-----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, L/V7k4uyIErrHrw1/fWvUA+1I8vGdY3hGQ/9hLsRHJB0oDfZPuqyu3uyu6g16Bq6 BsTADIVWmZlS7OoOLphMUg== 0000310056-07-000002.txt : 20070213 0000310056-07-000002.hdr.sgml : 20070213 20070213172321 ACCESSION NUMBER: 0000310056-07-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070213 DATE AS OF CHANGE: 20070213 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: 07611692 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_021307.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 December 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 December 31, 2006, the registrant had outstanding 4,660,711 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 ------------------ 12/31/06 12/31/05 -------- -------- Net sales $17,883,234 $14,258,950 Cost of sales 10,681,773 8,622,831 ----------- ----------- Gross profit 7,201,461 5,636,119 Operating expenses: Selling, general and administrative expense 4,816,359 4,421,732 Engineering & development expense 1,239,261 1,061,116 ----------- ----------- 6,055,620 5,482,848 Operating income 1,145,841 153,271 Interest expense 38,790 42,794 Interest and other income (111,156) (41,719) ----------- ----------- Income before income taxes 1,218,207 152,196 Income tax expense 103,000 5,000 ----------- ----------- Net income $ 1,115,207 $ 147,196 =========== =========== Basic and diluted earnings per share $ .24 $ .03 =========== =========== Shares used in computing earnings per share: Basic 4,615,704 4,569,584 Diluted 4,711,015 4,663,330 See Accompanying Notes to Condensed Consolidated Financial Statements. -2- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- ASSETS 12/31/06 9/30/06 - ------ -------- ------- (Unaudited) CURRENT ASSETS - -------------- Cash and cash equivalents $ 4,469,286 $ 5,639,334 Marketable securities 128,260 126,697 Accounts receivable, net 12,523,363 11,269,529 Inventories: Parts, components, and materials 2,767,980 2,809,152 Work-in-process 2,603,501 2,347,354 Finished products 7,291,182 6,812,732 ----------- ----------- 12,662,663 11,969,238 Prepaid expenses and other current assets 599,523 484,713 ----------- ----------- TOTAL CURRENT ASSETS 30,383,095 29,489,511 Property, plant and equipment 13,288,153 13,050,211 Less accumulated depreciation and amortization (7,095,452) (6,821,126) ------------ ----------- 6,192,701 6,229,085 Other assets 149,292 236,521 ----------- ----------- TOTAL ASSETS $36,725,088 $35,955,117 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES - ------------------- Current maturities of long-term debt $ 315,109 $ 331,830 Accounts payable 3,627,530 4,162,263 Accrued compensation and employee benefits 1,952,389 2,427,525 Accrued expenses 1,529,107 1,429,566 Unearned revenue 915,524 806,142 Income taxes payable 264,889 151,323 ----------- ----------- TOTAL CURRENT LIABILITIES 8,604,548 9,308,649 Long-term debt 1,671,494 1,740,335 Unearned revenue 422,065 457,474 Other long-term liabilities 523,279 429,818 SHAREHOLDERS' EQUITY - -------------------- Common stock, par value $.01 48,885 48,609 Additional paid in capital 22,211,567 22,562,126 Retained earnings 2,849,697 1,734,490 ----------- ----------- 25,110,149 24,345,225 Less treasury stock, at cost (865,937) (1,299,999) Accumulated other comprehensive income 1,259,490 973,615 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 25,503,702 24,018,841 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $36,725,088 $35,955,117 =========== =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -3- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (UNAUDITED) Three Months Ended ------------------ 12/31/06 12/31/05 -------- -------- Cash flows from operating activities: Net income $ 1,115,207 $ 147,196 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 232,991 236,734 Amortization of deferred compensation 2,675 2,301 Stock compensation expense 45,129 21,838 Change in assets and liabilities: Accounts receivable, net (982,138) (23,034) Inventories (559,006) (970,828) Prepaid expenses and other current assets (100,323) (92,930) Other assets 90,170 36,439 Accounts payable (589,083) 1,136,819 Accrued compensation and employee benefits (489,817) 33,176 Accrued expenses 85,958 38,598 Unearned revenue 73,972 (58,587) Income taxes payable 102,855 5,049 Other liabilities 31,448 21,755 ------------ ----------- Net cash provided by (used in) operating activities (939,962) 534,526 Cash flows from investing activities: Capital expenditures (130,480) (188,907) Net increase in marketable securities (1,502) (1,289) ------------ ----------- Net cash used in investing activities (131,982) (190,196) Cash flows from financing activities: Repayments of long-term debt (87,620) (145,678) Proceeds from exercise of stock options 35,975 - ------------ ----------- Net cash used in financing activities (51,645) (145,678) ------------ ----------- Effect of exchange rate changes on cash (46,459) (29,093) ------------ ----------- Net increase (decrease) in cash (1,170,048) 169,559 Cash at beginning of year 5,639,334 5,818,178 ------------ ----------- Cash at end of period $ 4,469,286 $ 5,987,737 ============ =========== See Accompanying Notes to Condensed Consolidated Financial Statements. -4- VICON INDUSTRIES, INC. AND SUBSIDIARIES --------------------------------------- NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ---------------------------------------------------------------- December 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 three months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2007. 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, 2006. 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 December 31, 2006 was $130,876, with $2,616 of cumulative unrealized losses reported at December 31, 2006. Note 3: Accounts Receivable - ---------------------------- Accounts receivable is stated net of an allowance for uncollectible accounts of $1,030,000 and $1,325,000 as of December 31, 2006 and September 30, 2006, 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 incremental common shares issuable upon the exercise of stock options and under deferred compensation agreements. The following table provides the components of the basic and diluted EPS computations for the three month periods ended December 31, 2006 and 2005: Three Months Ended December 31, ------------------ 2006 2005 ---------- -------- Basic EPS Computation - --------------------- Net income.................................. $ 1,115,207 $ 147,196 Weighted average shares outstanding......... 4,615,704 4,569,584 Basic earnings per share.................... $ .24 $ .03 ============ =========== -5- Three Months Ended December 31, ------------------ 2006 2005 ---------- --------- Diluted EPS Computation Net income.................................. $ 1,115,207 $ 147,196 Weighted average shares outstanding....... 4,615,704 4,569,584 Stock options............................. 47,389 18,258 Stock compensation arrangements........... 47,922 75,488 --------- ----------- Diluted shares outstanding.................. 4,711,015 4,663,330 Diluted earnings per share.................. $ .24 $ .03 =========== =========== The diluted weighted average shares outstanding do not include the antidilutive impact of 267,008 and 424,916 options for the three month periods ended December 31, 2006 and 2005, respectively, because the exercise price of the stock options exceeded the average market value of the stock in the periods presented. Note 5: Comprehensive Income (Loss) - ------------------------------------- The Company's total comprehensive income (loss) for the three month periods ended December 31, 2006 and 2005 was as follows: Three Months Ended December 31, ------------------ 2006 2005 ---------- --------- Net income $ 1,115,207 $ 147,196 Other comprehensive income (loss), net of tax: Decrease (increase) in unrealized loss on securities 60 (172) Unrealized loss on derivatives (62,013) (14,503) Foreign currency translation adjustment 347,828 (211,152) ------------ ------------ Comprehensive income (loss) $ 1,401,082 $ (78,631) ============ ============ The accumulated other comprehensive income balances at December 31, 2006 and September 30, 2006 consisted of the following: December 31, September 30, 2006 2006 ------------ ------------ Foreign currency translation adjustment $1,345,960 $ 998,132 Unrealized loss on derivatives (83,854) (21,841) Unrealized loss on securities (2,616) (2,676) ----------- ----------- Accumulated other comprehensive income $1,259,490 $ 973,615 =========== =========== Note 6: Derivative Instruments - -------------------------------- At December 31, 2006, the Company had interest rate swaps and forward exchange contracts outstanding with notional amounts aggregating $1.4 million and $1.8 million, respectively, whose aggregate fair value was a liability of approximately $84,000. The change in the amount of the liability for these instruments is shown as a component of accumulated other comprehensive income. -6- 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. 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 periods ended December 31, 2006 and 2005, the Company recorded non-cash compensation expense of $45,129 and $21,838, respectively, ($.01 and $.005 per basic and diluted share, respectively) 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 were not restated. The adoption of SFAS No. 123(R) resulted in an immaterial cumulative change in accounting as of the date of adoption. 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 plus pre-judgment interest. 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. -7- In January 2005, the Company petitioned the U.S. Patent and Trademark Office (USPTO) to reexamine the plaintiff's patent, believing it to be invalid. In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff's patent claims asserted against the Company citing the existence of prior art of the Company and another defendant. The plaintiff has appealed the USPTO ruling and has additional appeals available to it in the USPTO and, thereafter, in the Court of Appeals for the Federal Circuit. On June 30, 2006, the Federal District Court granted the defendants' motion for continuance (delay) of the trial, pending the outcome of the USPTO's reexamination proceedings. 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: Recent Accounting Pronouncements - ----------------------------------------- In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have a material impact on its consolidated financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Further, the standard establishes a framework for measuring fair value in generally accepted accounting principles and expands certain disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption of SFAS 157 will have a material impact on its consolidated financial position, results of operations or cash flows. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS - ------------- Results of Operations - --------------------- Three Months Ended December 31, 2006 Compared with December 31, 2005 - -------------------------------------------------------------------- Net sales for the quarter ended December 31, 2006 increased 25% to $17.9 million compared with $14.3 million in the year ago period. Domestic sales increased 32% to $9.7 million compared with $7.4 million in the year ago period. International sales for the quarter increased 19% to $8.2 million compared with $6.9 million in the year ago period. The backlog of unfilled orders was $6.9 million at December 31, 2006 compared with $7.2 million at September 30, 2006. Gross profit margins for the first quarter of fiscal 2007 increased to 40.3% compared with 39.5% in the year ago period due principally to the benefit of fixed production overhead on increased sales. Total operating expenses for the first quarter of fiscal 2007 increased to $6.1 million compared with $5.5 million in the year ago quarter principally as a result of increases in sales related costs, engineering and development expense and profit related bonus provisions. In addition, the Company continued to invest in new product development in the current quarter, incurring $1.2 million of engineering and development expenses compared with $1.1 million in the year ago period. The Company generated operating income of $1.1 million in the first quarter of fiscal 2007 compared with operating income of $153,000 in the year ago period. Interest expense decreased to $39,000 for the first quarter of fiscal 2007 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 $111,000 for the first quarter of fiscal 2007 compared with $42,000 in the year ago period. The increase was principally the result of a $72,000 gain from life insurance proceeds on the death of a retired executive. Income tax expense for the first quarter of fiscal 2007 increased to $103,000 compared with $5,000 in the year ago period relating principally to results reported by the Company's European operations. No U.S. tax provision was recognized in the current quarter as the Company is utilizing the benefit of previously reserved and unrecognized net operating loss carryforwards. The Company continues to provide a full valuation allowance against its deferred tax assets until such time that it can achieve a sustained level of profitability. As a result of the foregoing, the Company reported net income of $1.1 million for the first quarter of fiscal 2007 compared with net income of $147,000 in the year ago period. -9- Liquidity and Capital Resources - ------------------------------- Net cash used in operating activities was $940,000 for the first quarter of fiscal 2007. The $1.1 million of net income and $281,000 of non-cash charges for the quarter were fully offset by increases in accounts receivable and inventories of $982,000 and $559,000, respectively. Both inventories and accounts receivable increased as a result of higher sales. The Company further experienced decreases in accounts payable and accrued compensation of $589,000 and $490,000, respectively. Net cash used in investing activities was $132,000 for the first quarter of fiscal 2007 due principally to $130,000 of general capital expenditures. Net cash used in financing activities was $52,000, which consisted of $88,000 of scheduled repayments of bank mortgage loans, offset in part by $36,000 of proceeds received from exercise of stock options. As a result of the foregoing, cash decreased by $1.2 million for the first quarter of fiscal 2007 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 $1,960,000) to support its local working capital requirements. This facility expires in March 2007. At December 31, 2006 and September 30, 2006, 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 December 31, 2006: Payments Due Debt Lease By Period Repayments Commitments Total - ---------------- ---------- ----------- ----- Less than 1 year $ 315,000 $346,000 $ 661,000 1-3 years 1,672,000 87,000 1,759,000 3-5 years - - - Total $1,987,000 $433,000 $2,420,000 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 plus pre-judgment interest. 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. -10- In January 2005, the Company petitioned the U.S. Patent and Trademark Office (USPTO) to reexamine the plaintiff's patent, believing it to be invalid. In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff's patent claims asserted against the Company citing the existence of prior art of the Company and another defendant. The plaintiff has appealed the USPTO ruling and has additional appeals available to it in the USPTO and, thereafter, in the Court of Appeals for the Federal Circuit. On June 30, 2006, the Federal District Court granted the defendants' motion for continuance (delay) of the trial, pending the outcome of the USPTO's reexamination proceedings. 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, 2006 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. -11- 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 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 Pronouncements - -------------------------------- In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have a material impact on its consolidated financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 clarifies that fair value is the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants. Further, the standard establishes a framework for measuring fair value in generally accepted accounting principles and expands certain disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption of SFAS 157 will have a material impact on its consolidated financial position, results of operations or cash flows. -12- 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 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 December 31, 2006, the Company had $1.4 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 5. Long-Term Debt" to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 2006). Thus, the Company has substantially no net interest rate exposures on these instruments. However, the Company had approximately $568,000 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. -13- 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 ended December 31, 2006 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. 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. -14- 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 plus pre-judgment interest. 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 January 2005, the Company petitioned the U.S. Patent and Trademark Office (USPTO) to reexamine the plaintiff's patent, believing it to be invalid. In April 2006, the USPTO issued a non-final office action rejecting all of the plaintiff's patent claims asserted against the Company citing the existence of prior art of the Company and another defendant. The plaintiff has appealed the USPTO ruling and has additional appeals available to it in the USPTO and, thereafter, in the Court of Appeals for the Federal Circuit. On June 30, 2006, the Federal District Court granted the defendants' motion for continuance (delay) of the trial, pending the outcome of the USPTO's reexamination proceedings. ITEM 1A - RISK FACTORS - ---------------------- There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006. 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 Company did not repurchase any of its common stock during the three month period ended December 31, 2006. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - ---------------------------------------- None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None ITEM 5 - OTHER INFORMATION - -------------------------- None -15- ITEM 6 - EXHIBITS - ----------------- 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. -16- Signatures ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VICON INDUSTRIES, INC. February 13, 2007 /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 -17- EX-31 2 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: February 13, 2007 /s/ John M. Badke - ----------------- John M. Badke Senior Vice President, Finance and Chief Financial Officer EX-32 3 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 December 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 February 13, 2007 EX-32 4 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 December 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 February 13, 2007 EX-31 5 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: February 13, 2007 /s/ Kenneth M. Darby - -------------------- Kenneth M. Darby Chairman and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----