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, 2003 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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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
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At December 31, 2003, the registrant had outstanding 4,598,659 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
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
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12/31/03 12/31/02
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Net sales $14,337,736 $12,018,014
Cost of sales 8,491,185 8,117,459
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Gross profit 5,846,551 3,900,555
Operating expenses:
Selling, general and
administrative expense 4,435,621 3,895,504
Engineering & development expense 1,125,395 1,075,446
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5,561,016 4,970,950
Operating income (loss) 285,535 (1,070,395)
Interest expense 51,391 70,243
Interest income (43,024) (63,659)
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Income (loss) before income taxes 277,168 (1,076,979)
Income tax expense (benefit) 155,000 (378,000)
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Income (loss) before cumulative
effect of a change in
accounting principle 122,168 (698,979)
Cumulative effect of a change in
accounting principle (Note 8) - (1,372,606)
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Net income (loss) $ 122,168 $(2,071,585)
=========== ===========
Basic and diluted earnings (loss) per share:
Income (loss) before cumulative
effect of a change in
accounting principle $ .03 $ (.15)
Cumulative effect of a change in
accounting principle - (.30)
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Net income (loss) $ .03 $ (.45)
========= ========
Shares used in computing earnings (loss) per share:
Basic 4,606,236 4,642,754
Diluted 4,790,995 4,642,754
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS 12/31/03 9/30/03
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(Unaudited)
CURRENT ASSETS
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Cash and cash equivalents $ 6,354,150 $ 4,836,148
Marketable securities 3,339,941 3,325,773
Accounts receivable, net 11,337,808 11,056,300
Inventories:
Parts, components, and materials 2,377,347 2,071,092
Work-in-process 2,978,375 2,881,592
Finished products 6,709,988 7,141,470
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12,065,710 12,094,154
Recoverable income taxes 225,372 2,052,662
Prepaid expenses and other current assets 650,329 701,779
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TOTAL CURRENT ASSETS 33,973,310 34,066,816
Property, plant and equipment 17,963,413 17,672,247
Less accumulated depreciation and amortization (10,741,608) (10,386,406)
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7,221,805 7,285,841
Other assets 548,762 540,407
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TOTAL ASSETS $41,743,877 $41,893,064
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
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Current maturities of long-term debt 334,133 325,294
Accounts payable 2,340,573 2,527,946
Accrued compensation and employee benefits 1,853,331 2,023,087
Accrued expenses 2,380,495 2,524,858
Unearned revenue 1,014,989 1,238,944
Income taxes payable 155,990 94,174
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TOTAL CURRENT LIABILITIES 8,079,511 8,734,303
Long-term debt 2,662,165 2,732,275
Unearned revenue 482,296 547,871
Other long-term liabilities 858,669 643,884
SHAREHOLDERS' EQUITY
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Common stock, par value $.01 48,350 48,326
Capital in excess of par value 22,469,198 22,439,637
Retained earnings 7,978,428 7,856,260
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30,495,976 30,344,223
Less treasury stock, at cost (1,053,249) (980,199)
Accumulated other comprehensive income 420,320 91,700
Deferred compensation (201,811) (220,993)
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TOTAL SHAREHOLDERS' EQUITY 29,661,236 29,234,731
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,743,877 $41,893,064
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See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
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12/31/03 12/31/02
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Cash flows from operating activities:
Net income (loss) $ 122,168 $(2,071,585)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 269,478 270,235
Stock compensation expense 24,306 20,379
Deferred income taxes - (253,000)
Cumulative effect of a change in
accounting principle - 1,372,606
Change in assets and liabilities:
Accounts receivable 69,303 1,065,796
Inventories 146,361 760,913
Recoverable income taxes 1,827,290 (225,000)
Prepaid expenses and other current assets 64,290 (118,131)
Other assets (8,355) 1,565
Accounts payable (264,069) (290,597)
Accrued compensation and employee benefits (187,449) (428,746)
Accrued expenses (174,629) 291,231
Unearned revenue (289,530) (213,089)
Income taxes payable 51,228 40,188
Other liabilities 104,557 45,937
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Net cash provided by operating activities 1,754,949 268,702
Cash flows from investing activities:
Capital expenditures (102,695) (164,944)
Purchases of marketable securities (35,350) (1,523,028)
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Net cash used in investing activities (138,045) (1,687,972)
Cash flows from financing activities:
Repayments of bank mortgage debt (81,896) (93,223)
Proceeds from exercise of stock options 5,280 16,169
Repurchases of common stock (73,050) (39,902)
Increase in borrowings under revolving
credit agreement - 151,852
Repayments of U.S. term loan - (225,000)
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Net cash used in financing activities (149,666) (190,104)
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Effect of exchange rate changes on cash 50,764 8,981
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Net increase (decrease) in cash 1,518,002 (1,600,393)
Cash at beginning of year 4,836,148 9,771,804
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Cash at end of period $ 6,354,150 $ 8,171,411
============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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December 31, 2003
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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, 2003 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 2004. 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, 2003. Certain prior
year amounts have been reclassified to conform to the current period
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 reported in other comprehensive income as a component of shareholders'
equity. The cost of such securities at December 31, 2003 was $3,367,678, with
$27,737 of unrealized losses reported at December 31, 2003.
Note 3: Accounts Receivable
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Accounts receivable is stated net of an allowance for uncollectible accounts of
$1,181,000 and $1,135,000 as of December 31, 2003 and September 30, 2003,
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 deferred compensation agreements. The
following table provides the components of the basic and diluted EPS
computations for the three month periods ended December 31, 2003 and 2002:
Three Months
Ended December 31,
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2003 2002
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Basic EPS Computation
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Net income (loss)........................... $ 122,168 $(2,071,585)
Weighted average shares outstanding......... 4,606,236 4,642,754
Basic net income (loss) per share........... $ .03 $ (.45)
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-5-
Three Months
Ended December 31,
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2003 2002
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Diluted EPS Computation
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Net income (loss)........................... $ 122,168 $(2,071,585)
Weighted average shares outstanding....... 4,606,236 4,642,754
Stock options............................. 136,476 -
Stock compensation arrangements........... 48,283 -
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Diluted shares outstanding.................. 4,790,995 4,642,754
Diluted net income (loss) per share......... $ .03 $ (.45)
============ ============
For the three months ended December 31, 2002, 48,275 shares 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 income (loss) for the three month periods
ended December 31, 2003 and 2002 was as follows:
Three Months
Ended December 31,
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2003 2002
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Net income (loss) $ 122,168 $(2,071,585)
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on securities (21,182) 3,716
Unrealized loss on derivatives (129,410) (17,584)
Foreign currency translation adjustment 479,212 157,010
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Comprehensive income (loss) $ 450,788 $(1,928,443)
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The accumulated other comprehensive income balances at December 31, 2003 and
September 30, 2003 consisted of the following:
December 31, September 30,
2003 2003
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Foreign currency translation adjustment $ 794,197 $ 314,985
Unrealized loss on derivatives (346,140) (216,730)
Unrealized loss on securities (27,737) (6,555)
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Accumulated other comprehensive income $ 420,320 $ 91,700
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-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. The other segment includes the
operations of TeleSite U.S.A., Inc. and subsidiary, an Israeli based designer
and producer of digital video products.
The Company evaluates performance and allocates resources based on, among other
things, the net profit or loss for each segment, excluding intersegment sales
and profits. Segment information for the three month periods ended December 31,
2003 and 2002 was as follows:
Three Months Ended
December 31, 2003 U.S. Europe Other Consolid. Totals
- ----------------- ---- ------ ----- --------- ------
Net sales to
external customers $ 9,255,000 $4,969,000 $ 114,000 $ - $14,338,000
Intersegment
net sales 1,027,000 - 1,830,000 (2,857,000) -
Net income (loss) (319,000) 320,000 118,000 3,000 122,000
Total assets 31,701,000 10,274,000 3,806,000 (4,037,000) 41,744,000
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) (2,217,000) 220,000 (64,000) (11,000) (2,072,000)
Total assets 38,792,000 8,222,000 3,471,000 (4,278,000) 46,207,000
The consolidating segment information above includes the elimination and
consolidation of intersegment transactions.
Note 7: Derivative Instruments
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At December 31, 2003, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $1.9 million and $2.0
million, respectively, whose aggregate fair value was a liability of
approximately $346,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive income.
Note 8: Goodwill
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The Company adopted SFAS No. 142 on October 1, 2002, and accordingly,
discontinued amortization of goodwill as of that date. The Company performed the
transitional goodwill impairment testing required under SFAS No. 142, which
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 to determine the implied fair
value of each reporting unit's goodwill.
-7-
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 three months ended
December 31, 2002.
Note 9: Stock-Based Compensation
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The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations in
accounting for its employee stock-based compensation. Under APB No. 25,
compensation expense would be recorded if, on the date of grant, the market
price of the underlying stock exceeded its exercise price. As permitted by SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" ("SFAS No. 148"), the Company has retained
the accounting prescribed by APB No. 25 and has presented the disclosure
information prescribed by SFAS No. 123 and SFAS No. 148 below.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of this Statement. The fair
value for options was estimated at the date of grant using the Black-Scholes
option pricing model.
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 fixed 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
month periods ended December 31, 2003 and 2002 would have been:
Three Months
Ended December 31,
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2003 2002
---- ----
Reported net income (loss) $ 122,168 $(2,071,575)
Stock-based compensation cost (36,303) (25,507)
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Pro forma net income (loss) $ 85,865 $(2,097,082)
=========== ===========
Reported basic and diluted EPS $ .03 $(.45)
Pro forma basic and diluted EPS $ .02 $(.45)
Note 10: Recent Accounting Pronouncement
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In August 2003, the Emerging Issues Task Force reached consensus on EITF Issue
No. 03-5 ("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2,
"Software Revenue Recognition," to Non-Software Deliverables in an Arrangement
Containing More-than-Incidental Software". EITF 03-5, which became effective for
the Company on October 1, 2003, provides guidance on determining whether
non-software deliverables are included within the scope of SOP 97-2 and,
accordingly, whether multiple element arrangements are to be accounted for in
accordance with EITF Issue No. 00-21 or SOP 97-2. The provisions of EITF 03-5
did not have an impact on the Company's results of operations or financial
position.
-8-
Note 11: Contingencies
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In May 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.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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Results of Operations
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Three Months Ended December 31, 2003 Compared with December 31, 2002
- --------------------------------------------------------------------
Net sales for the quarter ended December 31, 2003 increased $2.3 million or 19%
to $14.3 million compared with $12.0 million in the year ago period. Domestic
sales increased $1.3 million or 19% to $8.0 million compared with $6.7 million
in the year ago period principally as a result of sales of the Company's digital
video product line introduced in the March 2003 quarter. International sales for
the quarter increased $1.0 million or 19% to $6.3 million compared with $5.3
million in the year ago period. The increase was due in part to the effects of
favorable exchange rate changes as the British pound and Eurodollar strengthened
against the U.S. dollar in the current period. The backlog of unfilled orders
was $6.6 million at December 31, 2003 compared with $7.4 million at September
30, 2003.
Gross profit margins for the first quarter of fiscal 2004 increased to 40.8%
compared with 32.5% in the year ago period. The margin increase was principally
due to sales of the Company's new digital video product line, which carries
higher margins. The Company also experienced increased profit margins from its
European based operations due to the effects of favorable exchange rate changes
as the cost of their U.S. dollar sourced products declined.
Operating expenses for the first quarter of fiscal 2004 increased to $5.6
million compared with $5.0 million in the year ago period principally as a
result of increased selling costs and legal fees associated with the defense of
a patent infringement suit. The Company continued to invest in new product
development in the current quarter, incurring $1.1 million of engineering and
development expenses in both periods.
The Company generated operating income of $286,000 in the first fiscal quarter
of 2004 compared with an operating loss of $1.1 million in the year ago period.
Interest expense decreased to $51,000 for the first quarter of fiscal 2004
compared with $70,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense for the first quarter of fiscal 2004 was $155,000 compared
with an income tax benefit of $378,000 in the year ago period. The increase in
the current quarter effective tax rate was due to the fact that the Company has
ceased providing a deferred tax benefit on its U.S. operating losses.
During fiscal 2003, the Company completed its required goodwill impairment tests
as of October 1, 2002 and determined that the carrying amount of its 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 effective
October 1, 2002 as the cumulative effect of a change in accounting principle
reflected in the three months ended December 31, 2002.
As a result of the foregoing, the Company reported net income of $122,000 for
the first quarter of fiscal 2004 compared with a net loss of $2.1 million in the
year ago period.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Liquidity and Financial Condition
- ---------------------------------
Net cash provided by operating activities was $1.8 million for the first quarter
of fiscal 2004 due primarily to the receipt of a $1.8 million federal income tax
refund. Net cash used in investing activities was $138,000 for the first quarter
of fiscal 2004 relating to $103,000 of general capital expenditures and the
purchase of $35,000 of marketable securities. Net cash used in financing
activities was $150,000, which included $82,000 of scheduled repayments of bank
mortgage loans and $73,000 of treasury stock repurchases. As a result of the
foregoing, cash increased by $1.5 million for the first quarter of fiscal 2004
after the nominal 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. Borrowings under this facility bear interest at the bank's
prime rate or, at the Company's option, LIBOR plus 190 basis points (4.00% and
3.06%, respectively, at December 31, 2003). At December 31, 2003 and September
30, 2003, there were no outstanding borrowings under this facility. The Company
does not anticipate the need to draw on such facility through its expiration in
July 2004.
The Company also maintains a bank overdraft facility of one million Pounds
Sterling (approximately $1,780,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. This facility expires in March 2004.
At December 31, 2003 and September 30, 2003, there were no outstanding
borrowings under this facility.
Current and long-term debt maturing in the remaining nine months ended September
30, 2004 and in each of the subsequent fiscal years approximates $248,000 for
the remaining nine months ended September 30, 2004, $340,000 in 2005, $346,000
in 2006, $322,000 in 2007 and $1,740,000 in 2008.
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, 2003 was $522,000 with minimum rentals for the fiscal years shown
as follows: for the remaining nine months ended September 30, 2004 - $256,000;
2005 - $151,000; 2006 - $37,000; 2007 - $31,000; 2008 - $27,000; 2009 and
thereafter - $20,000.
The Company believes that it has sufficient cash to meet its anticipated
operating, capital expenditures and debt service requirements for at least the
next twelve months.
-11-
In May 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.
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,
2003 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 is generally
recognized when products are sold and title is passed to the customer. Shipping
and handling costs are included in cost of sales. Advance service billings under
a national supply contract with one customer are deferred and recognized as
revenues on a pro rata basis over the term of the service agreement. The Company
evaluates multiple-element revenue arrangements for separate units of accounting
pursuant to EITF Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables", and follows appropriate revenue recognition policies for each
separate unit. Elements are considered separate units of accounting provided
that (i) the delivered item has stand-alone value to the customer, (ii) there is
objective and reliable evidence of the fair value of the delivered item, and
(iii) if a general right of return exists relative to the delivered item,
delivery or performance of the undelivered item is considered probable and
substantially within the control of the Company. As applied to the Company,
under arrangements involving the sale of product and the provision of services,
product sales are recognized as revenue when the products are sold and title is
passed to the customer, and service revenue is recognized as services are
performed. For products that include more than incidental software, and for
separate licenses of the Company's software products, the Company recognizes
revenue in accordance with the provisions of Statement of Position 97-2,
"Software Revenue Recognition", as amended.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
-12-
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write-downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
The Company assesses the recoverability of the carrying value of its long-lived
assets, including identifiable intangible assets with finite useful lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company evaluates the recoverability of
such assets based upon the expectations of undiscounted cash flows from such
assets. If the sum of the expected future undiscounted cash flows were less than
the carrying amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
In fiscal 2003, the Company recognized a $1.9 million charge to provide a
valuation allowance against its deferred tax assets due to the uncertainty of
future realization. The establishment of such valuation allowance was determined
to be appropriate during that period due to updated judgments in light of the
Company's operating losses in current and 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.
The Company is subject to proceedings, lawsuits and other claims related to
labor, product and other matters. The Company assesses the likelihood of an
adverse judgment or outcomes for these matters, as well as the range of
potential losses. A determination of the reserves required, if any, is made
after careful analysis. The required reserves may change in the future due to
new developments.
Recent Accounting Pronouncement
- -------------------------------
In August 2003, the Emerging Issues Task Force reached consensus on EITF Issue
No. 03-5 ("EITF 03-5"), "Applicability of AICPA Statement of Position 97-2,
"Software Revenue Recognition," to Non-Software Deliverables in an Arrangement
Containing More-than-Incidental Software". EITF 03-5, which became effective for
the Company on October 1, 2003, provides guidance on determining whether
non-software deliverables are included within the scope of SOP 97-2 and,
accordingly, whether multiple element arrangements are to be accounted for in
accordance with EITF Issue No. 00-21 or SOP 97-2. The provisions of EITF 03-5
did not have an impact on the Company's results of operations or financial
position.
-13-
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.
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
December 31, 2003, substantially all of such foreign currency transactions have
been hedged by forward exchange contracts.
At December 31, 2003, the Company had $1.9 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 7.
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, 2003).
Thus, the Company has substantially no net interest rate exposures on these
instruments. However, the Company had approximately $843,000 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.
-14-
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission's rules and
forms.
Changes in Internal Controls
- ----------------------------
There were no 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.
Limitations on the Effectiveness of Controls
- --------------------------------------------
The Company believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
In May 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
-15-
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
- -----------------------------------------
a) Exhibits
--------
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
-------------------
No Form 8-K was required to be filed during the current quarter.
-16-
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 23, 2004
/s/ Kenneth M. Darby /s/ John M. Badke
- -------------------- --------------------
Kenneth M. Darby John M. Badke
Chairman and Vice President, Finance and
Chief Executive Officer Chief Financial Officer
-17-