SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO.1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
September 30, 1998 Commission File No. 1-7939
- ---------------------------------------------- -------
VICON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2160665
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 952-2288
- -----------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.01
(Title of class)
American Stock Exchange
(Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of December 15, 1998 was approximately $32,200,000.
The number of shares outstanding of the registrant's Common Stock as of December
15, 1998 was 4,483,193.
<PAGE>
The undersigned registrant hereby amends Item 7, Item 11, Item 13 and Item
14(a)1 of its Form 10-K for the fiscal year ended September 30, 1998, as filed
with the Securities and Exchange Commission on December 28, 1998, to read in
their entirety as follows:
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal Year 1998 Compared with 1997
Net sales for 1998 increased $11.8 million or 23% to $63.3 million compared with
$51.5 million in 1997. The sales growth was experienced principally in the U.S.
as domestic sales increased $11.5 million or 35% to $44.3 million principally as
a result of system sales supplied under a contract with the U.S. Postal Service
entered into in July 1997 and sales from a new line of dome cameras introduced
in February 1997. International sales increased 2% to $19.0 million.
International growth was limited as a result of lower sales in Asia offset by
higher sales in Europe, including sales to a private label reseller. The backlog
of unfilled orders was $12.4 million at September 30, 1998 compared with $7.0
million at September 30, 1997.
Gross profit margins for 1998 increased to 32.9% compared with 28.1% in 1997.
The margin improvement was primarily the result of a favorable sales mix of
higher margin products, lower procurement costs and greater fixed cost
absorption associated with the sales growth.
Operating expenses for 1998 were $14.0 million or 22.1% of net sales compared
with $11.7 million or 22.8% of net sales in 1997. The increase in operating
expenses was principally the result of higher selling expenses associated with
the sales growth and profit related bonus expense.
Operating income rose to $6.9 million for 1998 compared with $2.8 million for
1997 as a result of increased sales, higher gross margins and greater absorption
of fixed operating expenses.
Interest expense decreased slightly to $1.1 million in 1998. Such decrease
occurred subsequent to the public offering as $9.3 million of interest bearing
debt was repaid.
There was no income tax expense for 1998 due to the full utilization of a U.S.
net operating loss carryforward (NOL) and the reinstatement of previously
reserved deferred income tax assets. Beginning with the first quarter of 1999,
the Company will incur income taxes at a normal effective rate. In 1997, income
tax expense was $82,000 relating primarily to foreign subsidiary income.
As a result of the foregoing, net income increased to $5.8 million for 1998
compared with net income of $1.6 million for 1997.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Fiscal Year 1997 Compared with 1996
Net sales for 1997 were $51.5 million, an increase of 19%, compared with $43.2
million in 1996. The increase was principally due to incremental sales worldwide
of certain new products. The backlog of orders was $7.0 million at September 30,
1997 compared with $3.1 million at September 30, 1996.
Gross profit margins for 1997 increased 11% to 28.1% compared with 25.4% in
1996. The margin improvement was principally attributable to capacity gains from
increased sales, higher margins on certain new products and lower costs for
video products.
Operating expenses increased $2.0 million to $11.7 million in 1997 compared with
$9.7 million in 1996. The increase is the result of payroll and related costs as
the Company added sales, technical support and engineering personnel to support
increased sales and product development activities. The Company also incurred
$225,000 of costs and expenses to relocate to a new principal operating
facility. Interest expense increased by $261,000 to $1,144,000 as a result of
increased bank borrowings to support higher levels of working capital.
The increase in income of approximately $1.3 million was due to higher sales and
gross margins, offset in part by increased operating expenses.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
Net cash provided by operating activities was $3.3 million for 1998 due
primarily to the $5.8 million net income reported for the year, offset in part
by an increase in accounts receivable due to higher sales activity. Net cash
used in investing activities was $4.4 million for 1998 as a result of the
Company's purchase of its principal operating facility for $3.3 million and
capital expenditures for tooling and office equipment. Net cash provided by
financing activities was $5.6 million, which includes $10.8 million of net
proceeds received from a public stock offering in May 1998, $2.9 million of
proceeds from mortgage loans used to finance the facility purchase and $4.5
million of proceeds received under the July 1998 term loan agreement. These
inflows were partially offset by a $6.0 million reduction of borrowings under
the U.S. Bank Credit Agreement and the repayment of a $1.8 million term loan and
$5.0 million of interest-bearing accounts payable to a related party. As a
result of the foregoing, the net increase in cash was $4.6 million for 1998
after the nominal effect of exchange rate changes on the cash position of the
Company.
The Company maintains a bank overdraft facility of 600,000 Pounds Sterling
(approximately $1,020,000) in the U.K. to support local working capital
requirements of Vicon U.K. At September 30, 1998, borrowings under this facility
amounted to approximately $634,000.
In July 1998, the Company entered into a $14 million unsecured revolving credit
and term loan agreement with a new bank. Such agreement includes a $7.5 million
revolving credit facility which expires in July 2002, with an option to increase
the facility to $9.5 million at any time through July 2000. Borrowings under the
facility bear interest at the bank's prime rate minus 2% or, at the Company's
option, LIBOR plus 90 basis points (6.25% and 6.275%, respectively, at September
30, 1998). At September 30, 1998, there were no revolving credit borrowings
outstanding under this agreement. The agreement also provides for a $4.5 million
five-year term loan payable in equal monthly installments through July 2003 with
interest at 6.74%. The proceeds of the term loan were used to repay all
remaining interest-bearing accounts payable to a related party. The agreement
contains restrictive covenants which, among other things, require the Company to
maintain certain levels of earnings and ratios of debt service coverage and debt
to tangible net worth.
The Company believes that cash flow from operations and funds available under
its credit agreements will be sufficient to meet its anticipated operating,
capital expenditures and debt service requirements for at least the next twelve
months.
Year 2000
The Company's software-based products have been tested for year 2000 compliance
and the Company believes that such products are year 2000 compatible. With
respect to its own computer operating systems, the Company is in the process of
upgrading its principal operating computer software to the most recent available
revisions sold by its software suppliers, which the suppliers have represented
to be year 2000 compliant. The Company believes that such upgrades
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<PAGE>
will identify and solve those year 2000 problems that could affect its operating
software and can be accomplished before the year 2000. The costs for such
upgrades are not expected to be material. It is possible that certain computer
systems or software products of the Company's customers or suppliers may
experience year 2000 problems and that such problems could adversely affect the
Company. The Company is in the process of assessing the status of its principal
suppliers' year 2000 readiness and their plans to address problems that their
computer systems may face in correctly processing date information as the year
2000 approaches. However, since the ultimate success of the Company's customers
and suppliers to become compliant is largely outside of the Company's control,
no assurances can be made that the Company will be unaffected by the year 2000.
Should the Company's suppliers fail to achieve year 2000 compliance, the supply
of product to the Company may be interrupted resulting in possible lost revenue
to the Company due to its inability to supply finished product to its customers.
If such interruptions are prolonged, it could have a material adverse effect on
the Company. The Company intends to consider contingency plans to address the
risk its principal suppliers will not be year 2000 compliant during fiscal 1999.
New Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board (FASB) issued two new
disclosure standards. Management believes that the results of operations and
financial position of the Company will be unaffected by implementation of these
new standards.
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and displaying
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise," establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated.
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<PAGE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activity." This statement establishes comprehensive
accounting and reporting standards for derivative instruments and hedging
activities and will be adopted by the Company in the first quarter of fiscal
2000. Implementation of this statement is not expected to affect the Company's
financial position or results of operations.
Foreign Currency Activity
The Company's foreign exchange exposure is principally limited to the
relationship of the U.S. dollar to the Japanese yen and the British pound
sterling.
Japanese sourced products denominated in Japanese yen accounted for
approximately 11% and 7% of product purchases in fiscal 1998 and 1997,
respectively. Although the U.S. dollar strengthened against the Japanese yen
during 1998, in past years the U.S. dollar had weakened dramatically in relation
to the yen, resulting in increased costs for such products. When market
conditions permit, cost increases due to currency fluctuations are passed on to
customers through price increases. The Company also attempts to reduce the
impact of an unfavorable exchange rate condition through cost reductions from
its suppliers, lowering production cost through product redesign, and shifting
product sourcing to suppliers transacting in more stable and favorable
currencies. The Company's purchases from Japan are denominated in Japanese yen.
Depending on market conditions, the Company will enter into foreign exchange
contracts to hedge the currency risk on these product purchases.
Sales by the Company's U.K. subsidiary to customers in Europe are made in
pounds sterling. In fiscal 1998, approximately $3.5 million of products were
sold by the Company to its U.K. subsidiary for resale. The U.S. dollar was
relatively stable against the pound sterling in 1998. In the years when the
pound weakened significantly against the U.S. dollar, the cost of U.S.
sourced product sold by the Company's U.K. subsidiary increased. When market
conditions permitted, such cost increases were passed on to the customer
through price increases. The Company attempts to control its currency
exposure on intercompany sales through the purchase of forward exchange
contracts.
In general, the Company attempts to increase prices and seek lower costs from
suppliers to mitigate exchange rate exposures, however, there can be no
assurance that such steps will be effective in limiting foreign currency
exposure.
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<PAGE>
Market Risk Factors
The Company is exposed to various financial market risks, including changes in
foreign currency exchange rates and interest rates. The Company does not use
currency derivatives or other financial instruments for trading or speculative
purposes.
The Company enters into forward exchange contracts to hedge certain foreign
currency exposures and minimize the effect of such fluctuations on reported
earnings and cash flow (see "Foreign Currency Activity" and Note 1 "Derivative
Instruments" and "Fair Value of Financial Instruments" to the accompanying
financial statements). Such exposures include British Pound denominated
intercompany sales to the Company's U.K. subsidiary and Japanese Yen denominated
product purchases from suppliers. 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, 1998, a 10%
movement in the levels of foreign currency exchange rates against the U.S.
dollar would result in a $230,000 increase or decrease in the fair value of such
financial instruments. At September 30, 1997, such movement would result in a
$135,000 increase or decrease in the fair value of such financial instruments.
At September 30, 1998, the Company had $7.2 million of outstanding floating rate
bank debt and corresponding interest rate swap agreements which effectively
convert the foregoing floating rate debt to stated fixed rates (see "Note 6.
Long-Term Debt" to the accompanying financial statements). Thus, the Company has
substantially no net interest rate exposures on these instruments.
Inflation
The impact of inflation on the Company has lessened in recent years as the rate
of inflation remains low. However, inflation continues to increase costs to the
Company. As operating expenses and production costs increase, the Company seeks
price increases to its customers to the extent permitted by market conditions.
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<PAGE>
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995
Statements in this Report on Form 10-K and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Liquidity and
Financial Condition" and "Year 2000" are "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that should be
considered as subject to the many risks and uncertainties that exist in the
Company's operations and business environment. The forward-looking statements
are based on current expectations and involve a number of known and unknown
risks and uncertainties that could cause the actual results, performance and/or
achievements of the Company to differ materially from any future results,
performance or achievements, express or implied, by the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, and that in light of the significant uncertainties
inherent in forward-looking statements, the inclusion of such statements should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. The Company also assumes no
obligation to update its forward-looking statements or to advise of changes in
the assumptions and factors on which they are based.
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<PAGE>
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 1998, 1997 and 1996 by the Chief
Executive Officer and the Company's most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during any such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Awards Payouts
------------------------ --------
Annual Compensation Restricted Securities
Name and All Other Stock Underlying LTIP
Principal Position Year Salary ($) Bonus ($) Compensation Award Options (#) Payouts
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth M. Darby 1998 $225,000 $297,525 (1) $ 3,000 (3) $344,640 (4) - -
Chief Executive 1997 225,000 84,017 (1) 3,000 (3) - 58,000 -
Officer 1996 195,000 31,750 (2) 3,000 (3) - 95,000 -
Arthur D. Roche 1998 170,000 160,206 (1) - - - -
Executive 1997 170,000 45,240 (1) - - 35,000 -
Vice President 1996 150,000 15,875 (2) - - 25,000 -
</TABLE>
(1) Represents cash bonus equal to 4.55% and 2.45% of the sum of consolidated
pre-tax income and provision for officers' bonuses for Mr. Darby and Mr.
Roche, respectively, which bonus formula was adopted for years 1998
and 1997 by the Board of Directors upon the recommendation of its
Compensation Committee.
(2) Represents bonus in the form of 16,933 and 8,467 shares of Common Stock
issued from Treasury to Mr. Darby and Mr. Roche, respectively.
(3) Represents life insurance policy payment.
(4) Represents deferred compensation benefit of 45,952 shares of Common Stock
held by the Company in Treasury which vests upon the expiration of Mr.
Darby's employment agreement in October 2003, 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, 1998, the quoted market value
of such shares approximated $327,000. No dividends can be paid on such
shares.
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<PAGE>
Stock Options
There were no option grants during fiscal year 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
At September 30, 1998
-----------------------------
Number of
Number of Securities Value of
Shares Underlying Unexercisable
Acquired Value Unexercisable In-the-Money
Name On Exercise Realized (1) Options (2) Options (3)
- ----------------- ----------- ------------ ------------- -------------
Kenneth M. Darby 55,400 $257,725 23,200 $102,800
Arthur D. Roche 20,500 $ 93,688 14,000 $ 62,500
(1) Calculated based on the difference between the closing quoted market prices
per share at the dates of exercise and the exercise prices.
(2) No options were exercisable by the above named officers at September 30,
1998.
(3) Calculated based on the difference between the closing quoted market price
($7.125) and the exercise price.
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<PAGE>
Employment Agreements
Mr. Darby and Mr. Roche have each entered into employment agreements with
the Company that provide for annual salaries of $275,000 and $180,000,
respectively, through 2003 and 1999, respectively. Each of these agreements
provides for payment in an amount up to three times their 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 agreements). In
addition, Messrs. Darby and Roche are eligible to receive cash bonuses based on
performance of the Company. In 1999, their bonus arrangements provide for cash
bonuses equal to 3.25% and 1.75%, respectively, of the sum of consolidated
pre-tax income and provision for officers' bonuses, which bonus formula was
adopted by the Board of Directors upon the recommendation of its Compensation
Committee. Mr. Darby's agreement also provides for an additional deferred
compensation benefit of 16,565 shares of Common Stock held by the Company in
treasury. Such benefit vests upon the expiration of his employment agreement in
October 2003, or earlier upon certain occurrences including his death,
involuntary termination or a change in control of the Company. The market value
of such benefit approximated $112,000 at the date of grant.
Donald N. Horn, a director, and Arthur V. Wallace, a retired director, each have
deferred compensation agreements with the Company which provide that upon
reaching retirement age total payments of $917,000 and $631,000, respectively,
will be made in monthly installments over a 10-year period. The full deferred
compensation payment is subject to such individuals' adherence to certain
noncompete covenants. Mr. Wallace began receiving payments under the agreement
in October 1990 and Mr. Horn began receiving payments under the agreement in
January 1994.
Directors' Compensation and Term
Since January 1, 1997, the directors and the Chairman of the Board have been
compensated at annual rates of $6,000 and $10,000, respectively, while committee
fees have been $500 per meeting attended in person. Employee directors are not
compensated for Board or committee meetings. Directors may not stand for
reelection after age 70.
Immediately prior to the annual meeting of shareholders to be held on April 22,
1999, Mr. Donald Horn, founder and Chairman of the Board since the Company's
inception and Mr. Peter Barry, a member of the Board since 1984, will retire
from the Board upon reaching the mandatory retirement age. Management intends to
propose to the Board of Directors that the number of directors be reduced from
nine to seven effective as of such annual meeting. Management also intends to
propose to the Board of Directors, and to the shareholders at such meeting, that
the certificate of incorporation be amended to provide that the directors be
divided into two classes instead of three classes, and that their respective
terms expire after two years, instead of after three years.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors consists of Messrs.
Neumann, Gidge and Robertson, none of whom has ever been an officer of the
Company.
Board Compensation Committee Report
The Compensation Committee's compensation policies applicable to the Company's
officers for 1998 were to pay a competitive market price for the services of
such officers, taking into account the overall performance and financial
capabilities of the Company and the officer's individual level of performance.
Mr. Darby makes recommendations to the Compensation Committee as to the base
salary and incentive compensation of all officers other than himself. The
Committee reviews these recommendations with Mr. Darby and, after such review,
determines compensation. In the case of Mr. Darby, the Compensation Committee
makes its determination after direct negotiation with him. For each officer, the
committee's determinations are based on its conclusions concerning each
officer's performance and comparable compensation levels in the CCTV industry
and the Long Island area for similarly situated officers at comparable
companies. The overall level of performance of the Company is taken into account
but is not specifically related to the base salary of these officers. Also, the
Company has established an incentive compensation plan for all of the officers,
which provides a specified bonus to each officer upon the Company's achievement
of certain annual profitability targets.
The Compensation Committee grants options to officers to link compensation to
the performance of the Company. Options are exercisable in the future at the
fair market value at the time of grant, so that an officer granted an option is
rewarded by the increase in the price of the Company's stock. The committee
grants options to officers based on significant contributions of such officer to
the performance of the Company. In addition, in determining Mr. Darby's salary
for service as Chief Executive Officer, the committee considered the
responsibility assumed by him in formulating and implementing a management and
long-term strategic plan.
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<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Chugai Boyeki Company, Ltd. (Chugai), a Japanese corporation
which beneficially owns 11.5% of the outstanding shares of the Company, have
been conducting business with each other for approximately nineteen years.
During this period, Chugai has served as a lender, a product supplier and
sourcing agent, and a private label reseller of the Company's products.
Historically, Chugai has provided a significant amount of funding to the Company
in the form of extended accounts payable related to product purchases. In 1998,
the Company incurred approximately $427,000 in interest expense at the U.S.
prime rate of 8.5% on amounts it owed to Chugai with respect to extended
accounts payable. In the second half of 1998, all extended accounts payable were
repaid with proceeds from the May 1998 public offering and July 1998 bank term
loan agreement. Chugai also acts as the Company's sourcing agent for the
purchase of certain video products. In 1998, the Company purchased approximately
$5.3 million of video products from or through Chugai. Chugai has the exclusive
right to sell Vicon brand products in Japan and competes with the Company in
various markets, principally in the sale of video products and systems.
Additionally, the Company sells certain finished products to Chugai under
private label for resale in Europe and Russia. Sales of all products to Chugai
were $4.1 million in 1998. Kazuyoshi Sudo, a director of the Company and of
Chugai, is Chief Executive Officer of Chugai Boyeki (America) Corp., a U.S.
subsidiary of Chugai.
Mr. Chu S. Chun, a director who has beneficial voting control over 4.3% of
the Common Stock of the Company, also owns Chun Shin Industries, Inc. (CSI). CSI
is the Company's 50% partner in Chun Shin Electronics, Inc., (CSE), a joint
venture company that manufactures and assembles certain Vicon products in South
Korea. Mr. Chun is the President and has operating control of CSE. In 1998, CSE
sold approximately $8.0 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, and provided short-term financing through April
1998 on, all the Company's product purchases from CSE. Such short-term financing
was at a rate of 2% of the net invoice price covering the 30 day average period
of importation from Korea. CSE also sold approximately $748,000 of products to
CSI, which resells the Company's products in South Korea. In addition, I.I.I.
purchased approximately $344,000 of products directly from the Company during
1998 for resale to CSI. Although the Company believes its relationships with
CSE, CSI and I.I.I. have been beneficial to the Company on an overall basis, the
terms provided to the Company by I.I.I. for importation financing may be less
favorable than those the Company may be able to obtain from unaffiliated third
parties.
The Company has had discussions with Mr. Chun regarding the acquisition of CSI
and its 50% holding in CSE. In addition, CSI owns and operates a sales company
that sells various security products, including the Company's products,
principally within the South Korean market. The Company and Mr. Chun have not
agreed upon the terms of such an acquisition.
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<PAGE>
PART IV
ITEM 14(a)1 - FINANCIAL STATEMENTS
Included in Part IV, Item 14:
Independent Auditors' Report
Financial Statements:
Consolidated Statements of Operations, fiscal years ended
September 30, 1998, 1997, and 1996
Consolidated Balance Sheets at September 30, 1998 and 1997
Consolidated Statements of Shareholders' Equity, fiscal years ended
September 30, 1998, 1997, and 1996
Consolidated Statements of Cash Flows, fiscal years ended September
30, 1998, 1997, and 1996
Notes to Consolidated Financial Statements, fiscal years ended
September 30, 1998, 1997, and 1996
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<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Vicon Industries, Inc.:
We have audited the consolidated financial statements of Vicon Industries, Inc.
and subsidiaries as listed in Part IV, item 14(a)(1). In connection with our
audits of the consolidated financial statements, we also have audited the
financial statement schedule as listed in Part IV, item 14(a)(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vicon Industries,
Inc. and subsidiaries at September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Melville, New York
December 4 1998
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<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Net sales $63,310,466 $51,518,940 $43,191,446
Cost of sales 42,478,384 37,043,750 32,234,192
------------ ------------ -----------
Gross profit 20,832,082 14,475,190 10,957,254
Operating expenses:
Selling expense 9,536,988 7,957,340 6,800,361
General and administrative expense 4,426,107 3,542,400 2,931,333
Relocation expense - 225,129 -
----------- ----------- ----------
13,963,095 11,724,869 9,731,694
----------- ----------- ----------
Operating income 6,868,987 2,750,321 1,225,560
Interest expense 1,107,196 1,143,699 882,290
Other income, net (48,190) (39,896) (41,908)
----------- ----------- ---------
Income before income taxes 5,809,981 1,646,518 385,178
Income tax expense - 82,000 85,000
----------- ----------- -----------
Net income $5,809,981 $1,564,518 $ 300,178
=========== =========== ===========
Earnings per share:
Basic $1.61 $ .56 $ .11
===== ===== =====
Diluted $1.50 $ .52 $ .11
===== ===== =====
See accompanying notes to consolidated financial statements.
- 16 -
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
ASSETS 1998 1997
- ------ ---- ----
Current Assets:
Cash $ 4,854,557 $ 287,580
Accounts receivable (less allowance of
$694,000 in 1998 and $493,000 in 1997) 12,758,080 9,578,297
Inventories:
Parts, components, and materials 2,944,303 3,399,133
Work-in-process 2,374,769 2,046,174
Finished products 12,079,335 11,188,217
----------- -----------
17,398,407 16,633,524
Deferred income taxes 1,079,736 -
Prepaid expenses 332,241 307,580
----------- -----------
Total current assets 36,423,021 26,806,981
Property, plant and equipment:
Land 1,204,498 299,698
Buildings and improvements 4,185,298 1,653,503
Machinery, equipment, and vehicles 7,312,594 6,409,729
----------- -----------
12,702,390 8,362,930
Less accumulated depreciation and amortization 5,565,352 4,870,717
----------- -----------
7,137,038 3,492,213
Deferred income taxes 116,973 -
Other assets 709,369 900,417
----------- ----------
$44,386,401 $31,199,611
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Borrowings under revolving credit agreement $ 634,388 $ 169,006
Current maturities of long-term debt 1,179,367 515,092
Accounts payable:
Related party 652,487 7,146,985
Other 2,481,018 1,407,917
Accrued compensation and employee benefits 1,955,462 1,109,539
Accrued expenses 1,316,855 1,002,131
Income taxes payable 561,173 105,188
----------- -----------
Total current liabilities 8,780,750 11,455,858
Long-term debt:
Banks and other 7,001,819 6,904,368
Related party - 1,440,000
Other long-term liabilities 767,528 485,402
Commitments and contingencies - Note 11
Shareholders' equity
Common stock, par value $.01 per share
authorized - 10,000,000 shares
issued 4,534,710 and 3,047,060 shares 45,347 30,470
Capital in excess of par value 20,947,515 9,868,063
Retained earnings 7,090,888 1,280,907
----------- -----------
28,083,750 11,179,440
Less treasury stock at cost, 62,517 shares
in 1998 and 45,952 shares in 1997 (409,687) (298,686)
Foreign currency translation adjustment 162,241 33,229
----------- -----------
Total shareholders' equity 27,836,304 10,913,983
----------- -----------
$44,386,401 $31,199,611
=========== ===========
See accompanying notes to consolidated financial statements
- 17 -
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Fiscal Years Ended September 30, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Foreign Total
Capital in Retained currency share-
Common excess of earnings Treasury translation holders'
Shares Stock par value (deficit) Stock adjustment equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30, 1995 2,788,228 $27,882 $ 9,396,890 $ (583,789) $(82,901) $ (125,056) $8,633,026
Foreign currency
translation adjustment - - - - - 8,607 8,607
Exercise of stock options 14,500 145 26,199 - - - 26,344
Net income - - - 300,178 - - 300,178
--------- ------- ----------- ---------- -------- ---------- ---------
Balance September 30, 1996 2,802,728 $28,027 $ 9,423,089 $ (283,611) $(82,901) $ (116,449) $8,968,155
Foreign currency
translation adjustment - - - - - 149,678 149,678
Stock bonus awarded from
treasury - - (28,926) - 82,901 - 53,975
Exercise of stock options 244,332 2,443 473,900 - (298,686) - 177,657
Net income - - - 1,564,518 - - 1,564,518
--------- ------- ----------- ---------- ---------- -------- -----------
Balance September 30, 1997 3,047,060 30,470 9,868,063 1,280,907 (298,686) 33,229 10,913,983
Foreign currency
translation adjustment - - - - - 129,012 129,012
Common stock offering, net
of issuance costs 1,371,200 13,712 10,787,204 - - - 10,800,916
Exercise of stock options 116,450 1,165 253,063 - (111,001) - 143,227
Tax benefit from exercise
of stock options - - 39,185 - - - 39,185
Net income - - - 5,809,981 - - 5,809,981
--------- ------- ----------- ---------- ---------- ---------- -----------
Balance September 30, 1998 4,534,710 $45,347 $20,947,515 $7,090,888 $(409,687) $ 162,241 $27,836,304
========= ======= =========== ========== ========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 18 -
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,809,981 $ 1,564,518 $ 300,178
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 788,349 783,859 699,211
Amortization of deferred gain
on sale and leaseback - (433,993) (332,100)
Deferred income taxes (1,196,709) - -
Stock bonus award - 53,975 -
Foreign exchange gain - (39,896) (41,908)
Change in assets and liabilities:
Accounts receivable (3,187,475) (820,556) (122,162)
Inventories (382,087) (1,880,543) (2,593,382)
Prepaid expenses (10,068) 230,371 (218,762)
Other assets 228,772 4,910 67,780
Accounts payable (403,060) (1,355,267) 1,127,355
Accrued compensation and employee benefits 842,476 731,397 (68,793)
Accrued expenses 188,370 144,276 (391,557)
Income taxes payable 450,979 14,762 7,517
Other liabilities 179,256 (19,374) (45,833)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 3,308,784 (1,021,561) (1,612,456)
----------- ----------- ----------
Cash flows from investing activities:
Capital expenditures, net of
minor disposals (4,231,674) (925,024) (482,111)
Acquisition, net of cash acquired (158,925) - -
----------- ----------- ----------
Net cash used in
investing activities (4,390,599) (925,024) (482,111)
----------- ----------- -----------
Cash flows from financing activities:
(Decrease) increase in borrowings
under U.S. bank credit agreement (6,003,416) 1,860,518 4,142,898
Repayments of U.S. revolving
credit agreement - - (2,800,000)
Net proceeds from sale of common stock 10,800,916 - -
Proceeds from exercise of
stock options 143,227 177,657 26,344
Increase (decrease) in borrowings
under U.K. revolving credit agreement 443,596 (831,275) 57,251
(Decrease) increase in interest-bearing
accounts payable to related party (5,031,919) 627,693 (81,902)
Borrowings under U.S. term loan 4,500,000 - -
Borrowings under U.S. mortgage loan 2,900,000 - -
Borrowings under U.K. term loan - 810,000 -
Repayments of term loan to related party (1,800,000) (200,000) -
Repayments of long-term debt (310,692) (480,392) (220,625)
----------- --------- ----------
Net cash provided by
financing activities 5,641,712 1,964,201 1,123,966
----------- --------- ----------
Effect of exchange rate changes on cash 7,080 64,088 24,627
----------- --------- ----------
Net increase (decrease) in cash 4,566,977 81,704 (945,974)
Cash at beginning of year 287,580 205,876 1,151,850
----------- --------- ----------
Cash at end of year $ 4,854,557 $ 287,580 $ 205,876
=========== ========= ==========
Non-cash investing and financing activities:
Capital lease obligations - $ 276,624 -
Cash paid during the fiscal
year for:
Income taxes $ 64,523 $ 29,203 $ 78,121
Interest $ 1,265,243 $1,118,963 $ 888,061
</TABLE>
See accompanying notes to consolidated financial statements.
- 19 -
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years ended September 30, 1998, 1997, and 1996
NOTE 1. Summary of Significant Accounting Policies
Nature of Operations
The Company designs, manufactures, assembles and markets closed circuit
television systems for use in security, surveillance, safety and control
purposes by end users. The Company markets its products worldwide directly to
installing dealers, systems integrators, government entities and distributors.
Principles of Consolidation
The consolidated financial statements include the accounts of Vicon Industries,
Inc. (the Company); its wholly owned subsidiaries, Vicon Industries (U.K.), Ltd.
and Vicon Industries Foreign Sales Corp.; and its majority owned (60%)
subsidiary, Vicon Industries (H.K.) Ltd., after elimination of intercompany
accounts and transactions.
Revenue Recognition
Revenues are recognized when products are sold and title is passed to a third
party, generally at the time of shipment.
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. In connection with the Company's move to a
new principal operating facility in 1997, approximately $6.3 million of fully
depreciated abandoned assets and leasehold improvements were written off.
The Company reviews its long-lived assets (property, plant and equipment) for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying
amount of the asset exceeds its fair value.
Research and Development
Product research and development costs are principally charged to cost of sales
as incurred, and amounted to approximately $2,200,000, $2,000,000 and $1,800,000
in fiscal 1998, 1997, and 1996, respectively.
- 20 -
<PAGE>
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" which
requires companies to present basic and diluted earnings per share (EPS),
instead of primary and fully diluted EPS that was previously required. Basic EPS
is computed based on the weighted average number of shares outstanding. Diluted
EPS reflects the maximum dilution that would have resulted from the exercise of
stock options, warrants and incremental shares issuable under a deferred
compensation agreement (see Note 9).
The Company adopted the new standard in the first quarter ended December 31,
1997 of fiscal year 1998. EPS data has been restated for each of the prior years
presented to apply the provisions of SFAS No. 128.
Foreign Currency Translation
Foreign currency translation is performed utilizing the current rate method
under which assets and liabilities are translated at the exchange rate on the
balance sheet date, while revenues, costs, and expenses are translated at the
average exchange rate for the reporting period. The resulting translation
adjustment of $162,000 and $33,000 at September 30, 1998 and 1997, respectively,
is recorded as a component of shareholders' equity. Intercompany balances not
deemed long-term in nature at the balance sheet date resulted in a translation
gain of $35,000 and $14,000 in 1997 and 1996, respectively, which is reflected
in cost of sales.
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 5).
Derivative Instruments
The Company's derivative financial instruments consist of foreign currency
forward exchange contracts and interest rate swap agreements. The Company enters
into forward exchange contracts to hedge intercompany accounts receivable with
its U.K. subsidiary and Japanese Yen denominated trade accounts payable
liabilities due inventory suppliers. The forward exchange contracts have
maturities of less than one year and require the Company to exchange currencies
at specified dates and rates. Gains and losses on these contracts are recorded
in cost of sales generally when incurred.
The Company entered into interest rate swap agreements with its bank to
effectively convert its floating rate long-term debt to fixed interest rates
(see Note 6). Such agreements mature in the same amounts and over the same
periods as the related debt. Outstanding notional amounts under such agreements
approximated $7.2 million at September 30, 1998. Gains and losses on these
contracts are recorded in interest expense when incurred.
- 21 -
<PAGE>
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
disclosure of the fair value of certain financial instruments. The carrying
amounts for accounts and other receivables, accounts payable and accrued
expenses approximate fair value because of the short-term maturity of these
instruments. The carrying amounts of the Company's long-term debt approximate
fair value. The aggregate termination liability on the Company's interest rate
swap agreements at September 30, 1998 would have approximated $301,000. This
value represents the estimated amount the Company would have to pay to terminate
such agreements before maturity, principally resulting from market interest rate
decreases. The fair value of forward exchange contracts is estimated by
obtaining quoted market prices. The contracted exchange rates on committed
forward exchange contracts at September 30, 1998 and 1997 approximated market
rates for similar term contracts (see Note 11).
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to current year
presentation.
NOTE 2. Investment in Affiliate and Subsidiary
The Company has a 50 percent ownership interest in Chun Shin Electronics, Inc.
(CSE), a joint venture company which assembles certain Vicon products in South
Korea. The Company has not recognized its interest in the accumulated earnings
of CSE since it does not have control over the operations of CSE and does not
have the ability to repatriate any of its accumulated earnings. Net assets and
sales of CSE were approximately $2.1 million and $8.8 million, respectively, for
the fiscal year ended September 30, 1998. A significant portion of CSE sales
were to related parties including approximately $8.0 million indirectly to the
Company and approximately $748,000 to a company owned by the other joint venture
partner (see Note 12).
- 22 -
<PAGE>
In July 1998, the Company increased its interest to 60% in Vicon Industries
(H.K.) Ltd. for approximately $197,000 in cash. The acquisition was accounted
for as a purchase with the assets, liabilities and operations of the acquired
business being consolidated with those of the Company since the acquisition
date. The excess cost over the fair value of net assets acquired and the results
of operations for this subsidiary for fiscal 1998 were not material.
Note 3. Public Offering
In May 1998, the Company sold 1,371,200 shares of its common stock in a public
offering, the net proceeds of which were approximately $10.8 million. The
proceeds were principally used to repay borrowings under the U.S. bank credit
agreement, the related party term loan and certain interest-bearing accounts
payable.
NOTE 4. Short-Term Borrowings
Borrowings under the Company's short-term revolving credit agreement represent
borrowings by the Company's U.K. subsidiary under a bank overdraft facility. In
April 1997, such credit agreement was amended to provide for maximum borrowings
of 600,000 pounds ($1,020,000) and is secured by all the assets of the
subsidiary. Maximum borrowings during 1998, 1997 and 1996 amounted to
approximately $676,000, $1,282,000 and $1,045,000, respectively. The
weighted-average interest rate on borrowings during these years was 9.33% in
1998, 8.27% in 1997 and 8.00% in 1996.
At September 30, 1997, accounts payable to related party included approximately
$5.0 million of extended payable balances due Chugai Boyeki Company, Ltd., a
shareholder of the Company. A portion of the proceeds from the public offering
and the proceeds of the bank term loan were used to repay the extended payable
balances. Such payables bear interest at the U.S. prime rate (8.50% at September
30, 1997).
NOTE 5. Income Taxes
The components of income tax expense for the fiscal years indicated are as
follows:
1998 1997 1996
---- ---- ----
Federal $ (515,000) $ 24,000 $ -
State 380,000 5,000 -
Foreign 135,000 53,000 85,000
------------- ----------- -------------
$ - $ 82,000 $ 85,000
============= =========== =============
- 23 -
<PAGE>
A reconciliation of the U.S. statutory tax rate to the Company's effective tax
rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
U.S. statutory tax $ 1,975,000 34.0% $ 560,000 34.0% $ 131,000 34.0%
Change in valuation
allowance (2,560,000) (44.0) (467,000) (28.3) (56,000) (14.5)
State tax, net of
federal benefit 251,000 4.3 - - - -
Other 334,000 5.7 (11,000) (0.7) 10,000 2.6
----------- ------ --------- ------ --------- -----
Effective Tax Rate $ - - % $ 82,000 5.0% $ 85,000 22.1%
=========== ====== ========= ====== ========= ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at September 30, 1998 and 1997 are
presented below:
1998 1997
---- ----
Deferred tax assets:
Inventory reserves $ 865,000 $ 457,000
Deferred compensation accruals 186,000 199,000
Allowance for doubtful
accounts receivable 226,000 162,000
Net operating loss carryforwards - 1,753,000
General business credit carryforwards - 80,000
Other 9,000 9,000
---------- ----------
Total deferred tax assets 1,286,000 2,660,000
Less valuation allowance - (2,560,000)
---------- ----------
Net deferred tax assets 1,286,000 100,000
---------- ----------
Deferred tax liabilities:
Cash surrender value of officers'
life insurance 58,000 68,000
Other 31,000 32,000
---------- -----------
Total deferred tax liabilities 89,000 100,000
---------- -----------
Net deferred tax assets and liabilities $1,197,000 $ -
---------- -----------
The Company had provided a valuation allowance of $2,560,000 for deferred tax
assets at September 30, 1997 since realization of these assets was not assured.
During fiscal year 1998, the Company fully utilized its remaining federal net
operating loss carryforward and reversed the remaining valuation allowance based
on management's assessment that it is reasonably assured that all net deferred
income tax assets will be realized in the future given the Company's present
level of earnings. Pretax domestic income amounted to approximately $5,462,000,
$1,414,000 and $136,000 in fiscal years 1998, 1997 and 1996, respectively.
Pretax foreign income amounted to approximately $525,000, $236,000 and $311,000
in fiscal years 1998, 1997 and 1996, respectively.
- 24 -
<PAGE>
NOTE 6. Long-Term Debt
Long-term debt is comprised of the following at September 30, 1998 and 1997:
1998 1997
---- ----
Banks and other:
U.S. bank credit and security agreement $ - $6,003,416
U.S. bank term loan 4,425,000 -
U.S. bank mortgage loan 2,820,900 -
U.K. bank term loan 729,584 776,250
Capital lease obligations 205,702 279,794
---------- ----------
8,181,186 7,059,460
Less installments due within one year 1,179,367 155,092
---------- ----------
$7,001,819 $6,904,368
========== ==========
Related party:
Term loan with interest rate of 1%
above the prevailing prime rate
(9.50% at September 30, 1997) - 1,800,000
---------- ----------
- 1,800,000
Less installments due within one year - 360,000
---------- ----------
$ - $1,440,000
========== ==========
In July 1998, the Company entered into a $14 million unsecured revolving credit
and term loan agreement with a new bank. Such agreement includes a $7.5 million
revolving credit facility, which expires in July 2002, with an option to
increase the facility to $9.5 million at any time through July 2000. Borrowings
under this facility bear interest at the bank's prime rate minus 2% or, at the
Company's option, LIBOR plus 90 basis points (6.25% and 6.275% at September 30,
1998). At September 30, 1998, there were no revolving credit borrowings
outstanding under this agreement.
The agreement also provides for a $4.5 million five-year term loan payable in
equal monthly installments through July 2003, with interest at LIBOR plus 1%.
The proceeds of this term loan were used to repay interest-bearing accounts
payable to a related party. The agreement contains restrictive covenants which,
among other things, require the Company to maintain certain levels of earnings
and ratios of debt service coverage and debt to tangible net worth. In September
1998, the Company entered into an interest rate swap agreement with the same
bank to effectively convert the foregoing floating rate long-term loan to a
fixed rate loan. This agreement fixes the Company's interest rate on its $4.5
million term loan at 6.74%. The interest rate swap agreement matures in the same
amounts and over the same periods as the related term loan.
In December 1995, the Company entered into a two-year Credit and Security
Agreement with a bank that provided for maximum borrowings of $6,500,000,
subject to an availability formula based on accounts receivable and inventory
balances. In February 1997, the term of the agreement was extended to January
31, 1999. Borrowings under the agreement included interest at the bank's prime
rate plus 1.00% (9.50% at September 30, 1997). In May 1998, the outstanding
balance of approximately $5,100,000 was repaid with proceeds from the public
offering and the agreement was terminated.
- 25 -
<PAGE>
In January 1998, the Company entered into an aggregate $2.9 million mortgage and
term loan agreement with a bank to finance the purchase of its principal
operating facility. Such agreement includes a $2,512,000 ten-year mortgage loan
payable in monthly installments through January 2008, with a $1,188,000 payment
due at the end of the term. The agreement also provides a $388,000 five-year
term loan payable in monthly installments through January 2003, with a $138,500
payment due at the end of the term. Both loans bear interest at the bank's prime
rate minus 1.35%. The loans are secured by a first mortgage on the property and
fixtures and contain restrictive covenants that, among other things, require the
Company to maintain certain levels of earnings and ratios of debt service
coverage and debt to tangible net worth. At the same time, the Company entered
into interest rate swap agreements with the same bank to effectively convert the
foregoing floating rate long-term loans to fixed rate loans. These agreements
fix the Company's interest rate on its $2,512,000 mortgage loan at 7.79% and its
$388,000 term loan at 7.7%. The interest rate swap agreements mature in the same
amounts and over the same periods as the related mortgage and term loans.
In April 1997, the Company repaid its U.K. related party mortgage loan with the
proceeds of a new ten year 500,000 pound sterling (approx. $850,000) bank term
loan. The term loan is payable in equal monthly installments with interest at a
fixed rate of 9%. The loan is secured by a first mortgage on the subsidiary's
property and contains restrictive covenants which, among other things, require
the subsidiary to maintain certain levels of net worth, earnings and debt
service coverage.
In October 1993, the Company issued a $2,000,000 secured promissory note to
Chugai Boyeki Co., Ltd., a related party. The remaining balance of $1,800,000
was repaid in May 1998 with proceeds from the public offering.
Long-term debt maturing in each of the fiscal years subsequent to September 30,
1998 approximates $1,179,000 in 1999, $1,196,000 in 2000, $1,214,000 in 2001,
$1,197,000 in 2002, $1,200,000 in 2003 and $2,195,000 thereafter.
At September 30, 1998, future minimum annual rental commitments under
non-cancelable capital lease obligations were as follows: $69,334 per year in
1999 through 2001, and $33,454 in 2002.
- 26 -
<PAGE>
NOTE 7. Foreign Operations
The Company operates two foreign entities: Vicon Industries (U.K.), Ltd., a
wholly owned subsidiary which markets and distributes the Company's products
principally within the United Kingdom and Europe; and Vicon Industries (H.K.)
Ltd., a majority owned subsidiary which markets and distributes the Company's
products principally within Hong Kong and mainland China.
The following summarizes certain information concerning the Company's operations
in the U.S. and abroad for fiscal years 1998, 1997, and 1996:
1998 1997 1996
---- ---- ----
Net sales
U.S. $54,184,000 $43,605,000 $35,468,000
Foreign 9,126,000 7,914,000 7,723,000
----------- ----------- ----------
Total $63,310,000 $51,519,000 $43,191,000
Operating income
U.S. $ 6,280,000 $ 2,387,000 $ 805,000
Foreign 589,000 363,000 421,000
---------- ----------- ----------
Total $ 6,869,000 $ 2,750,000 $ 1,226,000
Identifiable assets
U.S. $37,859,000 $26,372,000 $23,260,000
Foreign 6,527,000 4,828,000 4,825,000
---------- ----------- ----------
Total $44,386,000 $31,200,000 $28,085,000
Net assets - Foreign $ 2,023,000 $ 1,515,000 $ 935,000
U.S. sales include $9,853,000, $10,747,000 and $8,531,000 for export in
fiscal years 1998, 1997, and 1996, respectively. Operating profits exclude
interest expense, other income and income taxes. U.S. assets include $4,404,000,
$162,000 and $117,000 in fiscal years 1998, 1997 and 1996, respectively, of cash
for general corporate use.
NOTE 8. Stock Options and Stock Purchase Warrants
The Company maintains stock option plans which include both incentive and
non-qualified options covering a total of 350,582 shares of common stock
reserved for issuance to key employees, including officers and directors. Such
amount includes a total of 200,000 options reserved for issuance under the 1996
Incentive Stock Option Plan, as well as a total of 50,000 options reserved for
issuance under the 1996 Non-Qualified Stock Option Plan for Outside Directors,
approved by the shareholders in April 1997. All options are issued at fair
market value at the grant date and are exercisable in varying installments
according to the plans. The plans allow for the payment of option exercises
through the surrender of previously owned shares based on the fair market value
of such shares at the date of surrender. During fiscal 1998 and 1997, a total of
16,565 and 45,952 common shares, respectively, were surrendered pursuant to
stock option exercises, which are held in treasury. There were 685 shares
available for grant at September 30, 1998.
- 27 -
<PAGE>
Changes in outstanding stock options for the three years ended September 30,
1998 are as follows:
Weighted
Number Average
of Exercise
Shares Price
- ------------------------------------------------------------
Balance - September 30, 1995 299,661 $2.01
Options granted 245,397 $1.72
Options exercised (14,500) $1.82
Options forfeited (85,909) $2.13
- ------------------------------------------------------------
Balance - September 30, 1996 444,649 $1.83
Options granted 241,000 $2.77
Options exercised (244,332) $1.95
Options forfeited (21,820) $2.35
- ------------------------------------------------------------
Balance - September 30, 1997 419,497 $2.27
Options granted 48,250 $6.98
Options exercised (116,450) $2.18
Options forfeited (1,400) $6.50
- ------------------------------------------------------------
Balance - September 30, 1998 349,897 $2.94
Price range $1.69 - $2.49
(weighted-average contractual 158,397 $1.85
life of 1.7 years)
Price range $2.50 - $7.00
(weighted-average contractual 191,500 $3.84
life of 3.7 years)
- ------------------------------------------------------------
Exercisable options -
September 30, 1996 289,471 $1.89
September 30, 1997 149,838 $1.96
September 30, 1998 253,123 $2.47
- ------------------------------------------------------------
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of this Statement. The fair
value for options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for 1998,
1997 and 1996:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.0% 6.0% 6.0%
Dividend yield 0.0% 0.0% 0.0%
Volatility factor 67.3% 52.7% 46.2%
Weighted average expected life 3 years 3 years 3 years
- ----------------------------------------------------------------------------
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
- 28 -
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net income and earnings per share are as follows:
1998 1997 1996
---- ---- ----
Net income:
As reported $5,809,981 $1,564,518 $300,178
Pro forma $5,638,166 $1,364,368 $213,848
Earnings per share:
As reported
Basic $1.61 $.56 $.11
Diluted $1.50 $.52 $.11
Pro forma
Basic $1.56 $.49 $.08
Diluted $1.46 $.45 $.08
Weighted average fair value
of options granted $3.34 $1.13 $.64
Pro forma earnings reflect only options granted in fiscal 1998, 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period and compensation cost for options granted prior to October 1, 1995 was
not considered.
In connection with the public offering, the Company granted the Underwriters
warrants to purchase up to 145,000 shares of Common Stock. The warrants are
exercisable at any time commencing May 1999 through May 2003 at a price of
$10.50 per share.
NOTE 9. Earnings Per Share
The following table provides the components of the basic and diluted
earnings per share (EPS) computations:
1998 1997 1996
---- ---- ----
Basic EPS Computation
Net income $5,809,981 $1,564,518 $ 300,178
Weighted average shares
outstanding 3,605,307 2,803,805 2,765,245
Basic earnings per share $ 1.61 $ .56 $ .11
========== ========== ==========
Diluted EPS Computation
Net income $5,809,981 $1,564,518 $ 300,178
Weighted average shares
outstanding 3,605,307 2,803,805 2,765,245
Stock options 260,425 218,191 75,341
Stock compensation arrangement 7,343 - -
--------- --------- ---------
Diluted shares outstanding 3,873,075 3,021,996 2,840,586
Diluted earnings per share $ 1.50 $ .52 $ .11
========== ========== ==========
- 29 -
<PAGE>
NOTE 10. Industry Segment and Major Customer
The Company operates in one industry which encompasses the design, manufacture,
assembly, and marketing of closed-circuit television (CCTV) equipment and
systems for the CCTV segment of the security products industry. The Company's
products include all components of a video surveillance system such as remote
positioning devices, cameras, monitors, video switchers, housings, mounting
accessories, recording devices, manual and motorized lenses, controls, video
signal equipment, and consoles for system assembly. During fiscal 1998, indirect
sales to the United States Postal Service under a national supply contract
approximated $12 million. No customer represented sales in excess of ten percent
of consolidated sales during fiscal 1997 and fiscal 1996.
NOTE 11. Commitments
The Company occupies certain facilities, or is contingently liable, under
operating leases which expire at various dates through 2001. The leases, which
cover periods from one to three years, generally provide for renewal options at
specified rental amounts. The aggregate operating lease commitment at September
30, 1998 was $201,000 with minimum rentals for the fiscal years shown as
follows: 1999 - $88,000; 2000 - $72,000; and 2001 - $41,000.
The Company is a party to employment agreements with five executives which
provide for, among other things, the payment of compensation if there is a
change in control without Board of Director approval (as defined in the
agreements). The contingent liability under these change in control provisions
at September 30, 1998 was approximately $2,205,000. The total compensation
payable under these agreements, absent a change in control, aggregated
$2,345,000 at September 30, 1998. The Company is also a party to insured
deferred compensation agreements with two retired officers. The aggregate
remaining compensation payments of approximately $656,000 as of September 30,
1998 are subject to the individuals' adherence to certain non-compete covenants,
and are payable in monthly installments through December 2003.
In October 1997 and 1998, the Company's Chief Executive Officer was
provided a deferred compensation benefit of 45,952 and 16,565 shares,
respectively, of common stock currently held by the Company in treasury. Such
shares vest upon the expiration of the executive's employment agreement in
October 2003, or earlier under certain occurrences including his death,
involuntary termination or a change in control of the Company. The market value
of such shares approximated $456,000 at the date of agreement, which is being
amortized on the straight-line method over the term of the employment agreement.
Sales to customers from the Company's U.K. subsidiary are denominated in British
pounds sterling. The Company attempts to minimize its currency exposure on these
sales through the purchase of forward exchange contracts to cover its billings
to this subsidiary. These contracts generally involve the exchange of one
currency for another at a future date and specified exchange rate. At September
30, 1998 and 1997, the Company had approximately $2,200,000 and $1,350,000,
respectively, of outstanding forward exchange contracts to sell British pounds.
Such contracts have maturities of less than one year.
The Company's purchases of Japanese sourced products through Chugai Boyeki Co.,
Ltd., a related party, are denominated in Japanese yen. At September 30, 1998
and 1997, the Company did not have any forward exchange contracts to purchase
Japanese yen.
- 30 -
<PAGE>
NOTE 12: Related Party Transactions
As of September 30, 1998, Chugai Boyeki Company, Ltd. and affiliates ("Chugai")
owned approximately 12.3% of the Company's outstanding common stock. The
Company, which has been conducting business with Chugai for approximately 19
years, imports certain finished products and components through Chugai and also
sells its products to Chugai who resells the products in certain Asian and
European markets. The Company purchased approximately $5.3 million, $7.1 million
and $9.2 million of products and components from Chugai in fiscal years 1998,
1997, and 1996, respectively, and the Company sold $4.1 million, $2.7 million
and $2.1 million of product to Chugai for distribution in fiscal years 1998,
1997, and 1996, respectively. At September 30, 1998 and 1997, the Company owed
$652,000 and $7.1 million, respectively, to Chugai and Chugai owed $491,000 and
$276,000, respectively, to the Company resulting from purchases of products. In
October 1993, the Company borrowed $2 million from Chugai under a promissory
note agreement. In May 1998, the Company repaid the remaining balance with
proceeds from the public offering.
As of September 30, 1998, Mr. Chu S. Chun had voting control over
approximately 4.6% of the Company's outstanding common stock. Mr. Chun owns Chun
Shin Industries, Inc., the Company's 50% South Korean joint venture partner in
Chun Shin Electronics, Inc. (CSE) (see Note 2). Mr. Chun also controls
International Industries, Inc. (I.I.I.), a U.S. based company, which arranges
the importation and provides short term financing on all the Company's products
purchased directly or indirectly from CSE. During fiscal years 1998 and 1997,
the Company purchased approximately $8.0 million and $7.0 million of products
from CSE through I.I.I. under this agreement. In addition, the Company sold
approximately $344,000 and $1,100,000 of its products to I.I.I. in 1998 and
1997, respectively. At September 30, 1998 and 1997, I.I.I. owed the Company
approximately $59,000 and $279,000, respectively.
- 31 -
<PAGE>
VICON INDUSTRIES, INC. AND SUBSIDIARIES
QUARTERLY FINANCIAL DATA
(Unaudited)
Earnings Per Share
------------------
Quarter Net Gross Net
Ended Sales Profit Income Basic Diluted
------- ----- ------ ------ ----- -------
Fiscal 1998
December $14,874,000 $4,628,000 $ 1,009,000 $ .34 $ .31
March 14,731,000 4,826,000 1,154,000 .38 .35
June 16,106,000 5,451,000 1,575,000 .40 .38
September 17,599,000 5,927,000 2,072,000 .46 .44
----------- ----------- ----------- ----- -----
Total $63,310,000 $20,832,000 $ 5,810,000 $1.61 $1.50
=========== =========== =========== ===== =====
Fiscal 1997
December $11,298,000 $3,181,000 $ 215,000 $ .08 $ .08
March 12,328,000 3,392,000 166,000 .06 .06
June 13,726,000 3,910,000 543,000 .19 .18
September 14,167,000 3,992,000 641,000 .23 .20
----------- ----------- ----------- ----- -----
Total $51,519,000 $14,475,000 $ 1,565,000 $ .56 $ .52
=========== =========== =========== ===== =====
The Company has not declared or paid cash dividends on its common stock for any
of the foregoing periods. Additionally, certain loan agreements restrict the
payment of any cash dividends in future periods.
Because of changes in the number of common shares outstanding and market price
fluctuations affecting outstanding stock options, the sum of quarterly earnings
per share may not equal the earnings per share for the full year.
- 32 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By Kenneth M. Darby By Arthur D. Roche By John M. Badke
----------------------- ------------------------- ------------------
Kenneth M. Darby Arthur D. Roche John M. Badke
President Executive Vice President V.P. Finance
(Chief Executive Officer) (Chief Financial Officer) (Chief Acctg. Officer)
April 12, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
VICON INDUSTRIES, INC.
Donald N. Horn April 12, 1999
- --------------------- --------------
Donald N. Horn Chairman of the Board Date
Kenneth M. Darby Director April 12, 1999
- --------------------- --------------
Kenneth M. Darby Date
Arthur D. Roche Director April 12, 1999
- --------------------- --------------
Arthur D. Roche Date
Peter F. Barry Director April 12, 1999
- --------------------- --------------
Peter F. Barry Date
Chu S. Chun April 12, 1999
- --------------------- --------------
Chu S. Chun Director Date
Milton F. Gidge April 12, 1999
- --------------------- --------------
Milton F. Gidge Director Date
Peter F. Neumann April 12, 1999
- --------------------- --------------
Peter F. Neumann Director Date
W. Gregory Robertson April 12, 1999
- -------------------- --------------
W. Gregory Robertson Director Date
Kazuyoshi Sudo April 12, 1999
- -------------------- --------------
Kazuyoshi Sudo Director Date
- 33 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VICON INDUSTRIES, INC.
By By By
---------------------- ------------------------ --------------------
Kenneth M. Darby Arthur D. Roche John M. Badke
President Executive Vice President V.P. Finance
(Chief Executive Officer) (Chief Financial Officer) (Chief Acctg.Officer)
April 12, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
VICON INDUSTRIES, INC.
April 12, 1999
- -------------------- --------------
Donald N. Horn Chairman of the Board Date
Director April 12, 1999
- -------------------- --------------
Kenneth M. Darby Date
Director April 12, 1999
- -------------------- --------------
Arthur D. Roche Date
Director April 12, 1999
- -------------------- --------------
Peter F. Barry Date
April 12, 1999
- -------------------- --------------
Chu S. Chun Director Date
April 12, 1999
- -------------------- --------------
Milton F. Gidge Director Date
April 12, 1999
- -------------------- --------------
Peter F. Neumann Director Date
April 12, 1999
- -------------------- --------------
W. Gregory Robertson Director Date
April 12, 1999
- -------------------- --------------
Kazuyoshi Sudo Director Date
- 33 -
