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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 SECURITIES
|X| AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING SEPTEMBER 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_____________
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 November 10, 2003 there were 18,910,986 shares outstanding of the
registrant's common stock, par value $.01 per share, and 248,681 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 Nine Months Ended
------------------ -----------------
Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002
------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES .............................................. $ 6,283,365 $ 6,382,633 $ 17,843,508 $ 18,589,245
COSTS AND EXPENSES
Cost of products and services .................... 4,493,829 4,680,582 12,718,951 13,824,510
Selling, general and administrative .............. 2,409,227 2,256,745 7,147,965 6,753,506
Impairment on property & equipment ............... 0 119,480 0 119,480
------------ ------------ ------------ ------------
Total Costs and Expenses ......................... 6,903,056 7,056,807 19,866,916 20,697,496
LOSS FROM OPERATIONS .................................. (619,691) (674,174) (2,023,408) (2,108,251)
OTHER EXPENSE
Interest expense ................................. (202,958) (349,388) (648,368) (1,122,292)
Other Income (expense) ............................ (6,513) (93,171) (56,777) (48,214)
------------ ------------ ------------ ------------
Total Other Expense .............................. (209,471) (442,559) (705,145) (1,170,506)
MINORITY INTEREST IN JOINT VENTURE .................... (3,460) 0 (4,853) 0
LOSS BEFORE INCOME TAXES .............................. (832,622) (1,116,733) (2,733,406) (3,278,757)
PROVISION FOR INCOME TAXES
0 0 0 0
------------ ------------ ------------ ------------
NET LOSS .............................................. $ (832,622) $ (1,116,733) $ (2,733,406) $ (3,278,757)
Preferred Stock Dividends ....................... (43,301) (39,494) (135,353) (90,230)
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
$ (875,923) $ (1,156,227) $ (2,868,759) $ (3,368,987)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED .................... $ (.05) $ (.09) $ (.19) $ (.29)
WEIGHTED AVERAGE SHARES OUTSTANDING -
BASIC AND DILUTED ..................................... 16,981,266 12,028,501 15,168,069 11,398,078
See notes to condensed consolidated financial statements
2
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept 30,2003 December 31, 2002
------------ -----------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 1,846,743 $ 540,375
Accounts receivable, net .......................................... 2,268,117 1,948,004
Inventories, net of reserve of $387,000 and $341,000 .............. 1,875,147 1,463,658
Other Current Assets .............................................. 277,084 226,774
------------ ------------
TOTAL CURRENT ASSETS ........................................... 6,267,091 4,178,811
------------ ------------
PROPERTY AND EQUIPMENT, NET .......................................... 3,484,141 3,248,973
------------ ------------
OTHER ASSETS
Goodwill .......................................................... 2,966,241 2,748,879
Other ............................................................. 231,291 170,653
------------ ------------
TOTAL OTHER ASSETS ............................................ 3,197,532 2,919,532
------------ ------------
TOTAL ASSETS ......................................................... $ 12,948,764 $ 10,347,316
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Wholesale line of credit .......................................... $ 1,323,767 $ 1,290,383
Current portion of note payable - stockholder ..................... 60,756 0
Current portion of long term debt ................................. 474,215 321,589
Current portion of capital lease obligations ...................... 45,200 59,570
Accounts payable .................................................. 1,639,757 1,735,931
Accrued liabilities ............................................... 807,454 714,479
Deferred service obligations and revenue .......................... 335,975 309,729
------------ ------------
TOTAL CURRENT LIABILITIES ...................................... 4,687,124 4,431,681
LONG TERM DEBT, NET .................................................. 2,245,535 3,114,006
NOTE PAYABLE - STOCKHOLDER, NET OF CURRENT PORTION ................... 48,784 0
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION .................... 176,461 159,344
MINORITY INTEREST .................................................... 64,853 0
------------ ------------
TOTAL LIABILITIES .................................................... 7,222,757 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 (8,700 and 6,200 shares issued and outstanding) ....... 74,663 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 (18,574,405 and 13,110,477 shares issued;
18,533,799 and 13,065,410 shares outstanding) ...................... 8,330,093 4,465,832
Stock subscriptions receivable ....................................... (531,768) (633,195)
Options and warrants ................................................. 28,188,007 26,632,299
Unamortized compensation ............................................. (327,939) (682,089)
Accumulated deficit .................................................. (32,584,758) (29,715,999)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY ........................................... 5,726,007 2,642,285
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................... $ 12,948,764 $ 10,347,316
============ ============
See notes to condensed consolidated financial statements.
3
VICOM, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
-----------------
SEPT 30, (UNAUDITED)
--------------------
2003 2002
---- ----
OPERATING ACTIVITIES
Net loss ......................................................................... $(2,733,406) $(3,278,757)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization ................................................. 709,404 730,581
Amortization of deferred compensation ......................................... 340,572 408,201
Amortization of original issue discount ....................................... 285,345 768,159
Impairment on property and equipment .......................................... 0 119,480
Common stock issued for services .............................................. 321,920 14,700
Loss on sales of property and equipment ....................................... 76,269 118,367
Interest receivable on stock subscription receivable .......................... 13,452 0
Discount on preferred stock related to warrants ............................... 0 (53,041)
Minority interest in joint venture .......................................... 4,853 0
Changes in operating assets and
liabilities:
Accounts receivable, net .................................................... (329,189) 428,421
Inventories, net ............................................................ (411,092) 138,640
Other current assets ........................................................ (6,026) (30,621)
Other assets ................................................................ (21,531) 19,507
Wholesale line of credit .................................................... 33,384 (506,934)
Accounts payable and accrued liabilities .................................... (388,208) 140,432
Deferred service obligations and revenue .................................... 26,246 (107,997)
Net cash flows from operating activities ................................. (2,078,007) (1,090,862)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment .............................................. (356,291) (583,552)
Proceeds from sale of property and equipment ..................................... 6,145 965,948
Payment for investment in joint venture .......................................... (64,878) 0
Collections on notes receivable .................................................. 5,806 33,572
----------- -----------
Net cash flows from investing activities ................................. (409,218) 415,968
----------- -----------
FINANCING ACTIVITIES
Proceeds from long-term debt and warrants issued with long term debt ............. 0 672,001
Payments on long term debt ....................................................... (183,936) (96,855)
Payments on capital lease obligations ............................................ (69,252) (919,365)
Proceeds from issuance of long term debt ......................................... 133,726 0
Proceeds from issuance of stock and warrants ..................................... 3,654,388 840,429
Exercise of warrants ............................................................. 312,030 0
Redemption of preferred stock .................................................... (2,100) (94,000)
Preferred stock dividends ........................................................ (51,263) (90,230)
----------- -----------
Net cash flows from financing activities ................................. 3,793,593 311,980
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................... 1,306,368 (362,914)
CASH AND CASH EQUIVALENTS
Beginning of period .............................................................. 540,375 624,845
----------- -----------
End of period .................................................................... $ 1,846,743 $ 261,931
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest, net of amortization of original issue discount ........... $ 280,148 $ 393,587
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 notes payable in to preferred stock ............................... 0 414,882
Conversion of current liabilities into stock ..................................... 248,623 7,255
Conversion of notes payable into common stock .................................... 642,000 0
Conversion of note receivable into common stock .................................. 0 34,563
Conversion of dividend into common stock ......................................... 84,090 0
Reduction of preferred stock to note payable ..................................... 0 290,000
Stock subscription receivable for issuance of common stock ....................... 40,000 0
Stock issued for guarantee of debt ............................................... 0 14,750
Reduction of stock subscription receivable ...................................... 26,602 0
See notes to condensed consolidated financial statements
4
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 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
Company's carrying value of goodwill is reduced by the estimated shortfall of
cash flows. The Company performed an independent assessment of the goodwill
carrying amount during the quarters ended September 30, 2003 and 2002. The
Company did not record any impairment charges related to goodwill during the
three or nine months ended September 30, 2003 and 2002.
5
The changes in the carrying value of goodwill for the nine months ended
September 30, 2003 are as follows:
Balance of goodwill as of December 31, 2002 $ 2,748,879
Goodwill recorded related to the investment into MBUSA
Joint venture (see Note 7) 217,362
-----------
Balance as of September 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, $100,191 and $130,602 of
compensation cost has been recognized in the accompanying consolidated
statements of operations for the three months ended September 30, 2003 and 2002,
respectively. For the nine months ended September 30, 2003 and 2002, $340,572
and $391,632 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 Statement 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 pro forma amounts:
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------- -------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Loss attributable to common stockholders $ (875,923) $(1,156,227) $(2,868,759) $(3,368,987)
Pro forma loss attributable to common shares $(1,013,109) $(1,206,160) $(3,582,520) $(3,518,288)
Basic and diluted net loss per share:
As reported $ (0.05) $ (0.09) $ (0.18) $ (0.29)
Pro forma loss attributable to common shares $ (0.06) $ (0.10) $ (0.24) $ (0.31)
Stock-based compensation:
As reported $ 100,191 $ 130,602 $ 340,572 $ 391,632
Proforma $ 137,186 $ 49,933 $ 713,761 $ 149,301
In determining the compensation cost of the options granted during the three and
nine months ended September 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 September 30:
Three Months Ended Nine Months Ended
Sept 30 Sept 30
------- -------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Risk-free interest rate 3.62% 4.40% 3.41% 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%
6
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 September 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 nine months ended September 30, 2003 and 2002, the Company incurred net
losses of $2,733,406 and $3,278,757, respectively. At September 30, 2003, the
Company had an accumulated deficit of $32,584,758. 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 - RELATED PARTY
Commissions of $5,932 and $18,781 were paid to Rangecap, LLC for the three and
nine months, respectively, ended September 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 5 - STOCK WARRANTS
Stock warrants activity is as follows for the nine months ended September 30,
2003:
Weighted Average
Number of Warrants Exercise Price
------------------ ----------------
Warrants outstanding - December 31, 2002 4,327,396 2.05
Granted 3,056,018 1.39
Canceled or expired 0 0
Exercised (594,381) 1.38
------------------ ----------------
Warrants outstanding - SEPTEMBER 30, 2003 6,789,033 1.82
================== ================
The warrants granted during the nine months ended September 30, 2003 were
awarded for common stock, preferred stock, for services rendered, and in
connection with notes payable.
7
NOTE 6 - BUSINESS SEGMENTS
Following is Company business segment information for the three months ended
September 30, 2003 and 2002:
Vicom CTU MultiBand Total
------------ ------------ ------------ ------------
Three months ended Sept 30, 2003
Revenues $ 0 $ 5,864,468 $ 418,897 $ 6,283,365
Income (Loss) from operations (370,645) 72,428 (321,474) (619,691)
Identifiable assets 4,543,772 5,601,468 2,803,524 12,948,764
Depreciation and amortization 9,640 100,173 149,862 259,675
Capital expenditures 0 41,698 6,611 48,309
Three months ended Sept 30, 2002
Revenues $ 0 $ 6,227,683 $ 154,950 $ 6,382,633
Income (Loss) from operations (437,013) 164,881 (402,042) (674,174)
Identifiable assets 3,020,620 5,020,048 1,969,577 10,010,245
Depreciation and amortization 140,871 107,966 110,101 358,938
Capital expenditures 2,126 195,421 130,744 328,291
Following is Company business segment information for the nine months ended
September 30, 2003 and 2002:
Vicom CTU MultiBand Total
------------ ------------ ------------ ------------
Nine Months ended Sept 30, 2003
Revenues $ 0 $ 16,831,531 $ 1,011,977 $ 17,843,508
Income/(Loss) from operations (1,279,925) 45,997 (789,480) (2,023,408)
Identifiable assets 4,543,772 5,601,468 2,803,524 12,948,764
Depreciation and amortization 33,090 318,839 357,475 709,404
Capital expenditures 0 272,466 83,825 356,291
Nine Months ended Sept 30, 2002
Revenues $ 0 $ 18,204,795 $ 384,450 $ 18,589,245
Income/(Loss) from operations (1,286,465) 88,638 (910,424) (2,108,251)
Identifiable assets 3,020,620 5,020,048 1,969,577 10,010,245
Depreciation and amortization 414,699 340,706 383,377 1,138,782
Capital expenditures 2,126 279,860 301,566 583,552
NOTE 7- 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 September 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 September 30, 2003, had approximately 5,000
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.
9
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), 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 DOLLAR AMOUNTS AS A PERCENTAGE OF
REVENUES REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES 100% 100% 100% 100%
COST OF PRODUCTS & SERVICES 71.5% 73.3% 71.3% 74.4%
GROSS MARGIN 28.5% 26.7% 28.7% 25.6%
SELLING, GENERAL & ADMINISTRATIVE 38.4% 35.4% 40.0% 36.3%
IMPAIRMENT ON PROPERTY & EQUIP 0 1.9% 0 .06%
OPERATING LOSS -9.9% -10.6% -11.3% -11.3%
INTEREST EXPENSE & OTHER, NET 3.4% 6.9% 4.0% 6.3%
LOSS BEFORE TAXES -13.3% -17.5% -15.3% -17.6%
MINORITY INTEREST IN JOINT VENTURE -.0% 0 -.0% 0
INCOME TAX 0 0 0 0
NET LOSS -13.3% -17.5% -15.3% -17.6%
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 NINE MONTHS ENDED
SEPT 30, 2003 SEPT 30, 2002 SEPT 30, 2003 SEPT 30, 2002
GROSS MARGIN PERCENTAGES:
CORPORATE TECHNOLOGIES USA, INC. 27.4% 26.8% 28.0% 25.6%
MULTIBAND, INC. 43.1% 24.0% 41.3% 30.9%
RESULTS OF OPERATIONS
Revenues
Revenues decreased 1.5% to $6,283,365 in the quarter ended September 30,
2003, as compared to $6,382,633 for the quarter ended September 30, 2002.
Revenues for (CTU) decreased 5.8% in the third quarter of fiscal 2003 to
$5,864,468 as compared to $6,227,683 in the third 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 170.3% to $418,897 in the third
quarter 2003 as compared to $154,950 in the third quarter of fiscal 2002. This
increase is due to continued expansion of MultiBand including services provided
to resort locations.
Revenues for the nine month period ended September 30, 2003 decreased 4.0%
to $17,843,508 from $18,589,245 for the same period in 2002. For the remainder
of fiscal year 2003, the Company anticipates revenues to increase as new
Multiband subscribers are added.
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Gross Margin
The Company's gross margin increased 5.1% or $87,485 to $1,789,536 for the
quarter ended September 30, 2003, as compared to $1,702,051 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 September 30, 2003, as a percent of total
revenues, gross margin was 28.5% 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. decreased by 3.7% to
$1,608,975 for the quarter ended September 30, 2003, as compared to $1,670,806
in the second quarter of fiscal 2002.
Gross margin for MultiBand, Inc. for the quarter ended September 30, 2003
increased 384.8% to $180,561 as compared to $37,245 in the third quarter of
fiscal 2002 reflecting on the increase of revenue being billed.
For the nine month period ended September 30, 2003, as a percent of total
revenues, gross margin was 28.7% as compared to 25.6% 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 6.8% to $2,409,227
in the quarter ended September 30, 2003, compared to $2,256,745 in the prior
year quarter. Selling, general and administrative expenses were, as a percentage
of revenues, 38.3% for the quarter ended September 30, 2003 and 35.4% 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 nine month period ended September 30, 2003 these expenses increased
5.4% to $7,147,965 as compared to $6,753,506 for the nine months ended September
30, 2002. As a percentage of revenues, selling, general and administrative
expenses are 40.1% for the period ended September 30, 2003 as compared to 36.3%
for the same period 2002.
Interest Expense
Interest expense was $202,958 for the quarter ended September 30, 2003,
versus $349,388 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 $85,365 and $296,402 for the three months ended September 30, 2003
and 2002.
Interest expense was $648,368 for the nine months ended September 30, 2003
and $1,122,292 for the same period last year. For the nine months ended
September 30, 2003 amortization of original discount was $285,345 and $768,159
in same period as last year.
Net Loss
In the third quarter of fiscal 2003, the Company incurred a net loss of
$832,622 compared to a net loss of $1,116,733 for the third fiscal quarter of
2002. A decline in operating losses for the third quarter of 2003 versus the
similar period a year ago was primarily due to the above mentioned increase in
gross margin and reduction in non-cash amortization expense.
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For the nine months ended September 30, 2003, the Company recorded a net
loss of $2,733,406, as compared to $3,278,757 for the nine months ended
September 30, 2002.
Liquidity and Capital Resources
Available working capital at September 30, 2003 increased over the similar
period last year primarily due to an increase in cash from equity sales. The
equity sales primarily involved sales of common stock to institutional investors
with certain warrant rights attached.
Inventories increased over last year's prior period inventories reflecting
an increase in the Wholesale Line of Credit . Net borrowings under notes and
installment obligations payable decreased for the period ended September 30,
2003 compared to the prior year's period in that payments on debt exceeded new
borrowings.
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 $356,291 for capital expenditures during the nine months
ended September 30, 2003, as compared to $583,552 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 nine months ended September 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. The Company performed an
independent assessment of the goodwill carrying amount during the quarters ended
September 30, 2003 and 2002. During the nine months ended September 30, 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.
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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/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 Rules 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
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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 matrially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the third quarter of fiscal year 2003, the Company raised approximately
$2,210,850 in gross proceeds of sales of common stock via private placements to
accredited investors and investor exercises of warrants. The majority of these
sales occurred during the period of September 23 through September 30, 2003. The
proceeds from the aforementioned were used primarily for working capital and to
retire debt.
ITEM 4. ANNUAL SHAREHOLDERS' MEETING
The Company's annual shareholder meeting was held on July 10, 2003. Eight
Directors were elected for a term of one year with the following votes per
Director as indicated below.
Name Votes in Favor
---- --------------
Jonathan Dodge 7,677,782
Donald Miller 7,677,782
Marvin Frieman 7,676,616
James Mandel 7,677,782
Dave Ekman 7,677,782
Steve Bell 7,676,949
Frank Bennett 7,677,782
David Weiss 7,677,782
In addition, at the meeting, Virchow Krause and Company, LLP were ratified as
the Company's Independent Auditors for Fiscal Year 2002. The votes were as
follows: For 7,672,034, Against, 0, Abstain, 5,748.
ITEM 5. LEGAL PROCEEDINGS
As of September 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
31.1
31.2
32
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on September 24, 2003
related to recent equity activity.
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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: November 14, 2003 By:
/s/ James L. Mandel
------------------------
Chief Executive Officer
Date: November 14, 2003 By:
/s/ Steven M. Bell
------------------------
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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