10-Q 1 f10q_123101.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, 2001 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, 2001, the registrant had outstanding 4,652,712 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 12/31/01 12/31/00 Net sales............................. $13,550,833 $17,376,279 Cost of sales......................... 9,078,363 11,475,557 ----------- ----------- Gross profit........................ 4,472,470 5,900,722 Operating expenses: Selling expense................... 2,958,130 3,164,609 General & administrative expense.. 998,270 1,338,213 Engineering & development expense. 997,087 970,208 ----------- ----------- 4,953,487 5,473,030 ----------- ----------- Operating (loss) income............. (481,017) 427,692 Gain on sale of securities............ - (2,404,233) Interest expense...................... 97,933 160,116 Interest income....................... (62,009) (32,661) ----------- ----------- (Loss) income before income taxes. (516,941) 2,704,470 Income tax (benefit) expense.......... (170,000) 982,000 ----------- ----------- Net (loss) income................. $ (346,941) $ 1,722,470 =========== ----------- (Loss) earnings per share: Basic $ (.07) $ .37 === === Diluted $ (.07) $ .37 === === Shares used in computing (loss) earnings per share: Basic 4,648,471 4,638,415 Diluted 4,648,471 4,645,027 See Accompanying Notes to Condensed Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS 12/31/01 9/30/01 ------ -------- ------- CURRENT ASSETS Cash and cash equivalents....................... $10,354,454 $ 9,795,148 Accounts receivable (less allowance of $1,088,000 at December 31, 2001 and $1,115,000 at September 30, 2001)............. 11,608,786 11,438,334 Inventories: Parts, components, and materials.............. 2,127,377 2,518,782 Work-in-process............................... 2,694,352 2,777,211 Finished products............................. 10,768,070 11,800,197 ----------- ----------- 15,589,799 17,096,190 Deferred income taxes........................... 1,478,404 1,420,372 Prepaid expenses................................ 436,276 566,861 ----------- ----------- TOTAL CURRENT ASSETS............................ 39,467,719 40,316,905 -------------------- Property, plant and equipment................... 16,481,609 16,371,853 Less accumulated depreciation and amortization.. (8,510,256) (8,232,536) ----------- ----------- 7,971,353 8,139,317 Goodwill, net of accumulated amortization....... 1,521,445 1,571,058 Deferred income taxes........................... 1,601,789 1,366,625 Other assets.................................... 488,573 531,660 ----------- ----------- TOTAL ASSETS.................................... $51,050,879 $51,925,565 ------------ =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Borrowings under revolving credit agreement..... $ 916,896 $ - Current maturities of long-term debt............ 1,285,396 2,144,727 Accounts payable................................ 2,448,082 2,375,825 Accrued compensation and employee benefits...... 1,437,117 1,789,401 Accrued expenses................................ 1,850,884 2,227,825 Unearned service revenue........................ 1,321,875 1,294,576 Income taxes payable............................ 282,604 479,361 ---------- ---------- TOTAL CURRENT LIABILITIES 9,542,854 10,311,715 ------------------------- Long-term debt.................................. 4,003,420 3,498,099 Unearned service revenue........................ 2,090,847 2,334,348 Other long-term liabilities..................... 806,296 883,356 SHAREHOLDERS' EQUITY Common stock, par value $.01.................... 47,765 47,565 Capital in excess of par value.................. 21,647,787 21,542,541 Retained earnings............................... 13,962,501 14,309,442 ------------ ----------- 35,658,053 35,899,548 Less treasury stock, at cost.................... (658,422) (633,422) Accumulated other comprehensive loss............ (392,169) (368,079) ------------ ----------- TOTAL SHAREHOLDERS' EQUITY 34,607,462 34,898,047 -------------------------- ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $51,050,879 $51,925,565 ------------------------------------------ ============ =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended 12/31/01 12/31/00 Cash flows from operating activities: Net (loss) income.............................. $ (346,941) $ 1,722,470 Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: Gain on sale of securities................... - (2,404,233) Depreciation and amortization................ 287,883 258,287 Goodwill amortization........................ 49,613 45,973 Stock compensation expense................... 56,696 - Deferred income taxes........................ (318,445) (37,418) Change in assets and liabilities: Accounts receivable........................ (218,888) 503,563 Inventories................................ 1,472,574 (266,781) Prepaid expenses........................... 127,471 125,971 Other assets............................... 43,087 31,613 Accounts payable........................... 77,730 (641,631) Accrued compensation and employee benefits. (349,289) (674,309) Accrued expenses........................... (370,253) 65,551 Unearned service revenue................... (216,202) 267,999 Income taxes payable....................... (189,509) 866,606 Other liabilities.......................... (2,795) 12,454 ------------ ------------ Net cash provided by (used in) operating activities................... 102,732 (123,885) ------------ ------------ Cash flows from investing activities: Proceeds from sale of securities............. - 2,624,858 Capital expenditures, net of disposals....... (138,757) (209,441) ------------ ------------ Net cash (used in) provided by investing activities................... (138,757) 2,415,417 ------------ ------------ Cash flows from financing activities: Repayments of borrowings under U.S. bank credit agreement........................... - (1,500,000) Increase in borrowings under U.K. revolving credit agreement................. 910,572 71,736 Proceeds from exercise of stock options...... 23,750 28,677 Repayments of U.S. term loan................. (225,000) (225,000) Repayments of other debt..................... (123,302) (61,086) ------------ ------------ Net cash provided by (used in) financing activities................... 586,020 (1,685,673) ------------ ------------ Effect of exchange rate changes on cash.......... 9,311 12,884 ------------ ------------ Net increase in cash............................. 559,306 618,743 Cash at beginning of year........................ 9,795,148 2,115,118 ------------ ------------ Cash at end of period............................ $10,354,454 $ 2,733,861 ============ ------------ See Accompanying Notes to Condensed Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- December 31, 2001 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, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2002. 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, 2001. Certain prior year amounts have been reclassified to conform to current year presentation. Note 2: 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 the exercise of stock options and incremental common shares issuable under a deferred compensation agreement. The following table provides the components of the basic and diluted EPS computations for the three months ended December 31, 2001 and 2000: 2001 2000 ---------- --------- Basic EPS Computation Net (loss) income....................... $ (346,941) $1,722,470 Weighted average shares outstanding..... 4,648,471 4,638,415 Basic (loss) earnings per share......... $ (.07) $ .37 ========== ========== Diluted EPS Computation Net (loss) income....................... $ (346,941) $1,722,470 Weighted average shares outstanding... 4,648,471 4,638,415 Stock options......................... - 6,612 ---------- ---------- Diluted shares outstanding.............. 4,648,471 4,645,027 Diluted (loss) earnings per share....... $ (.07) $ .37 ========== ========== For the three months ended December 31, 2001, 44,167 shares have been omitted from the calculation of diluted EPS, as their effect would have been antidilutive. -5- Note 3: Comprehensive Income The Company's total comprehensive income for the three months ended December 31, 2001 and 2000 was as follows: 2001 2000 ---------- ---------- Net (loss) income........................... $ (346,941) $1,722,470 Other comprehensive income (loss), net of tax: Unrealized gain on securities............. - (1,356,820) Unrealized gain on derivatives............ 49,015 - Foreign currency translation adjustment... (73,105) 51,086 ---------- ---------- Comprehensive (loss) income................. $ (371,031) $ 416,736 ========== ========== Note 4: Segment and Related Information The Company operates in one industry which encompasses the design, manufacture, assembly and marketing of video surveillance 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 (Europe) based operations. Its U.S. based operations consists of Vicon Industries, Inc., the Company's corporate headquarters and principal operating entity. Its Europe 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 or loss for each segment, excluding intersegment sales and profits. Segment information for the three months ended December 31, 2001 and 2000 was as follows: Three Months Ended December 31, 2001 U.S. Europe Other Consolid. Totals ------------------ ---------- ---------- --------- ---------- ------- Net sales to external customers $ 9,129,000 $3,482,000 $ 940,000 $ - $13,551,000 Intersegment net sales 2,101,000 - 144,000 (2,245,000) - Net income (loss) (433,000) 236,000 (91,000) (59,000) (347,000) Total assets 43,933,000 8,216,000 3,479,000 (4,577,000) 51,051,000 -6- Three Months Ended December 31, 2000 U.S. Europe 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 Total assets 46,390,000 6,550,000 3,797,000 (4,180,000) 52,557,000 The consolidating segment above includes the elimination and consolidation of intersegment transactions. Note 5: Gain on Sale of Securities During the three months 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 manufactures certain of the Company's proprietary products. Note 6: Derivative Instruments At December 31, 2001, the Company had interest rate swaps and forward exchange contracts outstanding with notional amounts aggregating $3.8 million and $766,000, respectively, whose aggregate fair value was a liability of approximately $192,000. The change in the amount of the liability for these instruments is shown as a component of accumulated other comprehensive loss, net of tax. Note 7: Impact of Recently Issued Accounting Standards In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized but, instead, tested for impairment at least annually in accordance with the provisions of the Statement. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Upon adoption, the Company will be required to assign its goodwill ($1.5 million at December 31, 2001, which relates to its acquisition of TeleSite U.S.A., Inc. in 1999) to "reporting units" as defined under SFAS No. 142. The Company's reporting units are anticipated to be equivalent to its current operating segments. Goodwill assigned to each of the reporting units will be tested for impairment as of October 1, 2002 by comparing the carrying amount of the reporting units' net assets (including goodwill) to its fair value. The Company has six months from October 1, 2002 to complete this "first step" of this transitional goodwill impairment test. If the carrying amount of the net assets of a reporting unit (including goodwill) exceeds the fair value of that reporting unit, a "second step" of the transitional goodwill impairment test must be completed as soon as possible, but not later than September 30, 2003. Due to the complexities involved with the transitional provisions of SFAS No. 142, the Company has not yet completed its evaluation of the possible effects of its adoption of SFAS No. 142 on the Company's financial condition or results of operations. -7- Until the Company's adoption of SFAS No. 142, the Company is continuing to amortize goodwill over its original 10-year period, and continuing to evaluate impairment. The Company believes that its ability to recover the carrying amount of its goodwill is dependent upon, among other things, its ability to successfully complete the development and marketing of certain new products. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," which supersedes SFAS No. 121. SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill will be evaluated for impairment under SFAS No. 142, as discussed above. The Company is required to adopt SFAS No. 144 on October 1, 2003. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. Note 8: Amendment to U.S. Bank Revolving Credit and Term Loan Agreement -------------------------------------------------------------------------- On February 12, 2002, the Company executed an amendment agreement that modified its unsecured revolving credit and term loan agreement with its bank to provide for a $5 million secured revolving credit facility through July 2004. Borrowings under such facility bear interest at the bank's prime rate or, at the Company's option, LIBOR plus 190 basis points. The amendment agreement grants the bank a security interest in all the assets of the Company and, among other things, effectively modified the financial covenants contained in all the existing loan and mortgage agreements with this bank. Current and long-term debt maturing in the nine months ended September 30, 2002 and in each of the subsequent fiscal years approximates $966,000 for the nine months ended September 30, 2002, $1,300,000 in 2003, $316,000 in 2004, $324,000 in 2005, $330,000 in 2006 and $2,053,000 thereafter. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Three Months Ended December 31, 2001 Compared with December 31, 2000 -------------------------------------------------------------------- Net sales for the quarter ended December 31, 2001 decreased $3.8 million or 22% to $13.6 million compared with $17.4 million in the year ago period. Domestic sales decreased $3.9 million or 32% to $8.6 million principally as a result of a $3.7 million decline in indirect sales to the United States Postal Service (USPS) under a former national supply contract. Indirect sales to the USPS for the quarter ended December 31, 2001 decreased 77% to $1.1 million compared with $4.8 million in the year ago period. In March 2001, the USPS announced a freeze on all its capital spending due to a severe projected budget deficit. As a result, the Company has since experienced a material reduction in its USPS order rate. In addition, the USPS supply contract had expired on June 30, 2001 with no new contract being awarded. The Company has since been named as one of three pre-approved suppliers in the latest USPS published specification for video systems. International sales for the quarter ended December 31, 2001 increased 2% to $5.0 million compared with $4.9 million in the year ago period. Gross profit margins for the first quarter of fiscal 2002 decreased to 33.0% compared with 34.0% in the year ago period. The margin decline was principally due to the effect of fixed production costs relative to the quarter's lower sales. Operating expenses for the first quarter of fiscal 2002 were $5.0 million or 36.6% of net sales compared with $5.5 million or 31.5% of net sales in the year ago period. The decrease in operating expenses principally resulted from a decline in sales related costs. Despite decreased sales in the quarter, the Company continued its investment in new product development incurring $1.0 million of engineering and development expenses. The Company incurred an operating loss of $481,000 for the first fiscal quarter of 2002 compared with operating income of $428,000 in the year ago period principally as a result of lower sales. In the prior year quarter, 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., a South Korean company which, among other things, manufactures certain of the Company's proprietary products. Interest expense decreased to $98,000 for the first quarter of fiscal 2002 compared with $160,000 in the year ago period principally as a result of the paydown of bank borrowings. The Company recorded an income tax benefit of $170,000 for the first quarter of fiscal 2002 compared with income tax expense of $982,000 in the year ago period. As a result of the foregoing, the Company incurred a net loss of $347,000 for the first quarter of fiscal 2002 compared with net income of $1.7 million in the year ago period. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS Liquidity and Financial Condition Net cash provided by operating activities was $103,000 for the first quarter of fiscal 2002. Net cash used in investing activities was $139,000 for the first quarter of fiscal 2002 relating to general capital expenditures. Net cash provided by financing activities was $586,000, which included $911,000 of borrowings under the Company's U.K. bank overdraft facility offset by $348,000 of scheduled repayments under U.S. bank mortgage and term loans. As a result of the foregoing, cash increased by $559,000 for the first quarter of fiscal 2002 after the nominal effect of exchange rate changes on the cash position of the Company. At December 31, 2001, the Company had a $9.5 million unsecured revolving credit facility in the U.S. with a bank that was scheduled to expire in July 2002. Borrowings under that facility bore interest at the bank's prime rate minus 2% or, at the Company's option, LIBOR plus 90 basis points (2.75% and 2.78%, respectively, at December 31, 2001). At December 31, 2001, there were no outstanding borrowings under this facility. The agreement contained restrictive covenants which, among other things, required the Company to maintain certain levels of earnings and ratios of debt service coverage and debt to tangible net worth. On February 12, 2002, the Company executed an amendment agreement that modified its unsecured revolving credit and term loan agreement referred to above to provide for a $5 million secured revolving credit facility through July 2004. Borrowings under such facility bear interest at the bank's prime rate or, at the Company's option, LIBOR plus 190 basis points. The amendment agreement grants the bank a security interest in all the assets of the Company and, among other things, effectively modified the financial covenants contained in all the existing loan and mortgage agreements with this bank. The Company also maintains a bank overdraft facility of 600,000 Pounds Sterling (approximately $870,000) in the U.K. to support local working capital requirements of Vicon Industries Limited. At December 31, 2001, outstanding borrowings under this facility amounted to $917,000. The Company believes that it has sufficient cash and funds available under its credit agreements to meet its anticipated operating, capital expenditures and debt service requirements for at least the next twelve months. -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 "Results of Operations" and "Liquidity and Financial Condition" 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 Number Description 10 Material Contracts (.1) Amendment No. 1 to the Credit Agreement between the Registrant and Washington Mutual Bank, FA dated February 12, 2002 (.2) Security Agreement between the Registrant and Washington Mutual Bank, FA dated February 12, 2002 No Form 8-K was required to be filed during the current quarter. -12- 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 14, 2002 By:/s/ Kenneth M. Darby By:/s/ John M. Badke ----------------------- ----------------------- Kenneth M. Darby John M. Badke Chairman and Vice President, Finance Chief Executive Officer Chief Financial Officer -13-