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, 2004 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 No X
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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, 2004, the registrant had outstanding 4,562,429 shares of Common
Stock, $.01 par value.
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
Three Months Ended
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12/31/04 12/31/03
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Net sales $15,582,091 $14,337,736
Cost of sales 9,713,864 8,491,185
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Gross profit 5,868,227 5,846,551
Operating expenses:
Selling, general and
administrative expense 5,159,402 4,435,621
Engineering & development expense 1,381,786 1,125,395
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6,541,188 5,561,016
Operating income (loss) (672,961) 285,535
Interest expense 45,997 51,391
Interest and other income (36,891) (43,024)
Loss on sale of marketable securities 44,936 -
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Income (loss) before income taxes (727,003) 277,168
Income tax expense 13,000 155,000
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Net income (loss) $ (740,003) $ 122,168
=========== ===========
Basic and diluted earnings
(loss) per share $ (.16) $ .03
=========== ===========
Shares used in computing earnings (loss) per share:
Basic 4,561,663 4,606,236
Diluted 4,561,663 4,790,995
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 12/31/04 9/30/04
- ------ -------- -------
(Unaudited)
CURRENT ASSETS
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Cash and cash equivalents $ 3,696,060 $ 6,063,198
Marketable securities 56,066 2,118,698
Accounts receivable, net 11,959,622 9,661,563
Inventories:
Parts, components, and materials 3,022,180 3,239,461
Work-in-process 3,794,519 3,675,122
Finished products 6,760,830 5,758,990
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13,577,529 12,673,573
Recoverable income taxes 239,402 239,402
Prepaid expenses and other current assets 512,760 388,347
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TOTAL CURRENT ASSETS 30,041,439 31,144,781
Property, plant and equipment 18,771,201 18,324,603
Less accumulated depreciation and amortization (11,581,923) (11,234,174)
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7,189,278 7,090,429
Other assets 637,518 631,807
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TOTAL ASSETS $37,868,235 $38,867,017
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
- -------------------
Current maturities of long-term debt 351,839 348,615
Accounts payable 3,028,059 3,282,671
Accrued compensation and employee benefits 1,915,697 2,048,417
Accrued expenses 1,358,443 1,541,888
Unearned revenue 693,908 792,073
Income taxes payable 202,104 337,632
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TOTAL CURRENT LIABILITIES 7,550,050 8,351,296
Long-term debt 2,332,656 2,410,190
Unearned revenue 445,106 401,352
Other long-term liabilities 931,448 790,834
SHAREHOLDERS' EQUITY
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Common stock, par value $.01 48,502 48,490
Additional paid in capital 22,507,788 22,505,100
Retained earnings 4,425,663 5,165,666
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26,981,953 27,719,256
Less treasury stock, at cost (1,299,999) (1,278,884)
Accumulated other comprehensive income 1,052,105 617,239
Deferred compensation (125,084) (144,266)
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TOTAL SHAREHOLDERS' EQUITY 26,608,975 26,913,345
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $37,868,235 $38,867,017
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
Three Months Ended
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12/31/04 12/31/03
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Cash flows from operating activities:
Net income (loss) $ (740,003) $ 122,168
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 271,776 250,296
Amortization of deferred compensation 19,182 19,182
Stock compensation expense - 24,306
Loss on sale of marketable securities 44,936 -
Change in assets and liabilities:
Accounts receivable, net (1,341,399) 69,303
Inventories (678,340) 146,361
Recoverable income taxes - 1,827,290
Prepaid expenses and other current assets (113,267) 64,290
Other assets (2,514) (8,355)
Accounts payable (302,052) (264,069)
Accrued compensation and employee benefits (146,486) (187,449)
Accrued expenses (191,987) (174,629)
Unearned revenue (56,936) (289,530)
Income taxes payable (151,350) 51,228
Other liabilities 86,263 104,557
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Net cash provided by (used in)
operating activities (3,302,177) 1,754,949
Cash flows from investing activities:
Capital expenditures (277,823) (102,695)
Acquisition, net of cash acquired (868,000) -
Net decrease (increase) in marketable securities 2,065,214 (35,350)
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Net cash provided by (used in)
investing activities 919,391 (138,045)
Cash flows from financing activities:
Repayments of bank mortgage debt (87,893) (81,896)
Proceeds from exercise of stock options 2,700 5,280
Repurchases of common stock (21,115) (73,050)
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Net cash used in financing activities (106,308) (149,666)
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Effect of exchange rate changes on cash 121,956 50,764
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Net increase (decrease) in cash (2,367,138) 1,518,002
Cash at beginning of year 6,063,198 4,836,148
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Cash at end of period $ 3,696,060 $ 6,354,150
============ ===========
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, 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 three months ended December 31, 2004 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 2005. 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, 2004. 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, 2004 was $57,125, with
$1,059 of cumulative unrealized losses reported at December 31, 2004.
Note 3: Accounts Receivable
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Accounts receivable is stated net of an allowance for uncollectible accounts of
$1,225,000 and $1,162,000 as of December 31, 2004 and September 30, 2004,
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, 2004 and 2003:
Three Months
Ended December 31,
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2004 2003
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Basic EPS Computation
Net income (loss)........................... $ (740,003) $ 122,168
Weighted average shares outstanding......... 4,561,663 4,606,236
Basic net income (loss) per share........... $ (.16) $ .03
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-5-
Three Months
Ended December 31,
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2004 2003
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Diluted EPS Computation
Net income (loss)........................... $ (740,003) $ 122,168
Weighted average shares outstanding....... 4,561,663 4,606,236
Stock options............................. - 136,476
Stock compensation arrangements........... - 48,283
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Diluted shares outstanding.................. 4,561,663 4,790,995
Diluted net income (loss) per share......... $ (.16) $ .03
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For the three months ended December 31, 2004, 227,785 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, 2004 and 2003 was as follows:
Three Months
Ended December 31,
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2004 2003
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Net income (loss) $ (740,003) $ 122,168
Other comprehensive income (loss), net of tax:
Change in net unrealized gain (loss)
on securities 47,518 (21,182)
Unrealized loss on derivatives (54,350) (129,410)
Foreign currency translation adjustment 441,698 479,212
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Comprehensive income (loss) $ (305,137) $ 450,788
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The accumulated other comprehensive income balances at December 31, 2004 and
September 30, 2004 consisted of the following:
December 31, September 30,
2004 2004
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Foreign currency translation adjustment $1,216,462 $ 774,764
Unrealized loss on derivatives (163,298) (108,948)
Unrealized loss on securities (1,059) (48,577)
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Accumulated other comprehensive income $1,052,105 $ 617,239
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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 and its
newly acquired Videotronic subsidiary, which market and distribute 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.
-6-
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,
2004 and 2003 was as follows:
Three Months Ended
December 31, 2004 U.S. Europe Other Consolid. Totals
- ----------------- ---- ------ ----- --------- ------
Net sales to
external customers $10,752,000 $4,723,000 $ 107,000 $ - $15,582,000
Intersegment
net sales 1,008,000 - 2,242,000 (3,250,000) -
Net income (loss) (534,000) (152,000) 40,000 (94,000) (740,000)
Total assets 26,355,000 10,360,000 3,451,000 (2,298,000) 37,868,000
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
The consolidating segment information above includes the elimination and
consolidation of intersegment transactions.
Note 7: Derivative Instruments
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At December 31, 2004, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $1.7 million and $2.4
million, respectively, whose aggregate fair value was a liability of
approximately $163,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive income.
Note 8: 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 (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.
-7-
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, 2004 and 2003 would have been:
Three Months
Ended December 31,
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2004 2003
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Reported net income (loss) $ (740,003) $ 122,168
Stock-based compensation cost (34,048) (36,303)
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Pro forma net income (loss) $ (774,051) $ 85,865
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Reported basic and diluted EPS $ (.16) $ .03
Pro forma basic and diluted EPS $ (.17) $ .02
Note 9: Litigation
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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. 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.
In the normal course of business, the Company is a party to certain other claims
and litigation. Management believes that the settlement of such claims and
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.
Note 10: Asset Purchase
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On October 1, 2004, the Company entered into an agreement to purchase all of the
operating assets of Videotronic Infosystems GmbH ("Videotronic"), a German based
video system supplier operating under insolvency protection, for 700,000
Eurodollars (approximately $868,000). The purchase was ratified by Videotronic's
Creditors on November 26, 2004. The Company is presently evaluating the
allocation of its purchase price among the assets acquired and expects to have
such allocation completed by its second fiscal quarter ended March 31, 2005.
-8-
Note 11: Recent Accounting Pronouncement
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On December 16, 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based
Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123(R) supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123(R) is similar to the approach described
in SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values at the date of grant. Pro forma
disclosure is no longer an alternative. SFAS 123(R) must be adopted in fiscal
periods beginning after June 15, 2005. The Company expects to adopt Statement
123(R) on July 1, 2005, the commencement of its fourth quarter of fiscal 2005.
Statement 123(R) permits public companies to adopt its requirements using one of
two prescribed methods. The "modified prospective" method requires compensation
cost to be recognized based on the requirements of Statement 123(R) for all
outstanding vested stock option grants and all share-based payments granted
after the effective date. Such method allows for the use of Statement 123 for
all awards granted to employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date. The "modified retrospective" method
includes the requirements of the modified prospective method described above,
but also permits entities to restate based on the amounts previously recognized
under Statement 123 for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year of adoption.
As permitted by Statement 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options. The
Company is currently evaluating which method it will use in adopting Statement
123(R) and the effect that the accounting change will have on its financial
position and results of operations.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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Results of Operations
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Three Months Ended December 31, 2004 Compared with December 31, 2003
- --------------------------------------------------------------------
Net sales for the quarter ended December 31, 2004 increased 9% to $15.6 million
compared with $14.3 million in the year ago period. Domestic sales decreased 3%
to $7.8 million compared with $8.0 million in the year ago period. International
sales for the quarter increased $1.5 million to $7.8 million compared with $6.3
million in the year ago period due principally to sales by the Company's new
German based subsidiary, Videotronic, whose operating assets were acquired on
October 1, 2004. International sales for the current quarter also included the
shipment of a $2.2 million system order to one foreign customer. The backlog of
unfilled orders was $5.1 million at December 31, 2004 compared with $4.7 million
at September 30, 2004.
Gross profit margins for the first quarter of fiscal 2005 decreased to 37.7%
compared with 40.8% in the year ago period due principally to reduced margins on
sales of the Company's digital video server/recorder product line.
Operating expenses for the first quarter of fiscal 2005 increased $980,000 to
$6.5 million compared with $5.6 million in the year ago period. The increase
included $606,000 of operating expenses incurred by the Company's Videotronic
subsidiary and $256,000 of additional engineering and development expenses as
the Company continued to invest in new product development.
The Company incurred an operating loss of $673,000 in the first fiscal quarter
of 2005 compared with an operating profit of $286,000 in the year ago period.
The current quarter results included a $156,000 operating loss from the
Company's Videotronic subsidiary as it transitioned from former bankruptcy
protection.
Interest expense decreased to $46,000 for the first quarter of fiscal 2005
compared with $51,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense for the first quarter of fiscal 2005 was $13,000 compared
with $155,000 in the year ago period relating principally to profits reported by
the Company's European operations. The Company has ceased recognizing tax
benefits 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 $740,000 for
the first quarter of fiscal 2005 compared with a net profit of $122,000 in the
year ago period.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $3.3 million for the first quarter of
fiscal 2005. In addition to the $740,000 net loss for the period, the Company's
accounts receivable and inventories increased by $2 million, which included
$746,000 from the Videotronic subsidiary. The Company further paid down certain
prior year end accrued liabilities. Net cash provided by investing activities
was $919,000 for the first quarter of fiscal 2005, which included a $2.1 million
liquidation of marketable securities offset by the $868,000 acquisition of the
Company's Videotronic subsidiary operating assets and $278,000 of general
capital expenditures. Net cash used in financing activities was $106,000, which
included $88,000 of scheduled repayments of bank mortgage loans and $21,000 of
treasury stock repurchases. As a result of the foregoing, cash decreased by $2.4
million for the first quarter of fiscal 2005 after the effect of exchange rate
changes on the cash position of the Company.
The Company's European based subsidiary maintains a bank overdraft facility of
one million Pounds Sterling (approximately $1,920,000) to support its local
working capital requirements. This facility expires in March 2005. At December
31, 2004 and September 30, 2004, there were no outstanding borrowings under this
facility.
The following is a summary of the Company's long-term debt and material lease
obligations as of December 31, 2004:
Fiscal Debt Lease
Year Repayments Commitments Total
- ------ ---------- ----------- -----
2005 $ 265,000 $222,000 $ 487,000
2006 353,000 278,000 631,000
2007 326,000 229,000 555,000
2008 1,740,000 34,000 1,774,000
The Company presently 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 incurred operating losses in
recent periods which, if continued, could limit the Company's ability to secure
additional bank financing if needed.
The Company does not have any off-balance sheet transactions, arrangements or
obligations (including contingent obligations) that have, or are reasonably
likely to have, a material effect on the Company's financial condition, results
of operations, liquidity, capital expenditures or capital resources.
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. 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-
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,
2004 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.
-12-
The Company assesses the recoverability of the carrying value of its long-lived
assets, including identifiable intangible assets with finite useful lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company evaluates the recoverability of
such assets based upon the expectations of undiscounted cash flows from such
assets. If the sum of the expected future undiscounted cash flows 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
- -------------------------------
On December 16, 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based
Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS 123(R) supersedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows".
Generally, the approach in Statement 123(R) is similar to the approach described
in SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values at the date of grant. Pro forma
disclosure is no longer an alternative. SFAS 123(R) must be adopted in fiscal
periods beginning after June 15, 2005. The Company expects to adopt Statement
123(R) on July 1, 2005, the commencement of its fourth quarter of fiscal 2005.
Statement 123(R) permits public companies to adopt its requirements using one of
two prescribed methods. The "modified prospective" method requires compensation
cost to be recognized based on the requirements of Statement 123(R) for all
outstanding vested stock option grants and all share-based payments granted
after the effective date. Such method allows for the use of Statement 123 for
all awards granted to employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date. The "modified retrospective" method
includes the requirements of the modified prospective method described above,
but also permits entities to restate based on the amounts previously recognized
under Statement 123 for purposes of pro forma disclosures either (a) all prior
periods presented or (b) prior interim periods of the year of adoption.
-13-
As permitted by Statement 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options. The
Company is currently evaluating which method it will use in adopting Statement
123(R) and the effect that the accounting change will have on its financial
position and results of operations.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Statements in this Report on Form 10-Q and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Results of
Operations", "Liquidity and 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.
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, 2004, substantially all of such foreign currency transactions have
been hedged by forward exchange contracts.
At December 31, 2004, the Company had $1.7 million of outstanding floating rate
bank debt which was covered by an interest rate swap agreement that effectively
converts the foregoing floating rate debt to a stated fixed rate (see "Note 6.
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, 2004).
Thus, the Company has substantially no net interest rate exposures on these
instruments. However, the Company had approximately $748,000 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, as of the end
of the period covered by this report, 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 changes in the Company's internal control over financial reporting
identified in connection with the evaluation referred to above that occurred
during the quarter that have materially affected, or are reasonably likely to
materially affect, the registrant's internal control over financial reporting.
The Company's size dictates that it conducts business with a minimal number of
financial and administrative employees, which inherently results in a lack of
documented controls and segregation of duties within the Company and its
operating subsidiaries. Management will continue to evaluate the employees
involved and the control procedures in place, the risks associated with such
lack of segregation and whether the potential benefits of adding employees to
clearly segregate duties justifies the expense associated with such added
personnel. In addition, management is aware that many of the internal controls
that are in place at the Company are undocumented controls. The Company is
working to document these controls to be in compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.
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.
-15-
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. 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 December 31, 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
------ ------------- --------- ----------------------------
10/01/04-10/31/04 4,500 $4.65 $459,664
11/01/04-11/30/04 - $ - $459,664
12/01/04-12/31/04 - $ - $459,664
------ -----
Total 4,500 $4.65
====== =====
(1) All repurchases were executed in open market transactions.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- --------------------------
None
-16-
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 December 7, 2004, the Company filed a Current Report on Form 8-K
filing its press release announcing the Company's financial results
for its quarter and fiscal year ended September 30, 2004.
-17-
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VICON INDUSTRIES, INC.
February 22, 2005
/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
-18-