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, 2003 Commission File No. 1-7939
------------- ------
Vicon Industries, Inc.
----------------------
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
------- ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Securities Exchange Act of 1934)
Yes No X
------- -------
At June 30 2003, the registrant had outstanding 4,618,762 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
6/30/03 6/30/02
------- -------
Net sales $13,050,732 $14,274,490
Cost of sales 7,793,890 9,212,820
----------- -----------
Gross profit 5,256,842 5,061,670
Operating expenses:
Selling expense 2,764,499 2,929,144
General & administrative expense 1,067,316 939,951
Engineering & development expense 1,342,116 1,095,889
----------- -----------
5,173,931 4,964,984
Operating income 82,911 96,686
Interest expense 52,424 81,757
Interest income (28,524) (31,007)
----------- -----------
Income before income taxes 59,011 45,936
Income tax expense 29,000 18,000
----------- -----------
Net income $ 30,011 $ 27,936
=========== ===========
Earnings per share:
Basic $ .01 $ .01
=== ===
Diluted $ .01 $ .01
=== ===
Shares used in computing earnings per share:
Basic 4,626,546 4,669,526
Diluted 4,666,371 4,733,552
See Accompanying Notes to Condensed Consolidated Financial Statements.
-1-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Nine Months Ended
-----------------
6/30/03 6/30/02
------- -------
Net sales $38,150,627 $40,671,462
Cost of sales 24,352,236 26,902,063
----------- -----------
Gross profit 13,798,391 13,769,399
Operating expenses:
Selling expense 8,378,614 8,765,022
General & administrative expense 3,171,339 2,934,704
Engineering & development expense 3,758,677 3,117,226
----------- -----------
15,308,630 14,816,952
Operating loss (1,510,239) (1,047,553)
Interest expense 184,343 257,808
Interest income (129,799) (138,971)
----------- -----------
Loss before income taxes (1,564,783) (1,166,390)
Income tax expense (benefit) (Note 11) 1,838,957 (380,000)
----------- -----------
Loss before cumulative effect of
a change in accounting principle (3,403,740) (786,390)
Cumulative effect of a change in
accounting principle (Note 8) (1,372,606) -
----------- -----------
Net loss $(4,776,346) $ (786,390)
=========== ===========
Basic and diluted loss per share:
Loss before cumulative effect of
a change in accounting principle $ (.73) $ (.17)
Cumulative effect of a change in
accounting principle (.30) -
----------- -----------
Net loss $ (1.03) $ (.17)
=========== ===========
Shares used in computing loss per share:
Basic 4,636,834 4,657,752
Diluted 4,636,834 4,657,752
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS 6/30/03 9/30/02
- ------ ------- -------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 6,267,406 $ 9,771,804
Marketable securities 1,558,756 -
Accounts receivable, net 10,115,345 10,127,526
Accounts receivable - related parties 43,039 273,464
Inventories:
Parts, components, and materials 2,034,754 2,802,779
Work-in-process 2,133,309 1,275,057
Finished products 8,797,376 9,470,823
----------- -----------
12,965,439 13,548,659
Recoverable income taxes 1,937,728 1,712,728
Deferred income taxes - 673,574
Prepaid expenses 610,008 496,399
----------- -----------
TOTAL CURRENT ASSETS 33,497,721 36,604,154
Property, plant and equipment 17,553,809 16,997,129
Less accumulated depreciation and amortization (10,208,743) (9,331,102)
------------ -----------
7,345,066 7,666,027
Goodwill, net of accumulated amortization - 1,372,606
Deferred income taxes - 1,283,784
Other assets 479,503 499,918
----------- -----------
TOTAL ASSETS $41,322,290 $47,426,489
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt 485,379 1,304,227
Accounts payable - trade 1,977,133 1,740,919
Accounts payable - related parties 54,855 643,093
Accrued compensation and employee benefits 1,953,225 1,837,519
Accrued expenses 2,123,797 1,596,288
Unearned revenue 1,378,244 1,514,121
Income taxes payable 142,236 140,741
----------- -----------
TOTAL CURRENT LIABILITIES 8,114,869 8,776,908
Long-term debt 2,803,998 3,040,061
Unearned revenue 706,591 1,267,337
Other long-term liabilities 792,708 803,476
SHAREHOLDERS' EQUITY
Common stock, par value $.01 48,290 48,239
Capital in excess of par value 21,778,012 21,760,002
Retained earnings 7,954,068 12,730,414
----------- -----------
29,780,370 34,538,655
Less treasury stock, at cost (950,591) (842,024)
Accumulated other comprehensive income (loss) 74,345 (157,924)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 28,904,124 33,538,707
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,322,290 $47,426,489
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Nine Months Ended
-----------------
6/30/03 6/30/02
------- -------
Cash flows from operating activities:
Net loss $(4,776,346) $ (786,390)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 826,169 835,848
Goodwill amortization - 148,839
Stock compensation expense 1,892 23,287
Deferred income taxes 1,853,957 (534,788)
Cumulative effect of a change in
accounting principle 1,372,606 -
Change in assets and liabilities:
Accounts receivable 183,649 (818,675)
Accounts receivable - related parties 230,425 (137,622)
Inventories 675,586 828,414
Recoverable income taxes (225,000) -
Prepaid expenses (106,108) (4,506)
Other assets 20,415 84,501
Accounts payable - trade 195,033 14,420
Accounts payable - related parties (588,238) (89,091)
Accrued compensation and employee benefits 107,029 (380,205)
Accrued expenses 502,480 (683,700)
Unearned revenue (696,623) (543,873)
Income taxes payable (4,976) (326,188)
Other liabilities 83,202 10,339
------------ -----------
Net cash used in operating activities (344,848) (2,359,390)
Cash flows from investing activities:
Capital expenditures (436,170) (455,991)
Purchases of marketable securities (1,555,028) -
------------ -----------
Net cash used in investing activities (1,991,198) (455,991)
Cash flows from financing activities:
Repayments of U.S. term loan (675,000) (675,000)
Repayments of other long-term debt (396,371) (323,428)
Proceeds from exercise of stock options 16,169 42,890
Repurchases of common stock (108,567) - _
------------ -----------
Net cash used in financing activities (1,163,769) (955,538)
------------ -----------
Effect of exchange rate changes on cash (4,583) (86,693)
------------ -----------
Net decrease in cash (3,504,398) (3,857,612)
Cash at beginning of year 9,771,804 9,795,148
------------ -----------
Cash at end of period $ 6,267,406 $ 5,937,536
============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
June 30, 2003
-------------
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, 2003 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
- ------------------------------
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 at June 30, 2003 was $1,555,028, with $4,166
of unrealized gains and $438 of unrealized losses reported for the nine-month
period ended.
Note 3: Accounts Receivable
- ----------------------------
Accounts receivable is stated net of an allowance for doubtful accounts of
$1,379,000 and $1,077,000 as of June 30, 2003 and September 30, 2002,
respectively.
-5-
Note 4: 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 and nine month periods ended June 30, 2003 and 2002:
Three Months Nine Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Basic EPS Computation
Net income (loss)........... $ 30,011 $ 27,936 $(4,776,346) $ (786,390)
Weighted average
shares outstanding......... 4,626,546 4,669,526 4,636,834 4,657,752
Basic earnings (loss)
per share.................. $ .01 $ .01 $ (1.03) $ (.17)
========== ========== ============ ===========
Diluted EPS Computation
Net income (loss)........... $ 30,011 $ 27,936 $(4,776,346) $ (786,390)
Weighted average
shares outstanding....... 4,626,546 4,669,526 4,636,834 4,657,752
Stock compensation
arrangement.............. 16,283 10,989 - -
Stock options............. 23,542 53,037 - -
---------- ---------- ---------- ----------
Diluted shares outstanding.. 4,666,371 4,733,552 4,636,834 4,657,752
Diluted earnings (loss)
per share.................. $ .01 $ .01 $ (1.03) $ (.17)
========== ========== ============ ===========
For the nine months ended June 30, 2003 and 2002, 49,748 and 60,330 shares,
respectively, have been omitted from the calculation of diluted EPS as their
effect would have been antidilutive.
Note 5: Comprehensive Income (Loss)
- -------------------------------------
The Company's total comprehensive income (loss) for the three and nine month
periods ended June 30, 2003 and 2002 was as follows:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 30,011 $ 27,936 $(4,776,346) $(786,390)
Other comprehensive income
(loss), net of tax:
Net unrealized gain
(loss) on securities (20) - 3,728 -
Unrealized gain (loss)
on derivatives (5,366) (52,811) (9,431) 32,975
Foreign currency
translation adjustment 257,128 258,075 237,972 122,562
------------ ---------- ------------ ---------
Comprehensive income (loss) $ 281,753 $ 233,200 $(4,544,077) $(630,853)
============ ========== ============ =========
-6-
The accumulated other comprehensive income (loss) balances at June 30, 2003 and
September 30, 2002 consisted of the following:
June 30, September 30,
2003 2002
--------- ---------
Foreign currency translation adjustment $ 280,769 $ 42,797
Unrealized loss on derivatives (210,152) (200,721)
Unrealized gain on securities 3,728 -
---------- ---------
Accumulated other comprehensive income (loss) $ 74,345 $(157,924)
========== =========
Note 6: 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 and nine month periods ended June
30, 2003 and 2002 was as follows:
Three Months Ended
June 30, 2003 U.S. Europe Other Consolid. Totals
- -------------- ---------- ---------- --------- ---------- --------
Net sales to
external customers $ 9,358,000 $3,321,000 $ 372,000 $ - $13,051,000
Intersegment
net sales 1,534,000 - 928,000 (2,462,000) -
Net income (loss) 204,000 48,000 (190,000) (32,000) 30,000
Total assets 32,441,000 9,169,000 3,725,000 (4,013,000) 41,322,000
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-
Nine Months Ended
June 30, 2003 U.S. Europe Other Consolid. Totals
- ----------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $25,572,000 $11,413,000 $1,166,000 $ - $38,151,000
Intersegment
net sales 4,590,000 - 2,195,000 (6,785,000) -
Net income (loss) (3,197,000) 408,000 (509,000) (1,478,000) (4,776,000)
Total assets 32,441,000 9,169,000 3,725,000 (4,013,000) 41,322,000
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 income (loss) (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
The consolidating segment information above includes the elimination and
consolidation of intersegment transactions.
Note 7: Derivative Instruments
- --------------------------------
At June 30, 2003, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $2.1 million and $3.8
million, respectively, whose aggregate fair value was a liability of
approximately $210,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive loss.
Note 8: Goodwill
- ------------------
The Company adopted SFAS No. 142 on October 1, 2002, and accordingly, has
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 for the nine months ended June 30, 2003.
-8-
The following table presents pro forma income (loss) and earnings (loss) per
share data, before the cumulative effect of a change in accounting principle,
restated to include the retroactive impact of the adoption of SFAS No. 142:
Three Months Nine Months
Ended June 30, Ended June 30,
--------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Reported income (loss)
before cumulative
effect of a change in
accounting principle $ 30,011 $ 27,936 $(3,403,740) $(786,390)
Add back:
goodwill amortization - 49,613 - 148,839
----------- --------- ----------- ---------
Pro forma income (loss)
before cumulative
effect of a change in
accounting principle $ 30,011 $ 77,549 $(3,403,740) $(637,551)
============ ========== =========== =========
Basic and diluted earnings (loss) per share:
- --------------------------------------------
Reported earnings (loss) per
share before cumulative
effect of a change in
accounting principle $ .01 $ .01 $ (.73) $ (.17)
Goodwill amortization - .01 - .03
-------- ------- --------- ---------
Pro forma earnings (loss)
per share $ .01 $ .02 $ (.73) $ (.14)
========= ======== ========= =========
Note 9: Accrued Warranty Obligation
- -------------------------------------
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 requirements of this interpretation in the first
quarter ended December 31, 2002. The adoption of this interpretation did not
have a material impact on the Company's 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 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 reporting period:
Beginning balance as of September 30, 2002 $ 190,000
Deduct: Payments (122,000)
Add: Provision 212,000
---------
Ending balance as of June 30, 2003 $ 280,000
=========
-9-
Note 10: Stock-Based Compensation
- -----------------------------------
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock-based compensation plans.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123" for disclosure purposes. SFAS No. 148, issued in December
2002, provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require disclosures in annual and interim financial statements regarding the
method of accounting used for stock-based compensation and the effect of the
method used on reported results. The application of the disclosure portion of
this standard will have no impact on the Company's consolidated financial
position or results of operations.
In the Company's condensed consolidated financial statements, no compensation
expense has been recognized for stock option grants issued under any of the
Company's stock option plans. Had compensation expense for stock option grants
issued been determined under the fair value method of SFAS No. 123, the
Company's net income (loss) and earnings (loss) per share (EPS) for the three
and nine month periods ended June 30, 2003 and 2002 would have been:
Three Months Nine Months
Ended June 30, Ended June 30,
-------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Reported income (loss)
before cumulative
effect of a change in
accounting principle $ 30,011 $ 27,936 $(3,403,740) $(786,390)
Stock-based compensation
cost, net of tax (44,640) (13,670) (123,367) (42,865)
----------- ---------- ----------- ---------
Pro forma income (loss)
before cumulative
effect of a change in
accounting principle $ (14,629) $ 14,266 $(3,527,107) $(829,255)
=========== =========== ============ =========
Reported basic and diluted
EPS before cumulative
effect of a change in
accounting principle $ .01 $ .01 $(.73) $(.17)
Pro forma basic and diluted
EPS before cumulative
effect of a change in
accounting principle $ - $ - $(.76) $(.18)
Reported net income (loss) $ 30,011 $ 27,936 $(4,776,346) $(786,390)
Stock-based compensation
cost, net of tax (44,640) (13,670) (123,367) (42,865)
----------- ---------- ----------- ---------
Pro forma net income (loss) $ (14,629) $ 14,266 $(4,899,713) $(829,255)
=========== =========== ============ =========
Reported basic and
diluted EPS $ .01 $ .01 $(1.03) $(.17)
Pro forma basic and
diluted EPS $ - $ - $(1.06) $(.18)
-10-
Note 11: Income Taxes
- -----------------------
The components of income tax expense (benefit) for the periods indicated are as
follows:
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------- -----------------------
2003 2002 2003 2002
--------- ---------- ---------- ----------
Federal:
Current $ - $(284,000) $ (225,000) $(880,000)
Deferred - 276,000 1,853,957 310,000
--------- --------- ---------- ---------
- (8,000) 1,628,957 (570,000)
State - - - (40,000)
Foreign 29,000 26,000 210,000 230,000
--------- --------- ---------- ---------
Total income tax
expense (benefit) $ 29,000 $ 18,000 $1,838,957 $(380,000)
========= ========= ========== =========
In the nine month period ended June 30, 2003, the Company recognized a $2.1
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 current and 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 the nine month period ended June 30, 2003
includes the recognition of an available tax effected net operating loss
carryback of $225,000.
For income tax purposes, the Company had available at June 30, 2003, a tax
effected net operating loss carryback of approximately $1.9 million included in
recoverable income taxes, for which the Company plans to file a carryback claim
to obtain a refund of previously paid taxes.
Note 12: New Accounting Standards
- -----------------------------------
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 adopted SFAS No. 146, which did not have an
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.
-11-
Note 13: Contingencies
- ------------------------
On May 15, 2003, the Company was served with a summons and complaint in a patent
infringement suit that named the Company and thirteen other defendants. The
alleged infringement relates to the Company's 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 is without merit and the Company intends to vigorously defend
itself in this matter. 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. The Company plans
to present a joint defense with certain other named defendants in the suit.
Note 14: Related Party Transaction
- ------------------------------------
In the third quarter ended June 30, 2003, the Company recognized $360,000 of
revenues received from both a related and third party pursuant to the completion
of a contract to develop certain new product technology.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------
Results of Operations
- ---------------------
Three Months Ended June 30, 2003 Compared with June 30, 2002
- ------------------------------------------------------------
Net sales for the quarter ended June 30, 2003 decreased $1.2 million or 9% to
$13.1 million compared with $14.3 million in the year ago period. Domestic sales
decreased $1.8 million or 18% to $8.4 million compared with $10.2 million in the
year ago period. The year ago period sales included $1.6 million of shipments in
connection with a large system order for New York's JFK International Airport.
Current period sales included $360,000 of revenues received pursuant to the
completion of a contract to develop certain new product technology.
International sales for the quarter increased $.6 million or 14% to $4.7 million
compared with $4.1 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 third quarter of fiscal 2003 increased to 40.3%
compared with 35.5% in the year ago period. The margin increase was principally
due to the introduction of the Company's new digital video product line.
Operating expenses for the third quarter of fiscal 2003 were $5.2 million or
39.6% of net sales compared with $5.0 million or 34.8% of net sales in the year
ago period. The Company continued to invest in new product development in the
current quarter, incurring $1.3 million of engineering and development expenses
compared with $1.1 million in the year ago period. The current quarter
engineering and development expenses included a performance based compensation
charge of $278,000 associated with the introduction of the Company's new digital
video product line.
Operating income decreased to $83,000 for the third fiscal quarter of 2003
compared with $97,000 in the year ago period.
Interest expense decreased to $52,000 for the third quarter of fiscal 2003
compared with $82,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense for the third quarter of fiscal 2003 was $29,000 compared
with $18,000 in the year ago period.
As a result of the foregoing, the Company reported net income of $30,000 for the
third quarter of fiscal 2003 compared with net income of $28,000 in the year ago
period.
-13-
Results of Operations
- ---------------------
Nine Months Ended June 30, 2003 Compared with June 30, 2002
- -----------------------------------------------------------
Net sales for the nine months ended June 30, 2003 decreased $2.5 million or 6%
to $38.2 million compared with $40.7 million in the year ago period. Domestic
sales decreased $3.8 million or 14% to $22.9 million compared with $26.8 million
in the year ago period. Such decrease was due principally to the current period
slowdown in the U.S. economy and the delivery of a large system order in the
year ago period. International sales for the nine months ended June 30, 2003
increased $1.3 million or 10% to $15.3 million compared with $13.9 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 nine months of fiscal 2003 increased to 36.2%
compared with 33.9% in the year ago period. The margin increase was principally
due to a more favorable sales mix of higher margin products as the Company
introduced its new digital video product line in the second quarter ended March
31, 2003.
Operating expenses for the first nine months of fiscal 2003 were $15.3 million
or 40.1% of net sales compared with $14.8 million or 36.4% of net sales in the
year ago period. The Company continued to invest in new product development in
the current year period, incurring $3.8 million of engineering and development
expenses compared with $3.1 million in the year ago period. The current period
engineering and development expenses included a performance based compensation
charge of $603,000 associated with the introduction of the Company's new digital
video product line.
The Company incurred an operating loss of $1.5 million for the first nine months
of 2003 compared with an operating loss of $1.0 million in the year ago period
principally as a result of higher operating expenses.
Interest expense decreased to $184,000 for the first nine months of fiscal 2003
compared with $258,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense for the first nine months of fiscal 2003 was $1.8 million
compared with an income tax benefit of $380,000 in the year ago period. In the
second quarter ended March 31, 2003, the Company recognized a $2.1 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 and a net operating loss carryforward benefit of $253,000 recorded in
the first quarter ended December 31, 2002.
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 the
new 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 the
nine month period.
As a result of the foregoing, the Company incurred a net loss of $4.8 million
for the first nine months of fiscal 2003 compared with a net loss of $786,000 in
the year ago period.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Financial Condition
- ---------------------------------
Net cash used in operating activities was $345,000 for the first nine months of
fiscal 2003. The net loss of $4.8 million for the period included non-cash
charges of $1.9 million for deferred income taxes, $1.4 million for goodwill
impairment and $826,000 for depreciation and amortization. Net cash used in
investing activities was $2.0 million for the first nine months of fiscal 2003
relating to the purchase of $1.6 million of marketable securities, which consist
of mutual fund investments in U.S. government securities, and $436,000 of
general capital expenditures. Net cash used in financing activities was $1.2
million, which primarily represented scheduled repayments of bank mortgage and
term loans. As a result of the foregoing, cash decreased by $3.5 million for the
first nine months of fiscal 2003 after the effect of exchange rate changes on
the cash position of the Company. At June 30, 2003, the Company had an available
tax effected net operating loss carryback of approximately $1.9 million, for
which it plans to file a carryback claim in the near term to obtain a refund of
previously paid taxes.
The Company has a $5 million secured revolving credit facility with a bank that
expires in July 2004 and a $150,000 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 (4.00% and 3.02%, respectively, at June 30, 2003). 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 June 30, 2003 and September 30, 2002, there were no
outstanding borrowings under this facility.
The Company also maintains a bank overdraft facility of one million Pounds
Sterling (approximately $1,650,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. This facility expires in March 2004.
At June 30, 2003 and September 30, 2002, there were no outstanding borrowings
under this facility.
Current and long-term debt maturing in the remaining three months ended
September 30, 2003 and in each of the subsequent fiscal years approximates
$232,000 for the remaining three months ended September 30, 2003, $334,000 in
2004, $326,000 in 2005, $339,000 in 2006, $318,000 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 June
30, 2003 was $521,000 with minimum rentals for the fiscal years shown as
follows: for the remaining three months ended September 30, 2003 - $80,000; 2004
- - $275,000; 2005 - $99,000; 2006 - $25,000; 2007 - $25,000; 2008 and thereafter
- - $17,000.
-15-
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 incurred $603,000 of expenses relating
to these agreements in the first nine months of fiscal 2003 and believes that it
is likely that it will incur the majority of the remaining arrangement in the
next fiscal year.
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 limits 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.
-16-
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 and estimated net asset liquidation values. If the sum of the expected
future undiscounted cash flows, plus estimated asset liquidation values, 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.
In the quarter ended March 31, 2003, the Company recognized a $2.1 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 recent 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.
New Accounting Standard Not Yet Adopted
- ---------------------------------------
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.
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.
-17-
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). The Company's ongoing foreign
currency exchange risks include intercompany sales of product and services
between subsidiary companies operating in differing functional currencies. At
June 30, 2003, substantially all of such foreign currency transactions have been
hedged by forward exchange contracts.
At June 30, 2003, the Company had $2.1 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 $899,000 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) Evaluation of Disclosure Controls and Procedures
------------------------------------------------
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) Changes in Internal Controls
----------------------------
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.
-18-
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 June 30, 2003, and the related condensed
consolidated statements of operations and cash flows for the three and
nine-month periods ended June 30, 2003 and 2002. 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.
As discussed in Note 8, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets", effective October 1,
2002.
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 September 30, 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
August 14, 2003
-19-
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
On May 15, 2003, the Company was served with a summons and complaint in a patent
infringement suit that named the Company and thirteen other defendants. The
alleged infringement relates to the Company's 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 is without merit and the Company intends to vigorously defend
itself in this matter. 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. The Company plans
to present a joint defense with certain other named defendants in the suit.
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
-20-
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
a) Exhibits
--------
15.1 Letter re: unaudited interim financial information.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
b) Reports on Form 8-K
-------------------
On May 12, 2003, the Company filed a Current Report on Form 8-K filing its
May 7, 2003 press release announcing the Company's March 31, 2003
financial results.
-21-
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, 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
-22-