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, 2004 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
- --------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01
----------------------------
(Title of class)
American Stock Exchange
-----------------------
(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
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The aggregate market value of voting and non-voting Common Stock held by
non-affiliates of the registrant based upon the closing price of $4.68 per share
as of March 31, 2004 was approximately $12,638,000.
The number of shares outstanding of the registrant's Common Stock as of December
15, 2004 was 4,562,429.
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 asset protection. The U.S. security industry consists
of thousands of individuals and businesses (exclusive of public sector law
enforcement) that provide products and services for the protection and
monitoring of life, property and information. The security industry includes
fire and burglar alarm systems, access control, video systems, asset protection,
guard services and equipment, locks, safes, armored vehicles, security fencing,
private investigations, biometric systems and others. The Company's products are
typically used for crime deterrence, visual documentation, observation of
inaccessible or hazardous areas, enhancing safety, managing liability, obtaining
cost savings (such as lower insurance premiums), managing control systems and
improving the efficiency and effectiveness of personnel. The Company's products
are used in, among others, office buildings, manufacturing plants, apartment
complexes, retail stores, government facilities, airports, transportation
operations, prisons, casinos, hotels, sports arenas, health care facilities and
financial institutions.
Products
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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 network video servers and related
video management software, analog and IP cameras, digital recorders, display
units (monitors), matrix switching equipment for video distribution, robotic
camera dome systems, system controls, 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 a simple camera mounting bracket to
several hundred thousand dollars (depending upon configuration) for a large
digital control, transmission, recording, storage and video matrix switching
system.
- 2 -
Marketing
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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 marketing and electronic
mailings to existing and prospective customers, product videos, website
promotions, in-house training seminars for customers and end users, road shows
which preview new systems and system components, and advertising through trade
and end user magazines and the Company's web site (www.vicon-cctv.com). The
Company's products are sold principally to over 1,000 independent dealers,
system integrators and distributors. Sales are made principally by field sales
engineers and inside customer service representatives. The Company's sales
effort is supported by in-house customer service coordinators and technical
support groups which provide product information, application engineering,
design detail, field project management, and hardware and software technical
support.
The Company's products are employed in video system installations by: (1)
commercial and industrial users, such as office buildings, manufacturing plants,
warehouses, apartment complexes, shopping malls and retail stores; (2) federal,
state, and local governments for national security purposes, municipal
facilities, prisons, and military installations; (3) financial institutions,
such as banks, clearing houses, brokerage firms and depositories, for security
purposes; (4) transportation departments for highway traffic control, bridge and
tunnel monitoring, and airport, subway, bus and seaport security and
surveillance; (5) gaming casinos, where video surveillance is often mandated by
regulatory authorities; and (6) health care facilities, such as hospitals,
particularly psychiatric wards and intensive care units.
The Company's principal sales offices are located in Hauppauge, New York;
Fareham, England; Zaventem, Belgium; and Neumunster, Germany.
International Sales
- -------------------
The Company sells its products in Europe and the Middle East through its U.K.
based subsidiary and elsewhere outside the U.S. principally by direct export
from its U.S. based parent company. In October 2004, the Company acquired all of
the operating assets of Videotronic Infosystems GmbH, a 30-year old German based
video system supplier, to expand its presence into the sizable German video
security market. 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 $22.3 million, $21.1 million and $18.3 million or 42%, 41% and 34% of
consolidated net sales in fiscal years 2004, 2003, and 2002, respectively. The
Company's principal foreign markets are Europe, the Middle East and the Pacific
Rim, which together accounted for approximately 85 percent of international
sales in fiscal 2004.
- 3 -
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: Matsushita (Panasonic), Pelco Sales
Company, Bosch Security Systems, Inc., Sensormatic Electronics Corp. division of
Tyco International, GE Security Systems and Honeywell Security Systems. Many
additional companies, both domestic and international, produce products that
compete against one or more of the Company's system components. In addition,
many consumer video electronic companies or their affiliates, including
Matsushita Electric Corp. (Panasonic), Mitsubishi Electric Corporation, Sanyo
Electric Co., Ltd. and Sony Corporation, compete with the Company for the sale
of video products and systems. Almost all of the Company's principal competitors
are larger companies whose financial resources and scope of operations are
substantially greater than the Company's.
Engineering and Development
- ---------------------------
The Company's engineering and development is 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 the compression,
transmission, storage, manipulation, imaging and display of digital video. As
the demands of the Company's target market segment require the Company to keep
pace with changes in technology, the Company has focused its engineering effort
in these developing areas. 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.
At September 30, 2004, the Company employed a total of 50 engineers in the
following areas: software development, mechanical design, manufacturing/testing
and electrical and circuit design. Engineering and development expense amounted
to approximately 9%, 9% and 8% of net sales in fiscal 2004, 2003 and 2002,
respectively.
Source and Availability of Raw Materials
- ----------------------------------------
The Company relies upon independent manufacturers and suppliers to manufacture
and assemble certain of its proprietary products and expects to continue to rely
on such entities in the future. The Company's relationships with independent
manufacturers, assemblers and suppliers are 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 or components.
- 4 -
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 owns certain trademarks and
several other trademark applications are pending both in the United States and
in Europe. Most of the Company's key products employ proprietary software which
is protected by copyright. The Company considers its software products to be
unique and is a principal element in the differentiation of the Company's
products from its competition. However, the laws of certain foreign countries do
not protect intellectual property rights to the same extent or in the same
manner as the laws of the U.S. The Company has no 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. However, the
Company is a defendant in a patent infringement suit as discussed in "Item 3 -
Legal Proceedings", the outcome of which could possibly have a material effect
on the Company's business.
Inventories
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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, 2004 and 2003 was
approximately $4.7 million and $7.4 million, respectively. Orders are generally
cancelable without penalty at the option of the customer. The Company prefers
that its backlog of orders not exceed its ability to fulfill such orders on a
timely basis, since experience shows that long delivery schedules only encourage
the Company's customers to look elsewhere for product availability.
Employees
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At September 30, 2004, the Company employed 219 full-time employees, of whom 8
are officers, 43 are in administration, 81 are in sales and technical service
capacities, 50 are in engineering and 38 are production employees. At September
30, 2003, the Company employed 215 persons. There are no collective bargaining
agreements with any of the Company's employees and the Company considers its
relations with its employees to be good.
ITEM 2 - PROPERTIES
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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 Manchester, England; Zaventem, Belgium;
Yavne, Israel; and Neumunster, Germany.
- 5 -
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company believes that it has meritorious defenses to
such claims, there is a possibility that an unfavorable outcome could ultimately
occur that could result in a liability that is material to the Company's results
of operations and financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
PART II
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER
----------------------------------------------------------------------
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------
The Company's stock is traded on the American Stock Exchange (AMEX) under the
symbol (VII). The following table sets forth for the periods indicated, the
range of high and low prices for the Company's Common Stock on AMEX:
Quarter
Ended High Low
----- ---- ---
Fiscal 2004
-----------
December 4.74 3.90
March 5.25 4.53
June 11.49 4.00
September 5.15 4.47
Fiscal 2003
-----------
December 3.90 2.40
March 3.55 2.79
June 3.55 2.44
September 4.60 3.15
The last sale price of the Company's Common Stock on December 15, 2004 as
reported on AMEX was $4.98 per share. As of December 15, 2004, there were
approximately 206 shareholders of record.
The Company has never declared or paid cash dividends on its Common Stock and
anticipates that any earnings in the foreseeable future will be retained to
finance the growth and development of its business.
- 6 -
On April 26, 2001, the Company announced that its Board of Directors authorized
the repurchase of up to $1 million of shares of the Company's common stock,
which represented approximately 9.8% of shares outstanding on the announcement
date. The following table summarizes repurchases of common stock for the three
month period ended September 30, 2004:
Total
Number Average Approximate Dollar Value
of Shares Price Paid of Shares that May Yet Be
Period Purchased (1) per Share Purchased Under the Program
------ ------------- --------- ----------------------------
07/01/04-07/31/04 20,300 $4.88 $526,629
08/01/04-08/31/04 3,700 $4.71 $509,209
09/01/04-09/30/04 6,100 $4.69 $480,598
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Total 30,100 $4.82
====== =====
(1) All repurchases were executed in open market transactions.
ITEM 6 - SELECTED FINANCIAL DATA
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FISCAL YEAR 2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands, except per share data)
Net sales $53,533 $51,954 $54,168 $65,365 $74,624
Gross profit 19,711 19,091 18,218 21,686 23,054
Operating income (loss) (2,226) (1,677) (2,180) (418) 1,993
Income (loss) before
income taxes (2,210) (1,739) (2,349) 2,307 1,589
Net income (loss) (1) (2,691) (4,874) (1,579) 1,497 961
Earnings (loss) per share (1):
Basic (.59) (1.05) (.34) .32 .21
Diluted (.59) (1.05) (.34) .32 .21
Total assets 38,867 41,893 47,426 51,916 53,918
Long-term debt 2,410 2,732 3,040 3,498 7,090
Working capital 22,793 25,333 27,827 30,005 33,365
Property, plant and
equipment (net) 7,090 7,286 7,666 8,139 8,502
(1) Fiscal 2003 includes the effects of the Company's adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
on October 1, 2002.
- 7 -
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 2004 Compared with 2003
- -----------------------------------
Net sales for 2004 increased $1.5 million or 3% to $53.5 million compared with
$52.0 million in 2003. Domestic sales increased $.3 million or 1% to $31.2
million compared with $30.9 million in 2003. International sales increased $1.2
million or 6% to $22.3 million compared with $21.1 million in 2003. The increase
in international sales was due principally to the effects of favorable exchange
rate changes as the British pound and Eurodollar strengthened against the U.S.
dollar in the current year. The backlog of unfilled orders was $4.7 million at
September 30, 2004 compared with $7.4 million at September 30, 2003.
Gross profit margins for 2004 remained relatively unchanged from 2003 levels at
36.8%. In the current year, the Company recognized $1.1 million of charges for
the phase out of discontinued product lines with the introductions of the
Company's new network video servers/recorders and dome camera product lines.
Such inventory provisions were largely offset by increased profit margins from
the Company's European based operations due to the effects of favorable exchange
rate changes.
Operating expenses for 2004 were $21.9 million or 41.0% of net sales compared
with $20.8 million or 40.0% of net sales in 2003 principally as a result of
increased foreign sales office costs largely due to unfavorable currency
translation and legal fees associated with the defense of a patent infringement
suit. The Company continued to invest in new product development in 2004,
incurring $4.9 million of engineering and development expenses, virtually
unchanged from 2003 levels. Prior year operating expenses included a performance
based compensation charge of $620,000 associated with the introduction of the
Company's new digital video product line.
The Company incurred an operating loss of $2.2 million in 2004 compared with a
loss of $1.7 million in 2003.
Interest expense decreased $54,000 to $187,000 for 2004 compared with $241,000
in 2003 principally as a result of the paydown of bank borrowings.
Income tax expense for fiscal 2004 was $481,000 compared with $1.8 million in
2003. In fiscal 2003, the Company recognized a $1.9 million income tax charge to
provide a valuation allowance against its deferred tax assets due to the
uncertainty of future realization. Such charge was reduced by the recognition of
an available tax effected net operating loss carryback of $225,000. Income tax
expense for fiscal 2004 and 2003 included $469,000 and $249,000, respectively,
relating to taxes on profits reported by the Company's European operations.
During the six months ended March 31, 2003, the Company completed its required
goodwill impairment tests as of October 1, 2002 and determined that the entire
carrying amount of goodwill was impaired when tested pursuant to the
requirements of a new accounting standard. As a result, a goodwill impairment
charge of $1.4 million was recognized as the cumulative effect of a change in
accounting principle for 2003.
As a result of the foregoing, the Company incurred a net loss of $2.7 million in
2004 compared with a net loss of $4.9 million in 2003.
- 8 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year 2003 Compared with 2002
- -----------------------------------
Net sales for 2003 decreased $2.2 million or 4% to $52.0 million compared with
$54.2 million in 2002. Domestic sales decreased $5.0 million or 14% to $30.9
million compared with $35.9 million in 2002. Such decrease was due principally
to the current year slowdown in the U.S. economy and a reorganization of the
Company's domestic sales force to properly sell its new digital (network) video
products. International sales increased $2.8 million or 15% to $21.1 million
compared with $18.3 million in 2002. The increase was due in part to the effects
of favorable exchange rate changes as the British pound and Eurodollar
strengthened against the U.S. dollar in the current year. The Company's European
based operations further experienced an increase in large system orders in the
2003 fiscal year.
Gross profit margins for 2003 increased to 36.7% compared with 33.6% in 2002.
The margin increase was principally due to the introduction of the Company's new
digital video product line in the second half of 2003. The Company experienced
increased profit margins from its European based operations due to the effects
of favorable exchange rate changes as the cost of U.S. dollar sourced products
declined.
Operating expenses for 2003 were $20.8 million or 40.0% of net sales compared
with $20.4 million or 37.7% of net sales in 2002. The Company continued to
invest in new product development in 2003, incurring $4.9 million of engineering
and development expenses compared with $4.4 million in 2002. Fiscal 2003
operating expenses included a performance based compensation charge of $620,000
associated with the introduction of the Company's new digital video product
line.
The Company incurred an operating loss of $1.7 million in 2003 compared with a
loss of $2.2 million in 2002.
Interest expense decreased $99,000 to $241,000 for 2003 compared with $340,000
in 2002 principally as a result of the paydown of bank borrowings.
Income tax expense for fiscal 2003 was $1.8 million compared with an income tax
benefit of $770,000 in 2002. In fiscal 2003, the Company recognized a $1.9
million income tax charge to provide a valuation allowance against its deferred
tax assets due to the uncertainty of future realization. Such charge was reduced
by the recognition of an available tax effected net operating loss carryback of
$225,000.
During the six months ended March 31, 2003, the Company completed its required
goodwill impairment tests as of October 1, 2002 and determined that the carrying
amount of goodwill was impaired when tested pursuant to the requirements of a
new accounting standard. As a result, a goodwill impairment charge of $1.4
million was recognized as the cumulative effect of a change in accounting
principle for 2003.
As a result of the foregoing, the Company incurred a net loss of $4.9 million in
2003 compared with a net loss of $1.6 million in 2002.
- 9 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $1.4 million for 2004 due
primarily to the receipt of a $1.8 million federal income tax refund. The net
loss of $2.7 million for the period was offset by $1.0 million of non-cash
charges for depreciation and amortization and a $1.7 million reduction in
accounts receivable. Net cash provided by investing activities was $435,000 for
2004 relating to a reduction in marketable securities of $1.2 million, offset in
part by $730,000 of general capital expenditures. Net cash used in financing
activities was $585,000 in 2004, which included $325,000 of scheduled repayments
of bank mortgage loans and $299,000 of stock repurchases. As a result of the
foregoing, cash increased by $1.2 million for 2004 after the effect of exchange
rate changes on the cash position of the Company.
The Company had a $5 million secured revolving credit facility with a bank that
expired in July 2004 without renewal. At September 30, 2003 through expiration
of this facility, there were no outstanding borrowings under this facility.
The Company's European based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of 1 million Pounds Sterling (approximately
$1,810,000) to support its local working capital requirements. This facility
expires in March 2005. At September 30, 2004, there were no outstanding
borrowings under this facility.
The following is a summary of the Company's long-term debt and material lease
obligations as of September 30, 2004:
Debt Lease
Year Repayments Commitments Total
- ---- ---------- ----------- -----
2005 $ 349,000 $294,000 $ 643,000
2006 347,000 276,000 623,000
2007 323,000 227,000 550,000
2008 1,740,000 32,000 1,772,000
The Company believes that it has sufficient cash to meet its anticipated
operating, capital expenditures and debt service requirements for at least the
next twelve months. The Company has incurred operating losses in recent periods
which, if continued, could limit the Company's ability to secure additional bank
financing if needed.
The Company does not have any off-balance sheet transactions, arrangements or
obligations (including contingent obligations) that have, or are reasonably
likely to have, a material effect on the Company's financial condition, results
of operations, liquidity, capital expenditures or capital resources.
- 10 -
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company believes that it has meritorious defenses to
such claims, there is a possibility that an unfavorable outcome could ultimately
occur that could result in a liability that is material to the Company's results
of operations and financial position.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are fully described in Note 1 to
the consolidated financial statements included in Part IV. Management believes
the following critical accounting policies, among others, affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue is generally
recognized when products are sold and title is passed to the customer. Shipping
and handling costs are included in cost of sales. Advance service billings under
a national supply contract with one customer are deferred and recognized as
revenues on a pro rata basis over the term of the service agreement. Pursuant to
the adoption of EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables", effective July 1, 2003, the Company evaluates multiple-element
revenue arrangements for separate units of accounting, and follows appropriate
revenue recognition policies for each separate unit. Elements are considered
separate units of accounting provided that (i) the delivered item has
stand-alone value to the customer, (ii) there is objective and reliable evidence
of the fair value of the delivered item, and (iii) if a general right of return
exists relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially within the control of
the Company. As applied to the Company, under arrangements involving the sale of
product and the provision of services, product sales are recognized as revenue
when the products are sold and title is passed to the customer, and service
revenue is recognized as services are performed. For products that include more
than incidental software, and for separate licenses of the Company's software
products, the Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2, "Software Revenue Recognition", as amended.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
- 11 -
The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the carrying cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write-downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
The Company assesses the recoverability of the carrying value of its long-lived
assets, including identifiable intangible assets with finite useful lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company evaluates the recoverability of
such assets based upon the expectations of undiscounted cash flows from such
assets. If the sum of the expected future undiscounted cash flows were less than
the carrying amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
In fiscal 2003, the Company recognized a $1.9 million charge to provide a
valuation allowance against its deferred tax assets due to the uncertainty of
future realization. The establishment of such valuation allowance was determined
to be appropriate during that period due to updated judgments in light of the
Company's operating losses in current and past years and the inherent
uncertainties of predicting future operating results in periods over which such
net tax differences become deductible. The Company plans to provide a full
valuation allowance against its deferred tax assets until such time that it can
achieve a sustained level of profitability or other positive evidence arises
that would demonstrate an ability to recover such assets.
The Company is subject to proceedings, lawsuits and other claims related to
labor, product and other matters. The Company assesses the likelihood of an
adverse judgment or outcomes for these matters, as well as the range of
potential losses. A determination of the reserves required, if any, is made
after careful analysis. The required reserves may change in the future due to
new developments.
Foreign Currency Activity
- -------------------------
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. dollar to the British pound sterling, the Euro and the
Israeli shekel.
Sales by the Company's U.K. based subsidiary to customers in Europe and the
Middle East are made in British Pounds Sterling (Pounds) or Eurodollars (Euros).
In fiscal 2004, approximately $4.7 million of products were sold by the Company
to its U.K. based subsidiary for resale. 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 are funded by the Company in U.S. dollars. In past years, the Company had
purchased forward exchange contracts to minimize its currency exposure on these
expenses during periods of favorable fluctuating exchange rates.
As of September 30, 2004, the Company had forward exchange contracts outstanding
with notional amounts aggregating $2.3 million. The Company also attempts to
reduce the impact of an unfavorable exchange rate condition through cost
reductions from its suppliers and shifting product sourcing to suppliers
transacting in more stable and favorable currencies.
- 12 -
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.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Market Risk Factors
- -------------------
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. The Company has a policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes.
The Company enters into forward exchange contracts to hedge certain foreign
currency exposures and minimize the effect of such fluctuations on reported
earnings and cash flow (see "Foreign Currency Activity", Note 1 "Derivative
Instruments" and "Fair Value of Financial Instruments" to the accompanying
financial statements). At September 30, 2004, the Company's foreign currency
exchange risks included an aggregate $2.4 million of intercompany account
balances between the Company and its subsidiaries, which are short term and will
be settled in fiscal 2005. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant.
At September 30, 2004, a 10% strengthening or weakening of the U.S. dollar
versus the British Pound would result in a $237,000 decrease or increase,
respectively, in the intercompany accounts receivable balance. Such foreign
currency exchange risk at September 30, 2004 has been substantially hedged by
forward exchange contracts.
At September 30, 2004, the Company had $1.7 million of outstanding floating rate
bank debt which was covered by an interest rate swap agreement that effectively
converts 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 $776,000 of floating rate bank debt that is subject to
interest rate risk as it was not covered by an interest rate swap agreement. 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 14. 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
principally seeks to increase sales and lower its product cost where possible.
- 13 -
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
- --------------------------------------------------------------------------------
1995
----
Statements in this Report on Form 10-K and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "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
--------------------
The information in response to this Item has been previously reported in the
Registrant's Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 10, 2004.
ITEM 9A - CONTROLS AND PROCEDURES
- ---------------------------------
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission's rules and forms.
Changes in Internal Controls
- ----------------------------
There were no changes in the Company's internal control over financial reporting
identified in connection with the evaluation referred to above that occurred
during the fourth quarter of the fiscal year ended September 30, 2004 that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Limitations on the Effectiveness of Controls
- --------------------------------------------
The Company believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
- 14 -
ITEM 9B - OTHER INFORMATION
- ---------------------------
None.
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The Executive Officers and Directors of the Company are as follows:
Name Age Position
---- --- --------
Kenneth M. Darby 58 Chairman of the Board, President and
Chief Executive Officer
Thomas Finstein 47 Executive Vice President, Products
and Operations
John M. Badke 45 Senior Vice President, Finance and
Chief Financial Officer
Peter A. Horn 49 Vice President, Operations
Bret M. McGowan 39 Vice President, Marketing
Yacov A. Pshtissky 53 Vice President,Technology and Development
John F. Whiteman, Jr. 46 Vice President, Sales
Joan L. Wolf 50 Executive Administrator and
Corporate Secretary
Christopher J. Wall 51 Managing Director, Vicon Industries Ltd.
Yigal Abiri 55 General Manager, Vicon Systems Ltd.
Clifton H.W. Maloney 67 Director
Peter F. Neumann 70 Director
W. Gregory Robertson 61 Director
Arthur D. Roche 66 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.
Thomas Finstein - Executive Vice President, Products and Operations. Mr.
Finstein joined the Company in May 2004 as Executive Vice President, Products
and Operations. Prior to joining the Company, Mr. Finstein served as President
and CEO of ProAct Technologies, an HR and Benefits Software Solutions Company
with whom he was employed from October 2001 until May 2004. Prior to that, he
served as Vice President and General Manager of Hyperion Solutions, a Business
Intelligence Software Solutions Company with whom he was employed from January
1996 until October 2001.
John M. Badke - Senior Vice President, Finance and Chief Financial Officer. Mr.
Badke has been Senior Vice President, Finance since May 2004 and Chief Financial
Officer since December 1999. Previously, he was Vice President, Finance since
October 1998 and served as Controller since joining the Company in 1992. Prior
to joining the Company, Mr. Badke was Controller for NEK Cable, Inc. and an
audit manager with the international accounting firms of Arthur Andersen & Co.
and Peat Marwick Main & Co.
- 15 -
Peter A. Horn - Vice President, Operations. Mr. Horn has been Vice President,
Operations since June 1999. From 1995 to 1999, he was Vice President, Compliance
and Quality Assurance. Prior to that time, he served as Vice President in
various capacities since his promotion in May 1990.
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.
John F. Whiteman, Jr. - Vice President, Sales. Mr. Whiteman joined the Company
in December 2002 as Director of Sales and was promoted to Vice President, Sales
in March 2003. Prior to joining the Company, Mr. Whiteman was Senior Vice
President-Sales and Marketing for Sentry Technology Corporation, an electronic
security products manufacturer with whom he was employed for 16 years.
Joan L. Wolf - Executive Administrator and Corporate Secretary. Ms. Wolf has
been Executive Administrator since she joined the Company in 1990 and was
appointed to the non-operating officer position of Corporate Secretary in May
2002.
Christopher J. Wall - Managing Director, Vicon Industries, Ltd. Mr Wall has been
Managing Director, Vicon Industries, Ltd. since February 1996. Previously he
served as Financial Director, Vicon Industries, Ltd. since joining the Company
in 1989. Prior to joining the Company he held a variety of senior financial
positions within Westland plc, a UK aerospace company.
Yigal Abiri - General Manager, Vicon Systems Ltd. Mr. Abiri has been General
Manager, Vicon Systems Ltd. since joining the Company in August 1999.
Previously, he served as President of QSR, Ltd., a developer and manufacturer of
remote video surveillance equipment.
Clifton H.W. Maloney - Director. Mr. Maloney has been a director of the Company
since May 2004. Mr. Maloney is the President of C.H.W. Maloney & Co., Inc., a
private investment firm that he founded in 1981. From 1974 to 1984, he was a
Vice President in investment banking at Goldman, Sachs & Co. Mr. Maloney is a
Director of Interpool, Inc., Chromium Industries, Inc. and The Wall Street Fund.
His current term on the Board ends in May 2007.
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
2006.
W. Gregory Robertson - Director. Mr. Robertson has been a director of the
Company since 1991. He is President of TM Capital Corporation, a financial
services company which he founded in 1989. From 1985 to 1989, he was employed by
Thomson McKinnon Securities, Inc. as head of investment banking and public
finance. Mr. Robertson's current term on the Board ends in May 2007.
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.
- 16 -
There are no family relationships between any director, executive officer or
person nominated or chosen by the Company to become a director or officer.
Audit Committee Financial Expert
- --------------------------------
The Board of Directors has determined that Arthur D. Roche, the Chairman of the
Audit Committee of the Board of Directors, qualifies as an "Audit Committee
Financial Expert", as defined by Securities and Exchange Commission Rules, based
on his education, experience and background. Mr. Roche is independent as that
term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
Code of Ethics
- --------------
The Company has adopted a Code of Ethics that applies to all its employees,
including its chief executive officer, chief financial and accounting officer,
controller, and any persons performing similar functions. Such Code of Ethics is
published on the Company's internet website (www.vicon-cctv.com).
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during the year ended September 30, 2004 and certain written
representations that no Form 5 is required, no person who, at any time during
the year ended September 30, 2004 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, 2004, except that a director and three
officers each filed one late report on Form 3 as to their director and officer
appointments, respectively, and as to grants of stock options to such
individuals.
- 17 -
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to the Company during 2004, 2003 and 2002 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
--------------------------