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 March 31, 2002 Commission File No. 1-7939
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VICON INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
NEW YORK STATE 11-2160665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
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(Former name, address, and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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At March 31, 2002, the registrant had outstanding 4,664,512 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
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VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
Three Months Ended
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3/31/02 3/31/01
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Net sales............................. $12,846,138 $17,159,883
Cost of sales......................... 8,610,879 11,453,815
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Gross profit........................ 4,235,259 5,706,068
Operating expenses:
Selling expense................... 2,877,749 3,397,835
General & administrative expense.. 996,483 1,190,168
Engineering & development expense. 1,024,250 1,010,339
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4,898,482 5,598,342
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Operating (loss) income............. (663,223) 107,726
Gain on sale of securities............ - (618,346)
Interest expense...................... 78,118 117,153
Interest income....................... (45,955) (51,090)
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(Loss) income before income taxes. (695,386) 660,009
Income tax (benefit) expense.......... (228,000) 242,000
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Net (loss) income................. $ (467,386) $ 418,009
=========== ===========
(Loss) earnings per share:
Basic $ (.10) $ .09
=== ===
Diluted $ (.10) $ .09
=== ===
Shares used in computing (loss) earnings per share:
Basic 4,655,334 4,647,306
Diluted 4,655,334 4,650,274
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)
Six Months Ended
----------------
3/31/02 3/31/01
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Net sales............................. $26,396,971 $34,536,162
Cost of sales......................... 17,689,242 22,929,372
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Gross profit........................ 8,707,729 11,606,790
Operating expenses:
Selling expense................... 5,835,878 6,562,444
General & administrative expense.. 1,994,753 2,528,381
Engineering & development expense. 2,021,337 1,980,547
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9,851,968 11,071,372
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Operating (loss) income............. (1,144,239) 535,418
Gain on sale of securities............ - (3,022,579)
Interest expense...................... 176,052 277,269
Interest income....................... (107,964) (83,751)
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(Loss) income before income taxes. (1,212,327) 3,364,479
Income tax (benefit) expense.......... (398,000) 1,224,000
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Net (loss) income................. $ (814,327) $ 2,140,479
=========== ===========
(Loss) earnings per share:
Basic $ (.18) $ .46
=== ===
Diluted $ (.18) $ .46
=== ===
Shares used in computing (loss) earnings per share:
Basic 4,651,865 4,642,812
Diluted 4,651,865 4,647,602
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS 3/31/02 9/30/01
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(Unaudited)
CURRENT ASSETS
Cash and cash equivalents....................... $ 7,271,848 $ 9,795,148
Accounts receivable (less allowance
of $924,000 at March 31, 2002 and
$1,115,000 at September 30, 2001)............. 10,368,229 11,438,334
Inventories:
Parts, components, and materials.............. 2,153,198 2,518,782
Work-in-process............................... 2,404,218 2,777,211
Finished products............................. 12,819,720 11,800,197
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17,377,136 17,096,190
Deferred income taxes........................... 2,054,498 1,420,372
Prepaid expenses................................ 612,905 566,861
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TOTAL CURRENT ASSETS............................ 37,684,616 40,316,905
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Property, plant and equipment................... 16,620,073 16,371,853
Less accumulated depreciation and amortization.. (8,781,736) (8,232,536)
----------- -----------
7,838,337 8,139,317
Goodwill, net of accumulated amortization....... 1,471,832 1,571,058
Deferred income taxes........................... 1,239,108 1,366,625
Other assets.................................... 467,491 531,660
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TOTAL ASSETS.................................... $48,701,384 $51,925,565
- ------------ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt............ $ 1,400,253 $ 2,144,727
Accounts payable................................ 2,311,083 2,375,825
Accrued compensation and employee benefits...... 1,491,404 1,789,401
Accrued expenses................................ 1,550,498 2,227,825
Unearned service revenue........................ 1,361,641 1,294,576
Income taxes payable............................ 256,082 479,361
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TOTAL CURRENT LIABILITIES 8,370,961 10,311,715
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Long-term debt.................................. 3,557,869 3,498,099
Unearned service revenue........................ 1,875,919 2,334,348
Other long-term liabilities..................... 777,447 883,356
SHAREHOLDERS' EQUITY
Common stock, par value $.01.................... 48,177 47,565
Capital in excess of par value.................. 21,778,534 21,542,541
Retained earnings............................... 13,495,115 14,309,442
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35,321,826 35,899,548
Less treasury stock, at cost.................... (784,832) (633,422)
Accumulated other comprehensive loss............ (417,806) (368,079)
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TOTAL SHAREHOLDERS' EQUITY 34,119,188 34,898,047
- -------------------------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $48,701,384 $51,925,565
- ------------------------------------------ ============ ===========
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)
Six Months Ended
----------------
3/31/02 3/31/01
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Cash flows from operating activities:
Net (loss) income.............................. $ (814,327) $ 2,140,479
Adjustments to reconcile net (loss) income to
cash (used in) provided by operating activities:
Gain on sale of securities................... - (3,022,579)
Depreciation and amortization................ 570,202 555,584
Goodwill amortization........................ 99,226 91,945
Stock compensation expense................... 61,445 -
Deferred income taxes........................ (550,802) 397,507
Change in assets and liabilities:
Accounts receivable........................ 963,236 2,979,127
Inventories................................ (344,494) (600,697)
Prepaid expenses........................... (51,185) 18,072
Other assets............................... 64,169 36,662
Accounts payable........................... (57,379) (326,866)
Accrued compensation and employee benefits. (293,113) (201,975)
Accrued expenses........................... (665,868) 53,033
Unearned service revenue................... (391,364) 499,006
Income taxes payable....................... (211,252) 641,499
Other liabilities.......................... 24,070 (280)
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Net cash (used in) provided by
operating activities................... (1,597,436) 3,260,517
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Cash flows from investing activities:
Proceeds from sale of securities............. - 3,289,813
Capital expenditures, net of disposals....... (306,940) (431,339)
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Net cash (used in) provided by
investing activities................... (306,940) 2,858,474
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Cash flows from financing activities:
Repayments of borrowings under U.S. bank
credit agreement........................... - (1,500,000)
Decrease in borrowings under U.K.
revolving credit agreement................. - (56,462)
Proceeds from exercise of stock options...... 23,750 28,677
Repayments of U.S. term loan................. (450,000) (450,000)
Repayments of other debt..................... (223,537) (163,864)
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Net cash used in financing activities..... (649,787) (2,141,649)
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Effect of exchange rate changes on cash.......... 30,863 29,316
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Net (decrease) increase in cash.................. (2,523,300) 4,006,658
Cash at beginning of year........................ 9,795,148 2,115,118
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Cash at end of period............................ $ 7,271,848 $ 6,121,776
============ ===========
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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March 31, 2002
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Note 1: Basis of Presentation
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The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 2002. 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, 2001. Certain prior year amounts
have been reclassified to conform to current year presentation.
Note 2: Earnings per Share
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Basic earnings (loss) per share (EPS) is computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
maximum dilution that would have resulted from the exercise of stock options and
incremental common shares issuable under a deferred compensation agreement. The
following table provides the components of the basic and diluted EPS
computations for the three month and six month periods ended March 31, 2002 and
2001:
Three Months Six Months
Ended March 31, Ended March 31,
----------------------- ---------------------
2002 2001 2002 2001
---------- ---------- ---------- --------
Basic EPS Computation
Net (loss) income........... $ (467,386) $ 418,009 $ (814,327) $2,140,479
Weighted average
shares outstanding......... 4,655,334 4,647,306 4,651,865 4,642,812
Basic (loss) earnings
per share.................. $ (.10) $ .09 $ (.18) $ .46
========== ========== ========== ==========
Diluted EPS Computation
Net (loss) income........... $ (467,386) $ 418,009 $ (814,327) $2,140,479
Weighted average
shares outstanding....... 4,655,334 4,647,306 4,651,865 4,642,812
Stock options............. - 2,968 - 4,790
---------- ---------- ---------- ----------
Diluted shares outstanding.. 4,655,334 4,650,274 4,651,865 4,647,602
Diluted (loss) earnings
per share.................. $ (.10) $ .09 $ (.18) $ .46
========== ========== ========== ==========
For the three month and six month periods ended March 31, 2002, 83,786 and
63,977 shares, respectively, have been omitted from the calculation of diluted
EPS as their effect would have been antidilutive.
-6-
Note 3: Comprehensive Income
- ------------------------------
The Company's total comprehensive income for the three month and six month
periods ended March 31, 2002 and 2001 was as follows:
Three Months Six Months
Ended March 31, Ended March 31,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ----------- ----------
Net (loss) income.......... $ (467,386) $ 418,009 $ (814,327) $ 2,140,479
Other comprehensive income
(loss), net of tax:
Unrealized gain on
securities.............. - (198,142) - (1,554,962)
Unrealized gain on
derivatives............. 36,771 - 85,786 -
Foreign currency
translation adjustment... (62,408) (51,060) (135,513) 26
---------- ---------- ---------- -----------
Comprehensive (loss) income. $ (493,023) $ 168,807 $ (864,054) $ 585,543
========== ========== ========== ===========
Note 4: Segment and Related Information
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The Company operates in one industry which encompasses the design, manufacture,
assembly and marketing of video surveillance systems and system components for
the electronic protection segment of the security industry. The Company manages
its business segments primarily on a geographic basis. The Company's principal
reportable segments are comprised of its United States (U.S.) and United Kingdom
(Europe) based operations. Its U.S. based operations consists of Vicon
Industries, Inc., the Company's corporate headquarters and principal operating
entity. Its Europe based operations consist of Vicon Industries Limited, a
wholly owned subsidiary which markets and distributes the Company's products
principally within Europe and the Middle East. Other segments include the
operations of Vicon Industries (H.K.) Ltd., a Hong Kong based majority owned
subsidiary which markets and distributes the Company's products principally
within Hong Kong and mainland China, and TeleSite U.S.A., Inc. and subsidiary, a
U.S. and Israeli based designer and producer of digital video products.
The Company evaluates performance and allocates resources based on, among other
things, the net profit or loss for each segment, excluding intersegment sales
and profits. Segment information for the three month and six month periods ended
March 31, 2002 and 2001 was as follows:
Three Months Ended
March 31, 2002 U.S. Europe Other Consolid. Totals
- ------------------ ---------- ---------- --------- ---------- -------
Net sales to
external customers $ 8,624,000 $3,615,000 $ 607,000 $ - $12,846,000
Intersegment
net sales 2,133,000 - 34,000 (2,167,000) -
Net income (loss) (292,000) 183,000 (173,000) (185,000) (467,000)
Total assets 42,079,000 8,191,000 3,546,000 (5,115,000) 48,701,000
-7-
Three Months Ended
March 31, 2001 U.S. Europe Other Consolid. Totals
- ------------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $11,883,000 $4,233,000 $1,044,000 $ - $17,160,000
Intersegment
net sales 1,936,000 - 205,000 (2,141,000) -
Net income (loss) 450,000 359,000 (353,000) (38,000) 418,000
Total assets 46,470,000 7,438,000 3,764,000 (4,655,000) 53,017,000
Six Months Ended
March 31, 2002 U.S. Europe Other Consolid. Totals
- ------------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $17,753,000 $7,097,000 $1,547,000 $ - $26,397,000
Intersegment
net sales 4,234,000 - 178,000 (4,412,000) -
Net income (loss) (725,000) 419,000 (265,000) (243,000) (814,000)
Total assets 42,079,000 8,191,000 3,546,000 (5,115,000) 48,701,000
Six Months Ended
March 31, 2001 U.S. Europe Other Consolid. Totals
- ------------------- ---------- ---------- --------- ---------- -------
Net sales to
external customers $25,290,000 $7,374,000 $1,872,000 $ - $34,536,000
Intersegment
net sales 3,751,000 - 548,000 (4,299,000) -
Net income (loss) 2,451,000 530,000 (758,000) (83,000) 2,140,000
Total assets 46,470,000 7,438,000 3,764,000 (4,655,000) 53,017,000
The consolidating segment above includes the elimination and consolidation of
intersegment transactions.
Note 5: Gain on Sale of Securities
- ------------------------------------
During the three month and six month periods ended March 31, 2001, the Company
realized a $618,000 gain ($408,000 net of tax effect) and a $3.0 million gain
($2.0 million net of tax effect), respectively, on the sale of its remaining
equity interest in Chun Shin Electronics, Inc. (CSE), a South Korean company
which manufactures certain of the Company's proprietary products.
Note 6: Derivative Instruments
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At March 31, 2002, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $3.5 million and
$83,000, respectively, whose aggregate fair value was a liability of
approximately $137,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive loss, net
of tax.
Note 7: Impact of Recently Issued Accounting Standards
- --------------------------------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized but, instead, tested for
impairment at least annually in accordance with the provisions of the Statement.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
-8-
Upon adoption on October 1, 2002, the Company will be required to assign its
goodwill ($1.5 million at March 31, 2002, which relates to its acquisition of
TeleSite U.S.A., Inc. in 1999) to "reporting units" as defined under SFAS No.
142. Goodwill assigned to each of the reporting units will be tested for
impairment as of October 1, 2002 by comparing the carrying amount of the
reporting units' net assets (including goodwill) to its fair value. The Company
has six months from October 1, 2002 to complete this "first step" of this
transitional goodwill impairment test. If the carrying amount of the net assets
of a reporting unit (including goodwill) exceeds the fair value of that
reporting unit, a "second step" of the transitional goodwill impairment test
must be completed as soon as possible, but not later than September 30, 2003.
Due to the complexities involved with the transitional provisions of SFAS No.
142, the Company has not yet completed its evaluation of the possible effects of
its adoption of SFAS No. 142 on the Company's financial condition or results of
operations.
Until the Company's adoption of SFAS No. 142, the Company is continuing to
amortize goodwill over its original 10-year period, and continuing to evaluate
impairment. The Company believes that its ability to recover the carrying amount
of its goodwill is dependent upon, among other things, its ability to
successfully complete the development and marketing of certain new products.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets," which supersedes SFAS No. 121. SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. Unlike SFAS No. 121, an impairment assessment
under SFAS No. 144 will never result in a write-down of goodwill. Rather,
goodwill will be evaluated for impairment under SFAS No. 142, as discussed
above. The Company is required to adopt SFAS No. 144 on October 1, 2002.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's consolidated financial
statements because the impairment assessment under SFAS No. 144 is largely
unchanged from SFAS No. 121.
Note 8: Amendment to U.S. Bank Revolving Credit and Term Loan Agreement
- --------------------------------------------------------------------------
On February 12, 2002, the Company executed an amendment agreement that modified
its unsecured revolving credit and term loan agreement with its bank to provide
for a $5 million secured revolving credit facility through July 2004. Borrowings
under such facility bear interest at the bank's prime rate or, at the Company's
option, LIBOR plus 190 basis points. The amendment agreement grants the bank a
security interest in all the assets of the Company and, among other things,
effectively modified the financial covenants contained in all the existing loan
and mortgage agreements with this bank.
As of March 31, 2002, the Company was in compliance with the financial covenants
of its debt agreements. Should violations occur in the future, the Company
could, among other things, seek a waiver of such violations, renegotiate the
credit agreement or seek an alternative credit arrangement with a new lender.
There can be no assurance that the Company would be successful with these
efforts.
Current and long-term debt maturing in the six months ended September 30, 2002
and in each of the subsequent fiscal years approximates $635,000 for the six
months ended September 30, 2002, $1,300,000 in 2003, $316,000 in 2004, $324,000
in 2005, $330,000 in 2006 and $2,053,000 thereafter.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Results of Operations
- ---------------------
Three Months Ended March 31, 2002 Compared with March 31, 2001
- --------------------------------------------------------------
Net sales for the quarter ended March 31, 2002 decreased $4.3 million or 25% to
$12.8 million compared with $17.1 million in the year ago period. Domestic sales
decreased $3.5 million or 31% to $8.0 million compared with $11.5 million in the
year ago period principally as a result of a $3.4 million decline in indirect
sales to the United States Postal Service (USPS) under a former national supply
contract. Indirect sales to the USPS for the quarter ended March 31, 2002
decreased 76% to $1.1 million compared with $4.5 million in the year ago period.
In March 2001, the USPS announced a freeze on all its capital spending due to a
severe projected budget deficit. As a result, the Company has since experienced
a material reduction in its USPS order rate. In addition, the USPS supply
contract had expired on June 30, 2001 with no new contract being awarded. The
Company has since been named as one of a number of pre-approved suppliers in the
latest USPS published specification for video systems. International sales for
the quarter ended March 31, 2002 decreased 14% to $4.8 million compared with
$5.6 million in the year ago period.
Gross profit margins for the second quarter of fiscal 2002 decreased to 33.0%
compared with 33.3% in the year ago period. The margin decline was principally
due to the effect of fixed production costs relative to the quarter's lower
sales.
Operating expenses for the second quarter of fiscal 2002 were $4.9 million or
38.1% of net sales compared with $5.6 million or 32.6% of net sales in the year
ago period. The decrease in operating expenses principally resulted from a
decline in sales related costs. The Company continued its investment in new
product development, incurring $1.0 million of engineering and development
expenses in the quarter.
The Company incurred an operating loss of $663,000 for the second fiscal quarter
of 2002 compared with operating income of $108,000 in the year ago period
principally as a result of lower sales.
In the prior year quarter, the Company realized a $618,000 gain ($408,000 net of
tax effect) on the sale of its remaining equity interest in Chun Shin
Electronics, Inc., a South Korean company which, among other things,
manufactures certain of the Company's proprietary products.
Interest expense decreased to $78,000 for the second quarter of fiscal 2002
compared with $117,000 in the year ago period principally as a result of the
paydown of bank borrowings.
The Company recorded an income tax benefit of $228,000 for the second quarter of
fiscal 2002 compared with income tax expense of $242,000 in the year ago period.
As a result of the foregoing, the Company incurred a net loss of $467,000 for
the second quarter of fiscal 2002 compared with net income of $418,000 in the
year ago period.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Results of Operations
- ---------------------
Six Months Ended March 31, 2002 Compared with March 31, 2001
- ------------------------------------------------------------
Net sales for the six months ended March 31, 2002 decreased $8.1 million or 24%
to $26.4 million compared with $34.5 million in the year ago period. Domestic
sales decreased $7.5 million or 31% to $16.5 million compared with $24.0 million
in the year ago period principally as a result of a $7.1 million decline in
indirect sales to the United States Postal Service (USPS) under a former
national supply contract. Indirect sales to the USPS for the six months ended
March 31, 2002 decreased 77% to $2.2 million compared with $9.3 million in the
year ago period. In March 2001, the USPS announced a freeze on all its capital
spending due to a severe projected budget deficit. As a result, the Company has
since experienced a material reduction in its USPS order rate. In addition, the
USPS supply contract had expired on June 30, 2001 with no new contract being
awarded. The Company has since been named as one of a number of pre-approved
suppliers in the latest USPS published specification for video systems.
International sales for the six months ended March 31, 2002 decreased 6% to $9.9
million compared with $10.5 million in the year ago period. The backlog of
unfilled orders was $6.9 million at March 31, 2002 compared with $9.3 million at
March 31, 2001.
Gross profit margins for the first six months of fiscal 2002 decreased to 33.0%
compared with 33.6% in the year ago period. The margin decline was principally
due to the effect of fixed production costs relative to the quarter's lower
sales.
Operating expenses for the first six months of fiscal 2002 were $9.9 million or
37.3% of net sales compared with $11.1 million or 32.1% of net sales in the year
ago period. The decrease in operating expenses principally resulted from a
decline in sales related costs. The Company continued its investment in new
product development, incurring $2.0 million of engineering and development
expenses in the first six months of fiscal 2002.
The Company incurred an operating loss of $1.1 million for the first six months
of 2002 compared with operating income of $535,000 in the year ago period
principally as a result of lower sales.
In the prior year period, the Company realized a $3.0 million gain ($2.0 million
net of tax effect) on the sale of its remaining equity interest in Chun Shin
Electronics, Inc., a South Korean company which, among other things,
manufactures certain of the Company's proprietary products.
Interest expense decreased to $176,000 for the first six months of fiscal 2002
compared with $277,000 in the year ago period principally as a result of the
paydown of bank borrowings.
The Company recorded an income tax benefit of $398,000 for the first six months
of fiscal 2002 compared with income tax expense of $1.2 million in the year ago
period.
As a result of the foregoing, the Company incurred a net loss of $814,000 for
the first six months of fiscal 2002 compared with net income of $2.1 million in
the year ago period.
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Financial Condition
- ---------------------------------
Net cash used in operating activities was $1.6 million for the first six months
of fiscal 2002 due in part to the $814,000 net loss for the period. Net cash
used in investing activities was $307,000 for the first six months of fiscal
2002 relating to general capital expenditures. Net cash used in financing
activities was $650,000, which represented scheduled repayments under bank
mortgage and term loans. As a result of the foregoing, cash decreased by $2.5
million for the first six months of fiscal 2002 after the nominal effect of
exchange rate changes on the cash position of the Company.
On February 12, 2002, the Company executed an amendment agreement with its bank
that modified its unsecured revolving credit and term loan agreement to provide
for a $5 million secured revolving credit facility through July 2004. Borrowings
under such facility bear interest at the bank's prime rate or, at the Company's
option, LIBOR plus 190 basis points (4.75% and 4.23%, respectively, at March 31,
2002). The amendment agreement grants the bank a security interest in all the
assets of the Company and, among other things, effectively modified the
financial covenants contained in all the existing loan and mortgage agreements
with this bank. These covenants require the Company to maintain certain levels
of earnings and ratios of debt service coverage and debt to tangible net worth.
The Company also maintains a bank overdraft facility of 1,000,000 Pounds
Sterling (approximately $1,430,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. At March 31, 2002, there were no
outstanding borrowings under this facility.
The Company believes that it has sufficient cash and funds available under its
credit agreements to meet its anticipated operating, capital expenditures and
debt service requirements for at least the next twelve months. However, the
Company has experienced reduced sales levels and operating losses in recent
periods which, if continued, could limit the Company's ability to draw upon its
bank credit facilities.
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,
2001 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 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.
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The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write- downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income in
future and available carryback years during the periods over which net temporary
tax differences become deductible. Should the Company determine in the future
that it is not likely it will be able to realize the benefits of recorded
deferred tax assets, a valuation allowance will need to be established that
would result in the charge-off of previously reported tax benefits.
As further described in Note 7, the Company has not yet adopted the provisions
of SFAS No. 142 and determined its possible effects on the Company's financial
condition or results of operations. The Company continues to amortize its
recorded goodwill over its original 10-year period and continues to evaluate
impairment. The Company believes that its ability to recover the carrying amount
of its goodwill is dependent upon, among other things, its ability to
successfully complete the development and marketing of certain new product
lines.
"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" and "Liquidity and Financial Condition" 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.
-13-
PART II
-------
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
The Company has no material outstanding litigation.
ITEM 2 - CHANGES IN SECURITIES
- ------ ---------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
The Company's annual meeting was held on May 7, 2002.
Proposal 1: Election of Directors.
The following directors were elected by the votes indicated:
For Withheld
--- --------
Kenneth M. Darby 3,988,649 379,160
Arthur D. Roche 3,921,019 446,790
The terms of the following directors continued after the meeting:
Milton F. Gidge
Peter F. Neumann
W. Gregory Robertson
Kazuyoshi Sudo
Proposal 2: Amendment to the Company's Certificate of Incorporation to
increase the number of shares of Common Stock, par value $.01 per
share, authorized for issuance from 10 million shares to 25 million
shares.
The proposal was approved by the votes indicated:
For Against Abstain
--- ------- -------
3,751,756 603,793 12,260
Proposal 3: Approval of the 2002 Incentive Stock Option Plan, covering
200,000 shares of Common Stock.
The proposal was approved by the votes indicated:
For Against Abstain
--- ------- -------
1,809,322 813,742 56,030
-14-
Proposal 4: Approval of the 2002 Non-Qualified Stock Option Plan,
covering 200,000 shares of Common Stock.
The proposal was approved by the votes indicated:
For Against Abstain
--- ------- -------
1,800,482 822,352 56,260
Proposal 5: Ratification of Auditors.
The selection of auditors was approved by the votes indicated:
For Against Abstain
--- ------- -------
4,237,549 39,900 90,360
ITEM 5 - OTHER INFORMATION
- ------ -----------------
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
Exhibit
Number Description
------- -----------
10 Material Contracts
(.1) Advice of Borrowing Terms between the Registrant
and National Westminster Bank PLC dated March 25,
2002.
No Form 8-K was required to be filed during the current quarter.
-15-
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.
May 14, 2002
By:/s/ Kenneth M. Darby By:/s/ John M. Badke
- ----------------------- -----------------------
Kenneth M. Darby John M. Badke
Chairman and Vice President, Finance
Chief Executive Officer Chief Financial Officer
-16-