-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R1MZ1Qlv72X9UitWNn5GW6W46U+EcwP07U8qoMADr9lRU9GP3ySM2OhTdzccoFqP i23Pe6xL/kXe8P+0t9w2sg== 0000310056-03-000004.txt : 20030515 0000310056-03-000004.hdr.sgml : 20030515 20030515170856 ACCESSION NUMBER: 0000310056-03-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030515 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VICON INDUSTRIES INC /NY/ CENTRAL INDEX KEY: 0000310056 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 112160665 STATE OF INCORPORATION: NY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07939 FILM NUMBER: 03706013 BUSINESS ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5169522288 MAIL ADDRESS: STREET 1: 89 ARKAY DR CITY: HAUPPAUGE STATE: NY ZIP: 11788 10-Q 1 f10q_vicon10q051503.txt 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 March 31, 2003 Commission File No. 1-7939 - --------------------------------- --------------------------- Vicon Industries, Inc. ---------------------- New York State 11-2160665 -------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 89 Arkay Drive, Hauppauge, New York 11788 ----------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 952-2288 -------------- (Former name, address, and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 under the Securities Exchange Act of 1934) Yes No X ------- ------- At March 31, 2003, the registrant had outstanding 4,637,662 shares of Common Stock, $.01 par value. PART I - FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS - ----------------------------- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended ------------------ 3/31/03 3/31/02 ------- ------- Net sales $13,081,881 $12,846,138 Cost of sales 8,440,887 8,610,879 --------- --------- Gross profit 4,640,994 4,235,259 Operating expenses: Selling expense 2,832,963 2,877,749 General & administrative expense 989,671 996,483 Engineering & development expense 1,341,116 1,024,250 --------- --------- 5,163,750 4,898,482 Operating loss (522,756) (663,223) Interest expense 64,439 78,118 Interest income (40,380) (45,955) --------- --------- Loss before income taxes (546,815) (695,386) Income tax expense (benefit) (Note 11) 2,187,957 (228,000) --------- --------- Net loss $(2,734,772) $ (467,386) =========== =========== Loss per share: Basic $ (.59) $ (.10) ========= ======= Diluted $ (.59) $ (.10) ========= ======= Shares used in computing loss per share: Basic 4,641,213 4,655,334 Diluted 4,641,213 4,655,334 See Accompanying Notes to Condensed Consolidated Financial Statements. - 1 - VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Ended ---------------- 3/31/03 3/31/02 ------- ------- Net sales $25,099,895 $26,396,971 Cost of sales 16,558,346 17,689,242 ---------- ---------- Gross profit 8,541,549 8,707,729 Operating expenses: Selling expense 5,614,115 5,835,878 General & administrative expense 2,104,023 1,994,753 Engineering & development expense 2,416,562 2,021,337 ---------- ---------- 10,134,700 9,851,968 Operating loss (1,593,151) (1,144,239) Interest expense 131,918 176,052 Interest income (101,275) (107,964) ---------- ---------- Loss before income taxes (1,623,794) (1,212,327) Income tax expense (benefit) (Note 11) 1,809,957 (398,000) ---------- ---------- Loss before cumulative effect of a change in accounting principle (3,433,751) (814,327) Cumulative effect of a change in accounting principle (Note 8) (1,372,606) - ---------- ---------- Net loss $(4,806,357) $ (814,327) =========== =========== Basic and diluted loss per share: Loss before cumulative effect of a change in accounting principle $ (.74) $ (.18) Cumulative effect of a change in accounting principle (.30) - ---------- --------- Net loss $ (1.04) $ (.18) ========== ========= Shares used in computing loss per share: Basic 4,641,993 4,651,865 Diluted 4,641,993 4,651,865 See Accompanying Notes to Condensed Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS 3/31/03 9/30/02 - ------ ------- ------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 6,774,960 $ 9,771,804 Marketable securities 1,543,456 - Accounts receivable, net 10,053,572 10,127,526 Accounts receivable - related parties 76,699 273,464 Inventories: Parts, components, and materials 1,862,099 2,802,779 Work-in-process 2,066,108 1,275,057 Finished products 8,876,510 9,470,823 --------- --------- 12,804,717 13,548,659 Recoverable income taxes 1,937,728 1,712,728 Deferred income taxes - 673,574 Prepaid expenses 584,881 496,399 --------- --------- TOTAL CURRENT ASSETS 33,776,013 36,604,154 Property, plant and equipment 17,337,396 16,997,129 Less accumulated depreciation and amortization (9,869,262) (9,331,102) ---------- ---------- 7,468,134 7,666,027 Goodwill, net of accumulated amortization - 1,372,606 Deferred income taxes - 1,283,784 Other assets 477,939 499,918 --------- --------- TOTAL ASSETS $41,722,086 $47,426,489 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt 702,330 1,304,227 Accounts payable - trade 1,842,524 1,740,919 Accounts payable - related parties 26,558 643,093 Accrued compensation and employee benefits 2,062,791 1,837,519 Accrued expenses 1,781,154 1,596,288 Unearned revenue 1,893,646 1,514,121 Income taxes payable 188,007 140,741 --------- --------- TOTAL CURRENT LIABILITIES 8,497,010 8,776,908 Long-term debt 2,878,302 3,040,061 Unearned revenue 921,179 1,267,337 Other long-term liabilities 749,606 803,476 SHAREHOLDERS' EQUITY Common stock, par value $.01 48,290 48,239 Capital in excess of par value 21,776,120 21,760,002 Retained earnings 7,924,057 12,730,414 --------- ---------- 29,748,467 34,538,655 Less treasury stock, at cost (895,081) (842,024) Accumulated other comprehensive loss (177,397) (157,924) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 28,675,989 33,538,707 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $41,722,086 $47,426,489 =========== =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended ---------------- 3/31/03 3/31/02 ------- ------- Cash flows from operating activities: Net loss $(4,806,357) $ (814,327) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 532,677 570,202 Goodwill amortization - 99,226 Stock compensation expense - 61,445 Deferred income taxes 1,853,957 (550,802) Cumulative effect of a change in accounting principle 1,372,606 - Change in assets and liabilities: Accounts receivable 90,952 1,010,457 Accounts receivable - related parties 196,765 (47,221) Inventories 759,938 (344,494) Recoverable income taxes (225,000) - Prepaid expenses (88,585) (51,185) Other assets 21,980 64,169 Accounts payable - trade 103,849 145,365 Accounts payable - related parties (616,535) (202,744) Accrued compensation and employee benefits 225,242 (293,113) Accrued expenses 184,398 (665,868) Unearned revenue 33,367 (391,364) Income taxes payable 46,805 (211,252) Other liabilities 45,466 24,070 ------ ------ Net cash used in operating activities (268,475) (1,597,436) Cash flows from investing activities: Capital expenditures (325,651) (306,940) Purchases of marketable securities (1,539,708) - --------- --------- Net cash used in investing activities (1,865,359) (306,940) Cash flows from financing activities: Repayments of U.S. term loan (450,000) (450,000) Repayments of other long-term debt (316,198) (223,537) Proceeds from exercise of stock options 16,169 23,750 Repurchases of common stock (53,057) - --------- --------- Net cash used in financing activities (803,086) (649,787) Effect of exchange rate changes on cash (59,924) 30,863 Net decrease in cash (2,996,844) (2,523,300) Cash at beginning of year 9,771,804 9,795,148 --------- --------- Cash at end of period $ 6,774,960 $ 7,271,848 =========== =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2003 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 six months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2003. 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, 2002. Certain prior year amounts have been reclassified to conform to the current year presentation. Note 2: Marketable Securities - ------------------------------ Marketable securities consist of mutual fund investments in U.S. government debt securities. Such securities are stated at market value and are classified as available-for-sale under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 115, with unrealized gains and losses reported in other comprehensive income as a component of shareholders' equity. The cost of such securities at March 31, 2003 was $1,539,708, with $5,623 of unrealized gains and $1,875 of unrealized losses reported for the six-month period ended. Note 3: Accounts Receivable - ---------------------------- Accounts receivable is stated net of an allowance for doubtful accounts of $1,281,000 and $1,077,000 as of March 31, 2003 and September 30, 2002, respectively. Note 4: Earnings per Share - --------------------------- Basic earnings (loss) per share (EPS) is computed based on the weighted average number of common shares outstanding for the period. Diluted EPS reflects the maximum dilution that would have resulted from the exercise of stock options and incremental common shares issuable under a deferred compensation agreement. The weighted average number of shares of common stock used in determining basic and diluted EPS was 4,641,213 and 4,655,334 for the three months ended March 31, 2003 and 2002, respectively. The weighted average number of shares of common stock used in determining basic and diluted EPS was 4,641,993 and 4,651,865 for the six months ended March 31, 2003 and 2002, respectively. For the three months ended March 31, 2003 and 2002, 46,063 and 83,786 shares, respectively, have been omitted from the calculation of diluted EPS as their effect would have been antidilutive. For the six months ended March 31, 2003 and 2002, 47,169 and 63,977 shares, respectively, have been omitted from the calculation of diluted EPS as their effect would have been antidilutive. -5- Note 5: Comprehensive Income (Loss) - ------------------------------------- The Company's total comprehensive loss for the three month and six month periods ended March 31, 2003 and 2002 was as follows: Three Months Six Months Ended March 31, Ended March 31, --------------- --------------- 2003 2002 2003 2002 ---- ---- ---- ---- Net loss $(2,734,772) $ (467,386) $(4,806,357) $(814,327) Other comprehensive income (loss), net of tax: Net unrealized gains on securities 32 - 3,748 - Unrealized gain (loss) on derivatives 13,519 36,771 (4,065) 85,786 Foreign currency translation adjustment (176,166) (62,408) (19,156) (135,513) ----------- ---------- ------------ --------- Comprehensive loss $(2,897,387) $ (493,023) $(4,825,830) $(864,054) =========== ========== =========== ========= The accumulated other comprehensive loss balances at March 31, 2003 and September 30, 2002 consisted of the following: March 31, September 30, 2003 2002 ---- ---- Foreign currency translation adjustment $ 23,641 $ 42,797 Unrealized loss on derivatives, net of tax (204,786) (200,721) Unrealized gain on securities, net of tax 3,748 - --------- --------- Accumulated other comprehensive loss $(177,397) $(157,924) ========= ========= Note 6: 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 designer and producer of digital video products. -6- 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 month and six month periods ended March 31, 2003 and 2002 was as follows: Three Months Ended March 31, 2003 U.S. Europe Other Consolid. Totals - -------------- ---- ------ ----- --------- ------ Net sales to external customers $ 8,459,000 $4,268,000 $ 355,000 $ - $13,082,000 Intersegment net sales 1,653,000 - 707,000 (2,360,000) - Net income (loss) (2,558,000) 140,000 (254,000) (63,000) (2,735,000) Total assets 33,683,000 8,978,000 3,542,000 (4,481,000) 41,722,000 Three Months Ended March 31, 2002 U.S. Europe Other Consolid. Totals - -------------- ---- ------ ----- --------- ------ Net sales to external customers $ 8,624,000 $3,615,000 $ 607,000 $ - $12,846,000 Intersegment net sales 2,133,000 - 34,000 (2,167,000) - Net income (loss) (292,000) 183,000 (173,000) (185,000) (467,000) Total assets 42,079,000 8,191,000 3,546,000 (5,115,000) 48,701,000 Six Months Ended March 31, 2003 U.S. Europe Other Consolid. Totals - -------------- ---- ------ ----- --------- ------ Net sales to external customers $16,215,000 $8,093,000 $ 792,000 $ - $25,100,000 Intersegment net sales 3,056,000 - 1,267,000 (4,323,000) - Net income (loss) (3,401,000) 361,000 (319,000) (1,447,000) (4,806,000) Total assets 33,683,000 8,978,000 3,542,000 (4,481,000) 41,722,000 Six Months Ended March 31, 2002 U.S. Europe Other Consolid. Totals - -------------- ---- ------ ----- --------- ------ Net sales to external customers $17,753,000 $7,097,000 $1,547,000 $ - $26,397,000 Intersegment net sales 4,234,000 - 178,000 (4,412,000) - Net income (loss) (725,000) 419,000 (265,000) (243,000) (814,000) Total assets 42,079,000 8,191,000 3,546,000 (5,115,000) 48,701,000 The consolidating segment information above includes the elimination and consolidation of intersegment transactions. Note 7: Derivative Instruments - -------------------------------- At March 31, 2003, the Company had interest rate swaps and forward exchange contracts outstanding with notional amounts aggregating $2.3 million and $2.8 million, respectively, whose aggregate fair value was a liability of approximately $205,000. The change in the amount of the liability for these instruments is shown as a component of accumulated other comprehensive loss. -7- Note 8: Goodwill - ------------------ The Company adopted SFAS No. 142 on October 1, 2002, and accordingly, has discontinued amortization of goodwill as of that date. During the six month period ended March 31, 2003, the Company completed the transitional goodwill impairment testing required under SFAS No. 142. In accordance with SFAS No. 142, such testing included a comparison of the fair value of each of the Company's reporting units to the carrying amounts of each unit's net assets, and a determination of the implied fair value of each reporting unit's goodwill. Based upon an independent valuation conducted as of October 1, 2002, and the results of the transitional impairment testing, the Company recognized an impairment charge of approximately $1.4 million (primarily resulting from a change in measurement from undiscounted to discounted cash flows), as a cumulative effect of a change in accounting principle for the six months ended March 31, 2003. The following table presents pro forma loss and loss per share data, before the cumulative effect of a change in accounting principle, restated to include the retroactive impact of the adoption of SFAS No. 142: Three Months Six Months Ended March 31, Ended March 31, --------------- --------------- 2003 2002 2003 2002 ---- ---- ---- ---- Reported loss before cumulative effect of a change in accounting principle $(2,734,772) $(467,386) $(3,433,751) $(814,327) Add back: goodwill amortization - 49,613 - 99,226 ----------- --------- ----------- --------- Pro forma loss before cumulative effect of a change in accounting principle $(2,734,772) $(417,773) $(3,433,751) $(715,101) =========== ========= =========== ========= Basic and diluted loss per share: Reported loss per share before cumulative effect of a change in accounting principle $ (.59) $ (.10) $ (.74) $ (.18) Goodwill amortization - .01 - .02 -------- ------- --------- --------- Pro forma loss per share $ (.59) $ (.09) $ (.74) $ (.15) ======== ======= ========= ========= -8- Note 9: Accrued Warranty Obligation - ------------------------------------- In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN 45 also requires additional disclosure requirements about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of this interpretation are effective for financial statement periods ending after December 15, 2002. The Company adopted the disclosure requirements of this interpretation in the prior quarter ended December 31, 2002. The adoption of this interpretation did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company recognizes the estimated cost associated with its standard warranty on products at the time of sale. The estimate is based on historical warranty claim cost experience. The following is a summary of the changes in the Company's accrued warranty obligation (which is included in accrued expenses) for the reporting period: Beginning Balance as of September 30, 2002 $ 190,000 Deduct: Payments (81,000) Add: Provision 141,000 ------- Ending Balance as of March 31, 2003 $ 250,000 ========= Note 10: Stock-Based Compensation - ----------------------------------- The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. The Company follows Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation" and SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of FASB Statement No. 123" for disclosure purposes. SFAS No. 148, issued in December 2002, provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require disclosures in annual and interim financial statements regarding the method of accounting used for stock-based compensation and the effect of the method used on reported results. The application of the disclosure portion of this standard will have no impact on the Company's consolidated financial position or results of operations. -9- In the Company's condensed consolidated financial statements, no compensation expense has been recognized for stock option grants issued under any of the Company's stock option plans. Had compensation expense for stock option grants issued been determined under the fair value method of SFAS No. 123, the Company's net loss and loss per share (EPS) for the three and six month periods ended March 31, 2003 and 2002 would have been: Three Months Six Months Ended March 31, Ended March 31, 2003 2002 2003 2002 ---- ---- ---- ---- Reported loss before cumulative effect of a change in accounting principle $(2,734,772) $ (467,386) $(3,433,751) $(814,327) Stock-based compensation cost, net of tax (51,210) (14,785) (91,698) (27,108) ----------- ---------- ----------- --------- Pro forma loss before cumulative effect of a change in accounting principle $(2,785,982) $ (482,171) $(3,525,449) $(841,435) =========== ========== =========== ========= Reported basic and diluted EPS before cumulative effect of a change in accounting principle $(.59) $(.10) $(.74) $(.18) Pro forma basic and diluted EPS before cumulative effect of a change in accounting principle $(.60) $(.10) $(.76) $(.18) Reported net loss $(2,734,772) $ (467,386) $(4,806,357) $(814,327) Stock-based compensation cost, net of tax (51,210) (14,785) (91,698) (27,108) ----------- ---------- ----------- --------- Pro forma net loss $(2,785,982) $ (482,171) $(4,898,055) $(841,435) =========== ========== =========== ========= Reported basic and diluted EPS $(.59) $(.10) $(1.04) $(.18) Pro forma basic and diluted EPS $(.60) $(.10) $(1.06) $(.18) -10- Note 11: Income Taxes - ----------------------- In the quarter ended March 31, 2003, the Company recognized a $2.1 million charge to provide a valuation allowance against its deferred tax assets due to the uncertainty of future realization. The establishment of such valuation allowance was determined to be appropriate during the current period due to updated judgments of future results in light of the Company's operating losses in current and recent years and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible. Income tax expense for the six month period ended March 31, 2003 includes the recognition of an available tax effected net operating loss carryback of $225,000 and a net operating loss carryforward benefit of $253,000 recorded in the prior quarter ended December 31, 2002. Income tax expense for the three and six month periods ended March 31, 2003 also included a provision for foreign tax expense of $81,000 and $181,000, respectively. For income tax purposes, the Company had available at March 31, 2003, a tax effected net operating loss carryback of approximately $1.9 million included in recoverable income taxes, for which the Company plans to file a carryback claim to obtain a refund of previously paid taxes. Note 12: New Accounting Standards - ----------------------------------- In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal Activities". SFAS No. 146 requires that a liability be recognized for costs associated with an exit or disposal activity only when the liability is incurred. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS No. 146 is effective for exit and disposal activities initiated after December 31, 2002. The Company adopted SFAS No. 146, which did not have an impact on the Company's consolidated financial statements. In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently analyzing the impact of its adoption on its financial statements. Note 13: Contingencies - ------------------------ On May 15, 2003, the Company was served with a summons and complaint in a patent infringement suit that named the Company and thirteen other defendants. The alleged infringement relates to the Company's camera dome systems, which is a significant product line. Among other things, the suit seeks injunctive relief and unspecified damages. At this time, an assessment as to the likelihood of an unfavorable outcome can not be made as the Company and its counsel have not had sufficient time to evaluate the complaint. However, the Company intends to vigorously defend itself in this matter. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS - --------------------------------------------- Results of Operations - --------------------- Three Months Ended March 31, 2003 Compared with March 31, 2002 - -------------------------------------------------------------- Net sales for the quarter ended March 31, 2003 increased $.2 million or 2% to $13.1 million compared with $12.9 million in the year ago period. Domestic sales decreased $.3 million or 3% to $7.7 million compared with $8.0 million in the year ago period. Such decrease was due principally to the recent downturn in the U.S. economy. International sales for the March 31, 2003 quarter increased $.5 million or 10% to $5.4 million compared with $4.9 million in the year ago period principally as a result of favorable exchange rate changes as the British pound and Eurodollar strengthened against the U.S. dollar. Gross profit margins for the second quarter of fiscal 2003 increased to 35.5% compared with 33.0% in the year ago period. The margin increase was principally due to the introduction of the Company's new digital video product line and lower fixed production costs. Operating expenses for the second quarter of fiscal 2003 were $5.2 million or 39.5% of net sales compared with $4.9 million or 38.1% of net sales in the year ago period. The Company continued to invest in new product development in the current quarter, incurring $1.3 million of engineering and development expenses compared with $1.0 million in the year ago period. The current quarter engineering and development expenses included a performance based compensation charge of $325,000 associated with the introduction of the Company's new digital video product line. The Company incurred an operating loss of $523,000 for the second fiscal quarter of 2003 compared with an operating loss of $663,000 in the year ago period principally as a result of increased operating expenses. Interest expense decreased to $64,000 for the second quarter of fiscal 2003 compared with $78,000 in the year ago period principally as a result of the paydown of bank borrowings. Income tax expense for the second quarter of fiscal 2003 was $2.2 million compared with an income tax benefit of $228,000 in the year ago period. In the quarter ended March 31, 2003, the Company recognized a $2.1 million income tax charge to provide a valuation allowance against its deferred tax assets due to the uncertainty of future realization. The establishment of such valuation allowance was determined to be appropriate as a result of the Company's operating losses in current and recent years and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible. As a result of the foregoing, the Company incurred a net loss of $2.7 million for the second quarter of fiscal 2003 compared with a net loss of $467,000 in the year ago period. -12- Results of Operations - --------------------- Six Months Ended March 31, 2003 Compared with March 31, 2002 - ------------------------------------------------------------ Net sales for the six months ended March 31, 2003 decreased $1.3 million or 5% to $25.1 million compared with $26.4 million in the year ago period. Domestic sales decreased $2.0 million or 12% to $14.5 million compared with $16.5 million in the year ago period. Such decrease was due principally to the recent downturn in the U.S. economy. International sales for the six months ended March 31, 2003 increased $.7 million or 8% to $10.6 million compared with $9.9 million in the year ago period principally as a result of favorable exchange rate changes as the British pound and Eurodollar strengthened against the U.S. dollar. Gross profit margins for the first six months of fiscal 2003 increased to 34.0% compared with 33.0% in the year ago period. The margin increase was principally due to a more favorable sales mix of higher margin products as the Company introduced its new digital video product line in the second quarter ended March 31, 2003. Operating expenses for the first six months of fiscal 2003 were $10.1 million or 40.4% of net sales compared with $9.9 million or 37.3% of net sales in the year ago period. The Company continued to invest in new product development in the current year period, incurring $2.4 million of engineering and development expenses compared with $2.0 million in the year ago period. The Company incurred an operating loss of $1.6 million for the first six months of 2003 compared with an operating loss of $1.1 million in the year ago period principally as a result of lower sales and higher operating expenses. Interest expense decreased to $132,000 for the first six months of fiscal 2003 compared with $176,000 in the year ago period principally as a result of the paydown of bank borrowings. Income tax expense for the first six months of fiscal 2003 was $1.8 million compared with an income tax benefit of $398,000 in the year ago period. In the second quarter ended March 31, 2003, the Company recognized a $2.1 million income tax charge to provide a valuation allowance against its deferred tax assets due to the uncertainty of future realization. Such charge was reduced by the recognition of an available tax effected net operating loss carryback of $225,000 and a net operating loss carryforward benefit of $253,000 recorded in the first quarter ended December 31, 2002. During the six months ended March 31, 2003, the Company completed its required goodwill impairment tests as of October 1, 2002 and determined that the carrying amount of goodwill was impaired when tested pursuant to the requirements of the new standard. As a result, a goodwill impairment charge of $1.4 million was recognized as the cumulative effect of a change in accounting principle for the six month period. As a result of the foregoing, the Company incurred a net loss of $4.8 million for the first six months of fiscal 2003 compared with a net loss of $814,000 in the year ago period. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ Liquidity and Financial Condition - --------------------------------- Net cash used in operating activities was $268,000 for the first six months of fiscal 2003. The net loss of $4.8 million for the period included non-cash charges of $1.9 million for deferred income taxes and $1.4 million for goodwill impairment. Such net loss was further reduced by a non-cash charge of $533,000 for depreciation and amortization and a $760,000 reduction in inventories. Net cash used in investing activities was $1.9 million for the first six months of fiscal 2003 relating to the purchase of $1.5 million of marketable securities, which consist of mutual fund investments in U.S. government securities, and $326,000 of general capital expenditures. Net cash used in financing activities was $803,000, which primarily represented scheduled repayments of bank mortgage and term loans. As a result of the foregoing, cash decreased by $3.0 million for the first six months of fiscal 2003 after the effect of exchange rate changes on the cash position of the Company. At March 31, 2003, the Company had an available tax effected net operating loss carryback of approximately $1.9 million, for which it plans to file a carryback claim in the near term to obtain a refund of previously paid taxes. The Company has a $5 million secured revolving credit facility with a bank that expires in July 2004 and a $375,000 outstanding term loan with the same bank that matures in August 2003. Borrowings under the revolving credit facility bear interest at the bank's prime rate or, at the Company's option, LIBOR plus 190 basis points (4.25% and 3.19%, respectively, at March 31, 2003). The credit agreement includes a provision that waives the Company's obligation to comply with all financial covenants contained in the agreements so long as there are no outstanding borrowings under the revolving credit facility and the Company maintains certain compensating balances. At this time, the Company does not anticipate that it will be obligated to comply with these financial covenants in the near term. At March 31, 2003 and September 30, 2002, there were no outstanding borrowings under this facility. The Company also maintains a bank overdraft facility of one million Pounds Sterling (approximately $1,580,000) in the U.K. to support local working capital requirements of Vicon Industries Limited. This facility expires in March 2004. At March 31, 2003 and September 30, 2002, there were no outstanding borrowings under this facility. Current and long-term debt maturing in the remaining six months ended September 30, 2003 and in each of the subsequent fiscal years approximates $539,000 for the remaining six months ended September 30, 2003, $321,000 in 2004, $329,000 in 2005, $336,000 in 2006, $316,000 in 2007 and $1,740,000 thereafter. The Company occupies certain facilities, or is contingently liable, under operating leases that expire at various dates through 2008. The leases, which cover periods from three to eight years, generally provide for renewal options at specified rental amounts. The aggregate operating lease commitment at March 31, 2003 was $591,000 with minimum rentals for the fiscal years shown as follows: for the remaining six months ended September 30, 2003 - $157,000; 2004 - - $272,000; 2005 - $98,000; 2006 - $24,000; 2007 - $24,000; 2008 and thereafter - - $16,000. -14- The Company entered into certain consulting and incentive compensation agreements that provide for the payout of up to $810,000 of fees and compensation upon the completion and sale of a specified number of units of a newly developed product line. The Company incurred $325,000 of expenses relating to these agreements in the second fiscal quarter ended March 31, 2003 and believes that it is likely that it will incur the majority of the remaining arrangement over the last two quarters of this fiscal year. The Company believes that it has sufficient cash to meet its anticipated operating, capital expenditures and debt service requirements for at least the next twelve months. The Company has experienced reduced sales levels and incurred operating losses in past periods which limits the Company's ability to draw upon its bank credit facilities, if needed. Critical Accounting Policies - ---------------------------- The Company's significant accounting policies are fully described in Note 1 to the Company's consolidated financial statements included in its September 30, 2002 Annual Report on Form 10-K. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility of the resulting receivable is reasonably assured. As it relates to product sales, revenue (including shipping and handling fees) is generally recognized when products are sold and title is passed to the customer. Under arrangements that involve the sale of product combined with the provision of services, revenue is generally recognized for each element of the arrangement upon delivery or performance provided that (i) the undelivered element is not essential to the functionality of the delivered element and (ii) there is objective evidence of the fair value of the undelivered elements. Advance service billings under a national supply contract with one customer are deferred and recognized as revenues on a pro-rata basis over the term of the service agreement. Shipping and handling costs are included in cost of sales. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company provides for the estimated cost of product warranties at the time revenue is recognized. While the Company engages in product quality programs and processes, including monitoring and evaluating the quality of its component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from its estimates, revisions to the estimated warranty liability may be required. The Company writes down its inventory for estimated obsolescence and slow moving inventory equal to the difference between the cost of inventory and the estimated net realizable market value based upon assumptions about future demand and market conditions. Technology changes and market conditions may render some of the Company's products obsolete and additional inventory write-downs may be required. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. -15- The Company assesses the recoverability of the carrying value of its long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets and estimated net asset liquidation values. If the sum of the expected future undiscounted cash flows, plus estimated asset liquidation values, is less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. The Company's ability to recover the reported amounts of deferred income tax assets is dependent upon its ability to generate sufficient taxable income during the periods over which net temporary tax differences become deductible. In the quarter ended March 31, 2003, the Company recognized a $2.1 million charge to provide a valuation allowance against its deferred tax assets due to the uncertainty of future realization. The establishment of such valuation allowance was determined to be appropriate during the current period due to updated judgments in light of the Company's operating losses in current and recent years and the inherent uncertainties of predicting future operating results in periods over which such net tax differences become deductible. The Company plans to provide a full valuation allowance against its deferred tax assets until such time that it can achieve a sustained level of profitability or other positive evidence arises that would demonstrate an ability to recover such assets. New Accounting Standard Not Yet Adopted - --------------------------------------- In November 2002, the Emerging Issues Task Force (EITF) finalized its tentative consensus on EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables", which provides guidance on the timing and method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently analyzing the impact of its adoption on its financial statements. 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 "Critical Accounting Policies" are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 that should be considered as subject to the many risks and uncertainties that exist in the Company's operations and business environment. The forward-looking statements are based on current expectations and involve a number of known and unknown risks and uncertainties that could cause the actual results, performance and/or achievements of the Company to differ materially from any future results, performance or achievements, express or implied, by the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, and that in light of the significant uncertainties inherent in forward-looking statements, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company also assumes no obligation to update its forward-looking statements or to advise of changes in the assumptions and factors on which they are based. -16- ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK - ------------------------------------------------------------------- The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rates. The Company has a policy that prohibits the use of currency derivatives or other financial instruments for trading or speculative purposes. The Company enters into forward exchange contracts to hedge certain foreign currency exposures and minimize the effect of such fluctuations on reported earnings and cash flow (see Note 7 "Derivative Instruments" to the accompanying condensed consolidated financial statements). At March 31, 2003, the Company's foreign currency exchange risks included a $2.3 million intercompany accounts receivable balance due from the Company's U.K. based subsidiary and a nominal Japanese Yen denominated trade accounts payable liability due to inventory suppliers. Such assets and liabilities are short term and will be settled in fiscal 2003. The following sensitivity analysis assumes an instantaneous 10% change in foreign currency exchange rates from quarter-end levels, with all other variables held constant. At March 31, 2003, a 10% strengthening or weakening of the U.S. dollar versus the British Pound would result in a $230,000 decrease or increase, respectively, in the intercompany accounts receivable balance. Such foreign currency exchange risk at March 31, 2003 has been substantially hedged by forward exchange contracts. At March 31, 2003, the Company had $2.3 million of outstanding floating rate bank debt which was covered by interest rate swap agreements that effectively convert the foregoing floating rate debt to stated fixed rates (see "Note 5. Long-Term Debt" to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2002). Thus, the Company has substantially no net interest rate exposures on these instruments. However, the Company had approximately $925,000 of floating rate bank debt that is subject to interest rate risk as it was not covered by interest rate swap agreements. The Company does not believe that a 10% fluctuation in interest rates would have a material effect on its consolidated financial position and results of operations. ITEM 4. CONTROLS AND PROCEDURES - -------------------------------- (a) Based on their evaluation as of a date within 90 days of the filing date of this quarterly report on Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. -17- Independent Accountants' Review Report The Board of Directors and Shareholders Vicon Industries, Inc. We have reviewed the condensed consolidated balance sheet of Vicon Industries, Inc. and subsidiaries as of March 31, 2003, and the related condensed consolidated statements of operations and cash flows for the three and six-month periods ended March 31, 2003 and 2002. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 8, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", effective October 1, 2002. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Vicon Industries, Inc. and subsidiaries as of September 30, 2002, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated December 10, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 30, 2002 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP ------------ Melville, New York May 15, 2003 -18- PART II - OTHER INFORMATION - --------------------------- ITEM 1 - LEGAL PROCEEDINGS - ------ ----------------- On May 15, 2003, the Company was served with a summons and complaint in a patent infringement suit that named the Company and thirteen other defendants. The alleged infringement relates to the Company's camera dome systems, which is a significant product line. Among other things, the suit seeks injunctive relief and unspecified damages. At this time, an assessment as to the likelihood of an unfavorable outcome can not be made as the Company and its counsel have not had sufficient time to evaluate the complaint. However, the Company intends to vigorously defend itself in this matter. ITEM 2 - CHANGES IN SECURITIES - ------ --------------------- None ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - ------ ------------------------------- None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- The Company's annual meeting was held on May 8, 2003. Proposal 1: Election of Director The following director was elected by the votes indicated: For Withheld --- -------- Peter F. Neumann 4,163,193 90,540 The terms of the following directors continued after the meeting: Kenneth M. Darby Milton F. Gidge W. Gregory Robertson Arthur D. Roche Proposal 2: Ratification of Appointment of Independent Auditors The selection of auditors was approved by the votes indicated: For Against Abstain --- ------- ------- 4,212,245 21,040 20,448 ITEM 5 - OTHER INFORMATION - ------ ----------------- None -19- 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 April 22, 2003. 15.1 Letter re: unaudited interim financial information. 99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. No Form 8-K was required to be filed during the current quarter. -20- 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. May 15, 2003 /s/ Kenneth M. Darby /s/ John M. Badke - -------------------- ----------------- Kenneth M. Darby John M. Badke Chairman and Vice President, Finance Chief Executive Officer Chief Financial Officer -21- CERTIFICATION OF CHIEF EXECUTIVE OFFICER - ---------------------------------------- I, Kenneth M. Darby, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Vicon Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Kenneth M. Darby - -------------------- Kenneth M. Darby Chairman and Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER - ---------------------------------------- I, John M. Badke, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Vicon Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ John M. Badke - ----------------- John M. Badke Vice President, Finance and Chief Financial Officer EX-10 2 f10q_051503ex10-1.txt EXHIBIT 10.1 The Royal Bank of Scotland - -------------------------- Date: 22 April, 2003 Private & Confidential Vicon Industries Limited Corporate Banking Solent & South West Company Number 1551194 Portsmouth Corporate Office Brunel Way Bay House Fareham North Harbour Business Park Hampshire North Harbour PO15 5TX Portsmouth PO6 4RS Telephone 023 9231 5344 ---------- Dear Sirs Multi-Currency Overdraft Facility I write to advise the terms and conditions upon which the Bank is willing to make available to you a multi-currency overdraft facility for the purpose of Working Capital Facility. 1. Definitions - -------------- In this letter the following expressions shall have the following meanings:- "Bank" means The Royal Bank of Scotland plc acting as agent for National Westminster Bank Plc; "BankOffice" means the office of the Bank at the above address or such other office/address as the Bank may notify to you from time to time; "Facility" means the multi-currency overdraft facility made available or to be made available on the terms and conditions set out in this letter; "Facility Accounts" means the Sterling Account and the Foreign Currency Accounts; "Facility Limit" means (Pound)1,000,000; "Foreign Currency" means any currency (including the Euro) which is freely convertible into Sterling and readily available in the London Interbank Market; "Foreign Currency Accounts" means the following Foreign Currency accounts on which the Facility is made available (or such other accounts as may be agreed between us from time to time):- References: 140-01-06101445, 550/00/06854451 ; "Gross Limit" means (Pound)1,000,000; "Sterling" and the sign "(pound)" means the lawful currency of the United Kingdom; "Sterling Account" means the following Sterling account on which the Facility is made available:- Number: 01144642, at Portsmouth Commercial Road (sorting code 560064); 2. Preconditions - ----------------- The Bank will not be obliged to make the Facility available until the following condition(s) have been met:- (a) any new security required has been valued and completed to the Bank's satisfaction and the availability of any existing security for the Facility has been confirmed to the Bank's satisfaction; (b) you have accepted the Facility on the terms and conditions set out in this letter by returning the duplicate of this letter with the acknowledgement duly signed, within 28 days of the date of this letter; 3. Limits and Utilisation - -------------------------- The Facility may be utilised by overdrawing the Facility Accounts up to the Facility Limit. The Facility Limit must not be exceeded at any time. In addition, the aggregate of the cleared debtor balances on the Facility Accounts must not at any time exceed the Gross Limit. For the purposes of calculating the utilisation of the Facility: (i) where appropriate, any creditor balances on the Foreign Currency Accounts will be netted against any debtor balances on the Foreign Currency Accounts in the same Foreign Currency; then (ii) the Sterling equivalent of the net balances on the Foreign Currency Accounts shall be calculated by reference to the prevailing market rate of exchange: and then (iii)the Sterling equivalent of the net balances on the Foreign Currency Accounts will be netted against (or aggregated with) the net balance on the Sterling Account. The Bank may decline to pay a cheque (or allow any other payment or withdrawal) from any Facility Account (whether in credit or debit) which would result in the Facility Limit or the Gross Limit being exceeded. If the Bank does pay a cheque (or allow such other payment or withdrawal) resulting in either the Facility Limit or the Gross Limit being exceeded it will not mean either that the relevant limit has changed or that the Bank will agree to pay any other cheque (or allow any other payment or withdrawal) which would have that effect. The Bank may disregard any uncleared credits for the purposes of calculating the utilisation of the Facility (and any interest payable) and compliance with the Gross Limit. If however the Bank does pay a cheque (or allows any other payment or withdrawal) against uncleared credits this does not mean that it is bound to do so at other times. 4. Availability - --------------- (a) The Facility is repayable upon demand in accordance with normal banking practice. (b) Without prejudice to its overriding right to call for repayment on demand, it is the Bank's present intention that the Facility will be available until 12 March 2004. The Facility will be reviewed on that date but may be extended by mutual agreement. The Bank will always give notification of its intention to place a restriction on your ability to make drawings on the Facility. You may at any time advise us in writing that the Facility is no longer required. 5. Set Off, Retention and Appropriation - --------------------------------------- In addition to any other rights to which it may be entitled, including rights under any guarantee or security, the Bank may retain, set off or appropriate any creditor balances (whether current or not yet due) either on the Facility Accounts or any other accounts you may have with the Bank against any debtor balances on the Facility Accounts, or any other obligations you may owe to the Bank whether present, future, actual or contingent. The Bank may exercise any of these rights without prior notice both before and after demand and in so doing may convert to Sterling at the prevailing market rate of exchange any balance which is in a Foreign Currency. 6. Interest - ----------- Sterling Accounts Interest will be charged by the Bank on the cleared debtor balance of the Sterling Account as follows:- (a) on that part of the cleared debtor balance on the Sterling Account up to (Pound)1,000,000, at a rate equivalent to 1.5% per annum over the Bank's Base Rate; and (b) for borrowing in excess of (Pound)1,000,000, at a rate equivalent to 4.5% over the Bank's Base Rate. Interest will be calculated both before and after demand, court decree or judgment on a daily basis and will be debited to the Sterling Account quarterly on the final business day of March, June, September and December (or on such other dates as the Bank may advise from time to time). The Bank's Base Rate may vary from time to time but as at 22 April 2003 was 3.75% per annum. Changes to the Bank's Base Rate may be made at any time and with immediate effect, such changes being advised by way of press notice. Omission to publish details of any change in the press shall not stop the change from taking effect. Foreign Currency Accounts - ------------------------- Interest on any debtor balances on the Foreign Currency Accounts will be charged separately by the Bank as follows:- (a) on that part of the debtor balance on each of the Foreign Currency Accounts up to (Pound)1,000,000, at a rate equivalent to 1.50% per annum over the Bank's relevant Currency Lending Rate; and (b) for borrowing in excess of (Pound)1,000,000, at a rate equivalent to 4.50% over the Bank's relevant Currency Lending Rate. The Bank's Currency Lending Rates are variable and will therefore change from time to time. Interest will be calculated on a daily basis and a year of 360 days (or such other period as reflects market convention) on the debtor balance and debited to the respective Foreign Currency Accounts quarterly on the first business day of March, June, September and December. 7. Costs - -------- An arrangement fee of (Pound)1,850 is payable and will be debited to the Sterling Account following receipt by the Bank of your acceptance of the terms and conditions of the Facility as set out in this letter or following first utilisation of the Facility, whichever is the earlier. You will also be responsible for paying any costs incurred by the Bank in connection with the Facility whether as a result of you breaking the terms of the Facility or not. These costs will include (but not be limited to) costs of taking and discharging any security; taking steps, including court action, to obtain payment; enforcing and/or preserving the Bank's rights under any security held for the Facility; tracing you if you change address without notice and communicating with you if you break the terms of the Facility. If such costs remain unpaid then they may be debited by the Bank to any of the Facility Accounts (where necessary after conversion at the prevailing market rate of exchange). 8. Security - ----------- The Facility will be secured by the following:- (a) the existing available security held by the Bank as follows:- (i) First Legal Charge by you over Industrial Unit at Site P3, Brunel Way, Segensworth Industrial Estate, Fareham , Hampshire; (ii) Debenture by you; (b) all further available security which the Bank may in future obtain. Any additional security will require to be granted in the Bank's preferred form. The value of the security will be reviewed regularly and, without prejudice to its overriding right to call for repayment on demand, the Bank may seek additional security if there is a significant drop in the value of the security held. 9. Financial Information - ------------------------ To enable the Bank to monitor the Facility you will provide:- (a) as soon as they become available but in any event within 180 days after the end of your financial year, your audited financial statements for that year; and (b) as soon as they become available but in any event no later than 21 days after the end of the accounting period to which they relate, and in a format acceptable to the Bank, your monthly management accounts incorporating balance sheet, profit and loss account and aged list of debtors (the "Management Accounts"); and (c) promptly, such further information regarding your financial condition and operations as the Bank may reasonably request (including audited financial statements where not already supplied). 10. Financial Performance - ------------------------- The financial statements and Management Accounts will require to demonstrate that on the last day of the period covered by the relevant statements/accounts Overdraft Utilisation was not more than 150% of Debtors and Overdraft Utilisation was not more than 250% of Debtors plus stock minus preferentials, failing which, without prejudice to the Bank's overriding right to call for repayment on demand, the Bank, after due notice, may amend, restrict or withdraw the facility. For the purpose of this clause the following definitions shall apply: "Debtors" means the value of debtors aged less than 90 days excluding, as determined by the Bank, inter company debtors, debtors who are also creditors, debtors in dispute or known to be doubtful, debtors domiciled outwith the United Kingdom, debtors that are not credit insured, stage payments due under contracts and retention monies. "Overdraft Utilisation" means the aggregate cleared debtor balance on the Facility Accounts as at the close of business on the final business day of the period covered by the financial statements or Management Accounts. "Stock" is subject to retention of title provisions, obsolete stock, work in progress and such other stock as the Bank may reasonably decide to exclude. 11. Miscellaneous - ----------------- (a) The Bank may debit any of the Facility Accounts in accordance with the terms of Clauses 6 and 7 of this letter even if it results in the Facility Limit or the Gross Limit being exceeded. (b) These terms and conditions will not be affected in any way by any of the Facility Accounts being allocated another account number by the Bank or being transferred to another branch, office or department of the Bank. (c) The Bank may change any of these terms and conditions by giving at least one month's written notice to you. (d) In the event of the Bank demanding repayment of the Facility in terms of Clause 4 of this letter:- (i) subject to sub-clause (iii) below, you will require to repay any debtor balances on Foreign Currency Accounts in immediately available funds of the relative Foreign Currency (or such other funds as may at the time being be customary for the settlement of international banking transactions in such Foreign Currency); (ii) all payments under the Facility will require to be made without set off or counterclaim and clear of any deduction, whether of present or future taxes, stamp duty or other charges unless you are required by law to make such payment subject to any deduction or withholding in which case the relevant payment will require to be increased to the extent necessary to ensure that the Bank receives a sum equal to the sum which it would have received had you not been required to make such a deduction or withholding; (iii)the Bank reserves the right, at any time after the serving of demand, to convert all or any balances on Foreign Currency Accounts (together with any accrued interest and unpaid costs, charges, fees and expenses denominated in such Foreign Currency) to Sterling at the prevailing market rate of exchange and pass a corresponding debit against any Sterling Account. (e) Unless otherwise agreed, requests for new Facility Accounts must be submitted via the Bank Office at least 5 business days in advance (in the case of Foreign Currency accounts, using the relevant application form required by the Bank). The Bank's agreement to the addition (or removal) of Facility Accounts to/from the Facility will be subject to these terms and conditions being suitably amended to the Bank's satisfaction. Please indicate your acceptance of the above terms and conditions by arranging for the acknowledgement on the duplicate of this letter to be signed and returned to me. We may, at our option, treat any usage of the Facility as acceptance (without amendment) of the terms and conditions of this letter. Please do not hesitate to contact me if you require clarification of any of the above terms and conditions. Yours faithfully For and on behalf of The Royal Bank of Scotland plc acting as agent for National Westminster Bank Plc Neil Holloway Senior Corporate Manager Having decided that the proposed Facility is appropriate and in our best interests the Facility is hereby accepted on the above terms and conditions For and on behalf of Vicon Industries Limited Signature(s) signed on (date) - ------------------------------ ------------------ signed on (date) - ------------------------------ ------------------ EX-99 3 f10q_051503ex99-1.txt EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Vicon Industries, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth M. Darby, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the report. /s/ Kenneth M. Darby -------------------- Kenneth M. Darby Chief Executive Officer May 15, 2003 EX-99 4 f10q_051503ex99-2.txt EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of Vicon Industries, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John M. Badke, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the report. /s/ John M. Badke ----------------- John M. Badke Chief Financial Officer May 15, 2003 EX-15 5 f10q_051003ex15-1.txt Exhibit 15.1 The Board of Directors Vicon Industries, Inc.: Re: Registration Statements on Form S-8 (Nos. 33-7892, 33-34349, 33-90038, 333-30097 and 333-71410) and Form S-2 (No. 333-46841): With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated May 15, 2003 related to our review of interim financial information. Pursuant to Rule 436 under the Securities Act of 1933 (the Act), such report is not considered part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act. /s/ KPMG LLP ------------ Melville, New York May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----