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, 2004 Commission File No. 1-7939
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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
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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 June 30, 2004, the registrant had outstanding 4,595,229 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
------------------
6/30/04 6/30/03
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Net sales $13,572,632 $13,050,732
Cost of sales 8,568,214 7,793,890
----------- -----------
Gross profit 5,004,418 5,256,842
Operating expenses:
Selling, general and
administrative expense 4,116,256 3,831,815
Engineering & development expense 1,247,498 1,342,116
----------- -----------
5,363,754 5,173,931
Operating income (loss) (359,336) 82,911
Interest expense 44,400 52,424
Interest and other income (37,799) (28,524)
----------- -----------
Income (loss) before income taxes (365,937) 59,011
Income tax expense 59,000 29,000
----------- ------------
Net income (loss) $ (424,937) $ 30,011
=========== ===========
Basic and diluted earnings
(loss) per share $ (.09) $ .01
=========== ===========
Shares used in computing earnings (loss) per share:
Basic 4,605,671 4,626,546
Diluted 4,605,671 4,666,371
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
Nine Months Ended
-----------------
6/30/04 6/30/03
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Net sales $40,145,320 $38,150,627
Cost of sales 24,769,555 24,352,236
----------- -----------
Gross profit 15,375,765 13,798,391
Operating expenses:
Selling, general and
administrative expense 12,707,147 11,549,953
Engineering & development expense 3,580,628 3,758,677
----------- -----------
16,287,775 15,308,630
Operating loss (912,010) (1,510,239)
Interest expense 141,113 184,343
Interest and other income (142,213) (129,799)
----------- -----------
Loss before income taxes (910,910) (1,564,783)
Income tax expense 293,000 1,838,957
----------- -----------
Loss before cumulative effect of a
change in accounting principle (1,203,910) (3,403,740)
Cumulative effect of a change in
accounting principle (Note 8) - (1,372,606)
----------- -----------
Net loss $(1,203,910) $(4,776,346)
=========== ===========
Basic and diluted loss per share:
Loss before cumulative effect of a
change in accounting principle $ (.26) $ (.73)
Cumulative effect of a change in
accounting principle - (.30)
----------- -----------
Net loss $ (.26) $ (1.03)
=========== ===========
Shares used in computing basic
and diluted loss per share 4,605,589 4,636,834
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS 6/30/04 9/30/03
- ------ ------- -------
(Unaudited)
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 5,841,834 $ 4,836,148
Marketable securities 3,346,223 3,325,773
Accounts receivable, net 10,028,740 11,056,300
Inventories:
Parts, components, and materials 2,687,446 2,071,092
Work-in-process 3,513,852 2,881,592
Finished products 6,275,032 7,141,470
----------- -----------
12,476,330 12,094,154
Recoverable income taxes 255,972 2,052,662
Prepaid expenses and other current assets 578,147 701,779
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TOTAL CURRENT ASSETS 32,527,246 34,066,816
Property, plant and equipment 18,061,524 17,672,247
Less accumulated depreciation and amortization (11,035,824) (10,386,406)
----------- -----------
7,025,700 7,285,841
Other assets 604,612 540,407
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TOTAL ASSETS $40,157,558 $41,893,064
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
- -------------------
Current maturities of long-term debt 331,728 325,294
Accounts payable 2,311,666 2,527,946
Accrued compensation and employee benefits 1,924,860 2,023,087
Accrued expenses 2,060,498 2,524,858
Unearned revenue 1,053,359 1,238,944
Income taxes payable 256,774 94,174
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TOTAL CURRENT LIABILITIES 7,938,885 8,734,303
Long-term debt 2,500,376 2,732,275
Unearned revenue 469,195 547,871
Other long-term liabilities 728,365 643,884
SHAREHOLDERS' EQUITY
- --------------------
Common stock, par value $.01 48,484 48,326
Additional paid in capital 22,514,935 22,439,637
Retained earnings 6,652,350 7,856,260
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29,215,769 30,344,223
Less treasury stock, at cost (1,132,629) (980,199)
Accumulated other comprehensive income 601,044 91,700
Deferred compensation (163,447) (220,993)
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TOTAL SHAREHOLDERS' EQUITY 28,520,737 29,234,731
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $40,157,558 $41,893,064
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
Nine Months Ended
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6/30/04 6/30/03
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Cash flows from operating activities:
Net loss $(1,203,910) $(4,776,346)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 849,263 826,169
Stock compensation expense 38,283 1,892
Deferred income taxes - 1,853,957
Cumulative effect of a change in
accounting principle - 1,372,606
Change in assets and liabilities:
Accounts receivable 1,371,067 414,074
Inventories (274,688) 675,586
Recoverable income taxes 1,796,690 (225,000)
Prepaid expenses and other current assets 136,157 (106,108)
Other assets (71,356) 20,415
Accounts payable (280,618) (393,205)
Accrued compensation and employee benefits (118,324) 107,029
Accrued expenses (383,733) 502,480
Unearned revenue (268,049) (696,623)
Income taxes payable 152,487 (4,976)
Other liabilities 264,670 83,202
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Net cash provided by (used in)
operating activities 2,007,939 (344,848)
Cash flows from investing activities:
Capital expenditures (468,071) (436,170)
Purchases of marketable securities (102,942) (1,555,028)
------------ -----------
Net cash used in investing activities (571,013) (1,991,198)
Cash flows from financing activities:
Repayments of bank mortgage debt (251,215) (396,371)
Proceeds from exercise of stock options 37,173 16,169
Repurchases of common stock (152,430) (108,567)
Repayments of U.S. term loan - (675,000)
------------ -----------
Net cash used in financing activities (366,472) (1,163,769)
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Effect of exchange rate changes on cash (64,768) (4,583)
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Net increase (decrease) in cash 1,005,686 (3,504,398)
Cash at beginning of year 4,836,148 9,771,804
------------ -----------
Cash at end of period $ 5,841,834 $ 6,267,406
============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-5-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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June 30, 2004
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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 nine months ended June 30, 2004 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 June 30, 2004 was $3,435,270, with
$89,048 of cumulative unrealized losses reported at June 30, 2004.
Note 3: Accounts Receivable
- ----------------------------
Accounts receivable is stated net of an allowance for uncollectible accounts of
$1,031,000 and $1,135,000 as of June 30, 2004 and September 30, 2003,
respectively.
-6-
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 deferred compensation agreements.
The following table provides the components of the basic and diluted EPS
computations for the three and nine month periods ended June 30, 2004 and 2003:
Three Months Nine Months
Ended June 30, Ended June 30,
--------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Basic EPS Computation
- ---------------------
Net income (loss)........... $ (424,937) $ 30,011 $(1,203,910) $(4,776,346)
Weighted average
shares outstanding......... 4,605,671 4,626,546 4,605,589 4,636,834
Basic earnings (loss)
per share.................. $ (.09) $ .01 $ (.26) $ (1.03)
=========== ========== ============ ============
Diluted EPS Computation
- -----------------------
Net income (loss)........... $ (424,937) $ 30,011 $(1,203,910) $(4,776,346)
Weighted average
shares outstanding....... 4,605,671 4,626,546 4,605,589 4,636,834
Stock compensation
arrangement.............. - 16,283 - -
Stock options............. - 23,542 - -
----------- ---------- ------------ ------------
Diluted shares outstanding.. 4,605,671 4,666,371 4,605,589 4,636,834
Diluted earnings (loss)
per share.................. $ (.09) $ .01 $ (.26) $ (1.03)
=========== ========== ============ ============
For the three months ended June 30, 2004, 294,995 shares have been omitted from
the calculation of diluted EPS as their effect would have been antidilutive. For
the nine months ended June 30, 2004 and 2003, 243,113 and 49,748 shares,
respectively, have been omitted from the calculation of diluted EPS as their
effect would have been antidilutive.
-7-
Note 5: Comprehensive Income (Loss)
- -------------------------------------
The Company's total comprehensive income (loss) for the three month and nine
month periods ended June 30, 2004 and 2003 was as follows:
Three Months Nine Months
Ended June 30, Ended June 30,
---------------- -----------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ (424,937) $ 30,011 $(1,203,910) $(4,776,346)
Other comprehensive income
(loss), net of tax:
Net unrealized (gain)
loss on securities (77,664) (20) (82,493) 3,728
Unrealized gain (loss)
on derivatives 159,530 (5,366) 122,644 (9,431)
Foreign currency
translation adjustment (140,227) 257,128 469,193 237,972
----------- --------- ------------ ------------
Comprehensive income (loss) $ (483,298) $ 281,753 $ (694,566) $(4,544,077)
=========== ========= ============ ============
The accumulated other comprehensive income balances at June 30, 2004 and
September 30, 2003 consisted of the following:
June 30, September 30,
2004 2003
---------- ----------
Foreign currency translation adjustment $ 784,178 $ 314,985
Unrealized loss on derivatives (94,086) (216,730)
Unrealized loss on securities (89,048) (6,555)
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Accumulated other comprehensive income $ 601,044 $ 91,700
========== ==========
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. 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 and nine month periods
ended June 30, 2004 and 2003 was as follows:
Three Months Ended
June 30, 2004 U.S. Europe Other Consolid. Totals
- ---------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $ 9,819,000 $3,681,000 $ 73,000 $ - $13,573,000
Intersegment
net sales 1,364,000 - 1,322,000 (2,686,000) -
Net income (loss) (471,000) 116,000 (109,000) 39,000 (425,000)
Total assets 28,943,000 10,537,000 3,657,000 (2,979,000) 40,158,000
-8-
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
Nine Months Ended
June 30, 2004 U.S. Europe Other Consolid. Totals
- ---------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $26,937,000 $12,876,000 $ 332,000 $ - $40,145,000
Intersegment
net sales 3,546,000 - 5,238,000 (8,784,000) -
Net income (loss) (1,854,000) 760,000 (100,000) (10,000) (1,204,000)
Total assets 28,943,000 10,537,000 3,657,000 (2,979,000) 40,158,000
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
The consolidating segment information above includes the elimination and
consolidation of intersegment transactions.
Note 7: Derivative Instruments
- --------------------------------
At June 30, 2004, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $1.8 million and $2.2
million, respectively, whose aggregate fair value was a liability of
approximately $94,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive income.
Note 8: Goodwill
- ------------------
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.
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.
-9-
Note 9: Stock-Based Compensation
- ----------------------------------
The Company follows Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25") and related interpretations in
accounting for its employee stock-based compensation. Under APB No. 25,
compensation expense would be recorded if, on the date of grant, the market
price of the underlying stock exceeded its exercise price. As permitted by SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123" ("SFAS No. 148"), the Company has retained
the accounting prescribed by APB No. 25 and has presented the disclosure
information prescribed by SFAS No. 123 and SFAS No. 148 below.
Pro forma information regarding net income (loss) and earnings (loss) per share
is required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of this Statement.
The fair value for options was estimated at the date of grant using 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
and nine month periods ended June 30, 2004 and 2003 would have been:
Three Months Nine Months
Ended June 30, Ended June 30,
---------------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Reported net loss $ (424,937) $ 30,011 $(1,203,910) $(4,776,346)
Stock-based compensation cost (28,946) (44,640) (92,728) (123,367)
----------- --------- ----------- -----------
Pro forma net loss $ (453,883) $ (14,629) $(1,296,638) $(4,899,713)
=========== ========= =========== ===========
Reported basic and diluted EPS $ (.09) $ .01 $ (.26) $(1.03)
Pro forma basic and diluted EPS $ (.10) $ - $ (.28) $(1.06)
Note 10: 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,
---------------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Federal:
Current $ - $ - $ - $ (225,000)
Deferred - - - 1,853,957
--------- --------- ---------- ---------
- - - 1,628,957
State - - 10,000 -
Foreign 59,000 29,000 283,000 210,000
--------- --------- ---------- ---------
Total income tax expense $ 59,000 $ 29,000 $ 293,000 $1,838,957
========= ========= ========== ==========
-10-
In the second 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 of future results in light of the Company's operating losses
in recent years and the inherent uncertainties of predicting future operating
results in periods over which such net tax differences become deductible. Income
tax expense for the nine months ended June 30, 2003 includes the recognition of
an available tax effected net operating loss carryback of $225,000.
Note 11: Contingencies
- ------------------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. In
addition, the Company is exploring the possibility of settlement with the
plaintiff. 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.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------
Results of Operations
- ---------------------
Three Months Ended June 30, 2004 Compared with June 30, 2003
- ------------------------------------------------------------
Net sales for the quarter ended June 30, 2004 increased $.5 million or 4% to
$13.6 million compared with $13.1 million in the year ago period. Domestic sales
decreased $.4 million or 4% to $8.1 million compared with $8.5 million in the
year ago period. International sales for the quarter increased 19% to $5.5
million compared with $4.6 million in the year ago period. The backlog of
unfilled orders was $6.2 million at June 30, 2004 compared with $7.4 million at
September 30, 2003.
Gross profit margins for the third quarter of fiscal 2004 decreased to 36.9%
compared with 40.3% in the year ago period. In the current quarter, the Company
recognized a $316,000 charge for the phase out of a discontinued product line.
Operating expenses for the third quarter of fiscal 2004 increased to $5.4
million compared with $5.2 million in the year ago period due principally to
increased foreign sales office costs. The Company continued to invest in new
product development in the current quarter, incurring $1.2 million of
engineering and development expenses compared with $1.3 million in the year ago
period.
The Company incurred an operating loss of $359,000 in the third fiscal quarter
of 2004 compared with an operating profit of $83,000 in the year ago period.
Interest expense decreased to $44,000 for the third quarter of fiscal 2004
compared with $52,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense for the third quarter of fiscal 2004 was $59,000 compared
with $29,000 in the year ago period relating principally to profits reported by
the Company's European operations. In the prior fiscal year, the Company ceased
recognition of a tax benefit on its U.S. operating losses due to the uncertainty
of its future realization.
As a result of the foregoing, the Company incurred a net loss of $425,000 for
the third quarter of fiscal 2004 compared with a net profit of $30,000 in the
year ago period.
-12-
Results of Operations
- ---------------------
Nine Months Ended June 30, 2004 Compared with June 30, 2003
- -----------------------------------------------------------
Net sales for the nine months ended June 30, 2004 increased $2.0 million or 5%
to $40.1 million compared with $38.1 million in the year ago period. Domestic
sales increased $.3 million or 1% to $23.2 million compared with $22.9 million
in the year ago period. International sales increased $1.7 million or 11% to
$16.9 million compared with $15.2 million in the year ago period.
Gross profit margins for the first nine months of fiscal 2004 increased to 38.3%
compared with 36.2% in the year ago period. The margin increase was principally
due to increased sales of the Company's 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. Such margin increases were offset, in part, by an aggregate $498,000
charge for the phase out of discontinued product lines taken in the second and
third quarters of fiscal 2004.
Operating expenses for the first nine months of fiscal 2004 increased to $16.3
million compared with $15.3 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 year period, incurring $3.6 million of engineering
and development expenses compared with $3.8 million in the year ago period.
The Company incurred an operating loss of $912,000 for the first nine months of
2004 compared with an operating loss of $1.5 million in the year ago period.
Interest expense decreased to $141,000 for the first nine months of fiscal 2004
compared with $184,000 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 2004 was $293,000
compared with $1.8 million in the year ago period. In the nine month period
ended June 30, 2003, the Company recognized a $1.9 million income tax charge to
provide a valuation allowance against its deferred tax assets due to the
uncertainty of future realization. The establishment of such valuation allowance
was determined to be appropriate as a result of the Company's operating losses
in recent years and the inherent uncertainties of predicting future operating
results in periods over which such net tax differences become deductible. Income
tax expense for the nine months ended June 30, 2003 includes the recognition of
an available tax effected net operating loss carryback of $225,000. Income tax
expense for the first nine months of fiscal 2004 and 2003 included $283,000 and
$210,000, respectively, relating to profits reported by the Company's European
operations.
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 nine months ended June 30, 2003.
As a result of the foregoing, the Company incurred a net loss of $1.2 million
for the first nine months of fiscal 2004 compared with a net loss of $4.8
million in the year ago period.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $2.0 million for the first nine
months of fiscal 2004 due primarily to the receipt of a $1.8 million federal
income tax refund. Net cash used in investing activities was $571,000 for the
first nine months of fiscal 2004 relating to $468,000 of general capital
expenditures and the purchase of $103,000 of marketable securities. Net cash
used in financing activities was $366,000, which included $251,000 of scheduled
repayments of bank mortgage loans and $152,000 of treasury stock repurchases. As
a result of the foregoing, cash increased by $1.0 million for the first nine
months of fiscal 2004 after the nominal effect of exchange rate changes on the
cash position of the Company.
The Company had a $5 million secured revolving credit facility with a bank that
expired in July 2004. At June 30, 2004 and September 30, 2003, there were no
outstanding borrowings under this facility.
The Company also maintains a bank overdraft facility of one million Pounds
Sterling (approximately $1,810,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. This facility expires in March 2005
and at June 30, 2004 and September 30, 2003, there were no outstanding
borrowings under this facility.
Current and long-term debt maturing in the remaining three months ended
September 30, 2004 and in each of the subsequent fiscal years approximates
$86,000 for the remaining three months ended September 30, 2004, $336,000 in
2005, $347,000 in 2006, $323,000 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 June
30, 2004 was $355,000 with minimum rentals for the fiscal years shown as
follows: for the remaining three months ended September 30, 2004 - $86,000; 2005
- - $152,000; 2006 - $37,000; 2007 - $31,000; 2008 - $28,000; 2009 and thereafter
- - $21,000.
The Company believes that it has sufficient cash to meet its anticipated
operating, capital expenditures and debt service requirements for at least the
next twelve months.
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. In
addition, the Company is exploring the possibility of settlement with the
plaintiff. 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.
-14-
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
equipment maintenance agreements are deferred and recognized as revenues on a
pro rata basis over the term of the service agreements. 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.
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.
-15-
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.
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 Capital Resources" 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.
-16-
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, 2004, substantially all of such foreign currency transactions have been
hedged by forward exchange contracts.
At June 30, 2004, the Company had $1.8 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 $790,000 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
- --------------------------------
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, as of the end of the period
covered by this report, 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.
-17-
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems, which is a significant product line.
Among other things, the suit seeks injunctive relief and unspecified damages.
The Company and its outside patent counsel believe that the complaint against
the Company is without merit. The Company is vigorously defending itself and it
plans to present a joint defense with certain other named defendants. In
addition, the Company is exploring the possibility of settlement with the
plaintiff. The Company is unable to reasonably estimate a range of possible
loss, if any, at this time. Although the Company believes that it has
meritorious defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial position.
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
- ------ -----------------------------------------------------------------------
SECURITIES
- ----------
On April 26, 2001, the Company announced that its Board of Directors authorized
the repurchase of up to $1 million of shares of the Company's common stock,
which represented approximately 9.8% of shares outstanding on the announcement
date. The following table summarizes repurchases of common stock for the three
month period ended June 30, 2004:
Total
Number Average Approximate Dollar Value
of Shares Price Paid of Shares that May Yet Be
Period Purchased (1) per Share Purchased Under the Program
------ ------------- --------- ----------------------------
04/01/04-04/30/04 - - 704,353
05/01/04-05/31/04 10,000 4.42 660,149
06/01/04-06/30/04 6,900 5.00 625,649
------ -----
Total 16,900 $4.66
====== =====
(1) All repurchases were executed in open market transactions.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
None
-18-
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
The Company's annual meeting was held on May 26, 2004.
Proposal 1: Election of Directors
- ----------------------------------
The following directors were elected by the votes indicated:
For Withheld
--- --------
Clifton H. W. Maloney 4,354,614 46,255
W. Gregory Robertson 4,358,814 42,055
The terms of the following directors continued after the meeting:
Kenneth M. Darby
Peter F. Neumann
Arthur D. Roche
Proposal 2: Ratification of Appointment of Independent Auditors
- ----------------------------------------------------------------
The selection of auditors was approved by the votes indicated:
For Against Abstain
--- ------- -------
4,360,591 32,650 7,628
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
-------------------
On May 19, 2004, the Company filed a Current Report on Form 8-K filing
its press release announcing the Company's financial results for the
quarter ended March 31, 2004.
-19-
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 16, 2004
/s/ Kenneth M. Darby /s/ John M. Badke
- -------------------- --------------------
Kenneth M. Darby John M. Badke
Chairman and Senior Vice President, Finance
Chief Executive Officer Chief Financial Officer
-20-