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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, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0 - 1325
VICOM, INCORPORATED
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(Exact name of registrant as specified in its charter)
MINNESOTA
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(State or other jurisdiction of incorporation or organization)
41 - 1255001
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(IRS Employer Identification No.)
9449 Science Center Drive, New Hope, Minnesota 55428
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(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 ($0.01 par value per share)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by references in Part III of this Form 10-K or any amendment to
this Form 10-K / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes |_| No |X|
As of June 30, 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
$9,393,037.
As of March 17, 2003, there were 13,642,405 outstanding shares of the
registrant's common stock, par value $0.01 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.
Risk Factors
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Part II
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters
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 Controls and Procedures
Item 17 Exhibits, Financial Statement Schedules, and Reports on Form-8K
Signatures
Item 1
Business
Vicom, Incorporated (Vicom) is a Minnesota corporation formed in September
1975. Vicom is the parent corporation of two wholly-owned subsidiaries,
Corporate Technologies, USA, Inc. (CTU), and MultiBand, Inc. (MultiBand).
Vicom completed an initial public offering in June 1984. In November 1992,
Vicom became a non-reporting company under the Securities Exchange Act of 1934.
In July 2000, Vicom regained its reporting company status. In December, 2000,
Vicom stock began trading on the NASDAQ stock exchange under the symbol VICM.
Vicom's website is located at: www.vicominc.net.
Vicom recently expanded its efforts to establish itself within the rapidly
evolving telecommunications and computer industries. Effective December 31,
1998, Vicom acquired the assets of the Midwest region of Enstar Networking
Corporation (ENC), a data cabling and networking company. In late 1999, in the
context of a forward triangular merger, Vicom, to expand its range of computer
products and related services, purchased the stock of Ekman, Inc. d/b/a
Corporate Technologies, and merged Ekman, Inc. into the newly formed surviving
corporation, Corporate Technologies, USA, Inc. (CTU). CTU provides voice, data
and video systems and services to business and government. MultiBand, Inc. was
incorporated in February 2000. MultiBand, Inc provides voice, data and video
services to multiple dwelling units (MDU's).
As of March 17, 2003, CTU was providing telephone equipment and service to
approximately 800 customers, with approximately 10,000 telephones in service. In
addition, CTU provides computer products and services to approximately 2,100
customers. Telecommunications systems distributed by CTU are intended to provide
users with flexible, cost-effective alternatives as compared to systems
available from major telephone companies, including those formerly comprising
the Bell System and from other interconnect telephone companies.
CTU provides a full range voice, data and video communications systems and
service, system integration, training and related communication sales and
support activities for commercial, professional and institutional customers,
most of which are located in Minnesota and North Dakota. CTU purchases products
and equipment from NEC America, Inc. (NEC), Siemens Enterprise Networks
(Siemens), Cisco Systems, Inc. (Cisco), Nortel Networks Corp. (Nortel), Tadiran
Telecommunications, Inc. (Tadiran), and other manufacturers of communications
and electronic products and equipment. CTU uses these products to design
telecommunications systems to fit its customers' specific needs and demands.
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.
In February 2003, the Company formed a 50% owned subsidiary, Multiband USA,
Inc. This subsidiary will provide the digital satellite signal to private cable
operations to multiple dwelling units.
See Page 23 for financial information for each segment.
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.
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. 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. Vicom believes it has positioned itself to be one of those providers.
While customers continue to rely heavily on technology to reduce
transaction costs by increasing operational efficiencies, the bias toward
software-centric solutions in lieu of hardware continues. Notwithstanding the
slow economic conditions, growth continues to occur in areas such as customer
contact solutions, CTI (computer telephony integration), unified media,
convergence (IP telephony), and mobility.
Current financial pressures also are making it increasingly difficult for
communications equipment manufacturers to support a direct distribution model.
Most independent distribution channels lack an adequate geographic footprint,
infrastructure, processes, and resources to effectively fulfill the
manufacturer's need to deploy complex high-end technology solutions. This has
resulted in the need for systems integration and support services through third
party providers. A key competency being driven by the market is the ability to
effectively integrate disparate technology platforms into enterprise-wide
applications solutions.
As a result of these factors, demand for communication services and
products has been relatively flat. Phillips InfoTech (InfoTech), a market
research firm specializing in telecommunications market information, estimates
that the U.S. market for traditional voice PBX systems will continue to decline
over the next five year as enterprises shift to converged solutions, a combined
form of voice and data, also referred to as IP Telephony. In 2001, total PBX
line shipments declined 12.2% from the same period in 2000. In contrast, IP line
shipments grew nearly 230.0% to 1.6 million lines during the same period.
Purchases associated with converged solutions are forecasted to grow
approximately 29.0% between 2001 and 2002, increasing to 47.8% growth from 2002
to 2003. Recent slowdowns in technology spending may delay this development,
however. Overall revenues in the U.S. marketplace for voice and convergence are
projected to reach $5.6 billion by 2005. Field maintenance and repair is the
largest, but slowest growing segment in services associated with the voice
marketplace. This includes the maintenance and repair of PBX, Key/Hybrid, Voice
Processing: IVR, CTI, ACD and fax. Growth in 2001 was estimated by Phillips
InfoTech at 2.8% to $4.2 billion, with expected growth to $4.8 billion by 2005.
Spending in video conferencing totaled an estimated $600.0 million in 2001, and
is projected to grow to $1.4 billion by 2006, while the audio and data
conferencing market is projected to grow to $2.4 billion in 2004 from $1.7
billion in 2001, according to Wainhouse Research and Frost & Sullivan, market
research firms specializing in collaboration and telecommunications data.
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 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 17, 2003, we had 30 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 and North 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, 2002 CTU received approximately 22.8% of its revenues from two
customers, Merit Care and Microsoft Great Plains. In its year ended December 31,
2001, CTU received approximately 21.7 % of all revenues from two customers.
Those two customers are Microsoft Great Plains and the State of North Dakota.
CTU 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.
Customer Service
CTU has 18 full-time customer service and related support personnel who
assist in project management duties, post-sale communications (which include
site surveys), coordinated network services,
and end-user training. Each key account is assigned its own individual customer
service representative to ensure efficient implementation. The customer service
representative works closely with the sales representative and main technician
assigned to the project to facilitate the utmost in customer satisfaction.
Back Office
Back office refers to the hardware and software systems that support the
primary functions of our operations, including sales support, order entry and
provisioning, and billing.
Order entry involves the initial loading of customer data into our
information system. Currently our sales representatives take orders and our
customer service and purchasing representatives load the initial customer
information into our ILS (Integrated Logistic System) billing and accounting
system. We use the ILS to manage and track the timely completion of each step in
the provisioning and installation process. Our system is designed to enable the
sales or customer service representative to keep an installation on schedule and
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 2002, Ingram Micro supplied 57.7% and Dell Computer 11.8% of total
products purchased. In 2001, Ingram Micro supplied 37.8% and Tech Data provided
18.9% of total products purchased. In 2000, Ingram Micro supplied 24% and Tech
Data provided 18% of 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, 2003. 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.
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 MultiBandsm offering addresses these
problems and provides the consumer several benefits, including:
o Lower Cost Per Service
o Blended Satellite and Cable Television Package
o Multiple Feature Local Phone Services (features such as call waiting,
call forwarding and three-way calling)
o Better than Industry Average Response Times
o One Number for Billing and Service Needs
o One Bill for Local, Long Distance Cable Television and Internet
o "Instant On" Service Availability
As we develop and market this package, we will keep a marketing focus on
two levels of customer for this product. The primary decision-makers are the
property owners/managers. Their concerns are focused on delivering their
residents reliability, quality of service, short response times, minimized
disruptions on the property, minimized alterations to the property and value
added services. Each of these concerns is addressed in our contracts with the
property owner, which include annual reviews and 10 to 15 year terms as service
providers on the property. The secondary customer is the end-user. We will
provide the property with on-going marketing support for their leasing agents to
deliver clear, concise and timely information on our services. This will include
simple sign up options that should maximize our penetration of the property.
When taken as a whole, and based on Vicom's interpretations of U.S. Census
Bureau statistics, cable television, telephone and internet services generate
over $170 billion of revenues annually in the U.S. These statistics indicate
stable growing markets with demand that is likely to deliver significant values
to businesses that can obtain a subscriber base of any meaningful size.
Multiband Industry Analysis
Strategy
For the near future, the services described below will be offered primarily
in Midwestern states.
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 Comcast 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
Comcast is the cable television service provider that has resulted from the
merger and acquisition of two competitive cable providers. This actually has
improved the overall continuity of service. However, we have a significant
consumer benefit in that we are establishing private rather than public
television systems, which allows us to deliver a package that is not laden with
local "public access" stations that clog the basic service package. In essence,
we will be able to deliver a customized service offering to each property based
upon pre-installation market research that we perform.
Long Distance Telephone Service
AT&T 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 frontrunners in this highly unregulated market are America
Online, Inc. and CompuServe Corp. They compete with local exchange carriers,
long distance carriers, Internet backbone companies and many local ISPs
(Internet Service Providers). Competition has driven this to a flat rate
unlimited access dial-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 MultiBandsm to MDU properties primarily
throughout Minnesota. We are focusing on properties that consist of 50 or more
units. We will target properties that range from 50 to 150 units on a contiguous
MDU property for television and Internet access only. We will survey properties
that exceed 150 units for the feasibility of local and long distance telephone
services.
We are initially concentrating on middle to high-end rental complexes. We
are also pursuing 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, 2002, MultiBand had 2,870 units wired for service and 1,125
customers using its services.
Backlog
At December 31, 2002, MultiBand was projecting that in 2003, it would wire
for its services in excess of 6,000 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, 2003, Vicom employed four full-time management employees.
As of that same date, CTU had 111 full-time employees, consisting of 30 in sales
and marketing, 45 in technical positions, 18 in customer service and related
support, 10 in management and 8 in administration and finance. As of March 15,
2003, MultiBand, Inc. has 2 full-time employees, one in sales and the rest in
operations.
Risk Factors
Our operations and our securities are subject to a number of risks,
including but not limited to those described below. If any of the following
risks actually occur, the business, financial condition or operating results of
Vicom and the trading price or value of our common stock could be materially
adversely affected.
General
Vicom, since 1998, has taken several significant steps to reinvent and
reposition itself to take advantage of opportunities presented by a shifting
economy and industry environment.
Recognizing that voice, data and video technologies in the late twentieth
century were beginning to systematically integrate as industry manufacturers
were evolving technological standards from "closed" proprietary networking
architectures to a more "open" flexible and integrated approach, Vicom, between
1998 and 2001, purchased three competitors which, in the aggregrate, possessed
expertise in data networking, voice and data cabling and video distribution
technologies.
In early 2000, Vicom created its Multiband subsidiary, employing the
aforementioned expertise, to provide communications and entertainment services
(local dial tone, long distance, high-speed internet and expanded satellite
television services) to residents in Multi-Dwelling-Unit properties (MDUs) on
one billing platform. Although Multiband related revenues (installations and
recurring subscriber fees) should account for less than 10% of overall Vicom
revenues in 2002, Vicom expects Multiband related revenues to increase
significantly in 2003 as a percentage of overall revenues. These revenues are
expected to provide higher gross margins than the company's more traditional
sales to commercial enterprises.
The specific risk factors, as detailed below, should be analyzed in the
context of the Company's anticipated Multiband related growth.
Net Losses
The Company had net losses of $4,438,059 for the fiscal year ended December
31, 2002, $5,325,552 for the fiscal year ended December 31, 2001, and $4,235,831
for the fiscal year ended December 31, 2000. Vicom may never be profitable.
The prolonged effects of generating losses without additional funding may
restrict our ability to pursue our business strategy. Unless our business plan
is successful, an investment in our common stock may result in a complete loss
of an investor's capital.
If we cannot achieve profitability from operating activities, we may not be
able to meet:
o our capital expenditure objectives;
o our debt service obligations; or
o our working capital needs.
Dependence on Asset-Based Financing
Vicom currently depends on asset-based financing to purchase product, and
we cannot guarantee that such financing will be available in the future.
Furthermore, we need additional financing to support the anticipated growth of
our Multiband subsidiary. We cannot guarantee that we will be able to obtain
this additional financing.
However, the Company recently introduced a program where it can control
capital expenditures by contracting Multiband services and equipment through a
landlord or third party investor owned equipment program. This program both
significantly reduces any Company expenditures in a Multi-dwelling-unit
installation and permits the Company to record revenues from the third party
sale of said equipment.
Goodwill
In June 2001, the Financial Accounting Standards Board (FASB) adopted
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other
Intangible Assets" which changes the amortization rules on recorded goodwill
from a monthly amortization to a periodic "impairment" analysis for fiscal years
beginning after December 15, 2001. In 2002, the Company retained an independent
outside expert to evaluate the impact of this new Accounting standard and the
expert concluded there was no impairment to goodwill. However, the Company could
be subject to a determination that its goodwill is impaired in the future. As of
December 31, 2002, the Company had recorded goodwill of approximately $2.7
million.
Deregulation
Several regulatory and judicial proceedings have recently concluded, are
underway or may soon be commenced that address issues affecting operations and
those of our competitors, which may cause significant changes to our industry.
We cannot predict the outcome of these developments, nor can we assure you that
these changes will not have a material adverse effect on us. Historically, we
have been a reseller of products and services, not a manufacturer or carrier
requiring regulation of its activities. Pursuant to Minnesota statutes, our
Multiband activity is specifically exempt from the need to tariff our services
in multiple dwelling units (MDUs). However, the Telecommunications Act of 1996
provides for significant deregulation of the telecommunications industry,
including the local telecommunications and long-distance industries. This
federal statute and the related regulations remain subject to judicial review
and additional rule-makings of the Federal Communications Commission, making it
difficult to predict what effect the legislation will have on us, our
operations, and our competitors.
Dependence on Strategic Alliances
Vicom has a distribution agreement with NEC, its main supplier of
telecommunication products, which expires June 30, 2003. An interruption or
substantial modification of Vicom's distribution relationship with NEC could
have a material adverse effect on Vicom's business, operating results and
financial condition.
In addition, several suppliers, or potential suppliers of Vicom, such as
McLeod, WorldCom, WS Net, XO Communications and others have filed for bankruptcy
in recent years. While the financial distress of its suppliers or potential
suppliers could have a material adverse effect on Vicom's business, Vicom
believes that enough alternate suppliers exist to allow the Company to execute
its business plans.
Changes in Technology
A portion of our projected future revenue is dependent on public acceptance
of broadband, and
expanded satellite television services. Acceptance of these services is
partially dependent on the infrastructure of the internet and satellite
television which is beyond Vicom's control. In addition, newer technologies,
such as video-on-demand, are being developed which could have a material adverse
effect on the Company's competitiveness in the marketplace if Vicom is unable to
adopt or deploy such technologies.
Attraction and Retention of Employees
Vicom's success depends on the continued employment of certain key
personnel, including executive officers. If Vicom were unable to continue to
attract and retain a sufficient number of qualified key personnel, its business,
operating results and financial condition could be materially and adversely
affected. In addition, Vicom's success depends on its ability to attract,
develop, motivate and retain highly skilled and educated professionals with a
wide variety of management, marketing, selling and technical capabilities.
Competition for such personnel is intense and is expected to increase in the
future.
Business Growth and Scalability
Vicom's Multiband subsidiary, as of December 31, 2002, was providing
communications and entertainment services to ten MDUs located in Minnesota and
North Dakota. Vicom needs to provide products and services to additional MDUs if
it is to become profitable. Vicom may need to go beyond its current geographic
territory to increase its MDU customers and attract additional financing.
In expanding the provision of its services to MDUs in its current
territories and beyond, Vicom needs to successfully overcome a number of the
factors listed above such as attracting the capital to finance expanded
installations, obtaining additional technical staff for installation and support
in its present markets and beyond; and extending its key vendor relationships
into other markets.
Intellectual Property Rights
Vicom relies on a combination of trade secret, copyright, and trademark
laws, license agreements, and contractual arrangements with certain key
employees to protect its proprietary rights and the proprietary rights of third
parties from which Vicom licenses intellectual property. If it was determined
that Vicom infringed the intellectual property rights of others, it could be
required to pay substantial damages or stop selling products and services that
contain the infringing intellectual property, which could have a material
adverse effect on Vicom's business, financial condition and results of
operations. Also, there can be no assurance that Vicom would be able to develop
non-infringing technology or that it could obtain a license on commercially
reasonable terms, or at all. Vicom's success depends in part on its ability to
protect the proprietary and confidential aspects of its technology and the
products and services it sells. There can be no assurance that the legal
protections afforded to Vicom or the steps taken by Vicom will be adequate to
prevent misappropriation of Vicom's intellectual property.
Variability of Quarterly Operating Results; Seasonality
Variations in Vicom's revenues and operating results occur from quarter to
quarter as a result of a number of factors, including customer engagements
commenced and completed during a quarter, the number of business days in a
quarter, employee hiring and utilization rates, the ability of customers to
terminate engagements without penalty, the size and scope of assignments and
general economic conditions. Because a significant portion of Vicom's expenses
are relatively fixed, a variation in the number of customer projects or the
timing of the initiation or completion of projects could cause significant
fluctuations in operating results from quarter to quarter. Further, Vicom has
historically experienced a seasonal fluctuation in its operating results, with a
larger proportion of its revenues and operating income occurring during the
third quarter of the fiscal year.
Certain Anti-Takeover Effects
Vicom is subject to Minnesota statutes regulating business combinations and
restricting voting rights of certain persons acquiring shares of Vicom. These
anti-takeover statutes may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of Vicom's securities, or the removal of incumbent management.
Volatility of Vicom's Common Stock
The trading price of our common stock has been and is likely to be
volatile. The stock market has experienced extreme volatility, and this
volatility has often been unrelated to the operating performance of particular
companies. We cannot be sure that an active public market for our common stock
will continue after this offering. Investors may not be able to sell the common
stock at or above the price they paid for their common stock, or at all. Prices
for the common stock will be determined in the marketplace and may be influenced
by many factors, including variations in our financial results, changes in
earnings estimates by industry research analysts, investors' perceptions of us
and general economic, industry and market conditions.
Future Sales of Our Common Stock May Lower Our Stock Price
If our existing shareholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly. The
perception in the public market that our existing shareholders might sell shares
of common stock could depress our market price.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of
federal securities law. Terminology such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue," "predict," or other similar
words, identify forward-looking statements. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other forward-looking information. Forward-looking statements
appear in a number of places in this prospectus and include statements regarding
our intent, belief or current expectation about, among other things, trends
affecting the industries in which we operate, as well as the industries we
service, and our business and growth strategies. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those predicted in the forward-looking statements as a result of
various factors, including those set forth in "Risk Factors."
Item 2:
Properties
Vicom and its subsidiaries lease principal offices located at 2000 44th
Street SW, Fargo, ND 58103 and 9449 Science Center Drive, New Hope, Minnesota
55428. We have no foreign operations. The main Fargo office lease expires in
2017 and covers approximately 22,500 square feet. The Fargo base rent ranges
from $21,577 to $24,360 per month. The New Hope office lease expires in 2006 and
covers approximately 47,000 square feet. The New Hope base rent ranges from
$16,640 to $17,653 per month. Both the New Hope and Fargo leases have provisions
that call for the tenants to pay net operating expenses, including property
taxes, related to the facilities. Both offices have office, warehouse and
training facilities.
Vicom considers its current facilities adequate for its current needs and
believes that suitable additional space would be available as needed.
Item 3:
Legal Proceedings
The Company is involved in legal actions in the ordinary course of
business. However, as of December 31, 2002, Vicom was not engaged in any pending
legal proceedings where, in the opinion of the Company and its counsel, 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.
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, 2001 and
December 31, 2002 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, 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
March 31, 2002 ......................... 1.90 1.37
June 30, 2002 .......................... 1.75 .80
September 30, 2002 ..................... .92 .52
December 31, 2002 ...................... 1.12 .50
As of March 17, 2003, Vicom had 518 shareholders of record of its common
stock and 13,642,405 shares of common stock outstanding. As of that date, eight
shareholders held a total of 27,831 of Class A Preferred, one shareholder held
6,200 shares of Class B Preferred, five shareholders held a total of 127,510
shares of Class C Preferred, and seven shareholders held a total of 70,000
shares of Class E Preferred.
Recent Sales of Unregistered Securities
The Company in 2002 issued $460,000 worth of its common stock to Pyramid
Trading LP. The common stock was issued at various prices pursuant to a formula
tied to the trading price of the Company's common stock.
The Company, in the fourth quarter of 2002, issued $700,000 worth of Class
E Preferred Stock to various accredited investors.
At various other times in 2002, the Company, via conversions of preferred
stock or investor purchases of common stock, issued common shares at various
prices.
In connection with these sales, we relied on the exemption from
registration provided by Sections 4(2) and 4(6) of the Securities Act of 1933,
as well as Rule 506 of Regulation D based on (i) our belief that the issuances
did not involve a public offering, (ii) the transactions involved fewer than 35
purchasers, and (iii) because we had a reasonable basis to believe that each of
the shareholders were either accredited or otherwise had sufficient knowledge
and sophistication, either alone or with a purchaser representative, to
appreciate and evaluate the risks and merits associated with their investment
decision.
Common Stock
Holders of common stock are entitled to one vote per share in all matters
to be voted upon by shareholders. There is no cumulative voting for the election
of directors, which means that the holders of shares entitled to exercise more
than 50% of the voting rights in the election of directors are able to elect all
of the directors. Vicom's Articles of Incorporation provide that holders of the
Company's common stock do not have preemptive rights to subscribe for and to
purchase additional shares of common stock or other obligations convertible into
shares of common stock which may be issued by the Company.
Holders of common stock are entitled to receive such dividends as are
declared by Vicom's Board of Directors out of funds legally available for the
payment of dividends. Vicom presently intends not to pay any dividends on the
common stock for the foreseeable future. Any future determination as to the
declaration and payment of dividends will be made at the discretion of the Board
of Directors. In the event of any liquidation, dissolution or winding up of
Vicom, and subject to the preferential rights of the holders of the Class A
Preferred, Class B Preferred, Class C Preferred, Class D Preferred and Class E
Preferred, the holders of common stock will be entitled to receive a pro rata
share of the net assets of Vicom remaining after payment or provision for
payment of the debts and other liabilities of Vicom.
All of the outstanding shares of common stock are fully paid and
non-assessable. Holders of common stock of Vicom are not liable for further
calls or assessments.
Preferred Stock
In December 1998, Vicom issued 2,550 shares of Class A Preferred for
$23,638 and 37,550 shares of Class B Preferred for $359,893. The Class B
Preferred was offered to certain note holders at a conversion rate of $10.00 per
share of Class B Preferred. Each share of Class A Preferred and Class B
Preferred is non-voting (except as otherwise required by law) and convertible
into five shares of common stock, subject to adjustment in certain
circumstances. Each holder of a share of Class A Preferred or Class B Preferred
has a five-year warrant to purchase one share of common stock at $3.00 per
share, subject to adjustment. During 2001, Vicom issued 67,655 shares of Class A
Preferred for $676,556.
In June 2000, Vicom issued 80,500 shares of Class C Preferred for $805,000.
The Class C Preferred was offered to certain note holders at a conversion rate
of $10.00 a share. In September 2000, Vicom issued an additional 72,810 shares
of Class C Preferred for $728,100. Each share of Class C Preferred is non-voting
(except as otherwise required by law) and convertible into two shares of Vicom
common stock, subject to adjustment in certain circumstances.
In November 2000, Vicom issued 72,500 shares of Class D Preferred for
$490,332. The Class D Preferred was sold to eight accredited investors at $10.00
per share. Each share of Class D Preferred is non-voting (except as otherwise
required by law) and convertible into two and one-half shares of Vicom Common
Stock, subject to adjustment in certain circumstances.
In the second quarter of 2002, Preferred Class D stocks were redeemed;
$100,000 converted to Common Stock, and $300,000 converted to a Note Payable.
In the fourth quarter of 2002, Vicom issued 70,000 shares of Class E
Preferred for $700,000, with $600,000 related to conversion of a note payable
from a director of the Company into Preferred Stock.
The holders of the Class A Preferred, Class B Preferred, Class C Preferred,
Class D Preferred and Class E Preferred (collectively, "Preferred Stock") are
entitled to receive, as and when declared by the Board, out of the assets of the
Company legally available for payment thereof, cumulative cash dividends
calculated based on the $10.00 per share stated value of the Preferred Stock.
The per annum dividend rate is
eight percent (8%) for the Class A Preferred and ten percent (10%) for the Class
B Preferred and Class C Preferred, fourteen percent (14%) for the Class D
Preferred and fifteen percent (15%) in the Class E Preferred, to be paid in
kind. Dividends on the Class A Preferred, Class C Preferred and Class D
Preferred are payable quarterly on March 31, June 30, September 30, and December
31 of each year. Dividends on the Class B Preferred are payable monthly on the
first day of each calendar month. Dividends on the Preferred Stock accrue
cumulatively on a daily basis until the Preferred Stock is redeemed or
converted.
In the event of any liquidation, dissolution or winding up of Vicom, the
holders of the Class A Preferred and Class B Preferred will be entitled to
receive a liquidation preference of $10.50 per share, and the holders of the
Class C Preferred, Class D Preferred and Class E Preferred will be entitled to
receive a liquidation preference of $10.00 per share, each subject to
adjustment. Any liquidation preference shall be payable out of any net assets of
Vicom remaining after payment or provision for payment of the debts and other
liabilities of Vicom.
Vicom may redeem the Preferred Stock, in whole or in part, at a redemption
price of $10.50 per share for the Class A Preferred and the Class B Preferred
and $10.00 per share for the Class C Preferred, Class D Preferred and Class E
Preferred (subject to adjustment, plus any earned and unpaid dividends) on not
less than thirty days' notice to the holders of the Preferred Stock, provided
that the closing bid price of the common stock exceeds $4.00 per share (subject
to adjustment) for any ten consecutive trading days prior to such notice. Upon
Vicom's call for redemption, the holders of the Preferred Stock called for
redemption will have the option to convert each share of Preferred Stock into
shares of common stock until the close of business on the date fixed for
redemption, unless extended by Vicom in its sole discretion. Preferred Stock not
so converted will be redeemed. No holder of Preferred Stock can require Vicom to
redeem his or her shares.
Equity Compensation
The following table sets forth certain information regarding equity
compensation plan information as of December 31, 2002.
Equity Compensation Plan Information
Number of Securities Number of securities
to be issued upon Weighted-average remaining available for
exercise of exercise price of future issuance under
outstanding options, outstanding options, equity compensation plans
warrants and warrants and restricted (excluding securities
restricted stock stock reflected in column (a))
---------------- ----- ------------------------
(a) (b) (c)
Equity compensation plans approved by
security holders 1,093,157 2.45 2,106,843
Equity compensation plans not approved by
security holders 4,372,462 2.05 N/A
--------- --------
Total 5,465,619 2,106,843
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, 2002, 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, 1999 and1998 and the Balance
Sheet data at December 31, 2000, 1999 and 1998 has been derived from our audited
consolidated financial statements which are not contained in this filing.
Statement of Operations Data 2002 2001 2000 1999 1998
- ---------------------------- ------------ ------------ ------------ ------------ ------------
Revenues ................... $ 24,540,969 $ 32,260,777 $ 39,781,846 $ 20,388,870 $ 6,458,113
Cost of products and
services ................ $ 18,036,750 $ 25,245,186 $ 31,698,569 $ 16,247,898 $ 4,841,111
Gross profit ............... $ 6,504,219 $ 6,965,591 $ 8,083,277 $ 4,140,972 $ 1,617,002
% of revenues .............. 26.5% 21.6% 20.3% 20.3% 25.0%
Selling, general and
administrative expenses ... $ 9,337,292 $ 10,962,739 $ 11,852,041 $ 5,823,945 $ 2,839,862
% of revenues .............. 38.0% 34.0% 29.8% 28.6% 44.0%
Loss from Operations ....... $ (2,833,073) $ (3,997,148) $ (3,768,764) $ (1,682,973) $ (1,222,860)
Other expense net .......... $ (1,604,986) $ (1,328,404) $ (458,067) $ (139,461) $ (170,888)
Loss before income taxes $ (4,438,059) $ (5,325,552) $ (4,226,831) $ (1,822,434) $ (1,393,748)
Income tax provision ....... $ 0 $ 0 $ 9,000 $ 241,200 $ 50,000
Net Loss ................... $ (4,438,059) $ (5,325,552) $ (4,235,831) $ (2,063,634) $ (1,443,748)
Loss attributable to common
stockholders ............ $ (4,591,637) $ (5,758,221) $ (5,082,011) $ (2,101,603) $ (1,443,748)
Loss per common share-basic
and diluted ............. $ (.39) $ (.66) $ (0.72) $ (0.55) (0.68)
Weighted average shares
outstanding ............. 11,735,095 8,762,814 7,009,751 3,821,978 2,129,387
Balance Sheet Data 2002 2001 2000 1999 1998
- ---------------------------- ------------ ------------ ------------ ------------ ------------
Working capital
(deficiency) ............ $ (252,870) $ 426,549 $ 2,870,114 $ (2,882,907) $ (43,161)
Total assets ............... $ 10,347,316 $ 12,209,681 $ 15,614,573 $ 12,598,745 $ 6,630,917
Long-term debt ............. $ 3,273,350 $ 3,311,870 $ 3,362,083 $ 926,821 $ 826,490
Stockholders' equity ....... $ 2,642,285 $ 4,184,001 $ 5,876,352 $ 1,026,344 $ 689,775
Item 7:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion of the financial condition and results of
operations of Vicom, Incorporated should be read in conjunction with the
Condensed Consolidated Financial Statements and the Notes thereto included
elsewhere in this report.
Years Ended December 31, 2002 and December 31, 2001
Results of Operations
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenue.
2002 2001
------- -------
Revenues
Vicom .0% .0%
CTU 97.65% 99.22%
MultiBand, Inc. 2.35% .78%
------ ------
Total Revenues 100.0% 100.0%
====== ======
Cost of Sales
Vicom .0% .02%
CTU 71.89% 77.39%
MultiBand, Inc. 1.61% .69%
------ ------
Total Cost of Sales 73.50% 78.10%
====== ======
Gross Margin 26.5% 21.88%
Selling, General and 37.39% 34.45%
Administrative expenses
Operating Loss (11.34%) (12.56%)
Net Loss (17.78%) (16.73%)
Revenues
Total revenues decreased 23.9% to $24,540,969 in 2002 from $32,260,777 in
2001.
Revenues from the CTU segment which traditionally sells computer
technologies products and services decreased 25.1% to $23,963,748 in 2002 from
$31,994,781 in 2001. This decrease in CTU segment revenues resulted primarily
from weaker economic conditions in 2002 and from CTU's desire to increase gross
margins versus maintaining top line revenues.
Vicom segment had no revenues.
Revenues from MultiBand increased 131% to $577,221 in 2002 from $249,590 in
2001. This increase is due to the expansion of Multiband services to ten
properties.
Gross Margin
The Company's gross margin was $6,504,219 for 2002, as compared to
$6,965,591 for 2001. The decrease of 6.6% in 2002 was due to reduced revenues.
For 2002, gross margin, as a percentage of total revenues, was 26.50% versus
21.5% for 2001. This increase in gross margin revenues is primarily due to an
increase in sale of services constituting a greater percentage of overall
revenues than in the prior year. As the Company continues to strive for bundled
sales of services, and bundled sales of equipment and services, the Company
anticipates that it will maintain its gross margin percentages in fiscal 2003.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 14.83% to $9,337,292
in 2002, compared to $10,962,739 in 2001. This decrease in expenses is primarily
related to reductions in payroll, benefits and vehicle expenses. Selling,
general and administrative expenses were, as a percentage of revenues, 38.0% for
2002 and 33.9% for 2001.
Interest Expense
Interest expense was $1,604,512 for 2002, versus $1,446,868 for 2001
reflecting an increase in debt due to capital raising efforts, valuation of
warrants issued with Preferred Stock and convertible notes, and additional
borrowings.
Net Loss
In 2002, the Company incurred a net loss of $4,438,059 compared to a net
loss of $5,325,552 for 2001. The decrease in net loss is primarily due to a
significant reduction in payroll and benefit related expenses from the prior
year.
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 and VMTS 0% 8.2%
CTU 99.2% 91.6%
MultiBand, Inc. .78% 0.2%
------- -------
Total Revenues 100.0% 100.0%
======= =======
Cost of Sales
Vicom and VMTS .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 34.45% 29.8%
Administrative expenses
Operating Loss (12.56%) (9.5%)
Net Income Loss (16.73%) (10.6%)
Revenues
Total revenues decreased 18.9% to $32,260,777 in 2001 from $39,781,846 in
2000.
Revenues from the CTU segment which traditionally sells computer
technologies products and services decreased 12.2% to $31,994,781 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.
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 Margins
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, 33.9% 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.
Unaudited Quarterly Results
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the two-year period ending
December 31, 2002. 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,
2002 2002 2002 2002 2001 2001 2001 2001
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Revenues:
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Vicom 0 0 0 0 0 0 0 0
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
CTU 5,758,953 6,227,683 5,815,531 6,161,581 5,980,561 7,618,442 7,794,443 10,617,741
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
MultiBand 192,771 154,950 128,893 100,607 88,634 60,092 35,786 65,078
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Total Revenues 5,951,724 6,382,633 5,944,424 6,262,188 6,069,195 7,678,534 7,830,229 10,682,819
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Cost of Sales 4,212,240 4,680,582 4,354,714 4,789,214 4,580,877 6,110,861 6,048,399 8,555,049
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Gross Margin 1,739,484 1,702,051 1,589,710 1,472,974 1,488,318 1,567,673 1,781,830 2,127,770
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
SG&A Expense 2,484,108 2,376,225 2,240,223 2,236,736 3,175,613 2,040,043 2,738,537 3,008,546
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Operating Loss (744,624) (674,174) (650,513) (763,762) (1,687,295) (472,370) (956,707) (880,776)
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Interest Expense (462,420) (349,388) (426,869) (365,835) (427,924) (352,735) (373,771) (292,438)
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Other Income (Expenses) 47,740 (93,171) 25,281 19,676 554,022 (480,955) 307 45,090
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Net Loss Before Taxes (1,159,304) (1,116,733) (1,052,101) (1,109,921) (1,561,197) (1,306,060) (1,330,171) (1,128,124)
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Income Tax (Benefit)
Provision 0 0 0 0 0 0 0 0
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Net Loss (1,159,304) (1,116,733) (1,052,101) (1,109,921) (1,561,197) (1,306,060) (1,330,171) (1,128,124)
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Loss Per Common Share
Basic and Diluted (.11) (.09) (.09) (.10) (.19) (.15) (.18) (.14)
- ------------------------- ------------ ------------- ------------ ------------ ------------- ------------ ------------ ------------
Liquidity and Capital Resources
Year Ended December 31, 2002
Available working capital, for 2002, decreased $679,419 due to Vicom's net
operating loss and net cash used in operating activities of $869,721. Proceeds
from issuance of long term debt, stock and warrants totaling $2,121,597 helped
offset Vicom's net operating loss. Vicom had a decrease of $38,344 in accounts
payable and other current liabilities for 2002 versus last year's period,
primarily due to significant reductions in accounts receivables which were used
to reduce payables.
Inventories year to date decreased net of reserves $182,783 over last
year's prior period inventories due to a decrease in revenues. The
aforementioned decrease in revenues also led to a decrease in accounts
receivable net of reserves of $576,509.
Total long term debt and capital lease obligation decreased by $102,631
during the year ended December 31, 2002. The Company paid out $937,828 related
to capital lease obligations and $131,605 related to long term debt during the
year ended December 31, 2002 versus $777,578 paid out in 2001.
In 2001, the Company entered into a long-term debt agreement, expiring in
2003, with an investment fund. The fund, in exchange for its $1.5 million
investment, also received 375,000 warrants and the right to convert its
investment into Vicom common stock at a predetermined price. The effect of
recording the beneficial conversion feature and warrants associated with the
convertible loan resulted in a $1,500,000 discount attributable to the warrants
in accordance with the Black-Scholes pricing model. The Company is expensing the
aforementioned warrant discount in eight quarterly installments over the two
year term of the loan. $460,000 of the debt was converted to stock in 2002
pursuant to a formula tied to the trading price of the Company's Common Stock.
In 2002, the Company borrowed $600,000 from a Director. This investment was
later converted into Class E Preferred Stock. Also in 2002, the Company
restructured its debenture with Convergent Capital, resetting the date of
principal repayment to begin in August 2005.
The Company used $1,275,434 for capital expenditures during 2002, as
compared to $1,884,945 in 2001. The decrease was primarily attributed to a
reduction in self-financed Multiband construction.
In 2002, the Company extinguished $937,828 worth of capital lease
obligations, reduced its principal indebtedness $460,000 to a note holder, and
converted another $600,000 worth of debt to Preferred Stock. All these events,
combined, with the aforementioned refinancing and delayed principal repayment to
its largest debt holder, should materially improve projected cash flows
throughout 2003 provided Company operating losses continue to diminish.
Net cash used by operations was approximately $869,721 in 2002 versus net
cash used by operations of $502,110 in 2001. The cash used by operations in 2002
is due primarily to net operating losses, and reductions in accounts payable and
wholesale line of credit balances in that year. During the years ended December
31, 2002 and December 31, 2001, the Company incurred significant net losses.
Although the majority of these losses were due to non-cash expenses, the Company
still continued to incur cash losses as well due to general corporate expense
and continuing expenses related to the building out of its Multiband network.
The Company in 2002 significantly cut its selling, general and administrative
expenses which led to a material decrease in cash losses. The on-going addition
of Multiband properties in the Company's portfolio also generated additional
cash flows in 2002 and these Multiband cash flows are projected to improve
meaningfully in 2003. Management of Vicom believes that, for the near future,
cash generated from new investments combined with existing credit facilities are
adequate to meet the anticipated liquidity in capital resource requirements of
its business, contingent upon Company operating results for the next twelve
months.
Year Ended December 31, 2001
Available working capital, for 2001, decreased $2,443,565 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 2000, 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 2000
inventories due to a decrease in revenues. The aforementioned decrease in
revenues also led to a decrease in accounts receivable net of reserves of
$3,087,313.
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 $777,578 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 attributable to the warrants
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.
Critical Accounting Policies
Impairment of Long-Lived Assets
The Company's long-lived assets include property, equipment and leasehold
improvement. At December 31, 2002, the Company had net property and equipment of
$3,248,973, which represents approximately 31% of the Company's total assets.
The estimated fair value of these assets is dependent on the Company's future
performance. In assessing for potential impairment for these assets, the Company
considers future performance. If these forecasts are not met, the Company may
have to record an impairment charge not previously recognized, which may be
material. In 2002, the Company recorded an impairment of $119,480 on property
plant and equipment. During the years ended December 31, 2001 and 2000, the
Company did not record any impairment losses related to long-lived assets.
Impairment of Goodwill
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and
operational performance of our acquired businesses. Future events could cause us
to conclude that impairment indicators exist and that goodwill associated with
our acquired businesses, which amounts to $2,748,879 (or 26% of total assets),
may be impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations. During the years
ended December 31, 2002, 2001 and 2000, 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 April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
effective for fiscal years beginning after May 15, 2002. The Company believes
the adoption of SFAS No. 145 will not have a material effect on the Company's
consolidated financial position or results of operations.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 requires the recognition of a
liability for a cost associated with an exit or disposal activity when the
liability is incurred versus the date the Company commits to an exit plan. In
addition, SFAS No. 146 states the liability should be initially measured at fair
value. The requirements of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company believes the
adoption of SFAS No. 146 will not have a material effect on the Company's
consolidated financial position or results of operations.
In October 2002, FASB issued SFAS No. 147, "Acquisitions of Certain Financial
Institutions." SFAS No. 147 is effective October 1, 2002. The adoption of SFAS
No. 147 did not have a material effect on the Company's consolidated financial
position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 is an amendment to SFAS
No. 123 providing alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation
and also provides required additional disclosures about the method of accounting
for stock-based employee compensation. The amendments are effective for
financial statements for fiscal years ending after December 15, 2002 and for the
interim periods beginning after December 15, 2002. The Company adopted the
annual disclosure provisions of SFAS No. 148. The Company has currently chosen
not to adopt the voluntary change to the fair value based method of accounting
for stock-based employee compensation, pursuant to SFAS No. 148, which, if
adopted, could have a material effect on the Company's consolidated financial
position or results of operations.
Disclosures about Contractual Obligations and Commercial Commitments
The following summarizes our contractual obligations at December 31, 2002,
and the effect these contractual obligations are expected to have on our
liquidity and cash flows in future periods (in thousands):
Total 1 Year of Less 1-3 Years Over 3 Years
----------- ----------- ----------- -----------
Operating Leases $ 4,954,000 $ 519,000 $ 1,382,000 $ 3,053,000
Capital Leases 272,282 79,307 156,894 36,081
Long Term Debt 4,090,140 321,589 2,923,507 845,044
Wholesale Line of Credit 1,290,383 1,290,383 -- --
----------- ----------- ----------- -----------
Total $10,606,805 $ 2,210,279 $ 4,462,401 $ 3,934,125
=========== =========== =========== ===========
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.
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 and Supplementary Data
VICOM, INCORPORATED AND SUBSIDIARIES
New Hope, Minnesota
December 31, 2002, 2001, and 2000
CONSOLIDATED FINANCIAL STATEMENTS
Including Independent Auditors' Report
VICOM, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Independent Auditors' Report 1
Independent Auditors' 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 Auditors' Report on Supplementary Information 29A
Valuation and Qualifying Accounts 30
INDEPENDENT AUDITORS' REPORT
To Stockholders, Board of Directors, and Audit Committee
Vicom, Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheets of Vicom,
Incorporated and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years 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 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 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, 2002 and 2001, and the results
of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
February 14, 2003
Page 1
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Vicom, Incorporated and Subsidiaries
New Hope, Minnesota
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Vicom, Incorporated and Subsidiaries for
the year ended December 31, 2000. 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.
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 of
Vicom, Incorporated and Subsidiaries present fairly, in all material respects,
the consolidated results of their operations and their cash flows for the year
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
February 15, 2001
Page 1A
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
ASSETS
2002 2001
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 540,375 $ 624,845
Accounts receivable, net 1,948,004 2,573,749
Inventories, net 1,463,658 1,646,441
Other current assets 226,774 295,324
------------ ------------
Total Current Assets 4,178,811 5,140,359
------------ ------------
PROPERTY AND EQUIPMENT, NET 3,248,973 4,059,831
------------ ------------
OTHER ASSETS
Goodwill 2,748,879 2,748,879
Other assets 170,653 260,612
------------ ------------
Total Other Assets 2,919,532 3,009,491
------------ ------------
TOTAL ASSETS $ 10,347,316 $ 12,209,681
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Wholesale line of credit $ 1,290,383 $ 1,324,807
Current portion of long-term debt 321,589 85,789
Current portion of capital lease obligations 59,570 309,906
Accounts payable 1,735,931 1,800,285
Accrued liabilities 714,479 776,417
Deferred service obligations and revenue 309,729 416,606
------------ ------------
Total Current Liabilities 4,431,681 4,713,810
LONG-TERM DEBT, NET 3,114,006 2,669,510
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 159,344 642,360
------------ ------------
Total Liabilities 7,705,031 8,025,680
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,831 and 28,872 shares issued and outstanding) 418,252 433,867
10% Class B (6,200 and 8,700 shares issued and outstanding) 62,000 87,000
10% Class C (131,510 and 139,510 shares issued and outstanding) 1,699,407 1,800,447
14% Class D (0 and 40,000 shares issued and outstanding) -- 417,500
15% Class E (70,000 and 0 shares issued and outstanding) 395,778 --
Common stock, no par value (13,110,477 and 10,679,450 shares issued;
13,065,410 and 10,604,113 shares outstanding) 4,465,832 3,443,104
Stock subscriptions receivable (633,195) (631,619)
Options and warrants 26,632,299 24,957,912
Unamortized compensation (682,089) (1,209,143)
Accumulated deficit (29,715,999) (25,115,067)
------------ ------------
Total Stockholders' Equity 2,642,285 4,184,001
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,347,316 $ 12,209,681
============ ============
See accompanying notes to consolidated financial statements.
Page 2
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001 and 2000
- --------------------------------------------------------------------------------
2002 2001 2000
------------ ------------ ------------
REVENUES $ 24,540,969 $ 32,260,777 $ 39,781,846
------------ ------------ ------------
COST AND EXPENSES
Cost of products and services 18,036,750 25,295,186 31,698,569
Selling, general and administrative 9,337,292 10,962,739 11,852,041
------------ ------------ ------------
Total Costs and Expenses 27,374,042 36,257,925 43,550,610
------------ ------------ ------------
LOSS FROM OPERATIONS (2,833,073) (3,997,148) (3,768,764)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (1,604,512) (1,446,868) (607,418)
Interest income 64,083 63,717 23,291
Other income (64,557) 54,747 126,060
------------ ------------ ------------
Total Other Expense (1,604,986) (1,328,404) (458,067)
------------ ------------ ------------
Loss Before Income Taxes (4,438,059) (5,325,552) (4,226,831)
PROVISION FOR INCOME TAXES -- -- 9,000
------------ ------------ ------------
NET LOSS $ (4,438,059) $ (5,325,552) $ (4,235,831)
Preferred stock dividends 153,578 432,669 846,180
------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,591,637) $ (5,758,221) $ (5,082,011)
============ ============ ============
LOSS PER COMMON SHARE- BASIC AND DILUTED $ (0.39) $ (0.66) $ (0.72)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC AND
DILUTED 11,735,095 8,762,814 7,009,751
============ ============ ============
See accompanying notes to consolidated financial statements.
Page 3
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001, and 2000
Cumulative Convertible Preferred Stock
- --------------------------------------------------------------------------------
8% Class A 10% Class B 10% Class C
------------------------- ------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
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
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 stock dividends -- -- -- -- -- 442,903
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 2000 -- -- 22,836 218,869 150,810 1,951,003
Stock issued:
Cash 32,050 320,500 -- -- -- --
Stock subscriptions receivable -- -- -- -- -- --
Acquisition of assets 10,640 106,400 -- -- -- --
Purchase of intangible asset -- -- -- -- -- --
Guarantee of debt financing -- -- -- -- -- --
Conversion of accounts payable 3,500 35,000 -- -- -- --
Conversion of accrued liabilities 9,631 96,306 -- -- -- --
Conversion of notes payable 5,804 58,044 -- -- -- --
Conversion of preferred stock (31,000) (310,000) (13,150) (131,500) (7,800) (78,000)
Conversion of dividends payable 6,030 60,300 -- -- -- --
Redemption of preferred stock (7,783) (77,830) (986) (369) (3,500) (35,000)
Discount on preferred stock related to -- 145,147 -- -- -- (37,556)
warrants
Interest receivable on stock subscription -- -- -- -- -- --
receivable
Warrants issued: -- --
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Debt -- -- -- -- -- --
Deferred compensation expense related to -- -- -- -- -- --
stock options issued below fair market value
Deferred compensation expense -- -- -- -- -- --
Restricted stock: -- --
Issued -- -- -- -- -- --
14% Class D 15% Class E
------------------------- --------------
Shares Amount Shares Amount
----------- ----------- ------ ------
BALANCES, December 31, 1999 -- $ -- -- $--
Stock issued:
Options and warrants exercised -- -- -- --
Other cash 72,500 490,332 -- --
Conversion of notes payable -- -- -- --
Conversion of preferred stock -- -- -- --
Redemption of preferred stock -- -- -- --
Issuance costs -- -- -- --
Warrants issued:
Warrant dividend -- -- -- --
Common stock -- -- -- --
Preferred stock -- -- -- --
Services -- -- -- --
Cash -- -- -- --
Restricted stock:
Issued -- -- -- --
Forfeited -- -- -- --
Amortization expense -- -- -- --
Preferred stock dividends -- 312,481 -- --
Net loss -- -- -- --
----------- ----------- ------ ------
BALANCES, December 31, 2000 72,500 802,813 -- --
Stock issued:
Cash -- -- -- --
Stock subscriptions receivable -- -- -- --
Acquisition of assets -- -- -- --
Purchase of intangible asset -- -- -- --
Guarantee of debt financing -- -- -- --
Conversion of accounts payable -- -- -- --
Conversion of accrued liabilities -- -- -- --
Conversion of notes payable 10,000 100,000 -- --
Conversion of preferred stock -- -- -- --
Conversion of dividends payable -- -- -- --
Redemption of preferred stock (42,500) (425,000) -- --
Discount on preferred stock related to -- (60,313) -- --
warrants
Interest receivable on stock subscription -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- --
Common stock -- -- -- --
Debt -- -- -- --
Deferred compensation expense related to -- -- -- --
stock options issued below fair market value
Deferred compensation expense -- -- -- --
Restricted stock:
Issued -- -- -- --
Page 4
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Repricing of warrants -- -- -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 2001 28,872 433,867 8,700 87,000 139,510 1,800,447
Stock issued:
Cash -- -- -- -- -- --
Notes receivable -- -- -- -- -- --
Acquisition of assets 1,859 18,590 -- -- -- --
Guarantee of debt financing -- -- -- -- -- --
Services rendered -- -- -- -- -- --
Conversion of accounts payable -- -- -- -- -- --
Conversion of notes payable and accrued -- -- -- -- -- --
interest
Conversion of accrued interest -- -- -- -- -- --
Conversion of preferred stock -- -- (2,500) (25,000) (2,500) (25,000)
Redemption of preferred stock (2,900) (29,000) -- -- (5,500) (55,000)
Discount on preferred stock related to -- (5,205) -- -- -- (21,040)
warrants issued
Interest receivable on stock subscription -- -- -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Debt -- -- -- -- -- --
Deferred compensation expense related to -- -- -- -- -- --
stock options issued below fair market value
Deferred compensation expense -- -- -- -- -- --
Restricted stock:
Issued and outstanding -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 2002 27,831 $ 418,252 6,200 $ 62,000 131,510 $ 1,699,407
========= =========== =========== =========== =========== ===========
Forfeited -- -- -- --
Amortization expense -- -- -- --
Repricing of warrants -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCES, December 31, 2001 40,000 417,500 -- --
Stock issued:
Cash -- -- 10,000