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 December 31, 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 December 31, 2000, the registrant had outstanding 4,646,081 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 12/31/00 12/31/99 Net sales............................. $17,376,279 $19,524,470 Cost of sales......................... 11,475,557 14,134,206 ----------- ----------- Gross profit........................ 5,900,722 5,390,264 Operating expenses: Selling expense................... 3,158,939 3,181,520 General & administrative expense.. 1,382,150 1,066,863 Engineering & development expense. 931,941 862,536 ---------- ---------- 5,473,030 5,110,919 ---------- ---------- Operating income.................... 427,692 279,345 Gain on sale of securities............ (2,404,233) - Interest expense...................... 160,116 166,088 Interest income....................... (32,661) (17,389) ----------- ----------- Income before income taxes........ 2,704,470 130,646 Income tax expense.................... 982,000 46,000 ----------- ------------ Net income........................ $ 1,722,470 84,646 =========== ============ Earnings per share: Basic $ .37 $ .02 === === Diluted $ .37 $ .02 === === Shares used in computing earnings per share: Basic 4,638,415 4,584,934 Diluted 4,645,027 4,699,703 See Notes to Condensed Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS 12/31/00 9/30/00 ------ -------- ------- CURRENT ASSETS Cash............................................ $ 2,733,861 $ 2,115,118 Marketable securities........................... 366,151 2,775,196 Accounts receivable (less allowance of $1,328,000 at December 31, 2000 and $1,063,000 at September 30, 2000)............. 16,622,772 17,101,618 Inventories: Parts, components, and materials.............. 2,865,679 3,011,071 Work-in-process............................... 3,487,196 3,285,213 Finished products............................. 12,589,584 12,364,719 ----------- ----------- 18,942,459 18,661,003 Deferred income taxes........................... 1,842,873 955,003 Prepaid expenses................................ 772,042 896,923 ----------- ----------- TOTAL CURRENT ASSETS............................ 41,280,158 42,504,861 -------------------- Property, plant and equipment................... 16,020,432 15,796,751 Less accumulated depreciation and amortization.. (7,558,984) (7,295,079) ----------- ----------- 8,461,448 8,501,672 Goodwill, net of accumulated amortization....... 1,593,705 1,639,678 Deferred income taxes........................... 786,234 805,087 Other assets.................................... 434,977 466,590 ----------- ----------- TOTAL ASSETS.................................... $52,556,522 $53,917,888 ------------ =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Borrowings under revolving credit agreement..... $ 203,036 $ 129,424 Current maturities of long-term debt............ 1,382,791 1,311,386 Accounts payable................................ 2,300,378 2,939,936 Accrued compensation and employee benefits...... 1,221,653 1,895,766 Accrued expenses................................ 1,780,060 1,713,316 Unearned service revenue........................ 956,928 835,045 Income taxes payable............................ 1,184,609 315,481 ---------- ---------- TOTAL CURRENT LIABILITIES 9,029,455 9,140,354 ------------------------- Long-term debt.................................. 5,235,803 7,090,253 Unearned service revenue........................ 2,157,239 2,011,123 Other long-term liabilities..................... 690,229 677,775 SHAREHOLDERS' EQUITY Common stock, par value $.01.................... 47,406 47,106 Capital in excess of par value.................. 21,494,936 21,444,638 Retained earnings............................... 14,534,764 12,812,294 ------------ ----------- 36,077,106 34,304,038 Less treasury stock, at cost.................... (577,018) (555,097) Accumulated other comprehensive (loss) income... (56,292) 1,249,442 ------------ ----------- TOTAL SHAREHOLDERS' EQUITY 35,443,796 34,998,383 -------------------------- ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $52,556,522 $53,917,888 ------------------------------------------ ============ =========== See Notes to Condensed Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended 12/31/00 12/31/99 -------- -------- Cash flows from operating activities: Net income..................................... $ 1,722,470 $ 84,646 Adjustments to reconcile net income to net cash used in operating activities: Gain on sale of securities................... (2,404,233) - Depreciation and amortization................ 258,287 211,352 Goodwill amortization........................ 45,973 51,964 Deferred income taxes........................ (37,418) (539,936) Change in assets and liabilities: Accounts receivable........................ 503,563 (1,446,286) Inventories................................ (266,781) (1,170,423) Prepaid expenses........................... 125,971 81,401 Other assets............................... 31,613 (12,909) Accounts payable........................... (641,631) 168,188 Accrued compensation and employee benefits. (674,309) (936,041) Accrued expenses........................... 65,551 509,876 Unearned service revenue................... 267,999 (53,348) Income taxes payable....................... 866,606 276,744 Other liabilities.......................... 12,454 (29,572) ------------ ------------ Net cash used in operating activities..... (123,885) (2,804,344) ------------ ------------ Cash flows from investing activities: Proceeds from sale of securities............. 2,624,858 - Capital expenditures......................... (209,441) (470,165) ------------ ------------ Net cash provided by (used in) investing activities................... 2,415,417 (470,165) ------------ ------------ Cashflows from financing activities: (Decrease) increase in borrowings under U.S. bank credit agreement...................... (1,500,000) 1,000,000 Increase in borrowings under U.K. revolving credit agreement................. 71,736 192,348 Proceeds from mortgage loan.................. - 1,200,000 Proceeds from exercise of stock options...... 28,677 5,838 Repayments of U.S. term loan................. (225,000) (225,000) Repayments of other debt..................... (61,086) (77,039) ------------ ------------ Net cash (used in) provided by financing activities................... (1,685,673) 2,096,147 ------------ ------------ Effect of exchange rate changes on cash.......... 12,884 (16,056) ------------ ------------ Net increase (decrease) in cash.................. 618,743 (1,194,418) Cash at beginning of year........................ 2,115,118 1,998,767 ------------ ------------ Cash at end of period............................ $ 2,733,861 $ 804,349 ============ ------------ See Notes to Condensed Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- December 31, 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 three months ended December 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2001. 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, 2000. 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 months ended December 31, 2000 and 1999: 2000 1999 ---------- --------- (Unaudited) (Unaudited) Basic EPS Computation Net income.............................. $1,722,470 $ 84,646 Weighted average shares outstanding..... 4,638,415 4,584,934 Basic earnings per share................ $ .37 $ .02 ========== ---------- Diluted EPS Computation Net income.............................. $1,722,470 $ 84,646 Weighted average shares outstanding... 4,638,415 4,584,934 Stock options......................... 6,612 108,730 Stock compensation arrangement........ - 6,039 ---------- ---------- Diluted shares outstanding.............. 4,645,027 4,699,703 Diluted earnings per share.............. $ .37 $ .02 ========== ========== -5- 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 months ended December 31, 2000 and 1999 was as follows: 2000 1999 ----------- ----------- (Unaudited) (Unaudited) Net income............................. $ 1,722,470 $ 84,646 Other comprehensive income (loss), net of tax: Change in unrealized gain on securities........................ (1,356,820) - Change in equity due to foreign currency translation adjustments.. 51,086 (94,894) ----------- ----------- Comprehensive income (loss)............ $ 416,736 $ (10,248) =========== =========== Note 4: Segment and Related Information The Company operates in one industry which encompasses the design, manufacture, assembly and marketing of 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 consist 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 and the Middle East. Other segments include the operations of Vicon Industries (H.K.) Ltd., a Hong Kong based majority owned subsidiary which markets and distributes the Company's products principally within Hong Kong and mainland China, and Telesite U.S.A., Inc. and subsidiary, a U.S. and Israeli based 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 months ended December 31, 2000 and 1999 was as follows: 2000 U.S. U.K. Other Consolid. Totals ---- ---------- --------- --------- ---------- ------- Net sales to external customers $13,408,000 $3,140,000 $ 828,000 $ - $17,376,000 Intersegment net sales 1,815,000 - 343,000 - 2,158,000 Net income (loss) 2,002,000 171,000 (406,000) (45,000) 1,722,000 Interest expense 139,000 45,000 11,000 (35,000) 160,000 Interest income 66,000 - - (33,000) 33,000 Depreciation and amortization 189,000 40,000 29,000 46,000 304,000 Total assets 46,390,000 6,550,000 3,797,000 (4,180,000) 52,557,000 Capital expenditures 131,000 16,000 62,000 - 209,000 -6- 1999 U.S. U.K. Other Consolid. Totals ---- ---------- ---------- --------- ---------- ------- Net sales to external customers $16,244,000 $2,392,000 $ 888,000 $ - $19,524,000 Intersegment net sales 1,594,000 - 84,000 - 1,678,000 Net income (loss) 160,000 26,000 (47,000) (54,000) 85,000 Interest expense 143,000 40,000 5,000 (22,000) 166,000 Interest income 52,000 - - (35,000) 17,000 Depreciation and amortization 176,000 26,000 9,000 52,000 263,000 Total assets 47,074,000 5,525,000 2,735,000 (3,437,000) 51,897,000 Capital expenditures 452,000 - 18,000 - 470,000 The consolidating segment above includes the elimination and consolidation of intersegment transactions. Note 5: Marketable Securities In the quarter ended December 31, 2000, the Company realized a $2.4 million gain ($1.6 million net of tax effect) on the sale of a majority of its equity interest in Chun Shin Electronics, Inc. (CSE), a South Korean company which, among other things, manufactures certain of the Company's proprietary products. In July 2000, CSE completed an initial public offering of approximately 1.4 million shares of its stock in South Korea, at which time the Company's ownership interest was reduced to approximately 21%. At December 31, 2000, the Company recorded an unrealized gain on its remaining security holdings of $320,000 ($198,000 net of tax effect) based upon a $366,000 fair market value and $46,000 cost basis. Realized gains from the sale of these securities were $316,000 in the quarter ended September 30, 2000. Prior to CSE's public offering, the Company recognized this investment on the cost method of accounting. As of December 31, 2000, the Company's ownership interest in CSE was approximately 3%. Note 6: Derivative Instruments The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138, as of October 1, 2000. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The Company's derivative financial instruments consist of foreign currency forward exchange contracts and interest rate swap agreements. Implementation of this statement did not have a material impact on the Company's financial position or results of operations for the quarter ended December 31, 2000. -7- MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Three Months Ended December 31, 2000 Compared with December 31, 1999 -------------------------------------------------------------------- Net sales for the quarter ended December 31, 2000 decreased $2.1 million or 11% to $17.4 million compared with $19.5 million in the year ago period. Domestic sales decreased $2.4 million or 16% to $12.5 million. Indirect sales to the United States Postal Service under a national supply contract decreased $1.2 million or 20% to $4.8 million. The contract was due to expire on December 31, 2000 and was extended to March 16, 2001. Other domestic sales decreased $1.2 million or 13% to $7.7 million principally as a result of a decrease in large system sales. Despite weaker European currencies, international sales increased $.3 million or 5% to $4.9 million. The backlog of unfilled orders was $7.5 million at December 31, 2000 compared with $9.2 million at December 31, 1999. Gross profit margins for the first quarter of fiscal 2001 increased to 34.0% compared with 27.6% in the year ago period. The margin increase was wholly attributable to the effects of a $1.3 million charge for warranty costs incurred in the year ago period. Operating expenses for the first quarter of fiscal 2001 were $5.5 million or 31.5% of net sales compared with $5.1 million or 26.2% of net sales in the year ago period. The increase in operating expenses was principally the result of increased product development costs and an additional provision for bad debts relating to a customer bankruptcy. Operating income increased to $428,000 for the first quarter of fiscal 2001 compared with $279,000 in the year ago period. The year ago period was impacted by a $1.3 million warranty charge. In the first quarter of fiscal 2001, the Company realized a $2.4 million gain on the sale of a majority of its equity interest in Chun Shin Electronics, Inc., a South Korean company which, among other things, manufactures certain of the Company's proprietary products. Interest expense was $160,000 for the first quarter of fiscal 2001 compared with $166,000 in the year ago period. Income tax expense was $982,000 for the first quarter of fiscal 2001 compared with $46,000 in the year ago period. As a result of the foregoing, net income increased to $1.7 million for the first quarter of fiscal 2001 compared with $85,000 for the year ago period. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS Liquidity and Financial Condition Net cash used in operating activities was $124,000 for the first quarter of fiscal 2001. Net cash provided by investing activities was $2.4 million for the first quarter of 2001 due principally to the receipt of $2.6 million of proceeds from the sale of a majority of the Company's equity interest in Chun Shin Electronics, Inc. Net cash used in financing activities was $1.7 million, which included the paydown of $1.5 million of borrowings under the Company's U.S. revolving credit agreement. As a result of the foregoing, cash increased by $619,000 for the first quarter of 2001 after the nominal 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 7.45%, respectively, at December 31, 2000). At December 31, 2000, there were no outstanding borrowings under this facility. 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 $882,000) in the U.K. to support local working capital requirements of Vicon Industries Limited. At December 31, 2000, outstanding borrowings under this facility were approximately $203,000. 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 three months ended December 31, 2000, approximately $1.2 million or 13% of the Company's purchases of components and finished products were supplied indirectly from CSE. 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 majority 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. Gross profit margins attributable to sales of CSE sourced products are generally comparable with the margins reported in the accompanying statements of operations. -9- "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. -10- 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 ------ -------------------------------- On January 25, 2001, the Company filed Form 8-K announcing the execution of an extension of the United States Postal Service contract to March 16, 2001. -11- 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. February 14, 2001 VICON INDUSTRIES, INC. Kenneth M. Darby John M. Badke Chairman and Vice President, Finance Chief Executive Officer Chief Financial Officer -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. February 14, 2001 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