ITEM 1 - BUSINESS
General
Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs, manufactures, assembles and markets a wide range of closed circuit video systems ("CCVS") and system components used for security, surveillance, safety and control purposes by a broad group of end users. A CCVS system is a private video system that can transmit and receive video, audio and data signals in accordance with the operational needs of the user. The Company's primary focus is the design of software-based engineered CCVS and components that it sells worldwide, primarily to installing dealers, system integrators, government entities and distributors.
The Company operates within the electronic protection segment of the security industry that includes, among others: fire and burglar alarm systems, access control, CCVS and article surveillance. The U.S. security industry consists of thousands of individuals and businesses (exclusive of public sector law enforcement) that provide products and services for the protection and monitoring of life, property and information. The security industry includes fire and burglar alarm systems, access control, CCVS, article surveillance, guard services and equipment, locks, safes, armored vehicles, security fencing, private investigations and others. The Company's products are typically used for crime deterrence, visual documentation, observation of inaccessible or hazardous areas, enhancing safety, obtaining cost savings (such as lower insurance premiums), managing control systems and improving the efficiency and effectiveness of personnel. The Company's products are used in office buildings, manufacturing plants, apartment complexes, large retail stores, government facilities, transportation operations, prisons, casinos, sports arenas, health care facilities and financial institutions.
Products
The Company's product line consists of approximately 600 products, of which about a third represent model variations. The Company's product line consists of various elements of a video system, including video cameras, display units (monitors), video recorders, switching equipment for video distribution, digital video and signal processing units (which perform character generation, video encoding, multi screen display, video insertion, intrusion detection, source identification and alarm processing), motorized zoom lenses, remote robotic cameras, system controls, environmental camera enclosures and consoles for system assembly. In August 1999, the Company acquired TeleSite U.S.A., Inc. ("TeleSite"), which designs, produces and sells remote video surveillance systems. The Company intends to substantially increase the product development efforts of TeleSite in order to maximize the potential of its core digital video compression technology. The Company provides a full line of products due to the many varied climatic and operational environments under which the products are expected to perform. In addition to selling from a standard catalog line, the Company at times produces to specification or will modify an existing product to meet a customer's requirements. The Company's products range in price from $10 for a simple camera mounting bracket to approximately one hundred thousand dollars (depending upon configuration) for a large digital control and video switching system.
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Marketing
The Company's marketing emphasizes engineered CCVS solutions which incorporate system design, project management and technical training and support. The Company markets its products through industry trade shows worldwide, product brochures and catalogues, direct mailings to existing and prospective customers, product videos, in-house training seminars for customers and end users, road shows which preview new systems and system components, and advertising through trade and end user magazines and the Company's internet web site. The Company's products are sold principally to approximately 2,000 independent dealers, system integrators and distributors. Sales are made principally by field sales engineers, independent sales representatives and customer service representatives. The Company's sales effort is supported by in-house customer service and technical support groups which provide product information, application engineering, design detail, field project management, and hardware and software technical support.
The Company's products are employed in video system installations by: (1) commercial and industrial users, such as office buildings, manufacturing plants, warehouses, apartment complexes, shopping malls and retail stores; (2) federal, state, and local governments for national security purposes, municipal facilities, prisons, and military installations; (3) financial institutions, such as banks, clearing houses, brokerage firms and depositories, for security purposes; (4) transportation departments for highway traffic control, bridge and tunnel monitoring, and airport, subway, bus and seaport surveillance; (5) gaming casinos, where video surveillance is often mandated by local regulation; and (6) health care facilities, such as hospitals, particularly psychiatric wards and intensive care units. In fiscal 1999 and 1998, indirect sales to the United States Postal Service under a national supply contract approximated $22.7 million and $12.0 million, respectively.
The Company's principal sales offices are located in Hauppauge, New York; Atlanta, Georgia; Fareham, England; Zaventem, Belgium; New Territories, Hong Kong; and Shanghai, China.
International Sales
The Company sells its products in Europe through its U.K. based subsidiary, in China through its Hong Kong subsidiary and elsewhere outside the U.S. by direct export. Sales are made to installing dealers or independent distributors which, outside of Europe and China, typically assume the responsibility for warranty repair as well as sales and marketing costs to promote the Company's product line. The Company has a few territorial exclusivity agreements with customers but primarily uses a wide range of installation companies and distributors in international markets. In Australia, Japan, Norway and South Korea, the Company permits independent sales representatives to use the Company's name for marketing purposes.
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Direct export sales and sales from the Company's foreign subsidiaries amounted to $15.4 million, $19.0 million and $18.7 million or 21%, 30% and 36% of consolidated net sales in fiscal years 1999, 1998, and 1997, respectively. Export sales are generally made through a wholly owned subsidiary, Vicon Industries Foreign Sales Corporation, a tax advantaged foreign sales corporation. The Company's principal foreign markets are Europe and the Pacific Rim, which together accounted for approximately 85 percent of international sales in fiscal 1999. Since fiscal 1998, the Company has experienced a decrease in demand for its products in certain Asian and European countries, due principally to the deterioration of local economies. For more information regarding foreign operations, see Note 8 of Notes to Consolidated Financial Statements included in Item 14.
Competition
The Company operates in a highly competitive marketplace both domestically and internationally. The Company competes by providing engineered systems and system components that incorporate broad capability together with high levels of customer service and technical support. Generally, the Company does not compete based on price alone.
The Company's principal engineered CCVS competitors include the following companies or their affiliates: Checkpoint Systems, Inc., Matsushita (Panasonic), Pelco Sales Company, Philips Communications and Security Systems, Inc., Sensormatic Electronics Corporation, and Ultrak, Inc. Many additional companies, both domestic and international, produce products that compete against one or more of the Company's product lines. In addition, some consumer video electronic companies or their affiliates, including Matsushita (Panasonic), Mitsubishi Electric Corporation, Sanyo Electric Co., Ltd. and Sony Corporation, compete with the Company for the sale of video products and systems. Most of the Company's competitors are larger companies whose financial resources and scope of operations are substantially greater than the Company's.
Research and Development
The Company's research and development ("R&D") is focused on new and improved CCVS and system components. In recent years, a trend of product development and demand within the video security and surveillance market has been toward the application of digital technology, specifically toward the compression, storage and display of digitized video signals. As the demands of the Company's target market segment requires the Company to keep pace with changes in technology, the Company intends to focus its R&D effort in these developing areas. R&D projects are chosen and prioritized based on direct customer feedback, the Company's analysis as to the needs of the marketplace and technological advances and marketing research.
The Company employs a total of 43 engineers in the following areas: 12 in software development, 10 in mechanical design, 9 in manufacturing/testing and 12 in electrical and circuit design. R&D expenditures have averaged approximately 4% of net sales for each of the past three years.
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Source and Availability of Raw Materials
The Company is substantially dependent upon outside manufacturers and suppliers to manufacture and assemble its products and will continue to be dependent on such entities in the future. In fiscal 1999, approximately 13% of the Company's purchases of components and finished products were from Chun Shin Electronics, Inc. ("CSE"), a 34% owned South Korean company (see Item 13). Additionally, in 1999, the Company purchased approximately 13% of its components and finished products from CBC Company, Ltd., a supplier and sourcing agent for the Company (see Item 13). The Company's relationships with outside manufacturers, assemblers and suppliers are generally not covered by formal contractual agreements.
Raw materials and components purchased by the Company and its suppliers are generally readily available in the market, subject to market lead times at the time of order. The Company is not dependent upon any single source for a significant amount of its raw materials and components.
Intellectual Property
The Company owns, and has pending, a limited number of design and utility patents expiring at various times. The Company has certain trademarks registered and several other trademark applications pending both in the United States and in Europe. Many of the Company's products employ proprietary software which is protected by copyright. However, the laws of certain foreign countries do not protect intellectual property rights to the same extent or in the same manner as the laws of the U.S. The Company has no licenses, franchises or concessions with respect to any of its products or business dealings. The Company does not deem its lack of patents, licenses, franchises and concessions, to be of substantial significance or to have a material effect on its business. The Company does, however, consider its proprietary software to be unique and valuable and is a principal element in the differentiation of the Company's products from its competition.
Inventories
The Company carries substantial finished goods inventory levels to respond to unanticipated customer demand, since most sales are to installing dealers and contractors who normally do not carry large inventory stocks. The Company principally builds inventory to known and anticipated customer demand. In addition to normal safety stock levels, certain additional inventory levels are maintained for products with long purchase and manufacturing lead times. The Company has also increased its raw material and work-in-process inventory as it has shifted certain of its production from contract manufacturers to labor subcontractors. The Company believes that it is important to carry adequate inventory levels of parts, components and products to avoid production and delivery delays that detract from its sales effort.
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Backlog
The backlog of orders believed to be firm as of September 30, 1999 and 1998 was approximately $11.3 million and $12.4 million, respectively. Orders are generally cancelable without penalty at the option of the customer. The Company prefers that its backlog of orders not exceed its ability to fulfill such orders on a timely basis, since experience shows that long delivery schedules only encourage the Company's customers to look elsewhere for product availability.
Employees
At September 30, 1999, the Company employed 252 full-time employees, of whom 7 are officers, 61 administrative, 101 in sales and technical service capacities, 42 in engineering, and 41 production employees. At September 30, 1998, the Company employed 217 persons. There are no collective bargaining agreements with any of the Company's employees and the Company considers its relations with its employees to be good.
ITEM 2
ITEM 2 - PROPERTIES
The Company owns and operates an 80,000 square-foot facility located at 89 Arkay Drive, Hauppauge, New York, which it purchased in January 1998. The Company also owns and operates a 14,000 square-foot sales, service and warehouse facility in southern England which services the U.K. and Europe. In addition, the Company operates, under short-term leases, sales offices in Atlanta, Georgia and Zaventem, Belgium. The Company also leases sales, service and warehouse facilities in Tenafly, New Jersey; Yavne, Israel; Hong Kong and Shanghai, China.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
None
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's stock is traded on the American Stock Exchange (AMEX) under the symbol (VII). The following table sets forth for the periods indicated, the range of high and low prices for the Company's Common Stock on AMEX:
Quarter Ended High Low
Fiscal 1999 December 8-13/16 4-5/8 March 9-9/16 6-3/4 June 10-3/8 6-1/2 September 9-7/16 6-3/4
Fiscal 1998 December 8-11/16 5-9/16 March 13-15/16 6-3/16 June 12-1/8 6-3/16 September 9-1/4 6
The last sale price of the Company's Common Stock on December 15, 1999 as reported on AMEX was $5-3/8 per share. As of December 15, 1999, there were approximately 300 shareholders of record.
The Company has never declared or paid cash dividends on its Common Stock and anticipates that any earnings in the foreseeable future will be retained to finance the growth and development of its business. In addition, the Company's bank credit agreements prohibit the payment of cash dividends on its Common Stock.
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ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
FISCAL YEAR 1999 1998 1997 1996 1995 ---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $73,414 $63,310 $51,519 $43,191 $43,847 Gross profit 24,699 20,832 14,475 10,957 9,546 Income (loss) before income taxes 7,442 5,810 1,647 385 (1,267) Net income (loss) 4,760 5,810 1,565 300 (1,347) Earnings (loss) per share: Basic 1.05 1.61 .56 .11 (.49) Diluted 1.01 1.50 .52 .11 (.49) Total assets 49,899 44,386 31,200 28,085 26,423 Long-term debt 5,799 7,002 8,344 6,429 5,339 Working capital 29,049 27,642 15,351 12,064 10,721 Property, plant and equipment (net) 8,053 7,137 3,492 3,034 3,262
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ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1999 Compared with 1998
Net sales for 1999 increased $10.1 million or 16% to $73.4 million compared with $63.3 million in 1998. The sales growth was experienced principally in the U.S. as domestic sales increased $13.7 million or 31% to $58.0 million principally as a result of increased system sales supplied under a contract with the U.S. Postal Service. International sales decreased 19% to $15.4 million principally as a result of the discontinuation of sales to a private label European reseller and lower sales in Asia. The backlog of unfilled orders was $11.3 million at September 30, 1999 compared with $12.4 million at September 30, 1998.
Gross profit margins for 1999 increased to 33.6% compared with 32.9% in 1998. The margin improvement was primarily the result of a favorable sales mix of higher margin products, lower procurement costs and greater fixed cost absorption associated with the sales growth.
Operating expenses for 1999 were $16.8 million or 22.9% of net sales compared with $14.0 million or 22.1% of net sales in 1998. The increase in operating expenses was principally the result of higher selling expenses associated with the sales growth.
Operating income increased to $7.9 million for 1999 compared with $6.9 million for 1998 principally as a result of increased sales.
Interest expense decreased $515,000 to $592,000 for 1999 compared with $1.1 million in 1998 as $9.3 million of interest-bearing debt was repaid in May 1998 with the net proceeds from a secondary stock offering.
Income tax expense for 1999 was $2.7 million, or a 36% effective tax rate. There was no income tax expense for 1998 due to the utilization of available U.S. federal and state net operating tax loss carryforwards and the reinstatement of previously reserved deferred income tax assets.
As a result of the foregoing, net income decreased to $4.8 million for 1999 compared with net income of $5.8 million for 1998. However, results for 1998 benefitted from the utilization of net operating tax loss carryforwards which affect the comparability of operating results. Assuming that income taxes had been incurred in 1998 at the same effective tax rate as in 1999, net income for 1998 would have been $3.7 million ($.96 per share diluted) compared with $4.8 million ($1.01 per share diluted) reported for 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared with 1997
Net sales for 1998 increased $11.8 million or 23% to $63.3 million compared with $51.5 million in 1997. The sales growth was experienced principally in the U.S. as domestic sales increased $11.5 million or 35% to $44.3 million principally as a result of system sales supplied under a contract with the U.S. Postal Service entered into in July 1997 and sales from a new line of dome cameras introduced in February 1997. International sales increased 2% to $19.0 million. International growth was limited as a result of lower sales in Asia offset by higher sales in Europe, including sales to a private label reseller. The backlog of unfilled orders was $12.4 million at September 30, 1998 compared with $7.0 million at September 30, 1997.
Gross profit margins for 1998 increased to 32.9% compared with 28.1% in 1997. The margin improvement was primarily the result of a favorable sales mix of higher margin products, lower procurement costs and greater fixed cost absorption associated with the sales growth.
Operating expenses for 1998 were $14.0 million or 22.1% of net sales compared with $11.7 million or 22.8% of net sales in 1997. The increase in operating expenses was principally the result of higher selling expenses associated with the sales growth and profit related bonus expense.
Operating income rose to $6.9 million for 1998 compared with $2.8 million for 1997 as a result of increased sales, higher gross margins and greater absorption of fixed operating expenses.
Interest expense decreased slightly to $1.1 million in 1998. Such decrease occurred subsequent to the public offering as $9.3 million of interest bearing debt was repaid.
There was no income tax expense for 1998 due to the full utilization of a U.S. net operating loss carryforward (NOL) and the reinstatement of previously reserved deferred income tax assets. Beginning with the first quarter of 1999, the Company will incur income taxes at a normal effective rate. In 1997, income tax expense was $82,000 relating primarily to foreign subsidiary income. As a result of the foregoing, net income increased to $5.8 million for 1998 compared with net income of $1.6 million for 1997.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
Net cash provided by operating activities was $2.2 million for 1999 due primarily to the $4.8 million net income reported for the year, offset in part by an increase in inventories to support higher sales activity. Net cash used in investing activities was $3.8 million for 1999 due primarily to the Company's acquisition of TeleSite U.S.A., Inc. for $2.1 million, the expenditure of $1.0 million for expansion of the Company's principal operating facility and other general capital expenditures. Net cash used in financing activities was $1.2 million due primarily to the scheduled repayments of U.S. bank term and mortgage loans and a decrease in borrowings under the Company's short-term revolving credit agreement. As a result of the foregoing, the net decrease in cash was $2.9 million for 1999 after the nominal effect of exchange rate changes on the cash position of the Company.
In July 1998, the Company entered into a $14 million unsecured revolving credit and term loan agreement with a bank. Such agreement includes a $7.5 million revolving credit facility that expires in July 2002, with an option to increase the facility to $9.5 million at any time through July 2000. Borrowings under the facility bear interest at the bank's prime rate minus 2% or, at the Company's option, LIBOR plus 90 basis points (6.25% and 6.30%, respectively, at September 30, 1999). At September 30, 1999, there were no revolving credit borrowings outstanding under this agreement. The agreement also provides for a $4.5 million five-year term loan payable in equal monthly installments through July 2003 with interest at 6.74%.
The Company maintains a bank overdraft facility of 600,000 Pounds Sterling (approximately $990,000) in the U.K. to support local working capital requirements of Vicon Industries Limited. At September 30, 1999, borrowings under this facility amounted to approximately $375,000.
In October 1999, the Company entered into a $1.2 million mortgage loan agreement with its bank to finance the expansion of its principal operating facility. The loan is payable in equal monthly principal installments through January 2008, with a $460,000 payment due at the end of the term. The loan bears interest at the bank's prime rate minus 160 basis points or, at the Company's option, LIBOR plus 100 basis points and contains the same covenants as included in the existing mortgage loans.
The Company believes that cash flow from operations and funds available under its credit agreements will be sufficient to meet its anticipated operating, capital expenditures and debt service requirements for at least the next twelve months.
Year 2000
The Company's software-based products have been tested for year 2000 compliance and the Company believes that such products are year 2000 compatible. With respect to its own computer operating systems, the Company has completed the upgrade of its principal operating computer software to the most recent available revisions sold by its software suppliers, which the suppliers have represented to be year 2000 compliant. The Company believes that such upgrades
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will solve those year 2000 problems that could affect its operating software. The costs for such upgrades were not material. It is possible that certain computer systems or software products of the Company's customers or suppliers may experience year 2000 problems and that such problems could adversely affect the Company. The Company continues to assess the status of its principal suppliers' year 2000 readiness and their plans to address problems that their computer systems may face in correctly processing date information as the year 2000 approaches. However, since the ultimate success of the Company's customers and suppliers to become compliant is largely outside of the Company's control, no assurances can be made that the Company will be unaffected by the year 2000.
Should the Company's suppliers fail to achieve year 2000 compliance, the supply of product to the Company may be interrupted resulting in possible lost revenue to the Company due to its inability to supply finished product to its customers. If such interruptions are prolonged, the Company will seek alternative suppliers. However, delays may occur which could have a material adverse effect on the Company.
New Accounting Standard Not Yet Adopted
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activity." This statement establishes comprehensive accounting and reporting standards for derivative instruments and hedging activities. In June 1999, the FASB issued SFAS No. 137, deferring the required implementation of SFAS No. 133. This SFAS will be adopted by the Company in the first quarter of fiscal 2001. Implementation of this statement is not expected to affect the Company's financial position or results of operations.
Foreign Currency Activity
The Company's foreign exchange exposure is principally limited to the relationship of the U.S. dollar to the Japanese yen and the British pound sterling.
Japanese sourced products denominated in Japanese yen accounted for approximately 9% and 11% of product purchases in fiscal 1999 and 1998, respectively. In 1999, the U.S. dollar had significantly weakened in relation to the yen, resulting in increased costs for such products. The Company attempts to minimize its currency exposure on these purchases through the purchase of foreign exchange contracts. The Company also attempts to reduce the impact of an unfavorable exchange rate condition through cost reductions from its suppliers, lowering production cost through product redesign, and shifting product sourcing to suppliers transacting in more stable and favorable currencies.
Sales by the Company's U.K. based subsidiary to customers in Europe are made in pounds sterling and euros. In fiscal 1999, approximately $4.0 million of products were sold by the Company to its U.K. based subsidiary for resale. The U.S. dollar was relatively stable against the pound sterling in 1999. In years when the pound weakened significantly against the U.S. dollar, the cost of U.S. sourced product sold by this subsidiary increased. The Company attempts to minimize its currency exposure on intercompany sales through the purchase of forward exchange contracts.
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In general, the Company seeks lower costs from suppliers and enters into forward exchange contracts to mitigate exchange rate exposures. However, there can be no assurance that such steps will be effective in limiting foreign currency exposure.
Market Risk Factors
The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. The Company has a policy that prohibits the use of currency derivatives or other financial instruments for trading or speculative purposes.
The Company enters into forward exchange contracts to hedge certain foreign currency exposures and minimize the effect of such fluctuations on reported earnings and cash flow (see "Foreign Currency Activity" and Note 1 "Derivative Instruments" and "Fair Value of Financial Instruments" to the accompanying financial statements). At September 30, 1999, the Company's foreign currency exchange risks included a $1.8 million intercompany accounts receivable balance due from the Company's U.K. based subsidiary and a $534,000 Japanese Yen denominated trade accounts payable liability due to inventory suppliers. Such assets and liabilities are short term and will be settled in fiscal 2000. The following sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from year-end levels, with all other variables held constant.
At September 30, 1999, a 10% strengthening or weakening of the U.S. dollar versus the British Pound would result in a $179,000 decrease or increase, respectively, in the intercompany accounts receivable balance. Such foreign currency exchange risk at September 30, 1999 has been substantially hedged by forward exchange contracts. A 10% strengthening of the U.S. dollar versus the Japanese Yen would result in a $49,000 decrease in the trade accounts payable liability, while a 10% weakening of the dollar would result in a $59,000 increase in such liability.
At September 30, 1999, the Company had $6.2 million of outstanding floating rate bank debt and corresponding interest rate swap agreements which effectively convert the foregoing floating rate debt to stated fixed rates (see "Note 7. Long-Term Debt" to the accompanying financial statements). Thus, the Company has substantially no net interest rate exposures on these instruments.
Inflation
The impact of inflation on the Company has lessened in recent years as the rate of inflation remains low. However, inflation continues to increase costs to the Company. As operating expenses and production costs increase, the Company seeks price increases to its customers to the extent permitted by market conditions.
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"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
Statements in this Report on Form 10-K and other statements made by the Company or its representatives that are not strictly historical facts including, without limitation, statements included herein under the captions "Liquidity and Financial Condition" and "Year 2000" are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company also assumes no obligation to update its forward-looking statements or to advise of changes in the assumptions and factors on which they are based.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 14, for an index to consolidated financial statements and financial statement schedules.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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PART III
ITEM 10
ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT
The Directors and Officers of the Company are as follows:
Name Age Position Kenneth M. Darby 53 Chairman of the Board, President and Chief Executive Officer John M. Badke 40 Vice President, Finance and Chief Financial Officer John L. Eckman 50 Vice President, Sales Robert D. Grossman 39 Vice President, Customer and Technical Services Peter A. Horn 44 Vice President, Operations Yacov A. Pshtissky 48 Vice President, Technology and Development Chu S. Chun 64 Director Milton F. Gidge 70 Director Peter F. Neumann 65 Director W. Gregory Robertson 55 Director Arthur D. Roche 61 Director Kazuyoshi Sudo 57 Director
The business experience, principal occupations and employment, as well as period of service, of each of the directors and officers of the Company during at least the last five years are set forth below.
Kenneth M. Darby - Chairman of the Board, President and Chief Executive Officer. Mr. Darby has served as Chairman of the Board since April 1999, as Chief Executive Officer since April 1992 and as President since October 1991. He has served as a director since 1987. Mr. Darby also served as Chief Operating Officer and as Executive Vice President, Vice President, Finance and Treasurer of the Company. He joined the Company in 1978 as Controller after more than nine years at Peat Marwick Mitchell & Co., a public accounting firm. Mr. Darby's current term on the Board ends in April 2002.
John M. Badke - Vice President, Finance and Chief Financial Officer. Mr. Badke has been Chief Financial Officer since December 1999 and Vice President, Finance since October 1998. Previously, he served as Controller since joining the Company in 1992. Prior to joining the Company, Mr. Badke was Controller for NEK Cable, Inc. and an audit manager with the international accounting firms of Arthur Andersen & Co. and Peat Marwick Main & Co.
John L. Eckman - Vice President, Sales. Mr. Eckman has been Vice President, Sales since April 1999. He joined the Company in August 1995 as Eastern Regional Manager and was promoted to Vice President, U.S. Sales in July 1996. Prior to joining the Company, he was Director of Field Operations for Cardkey Systems, Inc., an access control security products manufacturer for which he was employed for 12 years.
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Robert D. Grossman - Vice President, Customer and Technical Services. Mr. Grossman has been Vice President, Customer and Technical Services since June 1999. He joined the Company in 1996 as Director of Technical Services. Prior to joining the Company, he was Senior Project Manager for Sensormatic Electronics Corporation, a CCTV and electronic article surveillance products manufacturer, for which he was employed for 6 years.
Peter A. Horn - Vice President, Operations. Mr. Horn has been Vice President, Operations since June 1999. From 1995 to 1999, he was Vice President, Compliance and Quality Assurance. Prior to that time, he served as Vice President in various capacities since his promotion in May 1990.
Yacov A. Pshtissky - Vice President, Technology and Development. Mr. Pshtissky has been Vice President, Technology and Development since May 1990. Mr. Pshtissky was Director of Electrical Product Development from March 1988 through April 1990. Prior to that time he was an Electrical Design Engineer.
Chu S. Chun - Director. Mr. Chun has been a director of the Company since April 1998. He has been the President of CSI, Chairman of the Board and Chief Executive Officer of International Industries, Inc. ("I.I.I.") and President of Chun Shin Electronics, Inc. since at least 1988 (see Item 13). Mr. Chun's current term on the Board ends in April 2001.
Milton F. Gidge - Director. Mr. Gidge has been a director of the Company since 1987. He is a retired director and executive officer of Lincoln Savings Bank for which he served from 1976 to 1994 as Chairman, Credit Policy. He has also been a director since 1980 of Interboro Mutual Indemnity Insurance Co., a general insurance mutual company, and a director of Intervest Bancshares Corporation of New York, a mortgage banking holding company, and another affiliated company of Intervest since 1988. His current term on the Board ends in April 2001.
Peter F. Neumann - Director. Mr. Neumann has been a director of the Company since 1987. He is the retired President of Flynn-Neumann Agency, Inc., an insurance brokerage firm. Since 1978, Mr. Neumann has been serving as a director of Reliance Federal Savings Bank. Mr. Neumann's current term on the Board ends in April 2000.
W. Gregory Robertson - Director. Mr. Robertson has been a director of the Company since 1991. He is President of TM Capital Corporation, a financial services company which he founded in 1989. From 1985 to 1989, he was employed by Thomas McKinnon Securities, Inc. as head of investment banking and public finance. Mr. Robertson's current term on the Board ends in April 2001.
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Arthur D. Roche - Director. Mr. Roche has been a director of the Company since 1992. He served as Executive Vice President and co-participant in the Office of the President of the Company from August 1993 until his retirement in November 1999. For the six months prior to that time, Mr. Roche provided consulting services to the Company. In October 1991, Mr. Roche retired as a partner of Arthur Andersen & Co., an international accounting firm which he joined in 1960. His current term on the Board ends in April 2002.
Kazuyoshi Sudo - Director. Mr. Sudo has been a director of the Company since 1987. Mr. Sudo is Chief Executive Officer of CBC (America) Corp., a distributor of electronic, chemical and optical products. From 1981 to 1996, he was Treasurer of such company. He has also been a director of CBC Company, Ltd. since 1997. Mr. Sudo's current term on the Board ends in April 2000.
There are no family relationships between any director, executive officer, officer or person nominated or chosen by the Company to become a director or officer.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company during the year ended September 30, 1999 and certain written representations, no person, who, at any time during the year ended September 30, 1999 was a director, officer or beneficial owner of more than 10 percent of any class of equity securities of the Company registered pursuant to Section 12 of the Exchange Act failed to file on a timely basis, as disclosed in the above forms, reports required by Section 16(a) of the Exchange Act during the year ended September 30, 1999.
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ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or paid for all services rendered to the Company during 1999, 1998 and 1997 by the Chief Executive Officer and the Company's most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 during any such year.
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Stock Options
Options granted in the year ended September 30, 1999 were issued under the 1999 Incentive Stock Option Plan and the 1999 Non-Qualified Stock Option Plan. The options granted above are exercisable as follows: up to 30% of the shares on the second anniversary of the grant date, an additional 30% of the shares on the third anniversary of the grant date, and the balance of the shares on the fourth anniversary of the grant date, except that no option is exercisable after the expiration of six years from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
At September 30, 1999 Number of Securities Value of Underlying Unexercised Unexercised In-the-money Options (2) Options (2) Shares Acquired Value Exercisable/ Exercisable/ Name On Exercise Realized (1) Unexercisable Unexercisable - ---------------- ----------- ------------- ------------- -------------
Kenneth M. Darby 23,200 $115,850 -0- /50,000 -0-/$6,250 Arthur D. Roche - - 14,000/5,000 $60,750/-0-
(1) Calculated based on the difference between the closing quoted market prices per share at the dates of exercise and the exercise prices.
(2) Calculated based on the difference between the closing quoted market price ($7.00) and the exercise price.
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Employment Agreements
Mr. Darby has entered into an employment agreement with the Company that provides for an annual salary of $285,000 through fiscal 2004. This agreement provides for payment in an amount up to three times his average annual compensation for the previous five years if there is a change in control of the Company without Board of Director approval (as defined in the agreement). In addition, Mr. Darby is eligible to receive cash bonuses based on performance of the Company. In 2000, his bonus arrangement provides for a cash bonus equal to 3.25% of the sum of consolidated pre-tax income and provision for officers' bonuses, which bonus formula was adopted by the Board of Directors upon the recommendation of its Compensation Committee. Mr. Darby's agreement also provides for an additional deferred compensation benefit of 8,130 shares of Common Stock held by the Company in treasury. Such benefit vests upon the expiration of his employment agreement in October 2004, or earlier upon certain occurrences including his death, involuntary termination or a change in control of the Company. The market value of such benefit approximated $51,000 at the date of grant.
Donald N. Horn and Arthur V. Wallace, both retired directors, each have deferred compensation agreements with the Company which provide retirement benefits totaling $917,000 and $631,000, respectively, and are payable in monthly installments over a 10-year period from date of retirement. These payments are subject to their adherence to certain noncompete covenants. Mr. Wallace and Mr. Horn began receiving payments under these agreements in October 1990 and January 1994, respectively.
Directors' Compensation and Term
Non-employee directors are compensated at an annual rate of $6,000 for regular meetings, and for committee membership, receive $500 per meeting attended in person. Employee directors are not compensated for Board or committee meetings. Directors may not stand for reelection after age 70.
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Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors consists of Messrs. Neumann, Gidge and Robertson, none of whom has ever been an officer of the Company.
Board Compensation Committee Report
The Compensation Committee's compensation policies applicable to the Company's officers for 1999 were to pay a competitive market price for the services of such officers, taking into account the overall performance and financial capabilities of the Company and the officer's individual level of performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base salary and incentive compensation of all officers other than himself. The Committee reviews these recommendations with Mr. Darby and, after such review, determines compensation. In the case of Mr. Darby, the Compensation Committee makes its determination after direct negotiation with him. For each officer, the committee's determinations are based on its conclusions concerning each officer's performance and comparable compensation levels in the CCTV industry and the Long Island area for similarly situated officers at comparable companies. The overall level of performance of the Company is taken into account but is not specifically related to the base salary of these officers. Also, the Company has established an incentive compensation plan for all of the officers, which provides a specified bonus to each officer upon the Company's achievement of certain annual profitability targets.
The Compensation Committee grants options to officers to link compensation to the performance of the Company. Options are exercisable in the future at the fair market value at the time of grant, so that an officer granted an option is rewarded by the increase in the price of the Company's stock. The committee grants options to officers based on significant contributions of such officer to the performance of the Company. In addition, in determining Mr. Darby's salary for service as Chief Executive Officer, the committee considered the responsibility assumed by him in formulating and implementing a management and long-term strategic plan.
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This graph compares the return of $100 invested in the Company's stock on October 1, 1993, with the return on the same investment in the AMEX Market Value Index.
(The following table was represented by a chart in the printed material)
Vicon AMEX Market Date Industries, Inc. Value Index
10/01/94 100 100 10/01/95 103 119 10/01/96 138 125 10/01/97 462 152 10/01/98 393 135 10/01/99 386 172
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ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following sets forth information as to each person, known to the Company to be a "beneficial owner" (as defined in regulations of the Securities and Exchange Commission) of more than five percent of the Company's Common Stock outstanding as of December 15, 1999 and the shares beneficially owned by the Company's Directors and by all Officers and Directors as a group.
Name and Address Amount of of Beneficial Owner Beneficial Ownership (1) % of Class ------------------- ------------------------ ---------- CBC Company, Ltd. and affiliates 2-15-13 Tsukishima Chuo-ku Tokyo, Japan 104 543,715 11.4% ****************************************************************************** C/O Vicon Industries, Inc.
Kenneth M. Darby 250,092 5.2%
Chu S. Chun 204,507 (2) 4.3%
Arthur D. Roche 153,967 (3) 3.2%
W. Gregory Robertson 19,025 (4) *
Kazuyoshi Sudo 16,125 (5) *
Milton F. Gidge 15,825 (5) *
Peter F. Neumann 15,125 (4) *
Total all Officers and Directors as a group (12 persons) 801,115 (6) 16.7%
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment power over the shares of stock owned. (2) Mr. Chun has voting and dispositive power over 204,507 shares but disclaims beneficial ownership as to all but 48,400 shares. 100,707 shares are owned by the International Industries, Inc. Profit Sharing Plan and 55,400 shares are owned by immediate family members. (3) Includes currently exercisable options to purchase 14,000 shares. (4) Includes currently exercisable options to purchase 12,125 shares. (5) Includes currently exercisable options to purchase 7,125 shares. (6) Includes currently exercisable options to purchase 141,500 shares.
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ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and CBC Company, Ltd.(CBC), a Japanese corporation which beneficially owns 11.4% of the outstanding shares of the Company, have been conducting business with each other for approximately twenty years. During this period, CBC has served as a lender, a product supplier and sourcing agent, and a private label reseller of the Company's products. Historically, CBC has provided a significant amount of funding to the Company in the form of extended accounts payable related to product purchases. CBC has also acted as the Company's sourcing agent for the purchase of certain video products. In 1999, the Company purchased approximately $5.4 million of video products from or through CBC. CBC has the exclusive right to sell Vicon brand products in Japan and competes with the Company in various markets, principally in the sale of video products and systems. Additionally, the Company sells certain finished products to CBC under private label for resale in Europe and Russia. Sales of all products to CBC were $1.3 million in 1999. Kazuyoshi Sudo, a director of the Company and of CBC, is Chief Executive Officer of CBC (America) Corp., a U.S. subsidiary of CBC.
Mr. Chu S. Chun, a director who has beneficial voting control over 4.3% of the Common Stock of the Company, also beneficially owns a controlling interest in Chun Shin Electronics, Inc., (CSE), a 34% owned South Korean company that manufactures and assembles certain Vicon products. CSE also sells various security products, including the Company's products, principally within the South Korean market. Mr. Chun is the President and has operating control of CSE. In 1999, CSE sold approximately $5.7 million of products to the Company through International Industries, Inc. (I.I.I.), a U.S. based company controlled by Mr. Chun. I.I.I. arranges the importation of all the Company's product purchases from CSE. In addition, I.I.I. purchased approximately $535,000 of products directly from the Company during 1999 for resale to CSE.
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PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
Included in Part IV, Item 14:
Independent Auditors' Report
Financial Statements:
Consolidated Statements of Operations, fiscal years ended September 30, 1999, 1998, and 1997
Consolidated Balance Sheets at September 30, 1999 and 1998
Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 1999, 1998, and 1997
Consolidated Statements of Cash Flows, fiscal years ended September 30, 1999, 1998, and 1997
Notes to Consolidated Financial Statements, fiscal years ended September 30, 1999, 1998, and 1997
(a) (2) Financial Statement Schedule
Included in Part IV, Item 14:
Schedule I - Valuation and Qualifying Accounts for the years ended September 30, 1999, 1998, and 1997
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted.
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14(a)(3) Exhibits Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ---------------- 3 Articles of Incorporation and Incorporated by reference By-Laws, as amended to the 1985 Annual Report on Form 10-K; Form S-2 filed in Registration Statement No. 33-10435 and Exhibit A, B and C of the 1987 Proxy Statement 10 Material Contracts
(.1) Employment Contract dated 10.1 October 1, 1999 between the Registrant and Kenneth M. Darby
(.2) Employment Contract dated October Incorporated by reference 1, 1996 between Registrant to the 1996 Annual Report and Arthur D. Roche on Form 10-K
(.3) Employment Agreement dated October 10.3 1, 1999 between Registrant and John L. Eckman
(.4) Employment Agreement dated October 10.4 1, 1999 between Registrant and Peter Horn
(.5) Employment Agreement dated October 10.5 1, 1999 between Registrant and Yacov Pshtissky
(.6) Deferred Compensation Agreements Incorporated by dated November 1, 1986 between the reference to the 1992 Registrant and Donald N. Horn and Annual Report on Arthur V. Wallace Form 10K
(.7) Amended and restated 1986 Incorporated by Incentive Stock Option Plan reference to the 1990 Annual Report on Form 10-K (.8) 1994 Incentive Stock Option Plan Incorporated by reference to the 1994 Annual Report on Form 10-K
(.9) 1994 Non-Qualified Stock Option Incorporated by Plan for Outside Directors reference to the 1994 Annual Report on Form 10-K
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Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ---------------- (.10) 1996 Incentive Stock Option Plan Incorporated by reference to the 1997 Annual Report on Form 10-K
(.11) 1996 Non-Qualified Stock Option Incorporated by Plan for Outside Directors reference to the 1997 Annual Report on Form 10-K
(.12) Commercial fixed rate loan Incorporated by agreement between the Registrant reference to the and National Westminster Bank PLC June 30, 1997 filing dated April 8, 1997 on Form 10-Q
(.13) Loan Agreement between the Incorporated by Registrant and KeyBank National reference to the Association dated January 29, 1998 December 31, 1997 filing on Form 10-Q
(.14) Mortgage Note between the Incorporated by Registrant and KeyBank National reference to the Association dated January 29, 1998 December 31, 1997 filing on Form 10-Q
(.15) Term Loan Note between the Incorporated by Registrant and KeyBank National reference to the Association dated January 29, 1998 December 31, 1997 filing on Form 10-Q
(.16) Mortgage and Security Agreement Incorporated by in the amount of $2,512,000 between reference to the the Registrant and KeyBank National December 31, 1997 Association dated January 29, 1998 filing on Form 10-Q
(.17) Mortgage and Security Agreement Incorporated by in the amount of $388,000 between reference to the the Registrant and KeyBank National December 31, 1997 Association dated January 29, 1998 filing on Form 10-Q
(.18) Interest rate master swap agreement Incorporated by between the Registrant and KeyBank reference to the National Association dated December 31, 1997 December 11, 1997 filing on Form 10-Q
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Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ---------------- (.19) Schedule to the master agreement Incorporated by between the Registrant and KeyBank reference to the National Association dated December 31, 1997 December 11, 1997 filing on Form 10-Q
(.20) Swap transaction confirmation with Incorporated by a notional amount of $2,512,000 reference to the between the Registrant and KeyBank December 31, 1997 National Association dated filing on Form 10-Q December 30, 1997
(.21) Swap transaction confirmation with Incorporated by a notional amount of $388,000 reference to the between the Registrant and KeyBank December 31, 1997 National Association dated filing on Form 10-Q December 30, 1997
(.22) Advice of borrowing terms Incorporated by between the Registrant and reference to the National Westminster Bank PLC June 30, 1999 filing dated February 22, 1999 on Form 10-Q
(.23) Credit Agreement between the Incorporated by Registrant and KeyBank reference to the International dated June 30, 1998 filing July 20, 1998 on Form 10-Q
(.24) Swap transaction confirmation with Incorporated by a notional amount of $4,425,000 reference to the between the Registrant and KeyBank 1998 Annual Report National Association dated on Form 10-K September 9, 1998
(.25) Stock purchase agreement between 10.25 the Registrant and Isaac Gershoni dated August 12, 1999
(.26) Escrow agreement among the 10.26 Registrant, Isaac Gershoni and European American Bank dated August 12, 1999
(.27) Loan Agreement between the 10.27 Registrant and KeyBank National Association dated October 12, 1999
(.28) Mortgage Note between the 10.28 Registrant and KeyBank National Association dated October 12, 1999
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Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- --------------- (.29) Mortgage and Security Agreement 10.29 in the amount of $1,200,000 between the Registrant and KeyBank National Association dated October 12, 1999
(.30) 1999 Incentive Stock Option Plan 10.30
(.31) 1999 Non-Qualified Stock Option 10.31
22 Subsidiaries of the Registrant Incorporated by reference to the Notes to the Consolidated Financial Statements
24 Independent Auditors' Consent 24
No other exhibits are required to be filed.
14(b) - REPORTS ON FORM 8-K
No reports on Form 8-K were required to be filed during the last quarter of the period covered by this report.
Other Matters - Form S-8 and S-2 Undertaking
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892 (filed June 30, 1986), 33-34349 (filed April 1, 1990), 33-90038 (filed February 24, 1995) and 333-30097 (filed June 26, 1997) and on Form S-2 No. 333-46841 (effective May 1, 1998):
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
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Independent Auditors' Report
The Board of Directors and Shareholders Vicon Industries, Inc.:
We have audited the consolidated financial statements of Vicon Industries, Inc. and subsidiaries as listed in Part IV, item 14(a)(1). In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Part IV, item 14(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vicon Industries, Inc. and subsidiaries at September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Melville, New York November 30, 1999
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VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997 ---- ---- ----
Net sales $73,414,046 $63,310,466 $51,518,940 Cost of sales 48,714,749 42,478,384 37,043,750 ------------ ------------ ------------ Gross profit 24,699,297 20,832,082 14,475,190
Operating expenses: Selling expense 12,201,943 9,536,988 7,957,340 General and administrative expense 4,604,702 4,426,107 3,767,529 ----------- ----------- ----------- 16,806,645 13,963,095 11,724,869 ----------- ----------- -----------
Operating income 7,892,652 6,868,987 2,750,321
Interest expense 591,826 1,107,196 1,143,699 Other income (141,003) (48,190) (39,896) ----------- ----------- ----------- Income before income taxes 7,441,829 5,809,981 1,646,518 Income tax expense 2,681,628 - 82,000 ----------- ----------- ------------
Net income $4,760,201 $5,809,981 $ 1,564,518 =========== =========== ============
Earnings per share:
Basic $1.05 $1.61 $ .56 ===== ===== =====
Diluted $1.01 $1.50 $ .52 ===== ===== =====
See accompanying notes to consolidated financial statements.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1999 and 1998
ASSETS 1999 1998 - ------ ---- ---- Current Assets: Cash $ 1,998,767 $4,854,557 Accounts receivable (less allowance of $818,000 in 1999 and $694,000 in 1998) 13,771,411 12,758,080 Inventories: Parts, components, and materials 2,647,781 2,944,303 Work-in-process 5,298,862 2,374,769 Finished products 13,381,900 12,079,335 ----------- ----------- 21,328,543 17,398,407 Deferred income taxes 1,303,791 1,079,736 Prepaid expenses 630,716 332,241 ----------- ----------- Total current assets 39,033,228 36,423,021 Property, plant and equipment: Land 1,195,248 1,204,498 Buildings and improvements 5,156,490 4,185,298 Machinery, equipment, and vehicles 8,188,688 7,312,594 ----------- ----------- 14,540,426 12,702,390 Less accumulated depreciation and amortization 6,486,937 5,565,352 8,053,489 7,137,038 Goodwill, net of accumulated amortization 1,768,056 37,724 Deferred income taxes 264,218 116,973 Other assets 780,028 671,645 ----------- ---------- $49,899,019 $44,386,401 =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Borrowings under revolving credit agreement $ 374,806 $ 634,388 Current maturities of long-term debt 1,212,316 1,179,367 Accounts payable 4,022,892 3,133,505 Accrued compensation and employee benefits 2,233,441 1,955,462 Accrued expenses 1,749,395 1,316,855 Unearned service revenue 224,711 - Income taxes payable 167,013 561,173 ----------- ----------- Total current liabilities 9,984,574 8,780,750
Long-term debt 5,798,641 7,001,819 Unearned service revenue 639,169 - Other long-term liabilities 728,284 767,528 Commitments and contingencies - Note 11 Shareholders' equity Common stock, par value $.01 per share authorized - 10,000,000 shares issued 4,654,760 and 4,534,710 shares 46,547 45,347 Capital in excess of par value 21,343,676 20,947,515 Retained earnings 11,851,089 7,090,888 ----------- ----------- 33,241,312 28,083,750 Less treasury stock at cost, 74,948 shares in 1999 and 62,517 shares in 1998 (508,745) (409,687) Accumulated other comprehensive income 15,784 162,241 ----------- ------------ Total shareholders' equity 32,748,351 27,836,304 ----------- ----------- $49,899,019 $44,386,401 =========== ===========
See accompanying notes to consolidated financial statements
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VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years ended September 30, 1999, 1998, and 1997
NOTE 1. Summary of Significant Accounting Policies
Nature of Operations
The Company designs, manufactures, assembles and markets closed circuit television systems for use in security, surveillance, safety and control purposes by end users. The Company markets its products worldwide directly to installing dealers, systems integrators, government entities and distributors.
Principles of Consolidation
The consolidated financial statements include the accounts of Vicon Industries, Inc. (the Company) and its wholly owned subsidiaries: Vicon Industries Limited (formerly Vicon Industries (U.K.), Ltd.), TeleSite U.S.A., Inc. and subsidiary (Q.S.R. Ltd.), and Vicon Industries Foreign Sales Corp.; and its majority owned (60%) subsidiary, Vicon Industries (H.K.) Ltd., after elimination of intercompany accounts and transactions.
Revenue Recognition
Revenues are recognized when products are sold and title is passed to a third party, generally at the time of shipment. Advance service billings under a national supply contract with one customer are deferred and recognized as revenues on a pro rata basis over the term of the service agreement.
Inventories
Inventories are valued at the lower of cost (on a moving average basis which approximates a first-in, first-out method) or market. When it is determined that a product or product line will be sold below carrying cost, affected on hand inventories are written down to their estimated net realizable values.
Long-Lived Assets
Property, plant, and equipment are recorded at cost and include expenditures for replacements or major improvements. Depreciation, which includes amortization of assets under capital leases, is computed by the straight-line method over the estimated useful lives of the related assets. Machinery, equipment and vehicles are being depreciated over periods ranging from 2 to 10 years. The Company's buildings are being depreciated over periods ranging from 25 to 40 years and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term.
The Company reviews its long-lived assets (property, plant and equipment) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value.
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Goodwill
Goodwill represents the excess of purchase price over the fair value assigned to net assets acquired and is being amortized on a straight-line basis over 10 years. Periodically, the Company reviews the recoverability of goodwill. The measurement of possible impairment is based primarily on the ability to recover the balance of goodwill from expected future operating cash flows on an undiscounted basis. Accumulated amortization amounted to $41,668 and $5,389 at September 30, 1999 and 1998, respectively.
Research and Development
Product research and development costs are principally charged to cost of sales as incurred, and amounted to approximately $2,600,000, $2,200,000 and $2,000,000 in fiscal 1999, 1998, and 1997, respectively.
Earnings Per Share
The Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" requires companies to present basic and diluted earnings per share (EPS). Basic EPS is computed based on the weighted average number of shares outstanding. Diluted EPS reflects the maximum dilution that would have resulted from the exercise of stock options, warrants and incremental shares issuable under a deferred compensation agreement (see Note 10).
Foreign Currency Translation
Foreign currency translation is performed utilizing the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, while revenues, costs, and expenses are translated at the average exchange rate for the reporting period. The resulting translation adjustment of $16,000 and $162,000 at September 30, 1999 and 1998, respectively, is recorded as a component of shareholders' equity.
Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled (see Note 6).
Derivative Instruments
The Company's derivative financial instruments consist of foreign currency forward exchange contracts and interest rate swap agreements. The Company enters into forward exchange contracts to hedge intercompany accounts receivable with its U.K. based subsidiary and Japanese Yen denominated trade accounts payable liabilities due inventory suppliers. The forward exchange contracts have maturities of less than one year and require the Company to exchange currencies at specified dates and rates. Gains and losses on these contracts are recorded in cost of sales generally when incurred.
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The Company entered into interest rate swap agreements with its bank to effectively convert its floating rate long-term debt to fixed interest rates (see Note 7). Such agreements mature in the same amounts and over the same periods as the related debt. Outstanding notional amounts under such agreements approximated $6.2 million at September 30, 1999. Gains and losses on these contracts are recorded in interest expense when incurred.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure of the fair value of certain financial instruments. The carrying amounts for accounts and other receivables, accounts payable and accrued expenses approximate fair value because of the short-term maturity of these instruments. The carrying amounts of the Company's long-term debt approximate fair value. The carrying amounts of the Company's interest rate swap agreements approximated their fair market value at September 30, 1999. This value represents the estimated amount the Company would have to pay or would receive if such agreements were terminated before maturity, principally resulting from market interest rate changes. The fair value of forward exchange contracts is estimated by obtaining quoted market prices. The contracted exchange rates on committed forward exchange contracts at September 30, 1999 and 1998 approximated market rates for similar term contracts (see Note 11).
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
Segment Data
On September 30, 1999, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The new rules establish revised standards for public companies relating to the reporting of financial and descriptive information about their business segments in financial statements. The adoption of SFAS 131 did not have an effect on the Company's primary financial statements, but did affect the disclosure of segment information contained in Note 8 of the Notes to the Consolidated Financial Statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation.
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NOTE 2. Business Acquisitions
In August 1999, the Company acquired all of the outstanding shares of TeleSite U.S.A., Inc., a manufacturer and distributor of remote video surveillance systems, for $2.1 million. As additional compensation, the Company is liable to pay the sellers an amount equal to 30% of the acquired operation's yearly incremental consolidated sales for a three-year period commencing January 1, 2000. The acquisition has been accounted for as a purchase, and the results of the operations of the acquired business have been included in the consolidated financial statements since the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired of approximately $1.8 million has been recorded as goodwill and is being amortized on a straight-line basis over 10 years.
Assuming this acquisition had occurred on October 1, 1997, consolidated net sales would have been approximately $75.9 million for 1999 and $65.6 million for 1998. Consolidated pro forma net income and earnings per share would not have been materially different from the reported amounts for 1999 and 1998. Such unaudited pro forma amounts are not indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 1998.
In July 1998, the Company increased its interest to 60% in Vicon Industries (H.K.) Ltd. for approximately $197,000 in cash. The acquisition was accounted for as a purchase with the assets, liabilities and operations of the acquired business being consolidated with those of the Company since the acquisition date. The excess cost over the fair value of net assets acquired and the results of operations for this subsidiary for fiscal 1999 were not material.
NOTE 3. Investment in Affiliate
In September 1999, the Company's 50% ownership interest in Chun Shin Electronics, Inc. (CSE), a South Korean company which manufactures and assembles certain Vicon products, decreased to 34% with the merger of Chun Shin Industries, Inc. (CSI) into CSE. CSI is the former 50% shareholder of CSE and sells various security products, including the Company's products, principally within the South Korean market. The Company has not recognized its interest in the accumulated earnings of CSE since it does not have control over the operations of CSE and does not have the ability to repatriate any of its accumulated earnings. Net assets of CSE were approximately $5.6 million at September 30, 1999.
Note 4. Public Offering
In May 1998, the Company sold 1,371,200 shares of its common stock in a public offering, the net proceeds of which were approximately $10.8 million. The proceeds were principally used to repay certain interest bearing borrowings.
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NOTE 5. Short-Term Borrowings
Borrowings under the Company's short-term revolving credit agreement represent borrowings by the Company's U.K. based subsidiary under a bank overdraft facility. Such credit agreement provides for maximum borrowings of 600,000 pounds ($990,000) and is secured by all the assets of the subsidiary. Maximum borrowings during 1999, 1998 and 1997 amounted to approximately $852,000, $676,000 and $1,282,000, respectively. The weighted-average interest rate on borrowings during these years was 7.80% in 1999, 9.33% in 1998 and 8.27% in 1997.
NOTE 6. Income Taxes
The components of income tax expense for the fiscal years indicated are as follows:
1999 1998 1997 ---- ---- ----
Federal $ 2,392,000 $ (515,000) $ 24,000 State 200,000 380,000 5,000 Foreign 90,000 135,000 53,000 ------------- ----------- ------------ $ 2,682,000 $ - $ 82,000 ============= =========== ============
A reconciliation of the U.S. statutory tax rate to the Company's effective tax rate follows:
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 1999 and 1998 are presented below:
1999 1998 ---- ----
Deferred tax assets: Inventory reserves $1,009,000 $ 865,000 Deferred compensation accruals 179,000 186,000 Allowance for doubtful accounts receivable 256,000 226,000 Unearned service revenue 128,000 - Other 88,000 9,000 ---------- ---------- Total deferred tax assets 1,660,000 1,286,000
Deferred tax liabilities: Cash surrender value of officers' life insurance 46,000 58,000 Other 46,000 31,000 ---------- ----------- Total deferred tax liabilities 92,000 89,000 ---------- ----------- Net deferred tax assets and liabilities $1,568,000 $ 1,197,000 ---------- -----------
During fiscal year 1998, the Company fully utilized its remaining federal net operating loss carryforward and reversed the remaining valuation allowance based on management's assessment that it is reasonably assured that all net deferred income tax assets will be realized in the future given the Company's present level of earnings. Pretax domestic income amounted to approximately $7,385,000, $5,462,000 and $1,414,000 in fiscal years 1999, 1998 and 1997, respectively. Pretax foreign income amounted to approximately $57,000, $348,000 and $233,000 in fiscal years 1999, 1998 and 1997, respectively.
NOTE 7. Long-Term Debt
Long-term debt is comprised of the following at September 30, 1999 and 1998: 1999 1998 ---- ----
U.S. bank term loan $3,525,000 $4,425,000 U.S. bank mortgage loan 2,679,000 2,820,900 U.K. bank term loan 625,626 729,584 Other 181,331 205,702 ---------- ---------- 7,010,957 8,181,186 Less installments due within one year 1,212,316 1,179,367 ---------- ----------
$5,798,641 $7,001,819 ========== ==========
In July 1998, the Company entered into a $14 million unsecured revolving credit and term loan agreement with a bank. Such agreement includes a $7.5 million revolving credit facility, which expires in July 2002, with an option to increase the facility to $9.5 million at any time through July 2000. Borrowings under this facility bear interest at the bank's prime rate minus 2% or, at the Company's option, LIBOR plus 90 basis points (6.25% and 6.30% at September 30, 1999). At September 30, 1999 and 1998, there were no revolving credit borrowings outstanding under this agreement.
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The agreement also provided for a $4.5 million five-year term loan payable in equal monthly installments through July 2003, with interest at LIBOR plus 100 basis points. The agreement contains restrictive covenants which, among other things, require the Company to maintain certain levels of earnings and ratios of debt service coverage and debt to tangible net worth. In September 1998, the Company entered into an interest rate swap agreement with the same bank to effectively convert the foregoing floating rate long-term loan to a fixed rate loan. This agreement fixes the Company's interest rate on its $4.5 million term loan at 6.74%. The interest rate swap agreement matures in the same amounts and over the same periods as the related term loan.
In January 1998, the Company entered into an aggregate $2.9 million mortgage and term loan agreement with a bank to finance the purchase of its principal operating facility. Such agreement includes a $2,512,000 ten-year mortgage loan payable in monthly installments through January 2008, with a $1,188,000 payment due at the end of the term. The agreement also provides a $388,000 five-year term loan payable in monthly installments through January 2003, with a $138,500 payment due at the end of the term. Both loans bear interest at the bank's prime rate minus 1.35%. The loans are secured by a first mortgage on the property and fixtures and contain restrictive covenants that, among other things, require the Company to maintain certain levels of earnings and ratios of debt service coverage and debt to tangible net worth. At the same time, the Company entered into interest rate swap agreements with the same bank to effectively convert the foregoing floating rate long-term loans to fixed rate loans. These agreements fix the Company's interest rate on its $2,512,000 mortgage loan at 7.79% and its $388,000 term loan at 7.7%. The interest rate swap agreements mature in the same amounts and over the same periods as the related mortgage and term loans.
In October 1999, the Company entered into a $1.2 million mortgage loan agreement with its bank to finance the expansion of its principal operating facility. The loan is payable in equal monthly principal installments through January 2008, with a $460,000 payment due at the end of the term. The loan bears interest at the bank's prime rate minus 160 basis points or, at the Company's option, LIBOR plus 100 basis points and contains the same covenants as included in the existing mortgage loans.
In April 1997, the Company's U.K. based subsidiary entered into a ten-year 500,000 pound sterling (approximately $825,000) bank term loan. The term loan is payable in equal monthly installments with interest at a fixed rate of 9%. The loan is secured by a first mortgage on the subsidiary's property and contains restrictive covenants which, among other things, require the subsidiary to maintain certain levels of net worth, earnings and debt service coverage.
Long-term debt maturing in each of the fiscal years subsequent to September 30, 1999 approximates $1,212,000 in 2000, $1,216,000 in 2001, $1,199,000 in 2002, $1,197,000 in 2003, $438,000 in 2004 and $1,749,000 thereafter.
At September 30, 1999, future minimum annual rental commitments under non-cancelable capital lease obligations were as follows: $69,334 per year in 2000 and 2001, and $33,454 in 2002.
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NOTE 8. Segment and Related Information
The Company adopted SFAS 131, "Disclosures About Segments of an Enterprise and Related Information" in 1999, which changes the way the Company reports information about its operating segments. The information for 1998 and 1997 has been restated from the prior year's presentation in order to conform to the 1999 presentation.
The Company operates in one industry which encompasses the design, manufacture, assembly and marketing of closed-circuit video systems and system components for the electronic protection segment of the security industry. The Company manages its business segments primarily on a geographic basis. The Company's principal reportable segments are comprised of its United States (U.S.) and United Kingdom (U.K.) based operations. Its U.S. based operations consist of Vicon Industries, Inc., the Company's corporate headquarters and principal operating entity. Its U.K. based operations consist of Vicon Industries Limited, a wholly owned subsidiary which markets and distributes the Company's products principally within Europe. Other segments include the operations of Vicon Industries (H.K.), Ltd., a Hong Kong based majority owned subsidiary which markets and distributes the Company's products principally within Hong Kong and mainland China and TeleSite U.S.A., Inc. and subsidiary, a U.S. and Israeli based manufacturer and distributor of remote video surveillance systems.
The Company evaluates performance and allocates resources based on, among other things, the net profit for each segment, which excludes intersegment sales and profits. Segment information for the fiscal years ended September 30, 1999, 1998 and 1997 is as follows:
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The consolidating segment presented above includes the elimination and consolidation of intersegment transactions. Net sales and long-lived assets related to operations in the United States and other foreign countries for the fiscal years ended September 30, 1999, 1998, and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Net sales U.S. $63,236,000 $54,184,000 $43,605,000 Foreign 10,178,000 9,126,000 7,914,000 ----------- ----------- ---------- Total $73,414,000 $63,310,000 $51,519,000
Long-lived assets U.S. $ 6,234,000 $ 5,443,000 $ 2,059,000 Foreign 1,819,000 1,694,000 1,433,000 ---------- ----------- ---------- Total $ 8,053,000 $ 7,137,000 $ 3,492,000
U.S. sales include $5,236,000, $9,853,000 and $10,747,000 for export in fiscal years 1999, 1998, and 1997, respectively. Indirect sales to the United States Postal Service under a national supply contract approximated $22.7 million and $12.0 million in fiscal 1999 and 1998, respectively.
NOTE 9. Stock Options and Stock Purchase Warrants
The Company maintains stock option plans which include both incentive and non-qualified options covering a total of 430,532 shares of common stock reserved for issuance to key employees, including officers and directors. Such amount includes a total of 100,000 options reserved for issuance under the 1999 Incentive Stock Option Plan, as well as a total of 100,000 options reserved for issuance under the 1999 Non-Qualified Stock Option Plan, approved by the shareholders in April 1999. All options are issued at fair market value at the grant date and are exercisable in varying installments according to the plans. The plans allow for the payment of option exercises through the surrender of previously owned shares based on the fair market value of such shares at the date of surrender. During fiscal 1999 and 1998, a total of 12,431 and 16,565 common shares, respectively, were surrendered pursuant to stock option exercises, which are held in treasury. There were 59,885 shares available for grant at September 30, 1999.
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Changes in outstanding stock options for the three years ended September 30, 1999 are as follows:
Weighted Number Average of Exercise Shares Price - ------------------------------------------------------------------- Balance - September 30, 1996 444,649 $1.83 Options granted 241,000 $2.77 Options exercised (244,332) $1.95 Options forfeited (21,820) $2.35 - ------------------------------------------------------------------- Balance - September 30, 1997 419,497 $2.27 Options granted 48,250 $6.98 Options exercised (116,450) $2.18 Options forfeited (1,400) $6.50 - ------------------------------------------------------------------- Balance - September 30, 1998 349,897 $2.94 Options granted 143,000 $7.50 Options exercised (120,050) $2.26 Options forfeited (2,200) $7.00 - ------------------------------------------------------------------- Balance - September 30, 1999 370,647 $4.89 Price range $1.69 - $3.06 (weighted-average contractual 183,897 $2.36 life of 1.9 years) Price range $6.75 - $8.19 (weighted-average contractual 186,750 $7.38 life of 5.2 years) - ------------------------------------------------------------------- Exercisable options - September 30, 1997 149,838 $1.96 September 30, 1998 253,123 $2.47 September 30, 1999 210,147 $2.94 - -------------------------------------------------------------------
Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of this Statement. The fair value for options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- - ------------------------------------------------------------------------------ Risk-free interest rate 5.0% 5.0% 6.0% Dividend yield 0.0% 0.0% 0.0% Volatility factor 59.0% 67.3% 52.7% Weighted average expected life 4 years 3 years 3 years - ------------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
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For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net income and earnings per share are as follows:
1999 1998 1997 ---- ---- ---- Net income: As reported $4,760,201 $5,809,981 $1,564,518 Pro forma $4,646,938 $5,638,166 $1,364,368
Earnings per share:
As reported Basic $1.05 $1.61 $ .56 Diluted $1.01 $1.50 $ .52
Pro forma Basic $1.03 $1.56 $ .49 Diluted $ .98 $1.46 $ .45
Weighted average fair value of options granted $3.74 $3.34 $1.13
Pro forma earnings reflect only options granted since October 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period and compensation cost for options granted prior to October 1, 1995 was not considered.
In connection with the public offering, the Company granted the Underwriters warrants to purchase up to 145,000 shares of Common Stock. The warrants are exercisable at any time through May 2003 at a price of $10.50 per share.
NOTE 10. Earnings Per Share
The following table provides the components of the basic and diluted earnings per share (EPS) computations: 1999 1998 1997 ---- ---- ---- Basic EPS Computation
Net income $4,760,201 $5,809,981 $1,564,518 Weighted average shares outstanding 4,519,344 3,605,307 2,803,805
Basic earnings per share $ 1.05 $ 1.61 $ .56 ========== ========== ==========
Diluted EPS Computation
Net income $4,760,201 $5,809,981 $1,564,518 Weighted average shares outstanding 4,519,344 3,605,307 2,803,805 Stock options 185,940 260,425 218,191 Stock compensation arrangement 13,075 7,343 - --------- --------- --------- Diluted shares outstanding 4,718,358 3,873,075 3,021,996
Diluted earnings per share $ 1.01 $ 1.50 $ .52 ========== ========== ==========
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NOTE 11. Commitments
The Company occupies certain facilities, or is contingently liable, under operating leases that expire at various dates through 2008. The leases, which cover periods from three to nine years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment at September 30, 1999 was $522,000 with minimum rentals for the fiscal years shown as follows: 2000 - $158,000; 2001 - $136,000; 2002 - $73,000; 2003 - $27,000; 2004 - - $25,000; 2005 and thereafter - $103,000.
The Company is a party to employment agreements with four executives that provide for, among other things, the payment of compensation if there is a change in control without Board of Director approval (as defined in the agreements). The contingent liability under such change in control provisions at September 30, 1999 was approximately $1,605,000. The total compensation payable under these agreements, absent a change in control, aggregated $2,215,000 at September 30, 1999. The Company is also a party to insured deferred compensation agreements with two retired officers. The aggregate remaining compensation payments of approximately $495,000 as of September 30, 1999 are subject to the individuals' adherence to certain non-compete covenants, and are payable in monthly installments through December 2003. In October 1997, 1998 and 1999, the Company's Chief Executive Officer was provided a deferred compensation benefit of 45,952, 16,565 and 8,130 shares, respectively, of common stock currently held by the Company in treasury. Such shares vest upon the expiration of the executive's employment agreement in October 2004, or earlier under certain occurrences including his death, involuntary termination or a change in control of the Company. The market value of such shares approximated $507,000 at the dates of grant, which is being amortized on the straight-line method over the term of the employment agreement.
Sales to customers from the Company's U.K. based subsidiary are denominated in British pounds sterling. The Company attempts to minimize its currency exposure on these sales through the purchase of forward exchange contracts to cover its billings to this subsidiary. These contracts generally involve the exchange of one currency for another at a future date and specified exchange rate. At September 30, 1999 and 1998, the Company had approximately $1,550,000 and $2,200,000, respectively, of outstanding forward exchange contracts to sell British pounds. Such contracts have maturities of less than one year.
The Company's purchases of Japanese sourced products through CBC Company, Ltd., a related party, are denominated in Japanese yen. At September 30, 1999, the Company had approximately $1,059,000 of outstanding forward exchange contracts to purchase Japanese yen. At September 30, 1998, the Company did not have any forward exchange contracts to purchase Japanese yen.
The Company received notice from a competitor asserting that certain of the Company's products infringe upon a patent it allegedly owns and is seeking royalties on the Company's sales of such products. The Company is reviewing the claim and believes that it has good defenses in this matter. No assurance can be given that this matter will be resolved in the Company's favor and no reasonable estimate of potential loss, if any, can be made at this time.
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NOTE 12. Related Party Transactions
As of September 30, 1999, CBC Company, Ltd. and affiliates ("CBC") owned approximately 12.0% of the Company's outstanding common stock. The Company, which has been conducting business with CBC for approximately 20 years, imports certain finished products and components through CBC and also sells its products to CBC who resells the products in certain Asian and European markets. The Company purchased approximately $5.4 million, $5.3 million and $7.1 million of products and components from CBC in fiscal years 1999, 1998, and 1997, respectively, and the Company sold $1.3 million, $4.1 million and $2.7 million of product to CBC for distribution in fiscal years 1999, 1998, and 1997, respectively. At September 30, 1999 and 1998, the Company owed $955,000 and $652,000, respectively, to CBC and CBC owed $27,000 and $491,000, respectively, to the Company resulting from purchases of products.
As of September 30, 1999, Mr. Chu S. Chun had voting control over approximately 4.5% of the Company's outstanding common stock. Mr. Chun beneficially owns a controlling interest in Chun Shin Electronics, Inc. (CSE), a South Korean supplier of certain of the Company's products (see Note 3). Mr. Chun also controls International Industries, Inc. (I.I.I.), a U.S. based company, which arranges the importation of all the Company's products purchased directly or indirectly from CSE. During fiscal years 1999 and 1998, the Company purchased approximately $5.7 million and $8.0 million of products from CSE through I.I.I. under this agreement. In addition, the Company sold approximately $535,000 and $344,000 of its products to I.I.I. in 1999 and 1998, respectively, for resale to CSE. At September 30, 1999 and 1998, I.I.I. owed the Company approximately $238,000 and $59,000, respectively.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA
(Unaudited)
Earnings Per Share ------------------ Quarter Net Gross Net Ended Sales Profit Income Basic Diluted ------- ----- ------ ------ ----- -------
Fiscal 1999 December $17,128,000 $ 5,609,000 $ 1,060,000 $ .24 $ .23 March 17,500,000 5,895,000 1,161,000 .26 .25 June 19,493,000 6,614,000 1,346,000 .30 .28 September 19,293,000 6,581,000 1,193,000 .26 .25 ----------- ----------- ----------- ----- ----- Total $73,414,000 $24,699,000 $ 4,760,000 $1.05 $1.01 =========== =========== =========== ===== =====
Fiscal 1998 December $14,874,000 $4,628,000 $ 1,009,000 $ .34 $ .31 March 14,731,000 4,826,000 1,154,000 .38 .35 June 16,106,000 5,451,000 1,575,000 .40 .38 September 17,599,000 5,927,000 2,072,000 .46 .44 ----------- ----------- ----------- ----- ----- Total $63,310,000 $20,832,000 $ 5,810,000 $1.61 $1.50 =========== =========== =========== ===== =====
The Company has not declared or paid cash dividends on its common stock for any of the foregoing periods. Additionally, certain loan agreements restrict the payment of any cash dividends in future periods.
Because of changes in the number of common shares outstanding and market price fluctuations affecting outstanding stock options, the sum of quarterly earnings per share may not equal the earnings per share for the full year.
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SCHEDULE I
VICON INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years ended September 30, 1999, 1998, and 1997
Balance at Charged to Balance beginning costs and at end Description of period expenses Deductions of period ----------- --------- ---------- ---------- --------- Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts:
September 30, 1999 $694,000 $290,000 $166,000 $818,000 ======== ======== ======== ========
September 30, 1998 $493,000 $285,000 $ 84,000 $694,000 ======== ======== ======== ========
September 30, 1997 $396,000 $273,000 $176,000 $493,000 ======== ======== ======== ========
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By Kenneth M. Darby By John M. Badke ------------------------- ------------------------- Kenneth M. Darby John M. Badke Chairman Vice President, Finance (Chief Executive Officer) (Chief Financial Officer)
December 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
VICON INDUSTRIES, INC.
Kenneth M. Darby December 29, 1999 - --------------------- --------------------- Kenneth M. Darby Chairman and CEO Date
Chu S. Chun December 29, 1999 - --------------------- --------------------- Chu S. Chun Director Date
Milton F. Gidge December 29, 1999 - --------------------- --------------------- Milton F. Gidge Director Date
Peter F. Neumann December 29, 1999 - --------------------- --------------------- Peter F. Neumann Director Date
W. Gregory Robertson December 29, 1999 - --------------------- --------------------- W. Gregory Robertson Director Date
Arthur D. Roche December 29, 1999 - --------------------- --------------------- Arthur D. Roche Director Date
Kazuyoshi Sudo December 29, 1999 - --------------------- --------------------- Kazuyoshi Sudo Director Date
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By By Kenneth M. Darby John M. Badke Chairman Vice President, Finance (Chief Executive Officer) (Chief Financial Officer)
December 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
VICON INDUSTRIES, INC.
December 29, 1999 - --------------------- --------------------- Kenneth M. Darby Chairman and CEO Date
December 29, 1999 - --------------------- --------------------- Chu S. Chun Director Date
December 29, 1999 - --------------------- --------------------- Milton F. Gidge Director Date
December 29, 1999 - --------------------- --------------------- Peter F. Neumann Director Date
December 29, 1999 - --------------------- --------------------- W. Gregory Robertson Director Date
December 29, 1999 - --------------------- --------------------- Arthur D. Roche Director Date
December 29, 1999 - --------------------- --------------------- Kazuyoshi Sudo Director Date - 50 -