc and held other positions within the company since joining it in 1985.

 
16

 
Bret M. McGowan – Vice President, Sales.  Mr. McGowan has been Vice President, Sales since April 2005.  From 2001 to 2005, he served as Vice President, Marketing.  Previously, he served as Director of Marketing since 1998 and as Marketing Manager since 1994.  He joined the Company in 1993 as a Marketing Specialist.

Mark S. Provinsal – Vice President, Marketing and Product Management.  Mr. Provinsal has been Vice President, Marketing and Product Management since January 2010.  Prior to joining the Company, Mr. Provinsal served as Executive Vice President of Dedicated Micros Inc. (U.S.) since 2008 and prior as its Vice President Marketing and Product Strategy since joining the company in 2006.  From 2000 to 2006, he served as the Director of Marketing and Product Development of IPIX Corporation.

Christopher J. Wall - Managing Director, Vicon Industries, Ltd.  Mr. Wall has been Managing Director, Vicon Industries Ltd. since February 1996.  Previously he served as Financial Director, Vicon Industries, Ltd. since joining the Company in 1989.  Prior to joining the Company he held a variety of senior financial positions within Westland plc, a UK aerospace company.

Yigal Abiri – General Manager, Vicon Systems Ltd.  Mr. Abiri has been General Manager, Vicon Systems Ltd. since joining the Company in August 1999.  Previously, he served as President of QSR, Ltd., a developer and manufacturer of remote video surveillance equipment.

 
Peter F. Neumann - Director.  Mr. Neumann has been a director of the Company since 1987.  He is the retired President of Flynn-Neumann Agency, Inc., an insurance brokerage firm.  Mr. Neumann has significant general business experience and knowledge of insurance and other financial products having served as the President of his own insurance brokerage firm.  Mr. Neumann also brings experience and insight to the Board with respect to regulated industries and risk mitigation.  Mr. Neumann's current term on the Board ends in May 2012.
 

 
Bernard F. Reynolds - Director.  Mr. Reynolds has been a director of the Company since 2009.  He has been retired since 2004 and had previously served as the President of Aon Consulting’s Human Resources Outsourcing Group.  Prior to the merger of Aon Consulting Worldwide and ASI Solutions Incorporated in May 2001, Mr. Reynolds served as the Chairman and Chief Executive Officer of ASI, a company he founded in 1978.  Mr. Reynolds has extensive business knowledge having served as the President of a division of a global risk management services, insurance brokerage and human resources management consulting company.  Prior to that, Mr. Reynolds served as the Chairman of the Board and Chief Executive Officer of a publicly listed human resources outsourcing company, and brings general business experience and a particular knowledge of human resources and compensation matters.  Mr. Reynolds’ current term on the Board ends in May 2012.

 
W. Gregory Robertson - Director.  Mr. Robertson has been a director of the Company since 1991.  He is the Chairman of TM Capital Corporation, a financial services company which he founded in 1989.  From 1985 to 1989, he was employed by Thomson McKinnon Securities, Inc. as head of investment banking and public finance.  Mr. Robertson has extensive experience in investment banking and public finance having served as President and now Chairman of a financial services company.  Mr. Robertson has worked with a diverse group of both publicly listed and private companies in merger, acquisition, divestiture and finance transactions and provides valuable insight into the stockholder’s perspective on value creation and strategic decisions.  Mr. Robertson’s current term on the Board ends in May 2013.

 
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.  Mr. Roche brings extensive Company knowledge and financial experience having served as the Company’s Executive Vice President and formerly serving as a partner with an international public accounting firm.  Mr. Roche brings particular insight to the Board based on his former management responsibilities and provides strategic planning and financial oversight.  His current term on the Board ends in May 2011.
 
There are no family relationships between any director, executive officer or person nominated or chosen by the Company to become a director or officer.

 
17

 
Audit Committee Financial Expert

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

Code of Ethics

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

Compliance with Section 16(a) of the Exchange Act

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended September 30, 2010 and certain written representations that no Form 5 is required, no person who, at any time during the year ended September 30, 2010 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, 2010, except that Mr. Jacovino filed one late report on Form 3.



 
18

 

ITEM 11 - EXECUTIVE COMPENSATION

 
COMPENSATION DISCUSSION AND ANALYSIS
 
 
Compensation Philosophy and Objectives of Our Compensation Program
 
 
The Company’s compensation programs are intended to enable it to attract, motivate, reward and retain the management talent required to achieve corporate objectives, and thereby increase stockholder value. It is the Company’s policy to provide incentives to senior management to achieve both short-term and long-term objectives and to reward exceptional performance and contributions to the development of the business. To attain these objectives, the executive compensation program includes four key components:
 
 
 Base Salary.    Base salary for the Company’s executives is intended to provide competitive remuneration for services provided to the Company over a one-year period. Base salaries are set at levels designed to attract and retain the most appropriately qualified individuals for each of the key management level positions within the Company.
 
Cash Incentive Bonuses.    The Company's bonus programs are intended to reward executive officers for the achievement of various annual performance goals approved by the Company’s Board of Directors.  For fiscal 2010, the Company had no formal bonus plan for its named executive officers other than for Christopher J. Wall, the Company’s European subsidiary Managing Director.  A performance based bonus plan was established for Mr. Wall whereby he would earn an amount equal to between 3% and 6.5% (based on achievement levels) of the combined pretax operating profits of the Company’s Europe based subsidiaries.  Under such plan, Mr. Wall earned a bonus of $23,000 (14,939 Pounds Sterling) based upon the achievement of 3% of specified profits for fiscal 2010.

For fiscal 2009, a performance based bonus plan was established for certain of the Company’s executive officers, including among others Kenneth M. Darby, Chief Executive Officer and John M. Badke, Chief Financial Officer, whereby the participants would share a specified pretax profit based bonus pool of between seven percent (7%) and eleven percent (11%) upon the achievement of a certain annual pretax profit targets ranging from $2.0 million to $4.5 million (and above), respectively.  Under such plan, Messrs. Darby and Badke earned bonuses of $176,000 and $88,000, respectively, based upon the allocation of an aggregate bonus pool of ten percent (10%) of the Company’s consolidated pretax profit for 2009, after certain adjustments.  Mr. Darby’s and Mr. Badke’s bonus allocation represented approximately 49% and 25%, respectively, of the available bonus pool.  In addition, a performance based bonus plan was established for Mr. Wall for fiscal 2009 whereby Mr. Wall earned an amount equal to between 2% and 6% (based on achievement levels) of the combined pretax operating profits of the Company’s Europe based subsidiaries. Under such plan, Mr. Wall earned a bonus of $127,000 (82,083 Pounds Sterling) based upon the achievement of 5% of specified profits for fiscal 2009.
 
Equity-based Compensation.    Equity-based compensation is designed to provide incentives to the Company’s executive officers to build shareholder value over the long term by aligning their interests with the interest of shareholders. The Compensation Committee of the Board of Directors believes that equity-based compensation provides an incentive that focuses the executive's attention on managing the company from the perspective of an owner with an equity stake in the business. Among our executive officers, the number of shares of stock awarded or common stock subject to options granted to each individual generally depends upon the level of that officer's responsibility. The largest grants are generally awarded to the most senior officers who, in the view of the Compensation Committee, have the greatest potential impact on the Company’s profitability and growth. Previous grants of stock options or stock grants are reviewed in determining the size of any executive's award in a particular year.
 
In March 2007, the Board of Directors adopted the Company’s 2007 Stock Incentive Plan, which was approved by the Company’s stockholders at its Annual Meeting of Stockholders held on May 18, 2007. Under such plan, a total of 500,000 shares of Common Stock were reserved for issuance and include the grant of stock options, restricted stock and other stock awards as determined by the Compensation Committee. The purpose of the Stock Incentive Plan is to attract and retain executive management by providing them with appropriate equity-based incentives and rewards for superior performance and to provide incentive to a broader range of employees.  In fiscal 2009, the Compensation Committee awarded a total of 43,000 stock options to named executive officers, including 25,000 to Mr. Darby, 8,000 to Mr. Badke and 10,000 to Mr. Wall.
 
 
19

 
 
Retirement, Health and Welfare Benefits and Other Perquisites. The Company’s executive officers are entitled to a specified retirement/severance benefit pursuant to employment agreements as detailed below.
 
 
In addition, the executive officers are entitled to participate in all of the Company’s employee benefit plans, including medical, dental, group life, disability, accidental death and dismemberment insurance and the Company’s sponsored 401(k) and mandated foreign Retirement Plans. Further, Mr. Wall receives a supplemental retirement benefit in the form of a defined contribution of five percent (5%) of his annual salary. The Company also provides its Chief Executive Officer with a country club membership and certain additional insurances not covered by primary insurance plans available to other employees and the Company’s named executive officers are provided a leased car.
 
 
Employment Agreements
 
 
The Company has entered into employment agreements with its named executive officers that provide certain benefits upon termination of employment or change in control of the Company without Board of Director approval. Under Mr. Darby’s employment agreement, he is entitled to receive a lump sum payment equal to the balance owing under his agreement in the event of a change in control of the Company under any condition. All the other agreements provide the named executive officer with a payment of three times their average annual compensation for the previous five year period if there is a change in control of the Company without Board of Director approval, as defined. Such payment can be taken in a present value lump sum or equal installments over a three year period. The agreements also provide the named executive officers other than Mr. Darby with certain severance/retirement benefits upon certain occurrences including termination of employment without cause as defined, termination of employment due to the Company’s breach of specified employment conditions (good reason termination), death, disability or retirement at a specified age. Such severance/retirement benefit provisions survive the expiration of the agreements and include a fixed stated benefit of $350,000 for Mr. Badke and $158,000 (100,000 Pounds Sterling) for Mr. Wall.  In addition, Mr. Badke receives an additional deferred compensation benefit upon such employment termination occurrences in the form of 6,561 shares of the Company’s common stock.
 
 
On October 25, 2010, the Company entered into a one-year employment agreement with Kenneth M. Darby, the Company’s Chief Executive Officer, to expire on September 30, 2011. The terms of the new agreement provide for an annual base salary of $400,000. In the event the agreement is terminated prior to its expiration for reasons other than cause as defined, Mr. Darby is entitled to receive all remaining salary owed him through its expiration.
 

 
20

 

 
2010 Summary Compensation Table
 
 
The following table sets forth all compensation for the fiscal year ended September 30, 2010 awarded to or earned by the Company’s Chief Executive Officer and by each of our other named executive officers whose total compensation exceeded $100,000 during such period.
 
 
Name and Principal
Position
Year
 
Salary ($)
 
Bonus ($)
 
Stock Awards ($)
   
Option Awards ($)(1)
   
Non-Equity Incentive Plan Compensation ($)(3)
   
Nonqualified Deferred Compensation Earnings ($)
   
All Other Compensation ($)(2)
   
Total ($)
 
Kenneth M. Darby           
Chairman and Chief       
Executive Officer
2010
  $ 370,000     -     -       -       -       -     $ 21,026 (5)   $ 391,026  
2009
  $ 400,000     -     -     $ 91,000 (1)   $ 175,562 (2)     -     $ 21,026 (5)   $ 687,588  
                                                               
John M. Badke                 
Senior Vice President      
and Chief Financial        
Officer
2010
  $ 190,000     -     -       -       -       -     $ 8,311 (6)   $ 198,311  
2009
  $ 190,000     -     -     $ 29,120 (1)   $ 87,781 (2)     -     $ 8,465 (6)   $ 315,366  
                                                               
Christopher J. Wall           
Managing Director         
Vicon Industries, Ltd.
2010
  $ 161,000     -     -       -     $ 23,290 (3)     -     $ 24,383 (7)   $ 208,673  
2009
  $ 159,856     -     -     $ 30,100 (1)   $ 127,393 (4)     -     $ 24,273 (7)   $ 341,622  
                                                               
                                                               
(1)
Represents the aggregate grant date fair value of option awards computed in accordance with ASC 718 (Statement of Financial Accounting Standards No. 123R).  The amounts previously reported have been restated in accordance with new SEC rules relating to executive compensation.  (See “Note 1” under the caption “Accounting for Stock-Based Compensation” to the accompanying financial statements.)
 
(2)  
For fiscal 2009, a performance based bonus plan was established for certain of the Company’s executive officers, including among others Kenneth M. Darby, Chief Executive Officer and John M. Badke, Chief Financial Officer, whereby the participants would share a specified pretax profit based bonus pool of between seven percent (7%) and eleven percent (11%) upon the achievement of certain annual pretax profit targets ranging from $2.0 million to $4.5 million (and above), respectively.  Under such plan, Messrs. Darby and Badke earned bonuses based upon the allocation of an aggregate bonus pool of ten percent (10%) of the Company’s consolidated pretax profit for 2009, after certain adjustments.  Mr. Darby’s and Mr. Badke’s bonus allocation represented approximately 49% and 25%, respectively, of the available bonus pool.
 
(3)  
A performance based bonus plan was established for Christopher J. Wall, the Company’s European subsidiary Managing Director, for fiscal year 2010 whereby Mr. Wall would earn an amount equal to between 3% and 6.5% (based on achievement levels) of the combined pretax operating profits of the Company’s Europe based subsidiaries. Under such plan, Mr. Wall earned a bonus based upon the achievement of 3% of specified profits for fiscal 2010.
 
(4)  
A performance based bonus plan was established for Christopher J. Wall, the Company’s European subsidiary Managing Director, for fiscal year 2009 whereby Mr. Wall would earn an amount equal to between 2% and 6% (based on achievement levels) of the combined pretax operating profits of the Company’s Europe based subsidiaries. Under such plan, Mr. Wall earned a bonus based upon the achievement of 5% of specified profits for fiscal 2009.
 
(5)  
All other compensation represents: (a) automobile expense of $10,021 for both fiscal 2010 and fiscal 2009, (b) country club membership of $8,795 for both fiscal 2010 and fiscal 2009, and (c) long-term disability insurance of $2,210 paid by the Company for Mr. Darby in both fiscal 2010 and 2009.
 
(6)  
Represents automobile expense paid by the Company.
 
(7)  
All other compensation represents: (a) automobile expense of $16,354 and $16,280 for fiscal 2010 and 2009, respectively, and (b) supplemental retirement contributions of $8,029 and $7,993 for fiscal 2010 and 2009, respectively.
 
 
 
21

 
Outstanding Equity Awards at Fiscal 2010 Year-End
 
 
The following table sets forth information with respect to the outstanding equity awards of the named executive officers as of September 30, 2010.
 
 
 
 
 
 
Name
 
Number of Securities Underlying Unexercised Options (#) Exercisable
   
Number of Securities Underlying Unexercised Options (#) Unexercisable
   
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
   
Option Exercise Price ($)
 
Option Expiration Date
Kenneth M. Darby
    6,000 (1)     4,000 (1)     -     $ 3.59  
10/25/12
Chairman and Chief
    8,000 (3)     12,000 (3)     -     $ 4.79  
05/22/18
Executive Officer
    5,000 (3)     20,000 (3)     -     $ 5.00  
11/05/18
                                   
                                   
John M. Badke
    5,000 (1)     -       -     $ 3.00  
05/27/11
Senior Vice President
    5,000 (2)     -       -     $ 3.17  
12/09/10
and Chief Financial
    9,000 (1)     6,000 (1)     -     $ 3.59  
10/25/12
Officer
    4,000 (3)     6,000 (3)     -     $ 4.79  
05/22/18
      1,600 (3)     6,400 (3)     -     $ 5.00  
11/05/18
                                   
                                   
Christopher J. Wall
    5,000 (1)     -       -     $ 3.00  
05/27/11
Managing Director
    5,000 (1)     -       -     $ 3.17  
12/09/11
Vicon Industries, Ltd.
    3,000 (1)     2,000 (1)     -     $ 3.59  
10/25/12
      4,000 (3)     6,000 (3)     -     $ 4.79  
05/22/18
      -       10,000 (1)     -     $ 5.00  
11/05/14
                                   

(1)  
Options vest over a four year period at 30% of the shares on the second anniversary of the grant date, 30% of the shares on the third anniversary of the grant date and the remaining 40% of the shares on the fourth anniversary of the grant date. Options expire after the sixth anniversary of the grant date.
(2)  
Options vest over a two year period at 30% of the shares on the grant date, 30% of the shares on the first anniversary of the grant date and the remaining 40% of the shares on the second anniversary of the grant date. Options expire after the fifth anniversary of the grant date.
(3)  
Options vest over a five year period in five equal annual installments beginning on the first anniversary of the grant date.  Options expire after the tenth anniversary of the grant date.

 
22

 

 
 
Fiscal 2010 Directors' Compensation
 
 
The table below summarizes the compensation paid by the Company to non-employee directors for the fiscal year ended September 30, 2010.
 
Name
 
Fees Earned or Paid in
Cash ($)(1)
   
Stock
Awards ($)
   
Option
Awards
($)(2)(3)
   
All Other
Compensation
($)
   
Total 
($)
 
Peter F. Neumann
  $ 30,400       -       -       -     $ 30,400  
Bernard F. Reynolds
  $ 30,400       -       -       -     $ 30,400  
W. Gregory Robertson
  $ 30,400       -       -       -     $ 30,400  
Arthur D. Roche
  $ 38,400       -       -       -     $ 38,400  
                                         
(1)  
Directors who are not employees of the Company received an annual fee of $22,400 for regular Board meetings and $1,600 per committee meeting attended in person or by teleconference. The Chairman of the Audit Committee also received an additional annual retainer of $8,000.

(2)  
Represents the aggregate grant date fair value of option awards computed in accordance with ASC 718 (Statement of Financial Accounting Standards No. 123R. See “Note 1” under the caption “Accounting for Stock-Based Compensation” to the accompanying financial statements.)
 
(3)  
There were no options granted to directors during fiscal 2010.  

Directors’ Compensation and Term

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

Compensation Committee Interlocks and Insider Participation

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

Board Compensation Committee Report

The Compensation Committee’s compensation policies applicable to the Company’s officers for 2010 were to pay a competitive market price for the services of such officers, taking into account the overall performance and financial capabilities of the Company and the officer's individual level of performance.

Mr. Darby makes recommendations to the Compensation Committee as to the base salary and incentive compensation of all officers other than himself.  The Committee reviews these recommendations with Mr. Darby and, after such review, determines compensation.  In the case of Mr. Darby, the Compensation Committee makes its determination after direct negotiation with him.  For each officer, the Committee's determinations are based on its conclusions concerning each officer's performance and comparable compensation levels for similarly situated officers at comparable companies.  The overall level of performance of the Company is taken into account but is not specifically related to the base salary of these officers.  Also, the Company has established incentive compensation plans for certain officers, which provide for a specified bonus upon the Company’s achievement of certain annual sales and/or profitability targets.

 
23

 
The Compensation Committee grants options to officers to link compensation to the performance of the Company.  Options are exercisable in the future at the fair market value at the time of grant, so that an officer granted an option is rewarded by the increase in the price of the Company’s stock.  The Committee grants options to officers based on significant contributions of such officer to the performance of the Company.  In addition, in determining Mr. Darby’s salary and bonus for service as Chief Executive Officer, the Committee considers the responsibility assumed by him in formulating, implementing and managing the operational and strategic objectives of the Company.

The Compensation Committee has reviewed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with the Company’s management.  Based on such review and discussion, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.


Submitted by the Compensation Committee,

Peter F. Neumann, Chairman                Bernard F. Reynolds
W. Gregory Robertson                          Arthur D. Roche

 
24

 

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the beneficial ownership of the Company’s Common Stock as of December 15, 2010 by (i) those persons known by the Company to be beneficial owners of more than 5% of the Company’s outstanding Common Stock; (ii) each current executive officer named in the Summary Compensation Table; (iii) each director; and (iv) all directors and executive officers as a group.

Name and Address
Of Beneficial Owner
 
Number of Shares
Beneficially Owned (1)
       
% of Class
 
CBC Co., Ltd. and affiliates
2-15-13 Tsukishima, Chuo-ku,
Tokyo, Japan 104
             
             
    543,715         11.4 %
                   
Anita G. Zucker,
as Trustee of The Article 6 Marital Trust,
a successor of the Jerry Zucker Revocable Trust
c/o The InterTech Group, Inc.
4838 Jenkins Ave.
North Charleston, SC 29405
                 
                 
                 
                 
    507,122   (2 )     10.7 %
                     
Dimensional Fund Advisors
1299 Ocean Avenue
Santa Monica, CA 90401
                   
                   
    390,521   (3 )     8.2 %
                     
Renaissance Technologies, Corp.
800 Third Avenue
New York, NY 10022
                   
                   
    269,800           5.7 %
                     
C/O Vicon Industries, Inc.
                   
Kenneth M. Darby
    360,903   (4 )     7.6 %
Arthur D. Roche
    87,071   (5 )     1.8 %
John M. Badke
    70,307   (6 )     1.5 %
W. Gregory Robertson
    46,400   (7 )     *  
Peter F. Neumann
    45,822   (8 )     *  
Christopher J. Wall
    42,207   (9 )     *  
Bernard F. Reynolds
    27,500   (10 )     *  
   Total all Executive Officers and
                   
     Directors as a group (12 persons)
    822,479   (11 )     17.4 %
* Less than 1%
                   

(1)  Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment
           control over the shares of stock owned.
(2)  These shares are owned directly by the Article 6 Marital Trust, a successor of the Jerry Zucker Revocable Trust and 
           indirectly by Anita Zucker, as trustee and as a beneficiary of the trust.
(3)  Dimensional Fund Advisors had voting control over 387,621 shares and investment control over 390,521 shares as
           investment advisor and manager for various mutual funds and other clients. These shares are beneficially owned by such
           mutual funds or other clients.
(4)   Includes currently exercisable options to purchase 28,000 shares.
(5)   Includes 15,000 shares held by Mr. Roche’s wife and currently exercisable options to purchase 14,500 shares.
(6)   Includes currently exercisable options to purchase 27,200 shares.
(7)   Includes currently exercisable options to purchase 14,500 shares.
(8)   Includes currently exercisable options to purchase 12,750 shares.
(9)   Includes currently exercisable options to purchase 22,000 shares.
(10) Includes currently exercisable options to purchase 7,500 shares.
(11) Includes currently exercisable options to purchase 180,526 shares.

 
25

 
EQUITY COMPENSATION PLAN INFORMATION
at September 30, 2010

 
Plan category
 
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
     
Weighted average
exercise price of
outstanding options,
warrants and rights
(b)
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
 
                   
Equity compensation plans
                 
approved by security holders
    411,975     $ 4.42       270,385  
                         
Equity compensation plans not
                       
approved by security holders
    -       -       -  
                         
Total
    411,975     $ 4.42       270,385  
                         

EQUITY COMPENSATION GRANTS NOT APPROVED BY SECURITY HOLDERS

Through September 30, 2010 the Company had granted certain of its officers with deferred compensation benefits aggregating 16,320 shares of common stock currently held by the Company in treasury.  Such shares vest upon retirement.  All shares vest earlier under certain occurrences including death, involuntary termination or a change in control of the Company.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company and CBC Co., Ltd. (CBC), a Japanese corporation which beneficially owns 11.6% of the outstanding shares of the Company, have been conducting business with each other since 1979.  During this period, CBC has served as a lender, a product supplier and a private label reseller of the Company’s products. In fiscal 2010, the Company purchased approximately $138,000 of products from or through CBC. CBC competes with the Company in various markets, principally in the sale of video products and systems.  Sales of Vicon products to CBC were $69,000 in 2010.

All named directors other than Mr. Darby are independent directors in accordance with NYSE Amex listing requirements.

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table details: the aggregate fee arrangements with BDO USA, LLP for professional services rendered for the audit of the Company’s consolidated annual financial statements and review of the financial statements included in the Company’s quarterly reports on Form 10-Q; the aggregate fees billed by BDO USA, LLP for audit related matters and; the aggregate fees billed by BDO USA, LLP for tax compliance, tax advice and tax planning during fiscal years ended September 30, 2010 and 2009:



   
2010
   
2009
 
Audit fees
  $ 262,000     $ 262,000  
Audit related fees
  $ -     $ -  
Tax fees
  $ 47,000     $ 43,000  


 
26

 
Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

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

PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1)  Financial Statements

         Included in Part IV, Item 15:

         Report of Independent Registered Public Accounting Firm

         Financial Statements:

Consolidated Statements of Operations, fiscal years ended September 30, 2010, 2009, and 2008

Consolidated Balance Sheets at September 30, 2010 and 2009

Consolidated Statements of Shareholders’ Equity, fiscal years ended September 30, 2010, 2009, and 2008

Consolidated Statements of Cash Flows, fiscal years ended September 30, 2010, 2009, and 2008

Notes to Consolidated Financial Statements, fiscal years ended September 30, 2010, 2009, and 2008


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


 
27

 

15(a)(3)      Exhibits

Number
Description
3.1
Articles of Incorporation and By-Laws, as amended (Incorporated by reference 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)
3.2
Amendment of the Company’s By-Laws effective January 1, 2008 (Incorporated by reference to the 2007 Annual Report on Form 10-K)
3.3
Amendment of the Certificate of Incorporation dated May 7, 2002 (Incorporated by reference to the 2002 Annual Report on Form 10-K)
4
Rights Agreement dated December 4, 2001 between the Registrant and Computershare Investor Services (Incorporated by reference to the 2001 Annual Report on Form 10-K)
10.1
Employment Agreement effective as of October 1, 2010 between the Registrant and Kenneth M. Darby (Incorporated by reference to the Current Report on Form 8-K dated October 26, 2010)
10.2
1996 Incentive Stock Option Plan (Incorporated by reference to the 1997 Annual Report on Form 10-K)
10.3
1999 Incentive Stock Option Plan (Incorporated by reference to the 1999 Annual Report on Form 10-K)
10.4
1999 Non-Qualified Stock Option Plan (Incorporated by reference to the 1999 Annual Report on Form 10-K)
10.5
2002 Incentive Stock Option Plan (Incorporated by reference to the 2002 Annual Report on Form 10-K)
10.6
2002 Non-Qualified Stock Option Plan (Incorporated by reference to the 2002 Annual Report on Form 10-K)
10.7
Employment and Deferred Compensation Agreement dated January 1, 2006 between the Registrant and John M. Badke (Incorporated by reference to the Current Report on Form 8-K dated March 6, 2006)
10.8
Amendment 1 to the Employment and Deferred Compensation Agreement dated November 13, 2006 between the Registrant and John M. Badke (Incorporated by reference to the Current Report on Form 8-K dated November 16, 2006)
10.9
Employment Agreement dated November 1, 2006 between the Registrant and Christopher J. Wall (Incorporated by reference  to the Current Report on Form 8-K dated November 16, 2006)
10.10
Side letter to the agreement dated November 14, 2007 between the Registrant and Christopher J. Wall
10.11
2007 Stock Incentive Plan (Incorporated by reference to the Proxy Statement filed on April 27, 2007)
21
Subsidiaries of the Registrant (Incorporated by reference to the Notes to the Consolidated Financial Statements)
23
Consent of BDO USA, LLP
 
Rule 13a-14(a)/15d-14(a) Certifications
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Section 1350 Certifications
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   


No other exhibits are required to be filed.


 
28

 

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. 333-30097 (filed June 26, 1997), 333-71410 (filed October 11, 2001), 333-116361 (filed June 10, 2004) and 333-146749 (filed October 16, 2007) and on Form S-2 No. 333-46841 (effective May 1, 1998):

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.  In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 
29

 


Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders
Vicon Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Vicon Industries, Inc. as of September 30, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years ended September 30, 2010.  These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vicon Industries, Inc. at September 30, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2010, in conformity with accounting principles generally accepted in the United States of America.







/s/ BDO USA, LLP


Melville, New York
December 22, 2010





 
30

 

VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30, 2010, 2009 and 2008


   
2010
   
2009
   
2008
 
                   
Net sales
  $ 48,681,122     $ 60,444,867     $ 66,911,442  
Cost of sales
    28,183,336       33,152,064       36,489,172  
     Gross profit
    20,497,786       27,292,803       30,422,270  
                         
Operating expenses:
                       
   Selling, general and
                       
     administrative expense
    16,919,244       18,856,172       20,384,605  
   Engineering and development expense
    5,510,207       5,405,491       5,648,442  
      22,429,451       24,261,663       26,033,047  
                         
     Operating income (loss)
    (1,931,665 )     3,031,140       4,389,223  
                         
Other expense (income):
                       
   Interest expense
    -       2,179       44,549  
   Interest and other income
    (188,907 )     (189,680 )     (244,337 )
                         
     Income (loss) before income taxes
    (1,742,758 )     3,218,641       4,589,011  
                         
Income tax expense (benefit)
    (493,000 )     1,202,000       1,750,000  
                         
        Net income (loss)
  $ (1,249,758 )   $ 2,016,641     $ 2,839,011  
                         
                         
                         
                         
Earnings (loss) per share:
                       
                         
     Basic
  $ (.28 )   $ .44     $ .59  
                         
     Diluted
  $ (.28 )   $ .43     $ .57  
                         
                         




See accompanying notes to consolidated financial statements.

 
31

 







VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2010 and 2009
 
ASSETS
 
2010
   
2009
 
Current Assets:
           
  Cash and cash equivalents
  $ 8,789,967     $ 16,650,191  
  Marketable securities
    5,358,537       201,665  
  Accounts receivable (less allowance of
               
   $982,000 in 2010 and $1,025,000 in 2009)
    10,111,342       9,908,534  
  Inventories:
               
    Parts, components and materials
    3,706,372       3,923,027  
    Work-in-process
    2,416,690       2,444,994  
    Finished products
    4,957,865       5,580,908  
      11,080,927       11,948,929  
  Recoverable income taxes
    146,161       -  
  Deferred income taxes
    760,313       644,215  
  Prepaid expenses and other current assets
    508,937       523,488  
          Total current assets
    36,756,184       39,877,022  
Property, plant and equipment:
               
  Land
    1,182,485       1,184,520  
  Buildings and improvements
    5,677,226       5,685,353  
  Machinery, equipment and vehicles
    5,797,244       5,984,979  
      12,656,955       12,854,852  
  Less accumulated depreciation and amortization
    8,033,178       7,836,871  
      4,623,777       5,017,981  
Deferred income taxes
    1,382,686       1,132,457  
Other assets
    1,253,784       1,288,277  
            TOTAL ASSETS
  $ 44,016,431     $ 47,315,737  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current Liabilities:
               
  Accounts payable
  $ 3,437,460     $ 4,005,870  
  Accrued compensation and employee benefits
    2,286,103       2,823,825  
  Accrued expenses
    1,254,482       1,311,636  
  Unearned revenue
    705,484       735,850  
  Income taxes payable
    122,589       154,851  
          Total current liabilities
    7,806,118       9,032,032  
                 
Unearned revenue-non current
    308,063       303,980  
Other long-term liabilities
    2,358,306       2,580,241  
          Total liabilities
    10,472,487       11,916,253  
Commitments and contingencies - Note 8
               
Shareholders' equity:
               
  Common stock, par value $.01 per share
               
    authorized - 25,000,000 shares
               
    issued - 5,286,084 and 5,266,876 shares
    52,861       52,669  
  Capital in excess of par value
    24,583,239       24,294,511  
  Retained earnings
    13,101,666       14,351,424  
  Treasury stock at cost, 794,076 shares
               
    in 2010 and 645,288 shares in 2009
    (3,987,869 )     (3,145,204 )
  Accumulated other comprehensive loss
    (205,953 )     (153,916 )
          Total shareholders' equity
    33,543,944       35,399,484  
            TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  $ 44,016,431     $ 47,315,737  
                 
See accompanying notes to consolidated financial statements.
               

 
32

 

VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended September 30, 2010, 2009, and 2008

                                 
Accumulated
   
Total
 
               
Capital in
               
other
   
share-
 
         
Common
   
excess of
   
Retained
   
Treasury
   
comprehensive
   
holders'
 
   
Shares
   
Stock
   
par value
   
earnings
   
Stock
   
income
   
equity
 
                                           
Balance September 30, 2007
    5,053,503     $ 50,535     $ 22,874,285     $ 9,620,772     $ (1,139,728 )   $ 1,647,492     $ 33,053,356  
Comprehensive income (loss):
                                                       
     Net income
    -       -       -       2,839,011       -       -       2,839,011  
     Foreign currency translation adjustment
    -       -       -       -       -       (1,022,427 )     (1,022,427 )
     Unrealized gain on derivatives, net of tax
    -       -       -       -       -       97,855       97,855  
       Change in unrealized loss on 
          marketable securities, net of tax
    -       -       -       -       -       1,230       1,230  
Total comprehensive income (loss)
    -       -       -       -       -       -       1,915,669  
FIN 48 income tax liability
    -       -       -       (125,000 )     -       -       (125,000 )
Repurchases of common stock
    -       -       -       -       (628,407 )     -       (628,407 )
Exercise of stock options
    71,069       711       219,336       -       -       -       220,047  
Tax benefit from exercise of stock options
    -       -       24,270       -       -       -       24,270  
Stock-based compensation
    -       -       133,406       -       -       -       133,406  
Deferred compensation amortization
    -       -       10,639       -       -       -       10,639  
Balance September 30, 2008
    5,124,572     $ 51,246     $ 23,261,936     $ 12,334,783     $ (1,768,135 )   $ 724,150     $ 34,603,980  
Comprehensive income (loss):
                                                       
     Net income
    -       -       -       2,016,641       -       -       2,016,641  
     Foreign currency translation adjustment
    -       -       -       -       -       (778,621 )     (778,621 )
     Unrealized loss on derivatives, net of tax
    -       -       -       -       -       (103,056 )     (103,056 )
     Change in unrealized gain on
        marketable securities, net of tax
    -       -       -       -       -       3,611       3,611  
Total comprehensive income (loss)
    -       -       -       -       -       -       1,138,575  
Repurchases of common stock
    -       -       -       -       (1,262,169 )     -       (1,262,169 )
Distribution of deferred comp. shares
    1,800       18       (18 )     -       -       -       -  
Exercise of stock options
    140,504       1,405       510,725       -       (114,900 )     -       397,230  
Tax benefit from exercise of stock options
    -       -       175,440       -       -       -       175,440  
Stock-based compensation
    -       -       322,580       -       -       -       322,580  
Deferred compensation amortization
    -       -       23,848       -       -       -       23,848  
Balance September 30, 2009
    5,266,876     $ 52,669     $ 24,294,511     $ 14,351,424     $ (3,145,204 )   $ (153,916 )   $ 35,399,484  
Comprehensive income (loss):
                                                       
     Net loss
    -       -       -       (1,249,758 )     -       -       (1,249,758 )
     Foreign currency translation adjustment
    -       -       -       -       -       (83,492 )     (83,492 )
     Unrealized loss on derivatives, net of tax
    -       -       -       -       -       (25,001 )     (25,001 )
       Change in unrealized gain on  
          marketable securities, net of tax
    -       -       -       -       -       56,456       56,456  
Total comprehensive income (loss)
    -       -       -       -       -       -       (1,301,795 )
Repurchases of common stock
    -       -       -       -       (858,359 )     -       (858,359 )
Distribution of deferred comp. shares
    3,900       39       (59,937 )     -       59,898       -       -  
Exercise of stock options
    15,308       153       49,358       -       (44,204 )     -       5,307  
Tax benefit from exercise of stock options
    -       -       3,955       -       -       -       3,955  
Stock-based compensation
    -       -       290,584       -       -       -       290,584  
Deferred compensation amortization
    -       -       4,768       -       -       -       4,768  
Balance September 30, 2010
    5,286,084     $ 52,861     $ 24,583,239     $ 13,101,666     $ (3,987,869 )   $ (205,953 )   $ 33,543,944  
                                           
See accompanying notes to consolidated financial statements.
                                         

 
33

 

VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 30, 2010, 2009 and 2008


   
2010
   
2009
   
2008
 
Cash flows from operating activities:
                 
Net income (loss)
  $ (1,249,758 )   $ 2,016,641     $ 2,839,011  
 Adjustments to reconcile net income (loss) to net
                       
   cash provided by (used in) operating activities:
                       
     Deferred income taxes
    (379,820 )     904,963       1,136,612  
     Depreciation and amortization
    720,295       728,138       778,276  
     Amortization of deferred compensation
    4,768       23,848       10,639  
     Stock compensation expense
    290,584       322,580       133,406  
Change in assets and liabilities:
                       
  Accounts receivable, net
    (232,723 )     4,230,079       (2,565,752 )
  Inventories
    840,512       281,925       (21,022 )
  Recoverable income taxes
    (144,128 )     -       -  
  Prepaid expenses and other current assets
    11,828       143,853       (194,123 )
  Other assets
    34,493       (16,594 )     (347,241 )
  Accounts payable
    (550,844 )     (147,305 )     1,194,754  
  Accrued compensation and employee benefits
    (529,544 )     95,497       (4,260 )
  Accrued expenses
    (94,093 )     (203,143 )     64,408  
  Unearned revenue
    (25,574 )     (128,598 )     (55,973 )
  Income taxes payable
    (31,968 )     (115,660 )     (71,776 )
  Other liabilities
    (221,582 )     232,935       521,778  
          Net cash provided by (used in) operating activities
    (1,557,554 )     8,369,159       3,418,737  
                         
Cash flows from investing activities:
                       
  Net decrease (increase) in marketable securities
    (5,067,259 )     31,303       3,661  
  Capital expenditures
    (334,804 )     (573,384 )     (502,896 )
          Net cash used in investing activities
    (5,402,063 )     (542,081 )     (499,235 )
                         
Cash flows from financing activities:
                       
  Repurchases of common stock
    (858,359 )     (1,262,169 )     (628,407 )
  Proceeds from exercise of stock options
    5,307       397,230       220,047  
  Repayments of long-term debt
    -       -       (1,740,335 )
          Net cash used in financing activities
    (853,052 )     (864,939 )     (2,148,695 )
                         
Effect of exchange rate changes on cash
    (47,555 )     127,086       (17,951 )
Net increase (decrease) in cash
    (7,860,224 )     7,089,225       752,856  
Cash at beginning of year
    16,650,191       9,560,966       8,808,110  
Cash at end of year
  $ 8,789,967     $ 16,650,191     $ 9,560,966  
                         
Cash paid during the fiscal year for:
                       
  Income taxes
  $ 172,282     $ 472,797     $ 635,522  
  Interest
  $ -     $ 2,179     $ 55,181  
                         
                         
See accompanying notes to consolidated financial statements.
                 
 

 
34

 

VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 2010, 2009, and 2008


NOTE 1.  Summary of Significant Accounting Policies