SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For Quarter Ended June 30, 2006 Commission File No. 1-7939
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Vicon Industries, Inc.
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New York State 11-2160665
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
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(Former name, address, and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer Accelerated filer ___ Non-accelerated filer X
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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At June 30, 2006, the registrant had outstanding 4,573,084 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
Three Months Ended
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6/30/06 6/30/05
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Net sales $14,674,683 $13,990,499
Cost of sales 8,760,459 8,671,516
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Gross profit 5,914,224 5,318,983
Operating expenses:
Selling, general and
administrative expense 4,705,977 4,864,210
Engineering & development expense 1,154,364 1,016,147
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5,860,341 5,880,357
Operating income (loss) 53,883 (561,374)
Interest expense 40,833 46,316
Interest and other income (23,820) (14,184)
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Income (loss) before income taxes 36,870 (593,506)
Income tax benefit - (45,472)
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Net income (loss) $ 36,870 $ (548,034)
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Basic and diluted earnings
(loss) per share $ .01 $ (.12)
=========== ===========
Shares used in computing earnings (loss) per share:
Basic 4,573,084 4,569,584
Diluted 4,667,823 4,569,584
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(UNAUDITED)
Nine Months Ended
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6/30/06 6/30/05
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Net sales $41,156,338 $42,374,700
Cost of sales 25,028,433 26,479,697
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Gross profit 16,127,905 15,895,003
Operating expenses:
Selling, general and
administrative expense 13,444,825 14,716,661
Engineering & development expense 3,315,533 3,713,823
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16,760,358 18,430,484
Operating loss (632,453) (2,535,481)
Interest expense 124,592 135,280
Interest and other income (93,557) (56,869)
Loss on sale of marketable securities - 44,936
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Loss before income taxes (663,488) (2,658,828)
Income tax expense - 9,528
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Loss before extraordinary gain (663,488) (2,668,356)
Extraordinary gain - 210,968
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Net loss $ (663,488) $(2,457,388)
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Basic and diluted loss per share:
Loss before extraordinary gain $ (.15) $ (.58)
Extraordinary gain - .04
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Net loss $ (.15) $ (.54)
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Shares used in computing basic
and diluted loss per share 4,571,507 4,565,622
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 6/30/06 9/30/05
- ------ ------- -------
(Unaudited)
CURRENT ASSETS
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Cash and cash equivalents $ 4,640,783 $ 5,818,178
Marketable securities 123,018 121,830
Accounts receivable, net 10,912,882 10,125,967
Inventories:
Parts, components, and materials 2,535,405 2,277,415
Work-in-process 2,179,396 2,782,761
Finished products 6,703,825 5,406,593
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11,418,626 10,466,769
Prepaid expenses and other current assets 538,695 419,942
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TOTAL CURRENT ASSETS 27,634,004 26,952,686
Property, plant and equipment 13,454,270 12,890,801
Less accumulated depreciation and amortization (7,058,115) (6,274,975)
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6,396,155 6,615,826
Other assets 585,413 623,393
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TOTAL ASSETS $34,615,572 $34,191,905
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LIABILITIES AND SHAREHOLDERS' EQUITY
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CURRENT LIABILITIES
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Current maturities of long-term debt $ 348,976 $ 409,343
Accounts payable 3,178,744 2,462,671
Accrued compensation and employee benefits 2,346,974 2,353,849
Accrued expenses 1,574,035 1,403,734
Unearned revenue 660,044 566,065
Income taxes payable 8,703 44,306
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TOTAL CURRENT LIABILITIES 8,117,476 7,239,968
Long-term debt 1,809,177 2,061,825
Unearned revenue 492,129 582,679
Other long-term liabilities 419,700 328,953
SHAREHOLDERS' EQUITY
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Common stock, par value $.01 48,609 48,574
Additional paid in capital 22,515,922 22,459,478
Retained earnings 1,617,557 2,281,045
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24,182,088 24,789,097
Less treasury stock, at cost (1,299,999) (1,299,999)
Accumulated other comprehensive income 895,001 557,045
Deferred compensation - (67,663)
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TOTAL SHAREHOLDERS' EQUITY 23,777,090 23,978,480
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $34,615,572 $34,191,905
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
Nine Months Ended
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6/30/06 6/30/05
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Cash flows from operating activities:
Net loss $ (663,488) $(2,457,388)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 717,768 833,710
Amortization of deferred compensation 7,558 57,295
Stock compensation expense 108,882 (67,718)
Extraordinary gain on acquisition - (210,968)
Loss on sale of marketable securities - 44,936
Change in assets and liabilities:
Accounts receivable, net (593,748) (239,989)
Inventories (820,013) 2,014,547
Recoverable income taxes - 239,402
Prepaid expenses and other current assets (104,676) (57,577)
Other assets 41,123 4,687
Accounts payable 672,295 (918,400)
Accrued compensation and employee benefits (20,449) 249,082
Accrued expenses 162,206 (102,524)
Unearned revenue 3,429 (66,744)
Income taxes payable (35,404) (339,767)
Other liabilities 68,837 (379,871)
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Net cash used in operating activities (455,680) (1,397,287)
Cash flows from investing activities:
Capital expenditures (436,377) (543,950)
Acquisition, net of cash acquired - (868,000)
Net decrease (increase) in marketable securities (3,174) 2,064,099
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Net cash provided by (used in)
investing activities (439,551) 652,149
Cash flows from financing activities:
Repayments of long-term debt (316,723) (258,829)
Proceeds from exercise of stock options 7,700 22,180
Repurchases of common stock - (21,115)
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Net cash used in financing activities (309,023) (257,764)
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Effect of exchange rate changes on cash 26,859 (27,190)
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Net decrease in cash (1,177,395) (1,030,092)
Cash at beginning of year 5,818,178 6,063,198
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Cash at end of period $ 4,640,783 $ 5,033,106
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See Accompanying Notes to Condensed Consolidated Financial Statements.
-5-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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June 30, 2006
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Note 1: Basis of Presentation
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The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended June 30, 2006 are not necessarily
indicative of the results that may be expected for the fiscal year ended
September 30, 2006. 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, 2005. Certain prior year amounts
have been reclassified to conform to the current period presentation.
Note 2: Marketable Securities
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Marketable securities consist of mutual fund investments in U.S. government debt
securities. Such securities are stated at market value and are classified as
available-for-sale under Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 115, with unrealized gains and
losses reported in other comprehensive income as a component of shareholders'
equity. The cost of such securities at June 30, 2006 was $127,055, with $4,037
of cumulative unrealized losses reported at June 30, 2006.
Note 3: Accounts Receivable
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Accounts receivable is stated net of an allowance for uncollectible accounts of
$1,372,000 and $1,297,000 as of June 30, 2006 and September 30, 2005,
respectively.
Note 4: Earnings per Share
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Basic earnings (loss) per share (EPS) is computed based on the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
maximum dilution that would have resulted from the exercise of stock options and
incremental common shares issuable under deferred compensation agreements.
The following table provides the components of the basic and diluted EPS
computations for the three and nine month periods ended June 30, 2006 and 2005:
Three Months Nine Months
Ended June 30, Ended June 30,
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2006 2005 2006 2005
---- ---- ---- ----
Basic EPS Computation
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Net income (loss)........... $ 36,870 $ (548,034) $ (663,488) $(2,457,388)
Weighted average
shares outstanding......... 4,573,084 4,569,584 4,571,507 4,565,622
Basic earnings (loss)
per share.................. $ .01 $ (.12) $ (.15) $ (.54)
=========== ========== ============ ============
-6-
Three Months Nine Months
Ended June 30, Ended June 30,
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2006 2005 2006 2005
---- ---- ---- ----
Diluted EPS Computation
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Net income (loss)........... $ 36,870 $ (548,034) $ (663,488) $(2,457,388)
Weighted average
shares outstanding....... 4,573,084 4,569,584 4,571,507 4,565,622
Stock compensation
arrangement.............. 76,795 - - -
Stock options............. 17,944 - - -
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Diluted shares outstanding.. 4,667,823 4,569,584 4,571,507 4,565,622
Diluted earnings (loss)
per share.................. $ .01 $ (.12) $ (.15) $ (.54)
=========== ========== ============ ============
For the three months ended June 30, 2005, 100,631 shares have been omitted from
the calculation of diluted EPS as their effect would have been antidilutive. For
the nine months ended June 30, 2006 and 2005, 100,193 and 167,876 shares,
respectively, have been omitted from the calculation of diluted EPS as their
effect would have been antidilutive.
Note 5: Comprehensive Income (Loss)
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The Company's total comprehensive income (loss) for the three month and nine
month periods ended June 30, 2006 and 2005 was as follows:
Three Months Nine Months
Ended June 30, Ended June 30,
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2006 2005 2006 2005
---- ---- ---- ----
Net income (loss) $ 36,870 $ (548,034) $ (663,488) $(2,457,388)
Other comprehensive income
(loss), net of tax:
Decrease (increase) in
unrealized loss on
securities (610) 445 (1,986) 47,367
Unrealized gain (loss)
on derivatives (19,534) (17,044) (21,910) 22,431
Foreign currency
translation adjustment 408,101 (460,246) 361,852 (156,746)
----------- ----------- ------------ ------------
Comprehensive income (loss)$ 424,827 $(1,024,879) $ (325,532) $(2,544,336)
=========== ============ ============ ============
The accumulated other comprehensive income balances at June 30, 2006 and
September 30, 2005 consisted of the following:
June 30, September 30,
2006 2005
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Foreign currency translation adjustment $ 934,698 $ 572,846
Unrealized loss on derivatives (35,660) (13,750)
Unrealized loss on securities (4,037) (2,051)
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Accumulated other comprehensive income $ 895,001 $ 557,045
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Note 6: Derivative Instruments
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At June 30, 2006, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $1.5 million and
$500,000, respectively, whose aggregate fair value was a liability of
approximately $36,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive income.
-7-
Note 7: Stock-Based Compensation
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The Company maintains stock option plans that include both incentive and
non-qualified options reserved for issuance to key employees, including officers
and directors. All options are issued at fair market value at the grant date and
are exercisable in varying installments according to the plans. The plans allow
for the payment of option exercises through the surrender of previously owned
mature shares based on the fair market value of such shares at the date of
surrender.
Prior to October 1, 2005, the Company followed Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and
related interpretations in accounting for its employee stock-based compensation.
Under APB No. 25, compensation expense was recorded if, on the date of grant,
the market price of the underlying stock exceeded its exercise price. As
permitted by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") and SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123" ("SFAS No. 148"), the Company had retained the accounting
prescribed by APB No. 25 and presented the disclosure information prescribed by
SFAS No. 123 and SFAS No. 148.
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-month and nine-month periods ended June 30, 2005 would have
been:
Three Months Ended Nine Months Ended
June 30, 2005 June 30, 2005
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Reported net loss $ (548,034) $(2,457,388)
Stock-based compensation cost (50,381) (147,504)
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Pro forma net loss $ (598,415) $(2,604,892)
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Reported basic and diluted EPS $ (.12) $ (.54)
Pro forma basic and diluted EPS $ (.13) $ (.57)
Effective October 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based
Payment", which requires that all share based payments to employees, including
stock options, be recognized as compensation expense in the consolidated
financial statements based on their fair values and over the requisite service
period. For the three-month and nine-month periods ended June 30, 2006, the
Company recorded non-cash compensation expense of $43,522 and $108,882,
respectively, ($.01 and $.02 per basic and diluted share, respectively) relating
to stock options. The Company elected to utilize the modified-prospective
application method, whereby compensation expense is recorded for all awards
granted after October 1, 2005 and for the unvested portion of awards granted
prior to this date. Accordingly, prior period amounts have not been restated.
The adoption of SFAS No. 123(R) resulted in an immaterial cumulative change in
accounting as of the date of adoption. The fair value for options was determined
using a Black-Scholes valuation model and the straight-line attribution approach
using the following weighted average assumptions for the nine-months ended June
30, 2006:
Risk-free interest rate 4.44%
Dividend yield 0.00%
Volatility factor 75.91%
Weighted average expected life 5 years
-8-
The risk-free interest rate used in the Black-Scholes valuation method is based
on the implied yield currently available in U.S. Treasury securities at maturity
with an equivalent term. The Company has not recently declared or paid any
dividends and does not currently expect to do so in the future. Expected
volatility is based on the annualized daily historical volatility of the
Company's stock over a representative period. The weighted-average expected life
represents the period over which stock-based awards are expected to be
outstanding and was determined based on a number of factors, including
historical weighted average and projected holding periods for the remaining
unexercised shares, the contractual terms of the Company's stock-based awards,
vesting schedules and expectations of future employee behavior.
A summary of stock option activity for the nine-months ended June 30, 2006 is
presented below:
Weighted
Average
Weighted Remaining
Number Average Contractual Aggregate
of Exercise Term Intrinsic
Options Price (in years) Value
------- ----- ---------- -----
Balance at October 1, 2005 582,741 $3.35
Granted 39,975 $3.17
Exercised (3,500) $2.20
Forfeited or expired (73,933) $3.79
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Balance at June 30, 2006 545,283 $3.28 2.9 $ 18,500
======= ===== === ========
Exercisable at June 30, 2006 292,328 $3.24 2.1 $ 18,500
======= ===== === ========
The weighted-average grant date fair value of options granted for the nine
months ended June 30, 2006 was $2.05. The total intrinsic value of options
exercised during the nine months ended June 30, 2006 was $3,150.
A summary of the status of the Company's nonvested shares as of June 30, 2006 is
as follows:
Weighted-Average
Grant-Date
Nonvested Shares Shares Fair Value
- ---------------- ------ ----------
Nonvested at October 1, 2005 294,253 $1.79
Granted 39,975 $2.05
Vested (47,773) $1.53
Forfeited (33,500) $2.40
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Nonvested at June 30, 2006 252,955 $1.79
As of June 30, 2006, there was $249,208 of total unrecognized compensation cost,
net of estimated forfeitures, related to nonvested share-based compensation
arrangements, which is expected to be recognized over a weighted-average period
of 1.2 years. The total fair value of shares vested during the nine months ended
June 30, 2006 was $73,039.
-9-
Note 8: Litigation
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The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems and other products that represent
significant sales to the Company. Among other things, the suit seeks past and
enhanced damages, injunctive relief and attorney's fees. In January 2006, the
Company received the plaintiff's claim for past damages through December 31,
2005 that approximated $11.7 million. The Company and its outside patent counsel
believe that the complaint against the Company is without merit. The Company is
vigorously defending itself and is a party to a joint defense with certain other
named defendants. The Company is unable to reasonably estimate a range of
possible loss, if any, at this time. Although the Company believes that it has
meritorious defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial position. The Company has
held discussions with the plaintiff in the interest of settling the case.
However, there can be no assurance that any settlement can be reached.
In connection with this suit, the Company filed a request with the U.S. Patent
and Trademark Office (USPTO) for reexamination of the plaintiff's patent. In
April 2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company. The plaintiff has
multiple appeals available to it in the USPTO and, thereafter, in the Court of
Appeals for the Federal Circuit. On June 30, 2006, the Federal District Court
granted the defendants' motion for continuance (delay) of the trial, pending the
outcome of the USPTO's reexamination office proceedings. Subsequently, the
Federal District Court designated a new trial date in April 2007.
In the normal course of business, the Company is a party to certain other claims
and litigation. Management believes that the settlement of such claims and
litigation, considered in the aggregate, will not have a material adverse effect
on the Company's financial position and results of operations.
Note 9: Asset Purchase
- ----------------------
On October 1, 2004, the Company entered into an agreement to purchase all of the
operating assets of Videotronic Infosystems GmbH ("Videotronic"), a German based
video products supplier operating under insolvency protection, for 700,000
Eurodollars (approximately $868,000).
Note 10: Recent Accounting Pronouncement
- ----------------------------------------
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, "Accounting
for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109",
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 will be effective beginning fiscal
2008. We have not yet evaluated the impact of this implementation on our
condensed consolidated financial statements.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------
Results of Operations
- ---------------------
Three Months Ended June 30, 2006 Compared with June 30, 2005
- ------------------------------------------------------------
Net sales for the quarter ended June 30, 2006 increased 5% to $14.7 million
compared with $14.0 million in the year ago period. Domestic sales increased 10%
to $8.3 million compared with $7.5 million in the year ago period. International
sales for the quarter decreased 1% to $6.4 million compared with $6.5 million in
the year ago period. The backlog of unfilled orders was $6.4 million at June 30,
2006 compared with $6.7 million at September 30, 2005.
Gross profit margins for the third quarter of fiscal 2006 increased to 40.3%
compared with 38.0% in the year ago period due principally to production cost
reductions within the Company's digital video product line and a favorable
product sales mix.
Total operating expenses for the third quarter of fiscal 2006 were virtually
unchanged from the year ago period at $5.9 million. Selling, general and
administrative expense for the third quarter of fiscal 2006 decreased to $4.7
million compared with $4.9 million in the year ago period. Current quarter
expense included $296,000 of legal costs incurred in the ongoing defense of a
patent infringement suit, compared with $184,000 incurred in the year ago
period. In addition, the Company continued to invest in new product development
in the current quarter, incurring $1.2 million of engineering and development
expenses compared with $1.0 million in the year ago period.
The Company generated operating income of $54,000 in the third quarter of fiscal
2006 compared with an operating loss of $561,000 in the year ago period.
Interest expense decreased to $41,000 for the third quarter of fiscal 2006
compared with $46,000 in the year ago period principally as a result of the
paydown of bank borrowings offset, in part, by the effect of increased interest
rates during the current quarter. Interest and other income increased to $24,000
for the third quarter of fiscal 2006 compared with $14,000 in the year ago
period principally as a result of increased interest rates during the current
quarter.
The Company recorded no income tax expense for the third quarter of fiscal 2006
compared with an income tax benefit of $45,000 in the year ago period relating
principally to results reported by the Company's European operations. The
Company has ceased recognizing tax benefits on its U.S. operating losses due to
the uncertainty of their future realization.
As a result of the foregoing, the Company reported net income of $37,000 for the
third quarter of fiscal 2006 compared with a net loss of $548,000 in the year
ago period.
-11-
Results of Operations
- ---------------------
Nine Months Ended June 30, 2006 Compared with June 30, 2005
- -----------------------------------------------------------
Net sales for the nine months ended June 30, 2006 decreased 3% to $41.2 million
compared with $42.4 million in the year ago period. Domestic sales increased 3%
to $22.3 million compared with $21.5 million in the year ago period.
International sales decreased 9% to $18.9 million compared with $20.9 million in
the year ago period. International sales for the prior year period included the
shipment of a $2.2 million system order to one foreign customer.
Gross profit margins for the first nine months of fiscal 2006 increased to 39.2%
compared with 37.5% in the year ago period due principally to production cost
reductions within the Company's digital video product line and a favorable
product sales mix.
Operating expenses for the first nine months of fiscal 2006 decreased 9% to
$16.8 million compared with $18.4 million in the year ago period. The decrease
was spread among all reported operating expense categories as a result of
planned cost cutting initiatives. In connection with the ongoing defense of a
patent infringement suit, the Company incurred $492,000 of legal costs in fiscal
2006 compared with $580,000 in the year ago period ($1.8 million incurred since
inception in 2003).
The Company incurred an operating loss of $632,000 for the first nine months of
fiscal 2006 compared with an operating loss of $2.5 million in the year ago
period.
Interest expense decreased to $125,000 for the first nine months of fiscal 2006
compared with $135,000 in the year ago period principally as a result of the
paydown of bank borrowings offset, in part, by the effect of increased interest
rates during the current year period. Interest and other income increased to
$94,000 for the first nine months of fiscal 2006 compared with $57,000 in the
year ago period principally as a result of increased interest rates during the
current year period. During the prior year period, the Company liquidated the
principal portion of its investment in marketable securities resulting in a
$45,000 loss for the period.
There was no income tax expense reported for the first nine months of fiscal
2006 compared with $10,000 in the year ago period relating principally to
profits reported by the Company's European operations. The Company has ceased
recognizing tax benefits on its U.S. operating losses due to the uncertainty of
their future realization.
An extraordinary gain in the amount of $211,000 was recorded in the prior year
period relating to the Company's acquisition of its Videotronic subsidiary. The
gain represents the recovery of tangible net assets acquired in excess of their
purchase price.
As a result of the foregoing, the Company incurred a net loss of $663,000 for
the first nine months of fiscal 2006 compared with a net loss of $2.5 million in
the year ago period.
-12-
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $456,000 for the first nine months of
fiscal 2006 due principally to increases in inventories and accounts receivable
of $820,000 and $594,000, respectively, offset in part by a $672,000 increase in
accounts payable. In addition, the $663,000 net loss for the period was more
than offset by $834,000 of non-cash charges. Net cash used in investing
activities was $440,000 for the first nine months of fiscal 2006 due principally
to $436,000 of general capital expenditures. Net cash used in financing
activities was $309,000 principally representing repayments of bank debt. As a
result of the foregoing, cash decreased by $1.2 million for the first nine
months of fiscal 2006 after the effect of exchange rate changes on the cash
position of the Company.
The Company's European based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of one million Pounds Sterling (approximately
$1,850,000) to support its local working capital requirements. This facility
expires in March 2007. At June 30, 2006 and September 30, 2005, there were no
outstanding borrowings under this facility.
The following is a summary of the Company's long-term debt and material lease
obligations as of June 30, 2006:
Fiscal Debt Lease
Year Repayments Commitments Total
- ------ ---------- ----------- -----
2006 $ 94,000 $ 82,000 $ 176,000
2007 324,000 176,000 500,000
2008 1,740,000 38,000 1,778,000
The Company has incurred operating losses in recent years which, if continued,
could exhaust the Company's cash reserves and limit its ability to secure
additional bank financing, if needed. The Company has instituted certain plans
to preserve its cash, including cost cutting measures and inventory reduction
initiatives. Based upon the achievement of such plans, the Company believes that
it will have sufficient cash to meet its anticipated operating costs, capital
expenditures and debt service requirements for at least the next twelve months.
The Company does not have any off-balance sheet transactions, arrangements or
obligations (including contingent obligations) that have, or are reasonably
likely to have, a material effect on the Company's financial condition, results
of operations, liquidity, capital expenditures or capital resources.
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems and other products that represent
significant sales to the Company. Among other things, the suit seeks past and
enhanced damages, injunctive relief and attorney's fees. In January 2006, the
Company received the plaintiff's claim for past damages through December 31,
2005 that approximated $11.7 million. The Company and its outside patent counsel
believe that the complaint against the Company is without merit. The Company is
vigorously defending itself and is a party to a joint defense with certain other
named defendants. The Company is unable to reasonably estimate a range of
possible loss, if any, at this time. Although the Company believes that it has
meritorious defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial position. The Company has
held discussions with the plaintiff in the interest of settling the case.
However, there can be no assurance that any settlement can be reached.
-13-
In connection with this suit, the Company filed a request with the U.S. Patent
and Trademark Office (USPTO) for reexamination of the plaintiff's patent. In
April 2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company. The plaintiff has
multiple appeals available to it in the USPTO and, thereafter, in the Court of
Appeals for the Federal Circuit. On June 30, 2006, the Federal District Court
granted the defendants' motion for continuance (delay) of the trial, pending the
outcome of the USPTO's reexamination office proceedings. Subsequently, the
Federal District Court designated a new trial date in April 2007.
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,
2005 Annual Report on Form 10-K. Management believes the following critical
accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the selling price
is fixed or determinable, and collectibility of the resulting receivable is
reasonably assured. As it relates to product sales, revenue is generally
recognized when products are sold and title is passed to the customer. Shipping
and handling costs are included in cost of sales. Advance service billings under
equipment maintenance agreements are deferred and recognized as revenues on a
pro rata basis over the term of the service agreements. The Company evaluates
multiple-element revenue arrangements for separate units of accounting pursuant
to EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", and
follows appropriate revenue recognition policies for each separate unit.
Elements are considered separate units of accounting provided that (i) the
delivered item has stand-alone value to the customer, (ii) there is objective
and reliable evidence of the fair value of the delivered item, and (iii) if a
general right of return exists relative to the delivered item, delivery or
performance of the undelivered item is considered probable and substantially
within the control of the Company. As applied to the Company, under arrangements
involving the sale of product and the provision of services, product sales are
recognized as revenue when the products are sold and title is passed to the
customer, and service revenue is recognized as services are performed. For
products that include more than incidental software, and for separate licenses
of the Company's software products, the Company recognizes revenue in accordance
with the provisions of Statement of Position 97-2, "Software Revenue
Recognition", as amended.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of its customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
The Company provides for the estimated cost of product warranties at the time
revenue is recognized. While the Company engages in product quality programs and
processes, including monitoring and evaluating the quality of its component
suppliers, its warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from its estimates, revisions to the estimated warranty liability
may be required.
-14-
The Company writes down its inventory for estimated obsolescence and slow moving
inventory equal to the difference between the cost of inventory and the
estimated net realizable market value based upon assumptions about future demand
and market conditions. Technology changes and market conditions may render some
of the Company's products obsolete and additional inventory write-downs may be
required. If actual future demand or market conditions are less favorable than
those projected by management, additional inventory write-downs may be required.
The Company assesses the recoverability of the carrying value of its long-lived
assets, including identifiable intangible assets with finite useful lives,
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company evaluates the recoverability of
such assets based upon the expectations of undiscounted cash flows from such
assets. If the sum of the expected future undiscounted cash flows were less than
the carrying amount of the asset, a loss would be recognized for the difference
between the fair value and the carrying amount.
The Company's ability to recover the reported amounts of deferred income tax
assets is dependent upon its ability to generate sufficient taxable income
during the periods over which net temporary tax differences become deductible.
The Company maintains a full 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 due to the Company's
operating losses in recent years and the inherent uncertainties of predicting
future operating results in periods over which such net tax differences become
deductible. The Company plans to provide a full valuation allowance against its
deferred tax assets until such time that it can achieve a sustained level of
profitability or other positive evidence arises that would demonstrate an
ability to recover such assets.
The Company is subject to proceedings, lawsuits and other claims related to
labor, product and other matters. The Company assesses the likelihood of an
adverse judgment or outcomes for these matters, as well as the range of
potential losses. A determination of the reserves required, if any, is made
after careful analysis. The required reserves may change in the future due to
new developments.
Recent Accounting Pronouncement
- -------------------------------
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, "Accounting
for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109",
which prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 will be effective beginning fiscal
2008. We have not yet evaluated the impact of this implementation on our
condensed consolidated financial statements.
-15-
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Statements in this Report on Form 10-Q and other statements made by the Company
or its representatives that are not strictly historical facts including, without
limitation, statements included herein under the captions "Results of
Operations", "Liquidity and Capital Resources" and "Critical Accounting
Policies" are "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that should be considered as subject to
the many risks and uncertainties that exist in the Company's operations and
business environment. The forward-looking statements are based on current
expectations and involve a number of known and unknown risks and uncertainties
that could cause the actual results, performance and/or achievements of the
Company to differ materially from any future results, performance or
achievements, express or implied, by the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, and
that in light of the significant uncertainties inherent in forward-looking
statements, the inclusion of such statements should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company also assumes no obligation to
update its forward-looking statements or to advise of changes in the assumptions
and factors on which they are based.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. The Company has a policy that
prohibits the use of currency derivatives or other financial instruments for
trading or speculative purposes.
The Company enters into forward exchange contracts to hedge certain foreign
currency exposures and minimize the effect of such fluctuations on reported
earnings and cash flow (see Note 6 "Derivative Instruments" to the accompanying
condensed consolidated financial statements). The Company's ongoing foreign
currency exchange risks include intercompany sales of product and services
between subsidiary companies operating in differing functional currencies.
At June 30, 2006, the Company had $1.5 million of outstanding floating rate bank
debt which was covered by an interest rate swap agreement that effectively
converts the foregoing floating rate debt to a stated fixed rate (see "Note 6.
Long-Term Debt" to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended September 30, 2005).
Thus, the Company has substantially no net interest rate exposures on these
instruments. However, the Company had approximately $609,000 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.
-16-
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and procedures, as
required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, the Company's disclosure controls and
procedures were effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
by the Securities and Exchange Commission's rules and forms.
Changes in Internal Controls
- ----------------------------
There were no changes in the Company's internal control over financial reporting
identified in connection with the evaluation referred to above that occurred
during the quarter that have materially affected, or are reasonably likely to
materially affect, the registrant's internal control over financial reporting.
The Company's size dictates that it conducts business with a minimal number of
financial and administrative employees, which inherently results in a lack of
documented controls and segregation of duties within the Company and its
operating subsidiaries. Management will continue to evaluate the employees
involved and the control procedures in place, the risks associated with such
lack of segregation and whether the potential benefits of adding employees to
clearly segregate duties justifies the expense associated with such added
personnel. In addition, management is aware that many of the internal controls
that are in place at the Company are undocumented controls.
Limitations on the Effectiveness of Controls
- --------------------------------------------
The Company believes that a control system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.
-17-
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1 - LEGAL PROCEEDINGS
- --------------------------
The Company is one of several defendants in a patent infringement suit commenced
by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District
Court for the Western District of Tennessee. The alleged infringement by the
Company relates to its camera dome systems and other products that represent
significant sales to the Company. Among other things, the suit seeks past and
enhanced damages, injunctive relief and attorney's fees. In January 2006, the
Company received the plaintiff's claim for past damages through December 31,
2005 that approximated $11.7 million. The Company and its outside patent counsel
believe that the complaint against the Company is without merit. The Company is
vigorously defending itself and is a party to a joint defense with certain other
named defendants. The Company is unable to reasonably estimate a range of
possible loss, if any, at this time. Although the Company believes that it has
meritorious defenses to such claims, there is a possibility that an unfavorable
outcome could ultimately occur that could result in a liability that is material
to the Company's results of operations and financial position. The Company has
held discussions with the plaintiff in the interest of settling the case.
However, there can be no assurance that any settlement can be reached.
In connection with this suit, the Company filed a request with the U.S. Patent
and Trademark Office (USPTO) for reexamination of the plaintiff's patent. In
April 2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company. The plaintiff has
multiple appeals available to it in the USPTO and, thereafter, in the Court of
Appeals for the Federal Circuit. On June 30, 2006, the Federal District Court
granted the defendants' motion for continuance (delay) of the trial, pending the
outcome of the USPTO's reexamination office proceedings. Subsequently, the
Federal District Court designated a new trial date in April 2007.
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
- --------------------------------------------------------------------------------
SECURITIES
- ----------
On April 26, 2001, the Company announced that its Board of Directors authorized
the repurchase of up to $1 million of shares of the Company's common stock,
which represented approximately 9.8% of shares outstanding on the announcement
date. The following table summarizes repurchases of common stock for the three
month period ended June 30, 2006:
Total Number Average Approximate Dollar Value
of Shares Price Paid of Shares that May Yet Be
Period Purchased (1) per Share Purchased Under the Program
------ ------------- --------- ----------------------------
4/01/06-4/30/06 - $ - $459,664
5/01/06-5/31/06 - $ - $459,664
6/01/06-6/30/06 - $ - $459,664
------ -----
Total - $ -
====== =====
(1) All repurchases were executed in open market transactions.
-18-
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 25, 2006.
Proposal 1: Election of Director
- --------------------------------
The following director was elected by the votes indicated:
For Withheld
--- --------
Peter F. Neumann 4,040,981 503,911
The terms of the following directors continued after the meeting:
Kenneth M. Darby
Clifton H. W. Maloney
W. Gregory Robertson
Arthur D. Roche
Proposal 2: Ratification of Appointment of Independent Auditors
- ---------------------------------------------------------------
The selection of BDO Seidman, LLP as auditors was approved by the votes
indicated:
For Against Abstain
--- ------- -------
4,510,456 19,026 15,410
ITEM 5 - OTHER INFORMATION
- --------------------------
None
ITEM 6 - EXHIBITS
- -----------------
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-19-
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VICON INDUSTRIES, INC.
August 11, 2006
/s/ Kenneth M. Darby /s/ John M. Badke
- -------------------- --------------------
Kenneth M. Darby John M. Badke
Chairman and Senior Vice President, Finance
Chief Executive Officer Chief Financial Officer
-20-