SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
September 30, 2002 Commission File No. 1-7939
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VICON INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK 11-2160665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01
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(Title of class)
American Stock Exchange
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(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of December 13, 2002 was approximately $17,200,000.
The number of shares outstanding of the registrant's Common Stock as of December
13, 2002 was 4,642,062.
PART I
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ITEM 1 - BUSINESS
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General
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Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs,
manufactures, assembles and markets a wide range of video systems and system
components used for security, surveillance, safety and control purposes by a
broad group of end users. A video system is typically a private network that can
transmit and receive video, audio and data signals in accordance with the
operational needs of the user. The Company's primary business focus is the
design of digital video systems and components that it produces and sells
worldwide, primarily to installing dealers, system integrators, government
entities and distributors.
The Company operates within the electronic protection segment of the security
industry that includes, among others: fire and burglar alarm systems, access
control, video systems and article surveillance. The U.S. security industry
consists of thousands of individuals and businesses (exclusive of public sector
law enforcement) that provide products and services for the protection and
monitoring of life, property and information. The security industry includes
fire and burglar alarm systems, access control, video systems, article
surveillance, guard services and equipment, locks, safes, armored vehicles,
security fencing, private investigations and others. The Company's products are
typically used for crime deterrence, visual documentation, observation of
inaccessible or hazardous areas, enhancing safety, managing personal liability,
obtaining cost savings (such as lower insurance premiums), managing control
systems and improving the efficiency and effectiveness of personnel. The
Company's products are used in, among others, office buildings, manufacturing
plants, apartment complexes, retail stores, government facilities,
transportation operations, prisons, casinos, sports arenas, health care
facilities and financial institutions.
Products
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The Company's product line consists of approximately 700 products, of which
about half represent model variations. The Company's product line consists of
various elements of a video system, including digital video transmission and
recording systems, video cameras, display units (monitors), video recorders,
matrix switching equipment for video distribution, digital video and signal
processing units (which perform character generation, video encoding, multi
screen display, video insertion, intrusion detection, source identification and
alarm processing), motorized zoom lenses, remote robotic cameras, system
controls, environmental camera enclosures and consoles for system assembly. The
Company provides a full line of products due to the many varied climatic and
operational environments in which the products are expected to perform. In
addition to selling from a standard catalog line, the Company at times produces
to specification or will modify an existing product to meet a customer's
requirements.
The Company's products range in price from $10 for a simple camera mounting
bracket to several hundred thousand dollars (depending upon configuration) for a
large digital control and video matrix switching system.
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Marketing
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The Company's marketing emphasizes engineered video system solutions which
includes system design, project management, technical training and support. The
Company promotes and markets its products through industry trade shows
worldwide, product brochures and catalogues, direct mailings to existing and
prospective customers, product videos, website promotions, in-house training
seminars for customers and end users, road shows which preview new systems and
system components, and advertising through trade and end user magazines and the
Company's internet web site. The Company's products are sold principally to over
1,000 independent dealers, system integrators and distributors. Sales are made
principally by field sales engineers and inside customer service
representatives. The Company's sales effort is supported by in-house customer
service coordinators and technical support groups which provide product
information, application engineering, design detail, field project management,
and hardware and software technical support.
The Company's products are employed in video system installations by: (1)
commercial and industrial users, such as office buildings, manufacturing plants,
warehouses, apartment complexes, shopping malls and retail stores; (2) federal,
state, and local governments for national security purposes, municipal
facilities, prisons, and military installations; (3) financial institutions,
such as banks, clearing houses, brokerage firms and depositories, for security
purposes; (4) transportation departments for highway traffic control, bridge and
tunnel monitoring, and airport, subway, bus and seaport security and
surveillance; (5) gaming casinos, where video surveillance is often mandated by
regulatory authorities; and (6) health care facilities, such as hospitals,
particularly psychiatric wards and intensive care units. In fiscal 2002, 2001
and 2000, indirect sales to the United States Postal Service approximated $3.5
million, $15.2 million and $22.8 million, respectively.
The Company's principal sales offices are located in Hauppauge, New York;
Fareham, England; Zaventem, Belgium; and New Territories, Hong Kong.
International Sales
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The Company sells its products in Europe and the Middle East through its U.K.
based subsidiary, in China through its Hong Kong subsidiary and elsewhere
outside the U.S. principally by direct export from its U.S. based parent
company. Sales are made to installing dealers or independent distributors which,
outside of Europe and China, typically assume the responsibility for warranty
repair as well as sales and marketing costs to promote the Company's product
line. The Company has a few territorial exclusivity agreements with customers
but primarily uses a wide range of installation companies and distributors in
international markets. In Australia, Japan and Norway, the Company permits
independent sales representatives to use the Company's name for marketing
purposes.
Direct export sales and sales from the Company's foreign subsidiaries amounted
to $18.3 million, $20.5 million and $19.6 million or 34%, 31% and 26% of
consolidated net sales in fiscal years 2002, 2001, and 2000, respectively.
Export sales are generally made through a wholly owned subsidiary, Vicon
Industries Foreign Sales Corporation, a tax advantaged foreign sales
corporation. The Company's principal foreign markets are Europe, the Middle East
and the Pacific Rim, which together accounted for approximately 88 percent of
international sales in fiscal 2002.
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Competition
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The Company operates in a highly competitive marketplace both domestically and
internationally. The Company competes by providing high-end video systems and
system components that incorporate broad capability together with high levels of
customer service and technical support. Generally, the Company does not compete
based on price alone.
The Company's principal engineered video systems competitors include the
following companies or their affiliates: Checkpoint Systems, Inc., Matsushita
(Panasonic), Pelco Sales Company, Philips Communications and Security Systems,
Inc., the Tyco Fire and Security division of Tyco International, GE Interlogix,
Inc. and Honeywell's Ultrak, Inc. division. Many additional companies, both
domestic and international, produce products that compete against one or more of
the Company's system components. In addition, some consumer video electronic
companies or their affiliates, including Matsushita (Panasonic), Mitsubishi
Electric Corporation, Sanyo Electric Co., Ltd. and Sony Corporation, compete
with the Company for the sale of video products and systems. Almost all of the
Company's competitors are larger companies whose financial resources and scope
of operations are substantially greater than the Company's.
Engineering and Development
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The Company's engineering and development is focused on new and improved video
systems and system components. In recent years, the trend of product development
and demand within the video security and surveillance market has been toward the
application of digital video technology, specifically toward the compression,
transmission, storage and display of digital video. As the demands of the
Company's target market segment requires the Company to keep pace with changes
in technology, the Company has focused its engineering effort in these
developing areas. During the past three years, the Company substantially
increased its product development expenditures to meet the accelerating market
shift to network capable (digital) video systems. Development projects are
chosen and prioritized based on direct customer feedback, the Company's analysis
as to the needs of the marketplace, anticipated technological advances and
market research.
The Company employs a total of 46 engineers in the following areas: software
development, mechanical design, manufacturing/testing and electrical and circuit
design. Engineering and development expense amounted to approximately 8%, 6% and
5% of net sales in fiscal 2002, 2001 and 2000, respectively.
Source and Availability of Raw Materials
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The Company relies upon independent manufacturers and suppliers to manufacture
and assemble its proprietary products and expects to continue to rely on such
entities in the future. The Company's relationships with independent
manufacturers, assemblers and suppliers are generally not covered by formal
contractual agreements.
Raw materials and components purchased by the Company and its suppliers are
generally readily available in the market, subject to market lead times at the
time of order. The Company is not dependent upon any single source for a
significant amount of its raw materials and components.
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Intellectual Property
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The Company owns, and has pending, a limited number of design and utility
patents expiring at various times. The Company has certain trademarks registered
and several other trademark applications pending both in the United States and
in Europe. Most of the Company's key products employ proprietary software which
is protected by copyright. However, the laws of certain foreign countries do not
protect intellectual property rights to the same extent or in the same manner as
the laws of the U.S. The Company has no licenses, franchises or concessions with
respect to any of its products or business dealings. The Company does not deem
the limited number of its patents or its lack of licenses, franchises and
concessions to be of substantial significance or to have a material effect on
its business. The Company does, however, consider its proprietary software to be
unique and is a principal element in the differentiation of the Company's
products from its competition.
Inventories
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The Company generally maintains sufficient finished goods inventory levels to
respond to unanticipated customer demand, since most sales are to installing
dealers and contractors who normally do not carry any significant inventory. The
Company principally builds inventory to known or anticipated customer demand. In
addition to normal safety stock levels, certain additional inventory levels may
be maintained for products with long purchase and manufacturing lead times. The
Company believes that it is important to carry adequate inventory levels of
parts, components and products to avoid production and delivery delays that
detract from its sales effort.
Backlog
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The backlog of orders believed to be firm as of September 30, 2002 and 2001 was
approximately $4.2 million and $6.3 million, respectively. Orders are generally
cancelable without penalty at the option of the customer. The Company prefers
that its backlog of orders not exceed its ability to fulfill such orders on a
timely basis, since experience shows that long delivery schedules only encourage
the Company's customers to look elsewhere for product availability.
Employees
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At September 30, 2002, the Company employed 235 full-time employees, of whom 6
are officers, 55 administrative, 101 in sales and technical service capacities,
46 in engineering, and 27 production employees. At September 30, 2001, the
Company employed 251 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.
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ITEM 2 - PROPERTIES
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The Company principally operates from an 80,000 square-foot facility located at
89 Arkay Drive, Hauppauge, New York, which it owns. The Company also owns a
14,000 square-foot sales, service and warehouse facility in southern England
which services the U.K., Europe and the Middle East. In addition, the Company
operates under leases from offices in Zaventem, Belgium; Yavne, Israel; Hong
Kong and various offices in mainland China.
ITEM 3 - LEGAL PROCEEDINGS
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None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
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PART II
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
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MATTERS
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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
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Fiscal 2002
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December 5.0100 2.7500
March 6.0500 3.7000
June 4.1500 3.2600
September 3.8000 2.5200
Fiscal 2001
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December 3.3125 1.6875
March 2.7500 1.8125
June 2.7000 1.7000
September 6.5000 2.0200
The last sale price of the Company's Common Stock on December 13, 2002 as
reported on AMEX was $3.70 per share. As of December 13, 2002, 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.
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ITEM 6 - SELECTED FINANCIAL DATA
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FISCAL YEAR 2002 2001 2000 1999 1998
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(in thousands, except per share data)
Net sales $54,168 $65,365 $74,624 $73,414 $63,310
Gross profit 18,218 21,686 23,054 25,779 21,960
Operating income (loss) (2,180) (418) 1,993 7,893 6,869
Income (loss) before
income taxes (2,349) 2,307 1,589 7,442 5,810
Net income (loss) (1,579) 1,497 961 4,760 5,810
Earnings (loss) per share:
Basic (.34) .32 .21 1.05 1.61
Diluted (.34) .32 .21 1.01 1.50
Total assets 47,426 51,926 53,918 49,899 44,386
Long-term debt 3,040 3,498 7,090 5,799 7,002
Working capital 27,827 30,005 33,365 29,049 27,642
Property, plant and
equipment (net) 7,666 8,139 8,502 8,053 7,137
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
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Fiscal Year 2002 Compared with 2001
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Net sales for 2002 decreased $11.2 million or 17% to $54.2 million compared with
$65.4 million in 2001. Domestic sales decreased $9.0 million or 20% to $35.9
million compared with $44.9 million in 2001. Indirect sales to the United States
Postal Service (USPS) decreased $11.7 million to $3.5 million in 2002 compared
with $15.2 million in 2001. Other domestic sales for 2002 increased by $2.7
million or 9% to $32.4 million compared with $29.7 million in 2001. Current year
sales included $1.6 million of shipments in connection with a $2.3 million
system order received in February 2002 for New York's JFK International Airport.
International sales decreased $2.2 million or 11% to $18.3 million compared with
$20.5 million in 2001 principally as a result of lower sales in Europe and the
Middle East. The backlog of unfilled orders was $4.2 million at September 30,
2002 compared with $6.3 million at September 30, 2001.
Gross profit margins for 2002 increased slightly to 33.6% compared with 33.2% in
2001. The margin increase was principally the result of ongoing product cost
reduction efforts offset by the effect of fixed production costs relative to the
current year's lower sales.
Operating expenses for 2002 were $20.4 million or 37.7% of net sales compared
with $22.1 million or 33.8% of net sales in 2001. Selling, general and
administrative expenses decreased by $2.0 million, including $1.2 million of
selling costs and $.8 million of administrative expenses. The Company continued
to invest in new product development in 2002, incurring $4.4 million of
engineering and development expenses compared with $4.1 million in 2001.
The Company incurred an operating loss of $2.2 million in 2002 compared with a
loss of $418,000 in 2001 principally as a result of lower sales.
Interest expense decreased $158,000 to $340,000 for 2002 compared with $498,000
in 2001 principally as a result of the paydown of bank borrowings. Interest
income decreased by $30,000 in 2002 as a result of decreases in market interest
rates.
In the prior year, the Company realized a $3.0 million gain ($2.0 million net of
tax effect) on the sale of its remaining equity interest in Chun Shin
Electronics, Inc. (CSE), a South Korean company which, among other things,
manufactures certain of the Company's proprietary products.
The Company recorded an income tax benefit of $770,000 for 2002 compared with
income tax expense of $810,000 in 2001.
As a result of the foregoing, the Company incurred a net loss of $1.6 million
for 2002 compared with net income of $1.5 million in 2001.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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RESULTS OF OPERATIONS
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Fiscal Year 2001 Compared with 2000
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Net sales for 2001 decreased $9.2 million or 12% to $65.4 million compared with
$74.6 million in 2000. Domestic sales decreased $10.1 million or 18% to $44.9
million principally as a result of a $7.6 million decline in indirect sales to
the United States Postal Service (USPS) under a national supply contract.
Indirect sales to the USPS decreased 33% to $15.2 million in 2001 compared with
$22.8 million in 2000. In March 2001, the USPS announced an immediate freeze on
all its capital spending due to a severe projected budget deficit. As a result,
the Company has since experienced a material reduction in its USPS order rate.
In addition, the USPS supply contract had expired on June 30, 2001 with no new
contract being awarded. The Company has since been named as a pre-approved
supplier in the latest USPS published specification for video systems.
International sales increased $.9 million or 5% to $20.5 million primarily as a
result of increased sales in Europe. The backlog of unfilled orders was $6.3
million at September 30, 2001 compared with $8.4 million at September 30, 2000.
Gross profit margins for 2001 increased to 33.2% compared with 30.9% in 2000.
The margin increase was principally attributable to the effects of a $1.3
million charge for warranty costs incurred in the prior year.
Operating expenses for 2001 were $22.1 million or 33.8% of net sales compared
with $21.1 million or 28.2% of net sales in 2000. The increase in operating
expenses included the write-down of certain foreign assets, certain severance
and payroll related costs and costs incurred in the development of new product
lines.
The Company incurred an operating loss of $418,000 for 2001 compared with
operating income of $2.0 million for 2000 principally as a result of lower sales
and increased operating expenses during 2001.
Interest expense decreased $318,000 to $498,000 for 2001 compared with $816,000
in 2000 principally as a result of the paydown of bank borrowings.
The Company realized a $3.0 million gain ($2.0 million net of tax effect) on the
sale of its remaining equity interest in Chun Shin Electronics, Inc. (CSE), a
South Korean company which, among other things, manufactures certain of the
Company's proprietary products.
Income tax expense for 2001 was $810,000 compared with $628,000 in 2000.
As a result of the foregoing, net income increased to $1.5 million for 2001
compared with $961,000 for 2000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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LIQUIDITY AND FINANCIAL CONDITION
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Net cash provided by operating activities was $1.9 million for 2002 due
primarily to a $1.2 million decrease in accounts receivable and a $3.7 million
decrease in inventories as a result of lower sales. Such increases in cash were
offset, in part, by the $1.6 million net loss for the year and the reduction of
certain operating liabilities. Net cash used in investing activities was
$477,000 for 2002 principally relating to general capital expenditures. Net cash
used in financing activities was $1.3 million in 2002, which primarily
represented scheduled repayments of bank mortgage and term loans. As a result of
the foregoing, cash decreased by $23,000 for 2002 after the effect of exchange
rate changes on the cash position of the Company.
On February 12, 2002, the Company executed an amendment agreement with its bank
that modified its unsecured revolving credit and term loan agreement to provide
for a $5 million secured revolving credit facility through July 2004. Borrowings
under such facility bear interest at the bank's prime rate or, at the Company's
option, LIBOR plus 190 basis points (4.75% and 3.71%, respectively, at September
30, 2002). The amendment agreement grants the bank a security interest in all
the assets of the Company and, among other things, effectively modified the
financial covenants contained in all the existing loan and mortgage agreements
with the bank. These covenants require the Company to, among other things,
maintain certain levels of earnings, working capital and ratios of debt service
coverage and debt to tangible net worth.
On September 30, 2002, the Company executed a second amendment to its credit
agreement which, among other things, waives the Company's obligation to comply
with all financial covenants contained in the agreements so long as there are no
outstanding borrowings under the revolving credit facility and the Company
maintains a compensating balance equal to the sum of the then outstanding term
loan principal balance and outstanding banker acceptances. At this time, the
Company does not anticipate that it will be obligated to comply with these
amended covenants in the near term. The amendment agreement further waived the
Company's obligation to comply with all financial covenants contained in
mortgage loans with the same bank. At September 30, 2002 and 2001, there were no
outstanding borrowings under this facility.
The Company also maintains a bank overdraft facility of 1 million Pounds
Sterling (approximately $1,570,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. This facility expires in March 2003.
At September 30, 2002, there were no outstanding borrowings under this facility.
Current and long-term debt maturing in each of the fiscal years subsequent to
September 30, 2002 approximates $1,304,000 in 2003, $320,000 in 2004, $329,000
in 2005, $335,000 in 2006, $316,000 in 2007 and $1,740,000 thereafter.
The Company occupies certain facilities, or is contingently liable, under
operating leases that expire at various dates through 2008. The leases, which
cover periods from three to eight years, generally provide for renewal options
at specified rental amounts. The aggregate operating lease commitment at
September 30, 2002 was $746,000 with minimum rentals for the fiscal years shown
as follows: 2003 - $313,000; 2004 - $272,000; 2005 - $97,000; 2006 - $24,000;
2007 - $24,000; 2008 and thereafter - $16,000.
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The Company entered into certain consulting and incentive compensation
agreements that provide for the payout of up to $810,000 of fees and
compensation upon the completion and sale of a specified number of units of a
newly developed product line.
The Company believes that it has sufficient cash to meet its anticipated
operating, capital expenditures and debt service requirements for at least the
next twelve months. The Company has experienced reduced sales levels and
incurred operating losses in recent periods which, if continued, could limit the
Company's ability to draw upon its bank credit facilities if needed.
Critical Accounting Policies
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The Company's significant accounting policies are fully described in Note 1 to
the consolidated financial statements included in Part IV. Management believes
the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue (including shipping
and handling fees) is generally recognized when products are sold and title is
passed to the customer. Under arrangements that involve the sale of product
combined with the provision of services, revenue is generally recognized for
each element of the arrangement upon delivery or performance provided that (i)
the undelivered element is not essential to the functionality of the delivered
element and (ii) there is objective evidence of the fair value of the
undelivered elements. 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. Shipping and handling costs are included
in cost of sales.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
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The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write-downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
The Company assesses the recoverability of the carrying value of its long-lived
assets, including identifiable intangible assets with finite useful lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company evaluates the recoverability of
such assets based upon the expectations of undiscounted cash flows from such
assets. If the sum of the expected future undiscounted cash flows were less than
the carrying amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
The Company has incurred operating losses in the past two fiscal years. Should
such losses continue in the future, the Company may determine that it is not
likely it will be able to realize the benefits of recorded deferred tax assets,
and a valuation allowance will need to be established that would result in the
charge-off of previously reported tax benefits.
As further described in Note 1, the Company has not yet adopted the provisions
of SFAS No. 142 as of September 30, 2002 and determined its possible effects on
the Company's financial condition or results of operations. The Company
continued to amortize its recorded goodwill over its original 10-year period as
of September 30, 2002 and also evaluated impairment through that same period
using undiscounted cash flows.
New Accounting Standards Not Yet Adopted
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In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized but, instead, tested for
impairment at least annually in accordance with the provisions of the Statement.
SFAS No. 142 will also require that intangible assets with finite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets", as discussed
below.
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The Company adopted SFAS No. 142 on October 1, 2002 and is required to assign
its goodwill ($1.4 million at September 30, 2002, which relates to its
acquisition of TeleSite U.S.A., Inc. in 1999) to "reporting units" as defined
under SFAS No. 142. Goodwill assigned to each of the reporting units will be
tested for impairment as of October 1, 2002 by comparing the carrying amount of
the reporting units' net assets (including goodwill) to its fair value. The
Company has six months from October 1, 2002 to complete this "first step" of
this transitional goodwill impairment test. If the carrying amount of the net
assets of a reporting unit (including goodwill) exceeds the fair value of that
reporting unit, a "second step" of the transitional goodwill impairment test
must be completed as soon as possible, but not later than September 30, 2003.
Due to the complexities involved with the transitional provisions of SFAS No.
142, the Company has not yet completed its evaluation of the possible effects of
its adoption of SFAS No. 142 on the Company's financial condition or results of
operations. However, it is reasonably possible that the adoption of SFAS No. 142
will result in an impairment charge to goodwill of up to $1.4 million, which
would be reported as a cumulative effect change in accounting principle.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. Unlike SFAS No. 121, an impairment assessment
under SFAS No. 144 will never result in a write-down of goodwill. Rather,
goodwill will be evaluated for impairment under SFAS No. 142, as discussed
above. The Company adopted SFAS No. 144 on October 1, 2002, which did not have
an impact on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company believes that the adoption of SFAS No. 146 will
not have a material impact on its consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance on the timing and method of revenue
recognition for sales arrangements that include the delivery of more than one
product or service. EITF 00-21 is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company is
currently analyzing the impact of its adoption on the Company's financial
statements.
- 14 -
Foreign Currency Activity
- -------------------------
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. dollar to the British pound sterling, the Euro, the
Israeli shekel and the Japanese yen.
Sales by the Company's U.K. based subsidiary to customers in Europe and the
Middle East are made in British Pounds Sterling (Pounds) or Eurodollars (Euros).
In fiscal 2002, approximately $5.7 million of products were sold by the Company
to its U.K. based subsidiary for resale. In past years, the Pound and the Euro
have weakened against the U.S. dollar, thus increasing the cost of U.S. sourced
product sold by this subsidiary. The Company attempts to minimize its currency
exposure on intercompany sales through the purchase of forward exchange
contracts.
The Company's Israeli based subsidiary incurs Shekel based operating expenses
which, in recent years, have been funded by the Company in U.S. dollars. In the
recent year, the Company purchased forward exchange contracts to minimize its
currency exposure on these expenses.
Japanese sourced products denominated in Japanese yen accounted for
approximately 2% and 6% of component and finished product purchases in fiscal
2002 and 2001, respectively. The Company attempts to minimize its currency
exposure on these purchases through the purchase of forward exchange contracts.
The Company also attempts to reduce the impact of an unfavorable exchange rate
condition through cost reductions from its suppliers and shifting product
sourcing to suppliers transacting in more stable and favorable currencies.
As of September 30, 2002, the Company had interest rate swaps and forward
exchange contracts outstanding with notional amounts aggregating $3.0 million
and $2.6 million, respectively, whose aggregate fair value was a liability of
approximately $304,000.
In general, the Company seeks lower costs from suppliers and enters into forward
exchange contracts to mitigate short-term exchange rate exposures. However,
there can be no assurance that such steps will be effective in limiting
long-term foreign currency exposure.
Market Risk Factors
- -------------------
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. The Company has a policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes.
The Company enters into forward exchange contracts to hedge certain foreign
currency exposures and minimize the effect of such fluctuations on reported
earnings and cash flow (see "Foreign Currency Activity", Note 1 "Derivative
Instruments" and "Fair Value of Financial Instruments" to the accompanying
financial statements). At September 30, 2002, the Company's foreign currency
exchange risks included a $1.9 million intercompany accounts receivable balance
due from the Company's U.K. based subsidiary and a nominal Japanese Yen
denominated trade accounts payable liability due to inventory suppliers. Such
assets and liabilities are short term and will be settled in fiscal 2003. The
following sensitivity analysis assumes an instantaneous 10% change in foreign
currency exchange rates from year-end levels, with all other variables held
constant.
- 15 -
At September 30, 2002, a 10% strengthening or weakening of the U.S. dollar
versus the British Pound would result in a $186,000 decrease or increase,
respectively, in the intercompany accounts receivable balance. Such foreign
currency exchange risk at September 30, 2002 has been substantially hedged by
forward exchange contracts.
At September 30, 2002, the Company had $3.0 million of outstanding floating rate
bank debt which was covered by interest rate swap agreements that effectively
convert the foregoing floating rate debt to stated fixed rates (see "Note 6.
Long-Term Debt" to the accompanying financial statements). Thus, the Company has
substantially no net interest rate exposures on these instruments. However, the
Company had approximately $979,000 of floating rate bank debt that is subject to
interest rate risk as it was not covered by interest rate swap agreements. The
Company does not believe that a 10% fluctuation in interest rates would have a
material effect on its consolidated financial position and results of
operations.
Related Party Transactions
- --------------------------
Refer to Item 13 and "Note 11. Related Party Transactions" to the accompanying
financial statements.
Inflation
- ---------
The impact of inflation on the Company has been minimal in recent years as the
rate of inflation remains low. However, inflation continues to increase costs to
the Company. As operating expenses and production costs increase, the Company
seeks price increases to its customers to the extent permitted by market
conditions.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
- -----------------------------------------------------------------------------
1995
- ----
Statements in this Report on Form 10-K and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Results of
Operations" and "Liquidity and Financial Condition" are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 that should be considered as subject to the many risks and uncertainties
that exist in the Company's operations and business environment. The
forward-looking statements are based on current expectations and involve a
number of known and unknown risks and uncertainties that could cause the actual
results, performance and/or achievements of the Company to differ materially
from any future results, performance or achievements, express or implied, by the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, and that in light of the significant
uncertainties inherent in forward-looking statements, the inclusion of such
statements should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved. The
Company also assumes no obligation to publicly update or revise its
forward-looking statements or to advise of changes in the assumptions and
factors on which they are based.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
See Part IV, Item 15, for an index to consolidated financial statements and
financial statement schedules.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None
- 16 -
PART III
--------
ITEM 10 - DIRECTORS AND OFFICERS OF THE REGISTRANT
- --------------------------------------------------
The Officers and Directors of the Company are as follows:
Name Age Position
Kenneth M. Darby 56 Chairman of the Board, President and
Chief Executive Officer
John M. Badke 43 Vice President, Finance and Chief
Financial Officer
John L. Eckman 53 Vice President, Sales
Peter A. Horn 47 Vice President, Operations
Bret M. McGowan 37 Vice President, Marketing
Yacov A. Pshtissky 51 Vice President, Technology and Development
Milton F. Gidge 73 Director
Peter F. Neumann 68 Director
W. Gregory Robertson 59 Director
Arthur D. Roche 64 Director
Kazuyoshi Sudo 60 Director
The business experience, principal occupations and employment, as well as period
of service, of each of the officers and directors of the Company during at least
the last five years are set forth below.
Kenneth M. Darby - Chairman of the Board, President and Chief Executive Officer.
Mr. Darby has served as Chairman of the Board since April 1999, as Chief
Executive Officer since April 1992 and as President since October 1991. He has
served as a director since 1987. Mr. Darby also served as Chief Operating
Officer and as Executive Vice President, Vice President, Finance and Treasurer
of the Company. He joined the Company in 1978 as Controller after more than nine
years at Peat Marwick Mitchell & Co., a public accounting firm. Mr. Darby's
current term on the Board ends in May 2005.
John M. Badke - Vice President, Finance and Chief Financial Officer. Mr. Badke
has been Chief Financial Officer since December 1999 and Vice President, Finance
since October 1998. Previously, he served as Controller since joining the
Company in 1992. Prior to joining the Company, Mr. Badke was Controller for NEK
Cable, Inc. and an audit manager with the international accounting firms of
Arthur Andersen & Co. and Peat Marwick Main & Co.
John L. Eckman - Vice President, U.S. Sales. Mr. Eckman rejoined the Company in
April 2001 as Vice President, U.S. Sales after serving as District General
Manager with Honeywell from June 2000 to April 2001. From July 1996 to June
2000, he served as Vice President, U.S. Sales of the Company after joining the
Company in August 1995 as Eastern Regional Manager. Prior to that time, he was
Director of Field Operations for Cardkey Systems, Inc., an access control
security products manufacturer with whom he was employed for 12 years.
Peter A. Horn - Vice President, Operations. Mr. Horn has been Vice President,
Operations since June 1999. From 1995 to 1999, he was Vice President, Compliance
and Quality Assurance. Prior to that time, he served as Vice President in
various capacities since his promotion in May 1990.
- 17 -
Bret M. McGowan - Vice President, Marketing. Mr. McGowan was promoted to Vice
President, Marketing in October 2001. Previously, he served as Director of
Marketing since 1998 and as Marketing Manager since 1994. He joined the Company
in 1993 as a Marketing Specialist.
Yacov A. Pshtissky - Vice President, Technology and Development. Mr. Pshtissky
has been Vice President, Technology and Development since May 1990. Mr.
Pshtissky was Director of electrical product development from March 1988 through
April 1990.
Milton F. Gidge - Director. Mr. Gidge has been a director of the Company since
1987. He is a retired director and executive officer of Lincoln Savings Bank for
which he served from 1976 to 1994 as Chairman, Credit Policy. He also served as
a director of Interboro Mutual Indemnity Insurance Co., a general casualty
insurance company, from 1980 to 2001 and as a director of Intervest Bancshares
Corporation, a regional bank holding company, from 1988 to 2001. His current
term on the Board ends in May 2004.
Peter F. Neumann - Director. Mr. Neumann has been a director of the Company
since 1987. He is the retired President of Flynn-Neumann Agency, Inc., an
insurance brokerage firm. Mr. Neumann's current term on the Board ends in May
2003.
W. Gregory Robertson - Director. Mr. Robertson has been a director of the
Company since 1991. He is President of TM Capital Corporation, a financial
services company which he founded in 1989. From 1985 to 1989, he was employed by
Thomson McKinnon Securities, Inc. as head of investment banking and public
finance. Mr. Robertson's current term on the Board ends in May 2004.
Arthur D. Roche - Director. Mr. Roche has been a director of the Company since
1992. He served as Executive Vice President and co-participant in the Office of
the President of the Company from August 1993 until his retirement in November
1999. For the six months prior to that time, Mr. Roche provided consulting
services to the Company. In October 1991, Mr. Roche retired as a partner of
Arthur Andersen & Co., an international accounting firm which he joined in 1960.
His current term on the Board ends in May 2005.
Kazuyoshi Sudo - Director. Mr. Sudo has been a director of the Company since
1987. Mr. Sudo is President and Chief Executive Officer of Toyo Management,
Inc., a consulting firm which he founded in 2001. Previously, Mr. Sudo was Chief
Executive Officer of CBC (America) Corp., a distributor of electronic, chemical
and optical products, from 1996 to 2001 and a director of its parent company,
CBC Co., Ltd. Mr. Sudo's current term on the Board ends in May 2003.
There are no family relationships between any director, executive officer,
officer or person nominated or chosen by the Company to become a director or
officer.
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, 2002 and certain written
representations, no person, who, at any time during the year ended September 30,
2002 was a director, officer or beneficial owner of more than 10 percent of any
class of equity securities of the Company registered pursuant to Section 12 of
the Exchange Act failed to file on a timely basis, as disclosed in the above
forms, reports required by Section 16(a) of the Exchange Act during the year
ended September 30, 2002.
- 18 -
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 2002, 2001 and 2000 by the Chief
Executive Officer and the Company's most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during any such year.
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term Compensation
---------------------------------
Awards Payouts
------------------------ --------
Annual Compensation Restricted Securities
Name and All Other Stock Underlying LTIP
Principal Position Year Salary ($) Bonus ($) Compensation Award Options (#) Payouts
- ------------------ ---- ---------- ---------- ------------ ---------- ------------ -------
Kenneth M. Darby 2002 $310,000 $ 75,000 (1) $ 3,000 (3) - - -
Chairman and 2001 285,000 75,000 (1) 3,000 (3) - - -
Chief Executive 2000 285,000 42,271 (1) 3,000 (3) 50,813 (4) - -
Officer
Henry B. Murray 2002 $ - $ - $ - - - -
Executive 2001 184,615 - 87,179 (5) - - -
Vice President 2000 100,000 40,000 (2) - - - -
(1) Represents cash bonus which was approved by the Board of Directors upon
the recommendation of its Compensation Committee.
(2) Represents minimum guaranteed bonus for fiscal 2000.
(3) Represents life insurance policy payment.
(4) Represents deferred compensation benefit of 8,130 shares of Common Stock
which is being held by the Company in Treasury and which vest upon the
expiration of Mr. Darby's employment agreement in October 2004, or earlier
upon certain occurrences including his death, involuntary termination or a
change in control of the Company. The value of such stock is based on the
fair market value on the date of grant. At September 30, 2002, the quoted
market value of such shares approximated $25,000. No dividends can be paid
on such shares.
(5) Represents lump-sum severance payout pursuant to Mr. Murray's separation
from the Company effective August 31, 2001.
- 19 -
Stock Options
- -------------
There were no options granted to the aforementioned executive officers during
fiscal 2002.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
-----------------------------------------------
AND FISCAL YEAR-END OPTION VALUES
---------------------------------
At September 30, 2002
----------------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-money
Options Options (2)
Shares ----------- ------------
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized (1) Unexercisable Unexercisable
- ----------------- ----------- ------------ ------------- --------------
Kenneth M. Darby -0- -0- 6,462/15,077 -0-/-0-
Henry B. Murray -0- -0- -0-/-0- -0-/-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
($3.10) and the exercise price.
- 20 -
Employment Agreements
- ---------------------
Mr. Darby has entered into an employment agreement with the Company that
provides for an annual salary of $310,000 through fiscal year 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).
Directors' Compensation and Term
- --------------------------------
Non-employee directors are compensated at an annual rate of $16,000 for regular
Board meetings and $1,000 per committee meeting attended in person or by
teleconference. Employee directors are not compensated for Board or committee
meetings. Directors may not stand for reelection after age 70, except that any
director may serve one additional three-year term after age 70 with the
unanimous consent of the Board of Directors.
- 21 -
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Compensation Committee of the Board of Directors consists of Messrs. Gidge,
Neumann, Robertson and Roche none of whom has ever been an officer of the
Company except for Mr. Roche, who served as Executive Vice President from August
1993 until his retirement in November 1999.
Board Compensation Committee Report
-----------------------------------
The Compensation Committee's compensation policies applicable to the Company's
officers for 2002 were to pay a competitive market price for the services of
such officers, taking into account the overall performance and financial
capabilities of the Company and the officer's individual level of performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base
salary and incentive compensation of all officers other than himself. The
Committee reviews these recommendations with Mr. Darby and, after such review,
determines compensation. In the case of Mr. Darby, the Compensation Committee
makes its determination after direct negotiation with him. For each officer, the
committee's determinations are based on its conclusions concerning each
officer's performance and comparable compensation levels in the security
industry and the Long Island area for similarly situated officers at comparable
companies. The overall level of performance of the Company is taken into account
but is not specifically related to the base salary of these officers. Also, the
Company has established an incentive compensation plan for all of the officers,
which provides a specified bonus to each officer upon the Company's achievement
of certain annual sales and profitability targets and strategic initiatives.
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.
- 22 -
This graph compares the return of $100 invested in the Company's stock on
October 1, 1997, with the return on the same investment in the AMEX U.S. Market
Index and the AMEX Technology Index.
(The following table was represented by a chart in the printed material)
Vicon AMEX U.S. Amex Technology
Date Industries, Inc. Market Index Index
- ---- ---------------- ------------ ---------------
10/01/97 100 100 100
10/01/98 85 94 121
10/01/99 84 121 206
10/01/00 39 149 241
10/01/01 41 108 195
10/01/02 37 101 121
- 23 -
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following sets forth information as to each person, known to the Company to
be a "beneficial owner" (as defined in regulations of the Securities and
Exchange Commission) of more than five percent of the Company's Common Stock
outstanding as of December 13, 2002 and the shares beneficially owned by the
Company's Executive Officers and Directors and by all Executive Officers and
Directors as a group.
Name and Address Number of Shares
of Beneficial Owner Beneficially Owned (1) % of Class
------------------- ---------------------- ----------
CBC Co., Ltd.
and affiliates
2-15-13 Tsukishima
Chuo-ku
Tokyo, Japan 104 543,715 11.5%
Dimensional Fund Advisors
1299 Ocean Avenue
Santa Monica, CA 90401 320,900 (7) 6.8%
Chu S. Chun
C/O I.I.I. Companies, Inc.
915 Hartford Turnpike
Shrewsbury, MA 01545 299,457 (2) 6.3%
******************************************************************************
C/O Vicon Industries, Inc.
Kenneth M. Darby 257,059 (3) 5.4%
Arthur D. Roche 146,601 (4) 3.1%
Peter F. Neumann 17,072 (5) *
W. Gregory Robertson 13,847 (5) *
Milton F. Gidge 13,698 (5) *
Kazuyoshi Sudo 9,000 *
Total all Executive Officers and
Directors as a group (6 persons) 457,277 (6) 9.7%
* Less than 1%.
(1) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment control over the shares of stock
owned.
(2) Mr. Chun has voting and dispositive control over 299,457 shares but
disclaims beneficial ownership as to all but 48,400 shares. 195,657 shares
are owned by the International Industries, Inc. Profit Sharing Plan and
103,800 shares are owned by Mr. Chun and immediate family members.
(3) Includes currently exercisable options to purchase 6,967 shares.
(4) Includes 50,000 shares held by Mr. Roche's wife, 15,000 shares held by
their children and currently exercisable options to purchase 1,947 shares.
(5) Includes currently exercisable options to purchase 1,947 shares.
(6) Includes currently exercisable options to purchase 14,755 shares.
(7) Dimensional Fund Advisors had voting and investment control over 320,900
shares as investment advisor and manager for various mutual funds and
other clients. These shares are beneficially owned by such mutual funds
or other clients.
- 24 -
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------
At September 30, 2002
Number of securities
Number of securities Weighted average remaining available for
to be issued upon exercise price future issuance under
exercise of of outstanding equity compensation plans
outstanding options, options, warrants (excluding securities
warrants and rights and rights reflected in column (a))
Plan category (a) (b) (c)
- ------------------ ------------------- ---------------- ------------------------
Equity compensation
plans approved by
security holders 218,172 $3.24 438,141
Equity compensation
plans not approved
by security holders - - -
Total 218,172 $3.24 438,141
EQUITY COMPENSATION GRANT NOT APPROVED BY SECURITY HOLDERS
- ----------------------------------------------------------
Through September 30, 2002, the Company's Chief Executive Officer was provided a
deferred compensation benefit aggregating 70,647 shares 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.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The Company and CBC Company, Ltd.(CBC), a Japanese corporation which
beneficially owns 11.5% of the outstanding shares of the Company, have been
conducting business with each other for approximately twenty-three years. During
this period, CBC has served as a lender, a product supplier and sourcing agent,
and a private label reseller of the Company's products. CBC has also acted as
the Company's sourcing agent for the purchase of certain video products. In
fiscal 2002, the Company purchased approximately $1.3 million of products and
components from or through CBC. CBC competes with the Company in various
markets, principally in the sale of video products and systems. Sales of all
products to CBC were $409,000 in 2002. Kazuyoshi Sudo is a director of the
Company and a former director of CBC and Chief Executive Officer of CBC
(America) Corp., a U.S. subsidiary of CBC.
During fiscal year 2002, the Company entered into a royalty arrangement with CBC
whereby CBC will license certain technology from the Company. The total amount
of the arrangement is $200,000 and, as of September 30, 2002, the Company had
not received any payments under this arrangement.
Mr. Chu S. Chun, who has beneficial voting control over 6.3% of the Common Stock
of the Company, also beneficially owns a minority interest in Chun Shin
Electronics, Inc., (CSE), a South Korean public company that manufactures
certain of the Company's proprietary products. CSE also sells various security
products, including the Company's products, principally within the South Korean
market. In 2002, CSE sold approximately $2.1 million of 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 $399,000 of
products directly from the Company during 2002 for resale to CSE.
- 25 -
ITEM 14 - CONTROLS AND PROCEDURES
- ---------------------------------
(a) Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act)
are effective to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
PART IV
-------
ITEM 15 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
- ----------------------------------------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) (1) Financial Statements
--------------------
Included in Part IV, Item 15:
Independent Auditors' Report
Financial Statements:
Consolidated Statements of Operations, fiscal years ended
September 30, 2002, 2001, and 2000
Consolidated Balance Sheets at September 30, 2002 and 2001
Consolidated Statements of Shareholders' Equity, fiscal years ended
September 30, 2002, 2001, and 2000
Consolidated Statements of Cash Flows, fiscal years ended September
30, 2002, 2001, and 2000
Notes to Consolidated Financial Statements, fiscal years ended
September 30, 2002, 2001, and 2000
(a) (2) Financial Statement Schedule
----------------------------
Included in Part IV, Item 15:
Schedule II - Valuation and Qualifying Accounts for the years
ended September 30, 2002, 2001, and 2000
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.
- 26 -
15(a)(3) Exhibits Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -----------------
3 (.1) Articles of Incorporation and Incorporated by reference
By-Laws, as amended to the 1985 Annual Report
on Form 10-K; Form S-2
filed in Registration
Statement No.33-10435
and Exhibit A, B and C of
the 1987 Proxy Statement
(.2) Amendment of the Certificate
of Incorporation dated May 7, 2002 3.2
4 Instruments defining the rights of
security holders
(.1) Rights Agreement dated December Incorporated by reference
4, 2001 between the Registrant to the 2001 Annual Report
and Computershare Investor Services on Form 10-K
10 Material Contracts
(.1) Employment Contract dated Incorporated by reference
October 1, 1999 between the to the 1999 Annual Report
Registrant and Kenneth M. Darby on Form 10-K
(.2) Employment Contract dated April Incorporated by reference
1, 2001 between Registrant to the 2001 Annual Report
and John M. Badke on Form 10-K
(.3) Employment Agreement dated October Incorporated by reference
1, 2001 between Registrant and to the 2001 Annual Report
Peter Horn on Form 10-K
(.4) Employment Agreement dated October
1, 2001 between the Registrant and
Yacov Pshtissky 10.4
(.5) Employment Agreement dated April Incorporated by reference
1, 2001 between Registrant and to the 2001 Annual Report
John L.Eckman on Form 10-K
(.6) Employment Agreement dated October Incorporated by reference
1, 2001 between the Registrant and to the 2001 Annual Report
Yigal Abiri on Form 10-K
(.7) Deferred Compensation Agreement Incorporated by reference
dated November 1, 1986 between the to the 1992 Annual Report
Registrant and Donald N. Horn on Form 10-K
(.8) 1994 Incentive Stock Option Plan Incorporated by reference
to the 1994 Annual Report
on Form 10-K
(.9) 1994 Non-Qualified Stock Option Incorporated by
Plan for Outside Directors reference to the 1994
Annual Report on Form 10-K
- 27 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -----------------
(.10) 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 The Dime Savings reference to the
Bank of New York, FSB dated December 31, 1997
January 29, 1998 filing on Form 10-Q
(.14) Mortgage Note between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated December 31, 1997
January 29, 1998 filing on Form 10-Q
(.15) Term Loan Note between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated December 31, 1997
January 29, 1998 filing on Form 10-Q
(.16) Mortgage and Security Agreement Incorporated by
in the amount of $2,512,000 between reference to the
the Registrant and The Dime Savings December 31, 1997
Bank of New York, FSB dated filing on Form 10-Q
January 29, 1998
(.17) Mortgage and Security Agreement Incorporated by
in the amount of $388,000 between reference to the
the Registrant and The Dime Savings December 31, 1997
Bank of New York, FSB dated filing on Form 10-Q
January 29, 1998
(.18) Interest rate master swap agreement Incorporated by
between the Registrant and KeyBank reference to the
National Association dated December 31, 1997
December 11, 1997 filing on Form 10-Q
(.19) Schedule to the master agreement Incorporated by
between the Registrant and KeyBank reference to the
National Association dated December 31, 1997
December 11, 1997 filing on Form 10-Q
- 28 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -----------------
(.20) 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 March 31, 2002 filing
dated March 25, 2002 on Form 10-Q
(.23) Credit Agreement between the Incorporated by
Registrant and The Dime Savings reference to the
Bank of New York, FSB dated June 30, 1998 filing
July 20, 1998 on Form 10-Q
(.24) Swap transaction confirmation with Incorporated by
a notional amount of $4,425,000 reference to the
between the Registrant and KeyBank 1998 Annual Report
National Association dated on Form 10-K
September 9, 1998
(.25) Stock purchase agreement between Incorporated by reference
the Registrant and Isaac Gershoni to the 1999 Annual Report
dated August 12, 1999 on Form 10-K
(.26) Escrow agreement among the Incorporated by reference
Registrant, Isaac Gershoni and to the 1999 Annual Report
European American Bank dated on Form 10-K
August 12, 1999
(.27) Loan Agreement between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.28) Mortgage Note between the Incorporated by reference
Registrant and The Dime Savings to the 1999 Annual Report
Bank of New York, FSB dated on Form 10-K
October 12, 1999
(.29) Mortgage and Security Agreement Incorporated by reference
in the amount of $1,200,000 between to the 1999 Annual Report
the Registrant and The Dime Savings on Form 10-K
Bank of New York, FSB dated
October 12, 1999
- 29 -
Exhibit Number or
Exhibit Incorporation by
Numbers Description Reference to
- ------- ----------- -----------------
(.30) Amendment No. 1 to the Credit Incorporated by reference
Agreement between the Registrant to the December 31, 2001
and Washington Mutual Bank, FA filing on Form 10-Q
dated February 12, 2002
(.31) Security Agreement between the Incorporated by reference
Registrant and Washington Mutual to the December 31, 2001
Bank, FA dated February 12, 2002 filing on Form 10-Q
(.32) Amendment No. 2 to the Credit
Agreement between the Registrant
and Washington Mutual Bank, FA
dated September 30, 2002 10.32
(.33) 1999 Incentive Stock Option Plan Incorporated by reference
to the 1999 Annual Report
on Form 10-K
(.34) 1999 Non-Qualified Stock Option Plan Incorporated by reference
to the 1999 Annual Report
on Form 10-K
(.35) 2002 Incentive Stock Option Plan 10.35
(.36) 2002 Non-Qualified Stock Option Plan 10.36
21 Subsidiaries of the Registrant Incorporated by
reference to the Notes
to the Consolidated
Financial Statements
23 Independent Auditors' Consent 23
99 Additional Exhibits
(.1) Certification pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 99.1
(.2) Certification pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 99.2
No other exhibits are required to be filed.
15(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.
- 30 -
Other Matters - Form S-8 and S-2 Undertaking
- --------------------------------------------
For the purposes of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned
registrant hereby undertakes as follows, which undertaking shall be incorporated
by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892
(filed June 30, 1986), 33-34349 (filed April 1, 1990), 33-90038 (filed February
24, 1995), 333-30097 (filed June 26, 1997) and 333-71410 (filed October 11,
2001) and on Form S-2 No. 333-46841 (effective May 1, 1998):
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
- 31 -
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Vicon Industries, Inc.:
We have audited the consolidated financial statements of Vicon Industries, Inc.
and subsidiaries (the "Company") as listed in Part IV, item 15(a)(1). In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in Part IV, item
15(a)(2). These consolidated financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vicon Industries,
Inc. and subsidiaries at September 30, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
Melville, New York
December 10, 2002
- 32 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Net sales $54,168,110 $65,364,558 $74,624,065
Cost of sales 35,950,038 43,678,775 51,570,001
------------ ------------ ------------
Gross profit 18,218,072 21,685,783 23,054,064
Operating expenses:
Selling expense 11,833,103 13,025,115 13,117,039
General and administrative expense 4,194,358 4,973,816 4,190,856
Engineering and development expense 4,370,230 4,105,282 3,753,653
------------ ------------ ------------
20,397,691 22,104,213 21,061,548
------------ ------------ ------------
Operating income (loss) (2,179,619) (418,430) 1,992,516
Other expense (income):
Interest expense 339,587 497,597 816,017
Gain on sale of securities - (3,022,579) (315,955)
Interest and other income (170,178) (200,596) (96,751)
------------ ------------ ------------
Income (loss) before income taxes (2,349,028) 2,307,148 1,589,205
Income tax expense (benefit) (770,000) 810,000 628,000
------------ ------------ ------------
Net income (loss) $(1,579,028) $ 1,497,148 $ 961,205
============ ============ ============
Earnings (loss) per share:
Basic $(.34) $ .32 $ .21
====== ===== =====
Diluted $(.34) $ .32 $ .21
====== ===== =====
See accompanying notes to consolidated financial statements.
- 33 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and 2001
ASSETS 2002 2001
- ------ ---- ----
Current Assets:
Cash and cash equivalents $ 9,771,804 $ 9,795,148
Accounts receivable (less allowance of
$1,077,000 in 2002 and $1,115,000 in 2001) 10,400,990 11,438,334
Inventories:
Parts, components, and materials 2,802,779 2,518,782
Work-in-process 1,275,057 2,777,211
Finished products 9,470,823 11,800,197
----------- -----------
13,548,659 17,096,190
Recoverable income taxes 1,712,728 -
Deferred income taxes 673,574 1,420,372
Prepaid expenses 496,399 566,861
----------- -----------
Total current assets 36,604,154 40,316,905
Property, plant and equipment:
Land 1,180,448 1,161,948
Buildings and improvements 5,509,211 5,394,076
Machinery, equipment, and vehicles 10,307,470 9,815,829
----------- -----------
16,997,129 16,371,853
Less accumulated depreciation and amortization 9,331,102 8,232,536
----------- -----------
7,666,027 8,139,317
Goodwill, net of accumulated amortization 1,372,606 1,571,058
Deferred income taxes 1,283,784 1,366,625
Other assets 499,918 531,660
----------- -----------
$47,426,489 $51,925,565
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 1,304,227 $ 2,144,727
Accounts payable 2,384,012 2,375,825
Accrued compensation and employee benefits 1,837,519 1,789,401
Accrued expenses 1,596,288 2,227,825
Unearned service revenue 1,514,121 1,294,576
Income taxes payable 140,741 479,361
----------- -----------
Total current liabilities 8,776,908 10,311,715
Long-term debt 3,040,061 3,498,099
Unearned service revenue 1,267,337 2,334,348
Other long-term liabilities 803,476 883,356
Commitments and contingencies - Note 10
Shareholders' equity:
Common stock, par value $.01 per share
authorized - 25,000,000 and 10,000,000 shares
issued - 4,823,979 and 4,756,532 shares 48,239 47,565
Capital in excess of par value 21,760,002 21,542,541
Retained earnings 12,730,414 14,309,442
----------- -----------
34,538,655 35,899,548
Treasury stock at cost, 172,417 shares
in 2002 and 118,249 shares in 2001 (842,024) (633,422)
Accumulated other comprehensive income (157,924) (368,079)
----------- -----------
Total shareholders' equity 33,538,707 34,898,047
----------- -----------
$47,426,489 $51,925,565
=========== ===========
See accompanying notes to consolidated financial statements.
- 34 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended September 30, 2002, 2001, and 2000
Accumulated Total
Capital in other share-
Common excess of Retained Treasury comprehensive holders'
Shares Stock par value earnings Stock income equity
------ ------ ---------- -------- -------- ------------- -----------
Balance September 30, 1999 4,654,760 $46,547 $21,343,676 $11,851,089 $(508,745) $ 15,784 $32,748,351
Comprehensive income:
Net income - - - 961,205 - - 961,205
Foreign currency
translation adjustment - - - - - (321,304) (321,304)
Unrealized gain on
securities - - - - - 1,554,962 1,554,962
Total comprehensive income - - - - - - 2,194,863
Exercise of stock options 55,875 559 100,962 - (46,352) - 55,169
--------- ------ ---------- ---------- -------- ---------- -----------
Balance September 30, 2000 4,710,635 47,106 21,444,638 12,812,294 (555,097) 1,249,442 34,998,383
Comprehensive income:
Net income - - - 1,497,148 - - 1,497,148
Foreign currency
translation adjustment - - - - - 113,344 113,344
Reclassification adjustment
for gains on securities
included in net income - - - - - (1,554,962) (1,554,962)
Unrealized loss on
derivatives - - - - - (175,903) (175,903)
Total comprehensive income - - - - - - (120,373)
Repurchases of common stock - - - - (30,966) - (30,966)
Exercise of stock options 45,897 459 83,077 - (47,359) - 36,177
Tax benefit from exercise
of stock options - - 14,826 - - - 14,826
--------- ------ ---------- ---------- -------- ---------- -----------
Balance September 30, 2001 4,756,532 47,565 21,542,541 14,309,442 (633,422) (368,079) 34,898,047
Comprehensive income:
Net loss - - - (1,579,028) - - (1,579,028)
Foreign currency
translation adjustment - - - - - 234,973 234,973
Unrealized loss on
derivatives - - - - - (24,818) (24,818)
Total comprehensive income - - - - - - (1,368,873)
Repurchases of common stock - - - - (57,192) - (57,192)
Exercise of stock options 67,447 674 193,627 - (151,410) - 42,891
Tax benefit from exercise
of stock options - - 23,834 - - - 23,834
--------- ------ ---------- ---------- ----------- ----------- -----------
Balance September 30, 2002 4,823,979 $48,239 $21,760,002 $12,730,414 $ (842,024) $ (157,924) $33,538,707
========= ======= =========== =========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
- 35 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 30, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net income (loss) $(1,579,028) $ 1,497,148 $961,205
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,039,072 1,062,167 1,019,441
Goodwill amortization 198,452 193,543 200,659
Deferred income taxes 842,423 16,710 (1,145,081)
Gain on sale of securities - (3,022,579) (315,955)
Change in assets and liabilities:
Accounts receivable 1,249,601 5,703,378 (3,667,310)
Inventories 3,677,449 1,594,450 2,495,615
Recoverable income taxes (1,712,728) - -
Prepaid expenses 76,946 331,955 (283,892)
Other assets 31,742 (65,070) (57,594)
Accounts payable (10,842) (566,837) (1,060,362)
Accrued compensation and employee benefits 41,304 (107,988) (324,918)
Accrued expenses (650,517) 509,229 (6,536)
Unearned service revenue (847,466) 782,756 1,982,288
Income taxes payable (322,795) 157,723 147,195
Other liabilities (117,482) (60,939) (50,509)
---------- --------- ---------
Net cash provided by (used in)
operating activities 1,916,131 8,025,646 (105,754)
---------- --------- ---------
Cash flows from investing activities:
Capital expenditures (477,041) (689,427) (1,640,802)
Proceeds from sale of securities - 3,289,813 347,473
Acquisition, net of cash acquired - (124,923) -
---------- --------- ---------
Net cash provided by (used in)
investing activities (477,041) 2,475,463 (1,293,329)
---------- --------- ---------
Cash flows from financing activities:
Repayments of U.S. term loan (900,000) (900,000) (900,000)
Proceeds from exercise of stock options 42,891 51,004 75,518
Decrease in borrowings under short-term
revolving credit agreement - (127,655) (216,072)
Repayments of long-term debt (421,453) (360,605) (342,274)
Borrowings under mortgage loans - - 1,200,000
Increase (decrease) in borrowings under
U.S. bank credit agreement - (1,500,000) 1,500,000
Repurchases of common stock (57,192) (30,966) -
----------- ----------- -----------
Net cash provided by (used in)
financing activities (1,335,754) (2,868,222) 1,317,172
----------- ----------- -----------
Effect of exchange rate changes on cash (126,680) 47,143 198,262
----------- ----------- -----------
Net increase (decrease) in cash (23,344) 7,680,030 116,351
Cash at beginning of year 9,795,148 2,115,118 1,998,767
----------- ----------- -----------
Cash at end of year $ 9,771,804 $ 9,795,148 $ 2,115,118
=========== =========== ===========
Cash paid during the fiscal
year for:
Income taxes $ 676,857 $ 435,566 $ 1,673,100
Interest $ 356,022 $ 512,354 $ 717,355
See accompanying notes to consolidated financial statements.
- 36 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 2002, 2001, and 2000
NOTE 1. Summary of Significant Accounting Policies
- ---------------------------------------------------
Nature of Business
- ------------------
The Company designs, manufactures, assembles and markets video systems and
system components for use in security, surveillance, safety and control purposes
by end users. The Company markets its products worldwide primarily to installing
dealers, systems integrators, government entities and distributors.
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the accounts of Vicon
Industries, Inc. (the Company) and its wholly owned subsidiaries: Vicon
Industries, Limited; TeleSite U.S.A., Inc. and subsidiary (Q.S.R. Ltd.); and
Vicon Industries Foreign Sales Corp.; and its majority owned (60%) subsidiary,
Vicon Industries (H.K.) Ltd., after elimination of intercompany accounts and
transactions.
Revenue Recognition
- -------------------
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue (including shipping
and handling fees) is generally recognized when products are sold and title is
passed to the customer. Under arrangements that involve the sale of product
combined with the provision of services, revenue is generally recognized for
each element of the arrangement upon delivery or performance provided that (i)
the undelivered element is not essential to the functionality of the delivered
element and (ii) there is objective evidence of the fair value of the
undelivered elements. 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. Shipping and handling costs are included
in cost of sales.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents include cash on deposit and amounts invested in highly
liquid money market funds.
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 for impairment whenever events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value.
- 37 -
Goodwill
- --------
Goodwill represents the excess of the purchase price over the fair value
assigned to net assets acquired in connection with the Company's acquisition of
TeleSite U.S.A., Inc. in fiscal 1999. Such amount is being amortized on a
straight-line basis over 10 years. Accumulated amortization amounted to $634,322
and $435,870 at September 30, 2002 and 2001, respectively.
Engineering and Development
- ---------------------------
Product engineering and development costs are charged to expense as incurred,
and amounted to approximately $4,400,000, $4,100,000 and $3,800,000 in fiscal
2002, 2001, and 2000, respectively.
Earnings Per Share
- ------------------
The Financial Accounting Standards Board SFAS No. 128, "Earnings per Share"
requires companies to present basic and diluted earnings per share (EPS). Basic
EPS is computed based on the weighted average number of common shares
outstanding. Diluted EPS reflects the maximum dilution that would have resulted
from the exercise of stock options, warrants and incremental shares issuable
under a deferred compensation agreement (see Note 9). In periods when losses are
incurred, the effects of these securities would be antidilutive and, therefore,
excluded from the computation of diluted EPS.
Foreign Currency Translation
- ----------------------------
The Company translates the financial statements of its foreign subsidiaries by
applying the current rate method under which assets and liabilities are
translated at the exchange rate on the balance sheet date, while revenues,
costs, and expenses are translated at the average exchange rate for the
reporting period. The resulting cumulative translation adjustment of $43,000 and
$(192,000) at September 30, 2002 and 2001, respectively, is recorded as a
component of shareholders' equity in accumulated other comprehensive income.
Income Taxes
- ------------
The Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to be recovered or settled (see Note 4). Deferred U.S.
income taxes are not provided on undistributed earnings of foreign subsidiaries
as the Company intends to reinvest such earnings indefinitely.
Product Warranties
- ------------------
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
- 38 -
Derivative Instruments
- ----------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
establishes accounting and reporting standards for derivative instruments as
either assets or liabilities in the statement of financial position based on
their fair values. Changes in the fair values are required to be reported in
earnings or other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. Derivative instruments are
designated and accounted for as either a hedge of a recognized asset or
liability (fair value hedge) or a hedge of a forecasted transaction (cash flow
hedge). For derivatives designated as effective cash flow hedges, changes in
fair values are recognized in other comprehensive income. Changes in fair values
related to fair value hedges as well as the ineffective portion of cash flow
hedges are recognized in earnings.
The Company does not use derivative instruments for speculative or trading
purposes. Derivative instruments are primarily used to manage exposures related
to (i) transactions denominated in Japanese Yen, (ii) transactions with the
Company's Europe and Israel based subsidiaries, and (iii) interest rate risk on
certain variable rate indebtedness. To accomplish this, the Company uses certain
contracts, primarily foreign currency forward contracts ("forwards") and
interest rate swaps, which minimize cash flow risks from changes in foreign
currency exchange rates and interest rates, respectively. These derivatives have
been designated as cash flow hedges for accounting purposes.
As of September 30, 2002, the Company had interest rate swaps and forwards
outstanding with notional amounts aggregating $3.0 million and $2.6 million,
respectively, whose aggregate fair value was a liability of approximately
$304,000. The change in the fair value of these derivatives for the year ended
September 30, 2002, is reflected in other comprehensive income in the
accompanying statement of shareholders' equity, net of tax. The forwards have
maturities of less than one year and require the Company to exchange currencies
at specified dates and rates. The interest rate swaps mature in the same amounts
and over the same periods as the related debt. The Company considers the credit
risk related to the interest rate swaps and the forwards to be low because such
instruments are entered into only with financial institutions having high credit
ratings and are generally settled on a net basis.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts for trade accounts and other receivables, accounts payable
and accrued expenses approximate fair value due to the short-term maturity of
these instruments. The carrying amounts of the Company's long-term debt
instruments approximate fair value. The Company's interest rate swap agreements
are carried at their fair market values (which was a liability of approximately
$287,000 at September 30, 2002). This value represents the estimated amount the
Company would need to pay if such agreements were terminated before maturity,
principally resulting from market interest rate decreases. The fair value of the
Company's foreign currency forward exchange contracts is estimated by obtaining
quoted market prices. The contracted exchange rates on committed forward
exchange contracts exceeded the market rates for similar term contracts by
approximately $17,000 at September 30, 2002 (see Note 10).
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
- 39 -
Accounting for Stock-Based Compensation
- ---------------------------------------
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock options. Under APB No. 25,
compensation expense would be recorded if, on the date of grant, the market
price of the underlying stock exceeded its exercise price. As permitted by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), the Company has retained the accounting
prescribed by APB No. 25 and pre