-----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, VGpOD+BJ8ltfzbhQf9r4RybditDmAYpQoIucC3ocgaue17Ig3XKXQnlWVnII2o3t 1/tNaCJZs0qHp0Iiw7tDDQ== 0000310056-05-000007.txt : 20050516 0000310056-05-000007.hdr.sgml : 20050516 20050516163405 ACCESSION NUMBER: 0000310056-05-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050516 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: 05834988 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_may05.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, 2005 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 No X --- 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, 2005, the registrant had outstanding 4,566,584 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 ------------------ 3/31/05 3/31/04 ------- ------- Net sales $12,802,110 $12,234,953 Cost of sales 8,094,317 7,710,157 ----------- ----------- Gross profit 4,707,793 4,524,796 Operating expenses: Selling, general and administrative expense 4,693,049 4,155,268 Engineering & development expense 1,315,890 1,207,735 ---------- ---------- 6,008,939 5,363,003 Operating loss (1,301,146) (838,207) Interest expense 42,967 45,322 Interest and other income (5,794) (61,389) ---------- ---------- Loss before income taxes (1,338,319) (822,140) Income tax expense 42,000 79,000 ---------- ---------- Loss before extraordinary gain (1,380,319) (901,140) Extraordinary gain 210,968 - ----------- ---------- Net loss $(1,169,351) $ (901,140) =========== =========== Basic and diluted loss per share: - -------------------------------- Loss before extraordinary gain (.30) (.20) Extraordinary gain .04 - ----------- ----------- Net loss $ (.26) $ (.20) =========== =========== Shares used in computing basic and diluted loss per share 4,565,663 4,604,853 See Accompanying Notes to Condensed Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ----------------------------------------------- (UNAUDITED) Six Months Ended ---------------- 3/31/05 3/31/04 ------- ------- Net sales $28,384,201 $26,572,688 Cost of sales 17,808,181 16,201,341 ---------- ---------- Gross profit 10,576,020 10,371,347 Operating expenses: Selling, general and administrative expense 9,852,451 8,590,889 Engineering & development expense 2,697,676 2,333,131 ---------- ---------- 12,550,127 10,924,020 Operating loss (1,974,107) (552,673) Interest expense 88,964 96,713 Interest and other income (42,685) (104,413) Loss on sale of marketable securities 44,936 - ---------- --------- Loss before income taxes (2,065,322) (544,973) Income tax expense 55,000 234,000 ---------- --------- Loss before extraordinary gain (2,120,322) (778,973) Extraordinary gain 210,968 - ---------- --------- Net loss $(1,909,354) $ (778,973) =========== =========== Basic and diluted loss per share: - --------------------------------- Loss before extraordinary gain (.46) (.17) Extraordinary gain .04 - ----------- ----------- Net loss $ (.42) $ (.17) =========== =========== Shares used in computing basic and diluted loss per share 4,563,642 4,605,548 See Accompanying Notes to Condensed Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ASSETS 3/31/05 9/30/04 - ------ ------- ------- (Unaudited) CURRENT ASSETS - -------------- Cash and cash equivalents $ 4,398,893 $ 6,063,198 Marketable securities 56,020 2,118,698 Accounts receivable, net 9,836,455 9,661,563 Inventories: Parts, components, and materials 2,802,176 3,239,461 Work-in-process 2,651,820 3,675,122 Finished products 7,558,073 5,758,990 ----------- ----------- 13,012,069 12,673,573 Recoverable income taxes - 239,402 Prepaid expenses and other current assets 551,545 388,347 ----------- ----------- TOTAL CURRENT ASSETS 27,854,982 31,144,781 Property, plant and equipment 18,877,752 18,324,603 Less accumulated depreciation and amortization (11,842,577) (11,234,174) ----------- ----------- 7,035,175 7,090,429 Other assets 633,161 631,807 ----------- ----------- TOTAL ASSETS $35,523,318 $38,867,017 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES - ------------------- Current maturities of long-term debt 349,628 348,615 Accounts payable 2,241,480 3,282,671 Accrued compensation and employee benefits 2,375,086 2,048,417 Accrued expenses 1,571,021 1,541,888 Unearned revenue 515,062 792,073 Income taxes payable 58,204 337,632 ----------- ----------- TOTAL CURRENT LIABILITIES 7,110,481 8,351,296 Long-term debt 2,243,699 2,410,190 Unearned revenue 466,041 401,352 Other long-term liabilities 346,605 790,834 SHAREHOLDERS' EQUITY - -------------------- Common stock, par value $.01 48,544 48,490 Additional paid in capital 22,450,568 22,505,100 Retained earnings 3,256,312 5,165,666 ----------- ----------- 25,755,424 27,719,256 Less treasury stock, at cost (1,299,999) (1,278,884) Accumulated other comprehensive income 1,007,136 617,239 Deferred compensation (106,069) (144,266) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 25,356,492 26,913,345 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,523,318 $38,867,017 =========== =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (UNAUDITED) Six Months Ended ---------------- 3/31/05 3/31/04 ------- ------- Cash flows from operating activities: Net loss $(1,909,354) $ (778,973) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 553,632 490,722 Amortization of deferred compensation 38,197 38,364 Stock compensation expense (67,718) 25,428 Extraordinary gain on acquisition (210,968) - Loss on sale of marketable securities 44,936 - Change in assets and liabilities: Accounts receivable, net 673,185 967,699 Inventories 189,465 (225,785) Recoverable income taxes 239,402 1,827,290 Prepaid expenses and other current assets (156,255) 28,414 Other assets 971 (72,189) Accounts payable (1,119,140) (172,784) Accrued compensation and employee benefits 283,244 (127,240) Accrued expenses 18,177 (172,197) Unearned revenue (218,214) (455,020) Income taxes payable (292,323) 182,945 Other liabilities (404,755) 175,324 ---------- --------- Net cash provided by (used in) operating activities (2,337,518) 1,731,998 Cash flows from investing activities: Capital expenditures (430,671) (353,355) Acquisition, net of cash acquired (868,000) - Net decrease (increase) in marketable securities 2,064,665 (69,911) ---------- --------- Net cash provided by (used in) investing activities 765,994 (423,266) Cash flows from financing activities: Repayments of bank mortgage debt (175,561) (165,327) Proceeds from exercise of stock options 13,240 22,006 Repurchases of common stock (21,115) (73,050) ---------- --------- Net cash used in financing activities (183,436) (216,371) ---------- --------- Effect of exchange rate changes on cash 90,655 (51,887) ---------- --------- Net increase (decrease) in cash (1,664,305) 1,040,474 Cash at beginning of year 6,063,198 4,836,148 ----------- ----------- Cash at end of period $ 4,398,893 $ 5,876,622 =========== =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -5- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- March 31, 2005 -------------- 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, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2005. 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, 2004. Certain prior year amounts have been reclassified to conform to the current period 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, 2005 was $57,675, with $1,655 of cumulative unrealized losses reported at March 31, 2005. Note 3: Accounts Receivable - --------------------------- Accounts receivable is stated net of an allowance for uncollectible accounts of $1,286,000 and $1,162,000 as of March 31, 2005 and September 30, 2004, 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 deferred compensation agreements. The weighted average number of shares of common stock used in determining basic and diluted EPS was 4,565,663 and 4,604,853 for the three months ended March 31, 2005 and 2004, respectively. The weighted average number of shares of common stock used in determining basic and diluted EPS was 4,563,642 and 4,605,548 for the six months ended March 31, 2005 and 2004, respectively. For the three months ended March 31, 2005 and 2004, 175,213 and 249,585 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, 2005 and 2004, 201,499 and 217,172 shares, respectively, have been omitted from the calculation of diluted EPS as their effect would have been antidilutive. -6- Note 5: Comprehensive Income (Loss) - ----------------------------------- The Company's total comprehensive loss for the three month and six month periods ended March 31, 2005 and 2004 was as follows: Three Months Six Months Ended March 31, Ended March 31, ----------------- ---------------- 2005 2004 2005 2004 ---- ---- ---- ---- Net loss $(1,169,351) $ (901,140) $(1,909,354) $ (778,973) Other comprehensive income (loss), net of tax: Decrease (increase) in unrealized loss on securities (596) 16,354 46,922 (4,828) Unrealized gain (loss) on derivatives 93,825 92,524 39,475 (36,886) Foreign currency translation adjustment (138,198) 130,208 303,500 609,420 ----------- ----------- ----------- ----------- Comprehensive loss $(1,214,320) $ (662,054) $(1,519,457) $ (211,267) =========== =========== =========== =========== The accumulated other comprehensive income balances at March 31, 2005 and September 30, 2004 consisted of the following: March 31, September 30, 2005 2004 ---------- --------- Foreign currency translation adjustment $1,078,264 $ 774,764 Unrealized loss on derivatives (69,473) (108,948) Unrealized loss on securities (1,655) (48,577) ---------- --------- Accumulated other comprehensive income $1,007,136 $ 617,239 ========== ========= 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 and its newly acquired Videotronic subsidiary, which market and distribute the Company's products principally within Europe and the Middle East. The other segment includes the operations of TeleSite U.S.A., Inc. and subsidiary, an Israeli based designer and producer of digital video products. 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, 2005 and 2004 was as follows: Three Months Ended March 31, 2005 U.S. Europe Other Consolid. Totals - -------------- --------- ---------- ---------- --------- --------- Net sales to external customers $ 7,648,000 $5,026,000 $ 128,000 $ - $12,802,000 Intersegment net sales 1,032,000 - 1,987,000 (3,019,000) - Net income (loss) (1,601,000) 197,000 187,000 48,000 (1,169,000) Total assets 24,864,000 9,836,000 2,676,000 (1,853,000) 35,523,000 -7- Three Months Ended March 31, 2004 U.S. Europe Other Consolid. Totals - -------------- ----------- ---------- ---------- ---------- ----------- Net sales to external customers $ 7,864,000 $4,226,000 $ 145,000 $ - $12,235,000 Intersegment net sales 1,155,000 - 2,086,000 (3,241,000) - Net income (loss) (1,065,000) 325,000 (109,000) (52,000) (901,000) Total assets 30,182,000 10,234,000 4,729,000 (3,983,000) 41,162,000 Six Months Ended March 31, 2005 U.S. Europe Other Consolid. Totals - -------------- ----------- ---------- ---------- ----------- ---------- Net sales to external customers $18,400,000 $9,749,000 $ 235,000 $ - $28,384,000 Intersegment net sales 2,040,000 - 4,229,000 (6,269,000) - Net income (loss) (2,135,000) 45,000 227,000 (46,000) (1,909,000) Total assets 24,864,000 9,836,000 2,676,000 (1,853,000) 35,523,000 Six Months Ended March 31, 2004 U.S. Europe Other Consolid. Totals - -------------- ----------- ---------- ---------- ----------- ---------- Net sales to external customers $17,119,000 $9,195,000 $ 259,000 $ - $26,573,000 Intersegment net sales 2,182,000 - 3,916,000 (6,098,000) - Net income (loss) (1,384,000) 645,000 8,000 (48,000) (779,000) Total assets 30,182,000 10,234,000 4,729,000 (3,983,000) 41,162,000 The consolidating segment information above includes the elimination and consolidation of intersegment transactions. Note 7: Derivative Instrument - ----------------------------- At March 31, 2005, the Company had interest rate swaps and forward exchange contracts outstanding with notional amounts aggregating $1.7 million and $1.2 million, respectively, whose aggregate fair value was a liability of approximately $69,000. The change in the amount of the liability for these instruments is shown as a component of accumulated other comprehensive income. Note 8: Stock-Based Compensation - -------------------------------- The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related interpretations in accounting for its employee stock-based compensation. Under APB No. 25, compensation expense would be recorded if, on the date of grant, the market price of the underlying stock exceeded its exercise price. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123" ("SFAS No. 148"), the Company has retained the accounting prescribed by APB No. 25 and has presented the disclosure information prescribed by SFAS No. 123 and SFAS No. 148 below. Pro forma information regarding net income (loss) and earnings (loss) per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of this Statement. The fair value for options was estimated at the date of grant using the Black-Scholes option pricing model. -8- 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 fixed 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-month and six-month periods ended March 31, 2005 and 2004 would have been: Three Months Six Months Ended March 31, Ended March 31, ---------------- ---------------- 2005 2004 2005 2004 ------ ------ ------ ------ Reported net loss $(1,169,351) $(901,140) $(1,909,354) $ (778,973) Stock-based compensation cost (38,056) (50,720) (97,123) (112,126) ----------- --------- ----------- ---------- Pro forma net loss $(1,207,407) $(951,860) $(2,006,477) $ (891,099) =========== ========= =========== ========== Reported basic and diluted EPS $ (.26) $(.20) $ (.42) $ (.17) Pro forma basic and diluted EPS $ (.26) $(.21) $ (.44) $ (.19) Note 9: Litigation - ------------------ The Company is one of several defendants in a patent infringement suit commenced by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District Court for the Western District of Tennessee. The alleged infringement by the Company relates to its camera dome systems, which is a significant product line. Among other things, the suit seeks injunctive relief and unspecified damages. The Company and its outside patent counsel believe that the complaint against the Company is without merit. The Company is vigorously defending itself and is a party to a joint defense with certain other named defendants. The Company is unable to reasonably estimate a range of possible loss, if any, at this time. Although the Company believes that it has meritorious defenses to such claims, there is a possibility that an unfavorable outcome could ultimately occur that could result in a liability that is material to the Company's results of operations and financial position. In connection with this suit, the Company filed a request with the U.S. Patent and Trademark Office for reexamination of the plaintiff's patent. Such request was granted by the U.S. Patent and Trademark Office, who found sufficient evidence to warrant a reexamination of the plaintiff's patent. In the normal course of business, the Company is a party to certain other claims and litigation. Management believes that the settlement of such claims and litigation, considered in the aggregate, will not have a material adverse effect on the Company's financial position and results of operations. Note 10: Asset Purchase - ----------------------- On October 1, 2004, the Company entered into an agreement to purchase all of the operating assets of Videotronic Infosystems GmbH ("Videotronic"), a German based video system supplier operating under insolvency protection, for 700,000 Eurodollars (approximately $868,000). The purchase was ratified by Videotronic's Creditors on November 26, 2004. In the three month period ended March 31, 2005, the Company recognized a $211,000 extraordinary gain on the recovery of Videotronic net assets in excess of their allocated purchase price. Such gain includes adjustments to assigned values of accounts receivable, inventories, trade payables and severance liabilities. -9- Note 11: Recent Accounting Pronouncement - ---------------------------------------- On December 16, 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows". Generally, the approach in Statement 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. SFAS 123(R) must be adopted in annual reporting periods beginning after June 15, 2005. The Company expects to adopt Statement 123(R) on October 1, 2005. Statement 123(R) permits public companies to adopt its requirements using one of two prescribed methods. The "modified prospective" method requires compensation cost to be recognized based on the requirements of Statement 123(R) for all outstanding vested stock option grants and all share-based payments granted after the effective date. Such method allows for the use of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. The "modified retrospective" method includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. As permitted by Statement 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The Company is currently evaluating which method it will use in adopting Statement 123(R) and the effect that the accounting change will have on its financial position and results of operations. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------- Results of Operations - --------------------- Three Months Ended March 31, 2005 Compared with March 31, 2004 - -------------------------------------------------------------- Net sales for the quarter ended March 31, 2005 increased 5% to $12.8 million compared with $12.2 million in the year ago period. Domestic sales decreased 11% to $6.2 million compared with $7.0 million in the year ago period. International sales for the quarter increased $1.4 million to $6.6 million compared with $5.2 million in the year ago period due principally to sales by the Company's German subsidiary, Videotronic, whose operating assets were acquired on October 1, 2004. The backlog of unfilled orders was $5.6 million at March 31, 2005 compared with $4.7 million at September 30, 2004. Gross profit margins for the second quarter of fiscal 2005 decreased to 36.8% compared with 37.0% in the year ago period due principally to reduced margins on sales of the Company's digital video server/recorder product line. The Company has recently implemented plans that are expected to reduce the costs to produce this product line. The current period margins were benefited by the recognition of a $190,000 settlement of a supplier credit and the year ago period margins were negatively affected by a $182,000 provision for the writedown of a discontinued product line. Operating expenses for the second quarter of fiscal 2005 increased $646,000 to $6.0 million compared with $5.4 million in the year ago period. The increase included $547,000 of operating expenses incurred by the Company's Videotronic subsidiary and a $90,000 performance based compensation charge associated with the introduction of the Company's network camera and video server product lines. The Company also recognized $103,000 of employee severance charges in the current quarter relating to certain staff restructurings. In the current quarter, the Company incurred $249,000 of legal expense ($1.1 million since inception in 2003) in the defense of a patent infringement suit. The Company incurred an operating loss of $1.3 million in the second fiscal quarter of 2005 compared with an operating loss of $838,000 in the year ago period. The current quarter results included an $87,000 operating loss from the Company's Videotronic subsidiary as it transitioned from former bankruptcy protection. Interest expense decreased to $43,000 for the second quarter of fiscal 2005 compared with $45,000 in the year ago period principally as a result of the paydown of bank borrowings. Interest and other income decreased to $6,000 for the second quarter of fiscal 2005 compared with $61,000 in the year ago period principally as a result of reduced investable funds during the current period. Income tax expense for the second quarter of fiscal 2005 was $42,000 compared with $79,000 in the year ago period relating principally to profits reported by the Company's European operations. The Company has ceased recognizing tax benefits on its U.S. operating losses due to the uncertainty of its future realization. An extraordinary gain of $211,000 was recorded in the second quarter of 2005 relating to the Company's acquisition of its Videotronic subsidiary. The gain represents the excess recovery of tangible net assets acquired in excess of the purchase price of the assets. -11- As a result of the foregoing, the Company incurred a net loss of $1.2 million for the second quarter of fiscal 2005 compared with a net loss of $901,000 in the year ago period. Results of Operations - --------------------- Six Months Ended March 31, 2005 Compared with March 31, 2004 - ------------------------------------------------------------ Net sales for the six months ended March 31, 2005 increased 7% to $28.4 million compared with $26.6 million in the year ago period. Domestic sales decreased 7% to $14.0 million compared with $15.1 million in the year ago period. International sales for the current year period increased $2.9 million to $14.4 million compared with $11.5 million in the year ago period due principally to sales by the Company's German subsidiary, Videotronic, whose operating assets were acquired on October 1, 2004. Gross profit margins for the first six months of fiscal 2005 decreased to 37.3% compared with 39.0% in the year ago period due principally to reduced margins on sales of the Company's digital video server/recorder product line. Operating expenses for the first six months of fiscal 2005 increased $1.6 million to $12.5 million compared with $10.9 million in the year ago period. The increase included $1.2 million of operating expenses incurred by the Company's Videotronic subsidiary and $365,000 of additional engineering and development expenses as the Company continued to invest in new product development. The Company incurred an operating loss of $2.0 million for the first six months of 2005 compared with an operating loss of $553,000 in the year ago period. The current year period results included a $243,000 operating loss from the Company's Videotronic subsidiary as it transitioned from former bankruptcy protection. Interest expense decreased to $89,000 for the first six months of fiscal 2005 compared with $97,000 in the year ago period principally as a result of the paydown of bank borrowings. Interest and other income decreased to $43,000 for the first six months of fiscal 2005 compared with $104,000 in the year ago period principally as a result of reduced investable funds during the current period. During the current period, the Company also liquidated the principal portion of its investment in marketable securities that resulted in a $45,000 loss for the period. Income tax expense for the first six months of fiscal 2005 was $55,000 compared with $234,000 in the year ago period relating principally to profits reported by the Company's European operations. The Company has ceased recognizing tax benefits on its U.S. operating losses due to the uncertainty of its future realization. An extraordinary gain in the amount of $211,000 was recorded in the current year period relating to the Company's acquisition of its Videotronic subsidiary. The gain represents the excess recovery of tangible net assets acquired in excess of the purchase price of the assets. As a result of the foregoing, the Company incurred a net loss of $1.9 million for the first six months of fiscal 2005 compared with a net loss of $779,000 in the year ago period. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ Liquidity and Capital Resources - ------------------------------- Net cash used in operating activities was $2.3 million for the first six months of fiscal 2005. In addition to the $1.9 million net loss for the period, the Company paid down certain of its prior year-end liabilities. Net cash provided by investing activities was $766,000 for the first six months of fiscal 2005, which included a $2.1 million liquidation of marketable securities offset by the $868,000 acquisition of the Company's Videotronic subsidiary operating assets and $431,000 of general capital expenditures. Net cash used in financing activities was $183,000, which included $176,000 of scheduled repayments of bank mortgage loans and $21,000 of treasury stock repurchases. As a result of the foregoing, cash decreased by $1.7 million for the first six months of fiscal 2005 after the effect of exchange rate changes on the cash position of the Company. The Company's European based subsidiary maintains a bank overdraft facility of one million Pounds Sterling (approximately $1,890,000) to support its local working capital requirements. This facility expires in February 2006. At March 31, 2005 and September 30, 2004, there were no outstanding borrowings under this facility. The following is a summary of the Company's long-term debt and material lease obligations as of March 31, 2005: Fiscal Debt Lease Year Repayments Commitments Total - ------ ---------- ----------- ---------- 2005 $ 177,000 $148,000 $ 325,000 2006 351,000 277,000 628,000 2007 325,000 228,000 553,000 2008 1,740,000 34,000 1,774,000 The Company has incurred operating losses in recent years which, if continued, could exhaust the Company's cash reserves and limit its ability to secure additional bank financing, if needed. The Company has instituted certain plans to preserve its cash, including cost cutting measures and inventory reduction initiatives. Based upon the achievement of such plans, the Company believes that it will have sufficient cash to meet its anticipated operating, capital expenditures and debt service requirements for at least the next twelve months. The Company does not have any off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a material effect on the Company's financial condition, results of operations, liquidity, capital expenditures or capital resources. The Company is one of several defendants in a patent infringement suit commenced by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District Court for the Western District of Tennessee. The alleged infringement by the Company relates to its camera dome systems, which is a significant product line. Among other things, the suit seeks injunctive relief and unspecified damages. The Company and its outside patent counsel believe that the complaint against the Company is without merit. The Company is vigorously defending itself and is a party to a joint defense with certain other named defendants. The Company is unable to reasonably estimate a range of possible loss, if any, at this time. Although the Company believes that it has meritorious defenses to such claims, there is a possibility that an unfavorable outcome could ultimately occur that could result in a liability that is material to the Company's results of operations and financial position. -13- In connection with this suit, the Company filed a request with the U.S. Patent and Trademark Office for reexamination of the plaintiff's patent. Such request was granted by the U.S. Patent and Trademark Office, who found sufficient evidence to warrant a reexamination of the plaintiff's patent. 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, 2004 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 is generally recognized when products are sold and title is passed to the customer. Shipping and handling costs are included in cost of sales. Advance service billings under equipment maintenance agreements are deferred and recognized as revenues on a pro rata basis over the term of the service agreements. The Company evaluates multiple-element revenue arrangements for separate units of accounting pursuant to EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", and follows appropriate revenue recognition policies for each separate unit. Elements are considered separate units of accounting provided that (i) the delivered item has stand-alone value to the customer, (ii) there is objective and reliable evidence of the fair value of the delivered item, and (iii) if a general right of return exists relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially within the control of the Company. As applied to the Company, under arrangements involving the sale of product and the provision of services, product sales are recognized as revenue when the products are sold and title is passed to the customer, and service revenue is recognized as services are performed. For products that include more than incidental software, and for separate licenses of the Company's software products, the Company recognizes revenue in accordance with the provisions of Statement of Position 97-2, "Software Revenue Recognition", as amended. 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. -14- 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. 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. If the sum of the expected future undiscounted cash flows were 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 fiscal 2003, the Company recognized a $1.9 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 that 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. The Company is subject to proceedings, lawsuits and other claims related to labor, product and other matters. The Company assesses the likelihood of an adverse judgment or outcomes for these matters, as well as the range of potential losses. A determination of the reserves required, if any, is made after careful analysis. The required reserves may change in the future due to new developments. Recent Accounting Pronouncement - ------------------------------- On December 16, 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based Payment", which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123(R) supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees", and amends SFAS No. 95, "Statement of Cash Flows". Generally, the approach in Statement 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. SFAS 123(R) must be adopted in annual reporting periods beginning after June 15, 2005. The Company expects to adopt Statement 123(R) on October 1, 2005. Statement 123(R) permits public companies to adopt its requirements using one of two prescribed methods. The "modified prospective" method requires compensation cost to be recognized based on the requirements of Statement 123(R) for all outstanding vested stock option grants and all share-based -15- payments granted after the effective date. Such method allows for the use of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date. The "modified retrospective" method includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. As permitted by Statement 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. The Company is currently evaluating which method it will use in adopting Statement 123(R) and the effect that the accounting change will have on its financial position and results of operations. Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 - -------------------------------------------------------------------------------- Statements in this Report on Form 10-Q and other statements made by the Company or its representatives that are not strictly historical facts including, without limitation, statements included herein under the captions "Results of Operations", "Liquidity and Capital Resources" 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. 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). The Company's ongoing foreign currency exchange risks include intercompany sales of product and services between subsidiary companies operating in differing functional currencies. At March 31, 2005, substantially all of such foreign currency transactions have been hedged by forward exchange contracts. -16- At March 31, 2005, the Company had $1.7 million of outstanding floating rate bank debt which was covered by an interest rate swap agreement that effectively converts the foregoing floating rate debt to a stated fixed rate (see "Note 6. 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, 2004). Thus, the Company has substantially no net interest rate exposures on these instruments. However, the Company had approximately $721,000 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 - ------------------------------- Evaluation of Disclosure Controls and Procedures - ------------------------------------------------ The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as required by Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms. Changes in Internal Controls - ---------------------------- There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation referred to above that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. The Company's size dictates that it conducts business with a minimal number of financial and administrative employees, which inherently results in a lack of documented controls and segregation of duties within the Company and its operating subsidiaries. Management will continue to evaluate the employees involved and the control procedures in place, the risks associated with such lack of segregation and whether the potential benefits of adding employees to clearly segregate duties justifies the expense associated with such added personnel. In addition, management is aware that many of the internal controls that are in place at the Company are undocumented controls. The Company is working to document these controls to be in compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Limitations on the Effectiveness of Controls - -------------------------------------------- The Company believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. -17- PART II - OTHER INFORMATION - --------------------------- ITEM 1 - LEGAL PROCEEDINGS - -------------------------- The Company is one of several defendants in a patent infringement suit commenced by Lectrolarm Custom Systems, Inc. in May 2003 in the United States District Court for the Western District of Tennessee. The alleged infringement by the Company relates to its camera dome systems, which is a significant product line. Among other things, the suit seeks injunctive relief and unspecified damages. The Company and its outside patent counsel believe that the complaint against the Company is without merit. The Company is vigorously defending itself and is a party to a joint defense with certain other named defendants. The Company is unable to reasonably estimate a range of possible loss, if any, at this time. Although the Company believes that it has meritorious defenses to such claims, there is a possibility that an unfavorable outcome could ultimately occur that could result in a liability that is material to the Company's results of operations and financial position. In connection with this suit, the Company filed a request with the U.S. Patent and Trademark Office for reexamination of the plaintiff's patent. Such request was granted by the U.S. Patent and Trademark Office, who found sufficient evidence to warrant a reexamination of the plaintiff's patent. ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY - -------------------------------------------------------------------------------- SECURITIES - ---------- On April 26, 2001, the Company announced that its Board of Directors authorized the repurchase of up to $1 million of shares of the Company's common stock, which represented approximately 9.8% of shares outstanding on the announcement date. The following table summarizes repurchases of common stock for the three month period ended March 31, 2005: Total Number Average Approximate Dollar Value of Shares Price Paid of Shares that May Yet Be Period Purchased (1) per Share Purchased Under the Program ------ ------------ ---------- --------------------------- 01/01/05-01/31/05 - $ - $459,664 02/01/05-02/28/05 - $ - $459,664 03/01/05-03/31/05 - $ - $459,664 ----- ----- Total - $ - (1) All repurchases were executed in open market transactions. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None ITEM 5 - OTHER INFORMATION - -------------------------- None -18- ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a) Exhibits -------- 10 Material Contracts (.1) Advice of Borrowing Terms between the Registrant and National Westminster Bank PLC dated March 18, 2005. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) Reports on Form 8-K ------------------- On February 18, 2005, the Company filed a Current Report on Form 8-K filing its press release announcing the Company's financial results for its quarter ended December 31, 2004. -19- 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 16, 2005 /s/ Kenneth M. Darby /s/ John M. Badke - -------------------- ----------------- Kenneth M. Darby John M. Badke Chairman and Senior Vice President, Finance Chief Executive Officer Chief Financial Officer -20- EX-10 2 f10q_ex10-1.txt EXHIBIT 10.1 THIS IS AN IMPORTANT DOCUMENT WHICH SETS OUT THE TERMS AND CONDITIONS OF THE OVERDRAFT FACILITY. PLEASE NOTE THAT OVERDRAFTS ARE REPAYABLE ON DEMAND. WE RECOMMEND THAT YOU TAKE INDEPENDENT LEGAL ADVICE IF YOU HAVE ANY DOUBTS REGARDING THE TERMS AND CONDITIONS OF THE FACILITY. Date: 18 March, 2005 Private & Confidential Vicon Industries Limited Solent Corporate Office Company Number 1551194 84 High Street Brunel Way Southhampton Fareham SO14 2NT Hampshire PO15 5TX Telephone 023 8024 9409 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. 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; "Bank Office" 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 being exceeded. If the Bank does pay a cheque (or allow such other payment or withdrawal) resulting in the Facility Limit being exceeded it will not mean either that the Facility 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). 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 28 February 2006. 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 15 March 2005 was 4.75% 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 and creditors (the "Management Accounts"); and (c) promptly, such further information regarding your financial condition and operations as the Bank may reasonably request. All accounts and other financial information you provide to the Bank will be prepared consistently and in accordance with generally accepted accounting standards. 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 that are not credit insured, stage payments due under contracts and retention monies. " Overdraft Utilisation" means the aggregate 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 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 Relationship Director 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-31 3 f10q302kd_ex31-1.txt EXHIBIT 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 16, 2005 /s/ Kenneth M. Darby Kenneth M. Darby Chairman and Chief Executive Officer EX-32 4 f10q906jb_ex32-2.txt EXHIBIT 32.2 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, 2005 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), as applicable, 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 16, 2005 EX-32 5 f10q906kd_ex32-2.txt EXHIBIT 32.1 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, 2005 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), as applicable, 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 16, 2005 EX-31 6 f10q302jb_ex31-2.txt EXHIBIT 31.2 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 16, 2005 /s/ John M. Badke John M. Badke Senior Vice President, Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----