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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 MARCH 31, 2003
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 |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act).
Yes |_| No |X|
On May 7, 2003 there were 15,054,503 shares outstanding of the
registrant's common stock, par value $.01 per share, and 246,181 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
----------------------------
March 31, March 31,
------------ --------------
2003 2002
---- ----
(unaudited) (unaudited)
------------ --------------
REVENUES . . . . . . . . . . . . . . . . . . $ 5,871,762 $ 6,262,188
- -------------------------------------------- ------------ --------------
COSTS AND EXPENSES
- --------------------------------------------
Cost of products and services . . . . . 4,310,702 4,789,214
- -------------------------------------------- ------------ --------------
Selling, general and administrative . . 2,235,996 2,236,736
- -------------------------------------------- ------------ --------------
Total Costs and Expenses. . . . . . . . 6,546,698 7,025,950
- -------------------------------------------- ------------ --------------
LOSS FROM OPERATIONS . . . . . . . . (674,936) (763,762)
- -------------------------------------------- ------------ --------------
OTHER EXPENSE
- --------------------------------------------
Interest expense. . . . . . . . . . . . (225,687) (365,835)
- -------------------------------------------- ------------ --------------
Other Income (expense). . . . . . . . . (65,496) 19,676
- -------------------------------------------- ------------ --------------
Total Other Expense . . . . . . . . . . (291,183) (346,159)
- -------------------------------------------- ------------ --------------
LOSS BEFORE INCOME TAXES . . . . . . . . . . (966,119) (1,109,921)
- -------------------------------------------- ------------ --------------
PROVISION FOR INCOME TAXES . . . . . . 0 0
- -------------------------------------------- ------------ --------------
NET LOSS . . . . . . . . . . . . . . . . . . (966,119) (1,109,921)
- -------------------------------------------- ------------ --------------
Preferred Stock Dividends. . . . . . . . . . 56,471 51,726
- -------------------------------------------- ------------ --------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS . . (1,022,590) (1,161,647)
- -------------------------------------------- ============ ==============
LOSS PER SHARE - BASIC AND DILUTED .. . . . $ (.08) $ (.11)
- -------------------------------------------- ------------ --------------
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED . . . . . . . . . . . . . . . . 13,418,333 10,639,224
- -------------------------------------------- ------------ --------------
See notes to condensed consolidated financial statements
2
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002
March 31, 2003 December 31, 2002
---------------- -------------------
(unaudited) (audited)
---------------- -------------------
ASSETS
CURRENT ASSETS
- ------------------------------------------------------------------------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 413,571 $ 540,375
- ------------------------------------------------------------------------ ---------------- -------------------
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . 2,013,530 1,948,004
- ------------------------------------------------------------------------ ---------------- -------------------
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,493,759 1,463,658
- ------------------------------------------------------------------------ ---------------- -------------------
Other Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . 438,984 226,774
- ------------------------------------------------------------------------ ---------------- -------------------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . 4,359,844 4,178,811
- ------------------------------------------------------------------------ ---------------- -------------------
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . . . . . . . . . 3,137,824 3,248,973
- ------------------------------------------------------------------------ ---------------- -------------------
OTHER ASSETS
- ------------------------------------------------------------------------
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,748,879 2,748,879
- ------------------------------------------------------------------------ ---------------- -------------------
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,865 170,653
- ------------------------------------------------------------------------ ---------------- -------------------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . 2,914,744 2,919,532
- ------------------------------------------------------------------------ ---------------- -------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,412,412 $ 10,347,316
- ------------------------------------------------------------------------ ================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------
CURRENT LIABILITIES
- ------------------------------------------------------------------------
Wholesale line of credit . . . . . . . . . . . . . . . . . . . . . . . $ 1,478,293 $ 1,290,383
- ------------------------------------------------------------------------ ---------------- -------------------
Current portion of long term debt. . . . . . . . . . . . . . . . . . . 290,158 321,589
- ------------------------------------------------------------------------ ---------------- -------------------
Current portion of capital lease obligations . . . . . . . . . . . . . 51,343 59,570
- ------------------------------------------------------------------------ ---------------- -------------------
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,282,656 1,735,931
- ------------------------------------------------------------------------ ---------------- -------------------
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 840,764 714,479
- ------------------------------------------------------------------------ ---------------- -------------------
Deferred service obligations and revenue . . . . . . . . . . . . . . . 335,758 309,729
- ------------------------------------------------------------------------ ---------------- -------------------
TOTAL CURRENT LIABILITIES 4,278,972 4,431,681
- ------------------------------------------------------------------------ ---------------- -------------------
LONG TERM DEBT, NET. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,863,844 3,114,006
- ------------------------------------------------------------------------ ---------------- -------------------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION. . . . . . . . . . . . 151,099 159,344
- ------------------------------------------------------------------------ ---------------- -------------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,293,915 7,705,031
- ------------------------------------------------------------------------ ---------------- -------------------
STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------
Cumulative convertible preferred stock, no par value:
- ------------------------------------------------------------------------
8% Class A (27,831 shares issued and outstanding) . . . . . . . . . . 418,252 418,252
- ------------------------------------------------------------------------ ---------------- -------------------
10% Class B (6,200 shares issued and outstanding). . . . . . . . . . . 62,000 62,000
- ------------------------------------------------------------------------ ---------------- -------------------
10% Class C (134,500 and 131,510 shares issued and outstanding). . . . 1,720,493 1,699,407
- ------------------------------------------------------------------------ ---------------- -------------------
15% Class E (77,650 and 70,000 shares issued and outstanding). . . . . 438,964 395,778
- ------------------------------------------------------------------------ ---------------- -------------------
Common stock, no par value (14,413,962 and 13,110,477 shares issued;
14,380,293 and 13,065,410 shares outstanding). . . . . . . . . . . . . 5,247,828 4,465,832
- ------------------------------------------------------------------------ ---------------- -------------------
Stock subscriptions receivable . . . . . . . . . . . . . . . . . . . . (670,239) (633,195)
- ------------------------------------------------------------------------ ---------------- -------------------
Options and warrants . . . . . . . . . . . . . . . . . . . . . . . . . 27,195,980 26,632,299
- ------------------------------------------------------------------------ ---------------- -------------------
Unamortized compensation . . . . . . . . . . . . . . . . . . . . . . . (556,192) (682,089)
- ------------------------------------------------------------------------ ---------------- -------------------
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (30,738,589) (29,715,999)
- ------------------------------------------------------------------------ --------------- -------------------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . 3,118,497 2,642,285
- ------------------------------------------------------------------------ ---------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . $ 10,412,412 $ 10,347,316
- ------------------------------------------------------------------------ ================ ===================
See notes to condensed consolidated financial statements
3
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002 (Unaudited)
THREE MONTHS ENDED
-----------------------
MARCH 31,
---------
2003 2002
---------- ------------
OPERATING ACTIVITIES
- -----------------------------------------------------------------------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(966,119) $(1,109,921)
- ----------------------------------------------------------------------------- ---------- ------------
Adjustments to reconcile net loss to net cash flows from operating activities
- -----------------------------------------------------------------------------
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 214,132 258,300
- ----------------------------------------------------------------------------- ---------- ------------
Amortization of deferred compensation . . . . . . . . . . . . . . . . . . . 120,190 130,428
- ----------------------------------------------------------------------------- ---------- ------------
Amortization of original issue discount . . . . . . . . . . . . . . . . . . 114,616 210,983
- ----------------------------------------------------------------------------- ---------- ------------
Common stock issued for services. . . . . . . . . . . . . . . . . . . . . . 0 7,500
- ----------------------------------------------------------------------------- ---------- ------------
Warrants issued for services . . . . . . . . . . . . . . . . . . . . . . . 321,920 0
- ----------------------------------------------------------------------------- ---------- ------------
Loss on sales of property and equipment . . . . . . . . . . . . . . . . . . 74,137 (6,726)
- ----------------------------------------------------------------------------- ---------- ------------
Interest receivable on stock subscription receivable. . . . . . . . . . . . (10,826) 0
- ----------------------------------------------------------------------------- ---------- ------------
Discount on preferred stock related to warrants . . . . . . . . . . . . . . 0 (5,001)
- ----------------------------------------------------------------------------- ---------- ------------
Changes in operating assets and liabilities:
- -----------------------------------------------------------------------------
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . (65,526) 578,036
- ----------------------------------------------------------------------------- ---------- ------------
Inventories, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,704) 18,088
- ----------------------------------------------------------------------------- ---------- ------------
Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . (225,568) 53,329
- ----------------------------------------------------------------------------- ---------- ------------
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 12,838
- ----------------------------------------------------------------------------- ---------- ------------
Wholesale line of credit . . . . . . . . . . . 187,910 (74,255)
- ----------------------------------------------------------------------------- ---------- ------------
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . . (234,476) (80,223)
- ----------------------------------------------------------------------------- ---------- ------------
Deferred service obligations and revenue. . . . . . . . . . . . . . . . . . 26,029 (47,864)
- ----------------------------------------------------------------------------- ---------- ------------
Net cash flows from operating activities. . . . . . . . . . . . . . . . (472,685) (54,488)
- ----------------------------------------------------------------------------- ---------- ------------
INVESTING ACTIVITIES
- -----------------------------------------------------------------------------
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . (92,285) (105,533)
- ----------------------------------------------------------------------------- ---------- ------------
Proceeds from sale of property and equipment. . . . . . . . . . . . . . . . 0 7,554
- ----------------------------------------------------------------------------- ---------- ------------
Collections on notes receivable . . . . . . . . . . . . . . . . . . . . . . 5,000 0
- ----------------------------------------------------------------------------- ---------- ------------
Net cash flows from investing activities. . . . . . . . . . . . . . . . (87,285) (97,979)
- ----------------------------------------------------------------------------- ---------- ------------
FINANCING ACTIVITIES
- -----------------------------------------------------------------------------
Proceeds from long-term debt and warrants issued with long term debt. . . . 0 600,000
- ----------------------------------------------------------------------------- ---------- ------------
Payments on long term debt. . . . . . . . . . . . . . . . . . . . . . . . . (53,260) (1,547)
- ----------------------------------------------------------------------------- ---------- ------------
Payments on capital lease obligations .. . . . . . (20,474) (87,636)
- ----------------------------------------------------------------------------- ---------- ------------
Proceeds from issuance of stock and warrants. . . . . . . . . . . . . . . . 481,391 55,000
- ----------------------------------------------------------------------------- ---------- ------------
Exercise of warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,130 0
- ----------------------------------------------------------------------------- ---------- ------------
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . (2,100) (10,000)
- ----------------------------------------------------------------------------- ---------- ------------
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . (50,521) (51,726)
- ----------------------------------------------------------------------------- ---------- ------------
Net cash flows from financing activities. . . . . . . . . . . . . . . . 433,166 504,091
- ----------------------------------------------------------------------------- ---------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . (126,804) 351,624
- ----------------------------------------------------------------------------- ---------- ------------
CASH AND CASH EQUIVALENTS
- -----------------------------------------------------------------------------
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540,375 624,845
- ----------------------------------------------------------------------------- ---------- ------------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 413,571 $ 976,469
- ----------------------------------------------------------------------------- ========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- -----------------------------------------------------------------------------
Cash paid for interest, net of amortization of original issue discount. . . $ 119,489 $ 171,567
- ----------------------------------------------------------------------------- ---------- ------------
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
- -----------------------------------------------------------------------------
Stock options issued below fair market value . . . . 0 400
- ----------------------------------------------------------------------------- ---------- ------------
Issuance of preferred stock for acquisition of assets . . . . . . . . . . . 76,500 18,590
- ----------------------------------------------------------------------------- ---------- ------------
Warrants issued with debt . . . . . . . . . . . . . . . . . . . . . . . . . 208,447 8,529
- ----------------------------------------------------------------------------- ---------- ------------
Conversion of preferred stock into common stock . . . . . . . . . . . . . . 40,000 0
- ----------------------------------------------------------------------------- ---------- ------------
Current liabilities converted to stock. . . . . . . . . . . . . . . . . . . 92,514 0
- ----------------------------------------------------------------------------- ---------- ------------
Conversion of notes payable into common stock . . . . . . . . . . . . . . . 130,500 0
- ----------------------------------------------------------------------------- ---------- ------------
Conversion of dividend into common stock. . . . . . . . . . . . . . . . . . 5,950 0
- ----------------------------------------------------------------------------- ---------- ------------
Reduction of stock subscription receivable . . . . . . . . . . . . . . . . 8,782 0
- ----------------------------------------------------------------------------- ---------- ------------
Stock subscription receivable for issuance of common stock. . . . . . . . . 40,000 0
- ----------------------------------------------------------------------------- ---------- ------------
See notes to condensed consolidated financial statements
4
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003 and 2002
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 three months ended March 31, 2003 and 2002.
5
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003 and 2002
Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, the Company uses the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of the Company's common stock at the grant date
over the amount the employee must pay for the stock. The Company's general
policy is to grant stock options at fair value at the date of grant.
Pursuant to APB No. 25 and related interpretations, $120,190 and $130,428 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended March 31, 2003 and 2002,
respectively. Had compensation cost been recognized based on the fair values of
options at the grant dates consistent with the provisions of Statements of
Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Base
Compensation", the Company's net loss and loss attributable to common
stockholders and basic and diluted loss per common share would have been
increased to the additional pro forma amounts:
Three Months Ended
March 31
----------
2003 2002
---------------- ----------------
Loss attributable to common stockholders $ (1,022,590) $ (1,161,647)
Pro forma loss attributable to common shares $ (1,433,587) $(1,209,853)
Basic and diluted net loss per share:
As reported $ (0.08) $ (0.11)
Pro forma loss attributable to common shares $ (0.11) $ (0.11)
Stock-based compensation:
As reported $ 120,190 $ 130,428
Proforma $ 410,997 $ 48,206
In determining the compensation cost of the options granted during the three
months ended March 31, 2003 and 2002, as specified by SFAS No. 123, the fair
value of each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model and the weighted average assumptions used in
these calculations are summarized as follows for March 31:
2003 2002
----------------- ---------------
Risk-free interest rate 3.00% 4.40%
Expected life of options granted 10 years 10 years
Expected volatility range 170% 170%
Expected dividend yield 0% 0%
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 issued but not
outstanding restricted stock during the three months ended March 31, 2003 and
2002 were anti-dilutive.
6
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003 and 2002
NOTE 3 - 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 three months ended March 31, 2003 and 2002, the Company incurred net losses
of $966,119 and $1,109,921, respectively. At March 31, 2003, the Company had an
accumulated deficit of $30,738,589. 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 4 - NOTES PAYABLE
During the three months ended March 31, 2003, the Company reached an agreement
to convert $962,000 of its note payable with Pyramid Trading Limited Partnership
to equity. Terms of the conversion state that the note will be converted to
equity over a 14 month period at a price generally equivalent to a 10% discount
to market price. The Company issued an additional 253,000 5-year warrants at an
exercise price of $1.00 with the note payable extension. These warrants, valued
at $208,447, will be expensed over the remaining term of the note agreement.
NOTE 5 - STOCK WARRANTS
Stock warrants activity is as follows for the three months ended March 31, 2003:
Weighted Average
Number of Warrants Exercise Price
--------------------------------------------
Warrants outstanding - December 31, 2002 4,327,396 2.05
Granted 1,081,025 1.06
Canceled or expired 0 0
Exercised (76,290) 1.00
--------------------------------------------
Warrants outstanding - March 31, 2003 5,332,131 1.87
==================== ======================
The warrants granted during the three months ended March 31, 2003 were awarded
for common stock, preferred stock, for services rendered, and in connection with
notes payable.
7
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
MARCH 31, 2003 and 2002
NOTE 6 - BUSINESS SEGMENTS
Following is Company business segment information for the three months ended
March 31, 2003 and 2002:
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Vicom CTU MultiBand Total
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Quarter ended March 31, 2003
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Revenues $ 0 $ 5,636,642 $ 235,120 $ 5,871,762
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Loss from operations (406,421) (54,894) (213,621) (674,936)
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Identifiable assets 3,318,261 5,182,571 1,911,580 10,412,412
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Depreciation and amortization 11,725 106,944 95,463 214,132
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Capital expenditures 0 36,645 55,640 92,285
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Quarter ended March 31, 2002
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Revenues $ 0 $ 6,161,581 $ 100,607 $ 6,262,188
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Loss from operations (424,480) (87,275) (252,007) (763,762)
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Identifiable assets 3,231,228 5,374,184 3,161,624 11,767,036
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Depreciation and amortization 2,417 119,917 135,966 258,300
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
Capital expenditures 0 39,820 65,713 105,533
- ------------------------------------------- -------------------- -------------------- ------------------- --------------------
NOTE 7- SUBSEQUENT EVENT
During February 2003, the Company incorporated a new subsidiary,
Multiband USA, Incorporated (MB USA). This subsidiary was set up as part of
a 50% owned joint venture agreement with PACE Electronics, Inc. (PACE) with
the Company having the right to elect two of the three board of directors.
As part of the joint venture agreement, the Company, at its sole option and
discretion, shall have the right, but not the obligation to convert one
Vicom common share for every ten shares of MB USA issued to PACE.
On April 25, 2003, the Company, through MB USA, purchased certain
video equipment assets from Suncoast Automation, Inc for $450,000. The
Company also purchased related rights to video subscribers and rights of
access agreements.
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.
8
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) and one partially-owned subsidiary, Multiband USA, Inc.
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). Multiband USA, Inc. was formed in
February, 2003 in partnership with Pace Electronics, a video wholesaler, and
provides the same services as Multiband, Inc.
As of March 31, 2003, CTU was providing telephone equipment and service
to approximately 800 customers, with approximately 10,000 telephones in service.
In addition, CTU provides computer products and services to approximately 2,100
customers. MultiBand, as of March 31, 2003, had approximately 1,300 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 and North 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.
9
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------- -----------------------------------------------------
DOLLAR AMOUNTS AS A PERCENTAGE OF
REVENUES
- --------------------------------------------------- -----------------------------------------------------
THREE MONTHS ENDED
- --------------------------------------------------- -----------------------------------------------------
March 31, 2003 March 31, 2002
(unaudited) (unaudited)
- --------------------------------------------------- --------------------------- -------------------------
REVENUES 100% 100%
- --------------------------------------------------- --------------------------- -------------------------
COST OF PRODUCTS & SERVICES 73.4% 76.4%
- --------------------------------------------------- --------------------------- -------------------------
GROSS MARGIN 26.6% 23.6%
- --------------------------------------------------- --------------------------- -------------------------
SELLING, GENERAL & ADMINISTRATIVE 38.1% 35.7%
- --------------------------------------------------- --------------------------- -------------------------
OPERATING LOSS -11.5% -12.1%
- --------------------------------------------------- --------------------------- -------------------------
INTEREST EXPENSE & OTHER, NET -5.0% -5.5%
- --------------------------------------------------- --------------------------- -------------------------
LOSS BEFORE TAXES -16.5% -17.7%
- --------------------------------------------------- --------------------------- -------------------------
INCOME TAX 0 0
- --------------------------------------------------- --------------------------- -------------------------
NET LOSS -16.5% -17.7%
- --------------------------------------------------- --------------------------- -------------------------
The following table sets forth, for the period indicated, the gross margin
percentages for Corporate Technologies USA, Inc. and MultiBand, Inc.
THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
GROSS MARGIN PERCENTAGES:
CORPORATE TECHNOLOGIES USA, INC. 25.2% 22.9%
MULTIBAND, INC. 1.4% .6%
RESULTS OF OPERATIONS
Revenues
Revenues decreased 6.2% to $5,871,762 in the quarter ended March 31,
2003, as compared to $6,262,188 for the quarter ended March 31, 2002.
Revenues for (CTU) decreased 8.5% in the first quarter of fiscal 2003
to $5,636,642 as compared to $6,161,581 in the first quarter of fiscal 2002.
This decrease in CTU's revenues resulted primarily from CTU's desire to increase
gross margins versus maintaining top line revenues.
Revenues for MultiBand, Inc. increased 133.7% to $235,120 as compared
to $100,607 in the first quarter of fiscal 2002. This increase is due to
expansion of MultiBand services to five additional properties.
Gross Margin
The Company's gross margin increased 6% or $88,086 to $1,561,060 for
the quarter ended March 31, 2003, as compared to $1,472,974 for the similar
quarter last year. For the quarter ended March 31, 2003, as a percent of total
revenues, gross margin was 26.6% as compared to 23.6% for the similar period
last year. This increase in gross margin percentage is primarily due to an
10
increase in service sales and recurring subscriber revenues which have better
margins than equipment sales.
Gross margin for Corporate Technologies USA, Inc. increased by 2.6% to
$1,479,587 for the quarter ended March 31, 2003, as compared to $1,441,399 in
the first quarter of fiscal 2002. This increase is due to the above mentioned
service and subscriber sales.
Gross margin for MultiBand, Inc. for the quarter ended March 31, 2003
increased 116.8% to $81,473 as compared to $37,575 in the first quarter of
fiscal 2002 reflecting on the increase of revenue being billed.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased slightly to
$2,235,996 in the quarter ended March 31, 2003, compared to $2,236,736 in the
prior year quarter. Selling, general and administrative expenses were, as a
percentage of revenues, 38.1% for the quarter ended March 31, 2003 and 35.7% for
the similar period a year ago.
Interest Expense
Interest expense was $225,687 for the quarter ended March 31, 2003,
versus $365,835 for the similar period a year ago, reflecting a decrease in the
Company's long term debt that resulted in a considerable decrease in the
amortization of original issue discount expense. Amortization of original issue
discount was $114,616 and $210,983 for the three months ended March 31, 2003 and
2002.
Net Loss
In the first quarter of fiscal 2003, the Company incurred a net loss of
$966,119 compared to a net loss of $1,109,921 for the first fiscal quarter of
2002. A decline in operating losses for the first quarter of 2003 versus the
similar period a year ago was primarily due to the above mentioned increase in
gross margin.
Liquidity and Capital Resources
Available working capital, for the three months ended March 31, 2003,
increased slightly over the similar period last year. Vicom experienced a
significant decrease in accounts payable for the period ended March 31, 2003
versus year end due to a reduction in Multiband payables. Accounts receivable
increased slightly for the period ended March 31, 2003, compared to the prior
year period.
Inventories increased slightly over last year's year end balance.
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.
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.
11
Capital Expenditures
The Company used $92,285 for capital expenditures during the three
months ended March 31, 2003, as compared to $105,533 in the similar period last
year. Capital expenditures consisted of equipment acquired for internal use.
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 three months ended March 31, 2003
and 2002, 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 three months ended
March 31, 2003 and 2002, 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 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.
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.
12
PART II. OTHER INFORMATION
ITEM 4. LEGAL PROCEEDINGS
As of March 31, 2003, 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
None
(b) Reports on Form 8-K.
None
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: May 15, 2003 By:
/s/ James L. Mandel
Chief Executive Officer
Date: May 15, 2003 By:
/s/ Steven M. Bell
Chief Executive Officer
(Principal Financial and Accounting
Officer)
13
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: May 15, 2003
----------------------------------
/s/James Mandel
Chief Executive Officer
14
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: May 15, 2003 Signature:
-------------------------
/s/Steven Bell
Chief Financial Officer
15
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 March 31, 2003, 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: May 15, 2003 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 March 31, 2003, 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: May 15, 2003 By:
/s/ Steven M. Bell
Chief Financial Officer
- ------------------------------------------------------------------------------
16