- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(MARK ONE) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[X] SECURITIES AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0 - 1325
_______________
VICOM, INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA
(State or other jurisdiction of incorporation or organization)
41 - 1255001
(IRS Employer Identification No.)
9449 SCIENCE CENTER DRIVE, NEW HOPE, MINNESOTA 55428
(Address of principal executive offices)
TELEPHONE (763) 504-3000 FAX (763) 504-3060
www.vicominc.net Internet
(Registrant's telephone number, facsimile number, and Internet address)
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 and 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 [ ]
On August 6, 2002 there were 11,994,060 shares outstanding of the
registrant's common stock, par value $.01 per share, and 165,641 outstanding
shares of the registrant's convertible preferred stock.
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------ ----------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES . . . . . . . . . . . . . . . . . . . . . . . . $ 5,944,424 $ 7,830,229 $ 12,206,612 $ 18,513,048
COSTS AND EXPENSES
Cost of products and services 4,354,714 6,048,399 9,143,928 14,603,448
Selling, general and administrative . . . . . . . . 2,240,223 2,738,537 4,496,761 5,747,083
------------ ----------- ----------- -------------
Total Costs and Expenses 6,594,937 8,786,936 13,640,689 20,350,531
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . . (650,513) (956,707) (1,434,077) (1,837,483)
OTHER EXPENSE
Interest expense. . . . . . . . . . . . . . . . . . (426,869) (373,771) (772,904) (666,209)
Income (expense). . . . . . . . . . . . . . . . . . 25,281 307 44,957 45,397
------------ ----------- ----------- -------------
Total Other Expense (401,588) (373,464) (727,947) (620,812)
LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . . . . (1,052,101) (1,330,171) (2,162,024) (2,458,295)
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . 0 0 0 0
------------ ----------- ----------- -------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . $(1,052,101) $ (1,330,171) $ (2,162,024) $ (2,458,295)
Preferred Stock Dividends (8,427) (123,147) (60,153) (175,608)
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,060,528) $ (1,453,318) $ (2,222,177) $ (2,633,903)
============ =========== =========== =============
LOSS PER SHARE - BASIC AND DILUTED . . . . . . . . . . . $ (.09) $ (.18) $ (.20) $ (.33)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED. 11,505,838 7,989,569 11,078,284 7,960,727
See notes to condensed consolidated financial statements
2
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------- -----------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,250 $ 624,845
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 2,537,931 2,595,368
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,593,384 1,646,441
Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . 233,898 295,324
------------ ------------
TOTAL CURRENT ASSETS. . . . . . . . . . . . . . . . . . . . . . 4,965,463 5,161,978
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . . . . . . . . . . . 3,801,736 4,059,831
OTHER ASSETS
Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,748,879 2,748,879
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,015 260,612
------------ ------------
TOTAL OTHER ASSETS . 2,994,894 3,009,491
------------ ------------
TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,762,093 $ 12,231,300
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Wholesale line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 1,182,146 $ 1,324,807
Current portion of long term debt. . . . . . . . . . . . . . . . . . . 1,226,890 85,789
Current portion of capital lease obligations . . . . . . . . . . . . . 407,749 309,906
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,785,359 1,800,285
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 802,680 776,417
Deferred service obligations and revenue . . . . . . . . . . . . . . . 377,312 416,606
------------ ------------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . 5,782,136 4,713,810
LONG TERM DEBT, NET . . . . . . . . . . . . . . . . . . . . . . . . . . 2,212,376 2,669,510
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION . . . . . . . . . . . 393,377 642,360
------------ ------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,387,899 8,025,680
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,931 and 28,872 shares issued and outstanding) . . . . 419,752 433,867
10% Class B (6,200 and 8,700 shares issued and outstanding) . . . . . 62,000 87,000
10% Class C (131,510 and 139,510 shares issued and outstanding) . . . 1,699,407 1,800,447
14% Class D (0 and 40,000 shares issued and outstanding). . . . . . . 0 417,500
Common stock, no par value (11,953,965 and 10,679,450 shares issued;
11,912,402 and 10,604,113 shares outstanding) . . . . . . . . . . . . 4,461,089 3,443,104
Stock subscriptions receivable. . . . . . . . . . . . . . . . . . . . (578,740) (610,000)
Options and warrants. . . . . . . . . . . . . . . . . . . . . . . . . . 25,559,402 24,957,912
Unamortized compensation. . . . . . . . . . . . . . . . . . . . . . . . (911,584) (1,209,143)
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (27,337,122) (25,115,067)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . 3,374,204 4,205,620
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $ 11,762,093 $ 12,231,300
============ ============
See notes to condensed consolidated financial statements.
3
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
-------------------------
JUNE 30, (UNAUDITED)
-------------------------
2002 2001
----------- ------------
OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,162,024) $(2,458,295)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510,438 497,176
Amortization of deferred compensation . . . . . . . . . . . . . . . . . . . . 261,030 450,435
Amortization of original issue discount . . . . . . . . . . . . . . . . . . . 471,757 89,984
Common stock issued for services. . . . . . . . . . . . . . . . . . . . . . . 14,700 0
Loss on sales of property and equipment . . . . . . . . . . . . . . . . . . . (7,359) 0
Discount on preferred stock related to warrants (52,541) 0
Changes in operating assets and liabilities:
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . 57,437 1,401,139
Inventories, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,057 29,603
Costs, estimated earnings and billings. . . . . . . . . . . . . . . . . . . 0 35,295
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,424 0
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,598 (98,009)
Wholesale line of credit . . . . . . . . . . . (142,661) 39,913
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . 91,461 (386,205)
Deferred service obligations and revenue. . . . . . . . . . . . . . . . . . (39,294) 131,878
--------- ---------
Net cash flows from operating activities. . . . . . . . . . . . . . . . . (897,977) (267,086)
--------- ---------
INVESTING ACTIVITIES
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . (255,261) (1,403,953)
Purchase acquisition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (50,000)
Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . . 10,277 0
Collections on notes receivable . . . . . . . . . . . . . . . . . . . . . . . 28,572 38,007
--------- ---------
Net cash flows from investing activities. . . . . . . . . . . . . . . . . (216,412) (1,415,946)
--------- ---------
FINANCING ACTIVITIES
Proceeds from notes and installment obligations payable 0 169,050
Proceeds from long-term debt and warrants issued with long term debt. . . . . 750,000 1,545,000
Payments on long term debt. . . . . . . . . . . . . . . . . . . . . . . . . . (53,110) (256,037)
Payments on capital lease obligations .. . . . . . . (151,139) 0
Proceeds from issuance of stock and warrants. . . . . . . . . . . . . . . . . 687,779 483,918
Stock issuance costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (23,310)
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . (93,000) (460,000)
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . (50,736) (175,608)
--------- ---------
Net cash flows from financing activities. . . . . . . . . . . . . . . . . 1,089,794 1,283,013
--------- ---------
INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . (24,595) (400,019)
CASH
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,845 1,161,479
--------- ---------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,250 $ 761,460
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount. . . . 291,995 $ 378,237
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock options issued below fair market value . . . . . 400 1,200,000
Issuance of preferred stock for acquisition of assets . . . . . . . . . . . . 18,590 0
Warrants issued with debt . . . . . . . . . . . . . . . . . . . . . . . . . . 8,529 0
Notes payable converted to preferred stock. . . . . . . . . . . . . . . . . . 227,868 255,850
Accounts payable converted to common stock. . . . . . . . . . . . . . . . . . 7,255 129,050
Conversion of preferred stock to common stock . . . . . . . . . . . . . . . . 150,000 0
Subscriptions receivable on common stock. . . . . . . . . . . . . . . . . . . 0 300,000
Conversion of note receivable to common stock . . . . . . . . . . . . . . . . 32,688 0
Conversion of preferred stock to note payable . . . . . . . . . . . . . . . . 290,000 0
Purchase acquisition
Assets acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 438,154
Liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2,154
Equity securities consideration. . . . . . . . . . . . . . . . . . . . . . 0 386,000
See notes to condensed consolidated financial statements
4
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2002 and 2001
NOTE 1 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues and Cost Recognition
Vicom, Inc. and subsidiaries (the Company) earns revenues from four sources: 1)
Video and computer technology products which are sold but not installed, 2)
Voice, video and data communication products which are sold and installed, 3)
Service revenues related to communication products which are sold and both
installed and not installed, and 4) MultiBand user charges to multiple dwelling
units.
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms.
Customer contracts for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenues and costs on the sale of products where
installation is involved are recognized under the percentage of completion
method. Costs are expensed as incurred. The amount of revenue recognized is the
portion that the cost expended to date bears to the anticipated total contract
cost, based on current estimates to complete. Contract costs include all labor
and materials unique to or installed in the project, as well as subcontract
costs. Costs and estimated earnings in excess of billings are classified as
current assets; billings in excess of costs and estimated earnings are
classified as current liabilities.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. The Company, if the
customer elects, enters into equipment maintenance agreements for products sold
once the original manufacturer's warranty has expired. Revenues from all
equipment maintenance agreements are recognized on a straight-line basis over
the terms of each contract. Costs for services are expensed as incurred.
MultiBand user charges are recognized as revenues in the period the related
services are provided.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
Goodwill
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and was amortized using the straight-line
method over ten years. The carrying value of goodwill is reviewed if the facts
and circumstances suggest that it may be impaired. If the review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the assets acquired over the remaining amortization period, the
Company's carrying value of goodwill is reduced by the estimated shortfall of
5
cash flows. The Company did not record any impairment charges related to
goodwill and property and equipment during the six months ended June 30, 2002
and 2001. Amortization was $0 and $83,769 for the three months ended June 30,
2002 and 2001. Amortization was $0 and $175,120 for the six months ended June
30, 2002 and 2001. (See Note 3).
Net Loss per Share
Basic net loss per common share is computed by dividing the loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the reporting period. Diluted net loss per common share is computed by
dividing loss attributable to common stockholders by the sum of the weighted
average number of common shares outstanding plus all additional common stock
that would have been outstanding if potentially dilutive common shares related
to common share equivalents (stock options, stock warrants, convertible
preferred shares, and issued but not outstanding restricted stock) had been
issued. All options, warrants, convertible preferred shares, and restricted
stock outstanding during the three and six months ended June 30, 2002 and
2001 were anti-dilutive.
NOTE 3 - ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations",
effective for acquisitions initiated on or after July 1, 2001, and SFAS No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations. SFAS No. 142
indicates that goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules effective January 1, 2002. The Company will
perform the required goodwill impairment test at the close of the quarter ended
September 30, 2002 based on the carrying amount as of January 1, 2002. If it is
determined there is an impairment of goodwill, we will record an adjustment at
that time.
Components of intangible assets are as follows:
June 30, 2002 December 31, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Intangible assets subject to
amortization
Domain name $ 83,750 $ 13,958 $ 83,750 $ 5,588
Intangible assets not subject to
amortization
Goodwill $3,531,157 $782,278 $3,531,157 $782,278
There was no change in reported goodwill during the six months ended June 30,
2002.
Amortization of intangible assets was $4,185 and $0 for the three months ended
June 30, 2002 and 2001, respectively, and $8,370 and $0 for the six months ended
June 30, 2002 and 2001, respectively. Amortization expense is expected to be
approximately $8,370 for the remainder of 2002 (a total of approximately $16,740
for 2002). Estimated amortization expense of intangible assets for the years
ending December 31, 2003, 2004, 2005 and 2006 is $16,740, $16,740, $16,740 and
$11,202, respectively. Our net loss excluding goodwill amortization expense,
for the three months and six months ended June 30, 2001 would have been as
follows had we adopted SFAS No. 142 on January 1, 2001:
6
Three Six Months
Months Ended Ended
June 30, 2001
Net loss-as reported $ (1,330,171) $ (2,458,295)
SFAS No. 142 amortization adjustment 86,776 175,120
Net loss-as adjusted $ (1,243,395) $ (2,283,175)
Basic and diluted net loss per share-as reported $ (0.18) $ (0.33)
Basic and diluted net loss per share-adjusted $ (0.16) $ (0.29)
NOTE 4 - LIQUIDITY
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the six months ended June 30, 2002 and 2001, the Company incurred net losses of
$2,162,024 and $2,458,295, respectively. At June 30, 2002, the Company had an
accumulated deficit of $27,337,122. The Company's ability to continue as a
going concern is dependent on it ultimately achieving profitability and/or
raising additional capital. Management intends to obtain additional debt or
equity capital to meet all of its existing cash obligations and fund commitments
on planned MultiBand projects, however, there can be no assurance that the
sources will be available or available on terms favorable to the Company.
Management anticipates that the impact of the actions listed below, will
generate sufficient cash flows to pay current liabilities, long-term debt and
capital lease obligations and fund the Company's future operations:
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional equity investment in the Company by either issuing
preferred or common stock.
3. Continue to market MultiBand services and acquire additional multi-dwelling
unit customers.
4. Control capital expenditures by contracting MultiBand services and
equipment through a landlord-owned equipment program.
NOTE 5 - NOTES PAYABLE
During April 2002, the Company expanded its credit facility with Convergent
Capital Partners I, L.P. to $2,400,000. In addition, the principal repayment
was extended to begin in August 2005. The credit facility is secured by Company
assets and the facility agreement requires the Company to maintain collateral
requirements and minimum quarterly earnings before income taxes, depreciation
and amortization requirements, the latter requirement beginning in the Company's
fourth fiscal quarter of 2002. All other terms remain the same. In connection
with this note, the Company issued 500,000 (seven year) warrants to purchase
common stock at a price of $1.10 per share. The proceeds of the credit facility
were allocated between the loan and the warrants based on the relative fair
value of the securities at the time of issuance. The warrants were valued using
the Black Scholes calculation. The resulting original issue discount, the fair
value of the warrant, is being amortized over the life of the debenture using
the straight-line method, which approximates the interest method.
In April 2002, the Company converted 10,000 shares of 14% Class D convertible
preferred stock into a demand note for $100,000. The note expires in May 2007
and bears 14% interest.
In the second quarter of 2002, the Company amended its agreement with Pyramid
Trading, L.P. to convert approximately one-third of the principal balance of the
Pyramid note to Vicom common stock. As part of the amendment, the conversion
rate of the note was changed to 0.92 of a thirty day prior rolling average of
the Company's closing stock price. This change has been reflected in a revised
original issue discount.
NOTE 6 - STOCK WARRANTS
Stock warrants activity is as follows for the six months ended June 30, 2002:
7
WEIGHTED
NUMBER OF AVERAGE
WARRANTS EXERCISE PRICE
----------- ---------------
WARRANTS OUTSTANDING - DECEMBER 31, 2001 9,565,450 $2.37
GRANTED 1,293,690 1.68
CANCELED OR EXPIRED 0 0
EXERCISED 0 0
----------- ---------------
WARRANTS OUTSTANDING - JUNE 30, 2002 10,858,140 $2.29
=========== ===============
The warrants granted during the six months ended June 30, 2002 were awarded as
part of common stock issued, services related to equity financing, and in
connection with notes payable.
NOTE 7 - BUSINESS SEGMENTS
The following is Company business segment information for the three months
ended June 30, 2002 and 2001.
Vicom CTU MultiBand Total
Quarter ended June 30, 2002
Revenues 0 5,815,531 128,893 5,944,424
Income/(Loss) from operations (424,970) 30,832 (256,375) (650,513)
Identifiable assets 3,081,046 5,509,679 3,171,368 11,762,093
Depreciation and amortization 136,795 112,823 137,310 386,928
Capital expenditures 0 44,619 105,109 149,728
Quarter ended June 30, 2001
Revenues 0 7,794,443 35,786 7,830,229
Income/(Loss) from operations (395,167) (77,809) (483,731) (956,707)
Identifiable assets 3,283,754 8,423,440 3,277,087 14,984,281
Depreciation and amortization 194,659 114,757 128,468 437,884
Capital expenditures 0 138,255 122,768 261,023
Following is Company business segment information for six months ended June 30,
2002 and 2001:
Vicom CTU MultiBand Total
Six months ended June 30, 2002
Revenues 0 11,977,112 229,500 12,206,612
Income/(Loss) from operations (869,252) (56,443) (508,382) (1,434,077)
Identifiable assets 3,081,046 5,509,679 3,171,368 11,762,093
Depreciation and amortization 265,454 232,740 273,276 771,468
Capital expenditures 0 84,439 170,822 255,261
Six months ended June 30, 2001
Revenues 0 18,412,184 100,864 18,513,048
Income/(Loss) from operations (849,200) 58,552 (1,046,835) (1,837,483)
Identifiable assets 3,283,754 8,423,440 3,277,087 14,984,281
Depreciation and amortization 194,659 114,757 128,468 437,884
Capital expenditures 0 199,460 1,204,493 1,403,953
NOTE 8- SUBSEQUENT EVENT
Vicom, Incorporated announced on July 26, 2002 that it had received notice from
Nasdaq that its closing bid price has failed to meet the minimum requirement of
$1.00 per share for the last 30 consecutive trading days. Under the
8
notice, the Company has until January 21, 2003 to come back into compliance or
be subject to removal from the Nasdaq SmallCap Market.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, product pricing, management for growth, integration of acquisitions,
technological developments, new products, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements including those made in this statement. In order to
comply with the terms of the Private Securities Litigation Reform Act, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or Company's
forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
developments and results of the Company's business include the following:
national and regional economic conditions; pending and future legislation
affecting IT and telecommunications industries; market acceptance of the
Company's products and services; the Company's products and services; the
Company's continued ability to provide integrated communication solutions for
customers in a dynamic industry; and other competitive factors.
Because these and other factors could affect the Company's operating
results, past financial performance should not necessarily be considered as a
reliable indicator of future performance and anticipated future period results.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
GENERAL
Vicom, Incorporated (Vicom) is a Minnesota corporation formed in September
1975. Vicom is the parent corporation of two wholly-owned subsidiaries,
Corporate Technologies, USA, Inc. (CTU), and MultiBand, Inc. (MultiBand).
Vicom completed an initial public offering in June 1984. In November 1992,
Vicom became a non-reporting company under the Securities Exchange Act of 1934.
In July 2000, Vicom regained its reporting company status. In December, 2000,
Vicom stock began trading on the NASDAQ stock exchange under the symbol VICM.
Vicom's website is located at: www.vicominc.net.
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Vicom recently expanded its efforts to establish itself within the rapidly
evolving telecommunications and computer industries. Effective December 31,
1998, Vicom acquired the assets of the Midwest region of Enstar Networking
Corporation (ENC), a data cabling and networking company. In late 1999, in the
context of a forward triangular merger, Vicom, to expand its range of computer
products and related services, purchased the stock of Ekman, Inc. d/b/a
Corporate Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (CTU). CTU provides voice, data
and video systems and services to business and government. MultiBand, Inc. was
incorporated in February 2000. MultiBand, Inc provides voice, data and video
services to multiple dwelling units (MDU's).
As of June 30, 2002, CTU was providing telephone equipment and service to
approximately 1,000 customers, with approximately 10,000 telephones in service.
In addition, CTU provides computer products and services to approximately 3,000
customers. MultiBand, as of June 30, 2002, had approximately 806 customers.
Telecommunications systems distributed by Vicom are intended to provide users
with flexible, cost-effective alternatives as compared to systems available from
major telephone companies, including those formerly comprising the Bell System
and from other interconnect telephone companies.
CTU provides a full range voice, data and video communications systems and
service, system integration, training and related communication sales and
support activities for commercial, professional and institutional customers,
most of which are located in Minnesota, North Dakota, and South Dakota. CTU
purchases products and equipment from NEC America, Inc. (NEC), Siemens
Enterprise Networks (Siemens), Cisco Systems, Inc. (Cisco), Nortel Networks
Corp. (Nortel), Tadiran Telecommunications, Inc. (Tadiran), and other
manufacturers of communications and electronic products and equipment. CTU uses
these products to design telecommunications systems to fit its customers'
specific needs and demands.
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SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A DOLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE OF REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES 100% 100% 100% 100%
COST OF PRODUCTS & SERVICES 73.3% 77.2% 74.9% 78.9%
GROSS MARGIN 26.7% 22.8% 25.1% 21.1%
SELLING, GENERAL & ADMINISTRATIVE 37.7% 35.0% 36.8% 31.0%
OPERATING LOSS -11.0% -12.2% -11.7% -9.9%
INTEREST EXPENSE & OTHER, NET -6.7% -4.8% -6.0% -3.4%
LOSS BEFORE TAXES -17.7% -17.0% -17.7% -13.3%
INCOME TAX 0 0 0 0
NET LOSS -17.7% -17.0% -17.7% -13.3%
The following table sets forth, for the period indicated, the gross margin
percentages for Corporate Technologies USA, Inc. and MultiBand, Inc.
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
GROSS MARGIN PERCENTAGES:
CORPORATE TECHNOLOGIES USA, INC. 26.7% 23.7% 25.0% 21.4%
MULTIBAND, INC. 34.1% -63.6% 35.5% -35.1%
RESULTS OF OPERATIONS
Revenues
Revenues decreased 24.1% to $5,944,424 in the quarter ended June 30, 2002,
as compared to $7,830,229 for the quarter ended June 30, 2001.
Vicom Inc. has recorded no revenue since the first quarter of fiscal 2001
as all sales operations were transferred to Corporate Technologies, USA, Inc.
(CTU).
Revenues for (CTU) decreased 25.3% in the second quarter of fiscal 2002 to
$5,815,531 as compared to $7,794,443 in the second quarter of fiscal 2001. This
decrease in CTU's revenues resulted primarily from CTU's desire to increase
gross margins versus maintaining top line revenues. Thus, CTU has chosen to
eliminate certain lower margin equipment sales and instead has increased sales
of services which have higher margins.
Revenues for MultiBand, Inc. increased 260% to $128,893 as compared to
$35,786 in the second quarter of fiscal 2001. This increase is due to expansion
of MultiBand services to three additional properties as well as increased
sales to existing properties.
Revenues for the six month period ended June 30, 2002 decreased 34.1% to
$12,206,612 from $18,513,048 for the same period in 2001.
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Gross Margin
The Company's gross margin decreased 10.8% or $192,120 to $1,589,710 for
the quarter ended June 30, 2002, as compared to $1,781,830 for the similar
quarter last year. This decrease in gross margin is due to the substantial
decrease in revenues prompted by the Company's increased focus on sales of
services. For the quarter ended June 30, 2002, as a percent of total revenues,
gross margin was 26.7% as compared to 22.8% for the similar period last year.
This increase in gross margin percentage is primarily due to an increase in
service sales which have better margins than equipment sales.
Gross margin for Corporate Technologies USA, Inc. decreased by 14.1% to
$1,551,763 for the quarter ended June 30, 2002, as compared to $1,806,855 in the
second quarter of fiscal 2001. This decrease is due to the aforementioned
decrease in revenues.
Gross margin for MultiBand, Inc. for the quarter ended June 30, 2002
increased 293% to $43,947 as compared to ($22,747) in the second quarter of
fiscal 2001 reflecting on the increase of revenue being billed.
For the six month period ended June 30, 2002, as a percent of total
revenues, gross margin was 25.1% as compared to 21.1% for the same period in
2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 18.2% to $2,240,223
in the quarter ended June 30, 2002, compared to $2,738,537 in the prior year
quarter. Selling, general and administrative expenses were, as a percentage of
revenues, 37.7% for the quarter ended June 30, 2002 and 35.0% for the similar
period a year ago. This increase is primarily attributable to lower top line
revenues.
For the six month period ended June 30, 2002 these expenses decreased 21.8%
to $4,496,761 as compared to $5,747,083 for the six months ended June 30, 2001.
As a percentage of revenues, selling, general and administrative expenses are
36.8% for the period ended June 30, 2002 as compared to 31.0% for the same
period 2001.
Interest Expense
Interest expense was $426,869 for the quarter ended June 30, 2002, versus
$373,771 for the similar period a year ago, reflecting an increased Company debt
load due to acquisition related debt, warrant valuation and increased
borrowings. Amortization of original issue discount was $260,774 and $0 for the
three months ended June 30, 2002 and 2001.
Interest expense was $772,904 for the six months ended June 30, 2002 and
$666,209 for the same period last year. For the six months ended June 30, 2002
amortization of original discount was $471,757 and $89,984 in same period as
last year.
Net Loss
In the second quarter of fiscal 2002, the Company incurred a net loss of
$1,052,101 compared to a net loss of $1,330,171 for the second fiscal quarter of
2001. A decline in operating losses for the second quarter of 2002 versus the
similar period a year ago was offset by an increase in interest expense
primarily due to amortization of original issue discount.
For the six months ended June 30, 2002, the Company recorded a net loss of
$2,162,024, as compared to $2,458,295 for the six months ended June 30, 2001.
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Liquidity and Capital Resources
Available working capital at June 30, 2002 decreased over the similar
period last year due to operating losses. Vicom experienced a decrease in
accounts payable for the period ended June 30, 2002 versus last year's period,
primarily due to a significant reduction in revenues which led to a payables
decrease. Accounts receivable decreased for the period ended June 30, 2002,
compared to the prior year period, due to a significant decrease in revenues.
Inventories decreased over last year's prior period inventories due to the
aforementioned revenue decreases. Net borrowings under notes and installment
obligations payable increased materially for the period ended June 30, 2002
compared to the prior year's period due to financing with an investor, the
proceeds of which were used in part to finance MultiBand, Inc.'s project
build-out.
Management of Vicom believes that, for the near future, cash generated by
sales of stock, and existing credit facilities, in aggregate, are adequate to
meet the anticipated liquidity and capital resource requirements of its
Corporate Technologies USA, Inc. business for the next twelve months provided
Company operating losses continue to decrease. Significant continuation of the
Company's MultiBand, Inc.'s build-out is highly dependent on securing additional
financing for future projects. Management believes that while future build-out
financing is available, there is no guarantee that said financing will be
obtained.
Capital Expenditures
The Company used $255,261 for capital expenditures during the six months
ended June 30, 2002, as compared to $1,403,953 in the similar period last year.
Capital expenditures consisted of equipment acquired for internal use and for
MultiBand build-out projects as compared to the same period last year when
MultiBand build-out costs for construction totaled $1,081,725. The Company has
started a new business approach with having the building owners buy the
equipment and pay MultiBand a reduced management fee.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived Assets
- ----------------------------------
The Company's long-lived assets include property, equipment and leasehold
improvements. The estimated fair value of these assets is dependent on the
Company's future performance. In assessing for potential impairment for these
assets, the Company considers future performance. If these forecasts are not
met, the Company may have to record an impairment charge not previously
recognized, which may be material. During the six months ended June 30, 2002
and 2001, the Company did not record any impairment losses related to long-lived
assets.
Impairment of Goodwill
- ------------------------
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses is
impaired. Any resulting impairment loss could have a material adverse impact on
our financial condition and results of operations. During the six months ended
June 30, 2002 and 2001, the Company did not record any impairment losses related
to goodwill.
Inventories
- -----------
We value our inventory at the lower of the actual cost or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
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and record a provision for excess and obsolete inventory. Rapid technological
change, frequent new product development, and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand characterize our industry.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS.
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The Company believes the adoption of SFAS No. 145 will not have a
material effect on the Company's consolidated financial position or results of
operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes the
adoption of SFAS No. 146 will not have a material effect on the Company's
consolidated financial position or results of operations.
ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK
Vicom is not subject to any material interest rate risk as any current
lending agreements are at a fixed rate of interest.
PART II. OTHER INFORMATION
ITEM 4. LEGAL PROCEEDINGS
As of June 30, 2002, Vicom was not engaged in any legal proceedings
whose anticipated results would have a material adverse impact on the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1
(b) Reports on Form 8-K.
1) On June 4, 2002, Vicom filed a report on Form 8-K relating to
a solicitation from The Amara Group, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VICOM, Inc.
Registrant
Date: August 14, 2002 By: /s/ James L. Mandel
Chief Executive Officer
Date: August 14, 2002 By: /s/ Steven M. Bell
Chief Financial Officer
(Principal Financial and Accounting Officer)
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