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, 2003 Commission File No. 1-7939
- --------------------------------- ---------------------------
Vicon Industries, Inc.
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New York State 11-2160665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
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(Former name, address, and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 under the Securities Exchange Act of 1934)
Yes No X
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At March 31, 2003, the registrant had outstanding 4,637,662 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
------------------
3/31/03 3/31/02
------- -------
Net sales $13,081,881 $12,846,138
Cost of sales 8,440,887 8,610,879
--------- ---------
Gross profit 4,640,994 4,235,259
Operating expenses:
Selling expense 2,832,963 2,877,749
General & administrative expense 989,671 996,483
Engineering & development expense 1,341,116 1,024,250
--------- ---------
5,163,750 4,898,482
Operating loss (522,756) (663,223)
Interest expense 64,439 78,118
Interest income (40,380) (45,955)
--------- ---------
Loss before income taxes (546,815) (695,386)
Income tax expense (benefit) (Note 11) 2,187,957 (228,000)
--------- ---------
Net loss $(2,734,772) $ (467,386)
=========== ===========
Loss per share:
Basic $ (.59) $ (.10)
========= =======
Diluted $ (.59) $ (.10)
========= =======
Shares used in computing
loss per share:
Basic 4,641,213 4,655,334
Diluted 4,641,213 4,655,334
See Accompanying Notes to Condensed Consolidated Financial Statements.
- 1 -
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
----------------
3/31/03 3/31/02
------- -------
Net sales $25,099,895 $26,396,971
Cost of sales 16,558,346 17,689,242
---------- ----------
Gross profit 8,541,549 8,707,729
Operating expenses:
Selling expense 5,614,115 5,835,878
General & administrative expense 2,104,023 1,994,753
Engineering & development expense 2,416,562 2,021,337
---------- ----------
10,134,700 9,851,968
Operating loss (1,593,151) (1,144,239)
Interest expense 131,918 176,052
Interest income (101,275) (107,964)
---------- ----------
Loss before income taxes (1,623,794) (1,212,327)
Income tax expense (benefit) (Note 11) 1,809,957 (398,000)
---------- ----------
Loss before cumulative effect of
a change in accounting principle (3,433,751) (814,327)
Cumulative effect of a change in
accounting principle (Note 8) (1,372,606) -
---------- ----------
Net loss $(4,806,357) $ (814,327)
=========== ===========
Basic and diluted loss per share:
Loss before cumulative effect of
a change in accounting principle $ (.74) $ (.18)
Cumulative effect of a change in
accounting principle (.30) -
---------- ---------
Net loss $ (1.04) $ (.18)
========== =========
Shares used in computing
loss per share:
Basic 4,641,993 4,651,865
Diluted 4,641,993 4,651,865
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS 3/31/03 9/30/02
- ------ ------- -------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 6,774,960 $ 9,771,804
Marketable securities 1,543,456 -
Accounts receivable, net 10,053,572 10,127,526
Accounts receivable - related parties 76,699 273,464
Inventories:
Parts, components, and materials 1,862,099 2,802,779
Work-in-process 2,066,108 1,275,057
Finished products 8,876,510 9,470,823
--------- ---------
12,804,717 13,548,659
Recoverable income taxes 1,937,728 1,712,728
Deferred income taxes - 673,574
Prepaid expenses 584,881 496,399
--------- ---------
TOTAL CURRENT ASSETS 33,776,013 36,604,154
Property, plant and equipment 17,337,396 16,997,129
Less accumulated depreciation and amortization (9,869,262) (9,331,102)
---------- ----------
7,468,134 7,666,027
Goodwill, net of accumulated amortization - 1,372,606
Deferred income taxes - 1,283,784
Other assets 477,939 499,918
--------- ---------
TOTAL ASSETS $41,722,086 $47,426,489
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt 702,330 1,304,227
Accounts payable - trade 1,842,524 1,740,919
Accounts payable - related parties 26,558 643,093
Accrued compensation and employee benefits 2,062,791 1,837,519
Accrued expenses 1,781,154 1,596,288
Unearned revenue 1,893,646 1,514,121
Income taxes payable 188,007 140,741
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TOTAL CURRENT LIABILITIES 8,497,010 8,776,908
Long-term debt 2,878,302 3,040,061
Unearned revenue 921,179 1,267,337
Other long-term liabilities 749,606 803,476
SHAREHOLDERS' EQUITY
Common stock, par value $.01 48,290 48,239
Capital in excess of par value 21,776,120 21,760,002
Retained earnings 7,924,057 12,730,414
--------- ----------
29,748,467 34,538,655
Less treasury stock, at cost (895,081) (842,024)
Accumulated other comprehensive loss (177,397) (157,924)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 28,675,989 33,538,707
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,722,086 $47,426,489
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
----------------
3/31/03 3/31/02
------- -------
Cash flows from operating activities:
Net loss $(4,806,357) $ (814,327)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 532,677 570,202
Goodwill amortization - 99,226
Stock compensation expense - 61,445
Deferred income taxes 1,853,957 (550,802)
Cumulative effect of a change in
accounting principle 1,372,606 -
Change in assets and liabilities:
Accounts receivable 90,952 1,010,457
Accounts receivable - related parties 196,765 (47,221)
Inventories 759,938 (344,494)
Recoverable income taxes (225,000) -
Prepaid expenses (88,585) (51,185)
Other assets 21,980 64,169
Accounts payable - trade 103,849 145,365
Accounts payable - related parties (616,535) (202,744)
Accrued compensation and employee benefits 225,242 (293,113)
Accrued expenses 184,398 (665,868)
Unearned revenue 33,367 (391,364)
Income taxes payable 46,805 (211,252)
Other liabilities 45,466 24,070
------ ------
Net cash used in operating activities (268,475) (1,597,436)
Cash flows from investing activities:
Capital expenditures (325,651) (306,940)
Purchases of marketable securities (1,539,708) -
--------- ---------
Net cash used in investing activities (1,865,359) (306,940)
Cash flows from financing activities:
Repayments of U.S. term loan (450,000) (450,000)
Repayments of other long-term debt (316,198) (223,537)
Proceeds from exercise of stock options 16,169 23,750
Repurchases of common stock (53,057) -
--------- ---------
Net cash used in financing activities (803,086) (649,787)
Effect of exchange rate changes on cash (59,924) 30,863
Net decrease in cash (2,996,844) (2,523,300)
Cash at beginning of year 9,771,804 9,795,148
--------- ---------
Cash at end of period $ 6,774,960 $ 7,271,848
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003
Note 1: Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six months ended March 31, 2003 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the fiscal year ended September 30, 2002. Certain prior year amounts
have been reclassified to conform to the current year presentation.
Note 2: Marketable Securities
- ------------------------------
Marketable securities consist of mutual fund investments in U.S. government debt
securities. Such securities are stated at market value and are classified as
available-for-sale under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 115, with unrealized gains and
losses reported in other comprehensive income as a component of shareholders'
equity. The cost of such securities at March 31, 2003 was $1,539,708, with
$5,623 of unrealized gains and $1,875 of unrealized losses reported for the
six-month period ended.
Note 3: Accounts Receivable
- ----------------------------
Accounts receivable is stated net of an allowance for doubtful accounts of
$1,281,000 and $1,077,000 as of March 31, 2003 and September 30, 2002,
respectively.
Note 4: Earnings per Share
- ---------------------------
Basic earnings (loss) per share (EPS) is computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
maximum dilution that would have resulted from the exercise of stock options and
incremental common shares issuable under a deferred compensation agreement. The
weighted average number of shares of common stock used in determining basic and
diluted EPS was 4,641,213 and 4,655,334 for the three months ended March 31,
2003 and 2002, respectively. The weighted average number of shares of common
stock used in determining basic and diluted EPS was 4,641,993 and 4,651,865 for
the six months ended March 31, 2003 and 2002, respectively.
For the three months ended March 31, 2003 and 2002, 46,063 and 83,786 shares,
respectively, have been omitted from the calculation of diluted EPS as their
effect would have been antidilutive. For the six months ended March 31, 2003 and
2002, 47,169 and 63,977 shares, respectively, have been omitted from the
calculation of diluted EPS as their effect would have been antidilutive.
-5-
Note 5: Comprehensive Income (Loss)
- -------------------------------------
The Company's total comprehensive loss for the three month and six month periods
ended March 31, 2003 and 2002 was as follows:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss $(2,734,772) $ (467,386) $(4,806,357) $(814,327)
Other comprehensive income
(loss), net of tax:
Net unrealized gains
on securities 32 - 3,748 -
Unrealized gain (loss)
on derivatives 13,519 36,771 (4,065) 85,786
Foreign currency
translation adjustment (176,166) (62,408) (19,156) (135,513)
----------- ---------- ------------ ---------
Comprehensive loss $(2,897,387) $ (493,023) $(4,825,830) $(864,054)
=========== ========== =========== =========
The accumulated other comprehensive loss balances at March 31, 2003 and
September 30, 2002 consisted of the following:
March 31, September 30,
2003 2002
---- ----
Foreign currency translation adjustment $ 23,641 $ 42,797
Unrealized loss on derivatives, net of tax (204,786) (200,721)
Unrealized gain on securities, net of tax 3,748 -
--------- ---------
Accumulated other comprehensive loss $(177,397) $(157,924)
========= =========
Note 6: Segment and Related Information
- -----------------------------------------
The Company operates in one industry which encompasses the design, manufacture,
assembly and marketing of video surveillance systems and system components for
the electronic protection segment of the security industry. The Company manages
its business segments primarily on a geographic basis. The Company's principal
reportable segments are comprised of its United States (U.S.) and United Kingdom
(Europe) based operations. Its U.S. based operations consists of Vicon
Industries, Inc., the Company's corporate headquarters and principal operating
entity. Its Europe based operations consist of Vicon Industries Limited, a
wholly owned subsidiary which markets and distributes the Company's products
principally within Europe and the Middle East. Other segments include the
operations of Vicon Industries (H.K.) Ltd., a Hong Kong based majority owned
subsidiary which markets and distributes the Company's products principally
within Hong Kong and mainland China, and TeleSite U.S.A., Inc. and subsidiary, a
U.S. and Israeli based designer and producer of digital video products.
-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 and six month periods ended
March 31, 2003 and 2002 was as follows:
Three Months Ended
March 31, 2003 U.S. Europe Other Consolid. Totals
- -------------- ---- ------ ----- --------- ------
Net sales to
external customers $ 8,459,000 $4,268,000 $ 355,000 $ - $13,082,000
Intersegment
net sales 1,653,000 - 707,000 (2,360,000) -
Net income (loss) (2,558,000) 140,000 (254,000) (63,000) (2,735,000)
Total assets 33,683,000 8,978,000 3,542,000 (4,481,000) 41,722,000
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
Six Months Ended
March 31, 2003 U.S. Europe Other Consolid. Totals
- -------------- ---- ------ ----- --------- ------
Net sales to
external customers $16,215,000 $8,093,000 $ 792,000 $ - $25,100,000
Intersegment
net sales 3,056,000 - 1,267,000 (4,323,000) -
Net income (loss) (3,401,000) 361,000 (319,000) (1,447,000) (4,806,000)
Total assets 33,683,000 8,978,000 3,542,000 (4,481,000) 41,722,000
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
The consolidating segment information above includes the elimination and
consolidation of intersegment transactions.
Note 7: Derivative Instruments
- --------------------------------
At March 31, 2003, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $2.3 million and $2.8
million, respectively, whose aggregate fair value was a liability of
approximately $205,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive loss.
-7-
Note 8: Goodwill
- ------------------
The Company adopted SFAS No. 142 on October 1, 2002, and accordingly, has
discontinued amortization of goodwill as of that date. During the six month
period ended March 31, 2003, the Company completed the transitional goodwill
impairment testing required under SFAS No. 142. In accordance with SFAS No. 142,
such testing included a comparison of the fair value of each of the Company's
reporting units to the carrying amounts of each unit's net assets, and a
determination of the implied fair value of each reporting unit's goodwill. Based
upon an independent valuation conducted as of October 1, 2002, and the results
of the transitional impairment testing, the Company recognized an impairment
charge of approximately $1.4 million (primarily resulting from a change in
measurement from undiscounted to discounted cash flows), as a cumulative effect
of a change in accounting principle for the six months ended March 31, 2003.
The following table presents pro forma loss and loss per share data, before the
cumulative effect of a change in accounting principle, restated to include the
retroactive impact of the adoption of SFAS No. 142:
Three Months Six Months
Ended March 31, Ended March 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
Reported loss before
cumulative effect of
a change in accounting
principle $(2,734,772) $(467,386) $(3,433,751) $(814,327)
Add back:
goodwill amortization - 49,613 - 99,226
----------- --------- ----------- ---------
Pro forma loss before
cumulative effect of
a change in accounting
principle $(2,734,772) $(417,773) $(3,433,751) $(715,101)
=========== ========= =========== =========
Basic and diluted loss per share:
Reported loss per share
before cumulative effect
of a change in accounting
principle $ (.59) $ (.10) $ (.74) $ (.18)
Goodwill amortization - .01 - .02
-------- ------- --------- ---------
Pro forma loss per share $ (.59) $ (.09) $ (.74) $ (.15)
======== ======= ========= =========
-8-
Note 9: Accrued Warranty Obligation
- -------------------------------------
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor
recognize, at the inception of certain guarantees, a liability for the fair
value of the obligation undertaken in issuing such guarantee. FIN 45 also
requires additional disclosure requirements about the guarantor's obligations
under certain guarantees that it has issued.
The initial recognition and measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements of this interpretation are
effective for financial statement periods ending after December 15, 2002. The
Company adopted the disclosure requirements of this interpretation in the prior
quarter ended December 31, 2002. The adoption of this interpretation did not
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.
The Company recognizes the estimated cost associated with its standard warranty
on products at the time of sale. The estimate is based on historical warranty
claim cost experience. The following is a summary of the changes in the
Company's accrued warranty obligation (which is included in accrued expenses)
for the reporting period:
Beginning Balance as of September 30, 2002 $ 190,000
Deduct: Payments (81,000)
Add: Provision 141,000
-------
Ending Balance as of March 31, 2003 $ 250,000
=========
Note 10: Stock-Based Compensation
- -----------------------------------
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for its stock-based compensation plans.
The Company follows Statement of Financial Accounting Standards (SFAS) No. 123
"Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB
Statement No. 123" for disclosure purposes. SFAS No. 148, issued in December
2002, provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require disclosures in annual and interim financial statements regarding the
method of accounting used for stock-based compensation and the effect of the
method used on reported results. The application of the disclosure portion of
this standard will have no impact on the Company's consolidated financial
position or results of operations.
-9-
In the Company's condensed consolidated financial statements, no compensation
expense has been recognized for stock option grants issued under any of the
Company's stock option plans. Had compensation expense for stock option grants
issued been determined under the fair value method of SFAS No. 123, the
Company's net loss and loss per share (EPS) for the three and six month periods
ended March 31, 2003 and 2002 would have been:
Three Months Six Months
Ended March 31, Ended March 31,
2003 2002 2003 2002
---- ---- ---- ----
Reported loss before
cumulative effect of a
change in accounting
principle $(2,734,772) $ (467,386) $(3,433,751) $(814,327)
Stock-based compensation
cost, net of tax (51,210) (14,785) (91,698) (27,108)
----------- ---------- ----------- ---------
Pro forma loss before
cumulative effect of a
change in accounting
principle $(2,785,982) $ (482,171) $(3,525,449) $(841,435)
=========== ========== =========== =========
Reported basic and diluted
EPS before cumulative
effect of a change in
accounting principle $(.59) $(.10) $(.74) $(.18)
Pro forma basic and diluted
EPS before cumulative
effect of a change in
accounting principle $(.60) $(.10) $(.76) $(.18)
Reported net loss $(2,734,772) $ (467,386) $(4,806,357) $(814,327)
Stock-based compensation
cost, net of tax (51,210) (14,785) (91,698) (27,108)
----------- ---------- ----------- ---------
Pro forma net loss $(2,785,982) $ (482,171) $(4,898,055) $(841,435)
=========== ========== =========== =========
Reported basic and
diluted EPS $(.59) $(.10) $(1.04) $(.18)
Pro forma basic and
diluted EPS $(.60) $(.10) $(1.06) $(.18)
-10-
Note 11: Income Taxes
- -----------------------
In the quarter ended March 31, 2003, the Company recognized a $2.1 million
charge to provide a valuation allowance against its deferred tax assets due to
the uncertainty of future realization. The establishment of such valuation
allowance was determined to be appropriate during the current period due to
updated judgments of future results in light of the Company's operating losses
in current and recent years and the inherent uncertainties of predicting future
operating results in periods over which such net tax differences become
deductible. Income tax expense for the six month period ended March 31, 2003
includes the recognition of an available tax effected net operating loss
carryback of $225,000 and a net operating loss carryforward benefit of $253,000
recorded in the prior quarter ended December 31, 2002.
Income tax expense for the three and six month periods ended March 31, 2003 also
included a provision for foreign tax expense of $81,000 and $181,000,
respectively.
For income tax purposes, the Company had available at March 31, 2003, a tax
effected net operating loss carryback of approximately $1.9 million included in
recoverable income taxes, for which the Company plans to file a carryback claim
to obtain a refund of previously paid taxes.
Note 12: New Accounting Standards
- -----------------------------------
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit and Disposal Activities". SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit and disposal activities initiated after
December 31, 2002. The Company adopted SFAS No. 146, which did not have an
impact on the Company's consolidated financial statements.
In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance on the timing and method of revenue
recognition for sales arrangements that include the delivery of more than one
product or service. EITF is effective prospectively for arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is currently
analyzing the impact of its adoption on its financial statements.
Note 13: Contingencies
- ------------------------
On May 15, 2003, the Company was served with a summons and complaint in a patent
infringement suit that named the Company and thirteen other defendants. The
alleged infringement relates to the Company's camera dome systems, which is a
significant product line. Among other things, the suit seeks injunctive relief
and unspecified damages. At this time, an assessment as to the likelihood of an
unfavorable outcome can not be made as the Company and its counsel have not had
sufficient time to evaluate the complaint. However, the Company intends to
vigorously defend itself in this matter.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------
Results of Operations
- ---------------------
Three Months Ended March 31, 2003 Compared with March 31, 2002
- --------------------------------------------------------------
Net sales for the quarter ended March 31, 2003 increased $.2 million or 2% to
$13.1 million compared with $12.9 million in the year ago period. Domestic sales
decreased $.3 million or 3% to $7.7 million compared with $8.0 million in the
year ago period. Such decrease was due principally to the recent downturn in the
U.S. economy. International sales for the March 31, 2003 quarter increased $.5
million or 10% to $5.4 million compared with $4.9 million in the year ago period
principally as a result of favorable exchange rate changes as the British pound
and Eurodollar strengthened against the U.S. dollar.
Gross profit margins for the second quarter of fiscal 2003 increased to 35.5%
compared with 33.0% in the year ago period. The margin increase was principally
due to the introduction of the Company's new digital video product line and
lower fixed production costs.
Operating expenses for the second quarter of fiscal 2003 were $5.2 million or
39.5% of net sales compared with $4.9 million or 38.1% of net sales in the year
ago period. The Company continued to invest in new product development in the
current quarter, incurring $1.3 million of engineering and development expenses
compared with $1.0 million in the year ago period. The current quarter
engineering and development expenses included a performance based compensation
charge of $325,000 associated with the introduction of the Company's new digital
video product line.
The Company incurred an operating loss of $523,000 for the second fiscal quarter
of 2003 compared with an operating loss of $663,000 in the year ago period
principally as a result of increased operating expenses.
Interest expense decreased to $64,000 for the second quarter of fiscal 2003
compared with $78,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense for the second quarter of fiscal 2003 was $2.2 million
compared with an income tax benefit of $228,000 in the year ago period. In the
quarter ended March 31, 2003, the Company recognized a $2.1 million income tax
charge to provide a valuation allowance against its deferred tax assets due to
the uncertainty of future realization. The establishment of such valuation
allowance was determined to be appropriate as a result 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.
As a result of the foregoing, the Company incurred a net loss of $2.7 million
for the second quarter of fiscal 2003 compared with a net loss of $467,000 in
the year ago period.
-12-
Results of Operations
- ---------------------
Six Months Ended March 31, 2003 Compared with March 31, 2002
- ------------------------------------------------------------
Net sales for the six months ended March 31, 2003 decreased $1.3 million or 5%
to $25.1 million compared with $26.4 million in the year ago period. Domestic
sales decreased $2.0 million or 12% to $14.5 million compared with $16.5 million
in the year ago period. Such decrease was due principally to the recent downturn
in the U.S. economy. International sales for the six months ended March 31, 2003
increased $.7 million or 8% to $10.6 million compared with $9.9 million in the
year ago period principally as a result of favorable exchange rate changes as
the British pound and Eurodollar strengthened against the U.S. dollar.
Gross profit margins for the first six months of fiscal 2003 increased to 34.0%
compared with 33.0% in the year ago period. The margin increase was principally
due to a more favorable sales mix of higher margin products as the Company
introduced its new digital video product line in the second quarter ended March
31, 2003.
Operating expenses for the first six months of fiscal 2003 were $10.1 million or
40.4% of net sales compared with $9.9 million or 37.3% of net sales in the year
ago period. The Company continued to invest in new product development in the
current year period, incurring $2.4 million of engineering and development
expenses compared with $2.0 million in the year ago period.
The Company incurred an operating loss of $1.6 million for the first six months
of 2003 compared with an operating loss of $1.1 million in the year ago period
principally as a result of lower sales and higher operating expenses.
Interest expense decreased to $132,000 for the first six months of fiscal 2003
compared with $176,000 in the year ago period principally as a result of the
paydown of bank borrowings.
Income tax expense for the first six months of fiscal 2003 was $1.8 million
compared with an income tax benefit of $398,000 in the year ago period. In the
second quarter ended March 31, 2003, the Company recognized a $2.1 million
income tax charge to provide a valuation allowance against its deferred tax
assets due to the uncertainty of future realization. Such charge was reduced by
the recognition of an available tax effected net operating loss carryback of
$225,000 and a net operating loss carryforward benefit of $253,000 recorded in
the first quarter ended December 31, 2002.
During the six months ended March 31, 2003, the Company completed its required
goodwill impairment tests as of October 1, 2002 and determined that the carrying
amount of goodwill was impaired when tested pursuant to the requirements of the
new standard. As a result, a goodwill impairment charge of $1.4 million was
recognized as the cumulative effect of a change in accounting principle for the
six month period.
As a result of the foregoing, the Company incurred a net loss of $4.8 million
for the first six months of fiscal 2003 compared with a net loss of $814,000 in
the year ago period.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Liquidity and Financial Condition
- ---------------------------------
Net cash used in operating activities was $268,000 for the first six months of
fiscal 2003. The net loss of $4.8 million for the period included non-cash
charges of $1.9 million for deferred income taxes and $1.4 million for goodwill
impairment. Such net loss was further reduced by a non-cash charge of $533,000
for depreciation and amortization and a $760,000 reduction in inventories. Net
cash used in investing activities was $1.9 million for the first six months of
fiscal 2003 relating to the purchase of $1.5 million of marketable securities,
which consist of mutual fund investments in U.S. government securities, and
$326,000 of general capital expenditures. Net cash used in financing activities
was $803,000, which primarily represented scheduled repayments of bank mortgage
and term loans. As a result of the foregoing, cash decreased by $3.0 million for
the first six months of fiscal 2003 after the effect of exchange rate changes on
the cash position of the Company. At March 31, 2003, the Company had an
available tax effected net operating loss carryback of approximately $1.9
million, for which it plans to file a carryback claim in the near term to obtain
a refund of previously paid taxes.
The Company has a $5 million secured revolving credit facility with a bank that
expires in July 2004 and a $375,000 outstanding term loan with the same bank
that matures in August 2003. Borrowings under the revolving credit facility bear
interest at the bank's prime rate or, at the Company's option, LIBOR plus 190
basis points (4.25% and 3.19%, respectively, at March 31, 2003). The credit
agreement includes a provision that waives the Company's obligation to comply
with all financial covenants contained in the agreements so long as there are no
outstanding borrowings under the revolving credit facility and the Company
maintains certain compensating balances. At this time, the Company does not
anticipate that it will be obligated to comply with these financial covenants in
the near term. At March 31, 2003 and September 30, 2002, there were no
outstanding borrowings under this facility.
The Company also maintains a bank overdraft facility of one million Pounds
Sterling (approximately $1,580,000) in the U.K. to support local working capital
requirements of Vicon Industries Limited. This facility expires in March 2004.
At March 31, 2003 and September 30, 2002, there were no outstanding borrowings
under this facility.
Current and long-term debt maturing in the remaining six months ended September
30, 2003 and in each of the subsequent fiscal years approximates $539,000 for
the remaining six months ended September 30, 2003, $321,000 in 2004, $329,000 in
2005, $336,000 in 2006, $316,000 in 2007 and $1,740,000 thereafter.
The Company occupies certain facilities, or is contingently liable, under
operating leases that expire at various dates through 2008. The leases, which
cover periods from three to eight years, generally provide for renewal options
at specified rental amounts. The aggregate operating lease commitment at March
31, 2003 was $591,000 with minimum rentals for the fiscal years shown as
follows: for the remaining six months ended September 30, 2003 - $157,000; 2004
- - $272,000; 2005 - $98,000; 2006 - $24,000; 2007 - $24,000; 2008 and thereafter
- - $16,000.
-14-
The Company entered into certain consulting and incentive compensation
agreements that provide for the payout of up to $810,000 of fees and
compensation upon the completion and sale of a specified number of units of a
newly developed product line. The Company incurred $325,000 of expenses relating
to these agreements in the second fiscal quarter ended March 31, 2003 and
believes that it is likely that it will incur the majority of the remaining
arrangement over the last two quarters of this fiscal year.
The Company believes that it has sufficient cash to meet its anticipated
operating, capital expenditures and debt service requirements for at least the
next twelve months. The Company has experienced reduced sales levels and
incurred operating losses in past periods which limits the Company's ability to
draw upon its bank credit facilities, if needed.
Critical Accounting Policies
- ----------------------------
The Company's significant accounting policies are fully described in Note 1 to
the Company's consolidated financial statements included in its September 30,
2002 Annual Report on Form 10-K. Management believes the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue (including shipping
and handling fees) is generally recognized when products are sold and title is
passed to the customer. Under arrangements that involve the sale of product
combined with the provision of services, revenue is generally recognized for
each element of the arrangement upon delivery or performance provided that (i)
the undelivered element is not essential to the functionality of the delivered
element and (ii) there is objective evidence of the fair value of the
undelivered elements. Advance service billings under a national supply contract
with one customer are deferred and recognized as revenues on a pro-rata basis
over the term of the service agreement. Shipping and handling costs are included
in cost of sales.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write-downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
-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 and estimated net asset liquidation values. If the sum of the expected
future undiscounted cash flows, plus estimated asset liquidation values, is less
than the carrying amount of the asset, a loss would be recognized for the
difference between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
In the quarter ended March 31, 2003, the Company recognized a $2.1 million
charge to provide a valuation allowance against its deferred tax assets due to
the uncertainty of future realization. The establishment of such valuation
allowance was determined to be appropriate during the current period due to
updated judgments in light of the Company's operating losses in current and
recent years and the inherent uncertainties of predicting future operating
results in periods over which such net tax differences become deductible. The
Company plans to provide a full valuation allowance against its deferred tax
assets until such time that it can achieve a sustained level of profitability or
other positive evidence arises that would demonstrate an ability to recover such
assets.
New Accounting Standard Not Yet Adopted
- ---------------------------------------
In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative
consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple
Deliverables", which provides guidance on the timing and method of revenue
recognition for sales arrangements that include the delivery of more than one
product or service. EITF is effective prospectively for arrangements entered
into in fiscal periods beginning after June 15, 2003. The Company is currently
analyzing the impact of its adoption on its financial statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Statements in this Report on Form 10-Q and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Results of
Operations", "Liquidity and Financial Condition" and "Critical Accounting
Policies" are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that should be considered as subject to
the many risks and uncertainties that exist in the Company's operations and
business environment. The forward-looking statements are based on current
expectations and involve a number of known and unknown risks and uncertainties
that could cause the actual results, performance and/or achievements of the
Company to differ materially from any future results, performance or
achievements, express or implied, by the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, and
that in light of the significant uncertainties inherent in forward-looking
statements, the inclusion of such statements should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company also assumes no obligation to
update its forward-looking statements or to advise of changes in the assumptions
and factors on which they are based.
-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). At March 31, 2003, the Company's
foreign currency exchange risks included a $2.3 million intercompany accounts
receivable balance due from the Company's U.K. based subsidiary and a nominal
Japanese Yen denominated trade accounts payable liability due to inventory
suppliers. Such assets and liabilities are short term and will be settled in
fiscal 2003. The following sensitivity analysis assumes an instantaneous 10%
change in foreign currency exchange rates from quarter-end levels, with all
other variables held constant.
At March 31, 2003, a 10% strengthening or weakening of the U.S. dollar versus
the British Pound would result in a $230,000 decrease or increase, respectively,
in the intercompany accounts receivable balance. Such foreign currency exchange
risk at March 31, 2003 has been substantially hedged by forward exchange
contracts.
At March 31, 2003, the Company had $2.3 million of outstanding floating rate
bank debt which was covered by interest rate swap agreements that effectively
convert the foregoing floating rate debt to stated fixed rates (see "Note 5.
Long-Term Debt" to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2002).
Thus, the Company has substantially no net interest rate exposures on these
instruments. However, the Company had approximately $925,000 of floating rate
bank debt that is subject to interest rate risk as it was not covered by
interest rate swap agreements. The Company does not believe that a 10%
fluctuation in interest rates would have a material effect on its consolidated
financial position and results of operations.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Based on their evaluation as of a date within 90 days of the filing
date of this quarterly report on Form 10-Q, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Exchange Act) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act are recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) 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.
-17-
Independent Accountants' Review Report
The Board of Directors and Shareholders
Vicon Industries, Inc.
We have reviewed the condensed consolidated balance sheet of Vicon Industries,
Inc. and subsidiaries as of March 31, 2003, and the related condensed
consolidated statements of operations and cash flows for the three and six-month
periods ended March 31, 2003 and 2002. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 8, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets", effective October 1,
2002.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Vicon Industries, Inc. and subsidiaries as of September 30, 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
December 10, 2002, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of September 30, 2002 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
------------
Melville, New York
May 15, 2003
-18-
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
On May 15, 2003, the Company was served with a summons and complaint
in a patent infringement suit that named the Company and thirteen
other defendants. The alleged infringement relates to the Company's
camera dome systems, which is a significant product line. Among other
things, the suit seeks injunctive relief and unspecified damages. At
this time, an assessment as to the likelihood of an unfavorable
outcome can not be made as the Company and its counsel have not had
sufficient time to evaluate the complaint. However, the Company
intends to vigorously defend itself in this matter.
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 8, 2003.
Proposal 1: Election of Director
The following director was elected by the votes indicated:
For Withheld
--- --------
Peter F. Neumann 4,163,193 90,540
The terms of the following directors continued after the meeting:
Kenneth M. Darby
Milton F. Gidge
W. Gregory Robertson
Arthur D. Roche
Proposal 2: Ratification of Appointment of Independent Auditors
The selection of auditors was approved by the votes indicated:
For Against Abstain
--- ------- -------
4,212,245 21,040 20,448
ITEM 5 - OTHER INFORMATION
- ------ -----------------
None
-19-
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
April 22, 2003.
15.1 Letter re: unaudited interim financial information.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
No Form 8-K was required to be filed during the current quarter.
-20-
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 15, 2003
/s/ Kenneth M. Darby /s/ John M. Badke
- -------------------- -----------------
Kenneth M. Darby John M. Badke
Chairman and Vice President, Finance
Chief Executive Officer Chief Financial Officer
-21-
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
- ----------------------------------------
I, Kenneth M. Darby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vicon Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Kenneth M. Darby
- --------------------
Kenneth M. Darby
Chairman and
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
- ----------------------------------------
I, John M. Badke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Vicon Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ John M. Badke
- -----------------
John M. Badke
Vice President, Finance and
Chief Financial Officer