f10q_123109.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM 10-Q
[X]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended December 31, 2009
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[
]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
to
Commission
File Number: 1-7939
VICON
INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
New
York
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11-2160665
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(State
or other jurisdiction of incorporation
or organization)
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(I.R.S.
Employer Identification
No.)
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89
Arkay Drive, Hauppauge, New York
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11788
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(Address
of principal executive offices)
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(Zip
Code)
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(631)
952-2288
(Registrant’s
telephone number, including area code)
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.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ]
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Smaller
reporting company [x]
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [
] Yes [x] No
At
February 12, 2010, the registrant had outstanding 4,527,400 shares of Common
Stock, $.01 par value.
VICON INDUSTRIES, INC. AND
SUBSIDIARIES
VICON INDUSTRIES, INC. AND
SUBSIDIARIES
(UNAUDITED)
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Three Months Ended
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12/31/09
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12/31/08
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Net
sales
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$ |
11,099,291 |
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$ |
15,700,229 |
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Cost
of sales
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6,461,846 |
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8,553,060 |
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Gross
profit
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4,637,445 |
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7,147,169 |
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Operating
expenses:
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Selling,
general and
administrative
expense
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4,384,993 |
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4,803,980 |
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Engineering
& development expense
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1,356,053 |
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1,526,885 |
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5,741,046 |
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6,330,865 |
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Operating
income (loss)
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(1,103,601 |
) |
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816,304 |
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Interest
income
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(52,552 |
) |
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(37,490 |
) |
Other
expense
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6,058 |
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45,808 |
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Income
(loss) before income taxes
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(1,057,107 |
) |
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807,986 |
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Income
tax expense (benefit)
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(360,000 |
) |
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300,000 |
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Net
income (loss)
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$ |
(697,107 |
) |
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$ |
507,986 |
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Earnings (loss) per share:
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Basic
and diluted
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$ |
(.15 |
) |
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$ |
.11 |
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Shares
used in computing
earnings
(loss) per share:
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Basic
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4,589,309 |
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4,676,564 |
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Diluted
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4,589,309 |
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4,769,391 |
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See Accompanying Notes to
Condensed Consolidated Financial Statements.
VICON INDUSTRIES, INC. AND
SUBSIDIARIES
ASSETS
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12/31/09
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9/30/09
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(Unaudited)
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CURRENT ASSETS
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Cash
and cash equivalents
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$ |
14,660,852 |
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$ |
16,650,191 |
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Marketable
securities
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196,001 |
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201,665 |
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Accounts
receivable, net
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7,543,633 |
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9,908,534 |
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Inventories:
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Parts,
components, and materials
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4,453,071 |
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3,923,027 |
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Work-in-process
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2,430,864 |
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2,444,994 |
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Finished
products
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5,457,247 |
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5,580,908 |
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12,341,182 |
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11,948,929 |
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Recoverable
income taxes
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295,427 |
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- |
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Deferred
income taxes
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614,332 |
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644,215 |
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Prepaid
expenses and other current assets
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668,624 |
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523,488 |
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TOTAL
CURRENT ASSETS
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36,320,051 |
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39,877,022 |
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Property,
plant and equipment
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12,940,758 |
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12,854,852 |
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Less
accumulated depreciation and amortization
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(8,016,830 |
) |
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(7,836,871 |
) |
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4,923,928 |
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5,017,981 |
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Deferred
income taxes
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1,254,478 |
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1,132,457 |
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Other
assets
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1,318,262 |
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1,288,277 |
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TOTAL
ASSETS
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$ |
43,816,719 |
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$ |
47,315,737 |
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LIABILITIES AND SHAREHOLDERS’
EQUITY
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CURRENT LIABILITIES
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Accounts
payable
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$ |
2,421,548 |
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$ |
4,005,870 |
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Accrued
compensation and employee benefits
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2,118,408 |
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2,823,825 |
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Accrued
expenses
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1,270,550 |
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1,311,636 |
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Unearned
revenue
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691,830 |
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735,850 |
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Income
taxes payable
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32,137 |
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|
154,851 |
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TOTAL
CURRENT LIABILITIES
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6,534,473 |
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9,032,032 |
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Unearned
revenue
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319,380 |
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303,980 |
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Other
long-term liabilities
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2,474,142 |
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2,580,241 |
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TOTAL
LIABILITIES
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9,327,995 |
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11,916,253 |
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SHAREHOLDERS’ EQUITY
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Common
stock, par value $.01
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52,692 |
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52,669 |
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Capital
in excess of par value
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24,381,470 |
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24,294,511 |
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Retained
earnings
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13,654,317 |
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14,351,424 |
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Less
treasury stock, at cost
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(3,524,452 |
) |
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(3,145,204 |
) |
Accumulated
other comprehensive loss
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|
(75,303 |
) |
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|
(153,916 |
) |
TOTAL
SHAREHOLDERS’ EQUITY
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|
34,488,724 |
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35,399,484 |
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TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
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$ |
43,816,719 |
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$ |
47,315,737 |
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See
Accompanying Notes to Condensed Consolidated Financial Statements.
VICON INDUSTRIES, INC. AND
SUBSIDIARIES
(UNAUDITED)
|
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Three Months Ended
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|
12/31/09
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|
12/31/08
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(697,107 |
) |
|
$ |
507,986 |
|
Adjustments
to reconcile net income (loss)
to
net cash provided by (used in)
operating
activities:
|
|
|
|
|
|
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Depreciation
and amortization
|
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|
180,191 |
|
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|
182,406 |
|
Amortization
of deferred compensation
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|
1,202 |
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|
2,674 |
|
Stock
compensation expense
|
|
|
76,663 |
|
|
|
67,946 |
|
Deferred
income taxes
|
|
|
(122,000 |
) |
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|
121,644 |
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Loss
on marketable securities
|
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|
3,409 |
|
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|
44,275 |
|
Change
in assets and liabilities:
|
|
|
|
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|
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Accounts
receivable, net
|
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|
2,391,574 |
|
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|
3,241,817 |
|
Inventories
|
|
|
(377,971 |
) |
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|
(1,435,457 |
) |
Recoverable
income taxes
|
|
|
(299,330 |
) |
|
|
- |
|
Prepaid
expenses and other current assets
|
|
|
(132,386 |
) |
|
|
72,350 |
|
Other
assets
|
|
|
(29,985 |
) |
|
|
192,875 |
|
Accounts
payable
|
|
|
(1,599,503 |
) |
|
|
(79,326 |
) |
Accrued
compensation and employee benefits
|
|
|
(710,851 |
) |
|
|
(859,364 |
) |
Accrued
expenses
|
|
|
27,418 |
|
|
|
(132,059 |
) |
Unearned
revenue
|
|
|
(33,306 |
) |
|
|
24,045 |
|
Income
taxes payable
|
|
|
(123,078 |
) |
|
|
(29,222 |
) |
Other
liabilities
|
|
|
(105,961 |
) |
|
|
(84,623 |
) |
Net
cash provided by (used in)
|
|
|
|
|
|
|
|
|
operating
activities
|
|
|
(1,551,021 |
) |
|
|
1,837,967 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(84,520 |
) |
|
|
(143,633 |
) |
Net
cash used in investing activities
|
|
|
(84,520 |
) |
|
|
(143,633 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Repurchases
of common stock
|
|
|
(379,248 |
) |
|
|
(538,550 |
) |
Proceeds
from exercise of stock options
|
|
|
9,117 |
|
|
|
59,010 |
|
Net
cash used in financing activities
|
|
|
(370,131 |
) |
|
|
(479,540 |
) |
Effect
of exchange rate changes on cash
|
|
|
16,333 |
|
|
|
124,473 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
(1,989,339 |
) |
|
|
1,339,267 |
|
Cash
at beginning of year
|
|
|
16,650,191 |
|
|
|
9,560,966 |
|
Cash
at end of period
|
|
$ |
14,660,852 |
|
|
$ |
10,900,233 |
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements.
VICON INDUSTRIES, INC. AND
SUBSIDIARIES
December 31,
2009
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 8-03 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, 2009 are not necessarily indicative of the results that may be expected for
the fiscal year ended September 30, 2010. 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,
2009. Certain prior year amounts have been reclassified to conform to
the current period presentation. Events subsequent to December 31,
2009 were evaluated until the time of the Form 10-Q filing with the Securities
and Exchange Commission on February 12, 2010.
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 the provisions of Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 320
(FASB Statement of Financial Accounting Standards (SFAS) No. 115), with
unrealized gains and losses reported in accumulated other comprehensive income
as a component of shareholders’ equity. The cost of such securities
at December 31, 2009 was $193,965, with $2,036 of cumulative unrealized gains,
net of tax, reported at December 31, 2009.
Note 3: Accounts
Receivable
Accounts
receivable is stated net of an allowance for uncollectible accounts of
$1,011,000 and $1,025,000 as of December 31, 2009 and September 30, 2009,
respectively.
Note 4: Earnings
(Loss) 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 tables provide the components of the basic and diluted EPS
computations for the three month periods ended December 31, 2009 and
2008:
|
|
Three
Months
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Basic EPS Computation
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(697,107 |
) |
|
$ |
507,986 |
|
Weighted
average shares outstanding
|
|
|
4,589,309 |
|
|
|
4,676,564 |
|
Basic
earnings (loss) per share
|
|
$ |
(.15 |
) |
|
$ |
.11 |
|
|
|
Three
Months
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Diluted EPS Computation
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(697,107 |
) |
|
$ |
507,986 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
4,589,309 |
|
|
|
4,676,564 |
|
Stock
options
|
|
|
- |
|
|
|
70,525 |
|
Stock
compensation arrangements
|
|
-
|
|
|
|
22,302 |
|
Diluted
shares outstanding
|
|
|
4,589,309 |
|
|
|
4,769,391 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$ |
(.15 |
) |
|
$ |
.11 |
|
For the
three months ended December 31, 2009, 105,419 shares have been omitted from the
calculation of diluted EPS as their effect would have been
antidilutive.
Note
5: Comprehensive Loss
The
Company's total comprehensive loss for the three month periods ended December
31, 2009 and 2008 was as follows:
|
|
Three
Months
Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Net
income (loss)
|
|
$ |
(697,107 |
) |
|
$ |
507,986 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Unrealized
gain (loss) on securities, net of tax
|
|
|
(1,421 |
) |
|
|
2,543 |
|
Unrealized
gain on derivatives, net of tax
|
|
|
52,302 |
|
|
|
19,474 |
|
Foreign
currency translation adjustment
|
|
|
27,732 |
|
|
|
(1,279,190 |
) |
Comprehensive
loss
|
|
$ |
(618,494 |
) |
|
$ |
(749,187 |
) |
The
accumulated other comprehensive loss balances at December 31, 2009 and September
30, 2009 consisted of the following:
|
|
December
31,
2009
|
|
|
September
30,
2009
|
|
Foreign
currency translation adjustment
|
|
$ |
(86,033 |
) |
|
$ |
(113,765 |
) |
Unrealized
gain (loss) on derivatives, net of tax
|
|
|
8,694 |
|
|
|
(43,608 |
) |
Unrealized
gain on securities, net of tax
|
|
|
2,036 |
|
|
|
3,457 |
|
Accumulated
other comprehensive loss
|
|
$ |
(75,303 |
) |
|
$ |
(153,916 |
) |
|
|
|
|
|
|
|
|
|
Note
6: Derivative Instruments
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. 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, 2009, the Company had forward exchange contracts outstanding with
notional amounts aggregating $2.0 million, whose aggregate fair value was an
asset of approximately $13,800. Such fair value was determined using
published market exchange rates. The change in the amount of the
asset or liability for these instruments is shown as a component of accumulated
other comprehensive income, net of tax.
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.
The
Company follows ASC 718 (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, 2009 and 2008, the Company recorded
non-cash compensation expense of $76,663 and $67,946, respectively, ($.02 and
$.01 per basic and diluted share, respectively) relating to stock
compensation.
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.
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 on 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
October 2009, the FASB issued Accounting Standards Update (ASU) 2009-13,
“Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue
Arrangements” (ASU 2009-13) and ASU 2009-14, “Software (Topic
985) — Certain Revenue Arrangements That Include Software Elements”
(ASU 2009-14). ASU 2009-13 modifies the requirements that must be met
for an entity to recognize revenue from the sale of a delivered item that is
part of a multiple-element arrangement when other items have not yet been
delivered. ASU 2009-14 modifies the software revenue recognition
guidance to exclude from its scope tangible products that contain both software
and non-software components that function together to deliver a product’s
essential functionality. These new updates become effective on a
prospective basis for the Company’s fiscal year ended September 30, 2011,
although early adoption is permitted. The Company has not yet
evaluated the impact, if any, of adopting these updates.
Note 10: Income
Taxes
The
Company recognizes potential accrued interest and penalties related to
unrecognized tax benefits in 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., 2004 in the U.K., 2005 in Germany and 2002 in Israel.
Note 11: Fair
Value
The
majority of the Company’s non-financial assets and liabilities are not required
to be carried at fair value on a recurring basis, but the Company is required on
a non-recurring basis to use fair value measurements when analyzing asset
impairment as it relates to long-lived assets. The carrying amounts
for trade accounts and other receivables, accounts payable and accrued expenses
approximate fair value due to the short-term maturity of these
instruments. The fair value of the Company’s foreign currency forward
exchange contracts is estimated by obtaining quoted market
prices. The contracted exchange rates on committed forward exchange
contracts was approximately $13,800 more favorable than the market rates for
similar term contracts at December 31, 2009.
Fair
value estimates are made at a specific point in time based on relevant market
information about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
General
Management's
Discussion and Analysis of Financial Condition and Results of Operations
discusses our consolidated financial statements for the periods indicated, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, bad debts, product warranties, inventories, long lived
assets, income taxes and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
including general market conditions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Results for the periods reported
herein are not necessarily indicative of results that may be expected in future
periods.
Overview
The
Company designs, engineers, assembles and markets a wide range of video and
access control systems and system components used for security, surveillance,
safety and communication purposes by a broad group of end users
worldwide. The Company’s product line consists of various elements of
a video system, including digital video and network video recorders, video
encoders, decoders, servers and related physical security information management
software, analog, megapixel and IP fixed and robotic cameras, matrix video
switches, access control panels, video displays and system
peripherals.
The
Company sells its video systems and system components in a highly competitive
worldwide marketplace principally to authorized security dealers and system
integrators. Such dealers and integrators typically resell the
Company’s products directly to end users, among other services. The
Company’s sales are principally project based and are largely dependent upon
winning projects, construction activities and the timing of
funding. Sales will vary from period to period depending upon many
factors including seasonal and geographic trends in construction activities and
the timing of deliveries due to changes in project schedules and
funding. The Company does not maintain a sizable backlog as its
customer orders are typically deliverable within three months or often upon
receipt of order. The Company’s operating cost structure is
principally fixed and therefore profitability is largely dependent upon sales
levels. Throughout fiscal 2009 and subsequent, the Company’s business
has been impacted by the worldwide economic downturn as capital spending for new
construction and renovation projects weakened. In the first quarter
of fiscal 2010, the Company experienced increasing weak market conditions that
significantly reduced its sales levels and consequently adversely impacted its
financial results. The effect of weak incoming order levels
experienced thus far in fiscal 2010 will likely have a negative impact on the
Company’s near term financial results.
The
Company competes in a market of rapid technology shifts which influence the
performance capability of security systems. As a result, the Company
spends a significant amount on new product development. In the first
quarter of fiscal 2010 and 2009, the Company incurred $1.4 million and $1.5
million of engineering and development expense or 12% and 10% of net sales,
respectively. The Company’s expenditures for product development are
substantially less than its larger competitors. In recent years, the
rapid pace of technology changes has placed increased burden on the Company’s
development resources which may necessitate an increase in annual expense for
product development. Further, the Company’s sales effort requires a
high level of customer service and technical support for its
products. Customer support levels were maintained during the first
quarter of fiscal 2010 despite a reduction in sales and such expenditure levels
are expected to continue for the remainder of the fiscal year. The
Company will also consider any strategic initiative that may augment or
supplement its present product offerings and technology platforms, among other
benefits.
The
Company has a foreign sales and distribution subsidiary in Europe that conducts
business in British pounds and Euros that represented approximately 36% of the
Company’s consolidated sales for fiscal 2009. It also has an Israel
based engineering and development subsidiary that incurs a majority of its
operating expenses in Shekels that represented approximately 15% of the
Company’s operating expenses for fiscal 2009. During fiscal 2009,
there were material changes in exchange rates between world currencies that
affected the Company’s financial statements. In 2009, U.S. dollar
gained on average 21% against the British pound, 10% against the Euro and 8%
against the Shekel compared with 2008. This served to reduce the
Company’s consolidated reported sales and costs in these currencies on a
translation basis, increase the cost of European subsidiaries U.S. dollar based
sourced product costs and incur company-wide negative result impacts on the
settlements of transactional balances between companies. In the first
quarter of fiscal 2010, there were minimal financial statement impacts of
foreign currency transactions and translations as rate change volatility during
the quarter had significantly lessened compared with 2009. The
Company has also historically secured selected forward currency exchange
contracts to help stabilize the impact of changing exchange rates and will
continue to do so for the remainder of fiscal 2010. Such contract settlements
have served to further impact currency transactions for the periods
presented. The aggregate impacts of such complex currency exchange
transactions on the reported periods’ results were not reasonably
quantifiable.
Results of
Operations
Three Months Ended December
31, 2009 Compared with December 31, 2008
Net sales for the quarter ended December 31,
2009 decreased 29% to $11.1 million compared with $15.7 million in the year ago
period. Domestic sales decreased 19% to $6.4 million compared with
$7.8 million in the year ago period while international sales decreased 40% to
$4.7 million compared with $7.9 million in the year ago period. Order
intake for the quarter ended December 31, 2009 decreased $4.6 million or 25% to
$13.7 million compared with $18.3 million in the year ago period. The
sales and order intake decreases across all business segments were due to
weakening worldwide economic conditions as funding for new construction and
renovation projects significantly slowed during the current
quarter. The backlog of unfilled orders was $5.4 million at December
31, 2009 compared with $2.8 million at September 30, 2009.
Gross profit margins for the first quarter of
fiscal 2010 decreased to 41.8% compared with 45.5% in the year ago
period. The decrease in margins includes the impact of largely fixed
indirect production costs relative to the current quarter’s reduced sales
levels. The prior year quarter European margins were also benefited
by favorable exchange rate changes between the British pound and the euro and
have returned to more normalized historical margins in the current
quarter.
Total operating expenses for the first quarter
of fiscal 2010 decreased to $5.7 million or 52% of net sales compared with $6.3
million or 40% of net sales in the year ago quarter. Selling, general
and administrative expenses decreased to $4.4 million for the first quarter of
fiscal 2010 compared with $4.8 million in the year ago quarter. The
reduction included lower domestic and foreign selling costs on reduced sales
levels in the current quarter. Product development expense in the
current quarter was $1.4 million compared with $1.5 million in the year ago
period.
The
Company incurred an operating loss of $1.1 million in the first quarter of
fiscal 2010 compared with operating income of $816,000 in the year ago
period.
Interest income increased to $53,000 for the
first quarter of fiscal 2010 compared with $37,000 in the year ago period due to
increased investable balances in the current quarter offset in part by reduced
market yields on such investments. Other expense decreased to $6,000
for the first quarter of 2010 compared with $46,000 principally representing
changes in the market value of marketable securities held.
The Company recorded an income tax benefit of
$360,000 for the first quarter of fiscal 2010 compared with income tax expense
of $300,000 in the year ago period as a result of the pretax loss in the current
quarter.
As a result of the foregoing, the Company
reported a net loss of $697,000 for the first quarter of fiscal 2010 compared
with net income of $508,000 in the year ago period.
Liquidity and Capital
Resources
Net cash
used in operating activities was $1.6 million for the first quarter of fiscal
2010, which included a $697,000 net loss, a $2.3 million reduction of accounts
payable and accrued compensation, and a $378,000 increase in
inventories. These cash usages were offset in part by a $2.4 million
reduction in accounts receivable due to decreased sales levels in the December
31, 2009 quarter. Net cash used in investing activities was $85,000
for the first quarter of fiscal 2010 consisting of general capital
expenditures. Net cash used in financing activities was $370,000 for
the first quarter of fiscal 2010, which included $379,000 of common stock
repurchases offset in part by $9,000 of proceeds received from the exercise of
stock options. As a result of the foregoing, cash decreased by $2.0
million for the first quarter of fiscal 2010 after the effect of exchange rate
changes on the cash position of the Company.
The
Company believes that it will have sufficient cash to meet its anticipated
operating costs and capital expenditure 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.
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 on 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, 2009
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 ASC 605-25-05 (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.
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.
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 Management’s
Discussion and Analysis captions “Overview”, "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.
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
and such information is accumulated and communicated to management as
appropriate to allow timely decisions regarding required
disclosures.
Management's Report on
Internal Control over Financial Reporting
The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's internal
control over financial reporting is a process designed under the supervision of
its Chief Executive Officer and Chief Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of the Company's financial statements for external reporting in accordance with
accounting principles generally accepted in the United States of
America. Management evaluates the effectiveness of the Company's
internal control over financial reporting using the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework. Management, under the supervision and
with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2009 and concluded that it is
effective.
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, 2009 that have materially affected, or are
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
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 controls issues and instances of fraud, if any, within a Company have
been detected. The Company's disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that such controls and procedures are effective at the "reasonable assurance"
level.
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 on 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,
2009.
In
December 2008, the Board of Directors authorized the purchase of up to $1
million worth of shares of the Company’s outstanding common stock. On December
3, 2009, the Company’s Board of Directors authorized the repurchase of an
additional $1.5 million of shares of the Company’s common stock.
The
following table summarizes the Company’s purchases of common stock in open
market transactions or otherwise for the three month period ended December 31,
2009:
|
|
Total
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Approximate
Dollar Value
|
|
|
|
Of
Shares
|
|
|
Price
Paid
|
|
|
of
Shares that May Yet Be
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Purchased Under the
Programs
|
|
|
|
|
|
|
|
|
|
|
|
10/01/09-10/31/09
|
|
|
16,840 |
|
|
$ |
6.44 |
|
|
$ |
535,633 |
|
11/01/09-11/30/09
|
|
|
30,000 |
|
|
$ |
6.35 |
|
|
$ |
345,128 |
|
12/01/09-12/31/09
|
|
|
11,100 |
|
|
$ |
5.94 |
|
|
$ |
1,779,182 |
|
Total
|
|
|
57,940 |
|
|
$ |
6.30 |
|
|
|
|
|
ITEM 3 - DEFAULTS UPON SENIOR
SECURITIES
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
12, 2010
/s/ Kenneth M. Darby
|
/s/ John M. Badke
|
Kenneth
M. Darby
|
John
M. Badke
|
Chairman
and
|
Senior
Vice President, Finance and
|
Chief
Executive Officer
|
Chief
Financial Officer
|