10-Q 1 0001.txt VICON QUARTERLY REPORT 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, 2000 Commission File No. 1-7939 ---------------------------- ------- 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: (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 At June 30, 2000, the registrant had outstanding 4,625,074 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 6/30/00 6/30/99 Net sales............................. $19,123,105 $19,493,092 Cost of sales......................... 12,779,465 12,665,417 ----------- ----------- Gross profit........................ 6,343,640 6,827,675 Operating expenses: Selling expense................... 3,411,644 2,855,278 General & administrative expense.. 1,059,265 1,088,988 Engineering & development expense. 938,503 666,886 ---------- ---------- 5,409,412 4,611,152 ---------- ---------- Operating income.................... 934,228 2,216,523 Interest expense...................... 215,854 143,192 Interest income....................... (17,970) (32,519) ----------- ----------- Income before income taxes........ 736,344 2,105,850 Income tax expense.................... 258,000 760,000 ----------- ------------ Net income........................ $ 478,344 $ 1,345,850 =========== ============ Earnings per share: Basic $ .10 $ .30 === === Diluted $ .10 $ .28 === === Shares used in computing earnings per share: Basic 4,603,610 4,527,006 Diluted 4,654,713 4,733,794 See Notes to (Condensed) Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES (CONDENSED) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ended 6/30/00 6/30/99 Net sales............................. $56,089,919 $54,121,434 Cost of sales......................... 38,730,115 35,305,042 ----------- ----------- Gross profit........................ 17,359,804 18,816,392 Operating expenses: Selling expense................... 9,799,421 8,062,212 General & administrative expense.. 3,159,275 2,897,151 Engineering & development expense. 2,704,476 1,921,959 ---------- ---------- 15,663,172 12,881,322 ---------- ---------- Operating income.................... 1,696,632 5,935,070 Interest expense...................... 588,210 445,578 Interest income....................... (45,535) (122,835) ----------- ----------- Income before income taxes........ 1,153,957 5,612,327 Income tax expense.................... 405,000 2,045,000 ----------- ------------ Net income........................ $ 748,957 $ 3,567,327 =========== ============ Earnings per share: Basic $ .16 $ .79 === === Diluted $ .16 $ .76 === === Shares used in computing earnings per share: Basic 4,592,178 4,503,237 Diluted 4,675,638 4,712,921 See Notes to (Condensed) Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES (CONDENSED) CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS 6/30/00 9/30/99 CURRENT ASSETS Cash............................................ $ 798,381 $ 1,998,767 Accounts receivable (less allowance of $1,005,000 at June 30, 2000 and $818,000 at September 30, 1999)............... 18,982,092 13,771,411 Inventories: Parts, components, and materials.............. 3,655,557 2,647,781 Work-in-process............................... 4,256,105 5,298,862 Finished products............................. 13,482,194 13,381,900 ----------- ----------- 21,393,856 21,328,543 Deferred income taxes........................... 1,912,999 1,303,791 Prepaid expenses................................ 448,945 630,716 ----------- ----------- TOTAL CURRENT ASSETS............................ 43,536,273 39,033,228 -------------------- Property, plant and equipment................... 15,651,197 14,540,426 Less accumulated depreciation and amortization.. (7,170,121) (6,486,937) ----------- ----------- 8,481,076 8,053,489 Goodwill, net of accumulated amortization....... 1,685,650 1,768,056 Deferred income taxes........................... 465,154 264,218 Other assets.................................... 724,305 780,028 ----------- ----------- TOTAL ASSETS.................................... $54,892,458 $49,899,019 ------------ =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Borrowings under revolving credit agreement..... $ 502,790 $ 374,806 Current maturities of long-term debt............ 1,304,923 1,212,316 Accounts payable................................ 4,053,784 4,022,892 Accrued compensation and employee benefits...... 1,587,051 2,233,441 Accrued expenses................................ 1,870,335 1,749,395 Unearned service revenue........................ 698,081 224,711 Income taxes payable............................ 162,684 167,013 ---------- ---------- TOTAL CURRENT LIABILITIES 10,179,648 9,984,574 ------------------------- Long-term debt.................................. 8,901,954 5,798,641 Unearned service revenue........................ 1,786,530 639,169 Other long-term liabilities..................... 665,071 728,284 SHAREHOLDERS' EQUITY Common stock, par value $.01.................... 47,106 46,547 Capital in excess of par value.................. 21,464,987 21,343,676 Retained earnings............................... 12,600,046 11,851,089 ------------ ----------- 34,112,139 33,241,312 Less treasury stock, at cost.................... (555,097) (508,745) Accumulated other comprehensive income (loss)... (197,787) 15,784 ------------ ----------- TOTAL SHAREHOLDERS' EQUITY 33,359,255 32,748,351 -------------------------- ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $54,892,458 $49,899,019 ------------------------------------------ ============ =========== See Notes to (Condensed) Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES (CONDENSED) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended 6/30/00 6/30/99 Cash flows from operating activities: Net income..................................... $ 748,957 $ 3,567,327 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization................ 904,382 644,736 Deferred income taxes........................ (810,144) (354,000) Change in assets and liabilities: Accounts receivable........................ (5,459,862) (1,784,180) Inventories................................ (174,739) (3,440,603) Prepaid expenses........................... 172,468 (63,818) Other assets............................... (16,557) (136,897) Accounts payable........................... 45,794 281,570 Accrued compensation and employee benefits. (639,238) 37,302 Accrued expenses........................... 144,108 401,591 Unearned service revenue................... 1,620,731 - Income taxes payable....................... 5,544 (263,971) Other liabilities.......................... (63,213) 278,199 ------------ ------------ Net cash used in operating activities..... (3,521,769) (832,744) ------------ ------------ Cash flows from investing activities: Capital expenditures, net of minor disposals............................ (1,295,615) (724,433) ------------ ------------ Net cash used in investing activities..... (1,295,615) (724,433) ------------ ------------ Cash flows from financing activities: Borrowings under U.S. bank credit agreement.. 3,000,000 - Increase (decrease) in borrowings under U.K. revolving credit agreement................. 164,769 (17,824) Proceeds from mortgage loan.................. 1,200,000 - Proceeds from exercise of stock options...... 75,517 165,428 Repayments of U.S. term loan................. (675,000) (675,000) Repayments of other debt..................... (282,412) (204,842) ------------ ------------ Net cash provided by (used in) financing activities................... 3,482,874 (732,238) ------------ ------------ Effect of exchange rate changes on cash.......... 134,124 (36,012) ------------ ------------ Net decrease in cash............................. (1,200,386) (2,325,427) Cash at beginning of year........................ 1,998,767 4,854,557 ------------ ------------ Cash at end of period............................ $ 798,381 $ 2,529,130 ============ ------------ See Notes to (Condensed) Consolidated Financial Statements. -5- VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO (CONDENSED) CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2000 Note 1: Basis of Presentation 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 nine months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2000. 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, 1999. Certain prior year amounts have been reclassified to conform to current year presentation. Note 2: Earnings per Share The Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" requires companies to present basic and diluted earnings per share (EPS). Basic EPS is computed based on the weighted average number of shares outstanding for the period. Diluted EPS reflects the maximum dilution that would have resulted from the exercise of stock options and incremental shares issuable under a deferred compensation agreement. The following table provides the components of the basic and diluted earnings per share (EPS) computations for the three month and nine month periods ended June 30, 2000 and 1999: Three Months Nine Months Ended June 30, Ended June 30, 2000 1999 2000 1999 (Unaudited) (Unaudited) Basic EPS Computation Net income.................. $ 478,344 $1,345,850 $ 748,957 $3,567,327 Weighted average shares outstanding......... 4,603,610 4,527,006 4,592,178 4,503,237 Basic earnings per share.... $ .10 $ .30 $ .16 $ .79 ========== ========== ---------- ========== Diluted EPS Computation Net income.................. $ 478,344 $1,345,850 $ 748,957 $3,567,327 Weighted average shares outstanding....... 4,603,610 4,527,006 4,592,178 4,503,237 Stock options............. 51,103 190,350 81,446 197,452 Stock compensation arrangement.............. - 16,438 2,014 12,232 ---------- ---------- ---------- ---------- Diluted shares outstanding.. 4,654,713 4,733,794 4,675,638 4,712,921 Diluted earnings per share.. $ .10 $ .28 $ .16 $ .76 ========== ========== ========== ========== -6- Note 3: Comprehensive Income Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in the financial statements. The Company's total comprehensive income for the three month and nine month periods ended June 30, 2000 and 1999 was as follows: Three Months Nine Months Ended June 30, Ended June 30, 2000 1999 2000 1999 (Unaudited) (Unaudited) Net income................ $ 478,344 $1,345,850 $ 748,957 $3,567,327 Other comprehensive income (loss), net of tax: Change in equity due to foreign currency translation adjustments. (81,669) 1,067 (213,571) (282,664) ---------- ---------- ---------- ---------- Comprehensive income...... $ 396,675 $1,346,917 $ 535,386 $3,284,663 ========== ========== ========== ========== Note 4: Segment and Related Information The Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information" changes the way the Company reports information about its operating segments. The Company operates in one industry which encompasses the design, manufacture, assembly and marketing of closed-circuit video systems and system components for the electronic protection segment of the security industry. The Company manages its business segments primarily on a geographic basis. The Company's principal reportable segments are comprised of its United States (U.S.) and United Kingdom (U.K.) based operations. Its U.S. based operations consists of Vicon Industries, Inc., the Company's corporate headquarters and principal operating entity. Its U.K. based operations consist of Vicon Industries Limited, a wholly owned subsidiary which markets and distributes the Company's products principally within Europe. Other segments include the operations of Vicon Industries (H.K.) Ltd., a Hong Kong based majority owned subsidiary which markets and distributes the Company's products principally within Hong Kong and mainland China, and TeleSite U.S.A., Inc. and subsidiary, a U.S. and Israeli based manufacturer and distributor of remote video surveillance systems. The Company evaluates performance and allocates resources based on, among other things, the net profit for each segment, which excludes intersegment sales and profits. Segment information for the three month and nine month periods ended June 30, 2000 and 1999 was as follows: Three Months Ended June 30, 2000 U.S. U.K. Other Consolid. Totals ------------------- ---------- --------- --------- ---------- ------- Net sales to external customers $14,527,000 $3,314,000 $1,282,000 $ - $19,123,000 Intersegment net sales 1,253,000 - 7,000 - 1,260,000 Net income (loss) 489,000 188,000 (162,000) (37,000) 478,000 Total assets 49,479,000 6,216,000 2,482,000 (3,285,000) 54,892,000 -7- Three Months Ended June 30, 1999 U.S. U.K. Other Consolid. Totals ------------------- ---------- ---------- --------- ---------- ------- Net sales to external customers $16,600,000 $2,593,000 $ 300,000 $ - $19,493,000 Intersegment net sales 1,590,000 - - - 1,590,000 Net income (loss) 1,273,000 171,000 (95,000) (3,000) 1,346,000 Total assets 43,485,000 5,363,000 1,672,000 (2,981,000) 47,539,000 Nine Months Ended June 30, 2000 U.S. U.K. Other Consolid. Totals ------------------- ---------- --------- --------- ---------- ------- Net sales to external customers $44,586,000 $8,212,000 $3,292,000 $ - $56,090,000 Intersegment net sales 4,799,000 - 271,000 - 5,070,000 Net income (loss) 930,000 293,000 (330,000) (144,000) 749,000 Total assets 49,479,000 6,216,000 2,482,000 (3,285,000) 54,892,000 Nine Months Ended June 30, 1999 U.S. U.K. Other Consolid. Totals ------------------- ---------- ---------- --------- ---------- ------- Net sales to external customers $46,392,000 $6,310,000 $1,419,000 $ - $54,121,000 Intersegment net sales 3,819,000 - - - 3,819,000 Net income (loss) 3,504,000 160,000 (64,000) (33,000) 3,567,000 Total assets 43,485,000 5,363,000 1,672,000 (2,981,000) 47,539,000 The consolidating segment above includes the elimination and consolidation of intersegment transactions. Note 5: Investment in Affiliate At June 30, 2000, the Company had a 29% ownership interest in Chun Shin Electronics, Inc. (CSE), a South Korean company which, among other things, manufactures and assembles certain of the Company's products. The Company has not recognized its interest in the accumulated earnings of CSE since it does not have any control over its operations and does not have the ability to repatriate any of its accumulated earnings. Net assets of CSE were approximately $6.6 million at March 31, 2000. In July 2000, CSE completed an initial public offering of approximately 1.4 million shares of its stock in South Korea. The Company's ownership interest was then reduced to approximately 21%, which represents an approximate $3.2 million market value based upon the initial offering price. In the September 30, 2000 quarter, the Company plans to implement Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires that such marketable equity securities be adjusted to market value at the end of each accounting period. Unrealized market value gains and losses on securities are charged or credited to a separate component of shareholders' equity unless they are classified for short-term trade, in which case such gains and losses are charged to earnings. The Company anticipates that its investment in CSE marketable securities will be classified as "available-for-sale" securities. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Three Months Ended June 30, 2000 Compared with June 30, 1999 Net sales for the quarter ended June 30, 2000 were $19.1 million compared with $19.5 million in the year ago period. Domestic sales decreased $1.9 million or 13% to $13.5 million due in part to lower system sales to the U.S. Postal Service. International sales increased $1.5 million or 38% to $5.6 million due to increased sales efforts within new international markets. Gross profit margins for the third quarter of 2000 decreased to 33.2% compared with 35.0% in the year ago period principally as a result of lower selling prices. Operating expenses for the third quarter of 2000 were $5.4 million or 28.3% of net sales compared with $4.6 million or 23.7% of net sales in the year ago period. The increase in operating expenses was principally the result of additional sales, sales support and product development personnel. Operating income decreased to $934,000 for the third quarter of 2000 compared with $2.2 million in the year ago period principally as a result of the decrease in gross profit and increase in operating expenses as discussed above. Interest expense increased to $216,000 for the third quarter of 2000 compared with $143,000 in the year ago period principally as a result of an increase in bank borrowings. Income tax expense was $258,000 for the third quarter of 2000 compared with $760,000 in the year ago period. As a result of the foregoing, net income decreased to $478,000 for the third quarter of 2000 compared with $1.3 million for the year ago period. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Nine Months Ended June 30, 2000 Compared with June 30, 1999 Net sales for the nine months ended June 30, 2000 increased $2.0 million or 4% to $56.1 million compared with $54.1 million in the year ago period. Domestic sales decreased $1.5 million or 4% to $40.9 million. International sales increased $3.5 million or 30% to $15.2 million due to increased sales efforts within new international markets. The backlog of unfilled orders was $8.7 million at June 30, 2000 compared with $13.3 million at June 30, 1999. Gross profit margins for the first nine months of 2000 decreased to 31.0% compared with 34.8% in the year ago period. The margin decline was attributable to a $1.3 million first quarter warranty charge relating to a technical problem associated with a new product line and lower selling prices. Operating expenses for the first nine months of 2000 were $15.7 million or 27.9% of net sales compared with $12.9 million or 23.8% of net sales in the year ago period. The increase in operating expenses was principally the result of additional sales, sales support and product development personnel. Operating income decreased to $1.7 million for the first nine months of 2000 compared with $5.9 million in the year ago period principally as a result of a decrease in gross profit and increased operating expenses. Interest expense increased to $588,000 for the first nine months of 2000 compared with $446,000 in the year ago period principally as a result of an increase in bank borrowings. Income tax expense was $405,000 for the first nine months of 2000 compared with $2,045,000 in the year ago period. As a result of the foregoing, net income decreased to $749,000 for the first nine months of 2000 compared with $3.6 million for the year ago period. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS Liquidity and Financial Condition Net cash used in operating activities was $3.5 million for the first nine months of 2000 due primarily to an increase in accounts receivable of $5.5 million, offset by a $1.6 million increase in unearned service revenue billings under a contract with the U.S. Postal Service. The accounts receivable increase was due to an increase in current end of quarter sales compared with the year end quarter and a general slowdown in collections. Net cash used in investing activities was $1.3 million for the first nine months of 2000 due principally to capital expenditures, including the expansion of the Company's principal operating facility. Net cash provided by financing activities was $3.5 million, which included $3.0 million of borrowings under the Company's U.S. revolving credit agreement and $1.2 million of proceeds from a mortgage loan used to finance the facility expansion, offset by scheduled debt repayments. As a result of the foregoing, cash decreased by $1.2 million for the first nine months of 2000 after the effect of exchange rate changes on the cash position of the Company. The Company has a $9.5 million revolving credit facility with a bank which expires in July 2002. 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 (7.50% and 7.67%, respectively, at June 30, 2000). At June 30, 2000, outstanding borrowings under this facility were $3.0 million. 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 also maintains a bank overdraft facility of 600,000 Pounds Sterling (approximately $900,000) in the U.K. to support local working capital requirements of Vicon Industries Limited. At June 30, 2000, outstanding borrowings under this facility were approximately $503,000. In October 1999, the Company entered into a $1.2 million mortgage loan agreement with its bank to finance the expansion of its principal operating facility. The loan is payable in equal monthly principal installments through January 2008, with a $460,000 payment due at the end of the term. The loan bears interest at the bank's prime rate minus 160 basis points or, at the Company's option, LIBOR plus 100 basis points (7.90% and 7.77%, respectively, at June 30, 2000) and contains the same covenants as included in the previously existing mortgage loans. 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. Certain Related Party Transactions The Company is substantially dependent upon certain outside suppliers to manufacture and assemble its products. During the nine months ended June 30, 2000, approximately $4.0 million or 13% of the Company's purchases of components and finished products were supplied indirectly from CSE, a 21% owned South Korean company (see Note 5). The Company has no control over the operations of CSE and its relationship with this investee is strictly that of a buyer and supplier dealing with each other at arm's length. Although the Company believes that the principal portion of components and products supplied by CSE could in time be sourced through alternative suppliers at prices comparable to those paid to CSE, the immediate loss of CSE or any other significant supplier for any reason would impair the Company's ability to meet its obligations to customers and would have a material adverse effect on the Company's business. -11- Gross profit margins attributable to sales of CSE sourced products are generally comparable with the margins reported in the accompanying consolidated statements of operations. "Safe" Harbor Statement under the Private Securities Litigation Reform Act of 1995 Statements in this Report on Form 10-Q and other statements made by the Company or its representatives that are not strictly historical facts including, without limitation, statements included herein under the captions "Results of Operations", "Liquidity and Financial Condition" and "Certain Related Party Transactions" 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. -12- 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 Number Description 10 Material Contracts (.1) Advice of Borrowing Terms between the Registrant and National Westminster Bank PLC dated March 13, 2000. No Form 8-K was required to be filed during the current quarter. -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 11, 2000 ------------------------------- VICON INDUSTRIES, INC. -------------------------- -------------------------------- Kenneth M. Darby John M. Badke Chairman and Vice President, Finance Chief Executive Officer Chief Financial Officer -14- 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 11, 2000 VICON INDUSTRIES, INC. ------------------------------- VICON INDUSTRIES, INC. Kenneth M. Darby John M. Badke -------------------------- -------------------------------- Kenneth M. Darby John M. Badke Chairman and Vice President, Finance Chief Executive Officer Chief Financial Officer