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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(MARK ONE) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|X| SECURITIES AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING JUNE 30, 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
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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 August 7, 2003 there were 16,846,563 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
REVENUES ............................................... $ 5,688,381 $ 5,944,424 $ 11,560,143 $ 12,206,612
COSTS AND EXPENSES
Cost of products and services ..................... 3,914,420 4,354,714 8,225,122 9,143,928
Selling, general and administrative ............... 2,502,741 2,240,223 4,738,737 4,496,761
------------ ------------ ------------ ------------
Total Costs and Expenses .......................... $ 6,417,161 6,594,937 12,963,859 13,640,689
LOSS FROM OPERATIONS ................................... (728,780) (650,513) (1,403,716) (1,434,077)
OTHER EXPENSE
Interest expense .................................. (219,723) (426,869) (445,410) (772,904)
Other Income (expense) ............................. 15,232 25,281 (50,264) 44,957
------------ ------------ ------------ ------------
Total Other Expense ............................... (204,491) (401,588) (495,674) (727,947)
MINORITY INTEREST IN JOINT VENTURE ..................... (1,393) 0 (1,393) 0
LOSS BEFORE INCOME TAXES ............................... (934,664) (1,052,101) (1,900,783) (2,162,024)
PROVISION FOR INCOME TAXES ............................. 0 0 0 0
------------ ------------ ------------ ------------
NET LOSS ............................................... (934,664) $ (1,052,101) (1,900,783) $ (2,162,024)
Preferred Stock Dividends ........................ (38,580) (8,427) (95,051) (60,153)
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ (973,244) $ (1,060,528) $ (1,995,834) $ (2,222,177)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED ..................... $ (.06) $ (.09) $ (.13) $ (.20)
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND
DILUTED ................................................ 15,068,424 11,505,838 14,247,937 11,078,284
See notes to condensed consolidated financial statements
2
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 December 31, 2002
------------- -----------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................................... $ 971,513 $ 540,375
Accounts receivable ................................................................. 2,187,324 1,948,004
Inventories, net of reserve of $364,500 and $341,000 ................................ 2,005,636 1,463,658
Other Current Assets ................................................................ 318,306 226,774
------------ ------------
TOTAL CURRENT ASSETS ............................................................. 5,482,779 4,178,811
------------ ------------
PROPERTY AND EQUIPMENT, NET ............................................................ 3,626,112 3,248,973
------------ ------------
OTHER ASSETS
Goodwill ............................................................................ 2,966,241 2,748,879
Other ............................................................................... 219,744 170,653
------------ ------------
TOTAL OTHER ASSETS .............................................................. 3,185,985 2,919,532
------------ ------------
TOTAL ASSETS ........................................................................... $ 12,294,876 $ 10,347,316
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Wholesale line of credit ............................................................ $ 1,259,301 $ 1,290,383
Current portion of note payable - stockholder ....................................... 59,579 0
Current portion of long term debt ................................................... 550,830 321,589
Current portion of capital lease obligations ........................................ 50,988 59,570
Accounts payable .................................................................... 2,110,870 1,735,931
Accrued liabilities ................................................................. 1,051,501 714,479
Deferred service obligations and revenue ............................................ 298,377 309,729
------------ ------------
TOTAL CURRENT LIABILITIES ........................................................ 5,381,446 4,431,681
LONG TERM DEBT, NET .................................................................... 2,256,047 3,114,006
NOTE PAYABLE - STOCKHOLDER, NET OF CURRENT PORTION ..................................... 64,421 0
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ...................................... 186,409 159,344
------------ ------------
TOTAL LIABILITIES ...................................................................... 7,888,323 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 (16,738,194 and 13,110,477 shares issued;
16,711,189 and 13,065,410 shares outstanding) ........................................ 7,272,629 4,465,832
Stock subscriptions receivable ....................................................... (620,615) (633,195)
Options and warrants ................................................................ 27,195,980 26,632,299
Unamortized compensation ............................................................ (430,710) (682,089)
Minority Interest ................................................................... 61,393 0
Accumulated deficit ................................................................. (31,711,833) (29,715,999)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ............................................................. 4,406,553 2,642,285
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................. $ 12,294,876 $ 10,347,316
============ ============
See notes to condensed consolidated financial statements.
3
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30, (UNAUDITED)
2003 2002
---- ----
OPERATING ACTIVITIES
Net loss ........................................................................... $(1,900,783) $(2,162,024)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization ................................................... 449,729 510,438
Amortization of deferred compensation ........................................... 240,381 261,030
Amortization of original issue discount ......................................... 199,980 471,757
Common stock issued for services ................................................ 321,920 14,700
Warrants issued for services
Loss on sales of property and equipment ......................................... 76,269 (7,359)
Interest receivable on stock subscription receivable ............................ (10,272) 0
Discount on preferred stock related to warrants ................................. 0 0
Minority interest in joint venture .............................................. 1,393 0
Changes in operating assets and
liabilities:
Accounts receivable, net ...................................................... (241,014) 57,437
Inventories, net .............................................................. (541,581) 53,057
Other current assets .......................................................... (107,742) 31,424
Other assets .................................................................. (801) 14,598
Wholesale line of credit ...................................................... (31,082) (142,661)
Accounts payable and accrued liabilities ...................................... 283,974 91,461
Deferred service obligations and revenue ...................................... (11,352) (39,294)
----------- -----------
Net cash flows from operating activities ................................... (1,270,981) (897,977)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment ................................................ (307,982) (255,261)
Proceeds from sale of property and equipment ....................................... 6,145 10,277
Payment for investment in joint venture ............................................ (64,878) 0
Collections on notes receivable .................................................... 5,000 28,572
----------- -----------
Net cash flows from investing activities ................................... (361,715) (216,412)
----------- -----------
FINANCING ACTIVITIES
Proceeds from long-term debt and warrants issued with long term debt ............... 0 750,000
Payments on long term debt ......................................................... (97,896) (53,110)
Payments on capital lease obligations .............................................. (47,344) (151,139)
Proceeds from issuance of long term debt ........................................... 133,726 0
Proceeds from issuance of stock and warrants ....................................... 1,917,998 687,779
Exercise of warrants ............................................................... 199,530 0
Redemption of preferred stock ...................................................... (2,100) (93,000)
Preferred stock dividends .......................................................... (40,080) (50,736)
----------- -----------
Net cash flows from financing activities ................................... 2,063,834 1,089,794
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................... 431,138 (24,595)
CASH AND CASH EQUIVALENTS
Beginning of period ................................................................ 540,375 624,845
----------- -----------
End of period ...................................................................... $ 971,513 $ 600,250
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount ............. 259,391 291,995
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 .................................... 40,000 150,000
Conversion of current liabilities into stock ....................................... 173,148 7,255
Conversion of notes payable into common stock ...................................... 522,000 0
Conversion of dividend into common stock ........................................... 54,971 0
Reduction of preferred stock to note payable ....................................... 0 290,000
Stock subscription receivable for issuance of common stock ......................... 40,000 0
Conversion of notes payable to preferred stock ..................................... 0 227,868
Reduction of stock subscription receivable ........................................ 17,852 32,688
See notes to condensed consolidated financial statements
4
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 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 five 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, 4) MultiBand user charges to multiple dwelling
units, 5) Multiband USA user charges to timeshares.
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.
Customers contract 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
5
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 or six months ended June 30, 2003 and 2002.
The changes in the carrying value of goodwill for the six months ended June 30,
2003 are as follows:
Balance of goodwill as of December 31, 2002 $2,748,879
Goodwill recorded related to the investments into MB
USA joint venture (see Note 8) 217,362
----------
Balance as of June 30, 2003 2,966,241
==========
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, $120,191 and $130,602 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended June 30, 2003 and 2002,
respectively. For the six months ended June 30, 2003 and 2002, $240,381 and
$261,030 of compensation cost has been recognized. 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-Based 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 Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Loss attributable to common stockholders $ (973,244) $(1,060,528) $(1,995,834) $(2,222,177)
Pro forma loss attributable to common shares $(1,138,822) $(1,111,690) $(2,572,409) $(2,321,545)
Basic and diluted net loss per share:
As reported $ (0.06) $ (0.09) $ (0.14) $ (0.20)
Pro forma loss attributable to common shares $ (0.08) $ (0.10) $ (0.18) $ (0.21)
Stock-based compensation:
As reported $ 120,191 $ 130,602 $ 240,381 $ 261,030
Proforma $ 165,578 $ 51,162 $ 576,575 $ 99,368
In determining the compensation cost of the options granted during the three and
six months ended June 30, 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 June 30:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Risk-free interest rate 3.62% 4.40% 3.31% 4.40%
Expected life of options granted 10 years 10 years 10 years 10 years
Expected volatility range 170% 170% 170% 170%
Expected dividend yield 0% 0% 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
6
issued but not outstanding restricted stock during the three months ended June
30, 2003 and 2002 were anti-dilutive.
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 six months ended June 30, 2003 and 2002, the Company incurred net losses of
$1,900,783 and $2,162,024, respectively. At June 30, 2003, the Company had an
accumulated deficit of $31,711,833. 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 June 30, 2003, the Company borrowed $124,000 on an
unsecured basis from a shareholder under a two year note payable with 7.85%
interest, payable monthly.
A note payable was also issued to Western State Bank for $9,726 for a period of
four years, with 5.25% interest, payable monthly, secured by certain property.
NOTE 5 - RELATED PARTY
Commissions of $4,729 were paid to Rangecap, LLC for the three and six months
ended June 30, 2003 for profits recorded to Multiband equipment purchased by
Rangecap. David Weiss, Rangecap's principal, is a Vicom director. There were no
payments during fiscal year 2002.
NOTE 6 - STOCK WARRANTS
Stock warrants activity is as follows for the six months ended June 30, 2003:
Weighted Average
Number of Warrants Exercise Price
------------------ --------------
Warrants outstanding - December 31, 2002 4,327,396 2.05
Granted 2,425,173 1.26
Canceled or expired 0 0
Exercised (346,290) 1.79
---------- ----
Warrants outstanding - JUNE 30, 2003 6,406,279 1.77
========== ====
The warrants granted during the six months ended June 30, 2003 were awarded for
common stock, preferred stock, for services rendered, and in connection with
notes payable.
7
NOTE 7 - BUSINESS SEGMENTS
Following is Company business segment information for the three months ended
June 30, 2003 and 2002:
Vicom CTU MultiBand Total
--------- --------- --------- ----------
Three months ended June 30, 2003
Revenues $ 0 $ 5,330,420 $ 357,961 $ 5,688,381
Income (Loss) from operations (502,859) 28,463 (254,384) (728,780)
Identifiable assets 3,627,690 5,711,347 2,955,839 12,294,876
Depreciation and amortization 11,726 111,722 112,149 235,597
Capital expenditures 0 194,123 21,574 215,697
Three months ended June 30, 2002
Revenues $ 0 $ 5,815,531 $ 128,893 $ 5,944,424
Income (Loss) from operations (424,970) 30,832 (256,375) (650,513)
Identifiable assets 3,081,046 5,509,679 3,171,368 11,762,093
Depreciation and amortization 136,795 112,823 137,310 368,928
Capital expenditures 0 44,619 105,109 149,728
Following is Company business segment information for the six months ended June
30, 2003 and 2002:
Vicom CTU MultiBand Total
--------- --------- --------- ----------
Six Months ended June 30, 2003
Revenues $ 0 $ 10,967,062 $ 593,081 $ 11,560,143
Loss from operations (909,280) (26,431) (468,005) (1,403,716)
Identifiable assets 3,627,690 5,711,347 2,955,839 12,294,876
Depreciation and amortization 23,451 218,666 207,612 449,729
Capital expenditures 0 230,768 77,214 307,982
Six Months ended June 30, 2002
Revenues $ 0 $ 11,977,112 $ 229,500 $ 12,206,612
Loss from operations (869,252) (56,443) (508,382) (1,434,077)
Identifiable assets 3,081,046 5,509,679 3,171,368 11,762,093
Depreciation and amortization 265,454 232,740 273,276 771,470
Capital expenditures 0 84,439 170,822 255,261
NOTE 8- MULTIBAND USA JOINT VENTURE
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.
8
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.
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). 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 June 30, 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 June 30, 2003, had approximately 4,100 customers.
Telecommunications systems distributed by Vicom are intended to provide users
with flexible, cost-effective alternatives as compared to systems available from
9
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.
10
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A PERCENTAGE OF DOLAR AMOUNTS AS A PERCENTAGE OF
REVENUES REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES 100% 100% 100% 100%
COST OF PRODUCTS & SERVICES 68.8% 73.3% 71.2% 74.9%
GROSS MARGIN 31.2% 26.7% 28.8% 25.1%
SELLING, GENERAL & ADMINISTRATIVE 44.0% 37.7% 41.0% 36.8%
OPERATING LOSS -12.8% -11.0% -12.1% -11.7%
INTEREST EXPENSE & OTHER, NET -3.6% -6.7% -4.3% -6.0%
LOSS BEFORE TAXES -16.4% -17.7% -16.4% -17.7%
MINORITY INTEREST IN JOINT VENTURE 0% 0 0% 0
INCOME TAX 0 0 0 0
NET LOSS -16.4% -17.7% -16.4% -17.7%
The following table sets forth, for the period indicated, the gross margin
percentages for Corporate Technologies USA, Inc., MultiBand, Inc. and Multiband
USA, Inc.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
GROSS MARGIN PERCENTAGES:
CORPORATE TECHNOLOGIES USA, INC. 30.4% 26.7% 28.2% 25.0%
MULTIBAND, INC. 43.6% 34.1% 55.6% 35.5%
RESULTS OF OPERATIONS
Revenues
Revenues decreased 4.3% to $5,688,381 in the quarter ended June 30,
2003, as compared to $5,944,424 for the quarter ended June 30, 2002.
Revenues for (CTU) decreased 8.3% in the second quarter of fiscal 2002
to $5,330,420 as compared to $5,815,531 in the second 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 117.7% to $357,961 as compared
to $128,893 in the second quarter of fiscal 2002. This increase is due to
continued expansion of MultiBand services to additional properties.
Revenues for the six month period ended June 30, 2003 decreased 5.3% to
$11,560,143 from $12,206,612 for the same period in 2002. For the second half of
fiscal year 2003, the Company anticipates revenues to remain stable as both
subscriber revenues and Multiband project installation revenues are expected to
increase.
11
Gross Margin
The Company's gross margin increased 11.6% or $184,251 to $1,773,961
for the quarter ended June 30, 2003, as compared to $1,589,710 for the similar
quarter last year. This increase in gross margin is due to an increase in
service sales and recurring subscriber revenues which have better margins than
product sales. For the quarter ended June 30, 2003, as a percent of total
revenues, gross margin was 31.2% as compared to 26.7% for the similar period
last year. This increase in gross margin percentage is primarily due to an
increase in service sales and recurring subscriber revenues which have better
margins than equipment sales.
Gross margin for Corporate Technologies USA, Inc. increased by 4.3% to
$1,618,065 for the quarter ended June 30, 2003, as compared to $1,551,763 in the
second 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 June 30, 2003
increased 354.7% to $155,896 as compared to $43,947 in the second quarter of
fiscal 2002 reflecting on the increase of revenue being billed.
For the six month period ended June 30, 2003, as a percent of total
revenues, gross margin was 28.8% as compared to 25.1% for the same period in
2002. For the second half of fiscal year 2003, gross margin percentages are
expected to remain higher than gross margin percentages in the prior year as the
Company continues to shift its emphasis to consumer oriented services from
business related equipment sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 11.7% to
$2,502,741 in the quarter ended June 30, 2003, compared to $2,240,223 in the
prior year quarter. Selling, general and administrative expenses were, as a
percentage of revenues, 44.0% for the quarter ended June 30, 2003 and 37.7% for
the similar period a year ago. This increase is primarily attributable to higher
payroll and occupancy costs and the start-up of Multiband USA.
For the six month period ended June 30, 2003 these expenses increased
5.4% to $4,738,737 as compared to $4,496,761 for the six months ended June 30,
2002. As a percentage of revenues, selling, general and administrative expenses
are 41.0% for the period ended June 30, 2003 as compared to 36.8% for the same
period 2002.
Interest Expense
Interest expense was $219,723 for the quarter ended June 30, 2003,
versus $426,869 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 discount expense. Amortization of original issue
discount was $85,364 and $260,774 for the three months ended June 30, 2003 and
2002.
Interest expense was $445,410 for the six months ended June 30, 2003
and $772,904 for the same period last year. For the six months ended June 30,
2003 amortization of original discount was $199,980 and $471,757 in same period
as last year.
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Net Loss
In the second quarter of fiscal 2003, the Company incurred a net loss
of $934,664 compared to a net loss of $1,052,101 for the second fiscal quarter
of 2002. A decline in operating losses for the second quarter of 2003 versus the
similar period a year ago was primarily due to the above mentioned increase in
gross margin.
For the six months ended June 30, 2003, the Company recorded a net loss
of $1,900,783, as compared to $2,162,024 for the six months ended June 30, 2002.
Liquidity and Capital Resources
Available working capital at June 30, 2003 increased over the similar
period last year primarily due to a significant decrease in the current portion
of long term debt and capital lease obligations.
Inventories decreased over last year's prior period inventories due to
the aforementioned revenue decreases. Net borrowings under notes and installment
obligations payable decreased for the period ended June 30, 2003 compared to the
prior year's period due to the reduction in capital 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 operating losses continue to decrease. Significant continuation of the
Company's MultiBand, Inc.'s build-out is highly dependent on securing additional
financing for future projects. Management believes that while future build-out
financing is available, there is no guarantee that said financing will be
obtained.
Capital Expenditures
The Company used $307,982 for capital expenditures during the six
months ended June 30, 2003, as compared to $255,261 in the similar period last
year. Capital expenditures consisted of equipment acquired for internal use and
for completion of a Multiband build out.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvements. The estimated fair value of these assets is dependent on the
Company's future performance. In assessing for potential impairment for these
assets, the Company considers future performance. If these forecasts are not
met, the Company may have to record an impairment charge not previously
recognized, which may be material. During the six months ended June 30, 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 six months ended
June 30, 2003 and 2002, the Company did not record any impairment losses related
to goodwill.
13
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," effective for contracts entered
into or modified after June 30, 2003. This amendment clarifies when a contract
meets the characteristics of a derivative, clarifies when a derivate contains a
financing component and amends certain other existing pronouncements. The
Company believes the adoption of SFAS No. 149 will not have a material effect on
the Company's consolidated statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 requires the classification as a
liability of any financial instruments with a mandatory redemption feature, an
obligation to repurchase equity shares, or a conditional obligation based on the
issuance of a variable number of its equity shares. The Company does not have
any financial instruments as defined by SFAS No. 150. The Company believes the
adoption of SFAS No. 150 will not have a material effect on the Company's
consolidated statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements for periods ending after December 15, 2002. The adoption of
FIN 45 did not impact the Company's consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 states that companies that have
exposure to the economic risks and potential rewards from another entity's
assets and activities have a controlling financial interest in a variable
interest entity and should consolidate the entity, despite the absence of clear
control through a voting equity interest. The consolidation requirements apply
to all variable interest entities created after January 31, 2003. For variable
interest entities that existed prior to February 1, 2003, the consolidation
requirements are effective for annual or interim periods beginning after June
15, 2003. Disclosure of significant variable interest entities is required in
all financial statements issued after January 31, 2003, regardless of when the
variable interest was created. The Company does not expect the adoption of FIN
46 to have a material impact the Company's consolidated financial statements.
14
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
The Company has carried out an evaluation, with the participation of its chief
executive/chief financial officer, of the effectiveness, as of the end of the
most recent fiscal quarter, of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934), and the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 13a-15(f) of the Securities Exchange Act of 1934). Based
upon that evaluation, the chief executive/chief financial officer concluded that
the Company's disclosure controls and procedures are effective in alerting him,
on a timely basis, to material information required to be disclosed in the
Company's periodic reports to the Securities and Exchange Commission and that
there has been no significant change in the Company's internal control over
financial reporting that occurred over the most recently ended fiscal quarter,
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II. OTHER INFORMATION
During the second quarter of fiscal year 2003, the Company raised approximately
$1,917,998 due to sales of common stock via private placements to accredited
investors and investor exercises of warrants. The proceeds from the
aforementioned were used primarily for working capital and to retire debt.
ITEM 5. LEGAL PROCEEDINGS
As of June 30, 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
10.16
31.1
31.2
32
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VICOM, INC.
Registrant
Date: August 14, 2003 By:
/s/ James L. Mandel
Chief Executive Officer
Date: August 14, 2003 By:
/s/ Steven M. Bell
Chief Financial Officer
(Principal Financial and Accounting Officer)
16