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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED DECEMBER 31, 2001
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
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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 per share)
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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 / /
As of March 15, 2002, 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 $10,396,584.
As of March 15, 2002, there were 10,770,686 outstanding shares of the
registrant's common stock, no par value per share.
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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
Page
Part I Item 1. Business
Summary
Industry Overview
Products and Services
MultiBand, Inc.
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
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
Part III
Item 10. Directors and Executive Officers 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. Exhibits, Financial Statement Schedules, and Reports on
Form-8k Signatures
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ITEM 1
BUSINESS SUMMARY
Vicom, Incorporated (Vicom) is a Minnesota corporation formed in
September 1975. Vicom is the parent corporation of two wholly-owned
subsidiaries, Corporate Technologies, USA, Inc. (CTU), and MultiBand, Inc.
(MultiBand).
Vicom completed an initial public offering in June 1984. In November
1992, Vicom became a non-reporting company under the Securities Exchange Act of
1934. In July 2000, Vicom regained its reporting company status. In December,
2000, Vicom stock began trading on the NASDAQ stock exchange under the symbol
VICM.
Vicom's website is located at: www.vicominc.net.
Vicom recently expanded its efforts to establish itself within the
rapidly evolving telecommunications and computer industries. In late 1999, in
the context of a forward triangular merger, Vicom, to expand its range of
computer products and related services, purchased the stock of Ekman, Inc. d/b/a
Corporate Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (CTU). In May 2001, Vicom
acquired certain assets of Red River Computer, Inc, a voice and data networking
company. CTU provides voice, data and video systems and services to business and
government. MultiBand, Inc. was incorporated in February 2000. MultiBand, Inc
provides voice, data and video services to multiple dwelling units (MDU's).
As of March 15, 2002, CTU was providing telephone equipment and service
to approximately 1,000 customers, with approximately 10,000 telephones in
service. In addition, CTU provides computer products and services to
approximately 3,000 customers. Telecommunications systems distributed by Vicom
are intended to provide users with flexible, cost-effective alternatives as
compared to systems available from major telephone companies, including those
formerly comprising the Bell System and from other interconnect telephone
companies.
CTU provides a full range voice, data and video communications systems
and service, system integration, training and related communication sales and
support activities for commercial, professional and institutional customers,
most of which are located in Minnesota, North Dakota, and South Dakota. CTU
purchases products and equipment from NEC America, Inc. (NEC), Siemens
Enterprise Networks (Siemens), Cisco Systems, Inc. (Cisco), Nortel Networks
Corp. (Nortel), Tadiran Telecommunications, Inc. (Tadiran), and other
manufacturers of communications and electronic products and equipment. CTU uses
these products to design telecommunications systems to fit its customers'
specific needs and demands.
The products sold by CTU 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. CTU 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 CTU 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 due to fire, flood or other causes beyond CTU's control.
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INDUSTRY OVERVIEW
Vicom 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.
While organizations recognize the importance of communication and IT
systems in this business environment, the selection, implementation,
customization and maintenance of these systems are becoming more complex and the
resources required to perform these tasks are becoming increasingly scarce.
Faced with a shortage of qualified technical resources and great demands to
implement the latest technology, customers are increasingly relying on outside
vendors to provide the necessary resources. By outsourcing communication and
information technology (IT) services, companies are able to focus on their core
businesses; access specialized technical skills; implement solutions more
rapidly; benefit from flexible staffing; and reduce the cost of recruiting,
training and retaining communication and IT professionals.
As a result of these factors, demand for communication and IT services
and products has grown significantly. For calendar year 1999, Philips InfoTech
(InfoTech), a market research firm specializing in telecommunications market
information, estimates that the U.S. market for switching, maintenance and
professional services and application equipment was over $17 billion, and the
U.S. market for telecommunications maintenance and professional services and
application equipment was estimated to be $4 billion. As customers seek the
competitive advantages that advanced communication and computer telephony
integration can deliver, growth of certain segments of call processing are
expected to be particularly strong. According to InfoTech, between 1999 and
2004, the U.S. Market for voice mail, interactive voice response units,
automated call distribution equipment and other telecommunication peripherals
and applications is expected to grow at a compound annual growth rate of
approximately 7.5%. By 2004, the U.S. market for these associated applications
and peripherals is projected to be over $10 billion. The 1999 worldwide market
for IT services was estimated at $605 billion and is projected to grow to $1.3
trillion by 2004, according to DataQuest, Inc., a unit of Gartner Group, the
world's premiere business technology advisor. The market will continue to be
fueled by end-user demand for external service providers for everything from
product support to e-business transformation services to business process
outsourcing. Business management services are projected to achieve the fastest
growth at a compound annual growth rate of 25% through 2004.
The markets and technologies for communication equipment and IT
applications and systems continues 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. In addition, many middle-market and Fortune 500
companies rely on multiple, often specialized providers, where there
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is no distinct responsible party, creates vendor relationships that are
difficult and expensive to manage and adversely impacts the quality and
compatibility of communications and IT solutions. As previously separate
communication and IT technologies converge and their interoperability increases,
more organizations will seek a unified technology solution. Vicom 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.
PRODUCTS AND SERVICES
CORPORATE TECHNOLOGIES, USA (CTU)
CTU 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.
ON SITE AND DEPOT REPAIR
CTU 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
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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 CTU an
advantage over other resellers in North Dakota. The knowledge and skills of our
system engineers helps organizations meet today's 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.
TRAINING
CTU is both a Novell Authorized Education Center (NAEC) and a Microsoft
Certified Technical Education Center (CTEC). We also provide A+ Certification
training and end-user training on most of today's most popular business
productivity software, either on site or at our Training Center. These
facilities allow CTU and our clients to stay current in today's ever-changing
technology environment. We will be evaluating opportunities to expand our
training center revenues to the other markets we serve.
CONSULTING
As a multi-service, multi-vendor, multi-site integrator, CTU 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, 2002, we had 24 sales and marketing personnel with
expertise in telecommunications, computers and network services. CTU 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. CTU uses several
techniques to pursue new customer opportunities, including advertising,
participation in trade shows, seminars and telemarketing.
CUSTOMERS
CTU provides its products and services to commercial, professional and
government users within the states of Minnesota, North Dakota, and South Dakota.
CTU's customers are diverse and represent various industries such as financial
services, hospitality, legal, manufacturing, and education. In its year ended
December 31, 2001, CTU received approximately 15 % of all revenues from one
customer, which was Microsoft Great Plains. Vicom received approximately 27% of
all revenues from two customers in the year 2000. These two customers are Great
Plains Software and the State of North Dakota In 1999, no one customer provided
10% or more of Vicom's total revenues. In its year ended June 30, 1999, Ekman,
Inc. (the predecessor company to CTU) received 23% and 10% of its revenues,
respectively, from two major customers, Great Plains Software and Meritcare
Health Systems.
CUSTOMER SERVICE
CTU has 8 full-time customer service 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.
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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
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, CTU purchases products and equipment from NEC,
Siemens, 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 2001, Ingram Micro supplied 37.8% and Tech Data provided 18.9% of
total products purchased. In 2000, Ingram Micro supplied 24% and Tech Data
provided 18% of total products purchased. In 1999, Tech Data supplied 34% and
NEC supplied 18% of Vicom's total products purchased. In its year ended June 30,
1999, Pinacor supplied 42% and Ingram Micro supplied 21% of Ekman Inc.'s (the
predecessor to CTU) total products purchased.
The products CTU purchase are off-the-shelf products. CTU 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.
CTU has a distribution agreement with NEC, its main supplier of
telecommunication products, which expires June 30, 2002. CTU could replace NEC
with an alternate supplier fairly quickly, but with a less competitive product.
However, CTU's replacement of NEC could have a material adverse effect on
Vicom's business, operating results and financial condition.
CTU also has a distribution agreement with Siemens, a supplier of
telecommunications products, which expires December 14, 2002.
MULTIBAND
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 pressing concerns. 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 creating an eyesore or a structural/maintenance problem. The
second is how to allow competitive access for local and long distance telephone
cable television and Internet services. Our MultiBand(SM) offering addresses
these problems and provides the consumer several benefits, including:
o Lower Cost Per Service
o Blended Satellite and Cable Television Package
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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 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 20 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.
MULTIBAND INDUSTRY ANALYSIS
All statistics in this section were taken from the 1998 statistical
abstract of the United States; communications and information technology
section, authored by the U.S. Census Bureau.
CABLE AND PAY TELEVISION
The U.S. Census Bureau has reported that as of December 31, 1997, the
last official year reported, there were more than 64,210,000 cable and pay TV
subscribers in the United States, with an average bill of $26.48 per month each.
Vicom estimates, based on the aforementioned U.S. Census Bureau data, that this
equates to annual cable and pay television billing revenues of more than $20
billion. The U.S. Census Bureau has also estimated that consumer spending on
cable and pay television for the year ended December 31, 1998 surpassed $31.8
billion. Projections compiled by the U.S. Census Bureau indicate that by 2001,
consumer spending per person for cable and pay television will reach $196.62 or
over $55 billion annually.
TELEPHONE
According to the U.S. Census Bureau, as of December 31, 1996, there
were more than 104,000,000 residential access lines with an average monthly bill
of $19.58 or $24 billion. This accounted for 93.8% of American homes. In the
same year, total toll service revenues for interstate long distance reached $82
billion.
INTERNET
According to the U.S. Census Bureau, the average annual spending per
person in the United States in 2001 for Internet services is estimated to be
$49.32. This is based on a projected population of more than 280,000,000 people,
which equates to approximately $13.8 billion.
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SUMMARY
When taken as a whole, and based on Vicom's interpretations of U.S.
Census Bureau statistics, these services could generate over $170 billion
annually by the end of 2001. 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.
STRATEGY
For the near future, the services described below will be offered only
in the states of Minnesota and North Dakota.
LOCAL TELEPHONE SERVICE
Our primary competition will come from the local incumbent providers of
telephone and cable television services. In Minnesota, we expect to compete with
Qwest (Qwest) for local telephone services and with AT&T Broadband (AT&T
Broadband) for PAY-TV customers. 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
AT&T Broadband is the cable television service provider that has
resulted from the merger and acquisition of three 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 Corp., MCI WorldCom Inc., and Sprint Corp. 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 frontrunner in this highly unregulated market is AOL
Timewarner. 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-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(SM) to MDU properties primarily
throughout Minnesota. We are focusing on properties that consist of 50 or more
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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 selected college campus apartment buildings and 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 and dated March 28, 2000, 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, 2001, MultiBand had 1,556 units wired for service and
480 customers using its services.
BACKLOG
At December 31, 2001, MultiBand was projecting that in 2002, it would
wire for its services another 2,000 multi dwelling units. The Company's
timetable for completing and its ability to complete these installations is
contingent on its ability to raise additional debt and/or equity financing
necessary to fund the installations.
EMPLOYEES
As of March 15, 2002, Vicom employed four full-time management
employees. As of that same date, CTU had 105 full-time employees, consisting of
24 in sales and marketing, 63 in technical positions, 8 in customer service, 6
in management and 4 in administration and finance. As of March 15, 2002,
MultiBand, Inc. has 3 full-time employees, one in sales and two in operations.
ITEM 2:
PROPERTIES
Vicom and its subsidiaries lease principal offices located at 1700 42nd
Street SW, Fargo, ND 58013 and 9449 Science Center Drive, New Hope, Minnesota
55428. Vicom also leases a satellite office in Fargo consisting of approximately
3,800 square feet of space under a lease with a term that expires in July 2002.
Vicom also has an office staffed with two employees in Sioux Falls, South
Dakota. We have no foreign operations. The main Fargo office lease expired in
2001 and covers approximately 20,000 square feet. The Fargo base rent is $18,550
per month. The Fargo office has executed a new fifteen year lease for 22,500
square feet commencing in 2002. The new Fargo base rent will be $21,562 per
month. The new Fargo address will be 2000 44th Street SW, Fargo, North Dakota
58103. The New Hope office lease expires in 2006 and covers approximately 47,000
square feet. The New Hope base rent ranges from $16,000 to $17,653 per month.
Both the New Hope and main Fargo leases have provisions that call for the
tenants to pay net operating expenses, including property taxes, related to the
facilities. Both locations have office, warehouse and training facilities.
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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
As of December 31, 2001, Vicom was not engaged in any pending legal
proceedings where the outcome is likely to have a material adverse effect upon
the business, operating results and financial condition of the Company.
ITEM 4:
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.
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ITEM 5:
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
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, 2000 and
December 31, 2001 and as provided by Nasdaq, the OTCBB or the Pink Sheets.
Market quotations provided herein represent inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
QUARTER ENDED HIGH BID LOW BID
------------- -------- -------
March 31, 2000......................... 12.63 2.50
June 30, 2000.......................... 10.50 4.75
September 30, 2000..................... 10.13 4.75
December 31, 2000...................... 7.13 3.38
March 31, 2001......................... 5.25 3.00
June 30, 2001.......................... 4.38 2.38
September 30, 2001..................... 3.00 1.01
December 31, 2001...................... 2.14 .91
As of March 15, 2002, Vicom had 516 shareholders of record of its
common stock and 10,770,686 shares of common stock outstanding. As of that date,
eight shareholders held a total of 28,372 of Class A Preferred, two shareholders
held a total of 8,700 shares of Class B Preferred, six shareholders held a total
of 139,510 shares of Class C Preferred, and three shareholders held a total of
40,000 shares of Class D Preferred.
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 and Class D 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.
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PREFERRED STOCK
In December 1998, Vicom issued 2,550 shares of Class A Preferred for
$23,638 (class a 2001) 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.
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 2001, at various times, Vicom issued 67,655 shares of Class A
Preferred for cash, acquisitions of assets and conversion of various
liabilities. The total cash and non-cash amount recorded for the shares issued
was $676,556. Vicom also issued 10,000 shares of Class D Preferred related to
conversion of a note payable for $100,000.
The holders of the Class A Preferred, Class B Preferred, Class C
Preferred and Class D 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 and fourteen percent (14%)
for the Class D Preferred. 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 and Class D 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 and Class D 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.
15
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, 2001, have been derived from our consolidated financial
statements and accompanying notes contained in this prospectus. The Statement of
Operations Data for the years ended December 31, 1998 and 1997 and the Balance
Sheet data at December 31, 1999, 1998, and 1997 has been derived from our
audited consolidated financial statements which are not contained in this
prospectus.
STATEMENT OF OPERATIONS DATA 2001 2000 1999 1998 1997
- ---------------------------- ---- ---- ---- ---- ----
Revenues ................. $ 31,822,891 $ 39,781,846 $ 20,388,870 $ 6,458,113 $ 6,639,026
Cost of products and
services .............. $ 24,857,300 $ 31,698,569 $ 16,247,898 $ 4,841,111 $ 4,095,990
Gross profit ............. $ 6,965,591 $ 8,083,277 $ 4,140,972 $ 1,617,002 $ 2,543,036
% of revenues ............ 21.88% 20.3% 20.3% 25.0% 38.3%
Selling, general and
administrative
expenses .............. $ 10,962,739 $ 11,852,041 $ 5,823,945 $ 2,839,862 $ 2,317,388
% of revenues ............ 34.45% 29.8% 28.6% 44.0% 34.9%
Income (loss) from
Operations ............. $ (3,997,148) $ (3,768,764) $ (1,682,973) $ (1,222,860) $ 225,648
Other expense net ........ $ (1,328,404) $ (458,067) $ (139,461) $ (170,888) $ (141,471)
Income (loss) before
income taxes .......... $ (5,325,552) $ (4,226,831) $ (1,822,434) $ (1,393,748) $ 84,177
Income tax provision ..... $ 0 $ 9,000 $ 241,200 $ 50,000 $ 28,000
Net income (loss) ........ $ (5,325,552) $ (4,235,831) $ (2,063,634) $ (1,443,748) $ 56,177
Income (loss) attributable
to common stockholders $ (5,758,221) $ (5,082,011) $ (2,101,603) $ (1,443,748) $ 56,177
Earnings (loss) per
common share-
basic and diluted ..... $ (.66) $ (0.72) $ (0.55) (0.68) $ 0.03
Weighted average
shares outstanding .... 8,762,814 7,009,751 3,821,978 2,129,387 2,098,944
BALANCE SHEET DATA 2001 2000 1999 1998 1997
- ------------------ ---- ---- ---- ---- ----
Working capital
(deficiency) .......... $ 448,168 $ 2,870,114 $ (2,882,907) $ (43,161) $ 376,568
Total assets ............. $ 12,231,300 $ 15,614,573 $ 12,598,745 $ 6,630,917 $ 4,418,239
Long-term debt ........... $ 3,311,870 $ 3,362,083 $ 926,821 $ 826,490 $ 674,436
Stockholders' equity ..... $ 4,205,620 $ 5,876,352 $ 1,026,344 $ 689,775 $ 973,792
16
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
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report.
YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
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.
2001 2000
---- ----
Revenues
Vicom .0% 8.2%
CTU 99.22% 91.6%
MultiBand, Inc. .78% 0.2%
----- -----
Total Revenues 100.0% 100.0%
===== =====
Cost of Sales
Vicom .02% 6.2%
CTU 77.39% 73.2%
MultiBand, Inc. .69% 0.3%
----- -----
Total Cost of Sales 78.10% 79.7%
===== =====
Gross Margin 21.88% 20.3%
Selling, General and
Administrative expenses 34.45% 29.8%
Operating Loss (12.56%) (9.5%)
Net Loss (16.73%) (10.6%)
REVENUES
Total revenues decreased 20.01% to $31,822,891 in 2001 from $39,781,846
in 2000.
Revenues from the CTU segment which traditionally sells computer
technologies products and services decreased 13.4% to $31,556,894 in 2001 from
$36,460,217 in 2000. This decrease in CTU segment revenues resulted primarily
from weaker economic conditions in 2001 and from CTU's desire to increase gross
margins versus maintaining top line revenues.
Revenues from the Vicom segment were minimal as Vicom had no active
operations in 2001.
17
Revenues from MultiBand increased 240% to $249,591 in 2001 from $73,219
in 2000. The year 2001 was the first full year of operations for MultiBand.
Revenues for 2000 reflected only six months of operations.
GROSS MARGIN
The Company's gross margin was $6,965,591 for 2001, as compared to
$8,083,277 for 2000. The decrease of 13.8% in 2001 was due to reduced revenues.
For 2001, gross margin, as a percentage of total revenues, was 21.88% versus
20.3% for 2000. This increase in gross margin percentage is primarily due to an
increase in service sales which have better margins than equipment sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 7.5% to
$10,962,739 in 2001, compared to $11,852,041 in 2000. This decrease in expenses
is primarily related to reductions in payroll. Selling, general and
administrative expenses were, as a percentage of revenues, 34.5% for 2001 and
29.8% for 2000.
INTEREST EXPENSE
Interest expense was $1,446,868 for 2001, versus $607,418 for 2000
reflecting an increase in debt due to capital raising efforts, valuation of
warrants issued with Preferred Class A Stock and convertible notes, and
additional borrowings.
NET LOSS
In 2001, the Company incurred a net loss of $5,325,552 compared to a
net loss of $4,235,831 for 2000. The increase in losses relates to additional
depreciation and amortization related to MultiBand units, additional interest
expense and 20% decrease in revenues.
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
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.
2000 1999
---- ----
Revenues
Vicom and VMTS 8.2% 76.4%
CTU 91.6% 23.6%
MultiBand, Inc. 0.2% 0
----- -----
Total Revenues 100.0% 100.0%
===== =====
Cost of Sales
Vicom and VMTS 6.2% 61.0%
CTU 73.2% 18.7%
MultiBand, Inc. 0.3% 0
----- -----
Total Cost of Sales 79.7% 79.7%
===== =====
Gross Margin 20.3% 20.3%
Selling, General and
Administrative expenses 29.8% 28.6%
Operating Loss (9.5%) (8.3%)
Net Loss (10.6%) (10.1%)
18
REVENUES
Total revenue increased 95.1% to $39,781,846 in 2000 from $20,388,870
in 1999. Total revenues decreased from the $44,941,776 pro forma consolidated
revenues for 1999, primarily due to intra company sales to MultiBand, Inc.,
which were eliminated in consolidation.
Revenues from the CTU segment which traditionally sells computer
technologies products and services increased 656% to $36,460,217 in 2000 from
$4,821,388 in 1999. This significant increase in CTU segment revenues resulted
primarily from the reporting of 12 months revenue in this segment versus two
months the prior year due to the November 1, 1999 acquisition of Ekman, Inc. A
secondary factoring the CTU revenue increase was the gradual merging of the
traditional Vicom and VMTS voice, video and data business segment into the CTU
operational and management structure.
Revenues from the Vicom and VMTS segment decreased 79.1% in 2000 to
$3,248,310 from $15,567,282 in 1999. The decrease in revenues resulted from the
aforementioned merging of the Vicom and CTU business segments during fiscal year
2000.
Revenues from MultiBand were $73,219 in 2000. There is no comparative
data for 1999, as MultiBand was not in operations during that year and was in
the start-up phase.
GROSS MARGIN
The Company's gross margin was $8,083,277 for 2000, as compared to
$4,140,972 for 1999. The gross margin increase is due to the aforementioned
acquisition of Ekman, Inc. For 2000, as a percent of total revenues, gross
margin was 20.3% as compared to 20.3% for 1999. The same gross margin percentage
is primarily due to an increase in service sales which allowed the company to
maintain margins.
The Company's gross margin as a percentage of revenues for Vicom was
24.5%. The Company's gross margin as a percentage of revenue for CTU was 20.1%.
The Company's gross loss for MultiBand, Inc. as a percentage of revenues was
47.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 103.5% to
$11,852,041 in 2000, compared to $5,823,943 in 1999. This increase in expenses
is primarily related to increased payroll due to acquisitions and start-up
expenses for the Company's MultiBand, Inc. subsidiary. Selling, general and
administrative expenses were, as a percentage of revenues, 29.8% for 2000 and
28.6% for 1999.
INTEREST EXPENSE
Interest expense was $607,418 for 2000, versus $262,228 for 1999
reflecting an increased Company debt load due to acquisition related debt and
increased bank borrowings.
19
NET LOSS
In 2000, the Company incurred a net loss of $4,235,831 compared to a
net loss of $2,063,634 for 1999.
20
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the two-year period ended December
31, 2001. 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,
2001 2001 2001 2001 2000 2000 2000 2000
- ----------------------------------------------------------------------------------------------------------------------------
Revenues:
- ------------------------------------------------------------------------------------------------------------------------------
Vicom 0 0 0 0 $ (214,437) $ 119,037 $ 1,626,568 $ 1,715,142
- ------------------------------------------------------------------------------------------------------------------------------
CTU 5,542,674 7,618,442 7,794,443 10,617,741 11,320,377 10,077,672 7,061,013 8,003,155
- ------------------------------------------------------------------------------------------------------------------------------
MultiBand 88,635 60,092 35,786 65,078 51,020 22,299 0 0
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Total 5,631,309 7,678,534 7,830,229 10,682,819 11,156,960 10,219,008 8,687,581 9,718,297
Revenues
- ------------------------------------------------------------------------------------------------------------------------------
Cost of Sales 4,142,991 6,110,861 6,048,399 8,555,049 9,517,517 7,868,109 6,506,435 7,806,508
- ------------------------------------------------------------------------------------------------------------------------------
Gross Margin 1,488,318 1,567,673 1,781,830 2,127,770 1,639,443 2,350,899 2,181,146 1,911,789
- ------------------------------------------------------------------------------------------------------------------------------
SG&A Expense 3,175,613 2,040,043 2,738,537 3,008,546 3,697,857 2,501,869 2,853,634 2,798,681
- ------------------------------------------------------------------------------------------------------------------------------
Operating loss (1,687,295) (472,370) (956,707) (880,776) (2,058,414) (150,970) (672,488) (886,892)
- ------------------------------------------------------------------------------------------------------------------------------
Interest (427,924) (352,735) (373,771) (292,438) (160,598) (133,669) (146,504) (166,647)
Expense
- ------------------------------------------------------------------------------------------------------------------------------
Other Income 554,022 (480,955) 307 45,090 149,351 169,834 (36,146) (133,688)
(Expenses)
- ------------------------------------------------------------------------------------------------------------------------------
Loss Before (1,561,197) (1,306,060) (1,330,171) (1,128,124) (2,069,661) (114,805) (855,138) (1,187,227)
Taxes
- ------------------------------------------------------------------------------------------------------------------------------
Income Tax 0 0 0 0 (9,000) 0 0 0
(Benefit)
Provision
- ------------------------------------------------------------------------------------------------------------------------------
Net Loss (1,561,197) (1,306,060) (1,330,171) (1,128,124) (2,078,661) (114,805) (855,138) (1,187,227)
- ------------------------------------------------------------------------------------------------------------------------------
Loss Per (.19) (.15) (.18) (.14) (0.31) (0.01) (0.12) (0.29)
Common
Share Basic
and Diluted
- ------------------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 2001
Available working capital, for 2001, decreased $2,421,946 due to
Vicom's net operating loss and net cash used in operating activities of
$502,110. Proceeds from issuance of long term debt, stock and warrants totaling
$3,190,262 helped offset Vicom's net operating loss. Vicom had a decrease of
$1,114,332 in accounts payable and other current liabilities for 2001 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 $705,050 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 $3,065,694.
21
Total long-term debt and capital lease obligation decreased by $82,852
during the year ended December 31, 2001. The Company paid out $315,770 related
to capital lease obligations and $461,808 related to long-term debt during the
year ended December 31, 2001 versus $2,482,624 paid out in 2000.
In 2001, the Company entered into wholesale line of credit agreements
totaling $1,450,000 with two financial institutions for the purchase of resale
merchandise from certain suppliers, interest generally at 0% (if paid within
certain terms), and collateralized by the related inventories and accounts
receivable.
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 in accordance with the
Black-Scholes Option-Pricing Model. The Company is expensing the aforementioned
warrant discount in eight quarterly installments over the two year term of the
loan.
The Company used $1,884,945 for capital expenditures during 2001, as
compared to $1,316,022 in 2000. These 2001 and 2000 expenditures were primarily
for construction related to MultiBand installations.
Net cash used by operations was approximately $502,110 in 2001 versus net cash
used by operations of $3,640,226 in 2000. The cash used by operations in 2001 is
due primarily to net operating losses, and reductions in accounts payable and
wholesale line of credit balances in that year. During the fiscal years ended
December 31, 2001 and 2000, the Company incurred significant net losses. These
net losses were primarily incurred due to general corporate expense and the
expense of building out its MultiBand network. The Company in 2001 significantly
cut its payroll expense in an effort to mitigate these losses in the future and
conserve cash. In addition, the Company expects to generate additional cash
flows in 2002 and beyond as MultiBand building projects convert from
work-in-process to completed projects capable of generating subscriber cash
flows. However, there can be no assurance that the Company will be successful in
achieving the aforementioned increase in cash flows. Management of Vicom
believes that, for the next twelve months, 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. Management estimates capital expenditures for the
year ending December 31, 2002 will approximate $450,000. 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 favorable
terms to the Company.
YEAR ENDED DECEMBER 31, 2000
Available working capital, for 2000, increased $5,753,021 over 1999 to
$8,429,375 due to proceeds from issuance of stock and warrants, which helped
offset Vicom's net operating loss and net cash used in operating activities of
$3,640,226. Vicom had a $2,092,811 decrease in accounts payable and other
liabilities for 2000 versus last year's period, primarily due to the
aforementioned proceeds, which were used to reduce payables.
Inventories year to date increased $320,406 over last year's prior
period inventories due to the aforementioned revenue increases. Net borrowings
under short-term loans increased $725,940 for 2000 compared to 1999.
22
In 2000, the Company entered into a $2,250,000 debenture agreement with
a financial institution, interest at 14% payable monthly due $102,273 per month
from August 1, 2003 through June 1, 2005, and collateralized by substantially
all Company assets.
In 2000, the Company entered into a $2,250,000 wholesale line of credit
agreement, with a financial institution for the purchase of resale merchandise
from certain suppliers, interest generally at 0% (if paid within certain terms),
and collateralized by the related inventories and accounts receivable.
Two other commercial line of credit agreements expired in 2000.
The Company used $1,316,022 for capital expenditures during 2000, as
compared to $631,166 in 1999. In addition, the Company financed the acquisition
of $1,310,081 of equipment through capital leases in 2000. These 2000
expenditures were primarily for construction related to the start up of
MultiBand. For the similar period last year, substantially all capital
expenditures consisted of equipment acquired for internal use.
Net cash used by operations was approximately $3,640,226 in 2000 versus
cash provided by operations of approximately $1,385,000 in 1999. The cash used
by operation is due primarily to the decrease in accounts payable and other
liabilities and MultiBand start-up expenses in 2000. Management of Vicom
believes that, for the near future, cash generated by sales of stock, exercise
of warrants, and existing credit facilities, in aggregate, are adequate to meet
the anticipated liquidity and capital resource requirements of its business.
CRITICAL ACCOUNTING POLICIES
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvements. At December 31, 2001, the Company had net property and equipment
of $4,059,831, which represents approximately 33% 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. During the years ended December 31, 2001, 2000 and 1999, the Company
did not record any impairment losses related to long-lived assets.
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgements regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired businesses,
which amounts to $2,749,879 (or 22% of total assets), is 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, 2001, 2000 and
1999, the Company did not record any impairment losses related to goodwill.
Inventories
We value our inventory at the lower of the actual cost or the current estimated
market value of the inventory. We regularly review inventory quantities on hand
and record a provision for excess and obsolete inventory. Rapid technological
change, frequent new product development, and rapid product obsolescence that
could result in an increase in the amount of obsolete inventory quantities on
hand characterize our industry.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations." SFAS No. 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business combinations
that were initiated prior to July 1, 2001. In addition, SFAS No. 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
The requirements of SFAS No. 141 are effective for any business combination
accounted for by the purchase method that is completed after June 30, 2001. The
Company is evaluating the impact of this new accounting standard.
In June 2001, the Financial Accounting Standards Board (FASB) adopted
Statement of Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 discontinues the amortization of recorded goodwill for
fiscal years beginning after December 15, 2001. In the future, goodwill will be
reduced based upon an impairment analysis of the amount recorded on the
Company's books. To the extent it has been determined that the carrying value of
goodwill is not recoverable and is in excess of fair value, an impairment loss
will be recognized. Impairment will be reviewed annually.
In June 2001, the FASB issued SFAS No. 143. "Accounting for Asset
Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The Company believes the adoption of SFAS No. 143 will not
have a material effect on the Company's consolidated financial position or
results of operations.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121. SFAS 144 primarily addresses significant issues relating to the
implementation of SFAS 121 and develops a single accounting model for long-lived
assets to be disposed of, whether primarily held, used or newly acquired. The
provisions of SFAS 144 will be effective for fiscal years beginning after
December 15, 2001. The provisions of SFAS No. 144 generally are to be applied
prospectively. The Company is evaluating the impact of this new accounting
standard.
23
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, Year 2000 compliance 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.
24
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.
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS
VICOM, INCORPORATED AND SUBSIDIARIES - CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 2001 AND 2000, AND CONSOLIDATED STATEMENTS OF OPERATIONS,
CONSOLIDATED STOCKHOLDERS' EQUITY AND CONSOLIDATED CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 2001, 2000 AND 1999.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
VICOM, INCORPORATED
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
VICOM, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT 1
Independent Auditor's Report 1A
FINANCIAL STATEMENTS
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4 - 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9 - 28
SUPPLEMENTAL INFORMATION
Independent Auditors' Report on Supplementary Information 29
Independent Auditor's Report - Supplementary Information 29A
Valuation and Qualifying Accounts 30
INDEPENDENT AUDITORS' REPORT
To Stockholders and Board of Directors
Vicom, Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheet of Vicom,
Incorporated and subsidiaries as of December 31, 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. 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 audit. The
consolidated financial statements of Vicom, Incorporated and subsidiaries as of
December 31, 2000 and 1999, were audited by other auditors whose report dated
February 15, 2001, expressed an unqualified opinion on those statements.
We conducted our audit 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
audit provides 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, 2001, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
February 15, 2002
Page 1
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Vicom, Incororated and Subsidiaries
New Hope, Minnesota
We have audited the accompanying consolidated balance sheet of Vicom,
Incorporated and Subsidiaries as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 200 and 1999. 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, 2000, and the consolidated
results of their operations and their cash flows for the years ended December
31, 2000 and 1999, in conformity with accounting principles generally accepted
in the United States of America.
Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
February 15, 2001
Page 1A
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
- --------------------------------------------------------------------------------
ASSETS
2001 2000
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 624,845 $ 1,161,479
Accounts receivable, net 2,595,368 5,661,064
Inventories, net 1,646,441 2,122,002
Other current assets 295,324 301,707
------------ ------------
Total Current Assets 5,161,978 9,246,252
------------ ------------
PROPERTY AND EQUIPMENT, NET 4,059,831 3,277,109
------------ ------------
OTHER ASSETS
Goodwill, net 2,748,879 2,914,037
Other assets 260,612 177,175
------------ ------------
Total Other Assets 3,009,491 3,091,212
------------ ------------
TOTAL ASSETS $ 12,231,300 $ 15,614,573
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Wholesale line of credit $ 1,324,807 $ 2,033,340
Current portion of long-term debt 85,789 89,825
Current portion of capital lease obligation 309,906 338,509
Accounts payable 1,800,285 2,769,390
Accrued liabilities 776,417 825,933
Deferred service obligations and revenue 416,606 319,141
------------ ------------
Total Current Liabilities 4,713,810 6,376,138
LONG-TERM DEBT, NET 2,669,510 2,431,733
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 642,360 930,350
------------ ------------
Total Liabilities 8,025,680 9,738,221
------------ ------------
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (28,872 and 0 shares issued and outstanding) 433,867 --
10% Class B (8,700 and 22,836 shares issued and
outstanding) 87,000 218,869
10% Class C (139,510 and 150,810 shares issued and
outstanding) 1,800,447 1,951,003
14% Class D (40,000 and 72,500 shares issued and
outstanding) 417,500 802,813
Common stock, no par value (10,679,450 and 8,137,181 shares
issued; 10,604,113 and 8,023,352 shares outstanding) 3,443,104 1,340,074
Stock subscriptions receivable (610,000) --
Options and warrants 24,957,912 14,347,833
Unamortized compensation (1,209,143) (278,138)
Accumulated deficit (25,115,067) (12,506,102)
------------ ------------
Total Stockholders' Equity 4,205,620 5,876,352
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 12,231,300 $ 15,614,573
============ ============
See accompanying notes to consolidated financial statements.
Page 2
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
REVENUES $ 31,822,891 $ 39,781,846 $ 20,388,870
------------ ------------ ------------
COST AND EXPENSES
Cost of products and services 24,857,300 31,698,569 16,247,898
Selling, general and administrative 10,962,739 11,852,041 5,823,945
------------ ------------ ------------
Total costs and expenses 35,820,039 43,550,610 22,071,843
------------ ------------ ------------
LOSS FROM OPERATIONS (3,997,148) (3,768,764) (1,682,973)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (1,446,868) (607,418) (262,228)
Interest income 63,717 23,291 18,367
Other income 54,747 126,060 104,400
------------ ------------ ------------
Total Other Expense (1,328,404) (458,067) (139,461)
------------ ------------ ------------
Loss Before Income Taxes (5,325,552) (4,226,831) (1,822,434)
PROVISION FOR INCOME TAXES -- 9,000 241,200
------------ ------------ ------------
NET LOSS $ (5,325,552) $ (4,235,831) $ (2,063,634)
Preferred stock dividends 432,669 846,180 37,969
------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (5,758,221) $ (5,082,011) $ (2,101,603)
============ ============ ============
LOSS PER COMMON SHARE- BASIC AND
DILUTED $ (0.66) $ (0.72) $ (0.55)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC AND DILUTED 8,762,814 7,009,751 3,821,978
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 3
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000, and 1999
Cumulative Convertible Preferred Stock
--------------------------------------------------------------------------------------------
8% Class A 10% Class B 10% Class C 14% Class D
-------------------- -------------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- --------- ------- --------- -------- ---------- -------- ---------
BALANCES, December 31, 1998 -- $ -- 35,050 $ 336,718 -- $ -- -- $ --
Sale of stock 2,550 23,638 2,500 23,175 -- -- -- --
Warrant issued:
Preferred stock -- -- -- -- -- -- -- --
Notes payable -- -- -- -- -- -- -- --
Restricted stock:
Issued -- -- -- -- -- -- -- --
Forfeited -- -- -- -- -- -- -- --
Amortization expense -- -- -- -- -- -- -- --
Acquisition of Ekman:
Stock -- -- -- -- -- -- -- --
Options and warrants -- -- -- -- -- -- -- --
Preferred dividends -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
-------- --------- ------- --------- -------- ---------- -------- ---------
BALANCES, December 31, 1999 2,550 23,638 37,550 359,893 -- -- -- --
Stock issued:
Options and warrants exercised -- -- -- -- -- -- -- --
Other cash -- -- -- -- 153,310 1,533,100 72,500 490,332
Conversion of notes payable -- -- -- -- -- -- -- --
Conversion of preferred stock (2,550) (23,638) (9,000) (86,259) -- -- -- --
Redemption of preferred stock -- -- (5,714) (54,765) (2,500) (25,000) -- --
Issuance costs -- -- -- -- -- -- -- --
Warrants issued:
Warrant dividend -- -- -- -- -- -- -- --
Common stock -- -- -- -- -- -- -- --
Preferred stock -- -- -- -- -- -- -- --
Services -- -- -- -- -- -- -- --
Cash -- -- -- -- -- -- -- --
Restricted Stock:
Issued -- -- -- -- -- -- -- --
Forfeited -- -- -- -- -- -- -- --
Amortization expense -- -- -- -- -- -- -- --
Preferred dividends -- -- -- -- -- 442,903 -- 312,481
Net loss -- -- -- -- -- -- -- --
-------- --------- ------- --------- -------- ---------- -------- ---------
See accompanying notes to consolidated financial statements.
Page 4
BALANCES, December 31, 2000 -- -- 22,836 218,869 150,810 1,951,003 72,500 802,813
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 -- -- -- -- 10,000 100,000
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) (42,500) (425,000)
Discount on preferred stock related
to warrants -- 145,147 -- -- -- (37,556) -- (60,313)
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 dividends -- -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- -- --
-------- --------- ------- --------- -------- ---------- -------- ---------
BALANCE, December 31, 2001 28,872 $ 433,867 8,700 $ 87,000 139,510 $1,800,447 40,000 $ 417,500
======== ========= ======= ========= ======== ========== ======== =========
See accompanying notes to consolidated financial statements.
Page 5
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000, and 1999
Common Stock
------------------------ Stock Options
Subscriptions and Unamortized Accumulated
Shares Amount Receivable Warrants Compensation Deficit Total
----------- ----------- ------------- ----------- ----------- ------------ -----------
BALANCES, December 31, 1998 3,612,995 $ 2,181,042 $ -- $ 701 $ (62,988) (1,765,698) $ 689,775
Sale of stock -- -- -- -- -- -- 46,813
Warrant issued:
Preferred stock -- -- -- 3,687 -- -- 3,687
Notes payable -- -- -- 112,640 -- -- 112,640
Restricted stock:
Issued 144,600 248,866 -- -- (248,866) -- --
Forfeited (22,750) (15,663) -- -- 15,663 -- --
Amortization expense -- -- -- -- 37,532 -- 37,532
Acquisition of Ekman:
Stock 1,250,000 2,137,500 -- -- -- -- 2,137,500
Options and warrants -- -- -- 100,000 -- -- 100,000
Preferred dividends -- -- -- -- -- (37,969) (37,969)
Net loss -- -- -- -- -- (2,063,634) (2,063,634)
----------- ----------- --------- ----------- ----------- ------------ -----------
BALANCES, December 31, 1999 4,984,845 4,551,745 -- 217,028 (258,659) (3,867,301) 1,026,344
Stock issued:
Options and warrants exercised 1,427,217 3,953,471 -- (163,703) -- -- 3,789,768
Other cash 860,828 1,804,921 -- -- -- -- 3,828,353
Conversion of notes payable 580,100 1,185,054 -- -- -- -- 1,185,054
Conversion of preferred stock 57,500 109,897 -- -- -- -- --
Redemption of preferred stock -- -- -- -- -- -- (79,765)
Issuance costs 249,959 (679,110) -- -- -- -- (679,110)
Warrants issued:
Warrant dividend -- (9,699,079) -- 13,255,869 -- (3,556,790) --
Common stock -- -- -- 495,971 -- -- 495,971
Preferred stock -- -- -- 234,668 -- -- 234,668
Services -- -- -- 208,000 -- -- 208,000
Cash -- -- -- 100,000 -- -- 100,000
Restricted Stock:
Issued 35,000 200,185 -- -- (200,185) -- --
Forfeited (58,268) (87,010) -- -- 87,010 -- --
Amortization expense -- -- -- -- 93,696 -- 93,696
Preferred dividends -- -- -- -- -- (846,180) (90,796)
Net loss -- -- -- -- -- (4,235,831) (4,235,831)
----------- ----------- --------- ----------- ----------- ------------ -----------
See accompanying notes to consolidated financial statements.
Page 6
BALANCES, December 31, 2000 8,137,181 1,340,074 -- 14,347,833 (278,138) (12,506,102) 5,876,352
Stock issued:
Cash, including 197,000 shares
issued for services rendered 1,092,953 421,566 -- -- -- -- 742,066
Stock subscriptions receivable 800,000 610,000 (610,000) -- -- -- --
Acquisition of assets 87,000 261,000 -- -- -- -- 367,400
Purchase of intangible asset 50,000 83,750 -- -- -- -- 83,750
Guarantee of debt financing 100,000 120,000 -- -- -- -- 120,000
Conversion of accounts payable -- -- -- -- -- -- 35,000
Conversion of accrued liabilities 10,000 9,007 -- -- -- -- 105,313
Conversion of notes payable 20,000 50,000 -- -- -- -- 208,044
Conversion of preferred stock 382,027 528,742 -- -- -- -- 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
Warrants issued:
Preferred stock -- -- -- 87,403 -- -- 87,403
Common stock -- -- -- 544,683 -- -- 544,683
Debt -- -- -- 1,382,126 -- -- 1,382,126
Deferred compensation expense related
to stock options issued below fair
market value -- -- -- 1,244,250 (1,244,250) -- --
Deferred compensation expense -- -- -- -- 239,461 -- 239,461
Restricted stock:
Issued 83,000 308,145 -- -- (308,145) -- --
Forfeited (82,711) (289,180) -- -- 289,180 -- --
Amortization expense -- -- -- -- 92,749 -- 92,749
Repricing of warrants -- -- -- 6,919,692 -- (6,919,692) --
Embedded value with Pyramid Trading
warrants -- -- -- 431,925 -- -- 431,925
Preferred dividends -- -- -- -- -- (432,669) (432,669)
Net loss -- -- -- -- -- (5,325,552) (5,325,552)
----------- ----------- --------- ----------- ----------- ------------ -----------
BALANCE, December 31, 2001 10,679,450 $ 3,443,104 $(610,000) $24,957,912 $(1,209,143) $(25,115,067) $ 4,205,620
=========== =========== ========= =========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
Page 7
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000, and 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,325,552) $ (4,235,831) $ (2,063,634)
Adjustments to reconcile net loss to cash flows from
operating activities:
Depreciation 1,019,581 673,074 408,796
Amortization 391,183 428,770 145,136
Amortization of deferred compensation 332,210 -- --
Amortization of original issue discount 797,169 -- --
Loss on sale of property and equipment 846 -- --
Warrants issued for services 87,403 208,000 --
Discount on preferred stock related to warrants (33,178) -- --
Deferred income taxes -- -- 249,200
Changes in operating assets and liabilities:
Accounts receivable, net 3,065,694 (291,843) 1,547,912
Inventories, net 705,050 (320,406) 1,240,723
Other current assets 47,031 225,234 (59,360)
Other assets -- (2,178) (44,625)
Wholesale line of credit (708,533) 2,033,340 --
Accounts payable and accrued liabilities (978,479) (2,092,811) 385,522
Deferred service obligations and revenue 97,465 (265,575) (424,149)
------------ ------------ ------------
Net Cash Flows from Operating Activities (502,110) (3,640,226) 1,385,521
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,884,945) (1,316,022) (631,166)
Proceeds from sale of property and equipment 60,019 -- --
Purchase of business, net of $64,072 cash received -- -- (435,928)
Payments received on notes receivable 59,084 45,331 29,383
Issuance of notes receivable -- (96,897) (30,000)
Other -- -- (30,000)
------------ ------------ ------------
Net Cash Flows from Investing Activities (1,765,842) (1,367,588) (1,097,711)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in checks issued in excess of deposits -- (126,297) (416,734)
Proceeds from long-term debt and warrants issued
with long-term debt 1,919,650 2,282,160 1,170,600
Net payments under short-term loans -- (1,307,400) (2,600)
Principal payments on notes and installment obligations -- (2,482,624) (847,242)
Payments on long-term debt (461,808) -- --
Payments on capital lease obligations (315,770) -- --
Proceeds from issuance of stock and warrants 1,270,612 8,448,760 50,500
Stock issuance costs -- (679,110) --
Redemption of preferred stock (538,199) (79,765) --
Preferred dividends (143,167) (90,796) (37,969)
------------ ------------ ------------
Net Cash Flows from Financing Activities 1,731,318 5,964,928 (83,445)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (536,634) 957,114 204,365
CASH AND CASH EQUIVALENTS - Beginning of Year 1,161,479 204,365 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 624,845 $ 1,161,479 $ 204,365
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 8
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
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 midwest geographical area of 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, 2001, 2000 and 1999, the Company incurred net
losses of $5,325,552, $4,235,831 and $2,063,634, respectively. At December 31,
2001, the Company had an accumulated deficit of $25,115,067. 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vicom,
Incorporated (Vicom) and its wholly owned subsidiaries, Vicom Midwest
Telecommunication Systems, Inc. (VMTS), Corporate Technologies, USA, Inc. (CTU),
and MultiBand, Inc. (MultiBand) (incorporated in February 2000 and in the
start-up phase) which provides voice, data and video services to residential
multi-dwelling units. All significant inter-company transactions and balances
have been eliminated in consolidation.
REVENUES AND COST RECOGNITION
The Company earns revenues from four sources: 1) Video and computer technology
products which are sold but not installed, 2) Voice, video and data
communication products which are sold and installed, 3) Service revenues related
to communication products which are sold and both installed and not installed,
and 4) MultiBand user charges to multiple dwelling units.
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms.
Page 9
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
================================================================================
Customers contract for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenues and costs on the sale of products where
installation is involved are recognized under the percentage of completion
method. Costs are expensed as incurred. The amount of revenue recognized is the
portion that the cost expended to date bears to the anticipated total contract
cost, based on current estimates to complete. Contract costs include all labor
and materials unique to or installed in the project, as well as subcontract
costs. Costs and estimated earnings in excess of billings are classified as
current assets; billings in excess of costs and estimated earnings are
classified as current liabilities.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. The Company, if the
customer elects, enters into equipment maintenance agreements for products sold
once the original manufacturer's warranty has expired. Revenues from all
equipment maintenance agreements are recognized on a straight-line basis over
the terms of each contract. Costs for services are expensed as incurred.
MultiBand user charges are recognized as revenues in the period the related
services are provided.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
CASH AND CASH EQUIVALENTS
The Company includes as cash equivalents certificates of deposit and all other
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.
ACCOUNTS RECEIVABLE
The Company provides an allowance for uncollectible accounts on accounts
receivable. The allowance for uncollectible accounts was $178,000 and $159,000
at December 31, 2001 and 2000, respectively. The Company believes all accounts
receivable in excess of the allowance are fully collectible. If accounts
receivable in excess of the provided allowance are determined uncollectible,
they are charged to expense in the year that determination is made. The Company
extends unsecured credit to customers in the normal course of business.
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. The Company established a reserve to account for potential
obsolescence of $321,000 and $200,000 at December 31, 2001 and 2000,
respectively.
Page 10
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
================================================================================
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
eight 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 one year life of the loan using the
straight-line method, which approximates the interest method.
GOODWILL
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and is amortized using the straight-line method
over ten years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If the review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the assets acquired over the remaining amortization period, the
Company's carrying value of goodwill is reduced by the estimated shortfall of
cash flows. Accumul