SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For Quarter Ended June 30, 2002 Commission File No. 1-7939
---------------------------- --------
VICON INDUSTRIES, INC.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK STATE 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
-------------------------
(Former name, address, and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------- ------
At June 30, 2002, the registrant had outstanding 4,670,762 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
------------------------------
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
-------------------
6/30/02 6/30/01
-------- --------
Net sales............................. $14,274,490 $16,081,123
Cost of sales......................... 9,212,820 10,615,933
----------- -----------
Gross profit........................ 5,061,670 5,465,190
Operating expenses:
Selling expense................... 2,929,144 3,560,480
General & administrative expense.. 939,951 1,451,378
Engineering & development expense. 1,095,889 976,067
----------- -----------
4,964,984 5,987,925
----------- -----------
Operating income (loss)............. 96,686 (522,735)
Interest expense...................... 81,757 111,516
Interest income....................... (31,007) (46,079)
----------- -----------
Income (loss) before income taxes. 45,936 (588,172)
Income tax expense (benefit).......... 18,000 (214,000)
----------- -----------
Net income (loss)................. $ 27,936 $ (374,172)
=========== ===========
Earnings (loss) per share:
Basic $ .01 $ (.08)
=== ===
Diluted $ .01 $ (.08)
=== ===
Shares used in computing earnings (loss) per share:
Basic 4,669,526 4,648,983
Diluted 4,733,552 4,648,983
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Nine Months Ended
-----------------
6/30/02 6/30/01
-------- --------
Net sales............................. $40,671,462 $50,617,285
Cost of sales......................... 26,902,063 33,545,305
----------- -----------
Gross profit........................ 13,769,399 17,071,980
Operating expenses:
Selling expense................... 8,765,022 10,109,821
General & administrative expense.. 2,934,704 4,075,726
Engineering & development expense. 3,117,226 2,873,751
----------- -----------
14,816,952 17,059,298
----------- -----------
Operating (loss) income............. (1,047,553) 12,682
Gain on sale of securities............ - (3,022,579)
Interest expense...................... 257,808 388,784
Interest income....................... (138,971) (129,830)
----------- -----------
(Loss) income before income taxes. (1,166,390) 2,776,307
Income tax (benefit) expense.......... (380,000) 1,010,000
----------- -----------
Net (loss) income................. $ (786,390) $ 1,766,307
=========== ===========
(Loss) earnings per share:
Basic $ (.17) $ .38
=== ===
Diluted $ (.17) $ .38
=== ===
Shares used in computing (loss) earnings per share:
Basic 4,657,752 4,644,869
Diluted 4,657,752 4,648,924
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS 6/30/02 9/30/01
- ------ --------- -------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents....................... $ 5,937,536 $ 9,795,148
Accounts receivable (less allowance
of $842,000 at June 30, 2002 and
$1,115,000 at September 30, 2001)............. 12,502,851 11,438,334
Inventories:
Parts, components, and materials.............. 2,795,467 2,518,782
Work-in-process............................... 1,427,228 2,777,211
Finished products............................. 12,122,816 11,800,197
----------- -----------
16,345,511 17,096,190
Deferred income taxes........................... 2,076,724 1,420,372
Prepaid expenses................................ 573,578 566,861
----------- -----------
TOTAL CURRENT ASSETS............................ 37,436,200 40,316,905
- --------------------
Property, plant and equipment................... 16,905,720 16,371,853
Less accumulated depreciation and amortization.. (9,101,708) (8,232,536)
----------- -----------
7,804,012 8,139,317
Goodwill, net of accumulated amortization....... 1,422,219 1,571,058
Deferred income taxes........................... 1,228,073 1,366,625
Other assets.................................... 447,159 531,660
----------- -----------
TOTAL ASSETS.................................... $48,337,663 $51,925,565
- ------------ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt............ $ 1,379,653 $ 2,144,727
Accounts payable................................ 2,307,581 2,375,825
Accrued compensation and employee benefits...... 1,409,952 1,789,401
Accrued expenses................................ 1,550,488 2,227,825
Unearned service revenue........................ 1,502,454 1,294,576
Income taxes payable............................ 152,130 479,361
---------- ----------
TOTAL CURRENT LIABILITIES 8,302,258 10,311,715
- -------------------------
Long-term debt.................................. 3,275,703 3,498,099
Unearned service revenue........................ 1,582,597 2,334,348
Other long-term liabilities..................... 843,732 883,356
SHAREHOLDERS' EQUITY
Common stock, par value $.01.................... 48,239 47,565
Capital in excess of par value.................. 21,759,456 21,542,541
Retained earnings............................... 13,523,052 14,309,442
------------ -----------
35,330,747 35,899,548
Less treasury stock, at cost.................... (784,832) (633,422)
Accumulated other comprehensive loss............ (212,542) (368,079)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 34,333,373 34,898,047
- -------------------------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $48,337,663 $51,925,565
- ------------------------------------------ ============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Nine Months Ended
-----------------
6/30/02 6/30/01
------- -------
Cash flows from operating activities:
Net (loss) income.............................. $ (786,390) $ 1,766,307
Adjustments to reconcile net (loss) income to
cash (used in) provided by operating activities:
Gain on sale of securities................... - (3,022,579)
Depreciation and amortization................ 835,848 846,031
Goodwill amortization........................ 148,839 142,744
Stock compensation expense................... 23,287 -
Deferred income taxes........................ (534,788) 413,956
Change in assets and liabilities:
Accounts receivable........................ (956,297) 4,831,133
Inventories................................ 828,414 (380,628)
Prepaid expenses........................... (4,506) 189,684
Other assets............................... 84,501 46,210
Accounts payable........................... (74,671) (1,226,348)
Accrued compensation and employee benefits. (380,205) (311,508)
Accrued expenses........................... (683,700) 129,274
Unearned service revenue................... (543,873) 716,109
Income taxes payable....................... (326,188) 115,639
Other liabilities.......................... 10,339 1,624
------------ ------------
Net cash (used in) provided by
operating activities................... (2,359,390) 4,257,648
------------ ------------
Cash flows from investing activities:
Proceeds from sale of securities............. - 3,289,813
Additional acquisition costs................. - (162,500)
Capital expenditures, net of disposals....... (455,991) (530,743)
------------ ------------
Net cash (used in) provided by
investing activities................... (455,991) 2,596,570
------------ ------------
Cash flows from financing activities:
Repayments of borrowings under U.S. bank
credit agreement........................... - (1,500,000)
Decrease in borrowings under U.K.
revolving credit agreement................. - (127,655)
Proceeds from exercise of stock options...... 42,890 28,677
Repayments of U.S. term loan................. (675,000) (675,000)
Repayments of other debt..................... (323,428) (270,899)
------------ ------------
Net cash used in financing activities..... (955,538) (2,544,877)
------------ ------------
Effect of exchange rate changes on cash.......... (86,693) 118,196
------------ ------------
Net (decrease) increase in cash.................. (3,857,612) 4,427,537
Cash at beginning of year........................ 9,795,148 2,115,118
------------ ------------
Cash at end of period............................ $ 5,937,536 $ 6,542,655
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements.
-5-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
June 30, 2002
-------------
Note 1: Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the fiscal year ended September 30, 2001. Certain prior year amounts
have been reclassified to conform to current year presentation.
Note 2: Earnings per Share
- ---------------------------
Basic earnings (loss) per share (EPS) is computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
maximum dilution that would have resulted from the exercise of stock options and
incremental common shares issuable under a deferred compensation agreement. The
following table provides the components of the basic and diluted EPS
computations for the three month and nine month periods ended June 30, 2002 and
2001:
Three Months Nine Months
Ended June 30, Ended June 30,
----------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- --------
Basic EPS Computation
- ---------------------
Net income (loss)........... $ 27,936 $ (374,172) $ (786,390) $1,766,307
Weighted average
shares outstanding......... 4,669,526 4,648,983 4,657,752 4,644,869
Basic earnings (loss)
per share.................. $ .01 $ (.08) $ (.17) $ .38
========== ========== ========== ==========
Diluted EPS Computation
- -----------------------
Net income (loss)........... $ 27,936 $ (374,172) $ (786,390) $1,766,307
Weighted average
shares outstanding....... 4,669,526 4,648,983 4,657,752 4,644,869
Stock compensation
arrangement.............. 10,989 - - -
Stock options............. 53,037 - - 4,055
---------- ---------- ---------- ----------
Diluted shares outstanding.. 4,733,552 4,648,983 4,657,752 4,648,924
Diluted earnings (loss)
per share.................. $ .01 $ (.08) $ (.17) $ .38
========== ========== ========== ==========
For the nine month period ended June 30, 2002 and the three month period ended
June 30, 2001, 60,330 and 2,585 shares, respectively, have been omitted from the
calculation of diluted EPS as their effect would have been antidilutive.
-6-
Note 3: Comprehensive Income
- ------------------------------
The Company's total comprehensive income for the three month and nine month
periods ended June 30, 2002 and 2001 was as follows:
Three Months Nine Months
Ended June 30, Ended June 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ----------- ----------
Net income (loss).......... $ 27,936 $ (374,172) $ (786,390) $ 1,766,307
Other comprehensive income
(loss), net of tax:
Unrealized gain on
securities.............. - - - (1,554,962)
Unrealized (loss) gain
on derivatives.......... (52,811) - 32,975 -
Foreign currency
translation adjustment... 258,075 (78,843) 122,562 (78,817)
---------- ---------- ---------- -----------
Comprehensive income (loss). $ 233,200 $ (453,015) $ (630,853) $ 132,528
========== ========== ========== ===========
Note 4: Segment and Related Information
- -----------------------------------------
The Company operates in one industry which encompasses the design, manufacture,
assembly and marketing of video surveillance 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 consists 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 and the Middle East. Other segments include the
operations of Vicon Industries (H.K.) Ltd., a Hong Kong based majority owned
subsidiary which markets and distributes the Company's products principally
within Hong Kong and mainland China, and TeleSite U.S.A., Inc. and subsidiary, a
U.S. and Israeli based designer and producer of digital video products.
The Company evaluates performance and allocates resources based on, among other
things, the net profit or loss for each segment, excluding intersegment sales
and profits. Segment information for the three month and nine month periods
ended June 30, 2002 and 2001 was as follows:
Three Months Ended
June 30, 2002 U.S. Europe Other Consolid. Totals
- ------------------ ---------- ---------- --------- ---------- -------
Net sales to
external customers $10,897,000 $2,853,000 $ 524,000 $ - $14,274,000
Intersegment
net sales 1,184,000 - 10,000 (1,194,000) -
Net income (loss) 340,000 116,000 (387,000) (41,000) 28,000
Total assets 41,726,000 7,795,000 3,518,000 (4,701,000) 48,338,000
-7-
Three Months Ended
June 30, 2001 U.S. Europe Other Consolid. Totals
- ------------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $11,387,000 $3,783,000 $ 911,000 $ - $16,081,000
Intersegment
net sales 2,391,000 - 204,000 (2,595,000) -
Net (loss) income (255,000) (206,000) 134,000 (47,000) (374,000)
Total assets 45,096,000 7,888,000 3,756,000 (5,855,000) 50,885,000
Nine Months Ended
June 30, 2002 U.S. Europe Other Consolid. Totals
- ------------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $28,650,000 $9,950,000 $2,071,000 $ - $40,671,000
Intersegment
net sales 5,530,000 - 76,000 (5,606,000) -
Net (loss) income (384,000) 535,000 (652,000) (285,000) (786,000)
Total assets 41,726,000 7,795,000 3,518,000 (4,701,000) 48,338,000
Nine Months Ended
June 30, 2001 U.S. Europe Other Consolid. Totals
- ------------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $36,677,000 $11,157,000 $2,783,000 $ - $50,617,000
Intersegment
net sales 6,141,000 - 753,000 (6,894,000) -
Net income (loss) 2,197,000 324,000 (624,000) (131,000) 1,766,000
Total assets 45,096,000 7,888,000 3,756,000 (5,855,000) 50,885,000
The consolidating segment above includes the elimination and consolidation of
intersegment transactions.
Note 5: Gain on Sale of Securities
- ------------------------------------
During the nine months ended June 30, 2001, the Company realized a $3.0 million
gain ($2.0 million net of tax effect) on the sale of its remaining equity
interest in Chun Shin Electronics, Inc. (CSE), a South Korean company which
manufactures certain of the Company's proprietary products.
Note 6: Derivative Instruments
- ---------------------------------
At June 30, 2002, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $3.3 million and $1.6
million, respectively, whose aggregate fair value was a liability of
approximately $217,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive loss, net
of tax.
Note 7: Impact of Recently Issued Accounting Standards
- --------------------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized but, instead, tested for
impairment at least annually in accordance with the provisions of the Statement.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
-8-
Upon adoption on October 1, 2002, the Company will be required to assign its
goodwill ($1.4 million at June 30, 2002, which relates to its acquisition of
TeleSite U.S.A., Inc. in 1999) to "reporting units" as defined under SFAS No.
142. Goodwill assigned to each of the reporting units will be tested for
impairment as of October 1, 2002 by comparing the carrying amount of the
reporting units' net assets (including goodwill) to its fair value. The Company
has six months from October 1, 2002 to complete this "first step" of this
transitional goodwill impairment test. If the carrying amount of the net assets
of a reporting unit (including goodwill) exceeds the fair value of that
reporting unit, a "second step" of the transitional goodwill impairment test
must be completed as soon as possible, but not later than September 30, 2003.
Due to the complexities involved with the transitional provisions of SFAS No.
142, the Company has not yet completed its evaluation of the possible effects of
its adoption of SFAS No. 142 on the Company's financial condition or results of
operations.
Until the Company's adoption of SFAS No. 142, the Company is continuing to
amortize goodwill over its original 10-year period, and continuing to evaluate
impairment. The Company believes that its ability to recover the carrying amount
of its goodwill is dependent upon, among other things, its ability to
successfully complete the development and marketing of certain new products.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. Unlike SFAS No. 121, an impairment assessment
under SFAS No. 144 will never result in a write-down of goodwill. Rather,
goodwill will be evaluated for impairment under SFAS No. 142, as discussed
above. The Company is required to adopt SFAS No. 144 on October 1, 2002.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's consolidated financial
statements because the impairment assessment under SFAS No. 144 is largely
unchanged from SFAS No. 121.
On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company has not determined the effect, if any, that the
adoption of SFAS No. 146 will have on the Company's consolidated financial
statements.
Note 8: Amendment to U.S. Bank Revolving Credit and Term Loan Agreement
- --------------------------------------------------------------------------
On February 12, 2002, the Company executed an amendment agreement that modified
its unsecured revolving credit and term loan agreement with its bank to provide
for a $5 million secured revolving credit facility through July 2004. Borrowings
under such facility bear interest at the bank's prime rate or, at the Company's
option, LIBOR plus 190 basis points. The amendment agreement grants the bank a
security interest in all the assets of the Company and, among other things,
effectively modified the financial covenants contained in all the existing loan
and mortgage agreements with this bank.
-9-
As of June 30, 2002, the Company was in compliance with the financial covenants
of its debt agreements. Should violations occur in the future, the Company
could, among other things, seek a waiver of such violations, renegotiate the
credit agreement or seek an alternative credit arrangement with a new lender.
There can be no assurance that the Company would be successful with these
efforts.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Results of Operations
- ---------------------
Three Months Ended June 30, 2002 Compared with June 30, 2001
- ------------------------------------------------------------
Net sales for the quarter ended June 30, 2002 decreased $1.8 million or 11% to
$14.3 million compared with $16.1 million in the year ago period. Domestic sales
decreased $.6 million or 5% to $10.2 million compared with $10.8 million in the
year ago period. Indirect sales to the United States Postal Service (USPS) for
the quarter ended June 30, 2002 decreased $2.9 million to $.6 million compared
with $3.5 million in the year ago period. Other domestic sales for the current
quarter increased by $2.4 million to $9.7 million compared with $7.3 million in
the year ago period. Current quarter sales included $1.6 million of shipments in
connection with a $2.3 million system order received in February 2002 for New
York's JFK International Airport. International sales for the quarter ended June
30, 2002 decreased $1.2 million or 24% to $4.1 million compared with $5.3
million in the year ago period principally as a result of weak sales in Europe
and the Middle East.
Gross profit margins for the third quarter of fiscal 2002 increased to 35.5%
compared with 34.0% in the year ago period. The margin increase was principally
the result of ongoing product cost reduction efforts.
Operating expenses for the third quarter of fiscal 2002 were $5.0 million or
34.8% of net sales compared with $6.0 million or 37.2% of net sales in the year
ago period. The $1.0 million decrease in operating expenses was due principally
to a reduction in sales payroll and related costs and the write- down of certain
foreign assets included in the year ago period expense. The Company continued to
invest in new product development, incurring $1.1 million of engineering and
development expenses in the current quarter.
The Company generated operating income of $97,000 for the third fiscal quarter
of 2002 compared with an operating loss of $523,000 in the year ago period
principally as a result of the reduction in operating expenses.
Interest expense decreased to $82,000 for the third quarter of fiscal 2002
compared with $112,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense was $18,000 for the third quarter of fiscal 2002 compared
with an income tax benefit of $214,000 in the year ago period.
As a result of the foregoing, the Company generated net income of $28,000 for
the third quarter of fiscal 2002 compared with a net loss of $374,000 in the
year ago period.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Results of Operations
- ---------------------
Nine Months Ended June 30, 2002 Compared with June 30, 2001
- -----------------------------------------------------------
Net sales for the nine months ended June 30, 2002 decreased $9.9 million or 20%
to $40.7 million compared with $50.6 million in the year ago period. Domestic
sales decreased $8.0 million or 23% to $26.8 million compared with $34.8 million
in the year ago period principally as a result of a $10.0 million decline in
indirect sales to the United States Postal Service (USPS) under an exclusive
supply contract that expired on June 30, 2001. Indirect sales to the USPS for
the nine months ended June 30, 2002 decreased 79% to $2.8 million compared with
$12.8 million in the year ago period. Other domestic sales for the current year
period increased by $2 million to $24 million compared with $22 million in the
year ago period. Current year period sales included $1.6 million of shipments in
connection with a $2.3 million system order received in February 2002 for New
York's JFK International Airport. International sales for the nine months ended
June 30, 2002 decreased $1.9 million or 12% to $13.9 million compared with $15.8
million in the year ago period principally as a result of weak sales in Europe
and the Middle East. The backlog of unfilled orders was $4.7 million at June 30,
2002 compared with $8.3 million at June 30, 2001.
Gross profit margins for the first nine months of fiscal 2002 increased to 33.9%
compared with 33.7% in the year ago period. The margin increase was principally
the result of ongoing product cost reduction efforts offset by the effect of
fixed production costs relative to the current period's lower sales.
Operating expenses for the first nine months of fiscal 2002 were $14.8 million
or 36.4% of net sales compared with $17.1 million or 33.7% of net sales in the
year ago period. The $2.3 million decrease in operating expenses was due
principally to a reduction in sales payroll and related costs and the write-
down of certain assets included in the year ago period expense. The Company
continued to invest in new product development, incurring $3.1 million of
engineering and development expenses in the first nine months of fiscal 2002.
The Company incurred an operating loss of $1.0 million for the first nine months
of 2002 compared with operating income of $13,000 in the year ago period
principally as a result of lower sales.
In the prior year period, the Company realized a $3.0 million gain ($2.0 million
net of tax effect) on the sale of its remaining equity interest in Chun Shin
Electronics, Inc., a South Korean company which, among other things,
manufactures certain of the Company's proprietary products.
Interest expense decreased to $258,000 for the first nine months of fiscal 2002
compared with $389,000 in the year ago period principally as a result of the
paydown of bank borrowings.
The Company recorded an income tax benefit of $380,000 for the first nine months
of fiscal 2002 compared with income tax expense of $1.0 million in the year ago
period.
As a result of the foregoing, the Company incurred a net loss of $786,000 for
the first nine months of fiscal 2002 compared with net income of $1.8 million in
the year ago period.
-12-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Financial Condition
- ---------------------------------
Net cash used in operating activities was $2.4 million for the first nine months
of fiscal 2002 due in part to the $786,000 net loss for the period. Net cash
used in investing activities was $456,000 for the first nine months of fiscal
2002 relating to general capital expenditures. Net cash used in financing
activities was $956,000, which represented scheduled repayments under bank
mortgage and term loans. As a result of the foregoing, cash decreased by $3.9
million for the first nine months of fiscal 2002 after the nominal effect of
exchange rate changes on the cash position of the Company.
On February 12, 2002, the Company executed an amendment agreement with its bank
that modified its unsecured revolving credit and term loan agreement to provide
for a $5 million secured revolving credit facility through July 2004. Borrowings
under such facility bear interest at the bank's prime rate or, at the Company's
option, LIBOR plus 190 basis points (4.75% and 3.76%, respectively, at June 30,
2002). The amendment agreement grants the bank a security interest in all the
assets of the Company and, among other things, effectively modified the
financial covenants contained in all the existing loan and mortgage agreements
with the bank. These covenants require the Company to, among other things,
maintain certain levels of earnings and ratios of debt service coverage and debt
to tangible net worth. At June 30, 2002, there were no outstanding borrowings
under this facility.
The Company also maintains a bank overdraft facility of 1 million Pounds
Sterling (approximately $1,520,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. At June 30, 2002, there were no
outstanding borrowings under this facility.
Current and long-term debt maturing in the three months ended September 30, 2002
and in each of the subsequent fiscal years approximates $332,000 for the three
months ended September 30, 2002, $1,300,000 in 2003, $316,000 in 2004, $324,000
in 2005, $330,000 in 2006 and $2,053,000 thereafter.
The Company believes that it has sufficient cash and funds available under its
credit agreements to meet its anticipated operating, capital expenditures and
debt service requirements for at least the next twelve months. However, the
Company has experienced reduced sales levels and operating losses in past
periods which, if continued, could limit the Company's ability to draw upon its
bank credit facilities.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are fully described in Note 1 to
the Company's consolidated financial statements included in its September 30,
2001 Annual Report on Form 10-K. 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 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.
-13-
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.
The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write- downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income in
future and available carryback years during the periods over which net temporary
tax differences become deductible. Should the Company determine in the future
that it is not likely it will be able to realize the benefits of recorded
deferred tax assets, a valuation allowance will need to be established that
would result in the charge-off of previously reported tax benefits.
As further described in Note 7, the Company has not yet adopted the provisions
of SFAS No. 142 and determined its possible effects on the Company's financial
condition or results of operations. The Company continues to amortize its
recorded goodwill over its original 10-year period and continues to evaluate
impairment. The Company believes that its ability to recover the carrying amount
of its goodwill is dependent upon, among other things, its ability to
successfully complete the development and marketing of certain new product
lines.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Statements in this Report on Form 10-Q 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 update its forward- looking statements or
to advise of changes in the assumptions and factors on which they are based.
-14-
PART II
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
The Company has no material outstanding litigation.
ITEM 2 - CHANGES IN SECURITIES
- ------ ---------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- ------ -----------------
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
Exhibit
Number Description
------- ------------
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
No Form 8-K was required to be filed during the current quarter.
-15-
Signatures
----------
Pursuant to the requirements of the Securities and 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.
August 14, 2002
By:/s/ Kenneth M. Darby By:/s/ John M. Badke
- ----------------------- -----------------------
Kenneth M. Darby John M. Badke
Chairman and Vice President, Finance
Chief Executive Officer Chief Financial Officer
-16-