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 December 31, 2002 Commission File No. 1-7939
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Vicon Industries, Inc.
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New York State 11-2160665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
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(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
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At December 31, 2002, the registrant had outstanding 4,642,062 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
Three Months Ended
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12/31/02 12/31/01
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Net sales $12,018,014 $13,550,833
Cost of sales 8,117,459 9,078,363
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Gross profit 3,900,555 4,472,470
Operating expenses:
Selling expense 2,781,153 2,958,130
General & administrative expense 1,114,351 998,270
Engineering & development expense 1,075,446 997,087
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4,970,950 4,953,487
Operating loss (1,070,395) (481,017)
Interest expense 70,243 97,933
Interest income (63,659) (62,009)
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Loss before income taxes (1,076,979) (516,941)
Income tax benefit (378,000) (170,000)
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Net loss $ (698,979) $ (346,941)
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Loss per share:
Basic $ (.15) $ (.07)
==== ===
Diluted $ (.15) $ (.07)
==== ===
Shares used in computing loss per share:
Basic 4,642,754 4,648,471
Diluted 4,642,754 4,648,471
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS 12/31/02 9/30/02
- ------ -------- -------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 8,171,411 $ 9,771,804
Marketable securities 1,528,926 -
Accounts receivable, net 9,370,679 10,127,526
Accounts receivable - related parties 69,656 273,464
Inventories:
Parts, components, and materials 2,413,113 2,802,779
Work-in-process 1,321,352 1,275,057
Finished products 9,091,169 9,470,823
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12,825,634 13,548,659
Recoverable income taxes 1,937,728 1,712,728
Deferred income taxes 771,266 673,574
Prepaid expenses 618,531 496,399
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TOTAL CURRENT ASSETS 35,293,831 36,604,154
Property, plant and equipment 17,221,392 16,997,129
Less accumulated depreciation and amortization (9,626,319) (9,331,102)
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7,595,073 7,666,027
Goodwill, net of accumulated amortization 1,372,606 1,372,606
Deferred income taxes 1,447,235 1,283,784
Other assets 498,353 499,918
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TOTAL ASSETS $46,207,098 $47,426,489
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
Borrowings under revolving credit agreement $ 155,721 $ -
Current maturities of long-term debt 1,079,612 1,304,227
Accounts payable - trade 1,904,786 1,740,919
Accounts payable - related parties 191,594 643,093
Accrued compensation and employee benefits 1,412,154 1,837,519
Accrued expenses 1,897,575 1,596,288
Unearned service revenue 1,525,170 1,514,121
Income taxes payable 185,328 140,741
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TOTAL CURRENT LIABILITIES 8,351,940 8,776,908
Long-term debt 2,955,120 3,040,061
Unearned service revenue 1,043,199 1,267,337
Other long-term liabilities 877,323 803,476
SHAREHOLDERS' EQUITY
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Common stock, par value $.01 48,290 48,239
Capital in excess of par value 21,796,499 21,760,002
Retained earnings 12,031,435 12,730,414
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33,876,224 34,538,655
Less treasury stock, at cost (881,926) (842,024)
Accumulated other comprehensive loss (14,782) (157,924)
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TOTAL SHAREHOLDERS' EQUITY 32,979,516 33,538,707
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $46,207,098 $47,426,489
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
Three Months Ended
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12/31/02 12/31/01
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Cash flows from operating activities:
Net loss $ (698,979) $ (346,941)
Adjustments to reconcile net loss to
cash provided by operating activities:
Depreciation and amortization 270,235 287,883
Goodwill amortization - 49,613
Stock compensation expense 20,379 56,696
Deferred income taxes (253,000) (318,445)
Change in assets and liabilities:
Accounts receivable 861,988 (162,570)
Accounts receivable - related parties 203,808 (56,318)
Inventories 760,913 1,472,574
Recoverable income taxes (225,000) -
Prepaid expenses (118,131) 127,471
Other assets 1,565 43,087
Accounts payable - trade 160,902 (47,457)
Accounts payable - related parties (451,499) 125,187
Accrued compensation and employee benefits (428,746) (349,289)
Accrued expenses 291,231 (370,253)
Unearned service revenue (213,089) (216,202)
Income taxes payable 40,188 (189,509)
Other liabilities 45,937 (2,795)
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Net cash provided by operating activities 268,702 102,732
Cash flows from investing activities:
Capital expenditures (164,944) (138,757)
Purchases of marketable securities (1,523,028) -
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Net cash used in investing activities (1,687,972) (138,757)
Cash flows from financing activities:
Increase in borrowings under revolving
credit agreement 151,852 910,572
Repayments of U.S. term loan (225,000) (225,000)
Repayments of other long-term debt (93,223) (123,302)
Proceeds from exercise of stock options 16,169 23,750
Repurchases of common stock (39,902) -
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Net cash provided by (used in)
financing activities (190,104) 586,020
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Effect of exchange rate changes on cash 8,981 9,311
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Net increase (decrease) in cash (1,600,393) 559,306
Cash at beginning of year 9,771,804 9,795,148
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Cash at end of period $ 8,171,411 $10,354,454
============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
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VICON INDUSTRIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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December 31, 2002
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Note 1: Basis of Presentation
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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 three months ended December 31, 2002 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 2003. 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, 2002. Certain prior
year amounts have been reclassified to conform to the current year presentation.
Note 2: Marketable Securities
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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, net of tax, reported in other comprehensive income as a component of
shareholders' equity. The cost of such securities at December 31, 2002 was
$1,523,028, with $7,775 of unrealized gains and $1,877 of unrealized losses
reported for the three-month period ended.
Note 3: Accounts Receivable
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Accounts receivable is stated net of an allowance for doubtful accounts of
$1,260,000 and $1,077,000 as of December 31, 2002 and September 30, 2002,
respectively.
Note 4: Earnings per Share
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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 months ended December 31, 2002 and 2001:
Three Months
Ended December 31,
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2002 2001
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Basic EPS Computation
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Net loss $ (698,979) $ (346,941)
Weighted average shares outstanding 4,642,754 4,648,471
Basic loss per share $ (.15) $ (.07)
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Three Months
Ended December 31,
-------------------------
2002 2001
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Diluted EPS Computation
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Net loss $ (698,979) $ (346,941)
Weighted average shares outstanding 4,642,754 4,648,471
Stock compensation arrangement - -
Stock options - -
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Diluted shares outstanding 4,642,754 4,648,471
Diluted loss per share $ (.15) $ (.07)
========== ==========
For the three months ended December 31, 2002 and 2001, 48,275 and 44,167 shares,
respectively, have been omitted from the calculation of diluted EPS as their
effect would have been antidilutive.
Note 5: Comprehensive Income (Loss)
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The Company's total comprehensive loss for the three months ended December 31,
2002 and 2001 was as follows:
Three Months
Ended December 31,
-----------------------
2002 2001
---------- ----------
Net loss $ (698,979) $ (346,941)
Other comprehensive income
(loss), net of tax:
Net unrealized gains on securities,
net of tax of $2,182 3,716 -
Unrealized gain (loss) on derivatives, net of
tax of $(10,326) in 2002 and $25,250 in 2001 (17,584) 49,015
Foreign currency translation adjustment 157,010 (73,105)
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Comprehensive loss $ (555,837) $ (371,031)
========== ==========
The accumulated other comprehensive loss balances at December 31, 2002 and
September 30, 2002 consisted of the following:
December 31, September 30,
2002 2002
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Foreign currency translation adjustment $ 199,807 $ 42,797
Unrealized loss on derivatives, net of tax (218,305) (200,721)
Unrealized gain on securities, net of tax 3,716 -
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Accumulated other comprehensive loss $ (14,782) $(157,924)
========= =========
-6-
Note 6: Segment and Related Information
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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 months ended December 31, 2002
and 2001 was as follows:
Three Months Ended
December 31, 2002 U.S. Europe Other Consolid. Totals
- ------------------ ---------- ---------- --------- ---------- -------
Net sales to
external customers $ 7,756,000 $3,825,000 $ 437,000 $ - $12,018,000
Intersegment
net sales 1,403,000 - 560,000 - 1,963,000
Net income (loss) (844,000) 220,000 (64,000) (11,000) (699,000)
Total assets 38,792,000 8,222,000 3,471,000 (4,278,000) 46,207,000
Three Months Ended
December 31, 2001 U.S. Europe Other Consolid. Totals
- ------------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $ 9,129,000 $3,482,000 $ 940,000 $ - $13,551,000
Intersegment
net sales 2,101,000 - 144,000 - 2,245,000
Net income (loss) (433,000) 236,000 (91,000) (59,000) (347,000)
Total assets 43,933,000 8,216,000 3,479,000 (4,577,000) 51,051,000
The consolidating segment information above includes the elimination and
consolidation of intersegment transactions.
Note 7: Derivative Instruments
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At December 31, 2002, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $2.7 million and $1.9
million, respectively, whose aggregate fair value was a liability of
approximately $332,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive loss, net
of tax of $113,727.
-7-
Note 8: Goodwill
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The Company adopted SFAS No. 142 on October 1, 2002 and, accordingly, has
discontinued amortization of goodwill. The Company is required to assign its
goodwill ($1.4 million at October 1, 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 the "first step" goodwill impairment test
and determined its possible effects on the Company's financial condition or
results of operations. However, it is reasonably possible that the adoption of
SFAS No. 142 will result in an impairment charge to goodwill of up to $1.4
million, which would be reported as a cumulative effect change in accounting
principle.
The following table presents pro-forma net loss and loss per share data restated
to include the retroactive impact of the adoption of SFAS No. 142:
Three Months
Ended December 31,
2002 2001
---- ----
Reported net loss $(698,979) $(346,941)
Add back: goodwill amortization - 49,613
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Pro-forma net loss $(698,979) $(297,328)
========= =========
Basic loss per share:
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Reported basic loss per share before SFAS No. 142 $ (.15) $ (.07)
SFAS No. 142 effect - .01
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Pro-forma basic loss per share $ (.15) $ (.06)
========= =========
Diluted loss per share:
- -----------------------
Reported diluted loss per share before SFAS No. 142 $ (.15) $ (.07)
SFAS No. 142 effect - .01
--------- ---------
Pro-forma diluted loss per share $ (.15) $ (.06)
========= =========
Weighted average shares outstanding:
- -----------------------------------
Basic 4,642,754 4,648,471
Diluted 4,642,754 4,648,471
Note 9: Accrued Warranty Obligation
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In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of this interpretation are effective for financial statement
periods ending after December 15, 2002. The Company adopted the disclosure
-8-
requirements of this interpretation in the current quarter. The adoption of this
interpretation did not have a material impact on its consolidated financial
position, results of operations or cash flows.
The Company recognizes the estimated cost associated with its standard warranty
on products at the time of sale. The estimate is based on historical failure
rates and current 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 reporting period:
Beginning Balance as of September 30, 2002 $ 190,000
Deduct: Payments (32,000)
Add: Provision 62,000
---------
Ending Balance as of December 31, 2002 $ 220,000
=========
Note 10: New Accounting Standards Not Yet Adopted
- ---------------------------------------------------
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company believes that the adoption of SFAS No. 146 will
not have a material impact on the Company's consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance on the timing and method of revenue
recognition for sales arrangements that include the delivery of more than one
product or service. EITF is effective prospectively for arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is currently
analyzing the impact of its adoption on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123 "Accounting for Stock-Based Compensation". Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The transitional requirements of SFAS No. 148 will be
effective for all financial statements for fiscal years ending after December
15, 2002. The disclosure requirements shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 31, 2002. The Company expects to adopt the disclosure portion of this
statement for the fiscal quarter ending March 31, 2003. The application of this
standard will have no impact on the Company's consolidated financial position or
results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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Results of Operations
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Three Months Ended December 31, 2002 Compared with December 31, 2001
- --------------------------------------------------------------------
Net sales for the quarter ended December 31, 2002 decreased $1.5 million or 11%
to $12.0 million compared with $13.6 million in the year ago period. Domestic
sales decreased $1.8 million or 21% to $6.7 million compared with $8.6 million
in the year ago period. Such decrease was due principally to a slowdown in
capital spending as a result of the recent downturn in the U.S. economy.
International sales for the December 31, 2002 quarter increased $.3 million or
5% to $5.3 million compared with $5.0 million in the year ago period principally
as a result of favorable exchange rate changes as the British pound and
Eurodollar strengthened against the U.S. dollar.
Gross profit margins for the first quarter of fiscal 2003 decreased to 32.5%
compared with 33.0% in the year ago period. The margin decrease was principally
due to the effect of fixed production costs relative to the quarter's lower
sales.
Operating expenses for the first quarter of fiscal 2003 were $5.0 million or
41.4% of net sales compared with $5.0 million or 36.6% of net sales in the year
ago period. The Company continued to invest in new product development in the
current quarter, incurring $1.1 million of engineering and development expenses
compared with $1.0 million in the year ago period.
The Company incurred an operating loss of $1.1 million for the first fiscal
quarter of 2003 compared with an operating loss of $481,000 in the year ago
period principally as a result of lower sales.
Interest expense decreased to $70,000 for the first quarter of fiscal 2003
compared with $98,000 in the year ago period principally as a result of the
paydown of bank borrowings.
The Company recorded an income tax benefit of $378,000 for the first quarter of
fiscal 2003 compared with an income tax benefit of $170,000 in the year ago
period.
As a result of the foregoing, the Company incurred a net loss of $699,000 for
the first quarter of fiscal 2003 compared with a net loss of $347,000 in the
year ago period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Financial Condition
- ---------------------------------
Net cash provided by operating activities was $269,000 for the first quarter of
fiscal 2003 due primarily to a $1.1 million decrease in accounts receivable and
a $761,000 decrease in inventories as a result of lower sales. Such increases in
cash were offset, in part, by the $699,000 net loss for the quarter and the
reduction of certain operating liabilities. Net cash used in investing
activities was $1.7 million for the first quarter of fiscal 2003 relating to the
purchase of $1.5 million of marketable securities, which consist of mutual fund
investments in U.S. government securities, and $165,000 of general capital
expenditures. Net cash used in financing activities was $190,000, which
primarily represented scheduled repayments of bank mortgage and term loans. As a
result of the foregoing, cash decreased by $1.6 million for the first quarter of
fiscal 2003 after the effect of exchange rate changes on the cash position of
the Company.
The Company has a $5 million secured revolving credit facility with a bank that
expires in July 2004 and a $600,000 outstanding term loan with the same bank
that matures in August 2003. Borrowings under the revolving credit facility bear
interest at the bank's prime rate or, at the Company's option, LIBOR plus 190
basis points (4.25% and 3.28%, respectively, at December 31, 2002). The credit
agreement includes a provision that waives the Company's obligation to comply
with all financial covenants contained in the agreements so long as there are no
outstanding borrowings under the revolving credit facility and the Company
maintains certain compensating balances. At this time, the Company does not
anticipate that it will be obligated to comply with these financial covenants in
the near term. At December 31, 2002 and September 30, 2002, there were no
outstanding borrowings under this facility.
The Company also maintains a bank overdraft facility of 1 million Pounds
Sterling (approximately $1,610,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. This facility expires in March 2003.
At December 31, 2002, outstanding borrowings under this facility amounted to
approximately $156,000.
Current and long-term debt maturing in the remaining nine months ended September
30, 2003 and in each of the subsequent fiscal years approximates $988,000 for
the remaining nine months ended September 30, 2003, $322,000 in 2004, $331,000
in 2005, $337,000 in 2006, $317,000 in 2007 and $1,740,000 thereafter.
The Company occupies certain facilities, or is contingently liable, under
operating leases that expire at various dates through 2008. The leases, which
cover periods from three to eight years, generally provide for renewal options
at specified rental amounts. The aggregate operating lease commitment at
December 31, 2002 was $674,000 with minimum rentals for the fiscal years shown
as follows: for the remaining nine months ended September 30, 2003 - $237,000;
2004 - $273,000; 2005 - $98,000; 2006 - $25,000; 2007 - $25,000; 2008 and
thereafter - $16,000.
The Company entered into certain consulting and incentive compensation
agreements that provide for the payout of up to $810,000 of fees and
compensation upon the completion and sale of a specified number of units of a
newly developed product line. The Company believes that it is likely that it
will incur the principal portion of such liability over the remaining nine
months of this fiscal year.
-11-
The Company believes that it has sufficient cash to meet its anticipated
operating, capital expenditures and debt service requirements for at least the
next twelve months. The Company has experienced reduced sales levels and
incurred operating losses in past periods which, if continued, could limit the
Company's ability to draw upon its bank credit facilities, if needed.
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,
2002 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 recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue (including shipping
and handling fees) is generally recognized when products are sold and title is
passed to the customer. Under arrangements that involve the sale of product
combined with the provision of services, revenue is generally recognized for
each element of the arrangement upon delivery or performance provided that (i)
the undelivered element is not essential to the functionality of the delivered
element and (ii) there is objective evidence of the fair value of the
undelivered elements. Advance service billings under a national supply contract
with one customer are deferred and recognized as revenues on a pro-rata basis
over the term of the service agreement. Shipping and handling costs are included
in cost of sales.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
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.
-12-
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 is less than
the carrying amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
The Company has incurred operating losses in the past two fiscal years and
through this first quarter. Should such losses continue in the future, the
Company may determine that it is not likely it will be able to realize the
benefits of recorded deferred tax assets, and a valuation allowance will need to
be established that would result in the charge-off of previously reported tax
benefits.
Accounting Change
- -----------------
The Company adopted SFAS No. 142 on October 1, 2002 and, accordingly, has
discontinued amortization of goodwill. The Company is required to assign its
goodwill ($1.4 million at October 1, 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 the "first step" goodwill impairment test
and determined its possible effects on the Company's financial condition or
results of operations. However, it is reasonably possible that the adoption of
SFAS No. 142 will result in an impairment charge to goodwill of up to $1.4
million, which would be reported as a cumulative effect change in accounting
principle.
New Accounting Standards Not Yet Adopted
- ----------------------------------------
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company believes that the adoption of SFAS No. 146 will
not have a material impact on the Company's consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance on the timing and method of revenue
recognition for sales arrangements that include the delivery of more than one
product or service. EITF is effective prospectively for arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is currently
analyzing the impact of its adoption on its financial statements.
-13-
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation as originally provided by SFAS
No. 123 "Accounting for Stock-Based Compensation". Additionally, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosure in both annual and interim financial statements about the method of
accounting for stock-based compensation and the effect of the method used on
reported results. The transitional requirements of SFAS No. 148 will be
effective for all financial statements for fiscal years ending after December
15, 2002. The disclosure requirements shall be effective for financial reports
containing condensed financial statements for interim periods beginning after
December 31, 2002. The Company expects to adopt the disclosure portion of this
statement for the fiscal quarter ending March 31, 2003. The application of this
standard will have no impact on the Company's consolidated financial position or
results of operations.
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", "Liquidity and Financial Condition" and "Critical Accounting
Policies" 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-
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
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 Note 7 "Derivative Instruments" to the accompanying
condensed consolidated financial statements). At December 31, 2002, the
Company's foreign currency exchange risks included a $2.4 million intercompany
accounts receivable balance due from the Company's U.K. based subsidiary and a
nominal Japanese Yen denominated trade accounts payable liability due to
inventory suppliers. Such assets and liabilities are short term and will be
settled in fiscal 2003. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from quarter-end
levels, with all other variables held constant.
At December 31, 2002, a 10% strengthening or weakening of the U.S. dollar versus
the British Pound would result in a $240,000 decrease or increase, respectively,
in the intercompany accounts receivable balance. Such foreign currency exchange
risk at December 31, 2002 has been substantially hedged by forward exchange
contracts.
At December 31, 2002, the Company had $2.7 million of outstanding floating rate
bank debt which was covered by interest rate swap agreements that effectively
convert the foregoing floating rate debt to stated fixed rates (see "Note 5.
Long-Term Debt" to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2002).
Thus, the Company has substantially no net interest rate exposures on these
instruments. However, the Company had approximately $1.1 million of floating
rate bank debt that is subject to interest rate risk as it was not covered by
interest rate swap agreements. The Company does not believe that a 10%
fluctuation in interest rates would have a material effect on its consolidated
financial position and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Based on their evaluation as of a date within 90 days of the filing date of
this quarterly report on Form 10-Q, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange
Act) are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act are recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
-15-
Independent Accountants' Review Report
--------------------------------------
The Board of Directors and Shareholders
Vicon Industries, Inc.
We have reviewed the condensed consolidated balance sheet of Vicon Industries,
Inc. and subsidiaries as of December 31, 2002, and the related condensed
consolidated statements of operations and cash flows for the three-month periods
ended December 31, 2002 and 2001. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Vicon Industries, Inc. and subsidiaries as of September 30, 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
December 10, 2002, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
Melville, New York
February 14, 2003
-16-
PART II - OTHER INFORMATION
- ---------------------------
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.
-17-
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.
February 14, 2003
/s/ Kenneth M. Darby /s/ John M. Badke
- -------------------- --------------------
Kenneth M. Darby John M. Badke
Chairman and Vice President, Finance
Chief Executive Officer Chief Financial Officer
-18-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
- ----------------------------------------
I, Kenneth M. Darby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vicon Industries, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Kenneth M. Darby
- --------------------
Kenneth M. Darby
Chairman and
Chief Executive Officer
-19-
CERTIFICATION OF CHIEF FINANCIAL OFFICER
- ----------------------------------------
I, John M. Badke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vicon Industries, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ John M. Badke
- -----------------
John M. Badke
Vice President, Finance and
Chief Financial Officer
-20-