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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING SEPTEMBER 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 October 31, 2002 there were 12,882,073 shares outstanding of the
registrant's common stock, par value $.01 per share, and 165,541 outstanding
shares of the registrant's convertible preferred stock.
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
------------ -------------------- ------------- -------------
REVENUES $6,382,633 $7,678,534 $18,589,245 $26,191,582
------------ -------------------- ------------ -------------
COSTS AND EXPENSES
Cost of products and services. . . . . . . . . . . . . 4,680,582 6,110,861 13,824,510 20,714,309
Selling, general and administrative. . . . . . . . . . 2,256,745 2,529,531 6,753,506 8,276,614
Impairment on property and equipment . . . . . . . . . 119,480 0 119,480 0
------------ -------------------- ------------ -------------
Total Costs and Expenses 7,056,807 8,640,392 20,697,496 28,990,923
------------ -------------------- ------------ -------------
LOSS FROM OPERATIONS . . . . . . . . . . . . . . . . . (674,174) (961,858) (2,108,251) (2,799,341)
------------ -------------------- ------------ -------------
OTHER EXPENSES
Interest expense . . . . . . . . . . . . . . . . . . . (349,388) (352,735) (1,122,292) (1,018,944)
Income (expense) . . . . . . . . . . . . . . . . . . . (93,171) 8,533 (48,214) 53,930
------------ -------------------- ------------ -------------
Total Other Expense (442,559) (344,202) (1,170,506) (965,014)
------------ -------------------- ------------ -------------
LOSS BEFORE INCOME TAXES . . . . . . . . . . . . . . . (1,116,733) (1,306,060) (3,278,757) (3,764,355)
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . 0 0 0 0
------------ -------------------- ------------ -------------
NET LOSS $(1,116,733) $ (1,306,060) $(3,278,757) $(3,764,355))
Preferred stock dividends (39,494) (72,817) (90,230) (248,425)
------------ -------------------- ------------ -------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,156,227) $ (1,378,877) $(3,368,987) $ (4,012,780)
============ ==================== ============ =============
LOSS PER SHARE-
BASIC AND DILUTED. . . . . . . . . . . . . . . . . . . $ (.09) $ (.15) $ (.29) $ (.48)
============ ==================== ============ =============
WEIGHTED AVERAGE SHARES OUTSTANDING-BASIC AND DILUTED 12,028,501 8,939,847 11,398,078 8,317,954
See notes to condensed consolidated financial statements
2
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 261,931 $ 624,845
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . 2,165,072 2,595,368
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,507,801 1,646,441
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 264,821 295,324
------------- -------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,199,625 5,161,978
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . . . . . . . . . . 2,822,250 4,059,831
OTHER ASSETS
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,748,879 2,748,879
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,491 260,612
------------- -------------
TOTAL OTHER ASSETS 2,988,370 3,009,491
------------- -------------
TOTAL ASSETS $ 10,010,245 $ 12,231,300
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Wholesale line of credit . . . . . . . . . . . . . . . . . . . . . . . . . $ 817,873 $ 1,324,807
Current portion of long term debt. . . . . . . . . . . . . . . . . . . . . 528,317 85,789
Current portion of capital lease obligations . . . . . . . . . . . . . . . 39,006 309,906
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,849,546 1,800,285
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 755,451 776,417
Deferred service obligations and revenue . . . . . . . . . . . . . . . . . 308,609 416,606
------------- -------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . 4,298,802 4,713,810
LONG TERM DEBT, NET. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,885,108 2,669,510
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION. . . . . . . . . . . . . 76,015 642,360
------------- -------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . 7,259,925 8,025,680
------------- -------------
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,831 and 28,872 shares issued and outstanding). . . 418,252 433,867
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 (12,757,634 and 10,679,450 shares issued;
12,700,313 and 10,604,113 shares outstanding) . . . . . . . . . . . . . . 4,802,146 3,443,104
Stock subscription receivable. . . . . . . . . . . . . . . . . . . . . . . (573,740) (610,000)
Options and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,604,899 24,957,912
Unamortized compensation . . . . . . . . . . . . . . . . (769,295) (1,209,143)
Accumulated deficit .. . . . . . . . . . . . . . . . . . (28,493,349) (25,115,067)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,750,320 4,205,620
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,010,245 $ 12,231,300
============= =============
See notes to condensed consolidated financial statements.
3
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NINE MONTHS ENDED
--------------------------
SEPTEMBER 30, (UNAUDITED)
--------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,278,757) $(3,764,355)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730,581 766,881
Amortization of deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . 408,201 667,735
Amortization of original issue discount. . . . . . . . . . . . . . . . . . . . . . . . . 768,159 179,968
Impairment on property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 119,480 0
Common stock issued for services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,700 0
Loss on sales of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . 118,367 0
Discount on preferred stock related to warrants (53,041) 0
Changes in operating assets and liabilities:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428,421 2,450,753
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,640 350,697
Costs, estimated earnings and billings . . . . . . . . . . . . . . . . . . . . . . . . . 0 25,460
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,621) 0
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,507 (107,650)
Wholesale line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (506,934) (974,647)
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 140,432 (313,134)
Deferred service obligations and revenue . . . . . . . . . . . . . . . . . . . . . . . . (107,997) 121,103
------------ ------------
Net cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . (1,090,862) (597,189)
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . (583,552) (1,585,278)
Purchase acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (50,000)
Proceeds from sale of property and equipment . . . . . . . . . . . 965,948 0
Collections on notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,572 52,972
------------ ------------
Net cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . 415,968 (1,582,306)
------------ ------------
FINANCING ACTIVITIES
Proceeds from notes and installment obligations payable. . . . . . . . . . . . . . . . . 0 169,050
Proceeds from long-term debt and warrants issued with long term debt . 672,001 1,695,000
Payments on long term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (96,855) (352,883)
Payments on capital lease obligations. . . . . . . . . . . . . . . . . . . . . . . . . . (919,365) 0
Proceeds from issuance of stock and warrants . . . . . . . . . . . . . . . . . . . . . . 840,429 1,363,919
Stock issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (101,975)
Redemption of preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (94,000) (480,500)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90,230) (248,425)
------------ ------------
Net cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . 311,980 2,044,186
------------ ------------
DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (362,914) (135,309)
CASH
Beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,845 1,161,479
------------ ------------
End of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,931 1,026,170
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount . . . . . . . . . 393,587 495,234
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Stock options issued below fair market value related to compensation. . . . . . . . . . 400 0
Issuance of preferred stock for acquisition of assets. . . . . . . . . . . . . . . . . . 18,590 0
Warrants issued with debt .. . . . . . . . . . . . . 8,529 0
Notes payable converted to preferred stock . . . . . . . . . . . . . . . . . . . . . . . 414,882 255,850
Accounts payable converted to common stock . . . . . . . . . . . . . . . . . . . . . . . 7,255 0
Accounts payable converted to preferred stock. . . . . . . . . . . . . . . . . . . . . . 0 129,050
Conversion of preferred stock to common stock. . . . . . . . . . . . . . . . . . . . . . 150,000 0
Subscriptions receivable on common stock . . . . . . . . . . . . . . . . . . . . . . . . 0 510,000
Conversion of note receivable to common stock . . . . . . . . 34,563 0
Conversion of preferred stock to note payable .. . . . . . . 290,000 0
Stock issued for guarantee of debt .. . . . . . . . . . 14,750 0
Purchase acquisition
Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 381,808
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2,154
Equity securities consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 329,664
Employee Stock Options Issued with Unamortized Compensation . . . . . . . . . . . . . . 0 1,200,000
See notes to condensed consolidated financial statements
4
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
cash flows. The Company did not record any impairment charges related to
goodwill during the nine months ended September 30, 2002 and 2001. Amortization
was $0 and $89,284 for the three months ended September 30, 2002 and 2001.
Amortization was $0 and $264,904 for the nine months ended September 30, 2002
and 2001. (See Note 3).
5
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 months ended September 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 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.
We adopted the new rules effective January 1, 2002. We performed the required
goodwill impairment test at the close of the quarter ended September 30, 2002.
As part of adopting this standard, we obtained an independent appraisal to
assess the fair value of our business units to determine whether goodwill
carried on our books was impaired and the extent of such impairment, if any. The
independent appraisal used the income method to measure the fair value of our
business units. Under the income method, value is dependent on the present value
of future economic benefits to be derived from ownership. Future net cash flows
available for distribution are discounted at market-based rates of return to
provide indications of value. The independent appraiser used a discount factor
of 18.35%. Based upon this independent appraisal, we determined that our current
goodwill balances were not impaired as of July 1, 2002.
Components of intangible assets are as follows:
September 30, 2002 December 31, 2001
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------
Intangible assets subject to
amortization
Domain name 83,750 18,146 83,750 5,588
Intangible assets not subject to amortization
Goodwill 3,531,157 782,278 3,531,157 782,278
Amortization of intangible assets was $4,185 and $0 for the three months ended
September 30, 2002 and 2001, respectively, and $12,555 and $0 for the nine
months ended September 30, 2002 and 2001, respectively. Amortization expense is
expected to be approximately $4,185 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
6
amortization expense, for the three months and nine months ended September 30,
2001 would have been as follows had we adopted SFAS No. 142 on January 1, 2001:
Three Months Ended Nine Months Ended
September 30, 2001
Net loss-as reported $ (1,306,060) $ (3,764,355)
SFAS No. 142 amortization adjustment 89,784 264,904
Net loss-as adjusted $ (1,216,276) $ (3,499,451)
Basic and diluted net loss per share-as reported $ (0.15) $ (0.48)
Basic and diluted net loss per share-adjusted $ (0.14) $ (0.42)
NOTE 4 - LIQUIDITY
The accompanying condensed 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 nine months ended September 30, 2002 and 2001, the Company
incurred net losses of $3,278,757 and $3,764,355, respectively. At September 30,
2002, the Company had an accumulated deficit of $28,493,349. 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 - CAPITAL LEASE OBLIGATIONS
During the three months ended September 30, 2002, the Company paid off capital
lease obligations of approximately $738,000. During the three months ended
September 30, 2002, the Company sold property and equipment related to the
Multiband subsidiary resulting in a net loss of approximately $111,000.
NOTE 6 - STOCK WARRANTS
Stock warrants activity is as follows for the nine months ended September 30,
2002:
WEIGHTED
NUMBER OF AVERAGE
WARRANTS EXERCISE PRICE
---------- --------------
WARRANTS OUTSTANDING - DECEMBER 31, 2001 9,564,450 $ 2.37
GRANTED 1,443,690 1.64
CANCELED OR EXPIRED 0 0
EXERCISED 0 0
---------- --------------
WARRANTS OUTSTANDING - SEPTEMBER 30, 2002 10,008,140 $ .64
---------- -------------
The warrants granted during the nine months ended September 30, 2002 were
awarded as part of common stock issued, services related to equity financing,
and in connection with notes payable.
7
NOTE 7 - BUSINESS SEGMENTS
The following is Company business segment information for the three months ended
September 30, 2002 and 2001:
Vicom CTU MultiBand Total
-------- --------- --------- ---------
Three months ended September 30, 2002:
Revenues 0 6,227,683 154,950 6,382,633
Gain/(Loss) from operations (437,013) 164,881 (402,042) (674,174)
Identifiable assets 3,020,620 5,020,048 1,969,577 10,010,245
Depreciation and amortization 140,871 107,966 110,101 358,938
Capital expenditures 2,126 195,421 130,744 328,291
Three months ended September 30, 2001:
Revenues 0 7,618,442 60,092 7,678,534
Loss from operations (554,126) (86,777) (320,955) (961,858)
Identifiable assets 2,782,481 7,666,404 3,199,417 13,648,302
Depreciation and amortization 223,434 139,160 126,894 489,488
Capital expenditures 0 18,613 162,712 181,325
The following is Company business segment information for the nine months ended
September 30, 2002 and 2001:
Vicom CTU MultiBand Total
-------- ---------- --------- -----------
Nine months ended September 30, 2002
Revenues 0 18,204,795 384,450 18,589,245
Gain/(Loss) from operations (1,286,465) 88,638 (910,424) (2,108,251)
Identifiable assets 3,020,620 5,020,048 1,969,577 10,010,245
Depreciation and amortization 414,699 340,706 383,377 1,138,782
Capital expenditures 2,126 279,860 301,566 583,552
Nine months ended September 30,2001
Revenues 0 26,030,626 160,956 26,191,582
Loss from operations (1,403,296) (28,255)(1,367,790) (2,799,341)
Identifiable assets 2,782,481 7,666,404 3,199,417 13,648,302
Depreciation and amortization 696,328 391,728 346,560 1,434,616
Capital expenditures 0 218,073 1,367,205 1,585,278
NOTE 8- COMMITMENTS AND CONTINGENCIES
(A) 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 notice, the Company has until January 21, 2003 to come back into compliance
or be subject to removal from the Nasdaq SmallCap Market.
(B) Recently, one of Multiband's suppliers of satellite TV programming, WSNet,
filed Chapter 11 Bankruptcy. While the Company does have alternate suppliers for
programming, it could be potentially disruptive and detrimental to Multiband's
business if WSNet were to entirely cease operations with little notice.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the three months ended September 30, 2002, the Company sold property and
equipment to the Chairman of the Company's board of directors and an entity
controlled by another Director, resulting in a net loss of approximately
$111,000. The Company also approved an option for the Chairman to purchase two
additional properties held by Multiband. The Company believes these transactions
were at fair market value.
8
NOTE 10 - RECLASSIFICATION
For comparability, certain third quarter 2001 amounts have been reclassified to
conform with classifications adopted in the third quarter 2002.
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 .
----------------
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 September 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 September 30, 2002, had
approximately 850 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 Telecom, 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.
10
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A DOLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE OF REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES 100% 100% 100% 100%
COST OF PRODUCTS & SERVICES 73.3% 79.6% 74.4% 79.1%
GROSS MARGIN 26.7% 20.4% 25.6% 20.9%
SELLING, GENERAL & ADMINISTRATIVE 35.4% 32.9% 36.3% 31.6%
IMPAIRMENT ON PROPERTY AND EQUIPMENT 1.9% 0 .06% 0
OPERATING LOSS -10.6% -12.5% -11.3% -10.7%
INTEREST EXPENSE & OTHER, NET 6.9% -4.5% 6.3% -3.7%
LOSS BEFORE TAXES -17.5% -17.0% -17.6% -14.4%
INCOME TAX 0 0 0 0
NET LOSS -17.5% -17.0% -17.6% -14.4%
The following table sets forth, for the period indicated, the gross margin
percentages for Corporate Technologies USA, Inc. and MultiBand, Inc.
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
GROSS MARGIN PERCENTAGES:
CORPORATE TECHNOLOGIES USA, INC. 26.8% 20.0% 25.6% 20.9%
MULTIBAND, INC. 24.0% 76.3% 30.9% 6.5%
RESULTS OF OPERATIONS
Revenues
Revenues decreased 16.9% to $6,382,633 in the quarter ended September 30,
2002, as compared to $7,678,534 for the quarter ended September 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.
Revenues for Corporate Technologies decreased 18.3% to $6,227,683 as
compared to $7,618,442 in the third 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.
MultiBand revenues increased 157.8% to $154,950 in the quarter ended
September 30, 2002 as compared to $60,092 in the third quarter of fiscal 2001.
This increase is due to the continual addition of Multiband subscribers.
Revenues for the nine-month period ended September 30, 2002 decreased 29.0%
to $18,589,245 from $26,191,582 for the comparable nine-month period of fiscal
2001.
11
Gross Margin
The Company's gross margin increased 8.6% or $134,378 to $1,702,051 for the
three months ended September 30, 2002, as compared to $1,567,673 for the similar
quarter last year. For the three months ended September 30, 2002, as a percent
of total revenues, gross margin was 26.7% as compared to 20.4% 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 CTU increased by 9.8 %, or $148,990 to $1,670,806 for the
three months ended September 30, 2002, as compared to $1,521,816 in the three
months ended September 30, 2001.
Gross margin for Multiband, Inc. for the three months ended September 30,
2002 decreased 18.8% to $37,245 as compared to $45,857 in the third quarter of
2001. Gross margin is expected to increase in the fourth quarter as the Company
is anticipating credits to invoices for circuits it believes it has overpaid for
as of September 30, 2002.
For the nine-month period ended September 30, 2002, the Company's gross
margin decreased 13.0% or $712,538 to $4,764,735, as compared to $5,477,273 for
the similar period last year. The decrease in gross margin is directly
attributable to the Company's decrease in revenues.
For the nine-month period ended September 30, 2002, as a percent of total
revenues, gross margin was 25.6% as compared to 20.9% for the similar period
last year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 10.8% to $2,256,745
in the three months ended September 30, 2002, compared to $2,529,531 in the
prior year quarter. This decrease in selling, general and administrative
expenses was, as a percentage of revenues, 35.4% for the three months ended
September 30, 2002 and 32.9% for the similar period a year ago.
For the nine-month period ended September 30, 2002, these expenses
decreased 18.4% to $6,753,506, as compared to $8,276,614 for the same period in
2001. As a percentage of revenues, selling, general and administrative expenses
are 36.3% for the period ended September 30, 2002, as compared to 31.6% for the
same period last year. This percentage increase is primarily attributable to
lower top line revenues.
Interest Expense
Interest expense was $349,388 for the three months ended September 30,
2002, versus $352,735 for the similar period a year ago. Amortization of
original issue discount was $218,400 and $187,500 for the three months ended
September 30, 2002 and 2001.
Interest expense was $1,122,292 for the nine months ended September 30,
2002, and $1,018,944 for the same period last year. For the nine months ended
September 30, 2002 amortization of the original discount was $768,159 and
$179,968 in the same nine month period last year.
Net Loss
In the three months ended September 30, 2002, the Company incurred a net
loss of $1,116,733 compared to a net loss of $1,306,060 for the three months
ended September 30 of 2001. The nine-month period ended September 30, 2002,
resulted in a net loss of $3,278,757 compared to a net loss of $3,764,355 for
12
the same period last year. This reduction in net loss is primarily due to
elimination of goodwill amortization in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Available working capital at September 30, 2002 decreased over the similar
period last year due to operating losses. Vicom experienced a material decrease
in accounts payable for the period ended September 30, 2002 versus last year's
period, primarily due to reduced revenues. Accounts receivable decreased for
the period ended September 30, 2002, compared to the prior year period, due to a
significant decrease in revenues.
Inventories as of September 30, 2002 decreased as compared to the period
ended September 30, 2001 due to the aforementioned revenue decreases. Net
borrowings under notes, leases and installment obligations payable decreased
materially for the period ended September 30, 2002 versus prior year period
primarily due to payoff of $738,000 worth of leases.
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 cash 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 $583,552 for capital expenditures during the nine months
ended September 30, 2002, as compared to $1,585,278 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 $1,548,072. 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 nine months ended September 30,
2002 and 2001, the Company recorded an impairment loss related to long-lived
assets of $119,480 and $0 for the nine months ended September 30, 2002 and
2001.
Impairment of Goodwill
- ------------------------
We periodically evaluate acquired businesses for potential impairment
indicators. Judgments 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 nine months ended
September 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
and record a provision for excess and obsolete inventory. Rapid
13
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 October 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of
Certain Financial Institutions." SFAS No. 147 is effective October 1, 2002.
The Company believes the adoption of SFAS No. 147 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.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-14(c) of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in alerting them in a timely basis to
material information relating to the Company required to be disclosed in the
Company's periodic SEC reports. There have been no significant changes in the
Company's internal controls or in other factors which could significantly affect
internal controls subsequent to the date the Company carried out its evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As of September 30, 2002, the Company was not engaged in any legal proceedings
whose anticipated results would have a material adverse impact.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1
(b) Reports on Form 8-K.
None.
14
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
By:
/s/ James L. Mandel
Date: November 14, 2002 Chief Executive Officer
By:
/s/ Steven M. Bell
Chief Executive Officer
Date: November 14, 2002 (Principal Financial and Accounting Officer)
15
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James Mandel, Chief Executive Officer of Vicom Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Vicom
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 Signature: /s/ James Mandel
___________________________
James Mandel
Chief Executive Officer
16
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven Bell, Chief Financial Officer of Vicom Incorporated, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Vicom
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002 Signature: /s/ Steven Bell
___________________________
Steven Bell
Chief Financial Officer
Exhibit 99.1
Vicom, Inc.
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this Quarterly Report Form 10-Q, Vicom, Inc. (the
"Company") for the period ended September 30, 2002, I, James L Mandel, Chief
Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1. This Periodic Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: November 14, 2002 By: /s/ James L. Mandel
Chief Executive Officer
In connection with this Quarterly Report Form 10-Q, Vicom, Inc. (the
"Company") for the period ended September 30, 2002, I, Steven M. Bell, Secretary
and Treasurer of the Company, hereby certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1. This Periodic Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: November 14, 2002 By: /s/ Steven M. Bell
Chief Financial Officer