SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For Quarter Ended December 31, 2006 Commission File No. 1-7939
------------------------------- --------
Vicon Industries, Inc.
New York State 11-2160665
- ----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
89 Arkay Drive, Hauppauge, New York 11788
- ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 952-2288
-------------------------
(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
------- -------------
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
------
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
------- -------
At December 31, 2006, the registrant had outstanding 4,660,711 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
------------------
12/31/06 12/31/05
-------- --------
Net sales $17,883,234 $14,258,950
Cost of sales 10,681,773 8,622,831
----------- -----------
Gross profit 7,201,461 5,636,119
Operating expenses:
Selling, general and
administrative expense 4,816,359 4,421,732
Engineering & development expense 1,239,261 1,061,116
----------- -----------
6,055,620 5,482,848
Operating income 1,145,841 153,271
Interest expense 38,790 42,794
Interest and other income (111,156) (41,719)
----------- -----------
Income before income taxes 1,218,207 152,196
Income tax expense 103,000 5,000
----------- -----------
Net income $ 1,115,207 $ 147,196
=========== ===========
Basic and diluted earnings per share $ .24 $ .03
=========== ===========
Shares used in computing earnings per share:
Basic 4,615,704 4,569,584
Diluted 4,711,015 4,663,330
See Accompanying Notes to Condensed Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS 12/31/06 9/30/06
- ------ -------- -------
(Unaudited)
CURRENT ASSETS
- --------------
Cash and cash equivalents $ 4,469,286 $ 5,639,334
Marketable securities 128,260 126,697
Accounts receivable, net 12,523,363 11,269,529
Inventories:
Parts, components, and materials 2,767,980 2,809,152
Work-in-process 2,603,501 2,347,354
Finished products 7,291,182 6,812,732
----------- -----------
12,662,663 11,969,238
Prepaid expenses and other current assets 599,523 484,713
----------- -----------
TOTAL CURRENT ASSETS 30,383,095 29,489,511
Property, plant and equipment 13,288,153 13,050,211
Less accumulated depreciation and amortization (7,095,452) (6,821,126)
------------ -----------
6,192,701 6,229,085
Other assets 149,292 236,521
----------- -----------
TOTAL ASSETS $36,725,088 $35,955,117
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
- -------------------
Current maturities of long-term debt $ 315,109 $ 331,830
Accounts payable 3,627,530 4,162,263
Accrued compensation and employee benefits 1,952,389 2,427,525
Accrued expenses 1,529,107 1,429,566
Unearned revenue 915,524 806,142
Income taxes payable 264,889 151,323
----------- -----------
TOTAL CURRENT LIABILITIES 8,604,548 9,308,649
Long-term debt 1,671,494 1,740,335
Unearned revenue 422,065 457,474
Other long-term liabilities 523,279 429,818
SHAREHOLDERS' EQUITY
- --------------------
Common stock, par value $.01 48,885 48,609
Additional paid in capital 22,211,567 22,562,126
Retained earnings 2,849,697 1,734,490
----------- -----------
25,110,149 24,345,225
Less treasury stock, at cost (865,937) (1,299,999)
Accumulated other comprehensive income 1,259,490 973,615
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 25,503,702 24,018,841
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $36,725,088 $35,955,117
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Three Months Ended
------------------
12/31/06 12/31/05
-------- --------
Cash flows from operating activities:
Net income $ 1,115,207 $ 147,196
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 232,991 236,734
Amortization of deferred compensation 2,675 2,301
Stock compensation expense 45,129 21,838
Change in assets and liabilities:
Accounts receivable, net (982,138) (23,034)
Inventories (559,006) (970,828)
Prepaid expenses and other current assets (100,323) (92,930)
Other assets 90,170 36,439
Accounts payable (589,083) 1,136,819
Accrued compensation and employee benefits (489,817) 33,176
Accrued expenses 85,958 38,598
Unearned revenue 73,972 (58,587)
Income taxes payable 102,855 5,049
Other liabilities 31,448 21,755
------------ -----------
Net cash provided by (used in)
operating activities (939,962) 534,526
Cash flows from investing activities:
Capital expenditures (130,480) (188,907)
Net increase in marketable securities (1,502) (1,289)
------------ -----------
Net cash used in investing activities (131,982) (190,196)
Cash flows from financing activities:
Repayments of long-term debt (87,620) (145,678)
Proceeds from exercise of stock options 35,975 -
------------ -----------
Net cash used in financing activities (51,645) (145,678)
------------ -----------
Effect of exchange rate changes on cash (46,459) (29,093)
------------ -----------
Net increase (decrease) in cash (1,170,048) 169,559
Cash at beginning of year 5,639,334 5,818,178
------------ -----------
Cash at end of period $ 4,469,286 $ 5,987,737
============ ===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
---------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
December 31, 2006
-----------------
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 three months ended December 31, 2006 are not
necessarily indicative of the results that may be expected for the fiscal year
ended September 30, 2007. 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, 2006. Certain prior
year amounts have been reclassified to conform to the current period
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 December 31, 2006 was $130,876, with
$2,616 of cumulative unrealized losses reported at December 31, 2006.
Note 3: Accounts Receivable
- ----------------------------
Accounts receivable is stated net of an allowance for uncollectible accounts of
$1,030,000 and $1,325,000 as of December 31, 2006 and September 30, 2006,
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 incremental common shares
issuable upon the exercise of stock options and under deferred compensation
agreements.
The following table provides the components of the basic and diluted EPS
computations for the three month periods ended December 31, 2006 and 2005:
Three Months
Ended December 31,
------------------
2006 2005
---------- --------
Basic EPS Computation
- ---------------------
Net income.................................. $ 1,115,207 $ 147,196
Weighted average shares outstanding......... 4,615,704 4,569,584
Basic earnings per share.................... $ .24 $ .03
============ ===========
-5-
Three Months
Ended December 31,
------------------
2006 2005
---------- ---------
Diluted EPS Computation
Net income.................................. $ 1,115,207 $ 147,196
Weighted average shares outstanding....... 4,615,704 4,569,584
Stock options............................. 47,389 18,258
Stock compensation arrangements........... 47,922 75,488
--------- -----------
Diluted shares outstanding.................. 4,711,015 4,663,330
Diluted earnings per share.................. $ .24 $ .03
=========== ===========
The diluted weighted average shares outstanding do not include the antidilutive
impact of 267,008 and 424,916 options for the three month periods ended December
31, 2006 and 2005, respectively, because the exercise price of the stock options
exceeded the average market value of the stock in the periods presented.
Note 5: Comprehensive Income (Loss)
- -------------------------------------
The Company's total comprehensive income (loss) for the three month periods
ended December 31, 2006 and 2005 was as follows:
Three Months
Ended December 31,
------------------
2006 2005
---------- ---------
Net income $ 1,115,207 $ 147,196
Other comprehensive income (loss), net of tax:
Decrease (increase) in unrealized loss
on securities 60 (172)
Unrealized loss on derivatives (62,013) (14,503)
Foreign currency translation adjustment 347,828 (211,152)
------------ ------------
Comprehensive income (loss) $ 1,401,082 $ (78,631)
============ ============
The accumulated other comprehensive income balances at December 31, 2006 and
September 30, 2006 consisted of the following:
December 31, September 30,
2006 2006
------------ ------------
Foreign currency translation adjustment $1,345,960 $ 998,132
Unrealized loss on derivatives (83,854) (21,841)
Unrealized loss on securities (2,616) (2,676)
----------- -----------
Accumulated other comprehensive income $1,259,490 $ 973,615
=========== ===========
Note 6: Derivative Instruments
- --------------------------------
At December 31, 2006, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $1.4 million and $1.8
million, respectively, whose aggregate fair value was a liability of
approximately $84,000. The change in the amount of the liability for these
instruments is shown as a component of accumulated other comprehensive income.
-6-
Note 7: Stock-Based Compensation
- ----------------------------------
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.
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 periods ended December 31, 2006 and 2005, the
Company recorded non-cash compensation expense of $45,129 and $21,838,
respectively, ($.01 and $.005 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
were not restated. The adoption of SFAS No. 123(R) resulted in an immaterial
cumulative change in accounting as of the date of adoption.
Note 8: Litigation
- --------------------
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 plus pre-judgment interest. 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.
-7-
In January 2005, the Company petitioned the U.S. Patent and Trademark Office
(USPTO) to reexamine the plaintiff's patent, believing it to be invalid. In
April 2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company citing the existence of
prior art of the Company and another defendant. The plaintiff has appealed the
USPTO ruling and has additional 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
proceedings.
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: Recent Accounting Pronouncements
- -----------------------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes --
an interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 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 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect that the adoption
of FIN 48 will have a material impact on its consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be
exchanged to sell an asset or transfer a liability in an orderly transaction
between market participants. Further, the standard establishes a framework for
measuring fair value in generally accepted accounting principles and expands
certain disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company does not expect that
the adoption of SFAS 157 will have a material impact on its consolidated
financial position, results of operations or cash flows.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations
- ---------------------
Three Months Ended December 31, 2006 Compared with December 31, 2005
- --------------------------------------------------------------------
Net sales for the quarter ended December 31, 2006 increased 25% to $17.9 million
compared with $14.3 million in the year ago period. Domestic sales increased 32%
to $9.7 million compared with $7.4 million in the year ago period. International
sales for the quarter increased 19% to $8.2 million compared with $6.9 million
in the year ago period. The backlog of unfilled orders was $6.9 million at
December 31, 2006 compared with $7.2 million at September 30, 2006.
Gross profit margins for the first quarter of fiscal 2007 increased to 40.3%
compared with 39.5% in the year ago period due principally to the benefit of
fixed production overhead on increased sales.
Total operating expenses for the first quarter of fiscal 2007 increased to $6.1
million compared with $5.5 million in the year ago quarter principally as a
result of increases in sales related costs, engineering and development expense
and profit related bonus provisions. 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 $1.1 million in the year
ago period.
The Company generated operating income of $1.1 million in the first quarter of
fiscal 2007 compared with operating income of $153,000 in the year ago period.
Interest expense decreased to $39,000 for the first quarter of fiscal 2007
compared with $43,000 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
$111,000 for the first quarter of fiscal 2007 compared with $42,000 in the year
ago period. The increase was principally the result of a $72,000 gain from life
insurance proceeds on the death of a retired executive.
Income tax expense for the first quarter of fiscal 2007 increased to $103,000
compared with $5,000 in the year ago period relating principally to results
reported by the Company's European operations. No U.S. tax provision was
recognized in the current quarter as the Company is utilizing the benefit of
previously reserved and unrecognized net operating loss carryforwards. The
Company continues to provide a full valuation allowance against its deferred tax
assets until such time that it can achieve a sustained level of profitability.
As a result of the foregoing, the Company reported net income of $1.1 million
for the first quarter of fiscal 2007 compared with net income of $147,000 in the
year ago period.
-9-
Liquidity and Capital Resources
- -------------------------------
Net cash used in operating activities was $940,000 for the first quarter of
fiscal 2007. The $1.1 million of net income and $281,000 of non-cash charges for
the quarter were fully offset by increases in accounts receivable and
inventories of $982,000 and $559,000, respectively. Both inventories and
accounts receivable increased as a result of higher sales. The Company further
experienced decreases in accounts payable and accrued compensation of $589,000
and $490,000, respectively. Net cash used in investing activities was $132,000
for the first quarter of fiscal 2007 due principally to $130,000 of general
capital expenditures. Net cash used in financing activities was $52,000, which
consisted of $88,000 of scheduled repayments of bank mortgage loans, offset in
part by $36,000 of proceeds received from exercise of stock options. As a result
of the foregoing, cash decreased by $1.2 million for the first quarter of fiscal
2007 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
$1,960,000) to support its local working capital requirements. This facility
expires in March 2007. At December 31, 2006 and September 30, 2006, there were
no outstanding borrowings under this facility.
The following is a summary of the Company's long-term debt and material lease
obligations as of December 31, 2006:
Payments Due Debt Lease
By Period Repayments Commitments Total
- ---------------- ---------- ----------- -----
Less than 1 year $ 315,000 $346,000 $ 661,000
1-3 years 1,672,000 87,000 1,759,000
3-5 years - - -
Total $1,987,000 $433,000 $2,420,000
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 plus pre-judgment interest. 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.
-10-
In January 2005, the Company petitioned the U.S. Patent and Trademark Office
(USPTO) to reexamine the plaintiff's patent, believing it to be invalid. In
April 2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company citing the existence of
prior art of the Company and another defendant. The plaintiff has appealed the
USPTO ruling and has additional 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
proceedings.
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,
2006 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.
-11-
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 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 Pronouncements
- --------------------------------
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes --
an interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements in accordance with FASB Statement No. 109, Accounting for Income
Taxes. FIN 48 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 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company does not expect that the adoption
of FIN 48 will have a material impact on its consolidated financial position,
results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be
exchanged to sell an asset or transfer a liability in an orderly transaction
between market participants. Further, the standard establishes a framework for
measuring fair value in generally accepted accounting principles and expands
certain disclosures about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007. The Company does not expect that
the adoption of SFAS 157 will have a material impact on its consolidated
financial position, results of operations or cash flows.
-12-
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 December 31, 2006, the Company had $1.4 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 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, 2006).
Thus, the Company has substantially no net interest rate exposures on these
instruments. However, the Company had approximately $568,000 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.
-13-
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 ended December 31, 2006 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.
-14-
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 plus pre-judgment interest. 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.
In January 2005, the Company petitioned the U.S. Patent and Trademark Office
(USPTO) to reexamine the plaintiff's patent, believing it to be invalid. In
April 2006, the USPTO issued a non-final office action rejecting all of the
plaintiff's patent claims asserted against the Company citing the existence of
prior art of the Company and another defendant. The plaintiff has appealed the
USPTO ruling and has additional 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
proceedings.
ITEM 1A - RISK FACTORS
- ----------------------
There have been no material changes with respect to the risk factors disclosed
in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.
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 Company did not repurchase any of its common stock during the three
month period ended December 31, 2006.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- --------------------------
None
-15-
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.
-16-
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VICON INDUSTRIES, INC.
February 13, 2007
/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
-17-