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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-K
(MARK ONE) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED DECEMBER 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
The Company's Internet Address: www.vicominc.net
(Registrant's telephone number, facsimile number, and Internet address)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock (no par value)
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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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by references in Part III of this Form 10-K or any amendment to
this Form 10-K / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
As of June 30, 2003 (the most recently completed fiscal second quarter),
the aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average high and low prices on such
date as reported by the Nasdaq Smallcap was approximately $29,012,556.
As of March 15, 2003, there were 19,533,138 outstanding shares of the
registrant's common stock, no par value stock.
================================================================================
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Documents Incorporated By Reference
Portions of the registrant's definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this report are
incorporated by reference into Part III hereof.
Table of Contents
Part I Item 1. Business
Summary
Business Industry Overview
Products and Services
MultiBand Consumer Services
Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security
Holders
Part II
Item 5. Market for the Registrant's Common Equity and
Related Shareholder Matters and
Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of
Operations
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Consolidated Financial Statements and
Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial
Disclosure
Item 9A. Controls and Procedures
Part III
Item 10. Directors, Executive Officers, Promoters and
Control Persons of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form-8K
Signatures
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ITEM 1
BUSINESS
Vicom, Incorporated (Vicom) is a Minnesota corporation formed in September
1975. Vicom has two operating divisions: 1) Multiband Business Services (MBS,
legally known as Corporate Technologies,USA, Inc. dba Multiband), and Multiband
Consumer Services (MCS), which encompasses the wholly owned subsidiary
corporations, Multiband USA, Inc. and URON, 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.
From its inception until December 31, 1998, Vicom operated as a telephone
interconnect company only. 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. (MBS). MBS provides voice, data and video systems and
services to business and government. MCS began in February 2000. MCS provides
voice, data and video services to multiple dwelling units (MDU's), including
apartment buildings and time share resorts.
As of March 15, 2004, MBS was providing telephone equipment and service to
approximately 800 customers, with approximately 17,000 telephones in service. In
addition, MBS provides computer products and services to approximately 1,800
customers. Telecommunications systems distributed by MBS 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.
MBS provides a full range of 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. MBS 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. MBS uses
these products to design telecommunications and computer systems to fit its
customers' specific needs and demands.
The products sold by MBS include Private Branch Exchange (PBX), telephone
systems, hubs and routers used as interconnection devices in computer networks,
personal computers, desktop video-conferencing units, and the wire and cable
products required to make all the other aforementioned products integrate and
operate as necessary. MBS has trained staff that install, maintain and repair
the products we sell. Repair of products is performed under either a time and
materials basis or an extended service contract basis, at the customer's
election, once the manufacturer's original warranty on a product has expired.
Extended service contracts offered by MBS generally range in length from
12 to 36 months. The contracts provide for repair or replacement of all broken
or non-working materials and the labor necessary to make such repairs or
replacements, subject to exceptions for customer abuse or negligence and
problems
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due to fire, flood or other causes beyond MBS's control.
See Page 22 for financial information for each segment.
MULTIBAND BUSINESS INDUSTRY OVERVIEW
MBS recently expanded its efforts to establish itself within the rapidly
evolving telecommunications and computer industries.
In the current climate of intense global competition and accelerating
technological change, businesses increasingly depend upon technology-based
solutions to enhance their competitive position, and to improve their
productivity and the quality of their products and services. Today's business
environment mandates the availability of efficient voice and video communication
channels and information in formats suited to a wide variety of users.
Businesses are looking to a variety of new technologies to enhance the
performance of their communication systems and to allow Information Technology
(IT) systems to collect, analyze and communicate information within the
enterprise and among customers and suppliers. An organization's ability to
integrate and deploy new communication and IT technologies in a unified and
cost-effective manner has become critical to competing successfully in today's
rapidly changing business environment.
The markets and technologies for communication equipment and IT
applications and systems continue to converge as communication equipment
migrates from proprietary switches to software-driven systems operating on
standardized computer platforms. As a result, businesses are integrating their
communication and IT systems. As previously separate communication and IT
technologies converge and their interoperability increases, more organizations
will seek a unified technology solution. MBS believes that these organizations
will attempt to reduce costs and management complexity by establishing
relationships with a small number of providers that offer a broad range of both
communication and IT products and services throughout the full life-cycle of a
project. MBS believes it has positioned itself to be one of those providers
through expertise gained in its historical operations and via acquisitions. MBS
has personnel that understand the voice and data sides of the equation. MBS is
able to provide a consultative selling approach, whereby it is able to match the
appropriate technology solution to its customers needs; whether that solution is
an IP telephony application, a traditional PBX application, or a hybrid of both.
While customers continue to rely heavily on technology to reduce
transaction costs by increasing operational efficiencies, the bias toward
software-centric solutions in lieu of hardware continues. Notwithstanding the
slow economic conditions, growth continues to occur in areas such as customer
contact solutions, CTI (computer telephony integration), unified media,
convergence (IP telephony), and mobility.
Current financial pressures also are making it increasingly difficult for
communications equipment manufacturers to support a direct distribution model.
Most independent distribution channels lack an adequate geographic footprint,
infrastructure, processes, and resources to effectively fulfill the
manufacturer's need to deploy complex high-end technology solutions. This has
resulted in the need for systems integration and support services through third
party providers. A key competency being driven by the market is the ability to
effectively integrate disparate technology platforms into enterprise-wide
applications solutions. Again, the range and depth of MBS's experience enables
MBS to provide businesses with overall technology solutions.
As a result of these factors, demand for communication services and
products has been relatively flat. InfoTech, a market research firm
specializing in telecommunications market information, estimates that the U.S.
market for traditional voice PBX systems will continue to decline over the next
three years as enterprises shift to converged solutions, a combined form of
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voice and data, also referred to as IP Telephony. IP shipments are expected to
surpass traditional PBX shipments sometime in 2006. Recent slowdowns in
technology spending may delay this development, however. Overall revenues in the
U.S. marketplace for voice and convergence are projected to reach $5.5 billion
by 2006. Field maintenance and repair is the largest, but slowest growing
segment in services associated with the voice marketplace. This includes the
maintenance and repair of PBX, Key/Hybrid, Voice Processing: IVR, CTI, ACD and
fax.
PRODUCTS AND SERVICES
CORPORATE TECHNOLOGIES, USA (MBS)
MBS provides other technical and customer services as described hereafter.
PRICING AND AVAILABILITY
We use our volume and purchasing power to achieve competitive pricing of
goods for our clients. We have the ability to provide a web-based client site
that allows clients to see availability and costs of hardware and software in
real time through the Internet by accessing current pricing and availability
from our manufacturers' Internet websites. This Internet-based model allows us
to extend product procurement services beyond the traditional 8 a.m. to 5 p.m.
schedule and into a 7 days a week, 24 hours a day service, providing a high
level of client flexibility.
WARRANTY POLICY
We strongly believe in the philosophy of "Service what you sell." We do
not knowingly sell any hardware product that we do not have authorized service
personnel to facilitate any warranty work that needs to be done. We are
committed to fulfill all warranty service calls in accordance with the
manufacturer's warranty, which range in length from 30 days to one year from the
date of sale. Warranty costs incurred to date are minimal.
ON SITE AND DEPOT REPAIR
MBS is authorized for depot and on site warranty repair for many
manufacturers, including Apple Computers, Nortel, Inc., Cisco, Hewlett Packard
Co., International Business Machines Corp. (IBM), Sun Microsystems, Inc., Compaq
Computer Corp., Xerox Corp., and Okidata Corp. With over $500,000 in spare parts
inventory, we have made a conscious effort to have the part clients need, when
they need it.
WIDE AREA NETWORK CONNECTIVITY
Our staff of Cisco and Nortel Wide Area Network (WAN) trained engineers
assist organizations with integrating their multiple sites, allowing the
exchange of information between geographically separated sites. Our association
with local Internet Service Providers (ISPs) gives us the opportunity to offer
organizations with multiple locations a single source provider providing a
cost-effective solution to WAN needs.
TECHNICAL SUPPORT FOR NETWORKING
We are committed to obtaining the highest vendor authorizations available
to indicate our knowledge and expertise to today's complex technological
environment. Becoming the only Microsoft Solution Partner, Novell Platinum
Reseller and Sun Microsystems Competency 2000 Certified reseller in North Dakota
is an indication of this commitment. Our staff of Certified Novell Engineers
(CNEs), Microsoft Certified System Engineers (MCSEs), Sun Microsystems System
Engineers, as well as certified personnel in products such as Nortel and Cisco
routers, gives MBS an advantage over other resellers in North Dakota. The
knowledge and skills of our system engineers helps organizations meet today's
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challenges and maintain a market advantage. Our close relationships and
certification levels with our vendors gives our staff access to resources that
few other value added resellers can provide.
CONSULTING
As a multi-service, multi-vendor, multi-site integrator, MBS has the
extensive infrastructure to offer solutions to complex technical challenges
through our consulting service. With years of experience in Local Area Networks
(LAN) and WAN technology, our consultants are dedicated to finding the solution
that will solve our customers' needs now and in the future. We specialize in
providing an integrated cost-effective, single source solution.
SALES AND MARKETING
As of March 15, 2004, we had 25 sales and marketing personnel with
expertise in telecommunications, computers and network services. MBS has a
consultative approach to selling, in which the salesperson analyzes the
customer's operations and then designs an application-oriented technical
solution to make the customer more efficient and profitable. MBS uses several
techniques to pursue new customer opportunities, including advertising,
participation in trade shows, seminars and telemarketing.
CUSTOMERS
MBS provides its products and services to commercial, professional and
government users within the states of Minnesota and North Dakota. MBS's
customers are diverse and represent various industries such as financial
services, hospitality, legal, manufacturing, and education. In the year ended
December 31, 2003, MBS received 17.5% of its revenues from Meritcare Health
System and 6.0% of its revenues from Noridian (Blue Cross Blue Shield). In its
year ended December 31, 2002, MBS received approximately 22.8% of its revenues
from two customers, Merit Care and Microsoft Great Plains. In its year ended
December 31, 2001, MBS received approximately 21.7 % of all revenues from two
customers. Those two customers were Microsoft Great Plains and the State of
North Dakota.
CUSTOMER SERVICE
MBS has 20 full-time customer service and related support personnel who
assist in project management duties, post-sale communications (which include
site surveys), coordinated network services, and end-user training. Each key
account is assigned its own individual customer service representative to ensure
efficient implementation. The customer service representative works closely with
the sales representative and main technician assigned to the project to
facilitate the utmost in customer satisfaction.
BACK OFFICE
Back office refers to the hardware and software systems that support the
primary functions of our operations, including sales support, order entry and
provisioning, and billing.
Order entry involves the initial loading of customer data into our
information system. Currently our sales representatives take orders and our
customer service and purchasing representatives load the initial customer
information into our ILS (Integrated Logistic System) billing and accounting
system. We use the ILS to manage and track the timely completion of each step in
the provisioning and installation process. Our system is designed to enable the
sales or customer service representative to keep an installation on schedule and
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notify the customer of any potential delays. Once an order has been completed,
we update our billing system to initiate billing of installed products or
services.
SUPPLIERS
As previously mentioned, MBS purchases products and equipment from NEC,
Tadiran, Cisco, Nortel, and other manufacturers of communications and computer
products. The telecommunication products are purchased directly from the
manufacturers. The computer products are purchased both directly from the
manufacturer and also indirectly from major wholesalers such as Ingram Micro and
Tech Data Corporation.
In 2003, Ingram Micro supplied 60.55% and Dell computer supplied 8.35% of
total products purchased. In 2002, Ingram Micro supplied 57.7% and Dell Computer
11.8% of total products purchased. In 2001, Ingram Micro supplied 37.8% and Tech
Data provided 18.9% of total products purchased.
The products MBS purchase are off-the-shelf products. MBS has several
alternate suppliers of computer products and could substitute any one of these
suppliers with an alternate supplier fairly quickly on the same or similar
terms.
MBS has a distribution agreement with NEC, its main supplier of
telecommunication products, which expires June 30, 2004. MBS could replace NEC
with an alternate supplier fairly quickly, but with a less competitive product.
However, MBS's replacement of NEC could have a material adverse effect on
Vicom's business, operating results and financial condition.
MULTIBAND CONSUMER SERVICES
We have expanded our strategy to include the vast potential of the multi
dwelling unit (MDU) market. Our experience in this market suggests that property
owners and managers are currently looking for a solution that will satisfy two
problems. The first problem that they are dealing with is how to satisfy the
residents who desire to bring satellite television service to the unit without
being visually unattractive or a structural/maintenance problem. The second is
how to provide competitive access for local and long distance telephone cable
television and Internet services. Our MCS offering addresses these problems and
provides the consumer several benefits, including:
o Lower Cost Per Service
o Blended Satellite and Cable Television Package
o Multiple Feature Local Phone Services (features such as call
waiting, call forwarding and three-way calling)
o Better than Industry Average Response Times
o One Number for Billing and Service Needs
o One Bill for Local, Long Distance Cable Television and Internet
o "Instant On" Service Availability
As we develop and market this package, we will keep a marketing focus on
two levels of customer for this product. The primary decision-makers are the
property owners/managers. Their concerns are focused on delivering their
residents reliability, quality of service, short response times, minimized
disruptions on
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the property, minimized alterations to the property and value added services.
Each of these concerns is addressed in our contracts with the property owner,
which include annual reviews and 10 to 15 year terms as service providers on the
property. The secondary customer is the end-user. We will provide the property
with on-going marketing support for their leasing agents to deliver clear,
concise and timely information on our services. This will include simple sign up
options that should maximize our penetration of the property.
When taken as a whole, and based on Vicom's interpretations of U.S. Census
Bureau statistics, cable television, telephone and internet services currently
generate over $170 billion of revenues annually in the U.S. These statistics
indicate stable growing markets with demand that is likely to deliver
significant values to businesses that can obtain a subscriber base of any
meaningful size.
MULTIBAND CONSUMER INDUSTRY ANALYSIS
Strategy
For the near future, the services described below will be offered
primarily in Midwestern states. Our primary competition will come from the local
incumbent providers of telephone and cable television services.
Local Telephone Service
In Minnesota, we expect to compete with Qwest Communications
International, Inc. (Qwest) for local telephone services. Although Qwest has
become the standard for local telephone service, we believe we have the ability
to underprice their service while maintaining high levels of customer
satisfaction.
Cable Television Service
In Minnesota, we expect to compete with Comcast Corporation (Comcast) for
pay-TV customers. Comcast is the cable television service provider that has
resulted from the merger and acquisition of two competitive cable providers.
This actually has improved the overall continuity of service. However, we have a
significant consumer benefit in that we are establishing private rather than
public television systems, which allows us to deliver a package that is not
laden with local "public access" stations that clog the basic service package.
In essence, we will be able to deliver a customized service offering to each
property based upon pre-installation market research that we perform.
Long Distance Telephone Service
AT&T Corporation (AT&T), WorldCom Inc. dba MCI (MCI), and Sprint
Corporation (Sprint) are our principal competitors in providing long distance
telephone service. They offer new products almost weekly. Our primary concern in
this marketplace is to assure that we are competitive with the most recent
advertised offerings in the "long distance wars." We will meet this challenge by
staying within a penny of the most current offering, while still maintaining a
high gross margin on our product. We accomplish this through various carrier
agency associations. We expect to generate a high penetration in our long
distance services amongst our local service subscribers because private property
owners in the shared tenant environment (similar to a hotel environment) are not
required to offer multiple long distance carriers to their tenants.
Internet Access Service
The clear frontrunners in this highly unregulated market are America
Online, Inc. and CompuServe Corp. They compete with local exchange carriers,
long distance carriers, Internet backbone companies and many local ISPs
(Internet Service Providers). Competition has driven this to a flat rate
unlimited access dial
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up service market. The general concern among consumers is the quality of the
connection and the speed of the download. Our design provides the highest
connection speeds that are currently available. The approach that we will market
is "blocks of service." Essentially, we deliver the same high bit rate service
in small, medium and large packages, with an appropriate per unit cost reduction
for those customers that will commit to a higher monthly expenditure.
Market Description
We are currently marketing MultiBand services to MDU properties primarily
throughout Minnesota, North Dakota, Missouri and Florida. We are focusing on
properties that consist of 50 or more units. We will target properties that
range from 50 to 150 units on a contiguous MDU property for television and
Internet access only. We will survey properties that exceed 150 units for the
feasibility of local and long distance telephone services.
We are initially concentrating on middle to high-end rental complexes. We
are also pursuing resort area condominiums. A recent U.S. Census Bureau table
indicates that there are more than 65,000 properties in the United States that
fit this profile. Assuming an average of 100 units per complex, our focus is on
a potential subscriber base of 6,500,000.
A recent Property Owners and Manager Survey, published by the U.S. Census
Bureau, shows that the rental properties are focusing on improving services and
amenities that are available to their tenants. These improvements are being
undertaken to reduce tenant turnover, relieve pricing pressures on rents and
attract tenants from competing properties. We believe that most of these owners
or managers are not interested in being "in the technology business" and will
use the services that we are offering. Various iterations of this package will
allow the owners to share in the residual income stream from the subscriber
base.
Number of Units/Customers
At December 31, 2003, MCS had 8,246 units wired for service and 6,827
subscribers using its services(1,180 using voice services, 4,908 using video
services and 739 using internet services).
Employees
As of March 15, 2004, Vicom employed four full-time management employees.
As of that same date, MBS had 90 full-time employees, consisting of 25 in sales
and marketing, 36 in technical positions, 20 in customer service and related
support, 10 in management and 9 in administration and finance. As of March 15,
2004, MCS had 6 full-time employees, 2 in sales and the rest in operations.
RISK FACTORS
Our operations and our securities are subject to a number of risks,
including but not limited to those described below. If any of the following
risks actually occur, the business, financial condition or operating results of
Vicom and the trading price or value of our common stock could be materially
adversely affected.
General
Vicom, since 1998, has taken several significant steps to reinvent and
reposition itself to take advantage of opportunities presented by a shifting
economy and industry environment.
Recognizing that voice, data and video technologies in the late twentieth
century were beginning to
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systematically integrate as industry manufacturers were evolving technological
standards from "closed" proprietary networking architetectures to a more "open"
flexible and integrated approach, Vicom, between 1998 and 2001, purchased three
competitors which, in the aggregrate, possessed expertise in data networking,
voice and data cabling and video distribution technologies.
In early 2000, Vicom created its MCS division, employing the
aforementioned expertise, to provide communications and entertainment services
(local dial tone, long distance, high-speed internet and expanded satellite
television services) to residents in Multi-Dwelling-Unit properties (MDUs) on
one billing platform. Although MCS revenues (recurring subscriber fees)
accounted for less than 6% of overall Vicom revenues in 2003, Vicom expects MCS
related revenues to increase significantly in 2004 as a percentage of overall
revenues. These revenues are expected to provide higher gross margins than the
company's more traditional sales to commercial enterprises.
The specific risk factors, as detailed below, should be analyzed in the
context of the Company's anticipated MCS related growth.
NET LOSSES
The Company had net losses of $4,365,004 for the fiscal year ended
December 31, 2003, $4,438,059 for the fiscal year ended December 31, 2002, and
$5,325,552 for the fiscal year ended December 31, 2001. Vicom may never be
profitable.
The prolonged effects of generating losses without additional funding may
restrict our ability to pursue our business strategy. Unless our business plan
is successful, an investment in our common stock may result in a complete loss
of an investor's capital.
If we cannot achieve profitability from operating activities, we may not
be able to meet:
o our capital expenditure objectives;
o our debt service obligations; or
o our working capital needs.
DEPENDENCE ON ASSET-BASED FINANCING
Vicom currently depends on asset-based financing to purchase product, and
we cannot guarantee that such financing will be available in the future.
Furthermore, we need additional financing to support the anticipated growth of
our MCS subsidiary. We cannot guarantee that we will be able to obtain this
additional financing.
However, the Company recently introduced a program where it can control
capital expenditures by contracting Multiband services and equipment through a
landlord or third party investor owned equipment program. This program both
significantly reduces any Company expenditures in a Multi-dwelling-unit
installation and permits the Company to record revenues from the third party
sale of said equipment.
GOODWILL
In June 2001, the Financial Accounting Standards Board (FASB) adopted
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other
Intangible Assets" which changes the amortization rules on recorded goodwill
from a monthly amortization to a periodic "impairment" analysis for fiscal years
beginning after December 15, 2001. In 2003, the Company retained an independent
outside expert to
12
evaluate the impact of this new accounting standard and the expert concluded
there was no impairment to goodwill. However, the Company could be subject to a
determination that its goodwill is impaired in the future. As of December 31,
2003, the Company had recorded goodwill of approximately $2.7 million.
DEREGULATION
Several regulatory and judicial proceedings have recently concluded, are
underway or may soon be commenced that address issues affecting operations and
those of our competitors, which may cause significant changes to our industry.
We cannot predict the outcome of these developments, nor can we assure you that
these changes will not have a material adverse effect on us. Historically, we
have been a reseller of products and services, not a manufacturer or carrier
requiring regulation of its activities. Pursuant to Minnesota statutes, our
Multiband activity is specifically exempt from the need to tariff our services
in multiple dwelling units (MDUs). However, the Telecommunications Act of 1996
provides for significant deregulation of the telecommunications industry,
including the local telecommunications and long-distance industries. This
federal statute and the related regulations remain subject to judicial review
and additional rule-makings of the Federal Communications Commission, making it
difficult to predict what effect the legislation will have on us, our
operations, and our competitors.
DEPENDENCE ON STRATEGIC ALLIANCES
Vicom has a distribution agreement with NEC, its main supplier of
telecommunication products, which expires June 30, 2004. An interruption or
substantial modification of Vicom's distribution relationship with NEC could
have a material adverse effect on Vicom's business, operating results and
financial condition.
In addition, several suppliers, or potential suppliers of Vicom, such as
McLeod, WorldCom, WS Net, XO Communications and others have filed for bankruptcy
in recent years. While the financial distress of its suppliers or potential
suppliers could have a material adverse effect on Vicom's business, Vicom
believes that enough alternate suppliers exist to allow the Company to execute
its business plans.
CHANGES IN TECHNOLOGY
A portion of our projected future revenue is dependent on public
acceptance of broadband, and expanded satellite television services. Acceptance
of these services is partially dependent on the infrastructure of the internet
and satellite television which is beyond Vicom's control. In addition, newer
technologies, such as video-on-demand, are being developed which could have a
material adverse effect on the Company's competitiveness in the marketplace if
Vicom is unable to adopt or deploy such technologies.
ATTRACTION AND RETENTION OF EMPLOYEES
Vicom's success depends on the continued employment of certain key
personnel, including executive officers. If Vicom were unable to continue to
attract and retain a sufficient number of qualified key personnel, its business,
operating results and financial condition could be materially and adversely
affected. In addition, Vicom's success depends on its ability to attract,
develop, motivate and retain highly skilled and educated professionals with a
wide variety of management, marketing, selling and technical capabilities.
Competition for such personnel is intense and is expected to increase in the
future.
BUSINESS GROWTH AND SCALABILITY
Vicom's Multiband subsidiary, as of December 31, 2003, was providing
communications and entertainment services to thirty-seven MDUs primarily located
in Minnesota, North Dakota, Missouri and Florida. Vicom needs to provide
products and services to additional MDUs if it is to become profitable.
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Vicom may need to go beyond its current geographic territory to increase its MDU
customers and attract additional financing.
In expanding the provision of its services to MDUs in its current
territories and beyond, Vicom needs to successfully overcome a number of the
factors listed above such as attracting the capital to finance expanded
installations, obtaining additional technical staff for installation and support
in its present markets and beyond; and extending its key vendor relationships
into other markets.
INTELLECTUAL PROPERTY RIGHTS
Vicom relies on a combination of trade secret, copyright, and trademark
laws, license agreements, and contractual arrangements with certain key
employees to protect its proprietary rights and the proprietary rights of third
parties from which Vicom licenses intellectual property. If it was determined
that Vicom infringed the intellectual property rights of others, it could be
required to pay substantial damages or stop selling products and services that
contain the infringing intellectual property, which could have a material
adverse effect on Vicom's business, financial condition and results of
operations. Also, there can be no assurance that Vicom would be able to develop
non-infringing technology or that it could obtain a license on commercially
reasonable terms, or at all. Vicom's success depends in part on its ability to
protect the proprietary and confidential aspects of its technology and the
products and services it sells. There can be no assurance that the legal
protections afforded to Vicom or the steps taken by Vicom will be adequate to
prevent misappropriation of Vicom's intellectual property.
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
Variations in Vicom's revenues and operating results occur from quarter to
quarter as a result of a number of factors, including customer engagements
commenced and completed during a quarter, the number of business days in a
quarter, employee hiring and utilization rates, the ability of customers to
terminate engagements without penalty, the size and scope of assignments and
general economic conditions. Because a significant portion of Vicom's expenses
are relatively fixed, a variation in the number of customer projects or the
timing of the initiation or completion of projects could cause significant
fluctuations in operating results from quarter to quarter. Further, Vicom has
historically experienced a seasonal fluctuation in its operating results, with a
larger proportion of its revenues and operating income occurring during the
third quarter of the fiscal year.
CERTAIN ANTI-TAKEOVER EFFECTS
Vicom is subject to Minnesota statutes regulating business combinations
and restricting voting rights of certain persons acquiring shares of Vicom.
These anti-takeover statutes may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of Vicom's securities, or the removal of incumbent management.
VOLATILITY OF VICOM'S COMMON STOCK
The trading price of our common stock has been and is likely to be
volatile. The stock market has experienced extreme volatility, and this
volatility has often been unrelated to the operating performance of particular
companies. We cannot be sure that an active public market for our common stock
will continue after this offering. Investors may not be able to sell the common
stock at or above the price they paid for their common stock, or at all. Prices
for the common stock will be determined in the marketplace and may be influenced
by many factors, including variations in our financial results, changes in
earnings estimates by industry research analysts, investors' perceptions of us
and general economic, industry and market conditions.
14
FUTURE SALES OF OUR COMMON STOCK MAY LOWER OUR STOCK PRICE
If our existing shareholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly. The
perception in the public market that our existing shareholders might sell shares
of common stock could depress our market price.
COMPETITION
We face competition from others who are competing for a share of the MDU
market, including other satellite companies and cable companies. Some of these
companies have significantly greater assets and resources than we do.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of
federal securities law. Terminology such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue," "predict," or other similar
words, identify forward-looking statements. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other forward-looking information. Forward-looking statements
appear in a number of places in this prospectus and include statements regarding
our intent, belief or current expectation about, among other things, trends
affecting the industries in which we operate, as well as the industries we
service, and our business and growth strategies. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those predicted in the forward-looking statements as a result of
various factors, including those set forth in "Risk Factors."
ITEM 2:
PROPERTIES
Vicom and its subsidiaries lease principal offices located at 2000 44th
Street SW, Fargo, ND 58103 and 9449 Science Center Drive, New Hope, Minnesota
55428. We have no foreign operations. The main Fargo office lease expires in
2017 and covers approximately 22,500 square feet. The Fargo base rent ranges
from $23,565 to $30,377 per month. The New Hope office lease expires in 2013 and
covers approximately 47,000 square feet. The New Hope base rent ranges from
$18,389 to $25,166 per month. Both the New Hope and Fargo leases have provisions
that call for the tenants to pay net operating expenses, including property
taxes, related to the facilities. Both offices have office, warehouse and
training facilities.
Vicom considers its current facilities adequate for its current needs and
believes that suitable additional space would be available as needed.
ITEM 3:
LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
business. However, as of December 31, 2003, Vicom was not engaged in any pending
legal proceedings where, in the opinion of the Company, the outcome is likely to
have a material adverse effect upon the business, operating results and
financial condition of the Company.
ITEM 4:
15
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit matters to a vote of security holders during
the last quarter of the fiscal year covered by this report.
16
PART II
ITEM 5:
MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Through May 17, 2000, Vicom's common stock was traded and quoted on the
OTC Bulletin Board(R) ("OTCBB") under the symbol "VICM." From May 18, 2000 until
August 21, 2000, the common stock was quoted under the VICM symbol on the Pink
Sheets(R) operated by Pink Sheets LLC. From August 21, 2000, to December 12,
2000, Vicom's common stock was traded and quoted on the OTCBB under the VICM
symbol. Since then, the stock has been traded and quoted on the Nasdaq Smallcap
market system. The table below sets forth the high and low bid prices for the
common stock during each quarter in the two years ended December 31, 2002 and
December 31, 2003 as provided by Nasdaq.
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
March 31, 2002 ............................. 1.90 1.37
June 30, 2002 .............................. 1.75 .80
September 30, 2002 ......................... .92 .52
December 31, 2002 .......................... 1.12 .50
March 31, 2003 ............................. 1.37 .77
June 30, 2003 .............................. 2.49 1.03
September 30, 2003 ......................... 2.20 1.52
December 31, 2003 .......................... 1.85 1.23
As of March 15, 2004, Vicom had 679 shareholders of record of its common
stock and 19,533,138 shares of common stock outstanding. As of that date, eight
shareholders held a total of 27,931 of Class A Preferred, two shareholders held
8,700 shares of Class B Preferred, five shareholders held a total of 125,400
shares of Class C Preferred, and eight shareholders held a total of 77,650
shares of Class E Preferred.
RECENT SALES OF UNREGISTERED SECURITIES
The Company in 2003 issued $828,172 worth of its common stock to Pyramid
Trading LP in connection with conversion of a note payable and accrued interest.
The common stock was issued at various prices pursuant to a formula tied to the
trading price of the Company's common stock.
The Company, during 2003, issued $25,000 worth of Class B Preferred Stock
and $76,500 worth of Class E Preferred Stock to various accredited investors.
The Company also issued $72,000 worth of Class C Preferred Stock to a related
party.
At various other times in 2003, the Company, via conversions of preferred
stock or investor purchases of common stock, issued common shares at various
prices, netting proceeds of $4,023,704. All sales were made to accredited
investors.
In connection with these sales, we relied on the exemption from
registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933,
as well as Rule 506 of Regulation D based on (i) our belief that the issuances
did not involve a public offering, (ii) the transactions involved fewer than 35
purchasers, and (iii) because we had a reasonable basis to believe that each of
the shareholders were either accredited or otherwise had sufficient knowledge
and sophistication, either alone or with a purchaser representative, to
appreciate and evaluate the risks and merits associated with their investment
decision.
17
COMMON STOCK
Holders of common stock are entitled to one vote per share in all matters
to be voted upon by shareholders. There is no cumulative voting for the election
of directors, which means that the holders of shares entitled to exercise more
than 50% of the voting rights in the election of directors are able to elect all
of the directors. Vicom's Articles of Incorporation provide that holders of the
Company's common stock do not have preemptive rights to subscribe for and to
purchase additional shares of common stock or other obligations convertible into
shares of common stock which may be issued by the Company.
Holders of common stock are entitled to receive such dividends as are
declared by Vicom's Board of Directors out of funds legally available for the
payment of dividends. Vicom presently intends not to pay any dividends on the
common stock for the foreseeable future. Any future determination as to the
declaration and payment of dividends will be made at the discretion of the Board
of Directors. In the event of any liquidation, dissolution or winding up of
Vicom, and subject to the preferential rights of the holders of the Class A
Preferred, Class B Preferred, Class C Preferred, Class D Preferred and Class E
Preferred, the holders of common stock will be entitled to receive a pro rata
share of the net assets of Vicom remaining after payment or provision for
payment of the debts and other liabilities of Vicom.
All of the outstanding shares of common stock are fully paid and
non-assessable. Holders of common stock of Vicom are not liable for further
calls or assessments.
The Company's Board of Directors has not declared any dividends on our
common stock since our inception, and does not intend to pay out any cash
dividends on our common stock in the foreseeable future. We presently intend to
retain all earnings, if any, to provide for our growth. The payment of cash
dividends in the future, if any, will be at the discretion of the Board of
Directors and will depend upon such factors as earnings levels, capital
requirements, our financial condition and other factors deemed relevant by our
Board of Directors.
PREFERRED STOCK
In December 1998, Vicom issued 2,550 shares of Class A Preferred for
$23,638 and 37,550 shares of Class B Preferred for $359,893. The Class B
Preferred was offered to certain note holders at a conversion rate of $10.00 per
share of Class B Preferred. Each share of Class A Preferred and Class B
Preferred is non-voting (except as otherwise required by law) and convertible
into five shares of common stock, subject to adjustment in certain
circumstances. Each holder of a share of Class A Preferred or Class B Preferred
has a five-year warrant to purchase one share of common stock at $3.00 per
share, subject to adjustment. During 2001, Vicom issued 67,655 shares of Class A
Preferred for $676,556.
In June 2000, Vicom issued 80,500 shares of Class C Preferred for
$805,000. The Class C Preferred was offered to certain note holders at a
conversion rate of $10.00 a share. In September 2000, Vicom issued an additional
72,810 shares of Class C Preferred for $728,100. Each share of Class C Preferred
is non-voting (except as otherwise required by law) and convertible into two
shares of Vicom common stock, subject to adjustment in certain circumstances.
In November 2000, Vicom issued 72,500 shares of Class D Preferred for
$490,332. The Class D Preferred was sold to eight accredited investors at $10.00
per share. Each share of Class D Preferred is non-voting (except as otherwise
required by law) and convertible into two and one-half shares of Vicom Common
Stock, subject to adjustment in certain circumstances.
In the second quarter of 2002, Preferred Class D stocks were redeemed;
$100,000 converted to Common Stock, and $300,000 converted to a Note Payable.
18
In the fourth quarter of 2002, Vicom issued 70,000 shares of Class E
Preferred for $700,000, with $600,000 related to conversion of a note payable
from a director of the Company into Preferred Stock.
In the first quarter of 2003, $72,000 worth of Class C Preferred Stock was
issued to an officer of the Company in a conversion of accounts payable. Also in
the first quarter of 2003, $76,500 worth of Class E Preferred Stock was issued
to a member of the Board for his purchase of Multiband assets.
In the third quarter of 2003 $25,000 worth of Class B Preferred Stock was
purchased by an accredited investor.
In addition, during 2003 $133,100 worth of Class C Preferred Stock was
redeemed.
The holders of the Class A Preferred, Class B Preferred, Class C
Preferred, Class D Preferred and Class E Preferred (collectively, "Preferred
Stock") are entitled to receive, as and when declared by the Board, out of the
assets of the Company legally available for payment thereof, cumulative cash
dividends calculated based on the $10.00 per share stated value of the Preferred
Stock. The per annum dividend rate is eight percent (8%) for the Class A
Preferred and ten percent (10%) for the Class B Preferred and Class C Preferred,
fourteen percent (14%) for the Class D Preferred and fifteen percent (15%) in
the Class E Preferred, to be paid in kind. Dividends on the Class A Preferred,
Class C Preferred and Class D Preferred are payable quarterly on March 31, June
30, September 30, and December 31 of each year. Dividends on the Class B
Preferred are payable monthly on the first day of each calendar month. Dividends
on the Preferred Stock accrue cumulatively on a daily basis until the Preferred
Stock is redeemed or converted.
In the event of any liquidation, dissolution or winding up of Vicom, the
holders of the Class A Preferred and Class B Preferred will be entitled to
receive a liquidation preference of $10.50 per share, and the holders of the
Class C Preferred, Class D Preferred and Class E Preferred will be entitled to
receive a liquidation preference of $10.00 per share, each subject to
adjustment. Any liquidation preference shall be payable out of any net assets of
Vicom remaining after payment or provision for payment of the debts and other
liabilities of Vicom.
Vicom may redeem the Preferred Stock, in whole or in part, at a redemption
price of $10.50 per share for the Class A Preferred and the Class B Preferred
and $10.00 per share for the Class C Preferred, Class D Preferred and Class E
Preferred (subject to adjustment, plus any earned and unpaid dividends) on not
less than thirty days' notice to the holders of the Preferred Stock, provided
that the closing bid price of the common stock exceeds $4.00 per share (subject
to adjustment) for any ten consecutive trading days prior to such notice. Upon
Vicom's call for redemption, the holders of the Preferred Stock called for
redemption will have the option to convert each share of Preferred Stock into
shares of common stock until the close of business on the date fixed for
redemption, unless extended by Vicom in its sole discretion. Preferred Stock not
so converted will be redeemed. No holder of Preferred Stock can require Vicom to
redeem his or her shares.
ITEM 6:
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated financial statements including the accompanying notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The data for each of the fiscal years in the three year period
ended December 31, 2003, have been derived from our consolidated financial
statements and accompanying notes contained in this prospectus. The Statement of
19
Operations Data for the year ended December 31, 2000 and 1999 and the Balance
Sheet data at December 31, 2001, 2000 and 1999 have been derived from our
audited consolidated financial statements which are not contained in this
filing.
STATEMENT OF OPERATIONS DATA 2003 2002 2001 2000 1999
- ---------------------------- ---- ---- ---- ---- ----
Revenues ............................ $ 22,640,421 $ 24,540,969 $ 32,260,777 $ 39,781,846 $ 20,388,870
Cost of products and
services ......................... $ 15,952,019 $ 18,036,750 $ 25,295,186 $ 31,698,569 $ 16,247,898
Gross profit ........................ $ 6,688,402 $ 6,504,219 $ 6,965,591 $ 8,083,277 $ 4,140,972
% of revenues ....................... 29.5% 26.5% 21.6% 20.3% 20.3%
Selling, general and
administrative expenses .......... $ 10,184,709 $ 9,337,292 $ 10,962,739 $ 11,852,041 $ 5,823,945
% of revenues ....................... 45.0% 38.0% 34.0% 29.8% 28.6%
Loss from Operations ................ $ (3,496,307) $ (2,833,073) $ (3,997,148) $ (3,768,764) $ (1,682,973)
Other expense net ................... $ (902,063) $ (1,604,986) $ (1,328,404) $ (458,067) $ (139,461)
Minority interest in
subsidiary ....................... $33,366 $0 $ 0 $ 0 $ 0
Loss before income taxes ............ $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (4,226,831) $ (1,822,434)
Income tax provision ................ $ 0 $ 0 $ 0 $ 9,000 $ 241,200
Net Loss ............................ $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (4,235,831) $ (2,063,634)
Loss attributable to common
stockholders ..................... $ (4,613,693) $ (4,591,637) $ (5,758,221) $ (5,082,011) $ (2,101,603)
Loss per common share-basic
and diluted ...................... $ (.29) $ (.39) $ (.66) $ (0.72) $ (0.55)
Weighted average shares
outstanding ...................... 16,112,231 11,735,095 8,762,814 7,009,751 3,821,978
BALANCE SHEET DATA 2003 2002 2001 2000 1999
- ------------------------------------- ------------ ------------ ------------ ------------ ------------
Working capital
(deficiency) ..................... $ 1,118,792 $ (252,870) $ 426,549 $ 2,870,114 $ (2,882,907)
Total assets ........................ $ 13,902,885 $ 10,347,316 $ 12,209,681 $ 15,614,573 $ 12,598,745
Long-term debt ...................... $ 2,262,891 $ 3,273,350 $ 3,311,870 $ 3,362,083 $ 926,821
Stockholders' equity ................ $ 5,807,711 $ 2,642,285 $ 4,184,001 $ 5,876,352 $ 1,026,344
ITEM 7:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following discussion of the financial condition and results of
operations of Vicom, Incorporated should be read in conjunction with the
Condensed Consolidated Financial Statements and the Notes thereto included
elsewhere in this report.
20
YEARS ENDED DECEMBER 31, 2003 AND DECEMBER 31, 2002
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenue.
2003 2002
Revenues
Vicom 0% 0%
MBS 93.63% 97.65%
MCS 6.37% 2.35%
----- -----
Total Revenues 100.0% 100.0%
====== ======
Cost of Sales
Vicom 0% 0%
MBS 66.55% 71.89%
MCS 3.91% 1.61%
----- -----
Total Cost of Sales 70.46% 73.50%
====== ======
Gross Margin 29.54% 26.5%
Selling, General and
Administrative expenses 44.98% 37.39%
Operating Loss (15.44%) (11.34%)
Net Loss (19.28%) (17.78%)
REVENUES
Total revenues decreased 7.7% to $22,640,421 in 2003 from $24,540,969 in
2002.
Revenues from the MBS segment which traditionally sells telephone and
computer technologies products and services decreased 11.5% to $21,199,303 in
2003 from $23,963,748 in 2002. This decrease in MBS segment revenues resulted
primarily from weaker economic conditions in 2003 and from MBS's desire to
increase gross margins versus maintaining top line revenues. MBS is increasing
margins by focusing more on sales of services versus sales of product.
Vicom segment had no revenues.
Revenues from MCS increased 149.7% to $1,441,118 in 2003 from $577,221 in
2002. This increase is due to the expansion of MCS services to nineteen
apartment properties and eighteen timeshare properties.
GROSS MARGIN
The Company's gross margin was $6,688,402 for 2003, as compared to
$6,504,219 for 2002. The increase of 2.8% in 2003 was primarily due to an
increase in consumer recurring revenues comprising a greater percentage of
overall revenues. For 2003, gross margin, as a percentage of total revenues, was
29.5% versus 26.5% for 2002. The Company expects gross margins to maintain or
even slightly increase in future periods as recurring revenues become a greater
percentage of the Company's overall revenue mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 9.1% to $10,184,709
in 2003, compared to $9,337,292 in 2002. This increase in expenses is primarily
related to increased payroll and facility expense and costs incurred for
21
re-branding Vicom operating divisions as Multiband. Increased payroll primarily
resulted from acquisition related payroll expense and increase in officer
compensation in 2003. Selling, general and administrative expenses were, as a
percentage of revenues, 45.0% for 2003 and 38.0% for 2002. The Company expects
these expenses to remain stable or even slightly decrease as a percentage of
revenues in 2004.
INTEREST EXPENSE
Interest expense was $897,704 for 2003, versus $1,604,512 for 2002
reflecting a substantial decrease in Original Issue Discount expense associated
with long term debt and a significant decrease in cash interest expense
associated with notes payable.
NET LOSS
In 2003, the Company incurred a net loss of $4,365,004 compared to a net
loss of $4,438,059 for 2002.
YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenue.
2002 2001
Revenues
Vicom and VMTS 0% 0%
MBS 97.65% 99.2%
MCS 2.35% .78%
----- ----
Total Revenues 100.0% 100.0%
====== ======
Cost of Sales
Vicom and VMTS 0% .02%
MBS 71.89% 77.39%
MCS 1.61% .69%
----- ----
Total Cost of Sales 73.50% 78.10%
====== ======
Gross Margin 26.5% 21.88%
Selling, General and
Administrative expenses 37.39% 34.45%
Operating Loss (11.34%) (12.56%)
Net Income Loss (17.78%) (16.73%)
REVENUES
Total revenues decreased 23.9% to $24,540,969 in 2002 from $32,260,777 in
2001.
Revenues from the MBS segment which traditionally sells computer
technologies products and services decreased 25.1% to $23,963,748 in 2002 from
$31,994,781 in 2001. This decrease in MBS segment revenues resulted primarily
from weaker economic conditions in 2002 and from MBS's desire to increase gross
margins versus maintaining top line revenues.
Vicom segment had no revenues.
Revenues from MultiBand increased 131% to $577,221 in 2002 from $249,590
in 2001. This increase is due to the expansion of Multiband services to ten
properties.
22
GROSS MARGIN
The Company's gross margin was $6,504,219 for 2002, as compared to
$6,965,591 for 2001. The decrease of 6.6% in 2002 was due to reduced revenues.
For 2002, gross margin, as a percentage of total revenues, was 26.50% versus
21.5% for 2001. This increase in gross margin revenues is primarily due to an
increase in sale of services constituting a greater percentage of overall
revenues than in the prior year. As the Company continues to strive for bundled
sales of services, and bundled sales of equipment and services, the Company
anticipates that it will maintain its gross margin percentages in fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 14.83% to
$9,337,292 in 2002, compared to $10,962,739 in 2001. This decrease in expenses
is primarily related to reductions in payroll, benefits and vehicle expenses.
Selling, general and administrative expenses were, as a percentage of revenues,
38.0% for 2002 and 33.9% for 2001.
INTEREST EXPENSE
Interest expense was $1,604,512 for 2002, versus $1,446,868 for 2001
reflecting an increase in debt due to capital raising efforts, valuation of
warrants issued with Preferred Stock and convertible notes, and additional
borrowings.
NET LOSS
In 2002, the Company incurred a net loss of $4,438,059 compared to a net
loss of $5,325,552 for 2001. The decrease in net loss is primarily due to a
significant reduction in payroll and benefit related expenses from the prior
year.
23
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the two-year period ending
December 31, 2003. This data includes, in the opinion of management, all normal
recurring adjustments necessary for the fair presentation of the information for
the periods presented when read in conjunction with the Company's consolidated
financial statements and related notes thereto. Results for any previous fiscal
quarter are not necessarily indicative of results for the full year or for any
future quarter. The Company has historically experienced a seasonal fluctuation
in its operating results, with a larger proportion of its revenues in the third
quarter of the fiscal year.
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2003 2003 2003 2002 2002 2002 2002
- --------------------------------------------------------------------------------------------------------------------------------
Revenues:
- --------------------------------------------------------------------------------------------------------------------------------
Vicom 0 0 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
MBS 4,367,773 5,864,468 5,330,420 5,636,642 5,758,953 6,227,683 5,815,531 6,161,581
- --------------------------------------------------------------------------------------------------------------------------------
MCS 429,140 418,897 357,961 235,120 192,771 154,950 128,893 100,607
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Total
Revenues 4,796,913 6,283,365 5,688,381 5,871,762 5,951,724 6,382,633 5,944,424 6,262,188
- --------------------------------------------------------------------------------------------------------------------------------
Cost of Sales 3,233,068 4,493,829 3,914,420 4,310,702 4,212,240 4,680,582 4,354,714 4,789,214
- --------------------------------------------------------------------------------------------------------------------------------
Gross Margin 1,563,845 1,789,536 1,773,961 1,561,060 1,739,484 1,702,051 1,589,710 1,472,974
- --------------------------------------------------------------------------------------------------------------------------------
SG&A
Expense 3,036,745 2,409,227 2,502,741 2,235,996 2,484,108 2,376,225 2,240,223 2,236,736
- --------------------------------------------------------------------------------------------------------------------------------
Operating
Loss (1,472,900) (619,691) (728,780) (674,936) (744,624) (674,174) (650,513) (763,762)
- --------------------------------------------------------------------------------------------------------------------------------
Interest
Expense (249,336) (202,958) (219,723) (225,687) (462,420) (349,388) (426,869) (365,835)
- --------------------------------------------------------------------------------------------------------------------------------
Other Income
(Expenses) 52,418 (6,513) 15,232 (65,496) 47,740 (93,171) 25,281 19,676
- --------------------------------------------------------------------------------------------------------------------------------
Minority
Interest 38,219 (3,460) (1,393)
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss
Before Taxes (1,631,599) (832,622) (934,664) (966,119) (1,159,304) (1,116,733) (1,052,101) (1,109,921)
- --------------------------------------------------------------------------------------------------------------------------------
Income Tax
(Benefit)
Provision 0 0 0 0 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
Net Loss (1,631,599) (832,622) (934,664) (966,119) (1,159,304) (1,116,733) (1,052,101) (1,109,921)
- --------------------------------------------------------------------------------------------------------------------------------
Loss Per
Common
Share Basic
and Diluted (.10) (.05) (.06) (.08) (.11) (.09) (.09) (.10)
- --------------------------------------------------------------------------------------------------------------------------------
a
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2003
Available working capital for 2003 increased $1,3771,662 primarily to a
stronger cash position due to investing activities. Vicom successfully completed
an offering of institutional financing in the second half of 2003 raising net
proceeds of $2,223,150. Vicom had a decrease of $289,890 in accounts receivable
as a result of a reduction in sales. Current liabilities increased in 2003 by
$1,373,968 as a result of higher current portion of long term debt and accrued
liabilities. Inventories increased by $509,762 primarily due to a planned
expansion to provide wireless intranet service.
Total long term debt and capital lease obligation decreased by $1,010,459
during the year ended December 31, 2003. Vicom paid out $75,301 related to
capital lease obligations and $200,768 related to long term debt during the year
ended December 31, 2003 versus $1,069,433 paid out in 2002.
The Company used $526,936 for capital expenditures during 2003, as
compared to $1,275,434 in 2002. The decrease was primarily attributed to a
reduction in self-financed MCS construction. In 2004
24
capital expenditures are expected to be limited to the Company's internal
information technology infrastructure and are expected to be less than 2003
expenditures.
In 2003, the Company reached an agreement to convert the remaining
$962,000 of a Note Payable to equity. Terms of the conversion state the note
will be converted to equity over a 14 month period at a price generally
equivalent to a 10% discount to market price.
In November of 2003, the Company borrowed $1,500,000 and issued a
three-year warrant to the lender to purchase 535,000 common shares at $2.21 per
share through November 2006. The debt is also convertible into common stock of
the Company at a conversion rate of $1.40 per share through November 2006.
On June 30, 2003, the Company borrowed $124,000 as an unsecured note from
a stockholder of the Company, with monthly payments of $5,600 at an interest
rate of 7.85%.
Net cash used by operations in 2003 was $2,580,248 as compared to cash
used by operations in 2002 of $869,721. The cash used by operations in 2003 is
due primarily to net operating losses and a reduction in the wholesale line of
credit. During the years ended December 31, 2003, and December 31, 2002, the
Company incurred significant net losses. Although the majority of these losses
were due to non-cash expenses, The Company still continued to incur cash losses
as well due to general corporate expense. The on-going addition of MCS
properties in the Company's portfolio provided additional cash flows in 2003 and
those cash flows are projected to improve in 2004 with additional expansions.
Management of Vicom believes that, for the near future, cash generated from new
investments combined with existing credit facilities are adequate to meet the
anticipated liquidity in capital resource requirements of its business,
contingent upon Company operating results for the next twelve months.
YEAR ENDED DECEMBER 31, 2002
Available working capital, for 2002, decreased $679,419 due to Vicom's net
operating loss and net cash used in operating activities of $869,721. Proceeds
from issuance of long term debt, stock and warrants totaling $2,121,597 helped
offset Vicom's net operating loss. Vicom had a decrease of $38,344 in accounts
payable and other current liabilities for 2002 versus last year's period,
primarily due to significant reductions in accounts receivables which were used
to reduce payables.
Inventories year to date decreased net of reserves $182,783 over last
year's prior period inventories due to a decrease in revenues. The
aforementioned decrease in revenues also led to a decrease in accounts
receivable net of reserves of $576,509.
Total long term debt and capital lease obligation decreased by $102,631
during the year ended December 31, 2002. The Company paid out $937,828 related
to capital lease obligations and $131,605 related to long term debt during the
year ended December 31, 2002 versus $777,578 paid out in 2001.
In 2001, the Company entered into a long-term debt agreement, expiring in
2003, with an investment fund. The fund, in exchange for its $1.5 million
investment, also received 375,000 warrants and the right to convert its
investment into Vicom common stock at a predetermined price. The effect of
recording the beneficial conversion feature and warrants associated with the
convertible loan resulted in a $1,500,000 discount attributable to the warrants
in accordance with the Black-Scholes pricing model. The Company is expensing the
aforementioned warrant discount in eight quarterly installments over the two
year term of the loan. $460,000 of the debt was converted to stock in 2002
pursuant to a formula tied to the trading price of the Company's Common Stock.
25
In 2002, the Company borrowed $600,000 from a Director. This investment
was later converted into Class E Preferred Stock. Also in 2002, the Company
restructured its debenture with Convergent Capital, resetting the date of
principal repayment to begin in August 2005.
The Company used $1,275,434 for capital expenditures during 2002, as
compared to $1,884,945 in 2001. The decrease was primarily attributed to a
reduction in self-financed MCS construction.
In 2002, the Company extinguished $937,828 worth of capital lease
obligations, reduced its principal indebtedness $460,000 to a note holder, and
converted another $600,000 worth of debt to Preferred Stock. All these events,
combined, with the aforementioned refinancing and delayed principal repayment to
its largest debt holder, should materially improve projected cash flows
throughout 2003 provided Company operating losses continue to diminish.
Net cash used by operations was approximately $869,721 in 2002 versus net
cash used by operations of $502,110 in 2001. The cash used by operations in 2002
is due primarily to net operating losses, and reductions in accounts payable and
wholesale line of credit balances in that year. During the years ended December
31, 2002 and December 31, 2001, the Company incurred significant net losses.
Although the majority of these losses were due to non-cash expenses, the Company
still continued to incur cash losses as well due to general corporate expense
and continuing expenses related to the building out of its MCS network. The
Company in 2002 significantly cut its selling, general and administrative
expenses which led to a material decrease in cash losses. The on-going addition
of MCS properties in the Company's portfolio also generated additional cash
flows in 2002 and these MCS cash flows are projected to improve meaningfully in
2003. Management of Vicom believes that, for the near future, cash generated
from new investments combined with existing credit facilities are adequate to
meet the anticipated liquidity in capital resource requirements of its business,
contingent upon Company operating results for the next twelve months.
CRITICAL ACCOUNTING POLICIES
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvement. At December 31, 2003, the Company had net property and equipment of
$3,589,704, which represents approximately 26% of the Company's total assets.
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. In 2003, the Company did not record any impairment. In 2002 the
Company recorded impairment of $119,480 on property, plant and equipment. During
the year ended December 31, 2001, the Company did not record any impairment
losses related to long-lived assets.
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses,
which amounts to $2,748,879 (or 20% of total assets), may be impaired. Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations. During the years ended December 31, 2003,
2002 and 2001, the Company did not record any impairment losses related to
goodwill.
26
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.
Recent Accounting Pronouncements
In April 2003, the FASB issued 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 derivative contains
a financing component and amends certain other existing pronouncements. The
adoption of SFAS No. 149 did not have a material effect on the Company's
consolidated financial statements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
lnstruments 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 adoption of SFAS No.
150 did not have a material effect on the Company's consolidated financial
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 effect the Company's consolidated financial statements.
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" (FIN 46R). This standard
replaces FIN 46, Consolidation of Variable Interest Entities" that was issued in
January 2003. FIN 46R modifies or clarifies various provisions of FIN 46. FIN
46R addresses the consolidation of business enterprises of variable interest
entities (VIEs), as defined by FIN 46R. FIN 46R exempts certain entities from
its requirements and provides for special effective dates for entities that have
fully or partially applied FIN 46 prior to issuance of FIN 46R. Otherwise,
application of FIN 46R is required in financial statements of public entities
that have interest in structures commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application by the Company
for all other types of VIEs is required in financial statements for periods
ending no later than the quarter ended January 31, 2005. The Company does not
expect the adoption of FIN 46R to have a material effect on the Company's
consolidated financial statements
27
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes our contractual obligations at December 31, 2003,
and the effect these contractual obligations are expected to have on our
liquidity and cash flows in future periods (in thousands):
Total 1 Year of Less 1-3 Years Over 3 Years
--------------- --------------- -------------- ---------------
Operating Leases $7,199,000 $534,000 $1,569,000 $5,096,000
Capital Leases 230,179 69,556 160,623 ---------
Long Term Debt 4,786,877 998,813 3,602,829 185,235
Wholesale Line of Credit 976,314 $976,314 --------- ---------
--------------- --------------- -------------- ---------------
Total $13,192,370 $2,578,683 $5,332,452 $5,281,235
=============== =============== ============== ===============
FORWARD LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, 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 document. 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 other
expectations expressed in the 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 the IT and
telecommunications industry; stability of foreign governments; market acceptance
of 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 investors
should not use historical trends to anticipate future period results.
28
ITEM 7A
QUANTITATIVE AND QUALITATIVE 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 except for the note payable
to Laurus Master Fund, Ltd., which is three percent over the prime interest
rate.
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VICOM, INCORPORATED AND SUBSIDIARIES
New Hope, Minnesota
December 31, 2003 and 2002
CONSOLIDATED FINANCIAL STATEMENTS
Including Report of Independent Auditors
VICOM, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
REPORT OF INDEPENDENT AUDITORS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4 - 9
Consolidated Statements of Cash Flows 10
Notes to Consolidated Financial Statements 11 - 34
SUPPLEMENTAL INFORMATION
Report of Independent Auditors on Supplementary Information 35
Valuation and Qualifying Accounts 36
REPORT OF INDEPENDENT AUDITORS
To Stockholders, Board of Directors, and Audit Committee
Vicom, Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheets of Vicom,
Incorporated and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vicom,
Incorporated and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
February 16, 2004
Page 1
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS
- --------------------------------------------------------------------------------
2003 2002
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 2,945,960 $ 540,375
Certificate of deposit 250,000 --
Accounts receivable, net 1,658,114 1,948,004
Inventories, net 1,973,817 1,463,658
Other current assets 96,550 226,774
------------ ------------
Total Current Assets 6,924,441 4,178,811
------------ ------------
PROPERTY AND EQUIPMENT, NET 3,589,704 3,248,973
------------ ------------
OTHER ASSETS
Goodwill 2,748,879 2,748,879
Other assets 639,861 170,653
------------ ------------
Total Other Assets 3,388,740 2,919,532
------------ ------------
TOTAL ASSETS $ 13,902,885 $ 10,347,316
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank $ 147,398 $ --
Wholesale line of credit 976,314 1,290,383
Current portion of long-term debt 998,813 321,589
Current portion of note payable - stockholder 81,554 --
Current portion of capital lease obligations 54,939 59,570
Accounts payable 1,771,699 1,735,931
Accrued liabilities 1,459,705 714,479
Deferred service obligations and revenue 315,227 309,729
------------ ------------
Total Current Liabilities 5,805,649 4,431,681
LONG-TERM LIABILITIES
Long-term debt, net 2,087,156 3,114,006
Note payable - stockholder, net of current portion 32,837 --
Capital lease obligations, net of current portion 142,898 159,344
------------ ------------
Total Liabilities 8,068,540 7,705,031
------------ ------------
MINORITY INTEREST IN SUBSIDIARY 26,634 --
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,931 and 27,831 shares issued and outstanding,
$293,276 and $292,226 liquidation preference) 419,752 418,252
10% Class B (8,700 and 6,200 shares issued and outstanding, $91,350
and $65,100 liquidation preference) 62,000 62,000
10% Class C (125,400 and 131,510 shares issued and outstanding,
$1,254,000 and $1,315,100 liquidation preference) 1,611,105 1,699,407
15% Class E (77,650 and 70,000 shares issued and outstanding,
$776,500 and $700,000 liquidation preference) 438,964 395,778
Common stock, no par value (19,036,805 and 13,110,477 shares issued;
19,019,786 and 13,065,410 shares outstanding) 7,726,505 4,465,832
Stock subscriptions receivable (418,085) (633,195)
Options and warrants 30,514,872 26,632,299
Unamortized compensation (217,210) (682,089)
Accumulated deficit (34,330,192) (29,715,999)
------------ ------------
Total Stockholders' Equity 5,807,711 2,642,285
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,902,885 $ 10,347,316
============ ============
See accompanying notes to consolidated financial statements.
PAGE 2
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------------ ------------------ ------------------
REVENUES $ 22,640,421 $ 24,540,969 $ 32,260,777
------------------ ------------------ ------------------
COST AND EXPENSES
Cost of products and services 15,952,019 18,036,750 25,295,186
Selling, general and administrative 10,184,709 9,337,292 10,962,739
------------------ ------------------ ------------------
Total costs and expenses 26,136,728 27,374,042 36,257,925
------------------ ------------------ ------------------
LOSS FROM OPERATIONS (3,496,307) (2,833,073) (3,997,148)
------------------ ------------------ ------------------
OTHER INCOME (EXPENSE)
Interest expense (897,704) (1,604,512) (1,446,868)
Interest income 16,309 64,083 63,717
Other income (expense) (20,668) (64,557) 54,747
------------------ ------------------ ------------------
Total Other Expense (902,063) (1,604,986) (1,328,404)
------------------ ------------------ ------------------
LOSS BEFORE MINORITY INTEREST IN SUBSIDIARY (4,398,370) (4,438,059) (5,325,552)
Minority interest in subsidiary 33,366 -- --
------------------ ------------------ ------------------
NET LOSS (4,365,004) (4,438,059) (5,325,552)
Preferred stock dividends 248,689 153,578 432,669
------------------ ------------------ ------------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,613,693) $ (4,591,637) $ (5,758,221)
================== ================== ==================
LOSS PER COMMON SHARE- BASIC AND DILUTED $ (0.29) $ (0.39) $ (0.66)
================== ================== ==================
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND
DILUTED 16,112,231 11,735,095 8,762,814
================== ================== ==================
See accompanying notes to consolidated financial statements.
PAGE 3
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Cumulative Convertible Preferred Stock
--------------------------------------------------------------------------
8% Class A 10% Class B 10% Class C
---------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount
--------- --------- --------- --------- --------- ---------
BALANCES, December 31, 2000 -- $ -- 22,836 $ 218,869 150,810 $1,951,003
Stock issued:
Cash 32,050 320,500 -- -- -- --
Stock subscriptions receivable -- -- -- -- -- --
Acquisition of assets 10,640 106,400 -- -- -- --
Purchase of intangible asset -- -- -- -- -- --
Guarantee of debt financing -- -- -- -- -- --
Conversion of accounts payable 3,500 35,000 -- -- -- --
Conversion of accrued liabilities 9,631 96,306 -- -- -- --
Conversion of notes payable 5,804 58,044 -- -- -- --
Conversion of preferred stock (31,000) (310,000) (13,150) (131,500) (7,800) (78,000)
Conversion of dividends payable 6,030 60,300 -- -- -- --
Redemption of preferred stock (7,783) (77,830) (986) (369) (3,500) (35,000)
Discount on preferred stock related to -- 145,147 -- -- -- (37,556)
warrants
Interest receivable on stock subscription -- -- -- -- -- --
receivable
Warrants issued: -- --
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Debt -- -- -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- -- -- --
Deferred compensation expense -- -- -- -- -- --
Restricted stock: -- --
Issued -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Repricing of warrants -- -- -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
BALANCES, December 31, 2001 28,872 433,867 8,700 87,000 139,510 1,800,447
Stock issued:
Cash -- -- -- -- -- --
Reduction of stock subscriptions -- -- -- -- -- --
receivable for fees related to equity
transactions
Acquisition of assets 1,859 18,590 -- -- -- --
Guarantee of debt financing -- -- -- -- -- --
14% Class D 15% Class E
---------------------- ---------------------
Shares Amount Shares Amount
--------- --------- --------- ---------
BALANCES, December 31, 2000 72,500 $ 802,813 -- $ --
Stock issued:
Cash -- -- -- --
Stock subscriptions receivable -- -- -- --
Acquisition of assets -- -- -- --
Purchase of intangible asset -- -- -- --
Guarantee of debt financing -- -- -- --
Conversion of accounts payable -- -- -- --
Conversion of accrued liabilities -- -- -- --
Conversion of notes payable 10,000 100,000 -- --
Conversion of preferred stock -- -- -- --
Conversion of dividends payable -- -- -- --
Redemption of preferred stock (42,500) (425,000) -- --
Discount on preferred stock related to -- (60,313) -- --
warrants
Interest receivable on stock subscription -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- --
Common stock -- -- -- --
Debt -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- --
Deferred compensation expense -- -- -- --
Restricted stock:
Issued -- -- -- --
Forfeited -- -- -- --
Amortization expense -- -- -- --
Repricing of warrants -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
BALANCES, December 31, 2001 40,000 417,500 -- --
Stock issued:
Cash -- -- 10,000 100,000
Reduction of stock subscriptions -- -- -- --
receivable for fees related to equity
transactions
Acquisition of assets -- -- -- --
Guarantee of debt financing -- -- -- --
See accompanying notesd to consolidated financial statements.
Page 4
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Cumulative Convertible Preferred Stock
--------------------------------------------------------------------------------
8% Class A 10% Class B 10% Class C
------------------------ ------------------------ ------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Services rendered -- -- -- -- -- --
Conversion of accounts payable -- -- -- -- -- --
Conversion of notes payable and accrued
interest -- -- -- -- -- --
Conversion of accrued interest -- -- -- -- -- --
Conversion of preferred stock -- -- (2,500) (25,000) (2,500) (25,000)
Redemption of preferred stock (2,900) (29,000) -- -- (5,500) (55,000)
Discount on preferred stock related to
warrants issued -- (5,205) -- -- -- (21,040)
Interest receivable on stock subscription -- -- -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Debt -- -- -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- -- -- --
Deferred compensation expense -- -- -- -- -- --
Restricted stock:
Issued and outstanding -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 2002 27,831 418,252 6,200 62,000 131,510 1,699,407
Stock issued:
Cash 100 1,000 2,500 25,000 -- --
Exercise of warrants -- -- -- -- -- --
Cashless exercise of warrants -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Reduction of stock subscriptions -- -- -- -- -- --
receivable for fees related to equity
transactions
Acquisition of assets -- -- -- -- -- --
Conversion of accounts payable -- -- -- -- 7,200 72,000
Conversion of notes payable -- -- -- -- -- --
Conversion of accrued interest -- -- -- -- -- --
Conversion of preferred stock -- -- -- -- (4,000) (40,000)
Conversion of dividends payable -- -- -- -- -- --
Redemption of preferred stock -- -- -- -- (9,310) (93,100)
Intrinsic value of convertible feature -- 500 -- -- -- (27,202)
Discount on preferred stock related to
warrants issued -- -- -- (25,000) -- --
Stock subscriptions receivable:
Cash payments -- -- -- -- -- --
Increase reserve -- -- -- -- -- --
Interest collected -- -- -- -- -- --
Warrants issued:
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
14% Class D 15% Class E
------------------------ -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Services rendered -- -- -- --
Conversion of accounts payable -- -- -- --
Conversion of notes payable and accrued
interest (30,000) (300,000) 60,000 600,000
Conversion of accrued interest -- -- -- --
Conversion of preferred stock (10,000) (100,000) -- --
Redemption of preferred stock -- -- -- --
Discount on preferred stock related to
warrants issued -- (17,500) -- (304,222)
Interest receivable on stock subscription -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- --
Common stock -- -- -- --
Debt -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- --
Deferred compensation expense -- -- -- --
Restricted stock:
Issued and outstanding -- -- -- --
Forfeited -- -- -- --
Amortization expense -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
BALANCES, December 31, 2002 -- -- 70,000 395,778
Stock issued:
Cash -- -- -- --
Exercise of warrants -- -- -- --
Cashless exercise of warrants -- -- -- --
Exercise of stock options -- -- -- --
Reduction of stock subscriptions -- -- -- --
receivable for fees related to equity
transactions
Acquisition of assets -- -- 7,650 76,500
Conversion of accounts payable -- -- -- --
Conversion of notes payable -- -- -- --
Conversion of accrued interest -- -- -- --
Conversion of preferred stock -- -- -- --
Conversion of dividends payable -- -- -- --
Redemption of preferred stock -- -- -- --
Intrinsic value of convertible feature -- -- -- --
Discount on preferred stock related to
warrants issued -- -- -- (33,314)
Stock subscriptions receivable:
Cash payments -- -- -- --
Increase reserve -- -- -- --
Interest collected -- -- -- --
Warrants issued:
Preferred stock -- -- -- --
Common stock -- -- -- --
See accompanying notes to consolidated financial statements.
Page 5
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Cumulative Convertible Preferred Stock
---------------------------------------------------------------------------
8% Class A 10% Class B 10% Class C
------------------------ ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Debt -- -- -- -- -- --
Services rendered -- -- -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- -- -- --
Deferred compensation expense -- -- -- -- -- --
Restricted stock:
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Embedded value with Laurus warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 2003 27,931 $ 419,752 8,700 $ 62,000 125,400 $1,611,105
========== ========== ========== ========== ========== ==========
14% Class D 15% Class E
----------------------- -----------------------
Shares Amount Shares Amount
---------- ---------- ---------- ----------
Debt -- -- -- --
Services rendered -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- --
Deferred compensation expense -- -- -- --
Restricted stock:
Forfeited -- -- -- --
Amortization expense -- -- -- --
Embedded value with Laurus warrants -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
---------- ---------- ---------- ----------
BALANCES, December 31, 2003 -- $ -- 77,650 $ 438,964
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
Page 6
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Common Stock Stock Options
---------------------------- Subscriptions and
Shares Amount Receivable Warrants
------------ ------------ ------------ ------------
BALANCES, December 31, 2000 8,137,181 $ 1,340,074 $ -- $ 14,347,833
Stock issued:
Cash 1,092,953 421,566 -- --
Stock subscriptions receivable 800,000 610,000 (610,000) --
Acquisition of assets 87,000 261,000 -- --
Purchase of intangible assets 50,000 83,750 -- --
Guarantee of debt financing 100,000 120,000 -- --
Conversion of accounts payable -- -- -- --
Conversion of accrued liabilities 10,000 9,007 -- --
Conversion of notes payable 20,000 50,000 -- --
Conversion of preferred stock 382,027 528,742 -- --
Conversion of dividends payable -- -- -- --
Redemption of preferred stock -- -- -- --
Discount on preferred stock related to warrants -- -- -- --
Interest receivable on stock subscription receivable -- -- (21,619) --
Warrants issued:
Preferred stock -- -- -- 87,403
Common stock -- -- -- 544,683
Debt -- -- -- 1,382,126
Deferred compensation expense related to stock
options issued below fair market value 1,244,250
Deferred compensation expense -- -- -- --
Restricted stock
Issued 83,000 308,145 -- --
Forfeited (82,711) (289,180) -- --
Amortization expense -- -- -- --
Repricing of warrants -- -- -- 6,919,692
Embedded value with Pyramid Trading warrants -- -- -- 431,925
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCES, December 31, 2001 10,679,450 3,443,104 (631,619) 24,957,912
Stock issued:
Cash 1,548,120 274,414 7,850 --
Reduction of stock subscriptions receivable for
fees related to equity transactions -- (40,563) 40,563 --
Acquisition of assets -- -- -- (18,590)
Guarantee of debt financing 25,000 14,750 -- --
Services rendered 35,214 27,700 -- --
Conversion of accounts payable 7,500 7,255 -- --
Conversion of notes payable and accrued interest 554,569 460,001 -- --
Conversion of accrued interest 117,787 119,881 -- --
Unamortized Accumulated
Compensation Deficit Total
------------ ------------ ------------
BALANCES, December 31, 2000 $ (278,138) $(12,506,102) $ 5,876,352
Stock issued:
Cash -- -- 742,066
Stock subscriptions receivable -- -- --
Acquisition of assets -- -- 367,400
Purchase of intangible assets -- -- 83,750
Guarantee of debt financing -- -- 120,000
Conversion of accounts payable -- -- 35,000
Conversion of accrued liabilities -- -- 105,313
Conversion of notes payable -- -- 208,044
Conversion of preferred stock -- -- 9,242
Conversion of dividends payable -- -- 60,300
Redemption of preferred stock -- -- (538,199)
Discount on preferred stock related to warrants -- 68,948 116,226
Interest receivable on stock subscription receivable -- -- (21,619)
Warrants issued:
Preferred stock -- -- 87,403
Common stock -- -- 544,683
Debt -- -- 1,382,126
Deferred compensation expense related to stock
options issued below fair market value (1,244,250) -- --
Deferred compensation expense 239,461 -- 239,461
Restricted stock
Issued (308,145) -- --
Forfeited 289,180 -- --
Amortization expense 92,749 -- 92,749
Repricing of warrants -- (6,919,692) --
Embedded value with Pyramid Trading warrants -- -- 431,925
Preferred stock dividends -- (432,669) (432,669)
Net loss -- (5,325,552) (5,325,552)
------------ ------------ ------------
BALANCES, December 31, 2001 (1,209,143) (25,115,067) 4,184,001
Stock issued:
Cash -- -- 382,264
Reduction of stock subscriptions receivable for
fees related to equity transactions -- -- --
Acquisition of assets -- -- --
Guarantee of debt financing -- -- 14,750
Services rendered -- -- 27,700
Conversion of accounts payable -- -- 7,255
Conversion of notes payable and accrued interest -- -- 760,001
Conversion of accrued interest -- -- 119,881
See accompanying notes to consolidated financial statements.
Page 7
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Common Stock Stock Options
---------------------------- Subscriptions and
Shares Amount Receivable Warrants
----------- ----------- ----------- -----------
Conversion of preferred stock 140,000 150,000 -- --
Redemption of preferred stock -- -- -- --
Discount on preferred stock related to warrants
issued -- -- -- --
Interest receivable on stock subscription
receivable -- -- (49,989) --
Warrants issued:
Preferred stock -- -- -- 324,324
Common stock -- -- -- 575,119
Debt -- -- -- 879,382
Deferred compensation expense related to stock
options issued below fair market value -- 53,745 -- (53,345)
Deferred compensation expense -- -- -- --
Restricted stock:
Issued and outstanding 22,434 21,255 -- --
Forfeited (19,597) (65,710) -- --
Amortization expense -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- (32,503)
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCES, December 31, 2002 13,110,477 4,465,832 (633,195) 26,632,299
Stock issued:
Cash 4,477,279 1,947,197 -- --
Exercise of warrants 258,790 262,030 -- --
Cashless exercise of warrants 141,529 -- -- --
Exercise of stock options 3,000 3,750 -- --
Reduction of stock subscriptions receivable -- (36,977) 36,977 --
for fees related to equity transactions
Acquisition of assets -- -- -- --
Conversion of accounts payable 85,000 120,690 -- --
Conversion of notes payable 654,202 762,000 -- --
Conversion of accrued interest 63,539 66,172 -- --
Conversion of preferred stock 66,666 40,000 -- --
Conversion of dividends payable 187,164 113,209 -- --
Redemption of preferred stock -- -- -- --
Intrinsic value of convertible feature -- -- -- --
Discount on preferred stock related to warrants -- -- -- --
issued
Stock subscriptions receivable:
Cash payments -- -- 105,806 --
Increase reserve -- -- 71,000 --
Interest collected -- -- 1,327 --
Warrants issued:
Preferred stock -- -- -- 58,314
Common stock -- -- -- 2,050,507
Debt -- -- -- 883,711
Services rendered -- -- -- 321,920
Deferred compensation expense related to stock
options issued below fair market value -- -- -- --
Deferred compensation expense -- -- -- --
Restricted stock:
Unamortized Accumulated
Compensation Deficit Total
----------- ----------- -----------
Conversion of preferred stock -- -- --
Redemption of preferred stock -- -- (84,000)
Discount on preferred stock related to warrants
issued -- (9,295) (357,262)
Interest receivable on stock subscription
receivable -- -- (49,989)
Warrants issued:
Preferred stock -- -- 324,324
Common stock -- -- 575,119
Debt -- -- 879,382
Deferred compensation expense related to stock
options issued below fair market value 4,307 -- 4,707
Deferred compensation expense 78,292 -- 78,292
Restricted stock:
Issued and outstanding (21,255) -- --
Forfeited 65,710 -- --
Amortization expense 400,000 -- 400,000
Embedded value with Pyramid Trading warrants -- -- (32,503)
Preferred stock dividends -- (153,578) (153,578)
Net loss -- (4,438,059) (4,438,059)
----------- ----------- -----------
BALANCES, December 31, 2002 (682,089) (29,715,999) 2,642,285
Stock issued:
Cash -- -- 1,973,197
Exercise of warrants -- -- 262,030
Cashless exercise of warrants -- -- --
Exercise of stock options -- -- 3,750
Reduction of stock subscriptions receivable -- -- --
for fees related to equity transactions
Acquisition of assets -- -- 76,500
Conversion of accounts payable -- -- 192,690
Conversion of notes payable -- -- 762,000
Conversion of accrued interest -- -- 66,172
Conversion of preferred stock -- -- --
Conversion of dividends payable -- -- 113,209
Redemption of preferred stock -- -- (93,100)
Intrinsic value of convertible feature -- (500) (27,202)
Discount on preferred stock related to warrants -- -- (58,314)
issued
Stock subscriptions receivable:
Cash payments -- -- 105,806
Increase reserve -- -- 71,000
Interest collected -- -- 1,327
Warrants issued:
Preferred stock -- -- 58,314
Common stock -- -- 2,050,507
Debt -- -- 883,711
Services rendered -- -- 321,920
Deferred compensation expense related to stock
options issued below fair market value 367 -- 367
Deferred compensation expense 47,114 -- 47,114
Restricted stock:
See accompanying notes to consolidated financial statements.
Page 8
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
Common Stock Stock Options
---------------------------- Subscriptions and
Shares Amount Receivable Warrants
------------ ------------ ------------- ------------
Forfeited (10,841) (17,398) -- --
Amortization expense -- -- -- --
Embedded value with Laurus warrants -- -- -- 568,121
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------- ------------
BALANCES, December 31, 2003 19,036,805 $ 7,726,505 $ (418,085) $ 30,514,872
============ ============ ============= ============
Unamortized Accumulated
Compensation Deficit Total
------------ ------------ ------------
Forfeited 17,398 -- --
Amortization expense 400,000 -- 400,000
Embedded value with Laurus warrants -- -- 568,121
Preferred stock dividends -- (248,689) (248,689)
Net loss -- (4,365,004) (4,365,004)
------------ ------------ ------------
BALANCES, December 31, 2003 $ (217,210) $(34,330,192) $ 5,807,711
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 9
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002, and 2001
- --------------------------------------------------------------------------------
2003 2002 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,365,004) $(4,438,059) $(5,325,552)
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation 948,796 981,985 1,019,581
Amortization 47,583 133,472 391,183
Amortization of deferred compensation 447,481 482,999 332,210
Amortization of original issue discount 405,248 1,103,314 797,169
Write off of notes receivable and investment 19,069 60,000 --
Reserve for stock subscriptions and interest receivable 71,000 -- --
Impairment reserve on property and equipment -- 119,480 --
Common stock issued for services -- 27,700 --
Loss on sale of property and equipment 79,394 31,412 846
Interest receivable on stock subscription receivable 1,327 (49,989) (21,619)
Warrants issued for services 321,920 -- 87,403
Warrants issued with debt conversion -- 183,903 --
Discount on preferred stock related to warrants -- -- (33,178)
Minority interest in subsidiary (33,366) -- --
Changes in operating assets and liabilities:
Accounts receivable, net 289,890 576,509 3,087,313
Inventories, net (509,762) 182,783 705,050
Other current assets 70,264 (205,483) 47,031
Other assets (143,101) 43,210 --
Wholesale line of credit (314,069) (34,424) (708,533)
Accounts payable and accrued liabilities 122,403 38,344 (978,479)
Deferred service obligations and revenue (39,321) (106,877) 97,465
----------- ----------- -----------
Net Cash Flows from Operating Activities (2,580,248) (869,721) (502,110)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 15,492 1,239,313 60,019
Purchases of property and equipment (526,936) (1,275,434) (1,884,945)
Payments received on notes receivable -- -- 59,084
Payments for investment in joint venture (64,878) -- --
Purchase of certificate of deposit (250,000) -- --
----------- ----------- -----------
Net Cash Flows from Investing Activities (826,322) (36,121) (1,765,842)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in checks issued in excess of cash in bank 147,398 -- --
Proceeds from long-term debt and warrants issued with long-term debt 1,659,726 1,172,064 1,919,650
Proceeds from note payable - stockholder 124,000 -- --
Payments received on stock subscriptions receivable 105,806 6,786 --
Payments on long-term debt (200,768) (131,605) (461,808)
Payments on note payable - stockholder (9,609) -- --
Payments on capital lease obligations (75,301) (937,828) (315,770)
Proceeds from issuance of stock and warrants 4,023,704 949,533 1,270,612
Redemption of preferred stock (93,100) (84,000) (538,199)
Preferred dividends (135,481) (153,578) (143,167)
Exercise of stock options 3,750 -- --
Exercise of warrants 262,030 -- --
----------- ----------- -----------
Net Cash Flows from Financing Activities 5,812,155 821,372 1,731,318
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,405,585 (84,470) (536,634)
CASH AND CASH EQUIVALENTS - Beginning of Year 540,375 624,845 1,161,479
----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,945,960 $ 540,375 $ 624,845
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 10
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Nature of Business
Vicom, Inc. (the Company) was incorporated in Minnesota in September 1975. The
Company provides voice, data and video services to business, government and
multi-dwelling customers. The Company's products and services are sold to
customers located throughout the United States of America.
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 years ended December 31, 2003, 2002, and 2001, the Company incurred net
losses of $4,365,004, $4,438,059 and $5,325,552, respectively. At December 31,
2003, the Company had an accumulated deficit of $34,330,192. 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.
5. Establish market for wireless internet services.
Principles of Consolidation
The consolidated financial statements include the accounts of Vicom,
Incorporated (Vicom) and its wholly owned subsidiaries, Corporate Technologies,
USA, Inc. (CTU), and Multiband, Inc. (Multiband) which provides voice, data and
video services to residential multi-dwelling units. In February 2003, the
Company formed a 50% owned subsidiary, Multiband USA, Inc. (MB USA) with Pace
Electronics, Inc. (PACE) a video wholesaler, and provides the same services as
Multiband). As part of the subsidiary agreement, the Company has the right to
elect two of the three board of directors and, 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 Multiband USA issued to PACE (Notes 2 and
17). Based on the Company's control of the subsidiary, the operating results
have been consolidated. All significant intercompany transactions and balances
have been eliminated in consolidation.
On January 1, 2004, the Company merged Multiband into CTU.
Revenues and Cost Recognition
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, and 5) MB USA user charges to
timeshares.
Page 11
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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. Product returns and customer discounts
are netted against revenues.
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 are recognized when the products are
delivered and installed and the customer has accepted the terms and has the
ability to fulfill the terms.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. Service revenues
accounted for less than 10% of total revenues for the years ended December 31,
2003, 2002 and 2001. 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 and MB USA 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.
Cash and Cash Equivalents
The Company includes as cash equivalents, investments with original maturities
of three months or less when purchased, which are readily convertible into known
amounts of cash. The Company deposits its cash in high credit quality financial
institutions. The balances, at times, may exceed federally insured limits.
Certificate of Deposit
The Company has a certificate of deposit which matures in October 2004.
Accounts Receivable
The Company reviews customers' credit history before extending unsecured credit
and establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers and other information. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. Invoices are due 30 days after
presentation. Accounts receivable over 30 days are considered past due. The
Company does not accrue interest on past due accounts receivable. Receivables
are written off only after all collection attempts have failed and are based on
individual credit evaluation and specific circumstances of the customer.
Accounts receivable are shown net of an allowance for uncollectible accounts of
$223,000 and $236,000 at December 31, 2003 and 2002, respectively. Accounts
receivable over 90 days were $433,000 and $331,000 at December 31, 2003 and
2002, respectively.
Page 12
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Inventories
Inventories, consisting principally of purchased telecommunication, networking
and computer equipment and parts, are stated at the lower of cost or market.
Cost is determined using an average cost method for telecommunication and
networking equipment and the first-in, first-out (FIFO) method for computer
equipment. Nonmonetary exchanges of inventory items with third parties are
recorded at the net book value of the items exchanged with no gains or losses
recognized.
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost.
Improvements are capitalized while repairs and maintenance costs are charged to
operations when incurred. Property and equipment is depreciated or amortized
using the straight-line method over estimated useful lives ranging from three to
seven years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of the assets.
Debt Issuance Costs
Debt issuance costs are amortized over the life of the loan of approximately
three years using the straight-line method, which approximates the interest
method.
Goodwilll and Other Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and was being amortized using the straight-line
method over ten years. Accumulated amortization was $782,278 at December 31,
2003 and 2002.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations",
effective for acquisitions initiated on or after July 1, 2001, and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations. SFAS No. 142
indicates that goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted SFAS No. 142 effective January 1, 2002. The Company
performed the required goodwill impairment test during the years ended December
31, 2003 and 2002.
Page 13
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
As part of compliance with this standard, the Company obtained an independent
appraisal to assess the fair value of its business units to determine whether
goodwill carried on its books was impaired and the extent of such impairment, if
any for the years ended December 31, 2003 and 2002. For the year ended December
31, 2003, the independent appraisal used the discounted future returns method to
measure the fair value of its business units rather than the income method which
was used for 2002. The method of valuation was changed due to the Company
changing its business model and historical results, which are used for the
income method, would not accurately evaluate the value of future economic
benefits. Under the discounted future returns method, future benefits over a
period of time are estimated and then discounted back to present value. For the
year ended December 31, 2002, the independent appraisal used the income method
to measure the fair value of its business units. Under the income method, value
is dependent on the present value of future economic benefits to be derived from
ownership. Future net cash flows available for distribution are discounted at
market-based rates of return to provide indications of value. The independent
appraiser used a discount factor of 16.8% and 18.35% for the years ended
December 31, 2003 and 2002, respectively. Based upon this independent appraisal,
the Company determined that its current goodwill balances were not impaired as
of December 31, 2003 and 2002.
Components of intangible assets are as follows:
December 31, 2003 December 31, 2002
------------------------------- -------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------- -------------- -------------- --------------
Intangible assets subject to amortization
Domain name $ 83,750 $ 39,083 $ 83,750 $ 22,333
Access contracts 60,000 13,334 -- --
Debt issuance costs 115,500 3,208 -- --
Customer cable lists 300,000 -- -- --
-------------- -------------- -------------- --------------
Total $ 559,250 $ 55,625 $ 83,750 $ 22,333
============== ============== ============== ==============
Intangible assets not subject to amortization
Goodwill $ 3,531,157 $ 782,278 $ 3,531,157 $ 782,278
============== ============== ============== ==============
Amortization of intangible assets was $33,291, $16,750 and $5,583 for the years
ended December 31, 2003, 2002 and 2001, respectively. Estimated amortization
expense of intangible assets for the years ending December 31, 2004, 2005, 2006,
2007, and 2008 is $135,250, $135,250, $113,125, $60,000 and $60,000,
respectively. The Company's loss attributable to common stockholders, excluding
goodwill amortization expense, for the years ended December 31, 2003, 2002 and
2001 would have been as follows had we adopted SFAS No. 142 on January 1, 2000:
2003 2002 2001
-------------- -------------- --------------
Loss attributable to common stockholders - as reported $ (4,613,693) $ (4,591,637) $ (5,758,221)
SFAS No. 142 amortization adjustment -- -- 345,600
Loss attributable to common stockholders - as adjusted (4,613,693) (4,591,637) (5,412,621)
Basic and diluted net loss per share - as reported (0.29) (0.39) (0.66)
Basic and diluted net loss per share - adjusted (0.29) (0.39) (0.62)
Page 14
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Intangible Assets
The Company amortizes a domain name acquired during the year ended December 31,
2001 over its estimated useful life of five years using the straight-line
method. The Company amortizes access contracts acquired during the year ended
December 31, 2003 over the estimate useful life of three years using the
straight-line method. The Company will amortize the customer cable lists
acquired on December 31, 2003 over five years beginning January 1, 2004.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were
$146,906, $104,788 and $230,629 for the years ended December 31, 2003, 2002 and
2001, respectively, and are included in selling, general and administrative
expenses in the consolidated statements of operations.
Shipping and Handling Costs
In accordance with Emerging Issues Task Force (EITF) Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs," the Company is including shipping and
handling revenues in revenues and shipping and handling costs in cost of
products and services.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement and income tax reporting bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance to the extent that
realization is not assured.
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. Options and
warrants issued to nonemployees are recorded at fair value, as required by SFAS
No. 123 "Accounting for Stock-Based Compensation," (SFAS No. 123), using the
Black Scholes pricing model. The Company has adopted the disclosure only
provision of SFAS No. 148, "Accounting for Stock-Based Compensation."
Pursuant to APB No. 25 and related interpretations, $447,481, $482,999 and
$332,210 of compensation cost has been recognized in the accompanying
consolidated statements of operations for the years ended December 31, 2003,
2002 and 2001, respectively. Had compensation cost been recognized based on the
fair values of options at the grant dates consistent with the provisions of SFAS
No. 123, the Company's loss attributable to common stockholders and basic and
diluted loss per common share would have increased to the following pro forma
amounts for the years ended December 31:
Page 15
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
2003 2002 2001
---------------- ---------------- ----------------
Loss attributable to common stockholders $ (4,613,693) $ (4,591,637) $ (5,758,221)
Pro forma loss attributable to common shares $ (5,363,381) $ (4,915,649) $ (6,131,692)
Basic and diluted net loss per share:
As reported $ (0.29) $ (0.39) $ (0.66)
Pro forma loss attributable to common shares $ (0.33) $ (0.42) $ (0.70)
Stock-based compensation:
As reported $ 447,481 $ 482,999 $ 332,210
Pro forma $ 749,688 $ 324,012 $ 373,471
In determining the compensation cost of the options granted during fiscal 2003,
2002, and 2001, 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:
2003 2002 2001
------------------ ------------------ -----------------
Risk-free interest rate 3.00% 4.40% 5.00%
Expected life of options granted 10 years 10 years 10 years
Expected volatility range 170% 170% 110%
Expected dividend yield 0% 0% 0%
Net Loss per Common Share
Basic net loss per common share is computed by dividing the loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the reporting period. Diluted net loss per common share is computed by
dividing loss attributable to common stockholders by the sum of the weighted
average number of common shares outstanding plus all additional common stock
that would have been outstanding if potentially dilutive common shares related
to common share equivalents (stock options, stock warrants, convertible
preferred shares, and issued but not outstanding restricted stock) had been
issued. All options, warrants, convertible preferred shares, and restricted
stock outstanding during the years ended December 31, 2003, 2002 and 2001 were
anti-dilutive.
Recently Issued Accounting Pronouncements
In April 2003, the FASB issued 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 derivative contains
a financing component and amends certain other existing pronouncements. The
adoption of SFAS No. 149 did not have a material effect on the Company's
consolidated financial statements.
Page 16
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
lnstruments 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 adoption of SFAS No.
150 did not have a material effect on the Company's consolidated financial
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 effect the Company's consolidated financial statements.
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" (FIN 46R). This standard
replaces FIN 46, Consolidation of Variable Interest Entities" that was issued in
January 2003. FIN 46R modifies or clarifies various provisions of FIN 46. FIN
46R addresses the consolidation of business enterprises of variable interest
entities (VIEs), as defined by FIN 46R. FIN 46R exempts certain entities from
its requirements and provides for special effective dates for entities that have
fully or partially applied FIN 46 prior to issuance of FIN 46R. Otherwise,
application of FIN 46R is required in financial statements of public entities
that have interest in structures commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application by the Company
for all other types of VIEs is required in financial statements for periods
ending no later than the quarter ended January 31, 2005. The Company does not
expect the adoption of FIN 46R to have a material effect on the Company's
consolidated financial statements.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant management estimates relate to the allowances for doubtful accounts,
inventory obsolescence, and stock subscriptions and interest receivable,
property and equipment estimated useful lives, goodwill carrying value and the
valuation of deferred income tax assets.
Financial Instruments
The carrying amounts for all financial instruments approximates fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments. The fair value of capital lease obligations, note
payable-stockholder and long-term debt approximates the carrying amounts based
upon the Company's expected borrowing rate for debt with similar remaining
maturities and comparable risk.
Page 17
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Reclassifications
Certain accounts in the prior years' consolidated financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year consolidated financial statements. These reclassifications had no
effect on net loss or stockholders' equity.
- --------------------------------------------------------------------------------
NOTE 2 - BUSINESS ACQUISITIONS
- --------------------------------------------------------------------------------
During February 2003, the Company incorporated a new subsidiary, MB USA. This
subsidiary was formed as a 50% owned joint venture agreement with PACE (Note 1).
The reason for the joint venture with PACE is to continue to expand the
Company's services related to multi-users of voice, data and video services.
On April 25, 2003, the Company, through MB USA, purchased certain video
equipment assets, related rights to video subscribers and rights of access
agreements from Suncoast Automation, Inc. (Suncoast). The purchase price was
allocated to the acquired assets and assumed certain liabilities based on the
estimated fair values as of the acquisition date. The purchase price was
allocated to assets and liabilities acquired as follows:
Property and equipment $ 504,224
Access contracts 60,000
Capital lease obligations (54,224)
-----------------
Net purchase price $ 510,000
=================
The net purchase price of $510,000 consisted entirely of cash paid. The
consolidated results of operations on an unaudited pro forma basis are not
presented separately as the results do not differ significantly from historical
amounts presented herein.
On December 31, 2003, the Company purchased certain customer lists from Florida
Cable, Inc. (Florida Cable) for $300,000 which was paid to Florida Cable on
January 2, 2004. In addition, the Company agreed to lease from Florida Cable
equipment used in the operation of the cable television systems for six months
for $1.00. After the six month lease period has expired, the Company has agreed
to purchase the equipment for $165,000. If the Company fails to pay the $165,000
in full, all rights and title of the customer lists mentioned above will revert
back to Florida Cable. At December 31, 2003, the Company has recorded the
$165,000 liability associated with the contingent purchase of equipment.
Page 18
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- -------------------------------------------------------------------------------
NOTE 3 - PROPERTY AND EQUIPMENT
- -------------------------------------------------------------------------------
Property and equipment consisted of the following at December 31:
2003 2002
----------- -----------
Leasehold improvements $ 764,064 $ 732,931
Property and equipment - owned 5,318,243 4,230,560
Property and equipment under capital lease obligations
428,749 456,124
----------- -----------
6,511,056 5,419,615
Less accumulated depreciation and amortization (2,921,352) (2,170,642)
----------- -----------
$ 3,589,704 $ 3,248,973
=========== ===========
Depreciation and amortization expense on property and equipment was $948,796,
$981,985 and $1,019,581 for the years ended December 31, 2003, 2002 and 2001,
respectively.
- -------------------------------------------------------------------------------
NOTE 4 - OTHER ASSETS
- -------------------------------------------------------------------------------
Other assets consisted of the following at December 31:
2003 2002
-------- --------
Other current assets:
Current portion of notes receivable $ 2,983 $ 52,977
Prepaid expenses and other 93,567 173,797
-------- --------
Total other current assets $ 96,550 $226,774
======== ========
Noncurrent assets:
Debt issuance costs, net $112,292 $ --
Access contracts, net 46,666 --
Domain name, net 44,667 61,417
Customer cable lists 300,000 --
Prepaid expenses and other 136,236 109,236
-------- --------
Total other assets $639,861 $170,653
======== ========
At December 31, 2003 and 2002, the Company had notes receivable of $2,983 and
$52,977, respectively. The remaining note was due in December 2003 with interest
of 12% and was unsecured.
Page 19
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- -------------------------------------------------------------------------------
NOTE 5 - ACCRUED LIABILITIES
- -------------------------------------------------------------------------------
Accrued liabilities consisted of the following at December 31:
2003 2002
---------- ----------
Payroll and related taxes $ 514,516 $ 398,415
Accrued preferred stock dividends 277,928 138,288
Payable - Florida Cable 465,000 --
Other 202,261 177,776
---------- ----------
$1,459,705 $ 714,479
========== ==========
- -------------------------------------------------------------------------------
NOTE 6 - WHOLESALE LINE OF CREDIT
- -------------------------------------------------------------------------------
At December 31, 2003, the Company has a $1,750,000 wholesale line of credit
agreement with a financial institution, which expires on December 1, 2004, for
the purchase of certain resale merchandise from certain suppliers. Interest is
generally at 0% (if paid within certain terms of up to 45 days), and the
wholesale line of credit is collateralized by the accounts receivable up to
$300,000 as well as all of the inventory financed and the $1,450,000 letters of
credit. The wholesale line of credit agreement is an agreement between the
Company, financial institution, and certain vendors of the Company. The Company
receives no funds from the financial institution, but pays the financial
institution rather than certain vendors. The balance outstanding was $976,314 at
December 31, 2003.
At December 31, 2002, the Company had a $1,450,000 wholesale line of credit
agreement with a different financial institution, which expired with 30 day
notice by either party, for the purchase of certain resale merchandise from
certain suppliers. Interest was generally at 0% (if paid within certain terms,
generally 30 days), and the wholesale line of credit was collateralized by the
related inventories, accounts receivable and the $1,450,000 letters of credit.
The wholesale line of credit agreement was an agreement between the Company,
financial institution, and certain vendors of the Company. The Company received
no funds from the financial institution, but paid the financial institution
rather than certain vendors The balance outstanding was $1,290,383 at December
31, 2002.
Page 20
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 7 - LONG-TERM DEBT
- --------------------------------------------------------------------------------
Long-term debt consisted of the following at December 31:
2003 2002
------------- -------------
Note payable - Pyramid Trading Limited Partnership, net of unamortized
original issue discount and beneficial conversion of note payable into
common stock of $59,557 and $59,250 at December 31, 2003 and 2002,
respectively, quarterly interest payments at 10% (effective interest rate
of 54.2%) through May 2004, monthly principal payments of $40,000, due
May 2004, unsecured. $ 140,443 $ 902,971
Debenture payable - Convergent Capital Partners I, L.P., net of original
issue discount of $432,504 and $595,295 at December 31, 2003 and 2002,
respectively, monthly interest only payments through July 2005, monthly
installments of $102,273 including interest at 14% (effective interest
rate 18.4%) thereafter, due May 2007, secured by substantially all of the
assets of the Company. 1,967,496 1,804,705
Demand debenture payable - Convergent Capital Partners I, L.P., monthly
interest only payments at 14% through May 2007, due on demand or May
2007, secured by substantially all of the assets of the Company. 100,000 100,000
Note payable - Lexus Tower Limited Partnership, monthly installments of
$5,987 including interest at 8.4%, due November 2010, secured by certain
assets of the Company. 379,332 418,872
Note payable - Laurus Master Fund LTD, net of unamortized original issue
discount and beneficial conversion of note payable into common stock of
$1,208,847 at December 31, 2003, monthly installments of $45,455
beginning in March 2004, including interest at prime rate plus 3% but not
less than 7% (7% at December 31, 2003) (effective interest rate of
174.6%), due through November 2006, secured by certain assets of the
Company. 291,153 --
Notes payable, interest at 5.25% to 20% due through May
2007, secured by certain assets of the Company. 207,545 209,047
------------- -------------
Total long-term debt 3,085,969 3,435,595
Less: current portion (998,813) (321,589)
------------- -------------
Long-term debt, net $ 2,087,156 $ 3,114,006
============= =============
Page 21
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Future maturities of long-term debt are as follows for the years ending December
31:
2004 $ 998,813
2005 1,113,898
2006 1,838,008
2007 650,923
2008 59,072
Thereafter 126,163
------------------
Total future minimum payments 4,786,877
Less: original issue discounts and beneficial
conversion feature (1,700,908)
------------------
Total long-term debt 3,085,969
Less: current portion (998,813)
------------------
Long-term debt, net $ 2,087,156
==================
In 2000, the Company entered into a $2,250,000 debenture agreement with
Convergent Capital Partners I, L.P., with interest at 14% payable monthly and
monthly payments of $102,273 from August 1, 2003 through June 1, 2005. The
timing of repayment was changed to August 2005 through May 2007 as part of the
amendment made in 2002. The debenture is secured by substantially all Company
assets. In connection with this debenture, the Company issued 150,000 five-year
warrants to purchase common stock at prices ranging from $1.50 to $5.20 per
share. The proceeds of $2,250,000 were allocated between the debenture and the
warrant based on the relative fair values of the securities at the time of
issuance. The warrants were valued using the Black Scholes pricing model. The
resulting original issue discount, the fair value of the warrants, is being
amortized over the life of the debenture using the straight-line method, which
approximates the interest method.
In 2002, the Company amended the debenture agreement with Convergent Capital
Partners I, L.P., and borrowed an additional $150,000 with interest at 14%
payable monthly and monthly principal payments from August 2005 through May
2007. In connection with this debenture, the Company issued an additional
500,000 seven-year warrants to purchase common stock at $1.10 per share. The
additional warrants were valued using the Black Scholes pricing model. The
resulting original issue discount, the fair value of the warrants, is being
amortized over the life of the debenture using the straight-line method, which
approximates the interest method. The Company was in violation of certain
covenants of this debt agreement. A waiver was obtained from the lender. The
debenture payable may be redeemed at the Company's option at a premium declining
ratably thereafter to par value in April 2005.
In January 2001, the Company borrowed $1,500,000 from Pyramid Trading Limited
Partnership and issued a five-year warrant to the lender to purchase 375,000
common shares at $4.00 per share through January 2003. The debt is also
convertible into common stock of the Company at a conversion rate of $4.75 per
share through January 2003. The proceeds of $1,500,000 were allocated between
the note and the fair value of the warrants using the Black Scholes pricing
model. An additional 375,000 five-year warrants were issued in April 2002 and
the fair value of the warrants was expensed as additional interest expense as of
December 31, 2002. The resulting original issue discount, the fair value of the
warrants, and the beneficial conversion of the note payable into common stock as
defined in EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments"(EITF 00-27), is being amortized over the life of the note using the
straight-line method, which approximates the interest method.
Page 22
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
In February 2003, the Company reached an agreement to convert $962,000 of its
note payable with Pyramid Trading Limited Partnership to equity and to extend
the due date to May 2004. 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 five-year
warrants at an exercise price of $1.00 with the note payable extension. These
warrants, valued at $208,447 using the Black Scholes pricing model, are being
expensed over the remaining term of the note agreement. During the year ended
December 31, 2003, the Company converted principal and accrued interest totaling
$828,172 into 717,741 shares of common stock.
During 2002, the Company borrowed $600,000 and issued a five-year warrant to one
of its directors to purchase 120,000 common shares at $1.50 per share. The
proceeds of $600,000 were allocated between the note and the fair value of the
warrants using the Black Scholes pricing model. The resulting original issue
discount, the fair value of the warrants, was being amortized over the life of
the note using the straight-line method which approximates the interest method.
In December 2002, the lender converted the note payable into 60,000 shares of
Class E convertible preferred stock. The remaining unamortized original issue
discount amount was expensed at the time of the conversion.
In November 2003, the Company borrowed $1,500,000 and issued a three-year
warrant to the lender to purchase 535,000 common shares at $2.21 per share
through November 2006. The debt is also convertible into common stock of the
Company at a conversion rate of $1.40 per share through November 2006. The
proceeds of $1,500,000 were allocated between the note, the intrinsic value of
the conversion option, and the fair value of the warrants using the Black
Scholes pricing model. The resulting original issue discount, the fair value of
the warrant, and the beneficial conversion of the note payable into common stock
as defined in EITF 00-27 is being amortized over the life of the note using the
straight-line method, which approximates the interest method.
Interest expense related to long-term debt with related parties for the years
ended December 31, 2003, 2002, and 2001 was approximately $0, $228,000 and
$3,000, respectively.
- --------------------------------------------------------------------------------
NOTE 8 - CAPITAL LEASE OBLIGATIONS
- --------------------------------------------------------------------------------
The Company has lease financing facilities for property, equipment and leasehold
improvements. Leases outstanding under these agreements bear interest at an
average rate of 8.25% and expires through October 2007. The obligations are
secured by the property under lease. Total cost and accumulated amortization of
the leased equipment was $428,749 and $221,432 at December 31, 2003 and $456,124
and $219,332 at December 31, 2002. Amortization expense related to these
obligations is included in depreciation expense.
Page 23
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Future minimum capital lease payments are as follows for the years ending
December 31:
2004 $ 69,556
2005 69,556
2006 56,457
2007 34,610
------------------
Total 230,179
Less: amounts representing interest (32,342)
------------------
Present value of future minimum lease payments 197,837
Less: current portion (54,939)
------------------
Capital lease obligations, net of current portion $ 142,898
==================
- --------------------------------------------------------------------------------
NOTE 9 - NOTE PAYABLE - STOCKHOLDER
- --------------------------------------------------------------------------------
On June 30, 2003, the Company borrowed $124,000 from a stockholder of the
Company with monthly payments of $5,600 including interest at 7.85%, due in June
2005, and unsecured. The balance due at December 31, 2003 is $114,391 of which
$81,554 is due in 2004 and $32,837 is due in 2005. Interest expense related to
this note payable - stockholder for the year ended December 31, 2003 was
approximately $1,600.
- --------------------------------------------------------------------------------
NOTE 10 - STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Capital Stock Authorized
The articles of incorporation authorize the Company to issue 50,000,000 shares
of no par capital stock. Authorization to individual classes of stock are
determined by a Board of Directors resolution. The authorized classes of stock
at December 31, 2003 are the following: 275,000 shares of Class A cumulative
convertible preferred stock, 60,000 shares of Class B cumulative convertible
preferred stock, 250,000 shares of Class C cumulative convertible preferred
stock, 250,000 shares of Class D cumulative convertible preferred stock, and
400,000 shares of Class E cumulative convertible preferred stock.
Page 24
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Cumulative Convertible Preferred Stock
Dividends on Class A, Class B, Class C, Class D, and Class E cumulative
convertible preferred stock are cumulative and payable quarterly at 8%, 10%,
10%, 14%, and 15% per annum, respectively. Cumulative convertible preferred
stock can be converted into common shares at any time as follows: Class A and
Class B - five shares, Class C - two shares, Class D - two and one-half shares,
and Class E - eight shares. The intrinsic value of any beneficial conversion
option is recorded as preferred stock dividends at the time of preferred stock
issuance. Dividends on Class B preferred are cumulative and payable monthly at
10% per annum. The dividends are based on $10 per share for all preferred
shares. The Class B preferred was offered to certain note payable holders at a
conversion of $10 per Class B preferred share. All preferred stock is
non-voting. Warrants to purchase shares of the Company's common stock were given
with the issuance of Class A, Class B, Class D, and Class E preferred stock and
were valued at fair value using the Black Scholes pricing model. The Company
may, but is not obligated to, redeem the preferred stock at $10.50 per share for
Class A and Class B and $10.00 per share for Class C, Class D, and Class E,
whenever the Company's common stock price exceeds certain defined criteria as
defined in the preferred stock agreements. Upon the Company's call for
redemption, the holders of the preferred stock called for redemption have the
option to convert each preferred share into shares of the Company's common
stock. Holders of preferred stock cannot require the Company to redeem their
shares. The liquidation preference is the same as the redemption price for each
class of preferred stock.
Stock Compensation Plans
The Company has a 1999 Stock Compensation Plan, which permits the issuance of
restricted stock and stock options to key employees and agents. All outstanding
incentive stock options granted under the prior 1997 Stock Options Plan continue
until all agreements have expired. There are 2,500,000 shares of common stock
reserved for issuance through restricted stock, non-qualified stock option
awards and incentive stock option awards. The Plans also provide that the term
of each award be determined by the Board of Directors. Under the Plans, the
exercise price of incentive stock options may not be less than the fair market
value of the stock on the award date, and the options are exercisable for a
period not to exceed ten years from award date.
The Company also has a 2000 Non-employee Director Stock Compensation Plan, which
permits the issuance of stock options for 300,000 shares of common stock to
non-employee directors. The exercise price of the stock options is the fair
market value of the stock on the award date, and the options are exercisable for
a period not to exceed ten years from award date.
Employee Stock Purchase Plan
The Company has a 2000 Employee Stock Purchase Plan, which allows for the sale
of 400,000 shares of Company common stock to qualified employees. At December
31, 2003, no shares were issued under the Plan.
Page 25
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Stock Subscriptions Receivable
The Company has stock subscriptions receivable including interest receivable
totaling $418,085 and $633,195 due to the Company at December 31, 2003 and 2002,
respectively, from the issuance of common stock. Monthly interest only payments
at interest ranging from 9% to 10% were required through December 2003 at which
time any unpaid stock subscription receivable was due. The receivables are
secured by the common stock issued. At December 31, 2003, the Company has
reserved $71,000 related to stock subscriptions and interest receivable deemed
to be uncollectible. The Company does not record interest receivable on the
outstanding receivable balance once they have determined it to be uncollectible.
Restricted Stock
The Company awards restricted common shares to selected employees. Recipients
are not required to provide any consideration other than services. Company share
awards are subject to certain restrictions on transfer, and all or part of the
shares awarded may be subject to forfeiture upon the occurrence of certain
events, including employment termination. The intrinsic value at the date of
grant related to the shares awarded is generally amortized over three years, the
vesting term of the awards. Compensation expense recorded during the years ended
December 31, 2003, 2002, and 2001 in connection with the amortization of the
award cost was $47,119, $78,292 and $92,749, respectively.
Restricted stock activity is as follows for the years ended December 31:
2003 2002 2001
----------------- ----------------- -----------------
Outstanding, January 1 45,066 75,337 113,829
Issued -- 22,434 83,000
Vested (17,204) (33,107) (38,781)
Forfeited (10,843) (19,598) (82,711)
----------------- ----------------- -----------------
Outstanding, December 31 17,019 45,066 75,337
================= ================= =================
Stock Options
Stock option activity is as follows for the years ended December 31:
Options Weighted-Average Exercise Price
-------------------------------------------- ----------------------------------------
2003 2002 2001 2003 2002 2001
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, January 1 1,093,157 1,050,024 1,145,507 $ 2.45 $ 2.55 $ 2.31
Granted 747,775 249,300 839,500 1.35 0.96 1.20
Exercised (3,000) -- (615,933) 1.25 -- 0.51
Forfeited (180,500) (206,167) (319,050) 4.49 1.86 2.11
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, December 31 1,657,432 1,093,157 1,050,024 $ 1.81 $ 2.45 $ 2.55
============= ============ ============ ============ =========== ===========
The weighted-average grant-date fair value of options granted during the years
ended December 31, 2003, 2002, and 2001 was $1.20, $0.86 and $2.94,
respectively.
Page 26
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Options outstanding and exercisable as of December 31, 2003, are as follows:
Outstanding Exercisable
---------------------------------------------------- -------------------------------------
Weighted - Average
----------------------------
Remaining Weighted-
Range of Exercise Exercise Contractual Average
Price Options Price Life-Years Options Exercise Price
- --------------------------- ----------------- ---------- ------------- ----------------- ---------------
$.60 255,000 $ 0.60 6.43 255,000 $ 0.60
$.93 to $1.38 409,800 1.15 9.18 256,433 1.24
$1.43 to $2.08 688,766 1.67 7.90 620,658 1.68
$2.50 to $2.88 140,000 2.67 6.81 140,000 2.67
$3.98 to $5.38 109,666 4.48 6.67 92,166 4.57
$6.00 to $6.75 54,200 6.60 6.24 46,900 6.57
----------------- ---------- ------------- ----------------- --------------
$.60 to $6.75 1,657,432 $ 1.81 7.76 1,411,157 $ 1.85
================= ========== ============= ================= ==============
Stock Warrants
Stock warrants activity is as follows for the years ended December 31:
Outstanding Weighted - Average Exercise Price
-------------------------------------------- -----------------------------------------
2003 2002 2001 2003 2002 2001
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, January 1 4,327,396 9,564,450 8,093,464 $ 2.05 $ 2.37 $ 8.71
Granted 3,687,447 2,546,690 9,483,530 1.53 1.46 2.32
Exercised (556,881) -- -- 1.53 -- --
Forfeited (36,088) (7,783,744) (8,012,544) 3.59 2.25 8.75
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, December 31 7,421,874 4,327,396 9,564,450 $ 1.83 $ 2.05 $ 2.37
============= ============ ============ ============ =========== ===========
The weighted-average grant-date fair value of warrants granted during the years
ended December 31, 2003, 2002 and 2001 was $1.10, $1.00 and $1.79, respectively.
Warrants outstanding and exercisable as of December 31, 2003, are as follows:
Weighted - Average
----------------------------------
Remaining
Range of Exercise Exercise Price Contractual
Prices Warrants Life-Years
- ------------------------ ------------------- --------------- ----------------
$.85 to $1.25 2,465,997 $ 1.02 4.13
$1.50 to $2.25 3,946,432 1.90 2.49
$2.40 to $3.56 501,025 2.52 3.15
$4.00 to $5.20 508,420 4.16 2.45
----------------- ------------- --------------
$.85 to $5.20 7,421,874 $ 1.83 3.08
================= ============= ==============
Page 27
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Stock warrants issued for the years ended December 31 were awarded for:
2003 2002 2001
----------------- ----------------- -----------------
Warrant repricing -- -- 8,012,544
Common stock 1,812,259 728,357 441,642
Services rendered 941,288 103,333 455,756
Preferred stock 145,900 420,000 48,588
Debt issuance and guarantees 788,000 1,295,000 525,000
----------------- ----------------- -----------------
3,687,447 2,546,690 9,483,530
================= ================= =================
During the year ended December 31, 2003, 298,091 warrants were exercised with a
weighted average exercise price of $1.05. Based on the warrant agreements, these
warrants were exercised in lieu of cash with the warrant holder receiving
141,529 shares of common stock.
During the year ended December 31, 2003, the Company issued 400,000 five-year
warrants with a weighted-average exercise price of $0.85 for services related to
investor relations. These warrants were valued at $321,920 using the Black
Scholes pricing model. During 2003, the Company issued 541,288 five-year
warrants with a weighted-average exercise price of $1.02 for services related to
equity financing.
During the year ended December 31, 2002, the Company issued 103,333 three-to
five-year warrants with a weighted-average exercise price of $1.56 for services
related to equity financing.
During the year ended December 31, 2001, the Company issued 455,756 one-to
five-year warrants with a weighted-average exercise price of $2.16 for services
related to equity financing. During 2001, the Company issued 48,588 two-to
five-year warrants with a weighted-average exercise price of $3.69 for services
related to preferred stock financing which were valued at $87,403 using the
Black Scholes pricing model.
On August 2, 2001, the Company approved the repricing of all outstanding
warrants issued at $8.75 to $2.25. The expiration date of these warrants was
extended to October 11, 2002. The Company recorded $6,919,692 to the accumulated
deficit related to the change in warrant value using the Black Scholes pricing
model.
All warrants were recorded at fair value using the Black Scholes pricing model.
The fair value of stock warrants is the estimated present value at grant date
using the Black Scholes pricing model with the following weighted-average
assumptions:
2003 2002 2001
------------------ ------------------ -----------------
Risk-free interest rate 2.37% 3.90% 5.30%
Expected life 3.4 years 4.5 years 4.5 years
Expected volatility 170% 151.3% 94.3%
Expected dividend rate 0% 0% 0%
Page 28
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- -------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
- -------------------------------------------------------------------------------
The Company has generated federal and state net operating losses of
approximately $23,469,000 and $10,382,000, respectively, which, if not used,
will begin to expire in 2004. Future changes in the ownership of the Company may
place limitations on the use of these net operating loss carryforwards.
The Company has recorded a full valuation allowance against its deferred tax
asset due to the uncertainty of realizing the related benefits. The change in
the valuation allowance was $1,722,000, $402,000, and $1,757,200 for the years
ended December 31, 2003, 2002 and 2001, respectively.
Components of net deferred income taxes are as follows at December 31:
2003 2002
----------- -----------
Deferred income tax assets:
Net operating loss carryforwards $ 9,387,000 $ 7,633,000
Goodwill 65,000 90,000
Asset valuation reserves 285,000 231,000
Accrued liabilities 55,000 69,000
----------- -----------
9,792,000 8,023,000
Less valuation allowance (9,674,000) (7,952,000)
----------- -----------
118,000 71,000
Deferred income tax liabilities - depreciation (118,000) (71,000)
----------- -----------
Net deferred income tax assets $ -- $ --
=========== ===========
Income tax computed at the federal statutory rate reconciled to the effective
tax rate is as follows for the years ended December 31:
2003 2002 2001
------ ------ ------
Federal statutory tax rate benefits (35.0)% (35.0)% (35.0)%
State tax, net of federal benefit (5.0) (5.0) (5.0)
Change in valuation allowance 39.6 36.1 33.0
Other 0.4 3.9 7.0
------ ------ ------
Effective tax rate 0.0% 0.0% 0.0 %
====== ====== ======
Page 29
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
The Company has the following net operating loss carryforwards at December 31,
2003, for income tax purposes:
Federal Net State Net
Year of Expiration Operating Loss Operating
------------------ -------------- ---------
Loss
----
2004 $ 1,050,000 $ 1,050,000
2005 599,000 599,000
2007 501,000 501,000
2008 59,000 57,000
2009 22,000 22,000
2011 595,000 575,000
2012 25,000 --
2018 1,122,000 1,096,000
2019 1,585,000 992,000
2020 4,839,000 1,587,000
2021 4,726,000 1,435,000
2022 4,353,000 1,230,000
2023 3,993,000 1,238,000
----------- -----------
$23,469,000 $10,382,000
=========== ===========
Under Internal Revenue Code Section 382, utilization of federal losses expiring
prior to 2019 are limited to approximately $375,000 each year.
Page 30
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 12 - SUPPLEMENTAL CASH FLOWS INFORMATION
- --------------------------------------------------------------------------------
2003 2002 2001
---------- ---------- ----------
Cash paid for interest $ 436,061 $ 512,167 $1,286,155
Noncash investing and financing transactions:
Repricing of warrants -- -- 6,919,692
Stock options issued below fair market value -- -- 1,244,250
Stock options issued for commissions earned -- 53,745 --
Stock subscriptions receivable received for
stock -- -- 610,000
Issuance of preferred and common stock for
acquisition of assets 76,500 18,590 386,000
Current liabilities converted to stock 192,690 59,755 225,613
Common stock issued for guarantee of debt -- 14,750 120,000
Issuance of stock for intangible asset -- -- 83,750
Purchase of customer lists and equipment
through payable to Florida Cable 465,000 -- --
Notes payable and accrued interest converted
to common and preferred stock 828,172 1,164,882 227,009
Capitalized lease equipment purchases -- 174,986 --
Conversion of preferred stock to common stock 40,000 150,000 528,742
Conversion of preferred stock into note payable -- 400,000 --
Reduction of stock subscription receivable
related to commission earned on equity
transactions 36,977 40,563 --
Warrants issued related to modifications of
long-term debt 208,447 528,650 --
Conversion of preferred stock dividends into
common stock 113,209 -- --
- --------------------------------------------------------------------------------
NOTE 13 - RETIREMENT SAVINGS PLAN
- --------------------------------------------------------------------------------
The Company has 401(k) profit sharing plan covering substantially all full-time
employees. Employee contributions are limited to the maximum amount allowable by
the Internal Revenue Code. The Company made no discretionary contributions for
any of the years presented.
Page 31
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- -------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------------------------------
Operating leases
Office space was leased from an LLC which an officer of the Company was partial
owner of through August 2003. In addition to basic monthly rents ranging from
$16,640 to $17,653, the Company paid building maintenance costs, real estate
taxes and assessments. During 2003, the Company converted $72,000 of accrued
rent into 7,200 shares of Class C preferred stock. At December 31, 2003 and
2002, accrued rent of $56,560 and $141,060, respectively, was owed to this
related party. In August 2003, the Company signed a new lease agreement with an
unrelated party disclosed below.
The Company has various other operating leases for its corporate office space,
vehicles and various equipment with lease terms expiring in August 2017. The
monthly base rents range from $69,736 to $83,325, net of payments received from
subleases. In July 2003, the Company entered into an agreement to sublease a
portion of their office space through August 2008 for approximately $5,000 per
month.The leases contain provisions for payments of real estate taxes, insurance
and common area costs.
Total rent expense for the years ended December 31, 2003, 2002 and 2001
including common area costs and real estate taxes was approximately $578,000,
$566,000 and $689,000, respectively. Rent expense with related parties for
December 31, 2003, 2002, 2001 was approximately $59,000, $462,000 and $561,000,
respectively.
Future minimum rental payments, net of payments received from subleases, are as
follows for the years ending December 31:
Year Amount
----- -----------------
2004 $ 534,000
2005 512,000
2006 516,000
2007 541,000
2008 587,000
Thereafter 4,509,000
-----------------
$ 7,199,000
=================
Legal proceedings
The Company is involved in legal actions in the ordinary course of its business.
Although the outcome of any such legal actions cannot be predicted, management
believes that there is no pending legal proceedings against or involving the
Company for which the outcome is likely to have a material adverse effect upon
the Company's consolidated financial position, results of operations, or cash
flows.
Page 32
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
- --------------------------------------------------------------------------------
NOTE 15 - SIGNIFICANT CUSTOMERS AND SUPPLIERS
- --------------------------------------------------------------------------------
One customer represented approximately 16%, 13%, and 15% of revenues for the
years ended December 31, 2003, 2002, and 2001, respectively.
The Company purchased materials from major suppliers approximately as follows
for the years ended December 31:
Supplier
----------------------------------------------
A B C
------------- -------------- -------------
2003 61% 4% 8%
2002 58% 6% 12%
2001 38% 19% 12%
The Company had revenues from companies that are associated with a director, who
was elected to the board of directors during 2003, of approximately $1,124,000,
$636,000, and $0 for the years ended December 31, 2003, 2002, and 2001,
respectively. In addition, the Company had accounts receivable outstanding from
these companies of approximately $142,000, $171,000, and $0 at December 31,
2003, 2002, and 2001, respectively.
- --------------------------------------------------------------------------------
NOTE 16 - BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
The CTU subsidiary functions as one segment for integrated voice, video, data
networking and computer technologies products and services, under one management
structure, with one management financial reporting system, and having one
unified marketing name.
With the start up of Multiband in February 2000, the Company added the segment
providing voice, data, and video services to residential multi-dwelling units.
MB USA's business model is similar to Multiband.
Segment disclosures are as follows:
Multiband/
Vicom CTU MB USA Total
---------- -------- ---------- ----------
Year Ended December 31, 2003:
Revenues $ -- $ 21,199,303 $ 1,441,118 $ 22,640,421
Loss from operations (1,941,271) (339,369) (1,215,667) (3,496,307)
Identifiable assets 5,691,867 5,254,221 2,956,797 13,902,885
Depreciation and amortization 45,789 432,364 518,226 996,379
Capital expenditures 13,342 424,047 89,547 526,936
Page 33
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Vicom CTU Multiband Total
--------- --------- --------- ----------
Year Ended December 31, 2002:
Revenues $ -- $ 23,963,748 $ 577,221 $ 24,540,969
Income (loss) from operations (1,810,241) 172,689 (1,195,521) (2,833,073)
Identifiable assets 3,151,891 5,282,233 1,913,192 10,347,316
Depreciation and amortization 142,426 482,390 490,641 1,115,457
Capital expenditures 2,126 814,464 458,844 1,275,434
Vicom CTU Multiband Total
--------- --------- --------- ----------
Year Ended December 31, 2001:
Revenues $ -- $ 32,011,187 $ 249,590 $ 32,260,777
Loss from operations (2,079,592) (299,553) (1,618,003) (3,997,148)
Identifiable assets 3,171,968 5,786,796 3,250,917 12,209,681
Depreciation and amortization 418,655 550,075 442,034 1,410,764
Capital expenditures 6,900 491,532 1,386,513 1,884,945
Segment disclosures are provided by entity to the extent practicable under the
Company's accounting system.
- --------------------------------------------------------------------------------
NOTE 17 - SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
On January 1, 2004, the Company entered into a stock purchase agreement with
URON, Inc. (URON) to purchase all of the outstanding capital stock of URON for a
total purchase price of 350,000 shares of the Company's common stock to be
issued in installments as follows: a) 180,000 shares issued at closing, b)
170,000 shares held in escrow. The common shares issued to URON were valued at
fair market value on the date of the agreement which was $1.31 per share for a
purchase price of $458,500. The terms of the escrow are as follows: 50,000
shares to be released upon URON providing the Company with documentation
satisfactory to the Company of a release from a certain vendor or any related
entity of all liabilities incurred to a certain vendor by URON; 120,000 shares
to be released in 40,000 share increments upon the Company's receipt of
distributable gross profits, generated by certain customers, in increments of
$75,000 cash. The escrow shall be terminated 24 months after the date of the
agreement and any shares not released will be rescinded to the Company. The
Company must register all shares issued within one year from the date of
issuance. The reason for the purchase of URON is to continue to expand the
Company's services related to voice, data and video services. The Company is
acquiring the customer lists of URON and will be amortizing them over their
estimated useful lives of three years.
In January 2004, the Company purchased the remaining 50% ownership of MB USA
from Pace, by issuing 30,000 shares of common stock valued at $39,300 (Note 2).
Page 34
REPORT OF INDEPENDENT AUDITORS ON SUPPLEMENTARY INFORMATION
To Stockholders, Board of Directors, and Audit Committee
Vicom, Incorporated and subsidiaries
New Hope, Minnesota
Our report on our audits of the basic consolidated financial statements of
Vicom, Incorporated and subsidiaries for the years ended December 31, 2003, 2002
and 2001 appears on page 1. The audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
supplementary information on page 36 is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
February 16, 2004
Page 35
VICOM, INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------- ----------------- ---------------- --------------------- ---------------
Additions
Charged to
Balance at Costs and Balance at End
Description Beginning of Year Expenses Deductions of Year
- ----------------------------------------------------- ----------------- ---------------- --------------------- ---------------
ALLOWANCE DEDUCTED FROM ASSET TO WHICH IT APPLIES
Allowance for doubtful accounts receivable:
2003 $ 236,000 $ -- $ 13,000 (A) $ 223,000
2002 178,000 58,000 -- 236,000
2001 159,000 141,000 122,000 (A) 178,000
Notes receivable:
2003 30,000 -- 30,000 (A) --
2002 -- 30,000 -- 30,000
2001 -- -- -- --
Stock subscriptions and interest receivable
2003 -- 71,000 -- 71,000
2002 -- -- -- --
2001 -- -- -- --
(A) Write-off uncollectible receivables
Page 36
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 9A.
CONTROLS AND PROCEDURES.
The Company, under the supervision and with the participation of its
management, including the Chief Executive Officer, evaluated the effectiveness
of the design and operation of the Company's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer concluded that the
Company's disclosure controls and procedures are effective in timely making
known to him material information relating to the Company and the Company's
consolidated subsidiaries required to be disclosed in the Company's reports
filed or submitted under the Exchange Act. There has been no change in the
Company's internal control over financial reporting during the quarter ended
December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
Management is aware that there is a lack of segregation of duties due to the
small number of employees dealing with general administrative and financial
matters. However, management has decided that considering the employees involved
and the control procedures in place, risks associated with such lack of
segregation are insignificant and the potential benefits of adding employees to
clearly segregate duties do not justify the expenses associated with such
increases.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT
Information with respect to the directors and executive officers of the
Company set forth under "Information Concerning Directors, Nominees and
Executive Officers" and under "Compliance with Section 16 (a) "in the Company's
definitive proxy statement for the annual meeting of shareholders to be held on
or about June 19, 2004, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to Executive Compensation set forth under
"Executive Compensation" in the Company's definitive proxy statement for the
annual meeting of shareholders to be held on or about June 19, 2004 is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management, set forth under "Beneficial Ownership of Principal
Shareholders and Management" in the Company's definitive proxy
statement for the annual meeting of shareholders to be held on or about June 19,
2004, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related
transactions, set forth under "Information Concerning Directors, Nominees and
Executive Officers" in the Company's definitive proxy statement for the annual
meeting of shareholders to be held on or about June 19, 2004, is incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Commitee of the Company selected Virchow, Krause & Company,
LLP ("Virchow Krause"), certified public accountants with offices in
Minneapolis, Minnesota, to audit the Company's financial statements for the
years ended December 31, 2003, 2002 and 2001. The following table details the
fees paid to Virchow Krause for the years ended December 31, 2003 and 2002.
2003 2002
------- -------
Audit Fees $60,929 $66,181
Audit-Related Fees 2,150 (1) 750 (1)
Tax Fees 15,000 11,750
All Other Fees 1,705 (2) 155 (2)
- ------------------ ------- -------
Total $79,784 $78,836
======= =======
(1) Fees related to review of Form S-3 Filings
(2) Fees related to miscellaneous research projects
The Company's Audit committee consists of Frank Bennett, Jonathan Dodge
and Donald Miller. All three are considered audit committee financial experts
independent from managers. The Company's current audit committee charter is
filed herewith as exhibit 3.5. The audit committee is responsible for engaging
the audit firm and fees related to their services.
The policy of the Company's audit committee is to review and
pre-approve both audit and non-audit services to be provided by the independent
auditors (other than with de minimis exceptions permitted by the Sarbanes-Oxley
Act of 2002). This duty may be delegated to one or more designated members of
the audit committee with such approval reported to the committee at its next
regularly scheduled meeting. Approval of non-audit services shall be disclosed
to investors in periodic reports required by section 13(a) of the Securities
Exchange Act of 1934. Approximately 95 % of the fees paid to Virchow Krause were
pre-approved by the audit committee.
No services in connection with appraisal or valuations services,
fairness opinions or contribution-in-kind reports were rendered by Virchow
Krause. Furthermore, no work of Virchow Krause with respect to its services
rendered to the Company was performed by anyone other than Virchow Krause.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. EXHIBITS
Exhibit 3.5 states Vicom's code of ethics for its senior officers. A
copy of said code will be provided upon written request. Any waivers
or amendments to said code will be posted to Vicom's website or
disclosed in an 8K filing.
Exhibit 3.6 provides Vicom's Audit committee charter
B. REPORTS ON FORM 8K
The Company filed reports on Form 8K on September 24, 2003 and
December 16, 2003.
Exhibits
See Index to Exhibits on page 51 of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of
Securities Exchange Act of 1934, the registrant has duly caused this 10-K Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
VICOM, INC.
Registrant
Date: March 30, 2004 By:
/s/ James L. Mandel
Chief Executive Officer
Date: March 30, 2004 By:
/s/ Steven M. Bell
Chief Executive Officer
(Principal Financial and Accounting Officer)
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.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1 Asset Purchase Agreement and related documents with Enstar Networking Corporation dated December 31, 1998(1)
2.2 Agreement and Plan of Merger with Ekman, Inc. dated December 29, 1999(1)
3.1 Amended and Restated Articles of Incorporation of Vicom, Inc.(1)
3.2 Restated Bylaws of Vicom, Incorporated(1)
3.3 Articles of Incorporation of Corporate Technologies, USA, Inc.(1)
3.5 Audit Committee Charter (9)
4.1 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 8% Class A Cumulative
Convertible Preferred Stock and 10% Class B Cumulative Convertible Preferred Stock dated December 9, 1998(1)
4.2 Form of Warrant Agreement(1)
4.3 Warrant Agreement with James Mandel dated December 29, 1999(1)
4.4 Warrant Agreement with Marvin Frieman dated December 29, 1999(1)
4.5 Warrant Agreement with Pierce McNally dated December 29, 1999(1)
4.6 Warrant Agreement with Enstar, Inc. dated December 29, 1999(1)
4.7 Warrant Agreement with David Ekman dated December 29, 1999(1)
4.8 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 10% Class C Cumulative
Convertible Stock(2)
4.9 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 14% Class D Cumulative
Convertible Stock(2)
4.10 Certificate of Designation of the Relative Rights, Restrictions and Preferences of 15% Class E Cumulative
Convertible Stock(2)
4.11 Securities Purchase Agreement Dated September 18, 2003 (6)
4.12 Secured Convertible Note Agreement (7)
4.13 Wholesale Services Agreement Dated March 4, 2004 (8)
5.1 Opinion of Steven M. Bell, Esq.(6)
10.1 Vicom Lease with Marbell Realty dated June 20, 1996(1)
10.2 Employment Agreement with Marvin Frieman dated October 1, 1996(1)
10.3 Employment Agreement with Steven Bell dated October 1, 1996(1)
10.4 Employment Agreement with James Mandel dated August 14, 1998(1)
10.5 Vicom Associate Agreement with NEC America, Inc. dated June 1999(1)
10.6 Loan Agreement with Wells Fargo dated June 17, 1999(1)
10.7 Employment Agreement with David Ekman dated December 29, 1999(1)
10.8 Debenture Loan Agreement with Convergent Capital dated March 9, 2000(1)
10.9 Corporate Technologies, USA, Inc. lease with David Ekman dated January 19, 2000(1)
10.10 Amendment dated July 11, 2000 to debenture loan agreement with Convergent Capital dated March 9, 2000.(2)
10.11 Corporate Technologies agreement with Siemens dated December 14, 2001(4)
10.12 Note with Pyramid Trading, L.P. (4)
10.14 Employment Agreement of Steven M. Bell dated January, 1, 2002(5)
10.15 Employment Agreement of James Mandel dated January 1, 2002(5)
14 Vicom Code of Ethics for Senior Officers (9)
19.1 2000 Non-Employee Director Stock Compensation Plan (3)
19.2 2000 Employee Stock Purchase Plan (3)
21.1 List of subsidiaries of the registrant(1)
23 Consent of Virchow, Krause & Company, LLP (9)
24.1 Power of Attorney (included on signature page of original registration statement)
31.1 Rule 13a-14 (s) Certification of Chief Executive Officer - James Mandel (9)
31.2 Rule 13a-14 (s) Certification of Chief Financial Officer - Steven Bell (9)
32.1 Section 1350 of Sarbanes-Oxley Act of 2002 - James Mandel (9)
32.2 Section 1350of Sarbanes-Oxley Act of 2002 - Steven Bell (9)
(1) Previously filed as the same exhibit to the Registrant's Registration
Statement on Form 10, as amended.
(2) Previously filed as the same exhibit to the original Registration Statement
on Form S-1 filed on August 11, 2000 and declared effective on August 18, 2000.
(3) Previously filed as the same exhibit to Registrant's Proxy Statement on Form
14A, filed on July 31, 2000.
(4) Previously filed as the same exhibit to the original Registration Statement
on Form S-1 filed on August 15, 2001 and declared effective on August 20, 2001.
(5) Previously filed as the same exhibit to Registrant's Form 10-Q filed May 15,
2002
(6) Previously filed as the same exhibit to Registrant's Form 8-K filed
September 24, 2003.
(7) Previously filed as the same exhibit to Registrant's Form 8-k filed December
16, 2003.
(8) Previously filed as the same exhibit to Registrant's Form 8-k filed March
17,2004.
(9) Filed herewith