-----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, AaQAK9vKirIW6+GP9iw3Q3qJugV/du8V8pDiN5qxqphiyRrDG+V5Vbs0oJxmdaF7 2+xVSq8DnILVXp3/9NR6nw== 0000310056-06-000007.txt : 20060515 0000310056-06-000007.hdr.sgml : 20060515 20060515162841 ACCESSION NUMBER: 0000310056-06-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060515 DATE AS OF CHANGE: 20060515 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: 06841697 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_051506.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, 2006 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer Accelerated filer ___ Non-accelerated filer X --- ----- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------- ------------- At March 31, 2006, the registrant had outstanding 4,573,084 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 ------------------ 3/31/06 3/31/05 ------- ------- Net sales $12,222,705 $12,802,110 Cost of sales 7,645,143 8,094,317 ----------- ----------- Gross profit 4,577,562 4,707,793 Operating expenses: Selling, general and administrative expense 4,317,117 4,693,049 Engineering & development expense 1,100,053 1,315,890 ----------- ----------- 5,417,170 6,008,939 Operating loss (839,608) (1,301,146) Interest expense 40,964 42,967 Interest and other income (28,018) (5,794) ----------- ----------- Loss before income taxes (852,554) (1,338,319) Income tax expense (benefit) (5,000) 42,000 ----------- ------------ Loss before extraordinary gain (847,554) (1,380,319) Extraordinary gain - 210,968 ----------- ----------- Net loss $ (847,554) $(1,169,351) =========== =========== Basic and diluted loss per share: Loss before extraordinary gain $ (.19) $ (.30) Extraordinary gain - .04 ----------- ----------- Net loss $ (.19) $ (.26) =========== =========== Shares used in computing basic and diluted loss per share 4,571,878 4,565,663 See Accompanying Notes to Condensed Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Six Months Ended ---------------- 3/31/06 3/31/05 ------- ------- Net sales $26,481,655 $28,384,201 Cost of sales 16,267,974 17,808,181 ----------- ----------- Gross profit 10,213,681 10,576,020 Operating expenses: Selling, general and administrative expense 8,738,849 9,852,451 Engineering & development expense 2,161,169 2,697,676 ----------- ----------- 10,900,018 12,550,127 Operating loss (686,337) (1,974,107) Interest expense 83,758 88,964 Interest and other income (69,737) (42,685) Loss on sale of marketable securities - 44,936 ----------- ----------- Loss before income taxes (700,358) (2,065,322) Income tax expense - 55,000 ----------- ------------ Loss before extraordinary gain (700,358) (2,120,322) Extraordinary gain - 210,968 ----------- ----------- Net loss $ (700,358) $(1,909,354) =========== =========== Basic and diluted loss per share: Loss before extraordinary gain $ (.15) $ (.46) Extraordinary gain - .04 ----------- ----------- Net loss $ (.15) $ (.42) =========== =========== Shares used in computing basic and diluted loss per share 4,570,719 4,563,642 See Accompanying Notes to Condensed Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS 3/31/06 9/30/05 - ------ ------- ------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 4,125,580 $ 5,818,178 Marketable securities 123,080 121,830 Accounts receivable, net 8,751,336 10,125,967 Inventories: Parts, components, and materials 3,242,112 2,277,415 Work-in-process 2,198,238 2,782,761 Finished products 7,362,198 5,406,593 ----------- ----------- 12,802,548 10,466,769 Prepaid expenses and other current assets 534,158 419,942 ----------- ----------- TOTAL CURRENT ASSETS 26,336,702 26,952,686 Property, plant and equipment 13,176,780 12,890,801 Less accumulated depreciation and amortization (6,710,579) (6,274,975) ------------ ----------- 6,466,201 6,615,826 Other assets 584,924 623,393 ----------- ----------- TOTAL ASSETS $33,387,827 $34,191,905 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES Current maturities of long-term debt $ 352,314 $ 409,343 Accounts payable 2,689,285 2,462,671 Accrued compensation and employee benefits 2,165,933 2,353,849 Accrued expenses 1,419,568 1,403,734 Unearned revenue 624,496 566,065 Income taxes payable 43,312 44,306 ----------- ----------- TOTAL CURRENT LIABILITIES 7,294,908 7,239,968 Long-term debt 1,885,267 2,061,825 Unearned revenue 525,067 582,679 Other long-term liabilities 376,490 328,953 SHAREHOLDERS' EQUITY Common stock, par value $.01 48,609 48,574 Additional paid in capital 22,469,754 22,459,478 Retained earnings 1,580,687 2,281,045 ----------- ----------- 24,099,050 24,789,097 Less treasury stock, at cost (1,299,999) (1,299,999) Accumulated other comprehensive income 507,044 557,045 Deferred compensation - (67,663) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 23,306,095 23,978,480 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $33,387,827 $34,191,905 =========== =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended ---------------- 3/31/06 3/31/05 ------- ------- Cash flows from operating activities: Net loss $ (700,358) $(1,909,354) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 458,511 553,632 Amortization of deferred compensation 4,913 38,197 Stock compensation expense 65,360 (67,718) Extraordinary gain on acquisition - (210,968) Loss on sale of marketable securities - 44,936 Change in assets and liabilities: Accounts receivable, net 1,310,518 673,185 Inventories (2,374,340) 189,465 Recoverable income taxes - 239,402 Prepaid expenses and other current assets (118,233) (156,255) Other assets 37,293 971 Accounts payable 238,811 (1,119,140) Accrued compensation and employee benefits (183,783) 283,244 Accrued expenses 18,888 18,177 Unearned revenue 819 (218,214) Income taxes payable - (292,323) Other liabilities 45,161 (404,755) ------------ ----------- Net cash used in operating activities (1,196,440) (2,337,518) Cash flows from investing activities: Capital expenditures (332,960) (430,671) Acquisition, net of cash acquired - (868,000) Net decrease (increase) in marketable securities (2,626) 2,064,665 ------------ ----------- Net cash provided by (used in) investing activities (335,586) 765,994 Cash flows from financing activities: Repayments of long-term debt (231,462) (175,561) Proceeds from exercise of stock options 7,700 13,240 Repurchases of common stock - (21,115) ------------ ----------- Net cash used in financing activities (223,762) (183,436) ------------ ----------- Effect of exchange rate changes on cash 63,190 90,655 ------------ ----------- Net decrease in cash (1,692,598) (1,664,305) Cash at beginning of year 5,818,178 6,063,198 ------------ ------------ Cash at end of period $ 4,125,580 $ 4,398,893 ============ =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -5- VICON INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2006 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, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2006. 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, 2005. 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, 2006 was $126,507, with $3,427 of cumulative unrealized losses reported at March 31, 2006. Note 3: Accounts Receivable - --------------------------- Accounts receivable is stated net of an allowance for uncollectible accounts of $1,384,000 and $1,297,000 as of March 31, 2006 and September 30, 2005, 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 4,571,878 and 4,565,663 for the three months ended March 31, 2006 and 2005, respectively. The weighted average number of shares of common stock used in determining basic and diluted EPS was 4,570,719 and 4,563,642 for the six months ended March 31, 2006 and 2005, respectively. For the three months ended March 31, 2006 and 2005, 112,093 and 175,213 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, 2006 and 2005, 102,920 and 201,499 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, 2006 and 2005 was as follows: Three Months Six Months Ended March 31, Ended March 31, --------------------- -------------------- 2006 2005 2006 2005 -------- -------- -------- ------- Net loss $ (847,554) $(1,169,351) $ (700,358) $(1,909,354) Other comprehensive income (loss), net of tax: Decrease (increase) in unrealized loss on securities (1,204) (596) (1,376) 46,922 Unrealized gain (loss) on derivatives 12,127 93,825 (2,376) 39,475 Foreign currency translation adjustment 164,903 (138,198) (46,249) 303,500 ----------- ----------- ------------ ------------ Comprehensive loss $ (671,728) $(1,214,320) $ (750,359) $(1,519,457) =========== ============ ============ ============ The accumulated other comprehensive income balances at March 31, 2006 and September 30, 2005 consisted of the following: March 31, September 30, 2006 2005 ------------ ------------ Foreign currency translation adjustment $ 526,597 $ 572,846 Unrealized loss on derivatives (16,126) (13,750) Unrealized loss on securities (3,427) (2,051) ----------- ---------- Accumulated other comprehensive income $ 507,044 $ 557,045 =========== ========== Note 6: Derivative Instruments - ------------------------------ At March 31, 2006, the Company had interest rate swaps and forward exchange contracts outstanding with notional amounts aggregating $1.5 million and $1.2 million, respectively, whose aggregate fair value was a liability of approximately $16,000. The change in the amount of the liability for these instruments is shown as a component of accumulated other comprehensive income. Note 7: Stock-Based Compensation - -------------------------------- The Company maintains stock option plans that include both incentive and non-qualified options reserved for issuance to key employees, including officers and directors. All options are issued at fair market value at the grant date and are exercisable in varying installments according to the plans. The plans allow for the payment of option exercises through the surrender of previously owned mature shares based on the fair market value of such shares at the date of surrender. Prior to October 1, 2005, the Company followed 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 was recorded if, on the date of grant, the market price of the underlying stock exceeded its exercise price. As permitted by Statement of Financial Accounting Standards 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 had retained the accounting prescribed by APB No. 25 and presented the disclosure information prescribed by SFAS No. 123 and SFAS No. 148. -7- 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-months periods ended March 31, 2005 would have been: Three Months Ended Six Months Ended March 31, 2005 March 31, 2005 -------------- -------------- Reported net loss $(1,169,351) $(1,909,354) Stock-based compensation cost (38,056) (97,123) ----------- ----------- Pro forma net loss $(1,207,407) $(2,006,477) =========== =========== Reported basic and diluted EPS $ (.26) $ (.42) Pro forma basic and diluted EPS $ (.26) $ (.44) Effective October 1, 2005, the Company adopted SFAS No. 123(R), "Share-Based Payment", which requires that all share based payments to employees, including stock options, be recognized as compensation expense in the consolidated financial statements based on their fair values and over the requisite service period. For the three-month and six-month periods ended March 31, 2006, the Company recorded non-cash compensation expense of $43,522 and $65,360, respectively, ($.01 per basic and diluted share) relating to stock options. The Company elected to utilize the modified-prospective application method, whereby compensation expense is recorded for all awards granted after October 1, 2005 and for the unvested portion of awards granted prior to this date. Accordingly, prior period amounts have not been restated. The adoption of SFAS No. 123(R) resulted in an immaterial cumulative change in accounting as of the date of adoption. The fair value for options was determined using a Black-Scholes valuation model and the straight-line attribution approach using the following weighted average assumptions for the six-months ended March 31, 2006: Risk-free interest rate 4.44% Dividend yield 0.00% Volatility factor 75.91% Weighted average expected life 5 years The risk-free interest rate used in the Black-Scholes valuation method is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. The Company has not recently declared or paid any dividends and does not currently expect to do so in the future. Expected volatility is based on the annualized daily historical volatility of the Company's stock over a representative period. The weighted-average expected life represents the period over which stock-based awards are expected to be outstanding and was determined based on a number of factors, including historical weighted average and projected holding periods for the remaining unexercised shares, the contractual terms of the Company's stock-based awards, vesting schedules and expectations of future employee behavior. -8- A summary of stock option activity for the six-months ended March 31, 2006 is presented below: Weighted Average Weighted Remaining Number Average Contractual Aggregate of Exercise Term Intrinsic Options Price (in years) Value ------- ----- ---------- ----- Balance at October 1, 2005 582,741 $3.35 Granted 39,975 $3.17 Exercised (3,500) $2.20 Forfeited or expired (35,000) $4.40 ------- ----- Balance at March 31, 2006 584,216 $3.28 2.9 $118,993 ======= ===== === ======== Exercisable at March 31, 2006 331,261 $3.24 2.1 $ 76,940 ======= ===== === ======== The weighted-average grant date fair value of options granted for the six months ended March 31, 2006 was $2.05. The total intrinsic value of options exercised during the six months ended March 31, 2006 was $3,150. A summary of the status of the Company's nonvested shares as of March 31, 2006 is as follows: Weighted-Average Grant-Date Nonvested Shares Shares Fair Value ------ ---------- Nonvested at October 1, 2005 294,253 $1.79 Granted 39,975 $2.05 Vested (47,773) $1.53 Forfeited (33,500) $1.92 ------- ------- Nonvested at March 31, 2006 252,955 $1.79 As of March 31, 2006, there was $292,731 of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.3 years. The total fair value of shares vested during the six months ended March 31, 2006 was $73,039. Note 8: 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 and other products that represent significant sales to the Company. Among other things, the suit seeks past and enhanced damages, injunctive relief and attorney's fees. In January 2006, the Company received the plaintiff's claim for past damages through December 31, 2005 that approximated $11.7 million. 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. The Company has held discussions with the plaintiff in the interest of settling the case. However, there can be no assurance that any settlement can be reached. -9- In connection with this suit, the Company filed a request with the U.S. Patent and Trademark Office (USPTO) for reexamination of the plaintiff's patent. In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff's patent claims asserted against the Company. The plaintiff has multiple appeals available to it in the USPTO and, thereafter, in the Court of Appeals for the Federal Circuit. 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 9: 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 products supplier operating under insolvency protection, for 700,000 Eurodollars (approximately $868,000). -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------- Results of Operations - --------------------- Three Months Ended March 31, 2006 Compared with March 31, 2005 - -------------------------------------------------------------- Net sales for the quarter ended March 31, 2006 decreased 5% to $12.2 million compared with $12.8 million in the year ago period. Domestic sales increased 6% to $6.6 million compared with $6.2 million in the year ago period. International sales for the quarter decreased 14% to $5.6 million compared with $6.6 million in the year ago period. The backlog of unfilled orders was $6.5 million at March 31, 2006 compared with $6.7 million at September 30, 2005. Gross profit margins for the second quarter of fiscal 2006 increased to 37.5% compared with 36.8% in the year ago period due principally to cost reductions on the Company's digital video server/recorder product line. Operating expenses for the second quarter of fiscal 2006 decreased $.6 million to $5.4 million compared with $6.0 million in the year ago period. The decrease was spread among all reported operating expense categories as a result of planned cost cutting initiatives. The Company incurred an operating loss of $840,000 in the second fiscal quarter of 2006 compared with an operating loss of $1.3 million in the year ago period. Interest expense decreased to $41,000 for the second quarter of fiscal 2006 compared with $43,000 in the year ago period principally as a result of the paydown of bank borrowings offset, in part, by the effect of increased interest rates during the current quarter. Interest and other income increased to $28,000 for the second quarter of fiscal 2006 compared with $6,000 in the year ago period principally as a result of increased interest rates during the current quarter. The Company recorded an income tax benefit of $5,000 for the second quarter of fiscal 2006 compared with income tax expense of $42,000 in the year ago period relating principally to results 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. As a result of the foregoing, the Company incurred a net loss of $848,000 for the second quarter of fiscal 2006 compared with a net loss of $1.2 million in the year ago period. -11- Results of Operations - --------------------- Six Months Ended March 31, 2006 Compared with March 31, 2005 - ------------------------------------------------------------ Net sales for the six months ended March 31, 2006 decreased 7% to $26.5 million compared with $28.4 million in the year ago period. Domestic sales for the current year period were virtually unchanged compared with the year ago period at $14.0 million, while international sales decreased 13% to $12.5 million compared with $14.4 million in the year ago period. International sales for the prior year period included the shipment of a $2.2 million system order to one foreign customer. Gross profit margins for the first six months of fiscal 2006 increased to 38.6% compared with 37.3% in the year ago period due principally to cost reductions on the Company's digital video server/recorder product line. Operating expenses for the first six months of fiscal 2006 decreased $1.7 million to $10.9 million compared with $12.6 million in the year ago period. The decrease was spread among all reported operating expense categories as a result of planned cost cutting initiatives. The Company incurred an operating loss of $686,000 for the first six months of fiscal 2006 compared with an operating loss of $2.0 million in the year ago period. Interest expense decreased to $84,000 for the first six months of fiscal 2006 compared with $89,000 in the year ago period principally as a result of the paydown of bank borrowings offset, in part, by the effect of increased interest rates during the current year period. Interest and other income increased to $70,000 for the first six months of fiscal 2006 compared with $43,000 in the year ago period principally as a result of increased interest rates during the current year period. During the prior year period, the Company liquidated the principal portion of its investment in marketable securities resulting in a $45,000 loss for the period. There was no income tax expense reported for the first six months of fiscal 2006 compared with $55,000 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 prior year period relating to the Company's acquisition of its Videotronic subsidiary. The gain represents the 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 $700,000 for the first six months of fiscal 2006 compared with a net loss of $1.9 million in the year ago period. -12- Liquidity and Capital Resources - ------------------------------- Net cash used in operating activities was $1.2 million for the first six months of fiscal 2006 due principally to a $2.4 million increase in inventories, offset in part by a $1.3 million reduction in accounts receivable. The $700,000 net loss for the period was offset, in part, by $529,000 of non-cash charges. Net cash used in investing activities was $336,000 for the first six months of fiscal 2006 due principally to $333,000 of general capital expenditures. Net cash used in financing activities was $224,000 principally representing repayments of bank debt. As a result of the foregoing, cash decreased by $1.7 million for the first six months of fiscal 2006 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 that provides for maximum borrowings of one million Pounds Sterling (approximately $1,740,000) to support its local working capital requirements. This facility expires in March 2007. At March 31, 2006 and September 30, 2005, 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, 2006: Fiscal Debt Lease Year Repayments Commitments Total - ------ ---------- ----------- ----- 2006 $ 177,000 $164,000 $ 341,000 2007 321,000 174,000 495,000 2008 1,740,000 37,000 1,777,000 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 costs, 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 and other products that represent significant sales to the Company. Among other things, the suit seeks past and enhanced damages, injunctive relief and attorney's fees. In January 2006, the Company received the plaintiff's claim for past damages through December 31, 2005 that approximated $11.7 million. 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. The Company has held discussions with the plaintiff in the interest of settling the case. However, there can be no assurance that any settlement can be reached. -13- In connection with this suit, the Company filed a request with the U.S. Patent and Trademark Office (USPTO) for reexamination of the plaintiff's patent. In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff's patent claims asserted against the Company. The plaintiff has multiple appeals available to it in the USPTO and, thereafter, in the Court of Appeals for the Federal Circuit. 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, 2005 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. The Company maintains a full 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 due to the Company's operating losses in 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. 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. -15- 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 6 "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, 2006, the Company had $1.5 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, 2005). Thus, the Company has substantially no net interest rate exposures on these instruments. However, the Company had approximately $627,000 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. -16- 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. 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 and other products that represent significant sales to the Company. Among other things, the suit seeks past and enhanced damages, injunctive relief and attorney's fees. In January 2006, the Company received the plaintiff's claim for past damages through December 31, 2005 that approximated $11.7 million. 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. The Company has held discussions with the plaintiff in the interest of settling the case. However, there can be no assurance that any settlement can be reached. In connection with this suit, the Company filed a request with the U.S. Patent and Trademark Office (USPTO) for reexamination of the plaintiff's patent. In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff's patent claims asserted against the Company. The plaintiff has multiple appeals available to it in the USPTO and, thereafter, in the Court of Appeals for the Federal Circuit. 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, 2006: 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 ------ ------------- --------- ---------------------------- 1/01/06-1/31/06 - $ - $459,664 2/01/06-2/28/06 - $ - $459,664 3/01/06-3/31/06 - $ - $459,664 ------ ----- Total - $ - ====== ===== (1) All repurchases were executed in open market transactions. -17- ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None ITEM 5 - OTHER INFORMATION - -------------------------- None ITEM 6 - EXHIBITS - ----------------- 10 Material Contracts (.1) Advice of Borrowing Terms between the Registrant and National Westminster Bank PLC dated March 6, 2006. 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. -18- 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, 2006 /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 -19- EX-32 2 f10q_ex32-1.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, 2006 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 15, 2006 EX-10 3 f10q_ex10-1.txt The Royal Bank of Scotland plc is registered in Scotland No 90312 Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB Agency agreements exist between members of The Royal Bank of Scotland Group - -------------------------------------------------------------------------------- THIS IS AN IMPORTANT LETTER WHICH SETS OUT THE TERMS AND CONDITIONS OF YOUR GROUP 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. - -------------------------------------------------------------------------------- The Royal Bank of Scotland Solent Corporate Centre Date: 6th March 2006 Address: 3 Hampshire Business Park, PO Box 462 Templars Way, Chandlers Ford Hants SO53 3RY Private & Confidential Telephone: 023 8024 2163 - ---------------------- Vicon Industries Limited Company Number 1551194 Brunel Way, Segensworth East, Fareham, Hampshire, PO15 5TX Dear Sirs Multi-Currency Overdraft Facility Account Holding Branch/Office: Portsmouth Commercial Road Branch (sorting code 56 00 64) I write to advise the terms and conditions upon which The Royal Bank of Scotland plc ("RBS") acting as agent for National Westminster Bank Plc is willing to make available to you a multi-currency overdraft facility for the purpose of your business. 1 Definitions 1.1 In this letter the following expressions shall have the following meanings:- "Bank" means National Westminster Bank Plc, which is the lender under this letter, and the "Bank" means its successors and assigns; "euro" means the single currency adopted or to be adopted by participating member states under the Treaty establishing the European Union; "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 Current Account and the Foreign Currency Current Account; "Facility Limit" means (pound)1,000,000; "Foreign Currency Accounts" means the Foreign Currency Creditor Account and the Foreign Currency Current Account; "Foreign Currency" means any non-Sterling currency (including the euro) which is freely convertible into Sterling and readily available in the London Interbank Market; "Foreign Currency Creditor Account" means the deposit account denominated in United States Dollars referenced 140-01-06101445 (or as amended from time to time pursuant to Clause 12.5); "Foreign Currency Current Account" means the current account denominated in euros referenced 550-00-06854451 (or as amended from time to time pursuant to Clause 12.5) on which the Facility is made available; "Sterling" means the lawful currency of the United Kingdom; "Sterling Current Account" means the current account denominated in Sterling on which the Facility is made available, referenced account number 01144642 (or as amended from time to time pursuant to Clause 12.5); and "United States Dollars" and "US$" mean the lawful currency of the United States of America. Overdraft Limit(s) and Utilisation 1.2 The Facility may be utilised by overdrawing the Facility Accounts up to the Facility Limit. The Facility Limit must not at any time be exceeded. 1.3 For the purpose of calculating utilisation of the Facility:- (a) any credit balances on the Foreign Currency Accounts will be netted against any debit balance on the Foreign Currency Accounts in the same Foreign Currency; then (b) 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 (c) the Sterling equivalent of the net balances on the Foreign Currency Accounts will be netted against (or aggregated with) the balance on the Sterling Current Account. 1.4 The Bank may decline to pay a cheque (or allow any other payment or withdrawal) from a Facility Account (whether in credit or debit) which would result in the Facility Limit being exceeded. 1.5 If the Bank does pay a cheque (or allows any other payment or withdrawal) resulting in the Facility Limit being exceeded it will not mean 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. 1.6 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. Creditor Account The Foreign Currency Creditor Account should remain in credit at all times and the Bank may decline to pay a cheque (or allow any other payment or withdrawal) which could result in a cleared debtor balance. If the Bank does pay a cheque (or allows any other payment or withdrawal) resulting in a cleared debtor balance it will not mean that a borrowing facility has been established or that the Bank will agree to pay any other cheque (or allow any other payment or withdrawal) which would have the same effect. 2 Preconditions 2.1 The Bank will not be obliged to make the Facility available until the following conditions have been met:- (a) any security required in terms of Clause 9 of this letter has been valued and completed to the Bank's satisfaction; and (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 Availability 3.1 The Facility is repayable upon demand in accordance with normal banking practice and the Facility can be unconditionally cancelled by the Bank at any time. 3.2 Subject to the Bank's rights under Clause 5.1 the Facility will be available until notification to you by the Bank of its intention to cancel the Facility. Without prejudice to the Bank's rights under this Clause the Facility will be subject to review on at least an annual basis. 3.3 The Bank will always give notification of its intention to place a restriction on your ability to make drawings on the Facility. 3.4 You may at any time advise us in writing that the Facility is no longer required. 4 Set Off, Retention and Appropriation 4.1 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 credit balances (whether current or not yet due) either on the Facility Accounts, the Foreign Currency Creditor Account or any other accounts you may have with the Bank against any debit balances on any such accounts, or any other obligations you may owe to the Bank whether present, future, actual or contingent. 4.2 The Bank may exercise any of these rights without prior notice both before and after demand and in so doing may, where required, convert between currencies at the prevailing market rate of exchange. 5 Interest Sterling Current Account 5.1 Interest will be charged separately by the Bank on the cleared debtor balance of the Sterling Current Account as follows:- (a) for borrowing up to the Facility Limit, at a rate which is equivalent to 1.5% per annum over the Bank's Sterling Base Rate; and (b) for borrowing in excess of the Facility Limit, at a rate which is equivalent to 4.5% per annum over the Bank's Sterling Base Rate. The Bank's Sterling Base Rate as at 2nd March 2006 was 4.5% per annum. Changes to the Bank's Sterling Base Rate may be made at any time and with immediate effect, such changes being advised by way of press notice. 5.2 Such interest will be calculated both before and after demand, decree or judgement on a daily basis and a year of 365 days and debited by the Bank to the Sterling Current Account quarterly on the final business day of March, June, September and December (or such other dates as the Bank may advise from time to time). Foreign Currency Current Account 5.3 Interest on any debtor balance on the Foreign Currency Current Account will be charged at 1.5% per annum over the Bank's relevant Currency Lending Rate. The Bank's Currency Lending Rates are variable and will therefore change from time to time. 5.4 Such interest will be calculated on the Foreign Currency Current Account both before and after demand, judgement or decree on a daily basis and a year of 360 days (or such other period as reflects market convention in the relevant currency) and shall be debited to the Foreign Currency Current Account quarterly on the first business day of March, June, September and December. 6 Costs 6.1 An arrangement fee of (pound)1,850 is payable and will be debited to Sterling Current Account 01144642 following receipt by the Bank of your acceptance of the terms and conditions of the Facility as set out in this letter or following your 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 or the Foreign Currency Creditor Account. 6.2 Further fees will be payable from time to time in respect of the Bank reviewing the operation and ongoing availability of the Facility and you will be advised by the Bank at least 14 days in advance of any such fee being payable. 7 Security 7.1 The Facility will be secured by the following:- (a) the existing available security held by the Bank as follows:- (i) a Debenture by you; (ii) a first Legal Charge over Site P3, Brunel Way, Segensworth Industrial Estate, Segensworth East, Fareham PO15 5TX and its associated assets; and (b) all further available security which the Bank may in future obtain. 7.2 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. 8 Financial Information 8.1 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 and the audited financial statements of any company which is or becomes your subsidiary within the meaning of Section 736 of the Companies Act 1985 for that year; (b) as soon as they become available but in any event within 21 days after the end of the financial 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"); (c) promptly, all notices or other documents sent by you to your shareholders and/or creditors; and (d) promptly, such further information regarding your financial condition and operations as the Bank may reasonably request. 8.2 All accounts and other financial information provided to the Bank will be prepared consistently and in accordance with generally accepted accounting standards. 9 Financial Performance 9.1 The financial statements and Management Accounts will require to demonstrate that on the last day of the period covered by the relevant statements/accounts:- (a) Overdraft Utilisation was not more than 40% of the aggregate of Debtors and Stock less all sums due to preferential creditors; and (b) Overdraft Utilisation was not more than 66% Debtors 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. 9.2 For the purpose of this Clause the following definitions shall apply:- "Debtors" means the value of your trade debtors aged less than 90 days excluding, as determined by the Bank (a) inter company debtors, (b) debtors who are also creditors and (c) debtors in dispute or known to be doubtful. "Overdraft Utilisation" means the utilisation of the facility as calculated pursuant to Clause 2.2 as at the close of business on the final business day of the period covered by the financial statements or Management Accounts. "Stock" means the value of trade stock (at the lower of cost and net realisable value) excluding (a) obsolete stock, (b) work in progress and (c) such other stock as the Bank may reasonably decide to exclude. 10 Miscellaneous 10.1 The Bank may debit any of the Facility Accounts in accordance with the terms of Clauses 7 and 8 of this letter even if it results in the Facility Limit being exceeded. 10.2 These terms and conditions will not be affected in any way by any of the Facility Accounts or the Foreign Currency Creditor Account being allocated another account number/reference by the Bank or being transferred to another branch, office or department of the Bank. 10.3 The Bank may change any of these terms and conditions by giving at least 30 days' written notice to you. 10.4 In the event of the Bank demanding repayment of the Facility in terms of Clause 5 of this letter:- (a) subject to Sub-Clause 12.4(c) below, you will require to repay any debtor balance on the Foreign Currency Accounts in immediately available funds of the relevant Foreign Currency (or such other funds as may for the time being be customary for the settlement of international banking transactions in such Foreign Currency); (b) all payments under the Facility will require to be made without set off or counterclaim and free 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; (c) the Bank reserves the right, at any time after the serving of demand, to convert any balance on the Foreign Currency Accounts (together with any accrued interest and unpaid costs, charges, fees and expenses denominated in Foreign Currency) to Sterling at the prevailing market rate of exchange and pass a corresponding debit against the Sterling Current Account. 10.5 Any requests for the addition of Facility Accounts and/or Foreign Currency Creditor Accounts to the Facility must be in writing (in the case of Foreign Currency Accounts, using the relevant application form required by the Bank), will be at the Bank's sole discretion and may be subject to these terms and conditions being suitably amended to the Bank's satisfaction. 10.6 RBS may act as agent for the Bank in connection with the administration of the Facility. Please indicate 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. The Bank will not be obliged to provide the Facility until the acknowledgement on the duplicate of this letter has been returned duly signed. The Bank may, at its 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 RBS acting as agent for the Bank /s/ Neil Holloway - ------------------------------------------- Neil Holloway Relationship Director Having decided that the proposed Facility is appropriate and in the interests of Vicon Industries Limited, the Facility is hereby accepted on the above terms and conditions. For and on behalf of Vicon Industries Limited /s/ Christopher J. Wall Signature/s .......................... Date/s ........................ .......................... ........................ 59246/CCD/SC/NWSOCO EX-31 4 f10q_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 15, 2006 /s/ Kenneth M. Darby - -------------------- Kenneth M. Darby Chairman and Chief Executive Officer EX-31 5 f10q_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 15, 2006 /s/ John M. Badke - ----------------- John M. Badke Senior Vice President, Finance and Chief Financial Officer EX-32 6 f10q_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, 2006 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 15, 2006 -----END PRIVACY-ENHANCED MESSAGE-----