-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rkb7Uyd/P92YNGu5O/d/1aKYnfpaPtUhTM0PQ+w+u8u3ScY+a/X4zKdf7vwt9m/W 7COjqNmdCCH5mqk154y3NQ== 0000310056-05-000001.txt : 20050111 0000310056-05-000001.hdr.sgml : 20050111 20050111161849 ACCESSION NUMBER: 0000310056-05-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20050111 DATE AS OF CHANGE: 20050111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VICON INDUSTRIES INC /NY/ CENTRAL INDEX KEY: 0000310056 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112160665 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07939 FILM NUMBER: 05523689 BUSINESS ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5169522288 MAIL ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-K 1 f10k_011104.txt 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 - ---------------------------------------------- ----------- 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: (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 ------- ------- 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 ------- ------- 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 ------ ITEM 1 - BUSINESS - ----------------- General - ------- Vicon Industries, Inc. ("the Company"), incorporated in 1967, designs, manufactures, assembles and markets a wide range of video systems and system components used for security, surveillance, safety and control purposes by a broad group of end users. A video system is typically a private network that can transmit and receive video, audio and data signals in accordance with the operational needs of the user. The Company's primary business focus is the design of 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 - -------- 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 - --------- 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 - ----------- 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 - --------------------- 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 - ----------- 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 - ------- 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 - --------- 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 - ------------------- 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 - ------------------------------------------------------------ None PART II ------- ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER ---------------------------------------------------------------------- MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ------------------------------------------------- The Company's stock is traded on the 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 ------ ----- Total 30,100 $4.82 ====== ===== (1) All repurchases were executed in open market transactions. ITEM 6 - SELECTED FINANCIAL DATA - -------------------------------- 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 --------------------------
Long-Term Compensation ---------------------- Annual Compensation Awards Payouts ------------------- ------ ------- Other All Annual Restricted Securities Other Name and Compen- Stock Underlying LTIP Compen- Principal Position Year Salary Bonus sation Award Options (#) Payouts sation - ------------------ ---- ------- ------- ------ ---------- ----------- ------- ------ Kenneth M. Darby 2004 $310,000 $ 75,000 (1) - - - - - Chairman and 2003 310,000 75,000 (1) - - 100,000 - - Chief Executive 2002 310,000 75,000 (1) - - - - - Officer Thomas Finstein 2004 $ 90,000 $ 20,000 (2) - - 20,000 - - Executive 2003 - - - - - - - Vice President 2002 - - - - - - - John M. Badke 2004 $152,000 $ 35,000 (1) - - - - - Senior Vice President 2003 $145,000 $ 35,000 (1) - - 25,000 - - and Chief Financial 2002 $140,000 $ 35,000 (1) - - 16,000 - - Officer Christopher J. Wall 2004 $148,000 $113,000 (3) - - - - - Managing Director 2003 $129,000 $ 89,000 (3) - - 20,000 - - Vicon Industries Ltd. 2002 $115,000 $ 27,000 (3) - - - - - Yigal Abiri 2004 $160,000 - - - - - $ 66,946 (5) General Manager 2003 $125,000 $ 25,000 (4) - - 10,000 - $620,000 (6) Vicon Systems Ltd. 2002 $125,000 - - - - - -
(1) Represents cash bonus approved by the Board of Directors upon the recommendation of its Compensation Committee. (2) Represents an incentive sign-on bonus. (3) Represents sales and profit related bonus based on financial results of Vicon Industries, Ltd. (4) Represents discretionary bonus. (5) Represents $43,938 of severance pay paid into a management insurance policy and $23,008 paid as compensation for accrued vacation. (6) Represents performance based compensation associated with the introduction of the Company's new digital video product line. - 18 - OPTION GRANTS IN LAST FISCAL YEAR - ---------------------------------
Individual Grants ----------------- Potential Realizable Value at Assumed Annual Rates of Stock % of Total Price Appreciation No. of Granted to Exercise for Option Term Options Employees in Price Expiration Name Granted Fiscal Year Per Share Date 5% 10% - ------------- ------- ------------- ---------- ----------- -------- ----------- Thomas Finstein 20,000 57.1% 5.40 5/10 $36,730 $ 83,329
Options granted in the year ended September 30, 2004 were issued under the 2002 Incentive Stock Option Plan and are exercisable as follows: up to 30% of the shares on the second anniversary of the grant date, an additional 30% of the shares on the third anniversary of the grant date, and the balance of the shares on the fourth anniversary of the grant date, except that no option is exercisable after the expiration of six years from the date of grant. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR ----------------------------------------------- AND FISCAL YEAR-END OPTION VALUES --------------------------------- At September 30, 2004 --------------------- Number of Securities Value of Underlying Unexercised Unexercised In-the-money Options Options (2) ------- ----------- Shares Acquired Value Exercisable/ Exercisable/ Name On Exercise Realized (1) Unexercisable Unexercisable - ---------------- ----------- ------------ ------------- ------------- Kenneth M. Darby -0- -0- 28,356/93,183 $38,852/$126,226 Thomas Finstein -0- -0- -0- /20,000 -0-/-0- John M. Badke -0- -0- 15,911/27,450 25,929/40,043 Christopher J. Wall -0- -0- -0- /20,000 -0-/26,500 Yigal Abiri -0- -0- 22,000/18,000 21,480/21,820 (1) Calculated based on the difference between the closing quoted market prices per share at the dates of exercise and the exercise prices. (2) Calculated based on the difference between the closing quoted market price($4.70) and the exercise price. - 19 - Employment Agreements - --------------------- Mr. Darby is a party to an employment agreement with the Company that provides for an annual salary of $310,000 through fiscal year 2005. Messrs. Finstein and Badke are parties to employment agreements that provide for annual salaries of $225,000 and $150,000, respectively, through fiscal year 2006. Each of these agreements provide for payment in an amount up to three times the average annual compensation for the previous five years if there is a change in control of the Company without Board of Director approval. Messrs. Wall and Abiri are parties to employment agreements that provide for annual salaries of $172,000 and $160,000, respectively, through fiscal year 2005. Mr. Wall's agreement was executed in November 2004, the terms of which are disclosed in Item 15(a)(3). In addition, the agreements provide for severance benefits of $620,000, $112,500 and $300,000 for Messrs. Darby, Finstein and Badke, respectively, under certain occurrences. Directors' Compensation and Term - -------------------------------- Directors are compensated at an annual rate of $16,000 for regular Board meetings and $1,000 per committee meeting attended in person or by teleconference. The Chairman of the Audit Committee also receives an annual retainer of $8,000. Employee directors are not compensated for Board or committee meetings. Directors may not stand for reelection after age 70, except that any director may serve one additional three-year term after age 70 with the unanimous consent of the Board of Directors. Compensation Committee Interlocks and Insider Participation - ----------------------------------------------------------- The Compensation Committee of the Board of Directors consists of Messrs. Maloney, Neumann, Robertson and Roche, none of whom has ever been an officer of the Company except for Mr. Roche, who served as Executive Vice President from August 1993 until his retirement in November 1999. Board Compensation Committee Report ----------------------------------- The Compensation Committee's compensation policies applicable to the Company's officers for 2004 were to pay a competitive market price for the services of such officers, taking into account the overall performance and financial capabilities of the Company and the officer's individual level of performance. Mr. Darby makes recommendations to the Compensation Committee as to the base salary and incentive compensation of all officers other than himself. The Committee reviews these recommendations with Mr. Darby and, after such review, determines compensation. In the case of Mr. Darby, the Compensation Committee makes its determination after direct negotiation with him. For each officer, the committee's determinations are based on its conclusions concerning each officer's performance and comparable compensation levels for similarly situated officers at comparable companies. The overall level of performance of the Company is taken into account but is not specifically related to the base salary of these officers. Also, the Company has established an incentive compensation plan for certain officers, which provides for a specified bonus upon the Company's achievement of certain annual sales and 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 and bonus for service as Chief Executive Officer, the committee considers the responsibility assumed by him in formulating, implementing and managing the operational and strategic objectives of the Company. - 20 - This graph compares the return of $100 invested in the Company's stock on October 1, 1999, with the return on the same investment in the AMEX U.S. Market Index and the AMEX Technology Index. (The following table was represented by a chart in the printed material) Vicon AMEX U.S. AMEX Technology Date Industries, Inc. Market Index Index - ---- ---------------- ------------ --------------- 10/01/99 100 100 100 10/01/00 46 123 117 10/01/01 49 89 95 10/01/02 44 78 59 10/01/03 59 100 85 10/01/04 67 116 96 - 21 - ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The following table sets forth the beneficial ownership of the Company's Common Stock as of December 15, 2004 by (i) those persons known by the Company to be beneficial owners of more than 5% of the Company's outstanding Common Stock; (ii) each current executive officer named in the Summary Compensation Table; (iii) each director; and (iv) all directors and executive officers as a group. Name and Address Number of Shares of Beneficial Owner Beneficially Owned (1) % of Class ------------------- ---------------------- ---------- CBC Co., Ltd. and affiliates 2-15-13 Tsukishima Chuo-ku Tokyo, Japan 104 543,715 11.3% Al Frank Asset Management, Inc. 32392 Coast Highway, Suite 260 Laguna Beach, CA 92651 291,995 (10) 6.1% Dimensional Fund Advisors 1299 Ocean Avenue Santa Monica, CA 90401 273,200 (11) 5.7% Leviticus Partners, L.P. 30 Park Avenue, Suite 12F New York, NY 10016 250,000 5.2% ****************************************************************************** C/O Vicon Industries, Inc. Kenneth M. Darby 293,616 (2) 6.1% Arthur D. Roche 151,601 (3) 3.2% Peter F. Neumann 37,072 (4) * W. Gregory Robertson 33,847 (5) * John M. Badke 32,900 (6) * Yigal Abiri 26,000 (7) * Christopher J. Wall 15,300 (8) * Thomas Finstein - * Clifton H.W. Maloney - * Total all Executive Officers and Directors as a group (14 persons) 681,037 (9) 14.2% * Less than 1%. (1) Unless otherwise indicated, the Company believes that all persons named in the table have sole voting and investment control over the shares of stock owned. (2) Includes currently exercisable options to purchase 43,524 shares. (3) Includes 50,000 shares held by Mr. Roche's wife and currently exercisable options to purchase 21,947 shares. (4) Includes currently exercisable options to purchase 20,000 shares. (5) Includes currently exercisable options to purchase 21,947 shares. (6) Includes currently exercisable options to purchase 21,461 shares. (7) Includes currently exercisable options to purchase 26,000 shares. (8) Includes currently exercisable options to purchase 3,000 shares. (9) Includes currently exercisable options to purchase 183,939 shares. (10) Al Frank Asset Management, Inc. had voting control over 126,721 shares and investment control over 291,995 shares. (11) Dimensional Fund Advisors had voting and investment control over 273,200 shares as investment advisor and manager for various mutual funds and other clients. These shares are beneficially owned by such mutual funds or other clients. - 22 - EQUITY COMPENSATION PLAN INFORMATION - ------------------------------------ at September 30, 2004 Number of securities Number of securities Weighted average remaining available to be issued upon exercise price for future issuance exercise of of outstanding under equity outstanding options, options, warrants compensation plans warrants and rights and rights (excluding securities reflected in column (a) ) Plan category (a) (b) (c) - ------------------ ------------------- ---------------- ------------------- Equity compensation plans approved by security holders 555,320 $3.50 75,751 Equity compensation plans not approved by security holders - - - Total 555,320 $3.50 75,751 EQUITY COMPENSATION GRANTS NOT APPROVED BY SECURITY HOLDERS - ----------------------------------------------------------- Through September 30, 2004, the Company had granted certain of its officers with deferred compensation benefits aggregating 97,337 shares of common stock currently held by the Company in treasury. Such shares vest upon retirement or, in the case of 70,647 shares, the expiration of one officer's employment agreement in October 2005. All shares vest earlier under certain occurrences including death, involuntary termination or a change in control of the Company. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The Company and CBC Co., Ltd.(CBC), a Japanese corporation which beneficially owns 11.3% of the outstanding shares of the Company, have been conducting business with each other for approximately twenty-five years. During this period, CBC has served as a lender, a product supplier and sourcing agent, and a private label reseller of the Company's products. CBC has also acted as the Company's sourcing agent for the purchase of certain video products. In fiscal 2004, the Company purchased approximately $651,000 of products and components from or through CBC. CBC competes with the Company in various markets, principally in the sale of video products and systems. Sales of all products to CBC were $712,000 in 2004. In fiscal 2003, the Company recognized $180,000 of revenues received from CBC pursuant to the completion of a contract to develop certain new product technology. - 23 - ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES - ------------------------------------------------ Audit Fees - ---------- The aggregate fees billed by BDO Seidman, LLP for professional services rendered for the audit of the Company's consolidated annual financial statements and the review of the financial statements included in the Company's quarterly reports on Form 10-Q for fiscal year 2004 were approximately $143,000. The aggregate fees billed by KPMG LLP for such services for fiscal year 2003 were $352,000. Tax Fees - -------- The aggregate fees billed by BDO Seidman, LLP for tax compliance, tax advice and tax planning during fiscal year 2004 were approximately $41,000. The aggregate fees billed by KPMG LLP for such tax services for fiscal year 2003 were $50,000. All these fees were pre-approved by the Audit Committee. Audit Related Fees - ------------------ Fees billed by KPMG LLP for professional services on audit related matters were $8,500 during fiscal year 2003. All Other Fees - -------------- None. Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of - -------------------------------------------------------------------------------- Independent Auditors - -------------------- The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent auditors. These services may include audit services, audit related services, tax services and other services. The Audit Committee has adopted a policy for the pre-approval of services provided by the independent auditors. Under the policy, pre-approval generally is provided for an annual period and any pre-approval is detailed as to the particular service or category of services and is subject to a specific limit. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis, which must be accompanied by a detailed explanation for each proposed service. The Audit Committee may delegate pre-approval authority to one or more of its members. Such member must report any decisions to the Audit Committee at the next scheduled meeting. - 24 - PART IV ------- ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES - ------------------------------------------------- (a) (1) Financial Statements -------------------- Included in Part IV, Item 15: Reports of Independent Registered Public Accounting Firms Financial Statements: Consolidated Statements of Operations, fiscal years ended September 30, 2004, 2003, and 2002 Consolidated Balance Sheets at September 30, 2004 and 2003 Consolidated Statements of Shareholders' Equity, fiscal years ended September 30, 2004, 2003, and 2002 Consolidated Statements of Cash Flows, fiscal years ended September 30, 2004, 2003, and 2002 Notes to Consolidated Financial Statements, fiscal years ended September 30, 2004, 2003, and 2002 (a) (2) Financial Statement Schedule ---------------------------- Included in Part IV, Item 15: Schedule II - Valuation and Qualifying Accounts for the years ended September 30, 2004, 2003, and 2002 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable and, therefore, have been omitted. - 25 - 15(a)(3) Exhibits - -------- -------- Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ------------------------- 3 (.1) Articles of Incorporation and Incorporated by reference By-Laws, as amended to the 1985 Annual Report on Form 10-K; Form S-2 filed in Registration Statement No. 33-10435 and Exhibit A, B and C of the 1987 Proxy Statement (.2) Amendment of the Certificate Incorporated by reference of Incorporation dated to the 2002 Annual Report May 7, 2002 on Form 10-K 4 Instruments defining the rights of security holders (.1) Rights Agreement dated December Incorporated by reference 4, 2001 between the Registrant and to the 2001 Annual Report Computershare Investor Services on Form 10-K 10 Material Contracts (.1) Employment Contract dated Incorporated by October 1, 2002 between the reference to the Registrant and Kenneth M. Darby 2004 Annual Report on Form 10-K (.2) 1994 Incentive Stock Option Plan Incorporated by reference to the 1994 Annual Report on Form 10-K (.3) 1994 Non-Qualified Stock Option Incorporated by Plan for Outside Directors reference to the 1994 Annual Report on Form 10-K (.4) 1996 Incentive Stock Option Plan Incorporated by reference to the 1997 Annual Report on Form 10-K (.5) 1996 Non-Qualified Stock Option Incorporated by Plan for Outside Directors reference to the 1997 Annual Report on Form 10-K (.6) Commercial fixed rate loan Incorporated by agreement between the Registrant reference to the and National Westminster Bank PLC June 30, 1997 filing dated April 8, 1997 on Form 10-Q (.7) Loan Agreement between the Incorporated by Registrant and The Dime Savings reference to the Bank of New York, FSB dated December 31, 1997 January 29, 1998 filing on Form 10-Q - 26 - Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ------------ (.8) Mortgage Note between the Incorporated by Registrant and The Dime Savings reference to the Bank of New York, FSB dated December 31, 1997 January 29, 1998 filing on Form 10-Q (.9) Mortgage and Security Agreement Incorporated by in the amount of $2,512,000 between reference to the the Registrant and The Dime Savings December 31, 1997 Bank of New York, FSB dated filing on Form 10-Q January 29, 1998 (.10) Interest rate master swap agreement Incorporated by between the Registrant and KeyBank reference to the National Association dated December 31, 1997 December 11, 1997 filing on Form 10-Q (.11) Schedule to the master agreement Incorporated by between the Registrant and KeyBank reference to the National Association dated December 31, 1997 December 11, 1997 filing on Form 10-Q (.12) Swap transaction confirmation with Incorporated by a notional amount of $2,512,000 reference to the between the Registrant and KeyBank December 31, 1997 National Association dated filing on Form 10-Q December 30, 1997 (.13) Advice of borrowing terms Incorporated by between the Registrant and reference to the National Westminster Bank PLC March 31, 2004 filing dated April 15, 2004 on Form 10-Q (.14) Loan Agreement between the Incorporated by reference Registrant and The Dime Savings to the 1999 Annual Report Bank of New York, FSB dated on Form 10-K October 12, 1999 (.15) Mortgage Note between the Incorporated by reference Registrant and The Dime Savings to the 1999 Annual Report Bank of New York, FSB dated on Form 10-K October 12, 1999 (.16) Mortgage and Security Agreement Incorporated by reference in the amount of $1,200,000 between to the 1999 Annual Report the Registrant and The Dime Savings on Form 10-K Bank of New York, FSB dated October 12, 1999 (.17) 1999 Incentive Stock Option Plan Incorporated by reference to the 1999 Annual Report on Form 10-K (.18) 1999 Non-Qualified Stock Incorporated by reference Option Plan to the 1999 Annual Report on Form 10-K (.19) 2002 Incentive Stock Option Plan Incorporated by reference to the 2002 Annual Report on Form 10-K - 27 - Exhibit Number or Exhibit Incorporation by Numbers Description Reference to - ------- ----------- ------------ (.20) 2002 Non-Qualified Stock Incorporated by reference Option Plan to the 2002 Annual Report on Form 10-K (.21) Employment Agreement dated 10.21 May 3, 2004 between the Registrant and Thomas Finstein (.22) Employment Agreement dated 10.22 January 1, 2004 between the Registrant and John M. Badke (.23) Employment Agreement dated 10.23 October 1, 2003 between the Registrant and Yigal Abiri (.24) Employment Agreement dated 10.24 February 8, 1996 between the Registrant and Christopher J. Wall (.25) Side Letter to the Employment 10.25 Agreement between the Registrant and Christopher J. Wall dated November 18, 2004 21 Subsidiaries of the Registrant Incorporated by reference to the Notes to the Consolidated Financial Statements 23 Consents (.1) Consent of BDO Seidman, LLP 23.1 (.2) Consent of KPMG LLP 23.2 31 Rule 13a-14(a)/15d-14(a) Certifications (.1) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.1 (.2) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 32 Section 1350 Certifications (.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.1 (.2) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 - 28 - No other exhibits are required to be filed. Other Matters - Form S-8 and S-2 Undertaking - -------------------------------------------- For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statements on Form S-8 Nos. 33-7892 (filed June 30, 1986), 33-34349 (filed April 1, 1990), 33-90038 (filed February 24, 1995), 333-30097 (filed June 26, 1997), 333-71410 (filed October 11, 2001) and 333-116361 (filed June 10, 2004) and on Form S-2 No. 333-46841 (effective May 1, 1998): Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. - 29 - Report of Independent Registered Public Accounting Firm ------------------------------------------------------- The Board of Directors and Stockholders Vicon Industries, Inc.: We have audited the accompanying consolidated balance sheet of Vicon Industries, Inc. as of September 30, 2004 and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended September 30, 2004. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule as listed in Part IV, item 15(a)(2) for the fiscal year ended September 30, 2004. 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 audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation and schedule. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vicon Industries, Inc. at September 30, 2004, and the results of its operations and its cash flows for the year ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP Melville, New York December 6, 2004 - 30 - Report of Independent Registered Public Accounting Firm ------------------------------------------------------- The Board of Directors and Shareholders Vicon Industries, Inc.: We have audited the consolidated balance sheet of Vicon Industries, Inc. and subsidiaries (the "Company") as of September 30, 2003, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the fiscal years ended September 30, 2003 and 2002. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Part IV, item 15(a)(2) for the fiscal years ended September 30, 2003 and 2002. 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, 2003, and the results of their operations and their cash flows for each of the fiscal years ended September 30, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule referred to above, 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. As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective October 1, 2002. /s/ KPMG LLP Melville, New York January 14, 2004 - 31 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Years Ended September 30, 2004, 2003 and 2002 2004 2003 2002 ---- ---- ---- Net sales $53,532,631 $51,953,650 $54,168,110 Cost of sales 33,821,618 32,862,590 35,950,038 ------------ ------------ ------------ Gross profit 19,711,013 19,091,060 18,218,072 Operating expenses: Selling, general and administrative expense 17,058,460 15,889,164 16,027,461 Engineering and development expense 4,878,981 4,879,294 4,370,230 ------------ ------------ ------------ 21,937,441 20,768,458 20,397,691 ------------ ------------ ------------ Operating loss (2,226,428) (1,677,398) (2,179,619) Other expense (income): Interest expense 187,390 240,843 339,587 Interest and other income (204,224) (179,716) (170,178) ------------ ------------ ------------ Loss before income taxes (2,209,594) (1,738,525) (2,349,028) Income tax expense (benefit) 481,000 1,763,023 (770,000) ------------ ------------ ------------ Loss before cumulative effect of a change in accounting principle (2,690,594) (3,501,548) (1,579,028) Cumulative effect of a change in accounting principle (Note 2) - (1,372,606) - ------------ ------------ ------------ Net loss $(2,690,594) $(4,874,154) $(1,579,028) ============ ============ ============ Basic and diluted loss per share: Loss before cumulative effect of a change in accounting principle $( .59) $( .75) $(.34) Cumulative effect of a change in accounting principle - ( .30) - ------- ------- ------ Net loss $( .59) $(1.05) $(.34) ======= ======= ====== See accompanying notes to consolidated financial statements. - 32 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2004 and 2003 ASSETS 2004 2003 - ------ ---- ---- Current Assets: Cash and cash equivalents $ 6,063,198 $ 4,836,148 Marketable securities 2,118,698 3,325,773 Accounts receivable (less allowance of $1,162,000 in 2004 and $1,135,000 in 2003) 9,661,563 11,056,300 Inventories: Parts, components, and materials 3,239,461 2,071,092 Work-in-process 3,675,122 2,881,592 Finished products 5,758,990 7,141,470 ----------- ----------- 12,673,573 12,094,154 Recoverable income taxes 239,402 2,052,662 Prepaid expenses and other current assets 388,347 701,779 ----------- ----------- Total current assets 31,144,781 34,066,816 Property, plant and equipment: Land 1,224,850 1,197,100 Buildings and improvements 5,720,721 5,620,495 Machinery, equipment, and vehicles 11,379,032 10,854,652 ----------- ----------- 18,324,603 17,672,247 Less accumulated depreciation and amortization 11,234,174 10,386,406 ----------- ----------- 7,090,429 7,285,841 Other assets 631,807 540,407 ----------- ----------- $38,867,017 $41,893,064 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current Liabilities: Current maturities of long-term debt $ 348,615 $ 325,294 Accounts payable 3,282,671 2,527,946 Accrued compensation and employee benefits 2,048,417 2,023,087 Accrued expenses 1,541,888 2,524,858 Unearned service revenue 792,073 1,238,944 Income taxes payable 337,632 94,174 ----------- ----------- Total current liabilities 8,351,296 8,734,303 Long-term debt 2,410,190 2,732,275 Unearned service revenue 401,352 547,871 Other long-term liabilities 790,834 643,884 Commitments and contingencies - Note 12 Shareholders' equity: Common stock, par value $.01 per share authorized - 25,000,000 shares issued - 4,849,046 and 4,832,576 shares 48,490 48,326 Capital in excess of par value 22,505,100 22,439,637 Retained earnings 5,165,666 7,856,260 ----------- ----------- 27,719,256 30,344,223 Treasury stock at cost, 283,317 shares in 2004 and 218,917 shares in 2003 (1,278,884) (980,199) Accumulated other comprehensive income 617,239 91,700 Deferred compensation (144,266) (220,993) ----------- ----------- Total shareholders' equity 26,913,345 29,234,731 ----------- ----------- $38,867,017 $41,893,064 =========== =========== See accompanying notes to consolidated financial statements. - 33 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Fiscal Years Ended September 30, 2004, 2003, and 2002
Accumulated Capital in other Deferred Total Common excess of Retained Treasury comprehensive compen- shareholders' Shares Stock par value earnings Stock income sation equity ------ ------- ----------- ---------- --------- ----------- --------- ---------- Balance September 30, 2001 4,756,532 $47,565 $21,542,541 $14,309,442 $(633,422) $ (368,079) $ - $34,898,047 Comprehensive income (loss): Net income - - - (1,579,028) - - - (1,579,028) Foreign currency translation adjustment - - - - - 234,973 - 234,973 Unrealized loss on derivatives - - - - - (24,818) - (24,818) Total comprehensive income (loss) - - - - - - - (1,368,873) Repurchases of common stock (19,200 shares) - - - - (57,192) - - (57,192) Exercise of stock options 67,447 674 193,627 - (151,410) - - 42,891 Tax benefit from exercise of stock options - - 23,834 - - - - 23,834 --------- ------ ---------- ---------- ----------- ----------- --------- --------- Balance September 30, 2002 4,823,979 48,239 21,760,002 12,730,414 (842,024) (157,924) - 33,538,707 Comprehensive income (loss): Net loss - - - (4,874,154) - - - (4,874,154) Foreign currency translation adjustment - - - - - 272,188 - 272,188 Unrealized loss on derivatives - - - - - (16,009) - (16,009) Unrealized loss on marketable securities - - - - - (6,555) - (6,555) Total comprehensive income (loss) - - - - - - - (4,624,530) Repurchases of common stock (46,500 shares) - - - - (138,175) - - (138,175) Exercise of stock options 8,597 87 26,001 - - - - 26,088 Stock-based compensation - - 43,345 - - - - 43,345 Deferred compensation awards and amortization - - 610,289 - - - (220,993) 389,296 --------- ------- ----------- ----------- ----------- ---------- -------- ----------- Balance September 30, 2003 4,832,576 48,326 22,439,637 7,856,260 (980,199) 91,700 (220,993) 29,234,731 Comprehensive income (loss): Net loss - - - (2,690,594) - - - (2,690,594) Foreign currency translation adjustment - - - - - 459,779 - 459,779 Unrealized gain on derivatives - - - - - 107,782 - 107,782 Unrealized loss on marketable securities - - - - - (42,022) - (42,022) Total comprehensive income (loss) - - - - - - - (2,165,055) Repurchases of common stock (64,400 shares) - - - - (298,685) - - (298,685) Exercise of stock options 16,470 164 38,359 - - - - 38,523 Stock-based compensation - - 27,104 - - - - 27,104 Deferred compensation amortization - - - - - - 76,727 76,727 --------- ------- ----------- ----------- ----------- ---------- --------- ----------- Balance September 30, 2004 4,849,046 $48,490 $22,505,100 $ 5,165,666 $(1,278,884) $ 617,239 $(144,266) $26,913,345 ========= ======= =========== =========== =========== ========== ========= ===========
See accompanying notes to consolidated financial statements. - 34 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Fiscal Years Ended September 30, 2004, 2003 and 2002
2004 2003 2002 ---- ---- ---- Cash flows from operating activities: Net loss $(2,690,594) $(4,874,154) $(1,579,028) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,046,553 1,133,110 1,039,072 Goodwill amortization - - 198,452 Amortization of deferred compensation 76,727 - - Stock compensation expense 27,104 43,345 - Deferred income taxes - 1,853,957 842,423 Cumulative effect of a change in accounting principle - 1,372,606 - Change in assets and liabilities: Accounts receivable, net 1,728,523 (431,820) 1,249,601 Inventories (470,812) 1,563,024 3,677,449 Recoverable income taxes 1,813,260 (339,934) (1,712,728) Prepaid expenses and other current assets 325,889 (197,284) 76,946 Other assets (98,919) (40,489) 31,742 Accounts payable 688,172 111,802 (10,842) Accrued compensation and employee benefits 4,462 173,842 41,304 Accrued expenses (900,647) 904,714 (650,517) Unearned service revenue (595,074) (994,643) (847,466) Income taxes payable 233,309 (51,981) (322,795) Other liabilities 254,731 317,096 (117,482) Net cash provided by ----------- ----------- ------------ operating activities 1,442,684 543,191 1,916,131 ----------- ----------- ------------ Cash flows from investing activities: Capital expenditures (730,102) (674,429) (477,041) Net decrease (increase) in marketable securities 1,165,053 (3,332,328) - Net cash provided by (used in) ----------- ------------ ------------ investing activities 434,951 (4,006,757) (477,041) ----------- ----------- ------------ Cash flows from financing activities: Repayments of U.S. term loan - (825,000) (900,000) Repayments of long-term debt (324,639) (479,346) (421,453) Proceeds from exercise of stock options 38,523 26,088 42,891 Repurchases of common stock (298,685) (138,175) (57,192) ----------- ----------- ------------ Net cash used in financing activities (584,801) (1,416,433) (1,335,754) ----------- ----------- ------------ Effect of exchange rate changes on cash (65,784) (55,657) (126,680) ----------- ----------- ------------ Net increase (decrease) in cash 1,227,050 (4,935,656) (23,344) Cash at beginning of year 4,836,148 9,771,804 9,795,148 ----------- ----------- ------------- Cash at end of year $ 6,063,198 $ 4,836,148 $ 9,771,804 =========== =========== ============ Cash paid during the fiscal year for: Income taxes $ 309,780 $ 328,566 $ 676,857 Interest $ 233,898 $ 245,892 $ 356,022
See accompanying notes to consolidated financial statements. - 35 - VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fiscal Years ended September 30, 2004, 2003, and 2002 NOTE 1. Summary of Significant Accounting Policies - --------------------------------------------------- Nature of Business - ------------------ The Company designs, manufactures, assembles and markets video systems and system components for use in security, surveillance, safety and control purposes by end users. The Company markets its products worldwide primarily to installing dealers, systems integrators, government entities and distributors. Basis of Presentation - --------------------- The accompanying consolidated financial statements include the accounts of Vicon Industries, Inc. (the Company) and its wholly owned subsidiaries: Vicon Industries, Limited; TeleSite U.S.A., Inc. and subsidiary (Vicon Systems Ltd.); and Vicon Industries Foreign Sales Corp., after elimination of intercompany accounts and transactions. Revenue Recognition - ------------------- The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility of the resulting receivable is reasonably assured. As it relates to product sales, revenue 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. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents include cash on deposit and amounts invested in highly liquid money market funds. Marketable Securities - --------------------- Marketable securities consist of mutual fund investments in U.S. government debt securities. Such securities are stated at market value and are classified as available-for-sale under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115, with unrealized gains and losses reported in other comprehensive income as a component of shareholders' equity. The cost of such securities was $2,167,275 and $3,332,328 at September 30, 2004 and 2003, respectively, with $48,577 and $6,555 of unrealized losses included in the carrying amounts at September 30, 2004 and 2003, respectively. - 36 - Allowances for Doubtful Accounts - -------------------------------- 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. 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. Depreciation and amortization of assets under capital leases, is computed by the straight-line method over the estimated useful lives of the related assets. Machinery, equipment and vehicles are being depreciated over periods ranging from 2 to 10 years. The Company's buildings are being depreciated over periods ranging from 25 to 40 years and leasehold improvements are amortized over the lesser of their estimated useful lives or the remaining lease term. The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted and without interest, is less than the carrying amount of the asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Engineering and Development - --------------------------- Product engineering and development costs are charged to expense as incurred, and amounted to approximately $4,900,000, $4,900,000 and $4,400,000 in fiscal 2004, 2003, and 2002, respectively. Earnings (Loss) Per Share - ------------------------- Basic EPS is computed based on the weighted average number of common shares outstanding. Diluted EPS reflects the maximum dilution that would have resulted from the exercise of stock options, warrants and incremental shares issuable under a deferred compensation agreement (see Note 11). In periods when losses are incurred, the effects of these securities would be antidilutive and, therefore, excluded from the computation of diluted EPS. Foreign Currency Translation - ---------------------------- The Company translates the financial statements of its foreign subsidiaries by applying the current rate method under which assets and liabilities are translated at the exchange rate on the balance sheet date, while revenues, costs, and expenses are translated at the average exchange rate for the reporting period. The resulting cumulative translation adjustment of $775,000 and $315,000 at September 30, 2004 and 2003, respectively, is recorded as a component of shareholders' equity in accumulated other comprehensive income (loss). - 37 - 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 reverse. Deferred U.S. income taxes are not provided on undistributed earnings of foreign subsidiaries as the Company presently intends to reinvest such earnings indefinitely, and any plan to repatriate any of such earnings in the future is not expected to result in a material incremental tax liability to the Company. In fiscal 2003 and 2004, the Company recognized a valuation allowance against its entire net deferred tax asset balance due to the uncertainty of future realization (see Note 5 for further discussion). Product Warranties - ------------------ The Company provides for the estimated cost of product warranties at the time revenue is recognized (see Note 4). 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. Derivative Instruments - ---------------------- SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", establishes accounting and reporting standards for derivative instruments as either assets or liabilities in the statement of financial position based on their fair values. Changes in the fair values are required to be reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in other comprehensive income. Changes in fair values related to fair value hedges as well as the ineffective portion of cash flow hedges are recognized in earnings. The Company does not use derivative instruments for speculative or trading purposes. Derivative instruments are primarily used to manage exposures related to transactions with the Company's Europe and Israel based subsidiaries and interest rate risk on certain variable rate bank indebtedness. To accomplish this, the Company uses certain contracts, primarily foreign currency forward contracts ("forwards") and interest rate swaps, which minimize cash flow risks from changes in foreign currency exchange rates and interest rates, respectively. These derivatives have been designated as cash flow hedges for accounting purposes. As of September 30, 2004, the Company had an interest rate swap and currency forwards outstanding with notional amounts aggregating $1.7 million and $2.3 million, respectively, whose aggregate fair value was a liability of approximately $109,000. The change in the fair value of these derivatives is reflected in other comprehensive income in the accompanying statement of shareholders' equity, net of tax where applicable. The forwards have maturities of less than one year and require the Company to exchange currencies at specified dates and rates. The interest rate swaps mature in the same amounts and over the same periods as the related debt. The Company considers the credit risk related to the interest rate swaps and the forwards to be low because such instruments are entered into with financial institutions having high credit ratings and are generally settled on a net basis. There were no gains or losses recognized in operations due to hedge ineffectiveness during the three-year period ended September 30, 2004. The Company does not expect the amounts that are currently classified in accumulated other comprehensive income that are expected to be recognized in operations in the next fiscal year to be material. - 38 - Fair Value of Financial Instruments - ----------------------------------- The carrying amounts for trade accounts and other receivables, accounts payable and accrued expenses approximate fair value due to the short-term maturity of these instruments. The carrying amounts of the Company's long-term debt instruments approximate fair value. The Company's interest rate swap agreement is carried at its fair market value (which was a liability of approximately $150,000 at September 30, 2004). This value represents the estimated amount the Company would need to pay if such agreement was terminated before maturity, principally resulting from market interest rate decreases. The fair value of the Company's foreign currency forward exchange contracts is estimated by obtaining quoted market prices. The contracted exchange rates on committed forward exchange contracts was approximately $41,000 more favorable than the market rates for similar term contracts at September 30, 2004. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accounting for Stock-Based Compensation - --------------------------------------- The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations in accounting for its employee stock-based compensation. Under APB No. 25, compensation expense would be recorded if, on the date of grant, the market price of the underlying stock exceeded its exercise price. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123" ("SFAS No. 148"), the Company has retained the accounting prescribed by APB No. 25 and has presented the disclosure information prescribed by SFAS No. 123 and SFAS No. 148 below. Pro forma information regarding net income (loss) and earnings (loss) 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 2004, 2003 and 2002: 2004 2003 2002 ---- ---- ---- Risk-free interest rate 3.5% 2.7% 2.5% Dividend yield 0.0% 0.0% 0.0% Volatility factor 67.9% 68.0% 68.8% Weighted average expected life 4 years 4 years 4 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. - 39 - In the Company's consolidated financial statements, no compensation expense has been recognized for stock option grants issued under any of the Company's fixed stock option plans. See Note 9 for discussion of variable stock option plans. Had compensation expense for fixed stock option grants issued been determined under the fair value method of SFAS No. 123, the Company's net loss and loss per share (EPS) for the fiscal years ended September 30, 2004, 2003 and 2002 would have been: 2004 2003 2002 ---------- -------- -------- Reported net loss $(2,690,594) $(4,874,154) $(1,579,028) Stock-based compensation cost, net of tax (127,546) (351,138) (96,796) ------------ ------------ ----------- Pro forma net loss $(2,818,140) $(5,225,292) $(1,675,824) ============ ============ ============ Reported basic and diluted EPS $ (.59) $ (1.05) $ (.34) Pro forma basic and diluted EPS $ (.61) $ (1.13) $ (.36) Weighted average fair value of options granted $2.90 $ 1.79 $ 1.62 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. Such estimates include, but are not limited to, provisions for doubtful accounts receivable, net realizable value of inventory, warranty obligations and assessments of the recoverability of the Company's long-lived assets. Actual results could differ from those estimates. NOTE 2. Goodwill - ----------------- The Company adopted SFAS No. 142 on October 1, 2002 and, accordingly, discontinued amortization of goodwill as of that date. In the second quarter ended March 31, 2003, the Company completed the transitional goodwill impairment testing required under SFAS No. 142. In accordance with SFAS No. 142, such testing included a comparison of the fair value of each of the Company's reporting units to the carrying amounts of each unit's net assets, and a determination of the implied fair value of each reporting unit's goodwill. Based upon an independent valuation conducted as of October 1, 2002, and the results of the transitional impairment testing, the Company recognized an impairment charge of approximately $1.4 million (primarily resulting from a change in measurement from undiscounted to discounted cash flows), as a cumulative effect of a change in accounting principle in 2003. The following table presents net loss and loss per share data, adjusted to exclude amortization expense for periods prior to the adoption of SFAS No. 142: 2004 2003 2002 ---- ---- ---- Reported net loss $(2,690,594) $(4,874,154) $(1,579,028) Add back: goodwill amortization - - 198,452 ----------- ----------- ----------- Adjusted net loss $(2,690,594) $(4,874,154) $(1,380,576) =========== =========== =========== Basic and diluted loss per share: Reported loss per share $ (.59) $ (1.05) $ (.34) Goodwill amortization - - .04 -------- -------- -------- Adjusted loss per share $ (.59) $ (1.05) $ (.30) ======== ======== ======== - 40 - NOTE 3. Short-Term Borrowings - ------------------------------ The Company's European based subsidiary maintains a bank overdraft facility that provides for maximum borrowings of 1 million Pounds Sterling ($1,810,000) and is secured by all the assets of the subsidiary. This facility expires in March 2005. During fiscal 2004 and 2003, there were no outstanding borrowings under this facility. NOTE 4. Accrued Warranty Obligation - ------------------------------------ The Company recognizes the estimated cost associated with its standard warranty on products at the time of sale. The estimate is based on historical warranty claim cost experience. The following is a summary of the changes in the Company's accrued warranty obligation (which is included in accrued expenses) for the years ended September 30, 2004 and 2003: Balance as of September 30, 2002 $ 190,000 Deduct: Expenditures (261,000) Add: Provision 396,000 --------- Balance as of September 30, 2003 $ 325,000 Deduct: Expenditures (295,000) Add: Provision 511,000 --------- Balance as of September 30, 2004 $ 541,000 ========= NOTE 5. Income Taxes - --------------------- The components of income tax expense (benefit) for the fiscal years indicated are as follows: 2004 2003 2002 ---- ---- ---- Federal: Current $ - $ (339,934) $ (1,713,000) Deferred - 1,853,957 729,000 ------------- ----------- ------------ - 1,514,023 (984,000) State 12,015 - (179,000) Foreign 468,985 249,000 393,000 ------------- ----------- ------------ Total income tax expense (benefit) $ 481,000 $ 1,763,023 $ (770,000) ============= =========== ============ A reconciliation of the U.S. statutory tax rate to the Company's effective tax rate follows:
2004 2003 2002 ---- ---- ---- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- U.S. statutory tax $ (751,000) (34.0)% $ (591,000) (34.0)% $(799,000) (34.0)% Increase in valuation allowance 1,408,000 63.7 2,436,000 140.1 - - Prior year loss carryback refund - - (115,000) (6.6) - - State tax, net of federal benefit 8,000 0.4 - - (56,000) (2.4) Goodwill amortization - - - - 67,000 2.8 Dissolution of subsidiary (192,000) (8.7) - - - - Other 8,000 0.4 33,000 1.9 18,000 0.8 ----------- ------ ---------- ------ --------- ------- Effective Tax Rate $ 481,000 21.8% $1,763,000 101.4% $(770,000) (32.8)% =========== ====== ========== ====== ========= =======
- 41 - The tax effects of temporary differences that give rise to deferred tax assets and liabilities at September 30, 2004 and 2003 are presented below: 2004 2003 ---- ---- Deferred tax assets: Inventories $ 902,000 $ 554,000 Deferred compensation accruals 171,000 152,000 Severance accruals 183,000 81,000 Warranty accrual 198,000 119,000 Depreciation 224,000 178,000 Allowance for doubtful accounts receivable 356,000 329,000 Unearned service revenue 307,000 627,000 Net operating loss carryforwards 1,614,000 339,000 Unrealized loss on derivatives 40,000 79,000 Other 18,000 146,000 ----------- ----------- Gross deferred tax assets 4,013,000 2,604,000 Deferred tax liabilities: Other 169,000 168,000 ----------- ----------- Gross deferred tax liabilities 169,000 168,000 ----------- ----------- Total deferred tax assets and liabilities $ 3,844,000 $ 2,436,000 Less valuation allowance (3,844,000) (2,436,000) ----------- ----------- Net deferred tax assets and liabilities $ - $ - =========== ============ In 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 of future results in light of the Company's operating losses in recent years and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible. Income tax expense for 2003 includes the recognition of an available tax effected net operating loss carryback of $225,000. Deferred U.S. income taxes are not provided on undistributed earnings of foreign subsidiaries as the Company presently intends to reinvest such earnings indefinitely, and any plan to repatriate any of such earnings in the future is not expected to result in a material incremental tax liability to the Company. For income tax purposes, the Company had a tax effected net operating loss carryback of approximately $2.1 million at September 30, 2003, which was included in recoverable income taxes. In fiscal 2004, the Company received a refund of previously paid taxes totaling $1.8 million under a carryback claim filed during 2003. The Company has approximately $4.7 million of U.S. federal income tax loss carryforwards that expire in 2023 through 2024. Pretax domestic loss amounted to approximately $(3,856,000), $(2,458,000) and $(3,245,000) in fiscal years 2004, 2003 and 2002, respectively. Pretax foreign income amounted to approximately $1,646,000, $719,000 and $896,000 in fiscal years 2004, 2003 and 2002, respectively. NOTE 6. Long-Term Debt - ----------------------- Long-term debt is comprised of the following at September 30, 2004 and 2003: 2004 2003 ---- ---- U.S. bank mortgage loans $2,510,865 $2,743,331 U.K. bank term loan 233,791 297,416 Other 14,149 16,822 ---------- ---------- 2,758,805 3,057,569 Less current maturities 348,615 325,294 ---------- ---------- $2,410,190 $2,732,275 ========== ========== - 42 - 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 provided a $388,000 five-year term loan that was repaid in monthly installments through January 2003 with a $138,500 payment that was made at the end of the term in February 2003. The mortgage loan bears interest at the bank's prime rate minus 1.35% and is secured by all the assets of the Company. At the same time, the Company entered into interest rate swap agreements with the same bank at the time to effectively convert the foregoing floating rate long-term loans to fixed rate loans. Subsequently, such bank sold its local operations, including the Company's loans, to another bank while retaining the Company's interest rate swap agreements. These agreements effectively fixed the Company's interest rate on its $2,512,000 mortgage loan at 7.79%. The interest rate swap agreement matures in the same amounts and over the same periods as the related mortgage loan. In October 1999, the Company entered into a $1.2 million mortgage loan agreement with its bank to finance the expansion of its principal operating facility. The loan is payable in equal monthly principal installments through January 2008, with a $460,000 payment due at the end of the term. The loan bears interest at the bank's prime rate minus 160 basis points (3.15% and 2.40% at September 30, 2004 and 2003, respectively) or, at the Company's option, LIBOR plus 100 basis points (3.01% and 2.16% at September 30, 2004 and 2003, respectively). In April 1997, the Company's Europe based subsidiary entered into a ten-year 500,000 pound sterling (approximately $905,000) 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 that, among other things, require the subsidiary to maintain certain levels of net worth, earnings and debt service coverage. Current and long-term debt maturing in each of the fiscal years subsequent to September 30, 2004 approximates $349,000 in 2005, $347,000 in 2006, $323,000 in 2007 and $1,740,000 in 2008. NOTE 7. Other Comprehensive Income - ----------------------------------- The accumulated other comprehensive income balances at September 30, 2004 and 2003 consisted of the following: 2004 2003 ---------- ---------- Foreign currency translation adjustment $ 774,764 $ 314,985 Unrealized loss on derivatives (108,948) (216,730) Unrealized loss on securities (48,577) (6,555) ---------- ---------- Accumulated other comprehensive income $ 617,239 $ 91,700 =========== ========== NOTE 8. Segment and Related Information - ---------------------------------------- The Company operates in one industry which encompasses the design, manufacture, assembly and marketing of video systems and system components for the electronic protection segment of the security industry. The Company manages its business segments primarily on a geographic basis. The Company's principal reportable segments are comprised of its United States (U.S.) and United Kingdom (Europe) based operations. Its U.S. based operations consist of Vicon Industries, Inc., the Company's corporate headquarters and principal operating entity. Its Europe based operations consist of Vicon Industries Limited, a wholly owned subsidiary which markets and distributes the Company's products principally within Europe. Other segments principally include the operations of Vicon Systems Ltd., an Israeli based wholly owned subsidiary which designs and produces the Company's principal digital video systems. - 43 - The Company evaluates performance and allocates resources based on, among other things, the net profit for each segment, which excludes intersegment sales and profits. Segment information for the fiscal years ended September 30, 2004, 2003 and 2002 is as follows:
2004 U.S. Europe Other Consolidating Totals - ---- ---------- ---------- --------- ------------- ------ Net sales to external customers $36,451,000 $16,637,000 $ 445,000 $ - $53,533,000 Intersegment net sales 4,820,000 - 6,456,000 (11,276,000) - Net income (loss) (3,639,000) 1,177,000 (261,000) 32,000 (2,691,000) Interest expense 162,000 147,000 2,000 (124,000) 187,000 Interest income 269,000 45,000 4,000 (114,000) 204,000 Depreciation and amortization 721,000 209,000 117,000 - 1,047,000 Total assets 27,438,000 10,744,000 3,503,000 (2,818,000) 38,867,000 Capital expenditures $ 456,000 $ 174,000 $ 100,000 $ - $ 730,000 2003 U.S. Europe Other Consolidating Totals - ---- ---------- ---------- --------- ------------- ------ Net sales to external customers $34,745,000 $15,486,000 $ 1,723,000 $ - $51,954,000 Intersegment net sales 6,043,000 - 3,870,000 (9,913,000) - Net income (loss) (4,880,000) 471,000 (346,000) (119,000) (4,874,000) Interest expense 204,000 158,000 7,000 (128,000) 241,000 Interest income 282,000 21,000 - (123,000) 180,000 Depreciation and amortization 744,000 169,000 220,000 - 1,133,000 Total assets 32,007,000 8,594,000 5,033,000 (3,741,000) 41,893,000 Capital expenditures $ 459,000 $ 132,000 $ 83,000 $ - $ 674,000 2002 U.S. Europe Other Consolidating Totals - ---- ---------- ---------- --------- ------------- ------ Net sales to external customers $38,726,000 $13,078,000 $2,364,000 $ - $54,168,000 Intersegment net sales 6,432,000 - 403,000 (6,835,000) - Net income (loss) (1,155,000) 593,000 (649,000) (368,000) (1,579,000) Interest expense 263,000 218,000 24,000 (165,000) 340,000 Interest income 355,000 - - (185,000) 170,000 Depreciation and amortization 760,000 103,000 176,000 199,000 1,238,000 Total assets 40,785,000 7,196,000 3,278,000 (3,833,000) 47,426,000 Capital expenditures $ 293,000 $ 21,000 $ 163,000 $ - $ 477,000
The consolidating segment information presented above includes the elimination and consolidation of intersegment transactions. Net sales and long-lived assets related to operations in the United States and other foreign countries for the fiscal years ended September 30, 2004, 2003, and 2002 are as follows: 2004 2003 2002 ---- ---- ---- Net sales U.S. $36,530,000 $34,909,000 $39,255,000 Foreign 17,003,000 17,045,000 14,913,000 ---------- ---------- ---------- Total $53,533,000 $51,954,000 $54,168,000 Long-lived assets U.S. $ 5,059,000 $ 5,324,000 $ 5,609,000 Foreign 2,031,000 1,962,000 2,057,000 ---------- ----------- ----------- Total $ 7,090,000 $ 7,286,000 $ 7,666,000 U.S. sales include $5,310,000, $4,030,000 and $3,413,000 for export in fiscal years 2004, 2003, and 2002, respectively. Foreign sales principally represent sales from the Company's Europe based subsidiary. - 44 - NOTE 9. Stock Option Plans - --------------------------- The Company maintains stock option plans which include both incentive and non-qualified options covering a total of 628,736 shares of common stock reserved for issuance to key employees, including officers and directors, as of September 30, 2004. Such amount includes a total of 200,000 options reserved for issuance under the 2002 Incentive Stock Option Plan, as well as a total of 200,000 options reserved for issuance under the 2002 Non-Qualified Stock Option Plan, approved by the shareholders in May 2002. 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 mature shares based on the fair market value of such shares at the date of surrender. During fiscal 2002, a total of 34,968 common shares were surrendered pursuant to stock option exercises, which are held in treasury. There were 75,751 shares available for grant at September 30, 2004. Changes in outstanding stock options for the three years ended September 30, 2004 are as follows: Weighted Number Average of Exercise Shares Price - ------------------------------------------------------------------- Balance - September 30, 2001 251,871 $3.15 Options granted 50,000 $3.05 Options exercised (67,447) $2.88 Options forfeited (16,252) $2.83 - ------------------------------------------------------------------- Balance - September 30, 2002 218,172 $3.24 Options granted 401,508 $3.37 Options exercised (8,597) $3.03 Options forfeited (48,546) $3.18 - ------------------------------------------------------------------- Balance - September 30, 2003 562,537 $3.34 Options granted 35,000 $5.40 Options exercised (16,470) $2.34 Options forfeited (25,747) $3.33 - ------------------------------------------------------------------- Balance - September 30, 2004 555,320 $3.50 Price range $2.20 - $3.05 (weighted-average contractual 257,000 $2.76 life of 3.6 years) Price range $3.06 - $7.44 (weighted-average contractual 298,320 $4.15 life of 4.0 years) - ------------------------------------------------------------------- Exercisable options - September 30, 2002 60,020 $4.12 September 30, 2003 93,546 $3.71 September 30, 2004 189,529 $3.49 - ------------------------------------------------------------------- On April 20, 2000, the Board of Directors granted holders of stock options the right to surrender their underwater options by May 31, 2000 in exchange for a reduced option grant at an exercise price of $3.18 per share, based on the closing market price of the Company's common stock on such date. On May 31, 2000, the Company granted 67,823 new options and cancelled 156,750 options with exercise prices ranging from $6.75 to $8.19 per share. These new grants were treated as repricings and are subject to variable plan accounting pursuant to FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." Accordingly, compensation expense (benefit) is recorded for any changes in the Company's stock price above the price of $3.18. In fiscal 2004 and 2003, compensation expense related to these repriced options was $27,104 and $43,345, respectively. - 45 - NOTE 10. Shareholder Rights Plan - --------------------------------- On November 14, 2001, the Company's Board of Directors adopted a Shareholder Rights Plan, which declared a dividend of one Common Stock Purchase Right (a Right) for each outstanding share of common stock of the Company to shareholders of record on December 21, 2001. Each Right entitles the holder to purchase from the Company one share of common stock at a purchase price of $15 per share. In the event of the acquisition of or tender offer for 20% or more of the Company's outstanding common stock by certain persons or group without the Board of Directors' consent, such purchase price will be adjusted to equal fifty percent of the average market price of the Company's common stock for a period of thirty consecutive trading days immediately prior to the event. Until the Rights become exercisable, they have no dilutive effect on the Company's earnings per share. The Rights, which are non-voting and exercisable until November 30, 2011, can be redeemed by the Company in whole at a price of $.001 per Right at any time prior to the acquisition by certain persons or group of 50% of the Company's common stock. Separate certificates for the Rights will not be distributed, nor will the Rights be exercisable, until either (i) a person or group acquires beneficial ownership of 20% or more of the Company's common stock or (ii) the tenth day after the commencement of a tender or exchange offer for 20% or more of the Company's common stock. Following an acquisition of 20% or more of the Company's common shares, each Right holder, except for the 20% or more stockholder, can exercise their Right(s), unless the 20% or more stockholder has offered to acquire all of the outstanding shares of the Company under terms that a majority of the independent Directors of the Company have determined to be fair and in the best interest of the Company and its stockholders. On May 7, 2002, the Company's shareholders approved an amendment of the Company's Certificate of Incorporation to increase the total number of shares of common stock authorized to issue from 10,000,000 to 25,000,000 shares. NOTE 11. Earnings (Loss) Per Share - ----------------------------------- The following table provides the components of the basic and diluted loss per share (EPS) computations: 2004 2003 2002 ---- ---- ---- Basic and Diluted EPS Computation - --------------------------------- Net loss $(2,690,594) $(4,874,154) $(1,579,028) Weighted average shares outstanding 4,597,961 4,630,745 4,658,612 Basic and diluted loss per share $ (.59) $ (1.05) $ (.34) ============ =========== =========== In 2004, 2003 and 2002, 238,717, 70,718 and 60,330 shares, respectively, have been omitted from the calculation of diluted EPS as their effect would have been antidilutive. NOTE 12. Commitments and Contingencies - --------------------------------------- The Company occupies certain facilities under operating leases that expire at various dates through 2008. The leases, which cover periods from three to eight years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment at September 30, 2004 was $829,000 with minimum rentals for the fiscal years shown as follows: 2005 - $294,000; 2006 - $276,000; 2007 - $227,000; and 2008 - $32,000. - 46 - The Company is a party to employment agreements with eight executives that provide for, among other things, the payment of compensation if there is a change in control without Board of Director approval (as defined in the agreements). The contingent liability under such change in control provisions at September 30, 2004 was approximately $3.6 million. Certain of the employment agreements provide for a severance benefit at the expiration of the agreement or at a specified date of retirement, absent a change in control, aggregating $1.5 million. The Company is amortizing such obligation to expense on the straight-line method over the term of the employment agreement or through the specified dates of retirement. Such expense amounted to approximately $279,000 and $146,000 in fiscal 2004 and 2003, respectively. The Company has agreements with certain of its officers to provide a deferred compensation benefit in the form of 97,337 shares of common stock currently held by the Company in treasury. Such shares vest upon retirement or, in the case of 70,647 shares, the expiration of one officer's employment agreement in October 2005. All shares vest earlier under certain occurrences including death, involuntary termination or a change in control of the Company. The market value of such shares approximated $610,000 at the dates of grant, which is being amortized on the straight-line method through the specified dates of retirement or over the term of the employment agreement. In October 1, 2004, the Company entered into an agreement to purchase all of the operating assets of Videotronic Infosystems GmbH ("Videotronic"), a German based video system supplier operating under insolvency protection, for 700,000 Eurodollars (approximately $868,000). The purchase was ratified by Videotronic's Creditors on November 26, 2004. NOTE 13. Litigation - -------------------- 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. In the normal course of business, the Company is a party to certain other claims and litigation. Management believes that the settlement of such claims and litigation, considered in the aggregate, will not have a material adverse effect on the Company's financial position and results of operations. NOTE 14. Related Party Transactions - ------------------------------------ As of September 30, 2004, CBC Co., Ltd. and affiliates ("CBC") owned approximately 11.9% of the Company's outstanding common stock. The Company, which has been conducting business with CBC for approximately 25 years, imports certain finished products and components through CBC and also sells its products to CBC. The Company purchased approximately $651,000, $832,000 and $1.3 million of products and components from CBC in fiscal years 2004, 2003, and 2002, respectively, and the Company sold $712,000, $370,000 and $409,000 of products to CBC for distribution in fiscal years 2004, 2003, and 2002, respectively. At September 30, 2004 and 2003, the Company owed $62,000 and $69,000, respectively, to CBC and CBC owed $55,000 and $7,000, respectively, to the Company resulting from purchases of products. In fiscal 2003, the Company recognized $180,000 of revenues received from CBC pursuant to the completion of a contract to develop certain new product technology. - 47 - NOTE 15. Quarterly Financial Data (unaudited) - ---------------------------------------------- Earnings (Loss) Per Share --------- Net Quarter Net Gross Income Ended Sales Profit (Loss) Basic Diluted ----- ----- ------ ------ ----- ------- Fiscal 2004 - ----------- December $14,338,000 $5,847,000 $ 122,000 $ .03 $ .03 March 12,235,000 4,525,000 (901,000) (.20) (.20) June 13,573,000 5,004,000 (425,000) (.09) (.09) September 13,387,000 4,335,000 (1,487,000) (.32) (.32) ----------- ----------- ----------- ------ ------ Total $53,533,000 $19,711,000 $(2,691,000) $ (.59) $ (.59) =========== =========== =========== ====== ====== Fiscal 2003 - ----------- December $12,018,000 $3,900,000 $(2,071,000) $ (.45) $ (.45) March 13,082,000 4,641,000 (2,735,000) (.59) (.59) June 13,051,000 5,257,000 30,000 .01 .01 September 13,803,000 5,293,000 (98,000) (.02) (.02) ----------- ----------- ----------- ------ ------ Total $51,954,000 $19,091,000 $(4,874,000) $(1.05) $(1.05) =========== =========== =========== ====== ====== In the quarter ended September 30, 2004, the Company recognized a $638,000 charge for the phase out of a discontinued product line, which was an addition to an initial assessment charge of $316,000 taken in the previous quarter ended June 30, 2004. The Company has not declared or paid cash dividends on its common stock for any of the foregoing 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. SCHEDULE II VICON INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS Years ended September 30, 2004, 2003, and 2002 Balance at Charged to Balance beginning costs and at end Description of period expenses Deductions of period ----------- --------- -------- ---------- --------- Allowance for uncollectible accounts: September 30, 2004 $1,135,000 $192,000 $165,000 $1,162,000 ========== ======== ======== ========== September 30, 2003 $1,077,000 $546,000 $488,000 $1,135,000 ========== ======== ======== ========== September 30, 2002 $1,115,000 $353,000 $391,000 $1,077,000 ========== ======== ======== ========== - 48 - 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 /s/ Kenneth M. Darby By /s/ John M. Badke - ----------------------- -------------------- Kenneth M. Darby John M. Badke Chairman and Senior Vice President, Finance Chief Executive Officer and Chief Financial Officer January 11, 2005 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. /s/ Kenneth M. Darby January 11, 2005 - --------------------- -------------------- Kenneth M. Darby Chairman and CEO Date /s/ Clifton H.W. Maloney January 11, 2005 - ------------------------ -------------------- Clifton H.W. Maloney Director Date /s/ Peter F. Neumann January 11, 2005 - --------------------- -------------------- Peter F. Neumann Director Date /s/ W. Gregory Robertson January 11, 2005 - ------------------------ -------------------- W. Gregory Robertson Director Date /s/ Arthur D. Roche January 11, 2005 - --------------------- -------------------- Arthur D. Roche Director Date - 49 - EX-10 2 ex_10-22jb.txt EXHIBIT 10.22 EMPLOYMENT AGREEMENT -------------------- AGREEMENT, dated as of January 1, 2004, between John M. Badke (hereinafter called "BADKE") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 89 Arkay Drive, Hauppauge, New York 11788 (hereinafter called the "Company"). WHEREAS, the Company and BADKE mutually desire to assure the continuation of BADKE's services to the Company, NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties covenant and agree as follows: 1. Employment. -------------- The Company shall employ BADKE as its Vice President of Finance and Chief Financial Officer throughout the term of this Agreement, and BADKE hereby accepts such employment. 2. Term. -------- The term of this Agreement shall commence as of the date of this Agreement and end on December 31, 2005 unless terminated earlier by the Company. 3. Compensation. ---------------- A. The Company shall pay BADKE a base salary of $150,000 per annum, subject to periodic adjustment as determined by the CEO of the Company with Board of Directors approval, but in any event shall not be less than the base salary so indicated. B. BADKE's base salary shall be payable monthly or bi-weekly. C. BADKE shall also be entitled to participate, if a full time employee, in any life insurance, medical, dental, hospital, disability, 401(k) or other benefit plans as may from time to time be made available to the officers of the Company, subject to the general eligibility requirements of such plans. 4. Covenant not to Compete. --------------------------- BADKE agrees that during the term of this Agreement and for a period of 24 months thereafter, he shall not directly or indirectly within the United States or Europe engage in, or enter the employment of or render any services to any other entity engaged in, any business of a similar nature to or in competition with the Company's business of designing, manufacturing and selling video security and surveillance equipment and protection devices anywhere in the United States and Europe. BADKE further acknowledges that the services to be rendered under this Agreement by him are special, unique, and of extraordinary character and that a material breach by him of this section will cause the Company to suffer irreparable damage; and BADKE agrees that in addition to any other remedy, this section shall be enforceable by negative or affirmative preliminary or permanent injunction in any Court of competent jurisdiction. BADKE acknowledges that he may only be released from this covenant if the Company materially breach's this agreement or provides a written release of this provision. 5. Severance Payment on Certain Terminations or Events. ------------------------------------------------------- A. If either Badke retires (anytime after attaining the minimum retirement age of 60) or the Company terminates Badke's employment with the Company for reasons other than "Misconduct"; or dies while still a full time employee, or is terminated under paragraph 7 herein, then Badke, or his survivor shall be entitled to receive severance or retirement payments as the case may be, without reduction for any offset or mitigation, in an amount equal to $300,000. This Section 5 shall survive the expiration of this Agreement. If this Agreement expires and Badke is required to perform his services outside of Long Island or is required to take any salary reduction, then Badke's employment shall be deemed to have been effectively terminated under this Section 5. B. "Misconduct" shall mean (a) a willful, substantial and unjustifiable refusal or inability, due to drug or alcohol impairment, to perform substantially the duties and services required of his position; (b) misappropriation or embezzlement involving the Company or its assets; (c) conviction of a felony involving moral turpitude;or (d) conviction of fraud in a court of law. C. In the event of payment of severance under this section 5, such payments shall be in lieu of any other obligation by the Company for accrued compensation benefit of any kind at the time of termination. Post termination stock option exercises in accordance with Plan provisions are excepted. D. The severance amount shall be paid in equal monthly payments over a 24-month period. Should Badke be in violation of Paragraph 4, severance payments shall cease at that time. 6. Termination Payment on Change of Control. -------------------------------------------- A. Notwithstanding any other provision of this Agreement, if a "Change of Control" occurs without the consent of the Board of Directors, BADKE, at his option, may elect to terminate his rights and obligations under this Agreement and to receive a termination payment, without reduction for any offset or mitigation, in an amount equal to three times his average annual base salary for the five years preceding the Change of Control, in either present value lump sum or extended payments over three years as BADKE shall elect. B. A "Change of Control" shall be deemed to have occurred if any entity or person shall directly or indirectly acquire beneficial ownership of 50% or more of the then outstanding shares of capital stock of the Company. C. BADKE's option to elect to terminate his obligations and to receive a termination payment as either a present value lump sum or extended payments may be exercised only by written notice delivered to the Company within 90 days following the date on which BADKE receives actual notice of a Change of Control. In selecting this option the Company shall have no obligation to BADKE for any severance payments under paragraph 5. 7. Death or Disability. ----------------------- The Company may terminate this Agreement and all salary due thereunder, at its sole option and determination if during the term of this Agreement (a) BADKE dies or (b) BADKE becomes so disabled for a period of six months that he is substantially unable to perform his duties under this Agreement for such period. The Company shall be the sole judge of such disability. 8. Arbitration. --------------- Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York in accordance with the rules of the American Arbitration then in effect, and judgement upon the award rendered be entered and enforced in any court having jurisdiction thereof. 9. Miscellaneous. ----------------- A. This Agreement contains the entire agreement between the parties and supersedes all prior agreements by the parties relating to payments by the Company upon involuntary employment termination with or without cause, however, it does not restrict or limit such other benefits as the President may determine to provide or make available to BADKE. B. This agreement may not be waived, changed, modified or discharged orally, but only by agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, or discharge is sought. C. This Agreement shall be governed by the laws of New York State applicable to contracts between New York State residents and made and to be entirely performed in New York State. D. If any part of this Agreement is held to be unenforceable by any court of competent jurisdiction, the remaining provisions of this Agreement shall continue in full force and effect. E. This Agreement shall inure to the benefit of, and be binding upon, the Company, its successor, and assigns. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. VICON INDUSTRIES, INC. /s/ John M. Badke By: /s/Kenneth M. Darby - ----------------- ------------------- John M. Badke Kenneth M. Darby CEO Vicon Industries, Inc. EX-31 3 ex_31-1kd.txt EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - ---------------------------------------- I, Kenneth M. Darby, certify that: 1. I have reviewed this annual report on Form 10-K of Vicon Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 11, 2005 /s/ Kenneth M. Darby - -------------------- Kenneth M. Darby Chairman and Chief Executive Officer EX-31 4 ex_31-2jb.txt EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER - ---------------------------------------- I, John M. Badke, certify that: 1. I have reviewed this annual report on Form 10-K of Vicon Industries, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 11, 2005 /s/ John M. Badke - ----------------- John M. Badke Senior Vice President, Finance and Chief Financial Officer EX-32 5 ex_32-1kd.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Vicon Industries, Inc. (the "Company") on Form 10-K for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth M. Darby, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the report. /s/ Kenneth M. Darby -------------------- Kenneth M. Darby Chief Executive Officer January 11, 2005 EX-32 6 ex_32-2jb.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Vicon Industries, Inc. (the "Company") on Form 10-K for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John M. Badke, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the report. /s/ John M. Badke ----------------- John M. Badke Chief Financial Officer January 11, 2005 EX-23 7 ex_23-1.txt EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm The Board of Directors Vicon Industries, Inc.: We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-7892, 33-34349, 33-90038, 333-30097, 333-71410 and 333-116361) and Form S-2 (No. 333-46841) of Vicon Industries, Inc. of our report dated December 6, 2004, relating to the consolidated balance sheet of Vicon Industries, Inc. and subsidiaries as of September 30, 2004, and the related consolidated statements of operations, shareholders' equity and cash flows and related schedule for the year ended September 30, 2004, which report appears in the September 30, 2004 annual report on Form 10-K of Vicon Industries, Inc. /s/ BDO Seidman, LLP Melville, New York January 11, 2005 EX-23 8 ex_23-2.txt EXHIBIT 23.2 Consent of Independent Registered Public Accounting Firm The Board of Directors Vicon Industries, Inc.: We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-7892, 33-34349, 33-90038, 333-30097, 333-71410 and 333-116361) and Form S-2 (No. 333-46841) of Vicon Industries, Inc. of our report dated January 14, 2004, relating to the consolidated balance sheet of Vicon Industries, Inc. and subsidiaries (the Company) as of September 30, 2003, and the related consolidated statements of operations, shareholders' equity and cash flows and related schedule for each of the fiscal years ended September 30, 2003 and 2002, which report appears in the September 30, 2004 annual report on Form 10-K of Vicon Industries, Inc. Our report includes an explanatory paragraph related to the Company's adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective October 1, 2002. /s/ KPMG LLP Melville, New York January 11, 2005 EX-10 9 ex_10-21tf.txt EXHIBIT 10.21 EMPLOYMENT AGREEMENT -------------------- AGREEMENT, dated as of May 3, 2004, between Thomas Finstein (hereinafter called "FINSTEIN") and VICON INDUSTRIES, INC., a New York corporation, having its principal place of business at 89 Arkay Drive, Hauppauge, New York 11788 (hereinafter called the "Company"). WHEREAS, the Company and FINSTEIN mutually desire to enter into this Agreement, NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties covenant and agree as follows: 1. Employment. The Company shall employ FINSTEIN as its Executive Vice President - Products and Operations throughout the term of this Agreement, and FINSTEIN hereby accepts such employment. 2. Term. The term of this Agreement shall commence as of the date of this Agreement and end on April 30, 2006 unless terminated earlier by the Company. 3. Compensation. A. The Company shall pay FINSTEIN a base salary of $225,000 per annum, subject to periodic adjustment as determined by the CEO of the Company with Board of Directors approval but in any event shall not be less than the base salary so indicated. B. FINSTEIN's base salary shall be payable monthly or bi-weekly. C. FINSTEIN shall also be entitled to participate, if a full time employee, in any life insurance, medical, dental, hospital, disability, 401(k) or other benefit plans as may from time to time be made available to the Officers of the Company, subject to the general eligibility requirements and provisions of such plans. 1 D. FINSTEIN shall be entitled to four (4) weeks paid vacation accrued in accordance with Company policy. 4. Covenant not to Compete. FINSTEIN agrees that during the term of this Agreement and for a period of two (2) years thereafter, he shall not directly or indirectly within the United States or Europe engage in, or enter the employment of or render any services to any other entity engaged in, any business of a similar nature to or in competition with the Company's business of designing, manufacturing and selling video security and surveillance equipment and protection devices anywhere in the United States and Europe. FINSTEIN further acknowledges that the services to be rendered under this Agreement by him are special, unique, and of extraordinary character and that a material breach by him of this section will cause the Company to suffer irreparable damage; and FINSTEIN agrees that in addition to any other remedy, this section shall be enforceable by negative or affirmative preliminary or permanent injunction in any Court of competent jurisdiction. FINSTEIN acknowledges that he may only be released from this covenant if the Company materially breach's this agreement or provides to him a written release of this provision. 5. Severance Payment on Certain Terminations or Events. A. If the Company terminates FINSTEIN's employment during the term of this Agreement for reasons other than "Misconduct" (as defined in 5B) then FINSTEIN shall be entitled to receive severance payments, except in the case of disability under paragraph 6. The severance amount shall be equal to twelve months of FINSTEIN's monthly base salary at the time of such termination. If this Agreement expires and the Company terminates FINSTEIN'S employment anytime thereafter for reasons other than "Misconduct" (as defined in 5B) then FINSTEIN shall be entitled to severance payments equal to six months of FINSTEIN'S monthly base salary at the time of such termination. 2 B. "Misconduct" shall mean (a) a willful refusal, or negligence or, inability due to drug or alcohol impairment, or indifference to perform (in performing) the duties and responsibilities required of his position; (b) fraud, misappropriation or embezzlement involving the Company or its assets; (c) conviction of a felony involving moral turpitude; or (d) a violation of the Company's Code of Ethics and Conduct. C. Payment of any severance shall be in lieu of any other obligation of the Company for severance or any other post-termination compensation under this Agreement or any other policy of the Company, if any. D. The severance amount shall be paid in equal monthly payments a twelve (12) month period. Should FINSTEIN be in violation of paragraph 4, while receiving severance payments then severance payments shall cease at that time. 6. Death or Disability. The Company may terminate this Agreement at its sole option and determination without liability for severance payments under paragraph 5 if during the term of this Agreement (a) FINSTEIN dies or (b) FINSTEIN becomes so disabled for a period of six months that he is substantially unable to perform his duties under this Agreement for such period. The Company shall be the sole judge of such disability. 7. Termination Payment on Change of Control. A. Notwithstanding any other provision of this Agreement, if a "Change of Control" occurs without the consent of the Board of Directors, FINSTEIN, at his option, may elect to terminate his obligations under this Agreement and to receive a lump sum termination payment in an amount equal to the present value of three times his average annual base salary for the five years or shorter period preceding the Change of Control calculated as if paid ratably over a three year period. 3 B. A "Change of Control" shall be deemed to have occurred if any entity shall directly or indirectly acquire beneficial ownership of 50% or more of the outstanding shares of capital stock of the Company. C. FINSTEIN's option to elect to terminate his obligations and to receive a termination payment may be exercised only by written notice delivered to the Company within 90 days following the date on which FINSTEIN receives actual notice of Change of Control. 8. Arbitration. Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York in accordance with the rules of the American Arbitration then in effect, and judgement upon the award rendered be entered and enforced in any court having jurisdiction thereof. 9. Miscellaneous. A. This Agreement contains the entire agreement between the parties, however, it does not restrict or limit such other benefits as the CEO may determine to provide or make available to FINSTEIN. B. This agreement may not be waived, changed, modified or discharged orally, but only by agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, or discharge is sought. C. This Agreement shall be governed by the laws of New York State applicable to contracts between New York State residents and made and to be entirely performed in New York State. D. If any part of this Agreement is held to be unenforceable by any court of competent jurisdiction, the remaining provisions of this Agreement shall continue in full force and effect. 4 E. This Agreement shall inure to the benefit of, and be binding upon, the Company, its successor, and assigns. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. VICON INDUSTRIES, INC. /s/ Thomas Finstein By: /s/ Kenneth M. Darby - ------------------- ------------------------ Thomas Finstein Kenneth M. Darby CEO Vicon Industries, Inc. 5 EX-10 10 ex_10-24cwall.txt EXHIBIT 10.24 T H I S A G R E E M E N T is made the 8th day of February 1996 BETWEEN. (1) "The Company" : Vicon Industries (UK) Limited of Brunel Way, Fareham, Hampshire PO15 5TX (2) "The Managing Director" : Christopher J Wall of 39 Park Road Hayling Island Hampshire PO11 0HT WHEREBY IT IS AGREED as follows: 1. Interpretation: In this Agreement: (A) "holding company" and "subsidiary" shall have the respective meanings given to them by section 736 Companies Act 1985; (B) "associated company" means any company (not being a subsidiary of the Company or of the holding company for the time being of the Company) in which the Company or any subsidiary or holding company of the Company or any subsidiary of any such holding company holds or controls more than 10 per cent in nominal value of the equity share capital or more than 10 per cent of the voting rights for the time being attached to the issued share capital; (C) "the Group means the Company and any holding company or subsidiary for the time being of the Company and any subsidiary of any such holding company and any associated company; (D) "the Board" means the board of directors for the time being of the company or the directors of the Company present at any meeting of directors at which a quorum is present and it includes any person nominated by the board of directors to represent it for the purposes of this Agreement; (E) "the Business" means the business of the Company and the business of any company in the Group for which the Managing Director is required to perform services pursuant to clause 2(B); -1- (F) "person" shall include any individual company corporation firm partnership joint venture association organization unincorporated body or trust (in each case Whether or not having a separate legal personality); (G) words denoting the singular shall include the plural and vice versa; (H) references to statutory provision shall be construed as references t those provisions as respectively amended or re-enacted from time to time or as their application is modified by other provisions (whether before or after the date hereof) and shall include any provisions of which they are re-enactments (whether with or without modification); (I) headings are inserted for convenience and shall not affect the construction of this Agreement; and (J) any provisions which are expressed or intended to take effect or continue in effect after the termination of this Agreement shall take effect or continue in effect notwithstanding its termination (for whatever reason). 2. Appointment: (A) The Company hereby appoints the Managing Director and the Managing Director agrees to serve the Company as Managing Director on the terms and conditions contained in this Agreement. (B) The Managing Director may be required by the Board to perform services not only for the Company but for any other company within the group and without further remuneration (except as otherwise agreed). 3. Term of Appointment: The Managing Director's appointment shall commence on the 1st February 1996 and (subject to the provision of clauses 16 and 17) shall continue until terminated by either party giving to the other in writing not less than a period measured by one month per year of completed service up to a maximum of 15 months. 4. Duties: (A) Unless prevented by ill-health or accident or as otherwise agreed by the Board in writing the Managing Director shall during the continuance of his appointment devote the whole of his time attention and abilities to the Business diligently and faithfully serve the Company to the best of his power skill and ability and use his best endeavours to promote and protect the interest of the Company. (B) The Managing Director shall exercise such powers perform such duties and comply with such directions in relation to the Business consistent with his appointment as the Board may from time to time confer upon or assign or give to him -2- (C) The Managing Director shall comply with all reasonable and lawful instructions and regulations from time to time given or made by the Board and at all times give the Board all such information and assistance as it may require in connection with the Business (D) For the purpose of Employment protection (Consolidation) Act 1978 there are no terms and conditions relating to hours of work or to normal working hours other than as contained in this Agreement The Managing Director's hours of work shall be such as may be requisite for the proper discharge of his duties 5. Mobility: (A) The Managing Director shall not be required to reside outside the United Kingdom but subject thereto he may be required to travel within or outside the United Kingdom in connection with the Business if the Board considers it necessary or desirable to enable him properly and efficiently to perform his obligations (B) The Managing Director shall reside in such place in the United Kingdom as will enable him in the opinion of the Board to fulfil his obligations efficiently and the Managing Director shall work in such place or places as the Board may require 6. Salary and Bonus: (A) the Company shall pay to the Managing Director during the continuance of his appointment as remuneration for his services a salary identified in the side letter to this agreement, (subject to review in accordance with sub-clause (B)) such salary to accrue from day to day and to be payable in arrears by equal monthly instalments on or before the last business day of each calendar month (B) The salary payable to the Managing Director by the Company pursuant to sub-clause (A) shall be reviewed annually. (C) In addition to the said salary the Managing Director shall be entitled to a bonus the terms and amount of the said bonus to be agreed between the parties 7. Expenses: The Company shall pay or repay to the Managing Director all reasonable travelling hotel entertainment and other similar out-of-pocket expenses properly and necessarily incurred by him in the performance of his duties but the Company shall be entitled as a condition of reimbursement to such evidence from the Managing Director as to such expenses as the Board may reasonably require -3- 8. Car: (A) The Company shall make available to the Managing Director a motor car ("the Car") of a type considered by the Board to be suitable to enable him properly to perform his duties and for his Personal use (B) The Company shall pay the costs in insuring maintaining testing and taxing the Car and shall reimburse the Managing Director for all its running expenses for which the Managing Director shall (if requested by the Company) submit written evidence of payment satisfactory to the Board (C) The Car may from time to time be replaced with such type and age of motor car (whether or not equivalent to the type previously provided) as the Board may in its discretion decide (D) The Managing Director shall be responsible for arranging the carrying out of such repairs maintenance and testing of the Car as are necessary to ensure that at all times when the Car is driven on a public highway it is in the state and condition required by law and (if so required) that a current test certificate is in force in respect of it (E) The Managing Director shall at all times during his appointment hold a current driving licence entitling him to drive motor cars in the United Kingdom and shall produce it to the Company on request (F) The Managing Director shall at all times conform to regulations which may from time to time be made or imposed by the Company or any other company with the Group with regard to motor cars provided for the use of employees 9. Holidays: (A) The Managing Director shall be entitled in addition to English statutory and bank holidays to 20 working days paid holiday in each year of the Managing Directors appointment (B) The Managing Director's holiday shall be taken at such time or times as the interests and requirements of the Business shall permit and as shall be agreed between the Board and the Managing Director (C) The Managing Director's entitlement to holidays shall accrue proportionately to the number of days worked by him in any holiday year and upon termination of his employment hereunder (other than pursuant to clause 18) the Managing Director shall be entitled to receive in respect of accrued holiday pay a sum equal to one day~s salary for each day's holiday then accrued due but not previously taken by him and if upon termination of the Managing Director's employment (for whatever reason) the amount of holiday taken by him exceeds his entitlement pursuant to subclause (A) the Managing Director shall repay to the Company (or the Company may deduct from any payments due to the Managing Director) salary at the rate for the time being in force for the period of such excess -4- (D) Holidays not taken in any holiday year cannot be carried forward to any future holiday year 10. Pension: The Managing Director shall participate in a pension scheme set up and administrated by Charlwood Leigh. The level of contribution made by the Company shall initially be 5% of the Managing Director's basic salary but that rate may be altered at the discretion of the Board. The obligations of the Company in respect of pension are specifically limited to this contribution. 11. Exclusive Service: - During the continuance of his appointment the Managing Director shall not without the previous consent of the Board either as principal servant agent consultant or otherwise carry on or be engaged concerned or interested directly or indirectly whether alone or in association with any other person in any trade business or occupation whatsoever other than that of the Company (otherwise than as a holder of not more than 5% of the shares of debentures in any company or companies whose shares are listed on any recognized stock exchange) 12. Confidentiality and the Company's Property: (A) In this clause: "the Group" means the group as whole or any company or companies in the Group any customer of the Group" means any customer or clients of or person having business dealings with the Group as a whole or any company or companies in the Group (B) The Managing Director shall not either before or after the termination (for whatever reason) of his appointment under this Agreement (a) use to the detriment of the Group or any Customer of the Group or (b) disclose divulge or communicate directly or indirectly to any person any secret or confidential knowledge or information relating to the business transactions products or affairs of the Group or of any customer of the Group which he may acquire during the continuance of his appointment or (c) supply or disclose to any person the names or addresses of any Customers of the Group of details of any contracts or negotiations to which the Group is a party or of any tenders offers or proposals submitted or to be submitted by the Group in connection with its business except in the proper course of his duties under this Agreement or as authorized in writing by the Board or as ordered by a Court of competent jurisdiction -5- (C) Upon termination of his employment hereunder (for whatever reason) the Managing Director shall forthwith deliver to the Company any property of the Group and of any Customer of the Group which may be in his possession or under his control including all documents and any copies thereof 13. Non-Competition: (A) In this and the next following clause "the restricted business" means design manufacture consultancy and sale of Closed Circuit Television equipment (B) The Managing Director undertakes with the Company that he will not for the period of six months following the termination of his employment hereunder either on his own account or for or on behalf of or through or in conjunction association or by arrangement with any person carry on or be engaged concerned or interested in (directly or indirectly) or in the carrying on of the restricted business within the United Kingdom and the Republic of Ireland other than as a holder of not more than 5% of the shares or debentures in any company or companies whose shares are listed on any recognized stock exchange 14. Non-Solicitation etc.: (A) The Managing Director shall not for the period of twelve months following the termination of his employment hereunder either on his own account or for or on behalf of or through or in conjunction association or by arrangement with any person solicit or entice away or endeavour to solicit or entice away from the Company or any company within the Group; (i) any employee manager director or consultant of the Company or any company within the Group whether or not such person would commit any breach of contract by reason of his leaving service; (ii) the custom or business of any person who shall at any time during the Managing Director's employment hereunder a customer or client of or in negotiations with the Company or any company in the Group or who at any time during the Managing Director's employment hereunder had business dealings with the Company or any company in the Group in relation to the restricted business (B) The Managing Director shall not for a period of twelve months after the termination of his employment hereunder either on his own account or through or for or on behalf of or in conjunction association or by arrangement with any person provide or arrange or procure or be involved in the provision of any service falling within the restricted business to any person who was at any time during the Managing Director's employment hereunder a customer or client of or in negotiations with the Company or any company in the Group or who at any time during the Managing Director's employment hereunder had business dealings with the Company or any company in the Group in relation to the restricted business -6- (C) The restrictions contained in the foregoing sub-clauses and in clause 13 are considered reasonable by the parties for the protection of the business of the Company and companies in the Group but in the event that any restriction shall be found to be void but would be valid if some part of it were deleted or if the period or area of application were reduced such restriction shall apply with such modification as may be necessary to make it valid and effective (D) If any of the provisions of this clause shall be void unlawful or unenforceable the validity lawfulness and enforceability of the remaining provisions of this Agreement shall not be affected or impaired thereby 15. Inventions: (A) In this Clause "Invention" means any know how invention formula process of improvement trade mark trade name copyright design plan drawing specification or device of whatever nature made invented developed or discovered by the Managing Director during the continuance of the Appointment and which relates to any process product or activity carried on made or dealt in by the Company or any other Company in the Group (B) If the Managing Director shall either solely or jointly with another make invent develop or discover any Invention he shall forthwith communicate written particulars thereof to the Secretary of the Company (C) An Invention and all rights therein shall belong to the Managing Director if it is an invention for which a patent may be granted under the provisions of Section 1 of the Patents Act 1977 ("the Act") and it belongs to the Managing Director by virtue of Section 39(2) of the Act. All other Inventions and all rights therein shall belong to the Company (D) The Managing Director shall not without the prior consent in writing of the company divulge or communicate any Invention to any third party nor use the same for his own personal benefit or otherwise save as provided for in sub-clause (E) and (F) (E) On receiving communication of any Invention which belongs to the Managing Director the Company shall be entitled to negotiate with the Managing Director with a view to acquiring all or any rights title and benefit in such Invention The Managing Director shall not without the consent in writing of the Company disclose the same to any third party except to a Chartered Patent Agent or other professional advisor for the purpose of seeking protection for such Invention nor use the same for his own personal benefit or otherwise until the Company has in writing declined to negotiate or acquire the Invention or until the expiry of six months from the date of such communication whichever is the sooner PROVIDED THAT if negotiations are entered into no disclosure of such Invention to any third party shall be made until the conclusion of such negotiations except to the extent that such disclosure is authorized in writing by the Company -7- (F) With regard to the Invention 'which belongs to the Company the Company shall have the right at any time to require the Managing Director at the Company's expense to execute all such documents and do all such acts and things as may in the opinion of the Company be necessary or convenient: (i) to vest such Invention in the Company or its assigns (ii) to enable any application or appeal in respect thereof to be made prosecuted amended or abandoned in any countries of the world in the name of the Company or its assigns or that of the Managing Director whether alone or jointly with the Company or some other person or body (iii)to secure' the grants of letters patent copyright or registered design to the Company or its assigns (iv) to assign to the Company or as it shall direct all the Managing Director's rights of whatever nature (including without limitation his rights in any letters patent or registered design or copyright or any application therefore) in or in respect of such Invention or the Managing Director's rights title and interest in any such rights belonging to him jointly with the Company or any other person or persons (v) to resist any infringement of or actions claims or demands in relation to the Invention (G) In the event that the Company does not intend to use exploit or retain an Invention disclosed by the Managing Director in accordance with the provisions hereinbefore contained the Managing Director shall be entitled to the same for his own use and benefit upon the Managing Director being notified to that effect in writing by the Secretary of the Company (which notification shall be given as soon as reasonably practicable) 16. Sick Leave and Sick Pay: (A) In cases where the Managing Director is absent due to sickness, The Company provides additional benefits over and above any entitlement to Statutory Sick Pay. The sickness year runs from the date of sickness on a rolling year basis. The Managing Director is entitled to the following payments for sickness absence: - 26 weeks at full pay, thereafter - 26 weeks at half pay Any further payment made is purely discretionary. -8- All payments include Statutory Sick Pay. As with SSP entitlement, the Absence Notification Procedure must be followed in order to qualify for payment. In the event of abuse of the scheme the Company reserves the right to withdraw or amend the benefit or take disciplinary action. Where payable, sickness or industrial injury benefit must be claimed from the DSS and any benefit received must be notified to the Company. Such benefits will be deducted from the above entitlements. The Company's Sick Pay Scheme does not prevent the Company from terminating an individual's employment prior to the expiry of the scheme. 17. Summary Termination: The Board may terminate the Managing Director's employment under this Agreement without notice and without making any further payment beyond the amount of any remuneration actually accrued due to the date of such termination if:- (A) The Managing Director commits any serious breach or repeated or continuing breach of any of his obligations under this Agreement or is guilty of any serious misconduct or neglect in the discharge of his duties or of any serious disobedience (B) If the Managing Director commits or has at any time committed any act of dishonesty or is convicted or has at any time been convicted of any criminal offence (other than an offence which in the opinion of the Board does not affect his position as an employee or officer of the Company or his ability to carry out his obligations hereunder or which has been disclosed to the Board before the commencement of this Agreement) (C) If the Managing Director becomes bankrupt or applies for or has a receiving order in bankruptcy made against him or make any arrangement or composition with his creditors (D) If the Managing Director by his actions or omissions brings the name or reputation of the Company or any company in the Group into disrepute (E) If the Managing Director becomes of unsound mind or becomes a patient for the purpose of any statute relating to mental health (F) If the Managing Director has a disqualification order made against him under any relevant Act of Parliament (G) If the Board reasonably resolves that the Managing Director has failed materially and without reasonable cause properly to carry out his obligations hereunder -9- 18. Directorship: (A) The Salary of the Managing Director under this Agreement is inclusive of any remuneration to which the Managing Director may be entitled as a Managing Director of the Company or of any other Company in the Group (B) Upon the termination of this Agreement for whatever reason the Managing Director shall at the request of the Company forthwith resign in writing his position as a Managing Director of the Company or any other company in the Group without compensation for loss of office (C) If the Managing Director shall cease to be a Managing Director of the Company this Agreement shall thereupon automatically determine but if such cessation shall be caused by any act or omission of either party without the consent concurrence or complicity of the other such act or omission shall be deemed a breach of this Agreement and determination hereunder shall be without prejudice to any claim for damages in respect of such breach 19. Grievance and Disciplinary Procedures: There are no specific disciplinary rules applicable to this Agreement if the Managing Director is dissatisfied with any disciplinary decision relating to him or if he has any grievance arising from his employment hereunder he may refer any such matter to the Board who will deal with the matter by discussion and by a majority decision of those present (other than the Managing Director) at the Board Meeting at which the matter is discussed 20. Notices: Any notice to be given hereunder shall be given in writing and may be given either personally or may be sent addressed in the case of the Company to its registered office for the time being and in the case of the Managing Director to him at his last known place of residence and any notice so given by post shall be deemed to have been served forty-eight hours after posting - 10 - I N W I T N E S S whereof this Agreement has been entered into the day year first above written SIGNED by Kenneth M Darby) Chairman ) for and on behalf of ) Vicon Industries (UK) Limited) in the presence of:- ) Rosslyn J Moseley ) Administrator Vicon Industries UK Limited ) SIGNED by Christopher J Wall ) in the presence of:- ) Rosslyn J Moseley ) Administrator Vicon Industries UK Limited ) - 11 - EX-10 11 ex_10-25cwall.txt EXHIBIT 10.25 Side letter to the agreement made the 8th February 1996 between Vicon Industries Ltd and Christopher J Wall The following salary and bonus arrangements for Christopher J Wall will apply for the fiscal year ending 30 September 2005: 1. Salary ------ With effect from 1st October 2004 your basic salary will increase to (pound)95,000 per annum. 2. Bonus ----- There will be two elements of bonus, a sales-related bonus and a profit-related bonus. Each element is to be based on the combined results of Vicon Europe and Videotronic, Germany. The calculations will be as follows: 2.1 Sales-related bonus ------------------- The sales-related bonus is to be calculated and paid on a quarterly cumulative basis. Net combined invoiced sales for the Company are to be measured against a threshold and a payment made for each full (pound)100,000 of sales above the threshold. The threshold for payment of a sales-related bonus will be (pound)12.0 million for the full year. For achievement above threshold the following rates of bonus will be earned: Vicon/Videotronic combined Total sales for year Payment per (pound)100,000 of sales in the range between (pound)12.0m and (pound)14.1m (pound)1000 above (pound)14.1m (pound)1500 Net sales for the purposes of this calculation are to exclude the installation elements of any large project that is not taken at normal profit rates. All sales bonuses payable under this sales-based element are subject to a retention amount equivalent to two weeks of base salary, until the end of the bonus year. At that time, a final accounting will be done and if amounts paid during the year total more than the amounts earned, then the difference is not refundable. The final sales figure (before the reduction for installation elements) for the purposes of this calculation shall be sales as per the audited final accounts. For each of the first three quarterly cumulative calculations, each of the annual figures above will be multiplied by 25%, 50% and 75% respectively. 2.2 Profit-related bonus -------------------- A bonus will be paid at the end of the financial year based on the audited pre-tax operating profits of the combined companies, Vicon Europe and Videotronic, Germany, before this bonus. Pre-tax operating profits are defined as profit before tax but after interest charges and after adding back any R&D charges from Vicon Israel or Vicon US under the R&D Agreement dated 1st October 2000 and the Amendment dated 1st October 2002. The profit-related bonus will be paid on the following formula: profit range % payment first (pound)200,000 of pre-tax operating profit 2% next (pound)200,000 of pre-tax operating profit 3% above (pound)400,000 of pre-tax operating profit 4% Reference will also be made to the combined expense budget of the Company. If the actual total overheads of the company including interest cost is less than 90% of the expense budget, then the profit figure will be reduced by the amount by which overheads are less than 90% of the expense budget unless the reduced overhead level is agreed in writing by the two parties to this side-letter. The expense budget for the year is (pound)4,675,000. Any other adjustments to the pre-tax operating profit shall be agreed in writing prior to inclusion in the UK accounts. Any further bonus payments for results exceeding those set out here will be at the discretion of the Board of Directors. Agreed this 18th day of November 2004: /s/ Kenneth M. Darby /s/ Christopher Wall -------------------- -------------------- Kenneth M Darby Christopher J Wall Vicon Industries Ltd EX-10 12 ex_10-23ya.txt EXHIBIT 10.23 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT, dated as of October 1, 2003 between YIGAL ABIRI (hereinafter called "Abiri") and Vicon Systems, Ltd., a Israeli corporation, having its principal place of business at 13 Gan Rave Avenue, Industrial Zone, P.O. B. 41, Yavne 70600, Israel (hereinafter called "VSL"). WHEREAS, Abiri has previously been employed by VSL, WHEREAS, VSL and Abiri mutually desire to assure the continuation of Abiri's services to VSL, NOW THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties covenant and agree as follows: 1. Employment VSL shall employ Abiri as its General Manager throughout the term of this Agreement, and Abiri hereby accepts such employment. 2. Term The term of this Agreement shall commence as of the date of this Agreement and end on September 30, 2005 unless terminated earlier by VSL for cause. 3. Compensation A. VSL shall pay Abiri a base salary of $160,000 per annum. Such base salary shall be payable monthly or bi-weekly. B. Abiri shall also be entitled to a fiscal year end Performance Bonus beginning with fiscal year 2004, but only if the consolidated audited financial results of Vicon Industries, Inc. and subsidiaries (Vicon) reflects a fiscal year end profit, as follows: 1 Performance Bonus ----------------- Amount Criteria ------ -------- a) 10% of base salary Vicon Consolidated Net Sales is above planned target b) 25% of base salary Vicon Consolidated Net Sales is 10% above planned target c) 50% of base salary Vicon Consolidated Net Sales is 20% above planned target For fiscal year 2004, the planned revenue target is $57 million U.S. dollars. The sales target for fiscal year 2005 shall be established each year by budget. Vicon Industries, Inc. Consolidated Net Sales shall be exclusive of sales from an acquired business whose sales are not included in an annual budget plan. C. Abiri shall also be entitled to participate in employee benefit plans as may be required by Israeli law or are offered to other full-time employees of VSL. 4. Expenses VSL will provide Abiri with an automobile to be agreed upon by the parties. In addition, VSL will pay all prudent and reasonable costs of operation of such automobile, such as gas, repairs and insurance. 5. Change of Control Should a majority, 51% or more, of the common stock of Vicon Industries, Inc. be owned and controlled by an entity or individual other than the Officers and Directors of Vicon Industries, Inc. existing at the date of this Agreement, then Abiri, at his own option, may resign from VSL and such resignation shall be considered involuntary. 2 6. Covenant not to Compete Abiri agrees that during the term of this Agreement and for a period of five years thereafter, he shall not directly or indirectly within the United States, Europe, or Israel, enter the employment of or render any services to any other entity engaged in, any business of a similar nature to or in competition with VSL's or Vicon's business of designing, manufacturing, marketing and selling video systems and equipment in the United States, Europe, or Israel. Abiri further acknowledges that the services rendered by him under this Agreement are special, unique, and of extraordinary character and that a material breach by him of this section will cause VSL, TeleSite and Vicon to suffer irreparable damage; and Abiri agrees that in addition to any other remedy, this section shall be enforceable by negative or affirmative preliminary or permanent injunction in any Court of competent jurisdiction. Abiri acknowledges that he may only be released from this covenant if VSL materially breaches this agreement or Vicon U.S.A. provides a written release to Abiri of this provision. 7. Death or Disability VSL may terminate this Agreement, at its sole option and determination, if during the term of this Agreement (a) Abiri dies or (b) Abiri becomes so disabled for a period of six months that he is substantially unable to perform his duties under this Agreement for such period. 8. Arbitration Any controversy or claim arising out of, or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of Tel Aviv in accordance with the rules of the Israeli Arbitration Board, then in effect, and judgement upon the award rendered to be entered and enforced in any court having jurisdiction thereof. 9. Miscellaneous A. This Agreement contains the entire agreement between the parties and supersedes all prior agreements by the parties whether written or verbal, including the Employment Agreement dated October 1, 2001 between Abiri and QSR Ltd. B. This Agreement may not be waived, changed, modified or discharged orally, but only by agreement in writing, signed by the party against whom enforcement of any waiver, change, modification, or discharge is sought. 3 C. This Agreement shall be governed by the laws of the State of Israel. D. If any part of this Agreement is held to be unenforceable by any court of competent jurisdiction, the remaining provisions of this Agreement shall continue in full force and effect. 10. This Agreement shall inure to the benefit of, and be binding upon, VSL, TeleSite or Vicon, its successors, and assigns. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement. VICON SYSTEMS, LTD. By /s/ Kenneth M. Darby ----------------------- Kenneth M. Darby, Chairman 4 /s/ Yigal Abiri --------------- Yigal Abiri -----END PRIVACY-ENHANCED MESSAGE-----