form10q_123107.htm
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, 2007 Commission File No. 1-7939
Vicon
Industries, Inc.
New York
State
|
11-2160665
|
(State
or other jurisdiction of
Incorporation
or organization)
|
(I.R.S.
Employer
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, 2007, the registrant had outstanding 4,809,470 shares of Common
Stock, $.01 par value.
VICON INDUSTRIES, INC. AND
SUBSIDIARIES
TABLE OF
CONTENTS
ITEM
1. FINANCIAL STATEMENTS
PART
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
12/31/07
|
|
|
12/31/06
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
15,643,541 |
|
|
$ |
17,883,234 |
|
Cost
of Sales
|
|
|
8,716,178 |
|
|
|
10,681,773 |
|
Gross
Profit
|
|
|
6,927,363 |
|
|
|
7,201,461 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and
administrative
expense
|
|
|
5,017,423 |
|
|
|
4,816,359 |
|
Engineering
& development expense
|
|
|
1,393,063 |
|
|
|
1,239,261 |
|
|
|
|
6,410,486 |
|
|
|
6,055,620 |
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
516,877 |
|
|
|
1,145,841 |
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
32,070 |
|
|
|
38,790 |
|
Interest
and other income
|
|
|
(88,104 |
) |
|
|
(111,156 |
) |
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
572,911 |
|
|
|
1,218,207 |
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
228,000 |
|
|
|
103,000 |
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
344,911 |
|
|
$ |
1,115,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
.07 |
|
|
$ |
.24 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
.07 |
|
|
$ |
.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in computing
earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,801,782 |
|
|
|
4,615,704 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
5,065,346 |
|
|
|
4,711,015 |
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to
Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED
BALANCE SHEETS
ASSETS
|
|
12/31/07
|
|
|
9/30/07
|
|
|
(Unaudited)
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
|
$ |
9,532,130 |
|
|
$ |
8,808,110 |
|
Marketable
securities
|
|
|
232,461 |
|
|
|
229,668 |
|
Accounts
receivable, net
|
|
|
11,244,803 |
|
|
|
12,995,595 |
|
Inventories:
|
|
|
|
|
|
|
|
|
Parts,
components, and materials
|
|
|
3,760,735 |
|
|
|
3,768,972 |
|
Work-in-process
|
|
|
2,904,106 |
|
|
|
2,274,661 |
|
Finished
products
|
|
|
6,432,232 |
|
|
|
6,951,619 |
|
|
|
|
13,097,073 |
|
|
|
12,995,252 |
|
Deferred
income taxes
|
|
|
1,538,832 |
|
|
|
1,472,551 |
|
Prepaid
expenses and other current assets
|
|
|
821,361 |
|
|
|
596,145 |
|
TOTAL
CURRENT ASSETS
|
|
|
36,466,660 |
|
|
|
37,097,321 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment
|
|
|
13,172,223 |
|
|
|
13,206,910 |
|
Less
accumulated depreciation and amortization
|
|
|
(7,546,808 |
) |
|
|
(7,445,405 |
) |
|
|
|
5,625,415 |
|
|
|
5,761,505 |
|
Deferred
income taxes
|
|
|
1,933,817 |
|
|
|
2,058,177 |
|
Other
assets
|
|
|
148,387 |
|
|
|
117,442 |
|
TOTAL
ASSETS
|
|
$ |
44,174,279 |
|
|
$ |
45,034,445 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$ |
1,684,358 |
|
|
$ |
1,747,744 |
|
Accounts
payable
|
|
|
3,167,215 |
|
|
|
3,397,562 |
|
Accrued
compensation and employee benefits
|
|
|
2,022,800 |
|
|
|
2,856,921 |
|
Accrued
expenses
|
|
|
1,552,774 |
|
|
|
1,806,989 |
|
Unearned
revenue
|
|
|
950,705 |
|
|
|
830,901 |
|
Income
taxes payable
|
|
|
492,985 |
|
|
|
416,655 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
9,870,837 |
|
|
|
11,056,772 |
|
|
|
|
|
|
|
|
|
|
Unearned
revenue
|
|
|
359,248 |
|
|
|
408,229 |
|
Other
long-term liabilities
|
|
|
766,923 |
|
|
|
516,088 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01
|
|
|
50,725 |
|
|
|
50,535 |
|
Additional
paid in capital
|
|
|
22,953,645 |
|
|
|
22,874,285 |
|
Retained
earnings
|
|
|
9,840,683 |
|
|
|
9,620,772 |
|
|
|
|
32,845,053 |
|
|
|
32,545,592 |
|
Less
treasury stock, at cost
|
|
|
(1,139,728 |
) |
|
|
(1,139,728 |
) |
Accumulated
other comprehensive income
|
|
|
1,471,946 |
|
|
|
1,647,492 |
|
TOTAL
SHAREHOLDERS’ EQUITY
|
|
|
33,177,271 |
|
|
|
33,053,356 |
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
$ |
44,174,279 |
|
|
$ |
45,034,445 |
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial Statements.
VICON INDUSTRIES, INC. AND
SUBSIDIARIES
(UNAUDITED)
|
|
Three Months Ended
|
|
|
|
12/31/07
|
|
|
12/31/06
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
344,911 |
|
|
$ |
1,115,207 |
|
Adjustments
to reconcile net income to
net
cash provided by (used in)
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
194,440 |
|
|
|
232,991 |
|
Amortization
of deferred compensation
|
|
|
2,675 |
|
|
|
2,675 |
|
Stock
compensation expense
|
|
|
20,767 |
|
|
|
45,129 |
|
Deferred
income taxes
|
|
|
122,613 |
|
|
|
- |
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
1,620,318 |
|
|
|
(982,138 |
) |
Inventories
|
|
|
(176,405 |
) |
|
|
(559,006 |
) |
Prepaid
expenses and other current assets
|
|
|
(204,676 |
) |
|
|
(100,323 |
) |
Other
assets
|
|
|
(30,945 |
) |
|
|
90,170 |
|
Accounts
payable
|
|
|
(188,745 |
) |
|
|
(589,083 |
) |
Accrued
compensation and employee benefits
|
|
|
(824,790 |
) |
|
|
(489,817 |
) |
Accrued
expenses
|
|
|
(186,495 |
) |
|
|
85,958 |
|
Unearned
revenue
|
|
|
70,823 |
|
|
|
73,972 |
|
Income
taxes payable
|
|
|
79,591 |
|
|
|
102,855 |
|
Other
liabilities
|
|
|
25,835 |
|
|
|
31,448 |
|
Net
cash provided by (used in)
operating
activities
|
|
|
869,917 |
|
|
|
(939,962 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(93,854 |
) |
|
|
(130,480 |
) |
Net
increase in marketable securities
|
|
|
(446 |
) |
|
|
(1,502 |
) |
Net
cash used in investing activities
|
|
|
(94,300 |
) |
|
|
(131,982 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments
of debt
|
|
|
(63,386 |
) |
|
|
(87,620 |
) |
Proceeds
from exercise of stock options
|
|
|
56,108 |
|
|
|
35,975 |
|
Net
cash used in financing activities
|
|
|
(7,278 |
) |
|
|
(51,645 |
) |
Effect
of exchange rate changes on cash
|
|
|
(44,319 |
) |
|
|
(46,459 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
724,020 |
|
|
|
(1,170,048 |
) |
Cash
at beginning of year
|
|
|
8,808,110 |
|
|
|
5,639,334 |
|
Cash
at end of period
|
|
$ |
9,532,130 |
|
|
$ |
4,469,286 |
|
See
Accompanying Notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31,
2007
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, 2007 are not necessarily indicative of the results that may be expected for
the fiscal year ended September 30, 2008. 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,
2007. 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
and holdings in an equity security. Such mutual fund investments 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, 2007 was $231,498, with $963 of cumulative unrealized
gains reported at December 31, 2007.
Note 3: Accounts
Receivable
Accounts
receivable is stated net of an allowance for uncollectible accounts of
$1,027,000 and $962,000 as of December 31, 2007 and September 30, 2007,
respectively.
Note 4: Earnings
per Share
Basic
earnings 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 tables provide the components of the basic and diluted EPS
computations for the three month periods ended December 31, 2007 and
2006:
|
|
Three
Months
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Basic EPS
Computation
|
|
|
|
|
|
|
Net
income
|
|
$ |
344,911 |
|
|
$ |
1,115,207 |
|
Weighted
average shares outstanding
|
|
|
4,801,782 |
|
|
|
4,615,704 |
|
Basic
earnings per share
|
|
$ |
.07 |
|
|
$ |
.24 |
|
|
|
Three
Months
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Diluted EPS
Computation
|
|
|
|
|
|
|
Net
income
|
|
$ |
344,911 |
|
|
$ |
1,115,207 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
4,801,782 |
|
|
|
4,615,704 |
|
Stock
options
|
|
|
236,818 |
|
|
|
47,389 |
|
Stock
compensation arrangements
|
|
|
26,746 |
|
|
|
47,922 |
|
Diluted
shares outstanding
|
|
|
5,065,346 |
|
|
|
4,711,015 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
.07 |
|
|
$ |
.24 |
|
The
diluted weighted average shares outstanding do not include the antidilutive
impact of 267,008 options for the three month period ended December 31, 2006
because the exercise price of the stock options exceeded the average market
value of the stock in the period.
Note
5: Comprehensive Income
The
Company's total comprehensive income for the three month periods ended December
31, 2007 and 2006 was as follows:
|
|
Three
Months
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Net
income
|
|
$ |
344,911 |
|
|
$ |
1,115,207 |
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
Increase
in unrealized gain/loss on securities
|
|
|
2,347 |
|
|
|
60 |
|
Unrealized
gain (loss) on derivatives
|
|
|
57,413 |
|
|
|
(62,013 |
) |
Foreign
currency translation adjustment
|
|
|
(235,306 |
) |
|
|
347,828 |
|
Comprehensive
income
|
|
$ |
169,365 |
|
|
$ |
1,401,082 |
|
The
accumulated other comprehensive income balances at December 31, 2007 and
September 30, 2007 consisted of the following:
|
|
December
31,
2007
|
|
|
September
30,
2007
|
|
Foreign
currency translation adjustment
|
|
$ |
1,451,977 |
|
|
$ |
1,687,283 |
|
Unrealized
gain (loss) on derivatives
|
|
|
19,006 |
|
|
|
(38,407 |
) |
Unrealized
gain (loss) on securities
|
|
|
963 |
|
|
|
(1,384 |
) |
Accumulated
other comprehensive income
|
|
$ |
1,471,946 |
|
|
$ |
1,647,492 |
|
|
|
|
|
|
|
|
|
|
Note
6: Derivative Instruments
At
December 31, 2007, the Company had interest rate swaps and forward exchange
contracts outstanding with notional amounts aggregating $1.2 million and $1.5
million, respectively, whose aggregate fair value was an asset of approximately
$33,000. The change in the amount of the asset or 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.
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, 2007 and 2006,
the Company recorded non-cash compensation expense of $20,767 and $45,129,
respectively, ($.004 and $.01 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.
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.
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. 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 February 2007, the USPTO
issued a Final Rejection of the six claims in the plaintiff’s patent asserted
against the Company, which was reaffirmed in June 2007 after the plaintiff filed
a response with the USPTO requesting reconsideration of its Final
Rejection. The plaintiff has appealed the examiner’s decision to the
USPTO Board of Patent Appeals and Interferences and has an additional appeal
available to it thereafter in the Court of Appeals for the Federal
Circuit.
The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company has received favorable rulings from
the USPTO with respect to the reexamination proceedings, there is always the
possibility that the plaintiff’s patent claims could be upheld in appeal and the
matter would proceed to trial. Should this occur and the Company
receives an unfavorable outcome at trial, it could result in a liability that is
material to the Company’s results of operations and financial
position.
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
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. In February 2008, the FASB provided a
one-year deferral for the implementation of SFAS 157 for nonfinancial assets and
liabilities recognized or disclosed at fair value in the financial statements on
a nonrecurring basis. 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.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," which gives companies the option to
measure eligible financial assets, financial liabilities and firm commitments at
fair value (i.e., the fair value option), on an instrument-by-instrument basis,
that are otherwise not permitted to be accounted for at fair value under other
accounting standards. The election to use the fair value option is available
when an entity first recognizes a financial asset or financial liability or upon
entering into a firm commitment. Subsequent changes in fair value
must be recorded in earnings. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15,
2007. The Company does not expect that the adoption of SFAS 159
will have a material impact on its consolidated financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS 141 (revised 2007), “Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change
the accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
IPR&D and restructuring costs. In addition, under SFAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income tax expense. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. The Company has not yet
evaluated the impact, if any, of adopting this pronouncement.
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51” (“SFAS 160”). SFAS 160 will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests (NCI) and classified as a component of
equity. This new consolidation method will significantly change the
accounting for transactions with minority interest
holders. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. The Company has not yet evaluated the impact,
if any, of adopting this pronouncement.
Note 10: Income
Taxes
The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” (“FIN 48”) effective as of October 1,
2007. The adoption of FIN 48 did not have a material impact on the
Company’s consolidated financial statements.
It is
Company’s policy to include applicable interest and penalties related to
uncertain tax positions as a component of income tax expense.
The
Company files U.S. Federal and State income tax returns and foreign tax returns
in the United Kingdom, Germany and Israel. The Company is generally no longer
subject to tax examinations in such jurisdictions for fiscal years prior to 2003
in the U.S, 2001 in the U.K., 2005 in Germany and 2002 in Israel.
Results of
Operations
Three Months Ended December
31, 2007 Compared with December 31, 2006
Net sales
for the quarter ended December 31, 2007 decreased 13% to $15.6 million compared
with $17.9 million in the year ago period. Domestic sales decreased
17% to $8.1 million compared with $9.7 million in the year ago
period. International sales for the quarter decreased 7% to $7.5
million compared with $8.2 million in the year ago period. The sales
decreases in these segments were due in part to weakening economic conditions in
certain of the Company’s markets. The backlog of unfilled orders was
$4.2 million at December 31, 2007 compared with $3.8 million at September 30,
2007.
Gross
profit margins for the first quarter of fiscal 2008 increased to 44.3% compared
with 40.3% in the year ago period. The margin increase included the
benefit of favorable exchange rate changes in Europe and reduced product
component costs on the Company’s digital video product line.
Total
operating expenses for the first quarter of fiscal 2008 increased to $6.4
million compared with $6.1 million in the year ago quarter principally as a
result of increases in sales related costs in Europe that included translation
effects of strengthening European currencies and increased engineering and
development expense. The Company continued to invest in new product
development in the current quarter, incurring $1.4 million of engineering and
development costs compared with $1.2 million in the year ago
period.
The
Company generated operating income of $517,000 in the first quarter of fiscal
2008 compared with operating income of $1.1 million in the year ago
period.
Interest
expense decreased to $32,000 for the first quarter of fiscal 2008 compared with
$39,000 in the year ago period principally as a result of the paydown of bank
borrowings. Interest and other income decreased to $88,000 for the
first quarter of fiscal 2008 compared with $111,000 in the year ago period. The
year ago period included a $72,000 gain from life insurance proceeds upon the
death of a retired executive. Excluding the effect of this gain,
interest and other income increased $49,000 principally as a result of increased
cash balances during the current quarter.
Income
tax expense for the first quarter of fiscal 2008 increased to $228,000 compared
with $103,000 in the year ago period. The current quarter tax expense
includes a $162,000 provision for U.S. income taxes as compared with no tax
provision in the year ago period. The Company now records income tax
expense on its U.S. income as a result of the recognition of previously
unrecorded net deferred tax assets in the fourth quarter of fiscal
2007. No U.S. income tax expense was recognized in the prior year
quarter as the Company was utilizing the benefit of previously reserved and
unrecognized net operating loss carryforwards.
As a
result of the foregoing, the Company reported net income of $345,000 for the
first quarter of fiscal 2008 compared with net income of $1.1 million in the
year ago period. Net income for the year ago period would have been
$721,000 based upon the application of a normalized effective tax rate for the
period.
Liquidity and Capital
Resources
Net cash
provided by operating activities was $870,000 for the first quarter of fiscal
2008, which included $345,000 of net income and $340,000 of non-cash charges for
the period. In addition, the $1.6 million decrease in accounts
receivable resulting from lower sales was substantially offset by increases in
other current assets and decreases in other current liabilities. Net cash used
in investing activities was $94,000 for the first quarter of fiscal 2008 due
principally to $94,000 of general capital expenditures. Net cash used
in financing activities was $7,000 for the first quarter of fiscal 2008, which
included $63,000 of scheduled repayments of bank mortgage loans offset by
$56,000 of proceeds received from the exercise of stock options. As a
result of the foregoing, cash increased by $724,000 for the first quarter of
fiscal 2008 after the effect of exchange rate changes on the cash position of
the Company.
The
Company’s U.K. based subsidiary maintains a bank overdraft facility that
provides for maximum borrowings of one million Pounds Sterling (approximately
$2,000,000) to support its local working capital requirements. At December 31,
2007 and September 30, 2007, there were no outstanding borrowings under this
facility.
The
following is a summary of the Company’s debt and material lease obligations as
of December 31, 2007:
Payments
Due
By
Period
|
|
Debt
Repayments
|
|
|
Lease
Commitments
|
|
|
Total
|
|
Less
than 1 year
|
|
$ |
1,684,000 |
|
|
$ |
551,000 |
|
|
$ |
2,235,000 |
|
1-3
years
|
|
|
- |
|
|
|
222,000 |
|
|
|
222,000 |
|
3-5
years
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$ |
1,684,000 |
|
|
$ |
773,000 |
|
|
$ |
2,457,000 |
|
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 used its cash reserves to repay
its $1.7 million mortgage obligation in January 2008.
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.
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. 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 February 2007, the USPTO
issued a Final Rejection of the six claims in the plaintiff’s patent asserted
against the Company, which was reaffirmed in June 2007 after the plaintiff filed
a response with the USPTO requesting reconsideration of its Final
Rejection. The plaintiff has appealed the examiner’s decision to the
USPTO Board of Patent Appeals and Interferences and has an additional appeal
available to it thereafter in the Court of Appeals for the Federal
Circuit.
The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company has received favorable rulings from
the USPTO with respect to the reexamination proceedings, there is always the
possibility that the plaintiff’s patent claims could be upheld in appeal and the
matter would proceed to trial. Should this occur and the Company
receives an unfavorable outcome at trial, it could result in a liability that is
material to the Company’s results of operations and financial
position.
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, 2007
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 undelivered 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.
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 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
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. In February 2008, the FASB provided a
one-year deferral for the implementation of SFAS 157 for nonfinancial assets and
liabilities recognized or disclosed at fair value in the financial statements on
a nonrecurring basis. 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.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," which gives companies the option to
measure eligible financial assets, financial liabilities and firm commitments at
fair value (i.e., the fair value option), on an instrument-by-instrument basis,
that are otherwise not permitted to be accounted for at fair value under other
accounting standards. The election to use the fair value option is available
when an entity first recognizes a financial asset or financial liability or upon
entering into a firm commitment. Subsequent changes in fair value
must be recorded in earnings. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15,
2007. The Company does not expect that the adoption of SFAS 159
will have a material impact on its consolidated financial position, results of
operations or cash flows.
In
December 2007, the FASB issued SFAS 141 (revised 2007), “Business
Combinations (“SFAS 141R”). SFAS 141R will significantly change
the accounting for business combinations in a number of areas including the
treatment of contingent consideration, contingencies, acquisition costs,
IPR&D and restructuring costs. In addition, under SFAS 141R,
changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period will impact
income tax expense. SFAS 141R is effective for fiscal years
beginning after December 15, 2008. The Company has not yet
evaluated the impact, if any, of adopting this pronouncement.
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB
No. 51” (“SFAS 160”). SFAS 160 will change the
accounting and reporting for minority interests, which will be recharacterized
as noncontrolling interests (NCI) and classified as a component of
equity. This new consolidation method will significantly change the
accounting for transactions with minority interest
holders. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. The Company has not yet evaluated the impact,
if any, of adopting this pronouncement.
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.
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, 2007, the Company had $1.2 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,
2007). Thus, the Company has substantially no net interest rate
exposures on these instruments. However, the Company had
approximately $481,000 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.
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, 2007 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.
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.
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. 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 February 2007, the USPTO
issued a Final Rejection of the six claims in the plaintiff’s patent asserted
against the Company, which was reaffirmed in June 2007 after the plaintiff filed
a response with the USPTO requesting reconsideration of its Final
Rejection. The plaintiff has appealed the examiner’s decision to the
USPTO Board of Patent Appeals and Interferences and has an additional appeal
available to it thereafter in the Court of Appeals for the Federal
Circuit.
The
Company is unable to reasonably estimate a range of possible loss, if any, at
this time. Although the Company has received favorable rulings from
the USPTO with respect to the reexamination proceedings, there is always the
possibility that the plaintiff’s patent claims could be upheld in appeal and the
matter would proceed to trial. Should this occur and the Company
receives an unfavorable outcome at trial, it could result in a liability that is
material to the Company’s results of operations and financial
position.
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,
2007.
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, 2007.
None
None
None
Exhibit
Number Description
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.
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
VICON
INDUSTRIES, INC.
February
14, 2008
/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
|