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, 1998 Commission File No. 1-7939
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VICON INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
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: (516) 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
At June 30, 1998, the registrant had outstanding 4,456,383 shares of Common
Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
VICON INDUSTRIES, INC. AND SUBSIDIARIES
(CONDENSED) CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
6/30/98 6/30/97
Net sales............................. $16,106,001 $13,725,759
Cost of sales......................... 10,655,224 9,815,328
----------- -----------
Gross profit........................ 5,450,777 3,910,431
Operating expenses:
General and administrative expense 1,194,222 997,476
Selling expense................... 2,376,629 2,050,980
---------- ----------
3,570,851 3,048,456
---------- ----------
Operating income.................... 1,879,926 861,975
Interest expense, net................. 230,449 309,274
Other income.......................... - (6,273)
----------- ------------
Income before income taxes........ 1,649,477 558,974
Income tax expense.................... 75,000 16,000
----------- ------------
Net income........................ $ 1,574,477 $ 542,974
=========== ============
Earnings per share:
Basic $ .40 $ .19
=== ===
Diluted $ .38 $ .18
=== ===
Shares used in computing
earnings per share:
Basic 3,900,699 2,802,728
Diluted 4,162,632 3,049,335
See Notes to (Condensed) Consolidated Financial Statements.
-2-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
(CONDENSED) CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
6/30/98 6/30/97
-------- --------
Net sales............................. $45,711,106 $37,351,404
Cost of sales......................... 30,805,651 26,867,870
----------- -----------
Gross profit........................ 14,905,455 10,483,534
Operating expenses:
General and administrative expense 3,241,103 2,661,844
Selling expense................... 6,777,591 5,807,037
Relocation expense................ - 225,129
---------- ----------
10,018,694 8,694,010
---------- ----------
Operating income.................... 4,886,761 1,789,524
Interest expense, net................. 924,279 834,207
Other income.......................... - (39,896)
----------- ------------
Income before income taxes........ 3,962,482 995,213
Income tax expense.................... 225,000 71,000
----------- ------------
Net income........................ $ 3,737,482 $ 924,213
=========== ============
Earnings per share:
Basic $ 1.13 $ .33
==== ===
Diluted $ 1.04 $ .31
==== ===
Shares used in computing
earnings per share:
Basic 3,315,510 2,794,168
Diluted 3,596,902 2,950,071
See Notes to (Condensed) Consolidated Financial Statements.
-3-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
(CONDENSED) CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS 6/30/98 9/30/97
- ------ -------- --------
CURRENT ASSETS
Cash............................................ $ 3,028,170 $ 287,580
Accounts receivable (less allowance
of $644,000 at June 30, 1998 and
$493,000 at September 30, 1997)............... 12,185,540 9,578,297
Inventories:
Parts, components, and materials.............. 2,677,978 3,399,133
Work-in-process............................... 2,672,535 2,046,174
Finished products............................. 11,670,631 11,188,217
----------- -----------
17,021,144 16,633,524
Prepaid expenses................................ 285,911 307,580
----------- -----------
TOTAL CURRENT ASSETS............................ 32,520,765 26,806,981
- --------------------
Property, plant and equipment................... 12,396,263 8,362,930
Less accumulated depreciation and amortization.. (5,421,587) (4,870,717)
----------- -----------
6,974,676 3,492,213
Other assets.................................... 778,321 900,417
----------- -----------
TOTAL ASSETS.................................... $40,273,762 $31,199,611
- ------------ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Borrowings under U.K. revolving credit agreement - 169,006
Current maturities of long-term debt............ 273,971 515,092
Accounts payable:
Related party................................. 5,300,404 7,146,985
Other......................................... 2,438,505 1,407,917
Accrued wages and expenses...................... 2,404,171 2,111,670
Income taxes payable............................ 242,906 105,188
---------- ----------
TOTAL CURRENT LIABILITIES 10,659,957 11,455,858
- -------------------------
Long-term debt:
Related party................................. - 1,440,000
Banks and other............................... 3,536,493 6,904,368
Other long-term liabilities..................... 467,545 485,402
SHAREHOLDERS' EQUITY
Common stock, par value $.01.................... 45,166 30,470
Capital in excess of par value.................. 20,858,629 9,868,063
Retained earnings............................... 5,018,389 1,280,907
------------ -----------
25,922,184 11,179,440
Less treasury stock 60,202 shares and
45,952 shares at cost......................... (391,312) (298,686)
Foreign currency translation adjustment......... 78,895 33,229
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TOTAL SHAREHOLDERS' EQUITY 25,609,767 10,913,983
- -------------------------- ------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $ 40,273,762 $31,199,611
- ------------------------------------------ ============ ===========
See Notes to (Condensed) Consolidated Financial Statements.
-4-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
(CONDENSED) CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
6/30/98 6/30/97
Cash flows from operating activities: -------- --------
Net income..................................... $3,737,482 $ 924,213
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 568,129 587,666
Amortization of gain on sale and leaseback... - (433,993)
Unrealized foreign exchange gain............. - (39,896)
Change in assets and liabilities:
Accounts receivable........................ (2,558,375) (857,330)
Inventories................................ (333,730) (3,534,235)
Prepaid expenses........................... 23,576 162,986
Other assets............................... 122,096 (48,789)
Accounts payable........................... 989,321 130,184
Accrued wages and expenses................. 284,730 708,692
Income taxes payable....................... 135,518 4,020
Other liabilities.......................... (17,857) (46,682)
------------ ------------
Net cash provided by (used in)
operating activities................... 2,950,890 (2,443,164)
------------ ------------
Cash flows from investing activities:
Capital expenditures, net of
minor disposals............................ (4,005,944) (771,553)
------------ ------------
Net cash used in investing activities.... (4,005,944) (771,553)
------------ ------------
Cashflows from financing activities:
(Decrease) increase in borrowings under U.S.
bank credit agreement...................... (6,003,416) 2,065,139
Decrease in borrowings under U.K.
revolving credit agreement................. (172,136) (226,766)
Net proceeds from sale of common stock....... 10,800,916 -
Proceeds from U.S. mortgage and term loans... 2,900,000 -
Proceeds from U.K. term loan................. - 830,000
(Decrease) increase in interest-bearing
accounts payable to related party.......... (1,812,228) 992,258
Repayment of promissory note to related party (1,800,000) (200,000)
Proceeds from exercise of stock options...... 111,720 -
Repayment of U.K. mortgage................... - (353,112)
Repayments of other debt..................... (168,789) (79,912)
------------ ------------
Net cash provided by financing activities.. 3,856,067 3,027,607
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Effect of exchange rate changes on cash.......... (60,423) 86,458
------------ -----------
Net increase (decrease) in cash.................. 2,740,590 (100,652)
Cash at beginning of year........................ 287,580 205,876
------------ -----------
Cash at end of period............................ $ 3,028,170 $ 105,224
============ ===========
See Notes to (Condensed) Consolidated Financial Statements.
-5-
VICON INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO (CONDENSED) CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
Note 1: Basis of Presentation
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The accompanying unaudited (condensed) consolidated financial statements have
been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 and nine months ended June 30,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 1998. 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,
1997.
Note 2: Earnings per Share
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In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" which
requires companies to present basic and diluted earnings per share (EPS) instead
of primary and fully diluted EPS that was previously required. Basic EPS are
computed based on the weighted average number of shares outstanding for the
period. Diluted EPS reflect the maximum dilution that would have resulted from
the exercise of stock options and incremental shares issuable under a deferred
compensation agreement. The new standard was initially adopted by the Company in
the quarter ended December 31, 1997. All EPS figures for prior periods reported
have been restated. The following table provides the components of the basic and
diluted earnings per share (EPS) computations:
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
(Unaudited) (Unaudited)
Basic EPS Computation
Net income..................... $1,574,477 $ 542,974 $3,737,482 $ 924,213
Weighted average
shares outstanding............ 3,900,699 2,802,728 3,315,510 2,794,168
Basic earnings per share....... $ .40 $ .19 $ 1.13 $ .33
========== ========== ========== ==========
Diluted EPS Computation
Net income..................... $1,574,477 $ 542,974 $3,737,482 $ 924,213
Weighted average
shares outstanding............ 3,900,699 2,802,728 3,315,510 2,794,168
Stock options.................. 251,401 246,607 273,597 155,903
Stock compensation
arrangement................... 10,532 - 7,795 -
--------- ---------- ---------- ----------
Diluted shares outstanding..... 4,162,632 3,049,335 3,596,902 2,950,071
Diluted earnings per share..... $ .38 $ .18 $ 1.04 $ .31
========== ========== ========== ==========
-6-
Note 3: Common Stock Offering
- ------------------------------
In May 1998, the Company sold an additional 1,371,200 shares of its Common Stock
in a public offering, the net proceeds of which were approximately $10.8
million. The proceeds were principally used to repay borrowings under the U.S.
bank credit agreement, the related party term loan and certain interest-bearing
accounts payable.
Note 4: Subsequent Event
- -------------------------
In July 1998, the Company entered into a $14 million unsecured revolving credit
and term loan agreement with a new bank. Such agreement includes a $7.5 million
revolving credit facility which expires in July 2002, with an option to increase
the facility to $9.5 million at any time through July 2000. Borrowings under the
facility bear interest at the bank's prime rate minus 2% or, at the Company's
option, LIBOR plus 90 basis points (6.50% and 6.56%, respectively, at July 20,
1998). The agreement also provides for a $4.5 million five year term loan
payable in equal monthly installments through July 2003, with interest at LIBOR
plus 1%. The proceeds of the term loan were used to repay interest-bearing
accounts payable to a related party.
The agreement contains restrictive covenants which, among other things, require
the Company to maintain certain levels of earnings and ratios of debt service
coverage and debt to tangible net worth.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Three Months Ended June 30, 1998 Compared with June 30, 1997
- ------------------------------------------------------------
Net sales for the quarter ended June 30, 1998 increased $2.4 million or 17% to
$16.1 million compared with $13.7 million in the year ago period. The sales
growth was experienced in the U.S. as domestic sales increased $2.6 million or
28% to $11.7 million principally as a result of system sales supplied under a
contract with the U.S. Postal Service entered into in July 1997. International
sales declined $196,000 or 4% to $4.4 million due to lower sales in Asia.
Gross profit margins for the third quarter of 1998 increased to 33.8% compared
with 28.5% in the year ago period. The margin improvement was primarily the
result of a better sales mix of higher margin products, lower procurement costs
for certain video products and greater fixed cost absorption associated with the
sales growth.
Operating expenses for the third quarter of 1998 were $3.6 million or 22.2% of
net sales compared with $3.0 million or 22.2% of net sales in the year ago
period. The increase was principally the result of higher selling expenses
associated with the sales growth and profit related bonus accruals.
Operating income rose to $1.9 million for the third quarter of 1998 compared
with $862,000 in the year ago period as a result of increased sales, higher
gross margins and greater absorption of fixed operating expenses.
Interest expense decreased $79,000 to $230,000 for the third quarter of 1998 as
$9.0 million of interest-bearing debt was repaid in May 1998 with the net
proceeds from a public stock offering.
Income tax expense was $75,000 for the third quarter of 1998 compared with
$16,000 in the year ago period. In both periods, the Company utilized net
operating loss ("NOL") carryforwards to substantially offset federal and state
taxable income. The nominal tax provision related primarily to foreign
subsidiary income.
As a result of the foregoing, net income increased to $1.6 million for the third
quarter of 1998 compared with net income of $543,000 for the year ago period.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Nine Months Ended June 30, 1998 Compared with June 30, 1997
- -----------------------------------------------------------
Net sales for the nine months ended June 30, 1998 increased $8.3 million or 22%
to $45.7 million compared with $37.4 million in the year ago period. The sales
growth was experienced principally in the U.S. as domestic sales increased $7.7
million or 33% to $31.2 million principally as a result of system sales supplied
under a contract with the U.S. Postal Service entered into in July 1997 and
sales from a new line of dome cameras introduced in February 1997. International
sales increased $637,000 or 5% to $14.5 million. The increase was due to greater
system sales and sales to a private label customer in Europe. International
growth was limited as a result of lower sales in Asia. The backlog of unfilled
orders was $11.4 million at June 30, 1998 compared with $4.4 million at June 30,
1997.
Gross profit margins for the first nine months of 1998 increased to 32.6%
compared with 28.1% in the year ago period. The margin improvement was primarily
the result of a better sales mix of higher margin products, lower procurement
costs and greater fixed cost absorption associated with the sales growth.
Operating expenses for the first nine months of 1998 were $10.0 million or 21.9%
of net sales compared with $8.5 million or 22.7% of net sales in the year ago
period, exclusive of relocation expense. The increase was principally the result
of higher selling expenses associated with the sales growth and profit related
bonus accruals.
Operating income rose to $4.9 million for the first nine months of 1998 compared
with $1.8 million in the year ago period as a result of increased sales, higher
gross margins and greater absorption of fixed operating expenses.
Interest expense increased $90,000 to $924,000 principally as a result of higher
borrowing levels during the first six months of 1998.
Income tax expense was $225,000 for the first nine months of 1998 compared with
$71,000 in the year ago period. In both periods, the Company utilized NOL
carryforwards to substantially offset federal and state taxable income. As of
June 30, 1998, the remaining NOL was approximately $.5 million for federal
income tax purposes. The nominal tax provision relates primarily to foreign
subsidiary income.
As a result of the foregoing, net income increased to $3.7 million for the first
nine months of 1998 compared with net income of $924,000 for the year ago
period.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
Net cash provided by operating activities was $3.0 million for the first nine
months of 1998 due primarily to the $3.7 million net income reported for the
period and an increase in accounts payable, offset in part by an increase in
accounts receivable due to higher sales activity. Net cash used in investing
activities was $4.0 million for the first nine months of 1998 as a result of the
Company's purchase of its principal operating facility for $3.3 million and
capital expenditures for tooling and office equipment. Net cash provided by
financing activities was $3.9 million, which includes $10.8 million of net
proceeds received from a public stock offering in May 1998 and $2.9 million of
proceeds from mortgage loans used to finance the facility purchase. These
inflows were partially offset by a $6.0 million reduction of borrowings under
the U.S. Bank Credit Agreement and the repayment of a $1.8 million term loan and
$1.8 million of interest-bearing accounts payable to a related party. As a
result of the foregoing, the net increase in cash was $2.7 million for the first
nine months of 1998 after the nominal effect of exchange rate changes on the
cash position of the Company.
The Company maintains a bank overdraft facility of 600,000 Pounds Sterling
(approximately $1,002,000) in the U.K. to support local working capital
requirements of Vicon U.K. At June 30, 1998, there were no outstanding
borrowings under this facility.
In July 1998, the Company entered into a $14 million unsecured revolving credit
and term loan agreement with a new bank. Such agreement includes a $7.5 million
revolving credit facility which expires in July 2002, with an option to increase
the facility to $9.5 million at any time through July 2000. Borrowings under the
facility bear interest at the bank's prime rate minus 2% or, at the Company's
option, LIBOR plus 90 basis points (6.50% and 6.56%, respectively, at July 20,
1998). The agreement also provides for a $4.5 million five year term loan
payable in equal monthly installments through July 2003, with interest at LIBOR
plus 1%. The proceeds of the term loan were used to repay all interest-bearing
accounts payable to a related party. The agreement contains restrictive
covenants which, among other things, require the Company to maintain certain
levels of earnings and ratios of debt service coverage and debt to tangible net
worth.
The Company believes that cash flow from operations and funds available under
its credit agreements will be sufficient to meet its anticipated operating,
capital expenditures and debt service requirements for at least the next twelve
months.
Year 2000
- ---------
The Company's software-based products have been tested for year 2000 compliance
and the Company believes that such products are year 2000 compatible. With
respect to its own computer operating systems, the Company is in the process of
upgrading its principal operating computer software to the most recent available
revisions sold by its software suppliers, which the suppliers have represented
to be year 2000 compliant. The Company believes that such upgrades will identify
and solve those year 2000 problems that could affect its operating software and
can be accomplished before the year 2000 at a reasonable cost. It is possible
that certain computer systems or software products of the Company's customers or
suppliers may experience year 2000 problems and that such problems could
adversely affect the Company. The Company is in the process of assessing the
status of its principal suppliers' year 2000 readiness and their plans to
address problems that their computer systems may face in correctly processing
date information as the year 2000 approaches. However, since the ultimate
success of the Company's customers and suppliers to become compliant is largely
outside of the Company's control, no assurances can be made that the Company
will be unaffected by the year 2000.
-10-
"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 "Liquidity and
Financial Condition" and "Year 2000" 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.
-11-
PART II
ITEM 1 - LEGAL PROCEEDINGS
- ------ -----------------
The Company has no material outstanding litigation.
ITEM 2 - CHANGES IN SECURITIES
- ------ ---------------------
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None
ITEM 5 - OTHER INFORMATION
- ------ -----------------
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
EXHIBIT
NUMBERS DESCRIPTION
- ------- -----------
10 Material Contracts
(.1) Advice of borrowing terms between the Registrant and National
Westminster Bank PLC dated March 27, 1998.
(.2) Credit Agreement between the Registrant and KeyBank National
Association dated July 20, 1998.
No Form 8-K was required to be filed during the current quarter.
-12-
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.
August 13, 1998
VICON INDUSTRIES, INC.
Kenneth M. Darby Arthur D. Roche
President Executive Vice President
Chief Executive Officer Chief Financial Officer
-13-
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.
August 13, 1998
VICON INDUSTRIES, INC.
VICON INDUSTRIES, INC.
Kenneth M. Darby Arthur D. Roche
Kenneth M. Darby Arthur D. Roche
President Executive Vice President
Chief Executive Officer Chief Financial Officer