AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 2004
REGISTRATION NO. 333-
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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VICOM, INCORPORATED
(Exact name of registration as specified in its charter)
MINNESOTA 4813 41-1255001
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
9449 SCIENCE CENTER DRIVE
NEW HOPE, MINNESOTA 55428
(763) 504-3000
(Address, including zip code, and telephone number,
including area code of registrant's principal executive offices)
JAMES L. MANDEL
CHIEF EXECUTIVE OFFICER
VICOM INC.
9449 SCIENCE CENTER DRIVE
NEW HOPE, MINNESOTA 55428
(763) 504-3000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
STEVEN M. BELL, ESQ.
VICOM INC.
9449 SCIENCE CENTER DRIVE
NEW HOPE, MINNESOTA 55428
(763) 504-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED
SALE TO PUBLIC: As soon as practicable after this
registration statement becomes effective.
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If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective date registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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Page 1
CALCULATION OF REGISTRATION FEE
------------------------------------------------- ---------------- ------------------------ ---------------------- ---------------
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to be Registered Amount to Offering Price Offering Price (1) Registration
Be Registered Per Unit (1) Fee
------------------------------------------------- ---------------- ------------------------ ---------------------- ---------------
Shares of Common Stock par value $0.01 per share 1,650,000 $1.33 $2,194,500 $278.00
------------------------------------------------- ---------------- ------------------------ ---------------------- ---------------
Shares of Common Stock, par value $0.01 per 554,500 $1.33 $737,485 $93.00
share, underlying Warrants
------------------------------------------------- ---------------- ------------------------ ---------------------- ---------------
Totals 2,204,500 $1.33 $2,931,985 $371.00
------------------------------------------------- ---------------- ------------------------ ---------------------- ---------------
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933. Based on the
closing price for the common stock on July 6, 2004 as reported on the Nasdaq
Stock Market.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
Page 2
(Subject to Completion) THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES AND WE ARE NOT SOLICITING OFFERS
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS Issued July 9, 2004
VICOM, INCORPORATED
2,204,500 Shares of Common Stock
The selling shareholders are offering up to an aggregate of 2,204,500
shares of our common stock. Of the shares of common stock being offered by the
selling shareholders, (i) 554,500 shares may be purchased upon exercise of
outstanding warrants and (ii) 1,650,000 shares are currently owned by
shareholders who acquired such shares in private placements to accredited
investors.
We will not receive any proceeds from the sale of common stock by the
selling shareholders under this prospectus. However, we will receive proceeds
upon any exercise of the warrants. See "Use of Proceeds" on page 7.
Our common stock is traded on the Nasdaq Stock Market under the symbol
"VICM." On July 6, 2004, the closing price of our common stock as reported by
NASDAQ was $1.33 per share.
The selling shareholders may offer the shares through public or private
transactions, on or off the NASDAQ Stock Market exchange, at prevailing market
prices or at privately negotiated prices. The selling shareholders may make
sales directly to purchasers or through agents, dealers or underwriters.
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YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS
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The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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THE DATE OF THIS PROSPECTUS IS JULY 9, 2004.
Page 3
TABLE OF CONTENTS
Page
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Prospectus Summary 4
Risk Factors 7
Forward-Looking Statements 9
Use of Proceeds 10
Dividend Policy 10
Capitalization 10
Selected Financial Data 11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Business 19
Management 24
Certain Transactions 31
Principal and Selling Shareholders 33
Plan of Distribution 36
Description of Securities 37
Legal Matters 39
Experts 39
Where You Can Find More Information 39
Index to Financial Statements F1
2,204,500 Shares
Vicom,
Incorporated
Common Stock
--------------------
PROSPECTUS
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July 9, 2004
Page 3
PROSPECTUS SUMMARY
This summary highlights selected information and does not contain all
the information that is important to you. You should carefully read this
prospectus and the documents we have referred you to in "Where You Can Find More
Information" for more information about Vicom and our financial statements. In
this prospectus, references to "Vicom," "we," "us" "our" and "Company" refer to
Vicom, Incorporated and its subsidiaries.
Our Company
Vicom, Incorporated (Vicom) is a Minnesota corporation formed in
September 1975. Vicom has two operating divisions: 1) Multiband Business
Services (MBS, legally known as Corporate Technologies, USA, Inc dba Multiband),
and Multiband Consumer Services (MCS), which encompasses the wholly owned
subsidiary corporations, Multiband USA, Inc., URON, Inc. and Minnesota Digital
Universe, Inc.
Vicom completed an initial public offering in June 1984. In November
1992, Vicom became a non-reporting company under the Securities Exchange Act of
1934. In July 2000, Vicom regained its reporting company status. In December,
2000, Vicom stock began trading on the NASDAQ stock exchange under the symbol
VICM.
Vicom's website is located at: www.vicominc.net.
----------------
As of June 2, 2004, MBS was providing telephone equipment and service
to approximately 800 customers, with approximately 17,000 telephones in service.
In addition, MBS provided computer products and services to approximately 1,800
customers. Telecommunications systems distributed by MBS are intended to provide
users with flexible, cost-effective alternatives as compared to systems
available from major telephone companies, including those formerly comprising
the Bell System and from other interconnect telephone companies.
MBS provides a full range of voice, data and video communications
systems and service, system integrations, training and related communication
sales and support activities for commercial, professional and institutional
customers, most of which are located in Minnesota and North Dakota. MBS
purchases products and equipment from NEC America, Inc. (NEC), Cisco Systems,
Inc. (Cisco), Nortel Networks Corp (Nortel), Tadiran Telecommunications, Inc.
(Tadiran), and other manufacturers of communications and electronic products and
equipment. MBS uses these products to design telecommunications and computer
systems to fit its customers' specific needs and demands.
Numbers of Units/Customers
At June 2, 2004, MCS had 10,128 subscribers using its services (1,110
using voice services, 6,738 using video services and 2,280 using internet
services).
Page 4
THE OFFERING
--------------------------------------------------- --------------------------------------------------------------------------------
Common stock offered 1,650,000 (1)
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Common stock to be outstanding after the offering 26,413,332 (2)
--------------------------------------------------- --------------------------------------------------------------------------------
Use of proceeds We intend to use the net proceeds from the exercise of the
warrants for working capital and other general corporate purposes. See"Use of
Proceeds".
--------------------------------------------------- --------------------------------------------------------------------------------
(1) The selling shareholders are offering up to an aggregate of 2,204,500 shares
of our common stock. Of the shares of common stock being offered by the selling
shareholders, (i) 554,500 shares may be purchased upon exercise of outstanding
warrants and (ii)1,650,000 shares are currently owned by shareholders who
acquired such shares in private placements to accredited investors.
(2) The information is based on the number of shares of common stock outstanding
as of June 2, 2004 and assumes that all of the warrants to purchase 554,500
shares were exercised. The number of shares outstanding does not include the
following:
o 7,678,938 shares of common stock issuable upon the exercise of
warrants outstanding as of June 2, 2004 with a weighted average
exercise price of $1.88 per share;
o 7,141 shares of unvested restricted stock grants as of June 2, 2004
with a weighted average grant price of $2.76 per share;
o 2,500,000 shares of common stock reserved for additional issuances
under our stock plans as of June 2, 2004; and
o 1,055,155 shares of common stock issuable upon the conversion of
shares of our 8% Class A Cumulative Convertible Preferred Stock
("Class A Preferred"), 10% Class B Cumulative Convertible Preferred
Stock ("Class B Preferred"), 10% Class C Cumulative Convertible
Preferred Stock ("Class C Preferred") and 15% Class E Cumulative
Convertible Preferred Stock ("Class E Preferred") outstanding as of
June 2, 2004.
o 941,558 shares upon conversion of a note owed as of June 2, 2004.
Page 5
SUMMARY FINANCIAL DATA
The following table sets forth certain summary financial data for
Vicom, Incorporated and should be read in conjunction with the Consolidated
financial Statements of Vicom, Incorporated included in this Prospectus
Supplement.
------------------------------------- ---------------------------------------------------------- -----------------------------------
Statement of Operations Data: Years Ended December 31, Three Months Ended March 31,
------------------------------------- ---------------------------------------------------------- -----------------------------------
2003 2002 2001 2004 2003
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Revenues $22,640,421 $24,540,969 $32,260,777 $5,747,474 $5,871,762
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Loss from operations $(3,496,307) $(2,833,073) $(3,997,148) $(1,198,328) $(674,936)
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Loss $(4,365,004) $(4,438,059) $(5,325,552) $(1,516,864) $(966,119)
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Loss per share-basic and diluted $(0.29) $(0.39) $(0.66) $(0.08) $(0.07)
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Weighted average shares outstanding 16,112,231 11,735,095 8,762,814 19,280,632 13,418,333
basic and diluted
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
------------------------------------- ---------------------------------------------------------- -----------------------------------
Balance Sheet Data:: Years Ended December 31, As of March 31, 2004
------------------------------------- ---------------------------------------------------------- -----------------------------------
Actual As Adjusted (1)
2003 2002 2001 (unaudited) (unaudited)
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Cash $2,945,960 $540,375 $624,845 $1,602,593 $2,808,038
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Total assets $13,902,885 $10,347,316 $12,209,681 $13,116,625 $14,322,570
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Working capital (deficit) $1,118,792 $(252,870) $426,549 $190,220 $1,395,665
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Total liabilities $8,068,540 $7,705,031 $8,025,680 $8,251,880 $8,251,880
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
Total stockholders' equity $5,807,711 $2,642,285 $4,184,001 $4,864,745 $6,070,110
------------------------------------- ------------------- ------------------ ------------------- ------------------ ----------------
(1) The As Adjusted column gives effect to the exercise of all warrants to
purchase the shares of common stock covered by this prospectus and the
application of the net proceeds from the exercise of the warrants, after
deducting our estimated offering expenses.
Page 6
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
aggregate, possessed expertise in data networking, voice and data cabling and
video distribution technologies.
In early 2000, Vicom created its MCS division, employing the
aforementioned expertise, to provide communications and entertainment services
(local dial tone, long distance, high-speed internet and expanded satellite
television services) to residents in Multi-Dwelling-Unit properties (MDU's) on
one billing platform. Although MCS revenues (recurring subscriber fees)
accounted for less than 6% of overall Vicom revenues in 2003, Vicom expects MCS
related revenues to increase significantly in 2004 as a percentage of overall
revenues. These revenues are expected to provide higher gross margins than the
Company's more traditional sales to commercial enterprises.
The specific risk factors, as detailed below, should be analyzed in the
context of the Company's anticipated MCS related growth.
Net Losses
The Company had net losses of $4,365,004 for the fiscal year ended
December 31, 2003, $4,438,059 for the fiscal year ended December 31, 2002, and
$5,325,552 for the fiscal year ended December 31, 2001. Vicom may never be
profitable.
The prolonged effects of generating losses without additional funding
may restrict our ability to pursue our business strategy. Unless our business
plan is successful, an investment in our common stock may result in a complete
loss of an investor's capital.
If we cannot achieve profitability from operating activities, we may
not be able to meet:
o our capital expenditure objectives;
o our debt service obligations; or
o our working capital needs.
Dependence on Asset-Based Financing
Vicom currently depends on asset-based financing to purchase product,
and we cannot guarantee that such financing will be available in the future.
Furthermore, we need additional financing to support the anticipated growth of
our MCS subsidiary. We cannot guarantee that we will be able to obtain this
additional financing.
However, the Company recently introduced a program where it can control
capital expenditures by contracting Multiband services and equipment through a
landlord or third party investor owned equipment program. This program both
significantly reduces any Company expenditures in a Multi-dwelling-unit
installation and permits the Company to record revenues from the third party
sale of said equipment.
Goodwill
In June 2001, the Financial Accounting Standards Board (FASB) adopted
Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other
Intangible Assets" which changes the amortization rules on recorded goodwill
from a
Page 7
monthly amortization to a periodic "impairment" analysis for fiscal years
beginning after December 15, 2001. In 2003, the Company retained an independent
outside expert to evaluate the impact of this new accounting standard and the
expert concluded there was no impairment to goodwill. However, the Company could
be subject to a determination that its goodwill is impaired in the future. As of
December 31, 2003, the Company had recorded goodwill of approximately $2.7
million.
Deregulation
Several regulatory and judicial proceedings have recently concluded,
are underway or may soon be commenced that address issues affecting operations
and those of our competitors, which may cause significant changes to our
industry. We cannot predict the outcome of these developments, nor can we assure
you that these changes will not have a material adverse effect on us.
Historically, we have been a reseller of products and services, not a
manufacturer or carrier requiring regulation of its activities. Pursuant to
Minnesota statutes, our Multiband activity is specifically exempt from the need
to tariff our services in multiple dwelling units (MDU's). 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, 2005. 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 June 1, 2004, was providing
communications and entertainment services to 41 MDU's primarily located in
Minnesota, North Dakota, Missouri and Florida. Vicom needs to provide products
and services to additional MDU's 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 MDU's 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.
Page 8
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. The exercise of
outstanding options or warrants could also lead to future sales of our common
stock which could depress our market price.
Competition
We face competition from others who are competing for a share of the
MDU market, including other satellite companies and cable companies. Some of
these companies have significantly greater assets and resources than we do.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of
federal securities law. Terminology such as "may," "will," "expect,"
"anticipate," "believe," "estimate," "continue," "predict," or other similar
words, identify forward-looking statements. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other forward-looking information. Forward-looking statements
appear in a number of places in this prospectus and include statements regarding
our intent, belief or current expectation about, among other things, trends
affecting the industries in which we operate, as well as the industries we
service, and our business and growth strategies. Although we believe that the
expectations reflected in these forward-looking statements are based on
reasonable assumptions, forward-looking statements are not guarantees of future
performance
Page 9
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."
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of
common stock by the selling shareholders under this prospectus. However, we will
receive proceeds of $1,225,445 from the exercise of the warrants at an exercise
price of $2.21 per share, estimated at $1,205,445 after payment of the offering
expenses. We have agreed to pay all of the expenses related to this offer,
estimated to be approximately $20,000.
We expect to use the net proceeds from the exercise of the warrants
primarily for working capital and other general corporate purposes, including
expenditures for sales and marketing and fixed assets and inventory. No specific
amount has been allocated to any particular purpose. Pending these uses, we
intend to invest the net proceeds of this offering in investment grade,
interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock, nor do we have
plans to do so in the foreseeable future. The declaration and payment of any
cash dividends on our common stock in the future will be determined by our Board
of Directors, in its discretion, and will depend on a number of factors,
including our earnings, capital requirements and overall financial condition.
The holders of our Series A Cumulative Convertible Preferred Stock are
entitled to receive a cumulative dividend of 8% per year, payable quarterly, and
the holders of our Series B Convertible and Series C Convertible Preferred Stock
are entitled to receive cumulative dividends of 10% per year, payable monthly
and the holders of our Series E Convertible Preferred Stock are entitled to
receive a cumulative dividend of 15% per year, payable in kind quarterly.
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March 31,
2004 and our capitalization as adjusted to reflect the issuance and sale of
554,500 shares of common stock upon exercise of the warrants and the historical
financial statements and notes thereto included elsewhere in this prospectus.
------------------------------------------------------------------------------------------------ -----------------------------------
As of March 31, 2004
------------------------------------------------------------------------------------------------ ------------------ ----------------
Actual As Adjusted (1)
(unaudited) (unaudited)
------------------------------------------------------------------------------------------------ ------------------ ----------------
Preferred stock:
------------------------------------------------------------------------------------------------ ------------------ ----------------
8% Class a cumulative convertible - no par value 27,931 shares issued and outstanding $419,752 $419,752
------------------------------------------------------------------------------------------------ ------------------ ----------------
10% Class B cumulative convertible - no par value 8,700 shares issued and outstanding $62,000 $62,000
------------------------------------------------------------------------------------------------ ------------------ ----------------
10% Class C cumulative convertible - no par value 125,400 shares issued and outstanding $1,611,105 $1,611,105
------------------------------------------------------------------------------------------------ ------------------ ----------------
15% Class E - no par value 77,650 shares issued and outstanding $438,964 $438,964
------------------------------------------------------------------------------------------------ ------------------ ----------------
Common stock - no par value 19,450,294 issued, 19,440,150 outstanding $8,230,982 $9,436,427
------------------------------------------------------------------------------------------------ ------------------ ----------------
Stock Subscription receivable $(415,085) $(415,085)
------------------------------------------------------------------------------------------------ ------------------ ----------------
Options and Warrants $30,514,872 $30,514,872
------------------------------------------------------------------------------------------------ ------------------ ----------------
Unamortized Compensation $(88,136) $(88,136)
------------------------------------------------------------------------------------------------ ------------------ ----------------
Accumulated deficit $(35,909,709) $(35,909,704)
------------------------------------------------------------------------------------------------ ------------------ ----------------
Page 10
SELECTED 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 as of December 31, 2003 and 2002 and the three months
ended March 31, 2004 and for each of the three years in the period ended
December 31, 2003 and the three months ended March 31, 2004 and 2003 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, 2000 and 1999 and the Balance Sheet Data at December 31,
2001, 2000 and 1999 have been derived from our audited financial statements
which are not contained in this prospectus.
------------------ --------------------------------------------------------------------------------- -------------------------------
Statement of
Operations Data Years Ended December 31, Three Months Ended March 31,
------------------ --------------------------------------------------------------------------------- -------------------------------
2003 2002 2001 2000 1999 2004 2003
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Revenues $22,640,421 $24,540,969 $32,260,777 $39,781,846 $20,388,870 $5,747,474 $5,871,762
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Cost of products $15,952,019 $18,036,750 $25,295,186 $31,698,569 $16,247,898 $4,348,949 $4,310,702
and services
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Gross Profit $6,688,402 $6,504,219 $6,965,591 $8,083,277 $4,140,972 1,398,525 $1,561,060
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
%of revenues 29.5% 26.5% 21.6% 20.3% 20.3% 24.3% 26.6%
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Selling, general $10,184,709 $9,337,292 $10,962,739 $11,852,041 $5,823,945 $2,596,953 $2,235,996
& administrative
expenses
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
% of revenues 45.0% 38.0% 34.0% 29.8% 28.6% 45.2% 38.1%
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Loss from $(3,496,307) $(2,833,073) $(3,997,148) $(3,768,764) $(1,682,973) $(1,198,328) $(674,936)
operations
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Other expense, $(902,063) $(1,604,986) $(1,328,404) $(458,067) $(139,461) $(318,536) $(291,183)
net
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Loss before $(4,365,004) $(4,438,059) $(5,325,552) $(4,226,831) $(1,822,434) $(1,516,864) $(966,119)
income taxes
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Income tax $0 $0 $0 $9,000 $241,200 $0 $0
provision
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Net Loss $(4,365,004) $(4,438,059) $(5,325,552) $(4,235,831) $(2,063,634) $(1,516,864) $(966,119)
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Preferred stock $(153,578) $(432,669) $(846,180) $(37,969) $(62,653) $(56,471)
dividends $(248,689)
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Loss $(4,613,693) $(4,591,637) $(5,758,221) $(5,082,011) $(2,101,603) $(1,579,517) $(1,022,590)
attributable to
common
stockholders
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Loss per common $(0.29) $(0.39) $(0.66) $(0.72) $(0.55) $(0.08) $(0.08)
share basic and
diluted
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
Weighted average 16,112,231 11,735,095 8,762,814 7,009,751 3,821,978 19,280,632 13,418,333
shares
outstanding
------------------ --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------
------------------ --------------------------------------------------------------------------------- ---------------
Balance Sheet Years Ended December 31,
Data
------------------ --------------------------------------------------------------------------------- ---------------
2003 2002 2001 2000 1999 March 31, 2004
------------------ --------------- ---------------- --------------- --------------- ---------------- ---------------
Working capital $1,118,792 $(252,870) $426,549 $2,870,114 $(2,882,907) $190,220
(deficiency)
------------------ --------------- ---------------- --------------- --------------- ---------------- ---------------
Total assets $13,902,885 $10,347,316 $12,209,681 $15,614,573 $12,598,745 $13,116,625
------------------ --------------- ---------------- --------------- --------------- ---------------- ---------------
Long-term debt $2,262,891 $3,273,350 $3,316,870 $3,362,083 $926,821 $2,495,296
------------------ --------------- ---------------- --------------- --------------- ---------------- ---------------
Stockholders' $5,807,711 $2,642,285 $4,184,001 $5,876,352 $1,026,344 $4,864,745
equity
------------------ --------------- ---------------- --------------- --------------- ---------------- ---------------
Page 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERTIONS
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.
Three Months Ended March 31, 2004 and March 31, 2003
Revenues
Revenues decreased 2.1% to $5,747,474 in the quarter ended March 31,
2004, as compared to $5,871,762 for the quarter ended March 31, 2003.
Revenues for (MBS) decreased 10.1% in the first quarter of fiscal 2004
to $5,066,929 as compared to $5,636,642 in the first quarter of fiscal 2003
primarily as a result of reduced spending by a few larger MBS customers. The
Company is diversifying its customer base to add medium and small businesses and
as a result the Company expects revenues will stabilize in future quarters.
Revenues for MCS increased 189.4% to $680,545 as compared to $235,120
in the first quarter of fiscal 2003. This increase is due to expansion of MCS
services to eight additional properties and the acquisition of URON cable
services. Future expansion of MCS will be primarily through acquisitions
financed with cash and equity which are expected to significantly increase
quarterly revenues beginning in the second quarter.
Gross Margin
The Company's gross margin decreased 6% or $162,435 to $1,398,625 for
the quarter ended March 31, 2004 as compared to $1,561,060 for the similar
quarter last year. For the quarter ended March 31, 2003, as a percent of total
revenues, gross margin was 24.3% as compared to 26.6% for the similar period
last year.
Gross margin for MBS decreased by 26.2% to $1,092,476 for the quarter
ended March 31, 2004, as compared to $1,479,587 in the first quarter of fiscal
2003 due to lower MBS sales and lower profits on those sales.
Gross margin for MCS for the quarter ended March 31, 2004 increased
275.8% to $306,149 as compared to $81,473 in the first quarter of fiscal 2003
reflecting on the increase of revenue being billed. The Company expects a slight
increase in its gross margin on a consolidated basis going forward due to an
increased amount of subscriber revenues contained in the Company's overall
revenue mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 16.1% to
$2,596,953 in the quarter ended March 31, 2004, compared to $2,235,996 in the
prior year quarter. This increase is primarily a result of increased expenses
related to the addition of multiple properties in the MCS division. Selling,
general and administrative expenses were, as a percentage of revenues, 45.2% for
the quarter ended March 31, 2004 and 38.1% for the similar period a year ago.
Interest Expense
Interest expense was $321,377 for the quarter ended March 31, 2004,
versus $225,687 for the similar period a year ago, reflecting an increase in the
Company's long term debt. Amortization of original issue discount was $188,979
and $114,616 for the three months ended March 31, 2004 and 2003.
Net Loss
In the first quarter of fiscal 2004, the Company incurred a net loss of
$1,516,864 compared to a net loss of $966,119 for the first fiscal quarter of
2003.
Page 12
Years Ended December 31, 2003 and December 31, 2002
Results of Operations
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenue.
2003 2002
------- -------
Revenues
Vicom 0% 0%
MBS 93.63% 97.65%
MCS 6.37% 2.35%
----- -----
Total Revenues 100.0% 100.0%
====== ======
Cost of Sales
Vicom 0% 0%
MBS 66.55% 71.89%
MCS 3.91% 1.61%
----- -----
Total Cost of Sales 70.46% 73.50%
====== ======
Gross Margin 29.54% 26.5%
Selling, General and 44.98% 37.39%
Administrative expenses
Operating Loss (15.44%) (11.34%)
Net Loss (19.28%) (17.78%)
Revenues
Total revenues decreased 7.7% to $22,640,421 in 2003 from $24,540,969
in 2002.
Revenues from the MBS segment which traditionally sells telephone and
computer technologies products and services decreased 11.5% to $21,199,303 in
2003 from $23,963,748 in 2002. This decrease in MBS segment revenues resulted
primarily from weaker economic conditions in 2003 and from MBS's desire to
increase gross margins versus maintaining top line revenues. MBS is increasing
margins by focusing more on sales of services versus sales of product.
Vicom segment had no revenues.
Revenues from MCS increased 149.7% to $1,441,118 in 2003 from $577,221
in 2002. This increase is due to the expansion of MCS services to nineteen
apartment properties and eighteen timeshare properties.
Gross Margin
The Company's gross margin was $6,688,402 for 2003, as compared to
$6,504,219 for 2002. The increase of 2.8% in 2003 was primarily due to an
increase in consumer recurring revenues comprising a greater percentage of
overall revenues. For 2003, gross margin, as a percentage of total revenues, was
29.5% versus 26.5% for 2002. The Company expects gross margins to maintain or
even slightly increase in future periods as recurring revenues become a greater
percentage of the Company's overall revenue mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 9.1% to
$10,184,709 in 2003, compared to $9,337,292 in 2002. This increase in expenses
is primarily related to increased payroll and facility expense and costs
incurred for re-branding Vicom operating divisions as Multiband. Increased
payroll primarily resulted from acquisition related payroll expense and increase
in officer compensation in 2003. Selling, general and administrative expenses
were, as a percentage of revenues, 45.0% for 2003 and 38.0% for 2002. The
Company expects these expenses to remain stable or even slightly decrease as a
percentage of revenues in 2004.
Interest Expense
Interest expense was $897,704 for 2003, versus $1,604,512 for 2002
reflecting a substantial decrease in Original Issue Discount expense associated
with long term debt and a significant decrease in cash interest expense
associated with notes payable.
Page 13
Net Loss
In 2003, the Company incurred a net loss of $4,365,004 compared to a
net loss of $4,438,059 for 2002.
Years Ended December 31, 2002 and December 31, 2001
Results of Operations
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenue.
2002 2001
-------- --------
Revenues
Vicom and VMTS 0% 0%
MBS 97.65% 99.2%
MCS 2.35% .78%
----- ----
Total Revenues 100.0% 100.0%
====== ======
Cost of Sales
Vicom and VMTS 0% .02%
MBS 71.89% 77.39%
MCS 1.61% .69%
----- ----
Total Cost of Sales 73.50% 78.10%
====== ======
Gross Margin 26.5% 21.88%
Selling, General and 37.39% 34.45%
Administrative expenses
Operating Loss (11.34%) (12.56%)
Net Income Loss (17.78%) (16.73%)
Revenues
Total revenues decreased 23.9% to $24,540,969 in 2002 from $32,260,777
in 2001.
Revenues from the MBS segment which traditionally sells computer
technologies products and services decreased 25.1% to $23,963,748 in 2002 from
$31,994,781 in 2001. This decrease in MBS segment revenues resulted primarily
from weaker economic conditions in 2002 and from MBS's desire to increase gross
margins versus maintaining top line revenues.
Vicom segment had no revenues.
Revenues from Multiband increased 131% to $577,221 in 2002 from
$249,590 in 2001. This increase is due to the expansion of Multiband services to
ten properties.
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.
Page 14
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.
Page 15
Unaudited Quarterly Results
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the two-year period ending
December 31, 2003. This data includes, in the opinion of management, all normal
recurring adjustments necessary for the fair presentation of the information for
the periods presented when read in conjunction with the Company's consolidated
financial statements and related notes thereto. Results for any previous fiscal
quarter are not necessarily indicative of results for the full year or for any
future quarter. The Company has historically experienced a seasonal fluctuation
in its operating results, with a larger proportion of its revenues in the third
quarter of the fiscal year.
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2003 2003 2003 2002 2002 2002 2002
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Revenues:
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Vicom 0 0 0 0 0 0 0 0
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
MBS 4,367,773 5,864,468 5,330,420 5,636,642 5,758,953 6,227,683 5,815,531 6,161,581
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
MCS 429,140 418,897 357,961 235,120 192,771 154,950 128,893 100,607
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Total
Revenues 4,796,913 6,283,365 5,688,381 5,871,762 5,951,724 6,382,633 5,944,424 6,262,188
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Cost of Sales 3,233,068 4,493,829 3,914,420 4,310,702 4,212,240 4,680,582 4,354,714 4,789,214
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Gross Margin 1,563,845 1,789,536 1,773,961 1,561,060 1,739,484 1,702,051 1,589,710 1,472,974
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
SG&A Expense
3,036,745 2,409,227 2,502,741 2,235,996 2,484,108 2,376,225 2,240,223 2,236,736
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Operating Loss
(1,472,900) (619,691) (728,780) (674,936) (744,624) (674,174) (650,513) (763,762)
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Interest Expense
(249,336) (202,958) (219,723) (225,687) (462,420) (349,388) (426,869) (365,835)
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Other Income
(Expenses) 52,418 (6,513) 15,232 (65,496) 47,740 (93,171) 25,281 19,676
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Minority
Interest 38,219 (3,460) (1,393) 0 0 0 0 0
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Net Loss Before
Taxes (1,631,599) (832,622) (934,664) (966,119) (1,159,304) (1,116,733) (1,052,101) (1,109,921)
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Income Tax
(Benefit)
Provision 0 0 0 0 0 0 0 0
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Net Loss (1,631,599) (832,622) (934,664) (966,119) (1,159,304) (1,116,733) (1,052,101) (1,109,921)
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Loss Per Common
Share Basic and
Diluted
(.10) (.05) (.06) (.08) (.11) (.09) (.09) (.10)
----------------- ------------- ------------ ------------ ------------ ------------- -------------- ------------- --------------
Page 16
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 2004
Available working capital, for the three months ended March 31, 2004,
decreased significantly over the similar period last year. Accounts receivable
and current portion of long term debt increased, while cash, inventories,
accounts payable and accrued liabilities all decreased.
The Company continues to face a very competitive environment in its MBS
division which in the first quarter of 2004 produced both declining revenues and
margins. The Company's MCS division continues to experience significant growth,
primarily due to increased subscriber related recurring revenues acquired via
various transactions previously mentioned herein. The Company expects its second
quarter operating results to be favorably impacted by acquisitions completed in
the first four months of 2004.
The Company, between April 1, 2004 and January 1, 2005, is obligated
to pay an additional $2.85 million to retire the notes payable related to its
MDU Inc. acquisition. The Company as of March 31, 2004 did not have available
cash on hand sufficient to retire said notes payable. The Company also continued
to experience operating losses in the first quarter. Nonetheless, management of
Vicom believes that, for the near future, cash generated by sales of stock, and
existing credit facilities, in aggregate, are adequate to meet the anticipated
liquidity and capital resource requirements of its business. The Company
believes the acquisitions completed in the first four months of 2004 will reduce
Company operating losses due to anticipated operating income related to said
acquisitions. The Company also believes, although it cannot guarantee, that it
will, as it has done in prior periods, be able to continue to raise money for
the purposes of financing acquisitions. However, significant continuation of the
Company's subscriber build-out and subscriber acquisition programs are highly
dependent on securing additional financing for future projects.
Capital Expenditures
The Company used $39,659 for capital expenditures during the three
months ended March 31, 2004, as compared to $92,285 in the similar period last
year. Capital expenditures consisted of equipment acquired for internal use. The
Company anticipates that for the current fiscal year capital purchases will
remain somewhat consistent with first quarter capital expenditures.
Year Ended December 31, 2003
Available working capital for 2003 increased $1,3771,662 primarily to a
stronger cash position due to investing activities. Vicom successfully completed
an offering of institutional financing in the second half of 2003 raising net
proceeds of $2,223,150. Vicom had a decrease of $289,890 in accounts receivable
as a result of a reduction in sales. Current liabilities increased in 2003 by
$1,373,968 as a result of higher current portion of long term debt and accrued
liabilities. Inventories increased by $509,762 primarily due to a planned
expansion to provide wireless intranet service.
Total long term debt and capital lease obligation decreased by
$1,010,459 during the year ended December 31, 2003. Vicom paid out $75,301
related to capital lease obligations and $200,768 related to long term debt
during the year ended December 31, 2003 versus $1,069,433 paid out in 2002.
The Company used $526,936 for capital expenditures during 2003, as
compared to $1,275,434 in 2002. The decrease was primarily attributed to a
reduction in self-financed MCS construction. In 2004 capital expenditures are
expected to be limited to the Company's internal information technology
infrastructure and are expected to be less than 2003 expenditures.
In 2003, the Company reached an agreement to convert the remaining
$962,000 of a Note Payable to equity. Terms of the conversion state the note
will be converted to equity over a 14 month period at a price generally
equivalent to a 10% discount to market price.
In November of 2003, the Company borrowed $1,500,000 and issued a
three-year warrant to the lender to purchase 535,000 common shares at $2.21 per
share through November 2006. The debt is also convertible into common stock of
the Company at a conversion rate of $1.40 per share through November 2006.
On June 30, 2003, the Company borrowed $124,000 as an unsecured note
from a stockholder of the Company, with monthly payments of $5,600 at an
interest rate of 7.85%.
Net cash used by operations in 2003 was $2,580,248 as compared to cash
used by operations in 2002 of $869,721. The
Page 17
cash used by operations in 2003 is due primarily to net operating losses and a
reduction in the wholesale line of credit. During the years ended December 31,
2003, and December 31, 2002, the Company incurred significant net losses.
Although the majority of these losses were due to non-cash expenses, The Company
still continued to incur cash losses as well due to general corporate expense.
The on-going addition of MCS properties in the Company's portfolio provided
additional cash flows in 2003 and those cash flows are projected to improve in
2004 with additional expansions. Management of Vicom believes that, for the near
future, cash generated from new investments combined with existing credit
facilities are adequate to meet the anticipated liquidity in capital resource
requirements of its business, contingent upon Company operating results for the
next twelve months.
Year Ended December 31, 2002
Available working capital, for 2002, decreased $679,419 due to Vicom's
net operating loss and net cash used in operating activities of $869,721.
Proceeds from issuance of long term debt, stock and warrants totaling $2,121,597
helped offset Vicom's net operating loss. Vicom had a decrease of $38,344 in
accounts payable and other current liabilities for 2002 versus last year's
period, primarily due to significant reductions in accounts receivables which
were used to reduce payables.
Inventories year to date decreased net of reserves $182,783 over last
year's prior period inventories due to a decrease in revenues. The
aforementioned decrease in revenues also led to a decrease in accounts
receivable net of reserves of $576,509.
Total long term debt and capital lease obligation decreased by $102,631
during the year ended December 31, 2002. The Company paid out $937,828 related
to capital lease obligations and $131,605 related to long term debt during the
year ended December 31, 2002 versus $777,578 paid out in 2001.
In 2001, the Company entered into a long-term debt agreement, expiring
in 2003, with an investment fund. The fund, in exchange for its $1.5 million
investment, also received 375,000 warrants and the right to convert its
investment into Vicom common stock at a predetermined price. The effect of
recording the beneficial conversion feature and warrants associated with the
convertible loan resulted in a $1,500,000 discount attributable to the warrants
in accordance with the Black-Scholes pricing model. The Company is expensing the
aforementioned warrant discount in eight quarterly installments over the two
year term of the loan. $460,000 of the debt was converted to stock in 2002
pursuant to a formula tied to the trading price of the Company's Common Stock.
In 2002, the Company borrowed $600,000 from a Director. This investment
was later converted into Class E Preferred Stock. Also in 2002, the Company
restructured its debenture with Convergent Capital, resetting the date of
principal repayment to begin in August 2005.
The Company used $1,275,434 for capital expenditures during 2002, as
compared to $1,884,945 in 2001. The decrease was primarily attributed to a
reduction in self-financed MCS construction.
In 2002, the Company extinguished $937,828 worth of capital lease
obligations, reduced its principal indebtedness $460,000 to a note holder, and
converted another $600,000 worth of debt to Preferred Stock. All these events,
combined, with the aforementioned refinancing and delayed principal repayment to
its largest debt holder, should materially improve projected cash flows
throughout 2003 provided Company operating losses continue to diminish.
Net cash used by operations was approximately $869,721 in 2002 versus
net cash used by operations of $502,110 in 2001. The cash used by operations in
2002 is due primarily to net operating losses, and reductions in accounts
payable and wholesale line of credit balances in that year. During the years
ended December 31, 2002 and December 31, 2001, the Company incurred significant
net losses. Although the majority of these losses were due to non-cash expenses,
the Company still continued to incur cash losses as well due to general
corporate expense and continuing expenses related to the building out of its MCS
network. The Company in 2002 significantly cut its selling, general and
administrative expenses which led to a material decrease in cash losses. The
on-going addition of MCS properties in the Company's portfolio also generated
additional cash flows in 2002 and these MCS cash flows are projected to improve
meaningfully in 2003. Management of Vicom believes that, for the near future,
cash generated from new investments combined with existing credit facilities are
adequate to meet the anticipated liquidity in capital resource requirements of
its business, contingent upon Company operating results for the next twelve
months.
Page 18
BUSINESS
Vicom, Incorporated (Vicom) is a Minnesota corporation formed in
September 1975. Vicom has two operating divisions: 1) Multiband Business
Services (MBS, legally known as Corporate Technologies, USA, Inc. dba
Multiband), and Multiband Consumer Services (MCS), which encompasses the wholly
owned subsidiary corporations, Multiband USA, Inc., URON, Inc. and Minnesota
Digital Universe, Inc.
Vicom completed an initial public offering in June 1984. In November
1992, Vicom became a non-reporting company under the Securities Exchange Act of
1934. In July 2000, Vicom regained its reporting company status. In December,
2000, Vicom stock began trading on the NASDAQ stock exchange under the symbol
VICM.
Vicom's website is located at: www.vicominc.net.
----------------
From its inception until December 31, 1998, Vicom operated as a
telephone interconnect company only. Effective December 31, 1998, Vicom acquired
the assets of the Midwest region of Enstar Networking Corporation (ENC), a data
cabling and networking company. In late 1999, in the context of a forward
triangular merger, Vicom, to expand its range of computer products and related
services, purchased the stock of Ekman, Inc. d/b/a Corporate Technologies, and
merged Ekman, Inc. into the newly formed surviving corporation, Corporate
Technologies, USA, Inc. (MBS). MBS provides voice, data and video systems and
services to business and government. MCS began in February 2000. MCS provides
voice, data and video services to multiple dwelling units (MDU's), including
apartment buildings and time share resorts.
As of June 2, 2004, MBS was providing telephone equipment and service
to approximately 800 customers, with approximately 17,000 telephones in service.
In addition, MBS provides computer products and services to approximately 1,800
customers. Telecommunications systems distributed by MBS are intended to provide
users with flexible, cost-effective alternatives as compared to systems
available from major telephone companies, including those formerly comprising
the Bell System and from other interconnect telephone companies.
MBS provides a full range of voice, data and video communications
systems and service, system integration, training and related communication
sales and support activities for commercial, professional and institutional
customers, most of which are located in Minnesota and North Dakota. MBS
purchases products and equipment from NEC America, Inc. (NEC), Cisco Systems,
Inc. (Cisco), Nortel Networks Corp. (Nortel), Tadiran Telecommunications, Inc.
(Tadiran), and other manufacturers of communications and electronic products and
equipment. MBS uses these products to design telecommunications and computer
systems to fit its customers' specific needs and demands.
The products sold by MBS include Private Branch Exchange (PBX),
telephone systems, hubs and routers used as interconnection devices in computer
networks, personal computers, desktop video-conferencing units, and the wire and
cable products required to make all the other aforementioned products integrate
and operate as necessary. MBS has trained staff that install, maintain and
repair the products we sell. Repair of products is performed under either a time
and materials basis or an extended service contract basis, at the customer's
election, once the manufacturer's original warranty on a product has expired.
Extended service contracts offered by MBS generally range in length
from 12 to 36 months. The contracts provide for repair or replacement of all
broken or non-working materials and the labor necessary to make such repairs or
replacements, subject to exceptions for customer abuse or negligence and
problems due to fire, flood or other causes beyond MBS's control.
Multiband Business Industry Overview
MBS recently expanded its efforts to establish itself within the
rapidly evolving telecommunications and computer industries.
In the current climate of intense global competition and accelerating
technological change, businesses increasingly depend upon technology-based
solutions to enhance their competitive position, and to improve their
productivity and the quality of their products and services. Today's business
environment mandates the availability of efficient voice and video communication
channels and information in formats suited to a wide variety of users.
Businesses are looking to a variety of new technologies to enhance the
performance of their communication systems and to allow Information Technology
(IT) systems to collect, analyze and communicate information within the
enterprise and among customers and suppliers. An organization's ability to
integrate and deploy new communication and IT technologies in a unified and
cost-effective manner has become critical to competing successfully in today's
rapidly changing business environment.
Page 19
The markets and technologies for communication equipment and IT
applications and systems continue to converge as communication equipment
migrates from proprietary switches to software-driven systems operating on
standardized computer platforms. As a result, businesses are integrating their
communication and IT systems. As previously separate communication and IT
technologies converge and their interoperability increases, more organizations
will seek a unified technology solution. MBS believes that these organizations
will attempt to reduce costs and management complexity by establishing
relationships with a small number of providers that offer a broad range of both
communication and IT products and services throughout the full life-cycle of a
project. MBS believes it has positioned itself to be one of those providers
through expertise gained in its historical operations and via acquisitions. MBS
has personnel that understand the voice and data sides of the equation. MBS is
able to provide a consultative selling approach whereby it is able to match the
appropriate technology solution to its customers needs; whether that solution is
an IP telephony application, a traditional PBX application, or a hybrid of both.
While customers continue to rely heavily on technology to reduce
transaction costs by increasing operational efficiencies, the bias toward
software-centric solutions in lieu of hardware continues. Notwithstanding the
slow economic conditions, growth continues to occur in areas such as customer
contact solutions, CTI (computer telephony integration), unified media,
convergence (IP telephony), and mobility.
Current financial pressures also are making it increasingly difficult
for communications equipment manufacturers to support a direct distribution
model. Most independent distribution channels lack an adequate geographic
footprint, infrastructure, processes, and resources to effectively fulfill the
manufacturer's need to deploy complex high-end technology solutions. This has
resulted in the need for systems integration and support services through third
party providers. A key competency being driven by the market is the ability to
effectively integrate disparate technology platforms into enterprise-wide
applications solutions. Again, the range and depth of MBS's experience enables
MBS to provide businesses with overall technology solutions.
As a result of these factors, demand for communication services and
products has been relatively flat. InfoTech , a market research firm
specializing in telecommunications market information, estimates that the U.S.
market for traditional voice PBX systems will continue to decline over the next
three years as enterprises shift to converged solutions, a combined form of
voice and data, also referred to as IP Telephony. IP shipments are expected to
surpass traditional PBX shipments sometime in 2006. Recent slowdowns in
technology spending may delay this development, however. Overall revenues in the
U.S. marketplace for voice and convergence are projected to reach $5.5 billion
by 2006. Field maintenance and repair is the largest, but slowest growing
segment in services associated with the voice marketplace. This includes the
maintenance and repair of PBX, Key/Hybrid, Voice Processing: IVR, CTI, ACD and
fax.
Products and Services
Corporate Technologies, USA (MBS)
MBS provides other technical and customer services as described
hereafter.
Pricing and Availability
We use our volume and purchasing power to achieve competitive pricing
of goods for our clients. We have the ability to provide a web-based client site
that allows clients to see availability and costs of hardware and software in
real time through the Internet by accessing current pricing and availability
from our manufacturers' Internet websites. This Internet-based model allows us
to extend product procurement services beyond the traditional 8 a.m. to 5 p.m.
schedule and into a 7 days a week, 24 hours a day service, providing a high
level of client flexibility.
Warranty Policy
We strongly believe in the philosophy of "Service what you sell." We do
not knowingly sell any hardware product that we do not have authorized service
personnel to facilitate any warranty work that needs to be done. We are
committed to fulfill all warranty service calls in accordance with the
manufacturer's warranty, which range in length from 30 days to one year from the
date of sale. Warranty costs incurred to date are minimal.
On Site and Depot Repair
MBS is authorized for depot and on site warranty repair for many
manufacturers, including Apple Computers, Nortel, Inc., Cisco, Hewlett Packard
Co., International Business Machines Corp. (IBM), Sun Microsystems, Inc., Compaq
Computer Corp., Xerox
Page 20
Corp., and Okidata Corp. With over $500,000 in spare parts inventory, we have
made a conscious effort to have the part clients need, when they need it.
Wide Area Network Connectivity
Our staff of Cisco and Nortel Wide Area Network (WAN) trained engineers
assist organizations with integrating their multiple sites, allowing the
exchange of information between geographically separated sites. Our association
with local Internet Service Providers (ISPs) gives us the opportunity to offer
organizations with multiple locations a single source provider providing a
cost-effective solution to WAN needs.
Technical Support for Networking
We are committed to obtaining the highest vendor authorizations
available to indicate our knowledge and expertise to today's complex
technological environment. Becoming the only Microsoft Solution Partner, Novell
Platinum Reseller and Sun Microsystems Competency 2000 Certified reseller in
North Dakota is an indication of this commitment. Our staff of Certified Novell
Engineers (CNEs), Microsoft Certified System Engineers (MCSEs), Sun Microsystems
System Engineers, as well as certified personnel in products such as Nortel and
Cisco routers, gives MBS an advantage over other resellers in North Dakota. The
knowledge and skills of our system engineers helps organizations meet today's
challenges and maintain a market advantage. Our close relationships and
certification levels with our vendors gives our staff access to resources that
few other value added resellers can provide.
Consulting
As a multi-service, multi-vendor, multi-site integrator, MBS has the
extensive infrastructure to offer solutions to complex technical challenges
through our consulting service. With years of experience in Local Area Networks
(LAN) and WAN technology, our consultants are dedicated to finding the solution
that will solve our customers' needs now and in the future. We specialize in
providing an integrated cost-effective, single source solution.
Sales and Marketing
As of June 2, 2004, we had 25 sales and marketing personnel with
expertise in telecommunications, computers and network services. MBS has a
consultative approach to selling, in which the salesperson analyzes the
customer's operations and then designs an application-oriented technical
solution to make the customer more efficient and profitable. MBS uses several
techniques to pursue new customer opportunities, including advertising,
participation in trade shows, seminars and telemarketing.
Customers
MBS provides its products and services to commercial, professional and
government users within the states of Minnesota and North Dakota. MBS's
customers are diverse and represent various industries such as financial
services, hospitality, legal, manufacturing, and education. In the year ended
December 31, 2003, MBS received 17.5% of its revenues from Meritcare Health
System and 6.0% of its revenues from Noridian (Blue Cross Blue Shield). In its
year ended December 31, 2002, MBS received approximately 22.8% of its revenues
from two customers, Merit Care and Microsoft Great Plains. In its year ended
December 31, 2001, MBS received approximately 21.7 % of all revenues from two
customers. Those two customers were Microsoft Great Plains and the State of
North Dakota.
Customer Service
MBS has 20 full-time customer service and related support personnel who
assist in project management duties, post-sale communications (which include
site surveys), coordinated network services, and end-user training. Each key
account is assigned its own individual customer service representative to ensure
efficient implementation. The customer service representative works closely with
the sales representative and main technician assigned to the project to
facilitate the utmost in customer satisfaction.
Back Office
Back office refers to the hardware and software systems that support
the primary functions of our operations, including sales support, order entry
and provisioning, and billing.
Order entry involves the initial loading of customer data into our
information system. Currently our sales representatives take orders and our
customer service and purchasing representatives load the initial customer
information into our ILS (Integrated Logistic
Page 21
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, MBS purchases products and equipment from NEC,
Tadiran, Cisco, Nortel, and other manufacturers of communications and computer
products. The telecommunication products are purchased directly from the
manufacturers. The computer products are purchased both directly from the
manufacturer and also indirectly from major wholesalers such as Ingram Micro and
Tech Data Corporation.
In 2003, Ingram Micro supplied 60.55% and Dell computer supplied 8.35%
of total products purchased. In 2002, Ingram Micro supplied 57.7% and Dell
Computer 11.8% of total products purchased. In 2001, Ingram Micro supplied 37.8%
and Tech Data provided 18.9% of total products purchased.
The products MBS purchase are off-the-shelf products. MBS has several
alternate suppliers of computer products and could substitute any one of these
suppliers with an alternate supplier fairly quickly on the same or similar
terms.
MBS has a distribution agreement with NEC, its main supplier of
telecommunication products, which expires June 30, 2004. MBS could replace NEC
with an alternate supplier fairly quickly, but with a less competitive product.
However, MBS's replacement of NEC could have a material adverse effect on
Vicom's business, operating results and financial condition.
Multiband Consumer Services
We have expanded our strategy to include the vast potential of the
multi dwelling unit (MDU) market. Our experience in this market suggests that
property owners and managers are currently looking for a solution that will
satisfy two problems. The first problem that they are dealing with is how to
satisfy the residents who desire to bring satellite television service to the
unit without being visually unattractive or a structural/maintenance problem.
The second is how to provide competitive access for local and long distance
telephone cable television and Internet services. Our MCS offering addresses
these problems and provides the consumer several benefits, including:
o Lower Cost Per Service
o Blended Satellite and Cable Television Package
o Multiple Feature Local Phone Services (features such as call
waiting, call forwarding and three-way calling)
o Better than Industry Average Response Times
o One Number for Billing and Service Needs
o One Bill for Local, Long Distance Cable Television and
Internet
o "Instant On" Service Availability
As we develop and market this package, we will keep a marketing focus
on two levels of customer for this product. The primary decision-makers are the
property owners/managers. Their concerns are focused on delivering their
residents reliability, quality of service, short response times, minimized
disruptions on the property, minimized alterations to the property and value
added services. Each of these concerns is addressed in our contracts with the
property owner, which include annual reviews and 10 to 15 year terms as service
providers on the property. The secondary customer is the end-user. We will
provide the property with on-going marketing support for their leasing agents to
deliver clear, concise and timely information on our services. This will include
simple sign up options that should maximize our penetration of the property.
When taken as a whole, and based on Vicom's interpretations of U.S.
Census Bureau statistics, cable television, telephone and internet services
currently generate over $170 billion of revenues annually in the U.S. These
statistics indicate stable growing markets with demand that is likely to deliver
significant values to businesses that can obtain a subscriber base of any
meaningful size.
Page 22
Multiband Consumer Industry Analysis
Strategy
For the near future, the services described below will be offered
primarily in Midwestern states. Our primary competition will come from the local
incumbent providers of telephone and cable television services.
Local Telephone Service
In Minnesota, we expect to compete with Qwest Communications
International, Inc. (Qwest) for local telephone services. Although Qwest has
become the standard for local telephone service, we believe we have the ability
to underprice their service while maintaining high levels of customer
satisfaction.
Cable Television Service
In Minnesota, we expect to compete with Comcast Corporation (Comcast)
for pay-TV customers. Comcast is the cable television service provider that has
resulted from the merger and acquisition of two competitive cable providers.
This actually has improved the overall continuity of service. However, we have a
significant consumer benefit in that we are establishing private rather than
public television systems, which allows us to deliver a package that is not
laden with local "public access" stations that clog the basic service package.
In essence, we will be able to deliver a customized service offering to each
property based upon pre-installation market research that we perform.
Long Distance Telephone Service
AT&T Corporation (AT&T), WorldCom Inc. dba MCI (MCI), and Sprint
Corporation (Sprint) are our principal competitors in providing long distance
telephone service. They offer new products almost weekly. Our primary concern in
this marketplace is to assure that we are competitive with the most recent
advertised offerings in the "long distance wars." We will meet this challenge by
staying within a penny of the most current offering, while still maintaining a
high gross margin on our product. We accomplish this through various carrier
agency associations. We expect to generate a high penetration in our long
distance services amongst our local service subscribers because private property
owners in the shared tenant environment (similar to a hotel environment) are not
required to offer multiple long distance carriers to their tenants.
Internet Access Service
The clear frontrunners in this highly unregulated market are America
Online, Inc. and CompuServe Corp. They compete with local exchange carriers,
long distance carriers, Internet backbone companies and many local ISPs
(Internet Service Providers). Competition has driven this to a flat rate
unlimited access dial-up service market. The general concern among consumers is
the quality of the connection and the speed of the download. Our design provides
the highest connection speeds that are currently available. The approach that we
will market is "blocks of service." Essentially, we deliver the same high bit
rate service in small, medium and large packages, with an appropriate per unit
cost reduction for those customers that will commit to a higher monthly
expenditure.
Market Description
We are currently marketing Multiband services to MDU properties
primarily throughout Minnesota, North Dakota, Missouri and Florida. We are
focusing on properties that consist of 50 or more units. We will target
properties that range from 50 to 150 units on a contiguous MDU property for
television and Internet access only. We will survey properties that exceed 150
units for the feasibility of local and long distance telephone services.
We are initially concentrating on middle to high-end rental complexes.
We are also pursuing resort area condominiums. A recent U.S. Census Bureau table
indicates that there are more than 65,000 properties in the United States that
fit this profile. Assuming an average of 100 units per complex, our focus is on
a potential subscriber base of 6,500,000.
A recent Property Owners and Manager Survey, published by the U.S.
Census Bureau , shows that the rental properties are focusing on improving
services and amenities that are available to their tenants. These improvements
are being undertaken to reduce tenant turnover, relieve pricing pressures on
rents and attract tenants from competing properties. We believe that most of
these owners or managers are not interested in being "in the technology
business" and will use the services that we are offering. Various iterations of
this package will allow the owners to share in the residual income stream from
the subscriber base.
Page 23
Number of Units/Customers
At June 2, 2004, MCS had 10,128 subscribers using its services (1,110
using voice services, 6,738 using video services and 2,280 using internet
services).
Employees
As of June 2, 2004, Vicom employed four full-time management employees.
As of that same date, MBS had 90 full-time employees, consisting of 25 in sales
and marketing, 36 in technical positions, 20 in customer service and related
support, 10 in management and 9 in administration and finance. As of March 15,
2004, MCS had 6 full-time employees, 2 in sales and the rest in operations.
PROPERTIES
Vicom and its subsidiaries lease principal offices located at 2000 44th
Street SW, Fargo, ND 58103 and 9449 Science Center Drive, New Hope, Minnesota
55428. We have no foreign operations. The main Fargo office lease expires in
2017 and covers approximately 22,500 square feet. The Fargo base rent ranges
from $23,565 to $30,377 per month. The New Hope office lease expires in 2013 and
covers approximately 47,000 square feet. The New Hope base rent ranges from
$18,389 to $25,166 per month. Both the New Hope and Fargo leases have provisions
that call for the tenants to pay net operating expenses, including property
taxes, related to the facilities. Both offices have office, warehouse and
training facilities.
Vicom considers its current facilities adequate for its current needs and
believes that suitable additional space would be available as needed.
LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
business. However, as of June 2, 2004, Vicom was not engaged in any pending
legal proceedings where, in the opinion of the Company, the outcome is likely to
have a material adverse effect upon the business, operating results and
financial condition of the Company.
MANAGEMENT
Name Age Position Director Since
---- --- -------- --------------
Steven Bell............... 45 President & CFO, Vicom Incorporated 1994
Frank Bennett............. 47 President, Artesian Capital 2002
Jonathan Dodge......... 53 Partner, Dodge & Fox C.P.A. Firm 1997
David Ekman............... 43 Chief Information Officer, Corporate Technologies USA, Inc. 1999
Eugene Harris............. 39 Shareholder, Eidelman, Finger, Harris & Co. 2004
James L. Mandel........... 47 Chief Executive Officer, Vicom, Incorporated 1998
Donald Miller............ 64 Chairman, Vicom, Incorporated 2001
David Weiss............... 41 Principal, Rangeline Capital, LLC 2002
Steven Bell was general counsel and Vice President of the Company from June 1985
through October 1994, at which time he became Chief Financial Officer. He was
also named President in July 1997. He is a graduate of the William Mitchell
College of Law.
Frank Bennett has been a Director of Vicom, Incorporated since 2002 and is
currently a member of the Audit Committee. Mr. Bennett is President of Artesian
Management, Inc., which manages Artesian Capital, a private equity investment
firm based in Minneapolis. Artesian Capital invests in companies in the
communications, consumer, financial services and health care industries. Prior
to founding Artesian Capital in 1989, he was a Vice President of Mayfield
Corporation, and a Vice President of Corporate Finance of Piper Jaffray &
Hopwood and a Vice President of Piper Jaffray Ventures, Inc. He is currently a
director of Fairfax Financial Holdings Limited, Odyssey Re Holdings Corp.,
Vicom, Inc., Northbridge Financial Corporation and Crum & Forster Holdings, Inc.
Mr. Bennett currently serves on the boards of several non-profit organizations
including the Social Enterprise Fund, American Federation of Arts, St. David's
Child Development and Family Services, PACER Center and Wayzata Community
Church. Mr. Bennett, a graduate of the University of Oregon, lives with his wife
and five children in Long Lake, MN.
Jonathan Dodge has been the Senior Partner of the C.P.A. firm of Dodge & Fox
since its inception in March 1997. Prior to that, he was a partner in the CPA
firm of Misukanis and Dodge from 1992 to March 1997. Mr. Dodge is a member of
both the AICPA
Page 24
and the Minnesota Society of CPA's.
David Ekman is Chief Information Officer of Corporate Technologies, USA, Inc., a
wholly owned subsidiary of Vicom. He has worked continuously in the computer
business since 1981, initially as a franchisee of Computerland, a personal
computer dealer and subsequently from 1996 to December 1999 as President of
Ekman, Inc., a value-added computer reseller and the predecessor company to
Corporate Technologies, USA, Inc.
Eugene Harris is a Vice President and major shareholder of Eidelman, Finger,
Harris & Co., a St. Louis based registered investment advisor. He has been with
Eidelman, Finger, Harris & Co. since 1994. Prior to joining Eidelman, Finger,
Harris & Co., Mr. Harris held positions in general management and new business
development for the Monsanto Company from 1990-1994. He also was an Associate
Consultant with Bain and Co. from 1996-1998. Mr. Harris received a B.S. in
Industrial Engineering from Stanford University in 1996 and an M.S. in
Management from the Sloan School of Management at the Massachusetts Institute of
Technology in 1990. He is a Chartered Financial Analyst and a member of the
Financial Analysts Federation. Mr. Harris was appointed to Vicom's Board of
Directors in April 2004.
James Mandel has been the Chief Executive Officer and a Director of the Company
since October 1, 1998. From October 1991 to October 1996, he was Vice President
of Systems for Grand Casinos, Inc., where his duties included managing the
design, development, installation and on-going maintenance for the 2,000 room,
$507 million Stratosphere Hotel, Casino and Tower in Las Vegas. Mr. Mandel also
managed the systems development of Grand Casino Mille Lacs, in Onamia,
Minnesota, Grand Casino Hinckley in Hinckley, Minnesota and six other casinos
nationwide. He also serves as Chairman of the Board of CorVu Corporation and is
a trustee of the Boys and Girls Club of Minneapolis.
Donald Miller worked for Schwan's enterprises between 1962 and 2001, primarily
as Chief Financial Officer. He is currently employed by Schwan's as Special
Assistant to the CEO. He was appointed to Vicom's Board of Directors in
September 2001 and was elected Chairman of the Board in April 2002. Mr. Miller
is also Chairman of Vicom's Audit Committee.
David Weiss has been a Director of Vicom since 2002. He is currently Managing
Principal for Rangeline Capital, LLC, a real estate investment banking company.
Prior to forming Rangeline in 2002, Mr. Weiss was Managing Director for the St.
Louis office of Northland/Marquette Capital Group.
The Company knows of no arrangements or understandings between a Director or
nominee and any other person pursuant to which any person has been selected as a
Director or nominee. There is no family relationship between any of the
nominees, Directors or executive officers of the company.
Board of Directors and its Committees
The Board has determined that a majority of its members are "independent" as
defined by the listing standards of the NASDAQ Stock Market. The independent
Directors are Messrs. Frank Bennett, Eugene Harris, Donald Miller and David
Weiss.
The Board of Directors met four times on a regular basis in 2003. As permitted
by Minnesota Law, the Board of Directors also acted from time to time during
2003 by unanimous written consent in lieu of conducting formal meetings. Last
year, there were four such actions and accompanying Board Resolutions passed.
The Board has designated an audit committee consisting of Jonathan Dodge, Donald
Miller and Frank Bennett. The Board also designated a compensation committee
consisting of Frank Bennett and David Weiss.
Shareholder communication with the Board
Our Board welcomes your questions and comments. If you would like to communicate
directly to our Board, or if you have a concern related to the Company's
business ethics or conduct, financial statements, accounting practices or
internal controls, then you may contact our website via www.multibandusa.com,
section Investor Relations. All communications will be forwarded to our audit
committee.
Directors' attendance at Annual Meetings can provide shareholders with an
opportunity to communicate with directors about issues affecting the Company.
The Company does not have a policy regarding director attendance, but all
directors are encouraged to attend the Annual Meeting of Shareholders. Six of
our directors attended our Annual Meeting in 2003.
Page 25
Audit Committee
Our audit committee:
o recommends to our Board of Directors the independent auditors to conduct
the annual audit of our books and records;
o reviews the proposed scope and results of the audit;
o approves the audit fees to be paid;
o reviews accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
o reviews and approves transactions between us and our Directors, officers
and affiliates.
Our audit committee has a formal charter that is an exhibit to our most recent
annual report on Form 10K.
Our audit committee met four times during 2003. The Audit Committee is comprised
entirely of individuals who meet the independence and financial literacy
requirements of NASDAQ listing standards. Our Board has determined that all
three members qualify as an "audit committee financial expert" independent from
management as defined by Item 401(h)(2) of Regulation S-K under the Securities
Act of 1933, as amended. Vicom acknowledges that the designation of the members
of the audit committee as financial experts does not impose on them any duties,
obligations or liability that are greater than the duties, obligations and
liability imposed on them as a member of the audit committee and the Board of
Directors in the absence of such designation.
Report of the Audit Committee
In accordance with its written charter adopted by the Board of
Directors, the Audit Committee assists the Board in fulfilling its
responsibility for oversight of the quality and integrity of the accounting,
auditing, and financial reporting practices of the Company. During the year
ended December 31, 2003, the Committee met four times, and Donald Miller, as the
Audit Committee chair and representative of the Audit Committee, discussed the
interim financial information contained in quarterly earnings announcement with
the Company's Chief Financial Officer and the Company's independent auditors
prior to public release.
In discharging its oversight responsibility as to the audit process,
the Audit Committee obtained from the independent auditors a formal written
statement describing all relationships between the auditors and the Company that
might bear on the auditors' independence consistent with Independence Standards
Board Standard No. 1, "Independence Discussions with Audit Committees,"
discussed with the auditors any relationships that may affect their objectivity
and independence and satisfied itself as to the auditors' independence. The
Audit Committee also discussed with management and the independent auditors the
quality and adequacy of the Company's internal controls. The Audit Committee
reviewed with both the independent auditors their audit plans, audit scope, and
identification of audit risks.
The Audit Committee discussed and reviewed with the Company's
independent auditors all communications required by generally accepted auditing
standards, including those described in Statement on Auditing Standards No. 61,
as amended, "Communication with Audit Committees" and, both with and without
management present, discussed and reviewed the results of the independent
auditors' examination of the Company's financial statements. The Audit Committee
reviewed the audited consolidated financial statements of the Company as of and
for the fiscal year ended December 31, 2003 with management and the independent
auditors. Management has the responsibility for the preparation of the Company's
consolidated financial statements and the Company's independent auditors have
the responsibility for the examination of those statements.
Based on the review referred to above and discussions with management
and the independent auditors, the Audit Committee recommended to the Board of
Directors that the Company's audited consolidated financial statements be
included in its Annual Report on Form 10-K for the fiscal year ended December
31, 2003 for filing with the Securities and Exchange Commission. The Audit
Committee also recommended the reappointment, subject to shareholder approval,
of the independent auditors and the Board of Directors concurred in such
recommendation.
Compensation Committee
Our compensation committee
o reviews and recommends the compensation arrangements for management,
including the compensation for our chief executive officer; and
o establishes and reviews general compensation policies with the objective to
attract and retain superior talent, to reward individual performance and to
achieve our financial goals.
Page 26
Our compensation committee met four times during 2003. The compensation
committee is comprised entirely of Directors who meet the independence
requirements of the NASDAQ listing standards.
Nominating Committee
The Nominating Committee (the "Nominating Committee") was formed by our Board in
April 2004 and consists of Frank Bennett and David Weiss. The Nominating
Committee's duties include adopting criteria for recommending candidates for
election or re-election to our Board and its committees, considering issues and
making recommendations considering the size and composition of our Board. The
Nominating Committee will also consider nominees for Director suggested by
shareholders in written submissions to the Company's Secretary.
The Nominating Committee met in April 2004 to decide upon the nominees for
Director at the Annual Meeting.
Director Nomination Procedures
DIRECTOR MANAGER QUALIFICATIONS. The Company's Nominating Committee has
established policies for the desired attributes of our Board as a whole. The
Board will seek to ensure that a majority of its members are independent as
defined in the NASDAQ listing standards. Each member of our Board must possess
the individual qualities of integrity and accountability, informed judgment,
financial literacy, high performance standards and must be committed to
representing the long-term interests of the Company and the shareholders. In
addition, Directors must be committed to devoting the time and effort necessary
to be responsible and productive members of our Board. Our Board values
diversity, in its broadest sense, reflecting, but not limited to, profession,
geography, gender, ethnicity, skills and experience.
IDENTIFYING AND EVALUATING NOMINEES. The Nominating Committee regularly
assesses the appropriate number of Directors comprising our Board, and whether
any vacancies on our Board are expected due to retirement or otherwise. The
Nominating Committee may consider those factors it deems appropriate in
evaluating Director candidates including judgment, skill, diversity, strength of
character, experience with businesses and organizations comparable in size or
scope to the Company, experience and skill relative to other Board members, and
specialized knowledge or experience. Depending upon the current needs of our
Board, certain factors may be weighed more or less heavily by the Nominating
Committee. In considering candidates for our Board, the Nominating Committee
evaluates the entirety of each candidate's credentials and, other than the
eligibility requirements established by the Nominating Committee, does not have
any specific minimum qualifications that must be met by a nominee. The
Nominating Committee considers candidates for the Board from any reasonable
source, including current Board members, shareholders, professional search firms
or other persons. The Nominating Committee does not evaluate candidates
differently based on who has made the recommendation. The Nominating Committee
has the authority under its charter to hire and pay a fee to consultants or
search firms to assist in the process of identifying and evaluating candidates.
CHARTER OF THE NOMINATING COMMITTEE. A copy of the charter of the
Nominating Committee is available on our website at www.multibandusa.com.
Executive Compensation
The following table sets forth certain information relating to the
remuneration paid by the Company to its executive officers whose aggregate cash
and cash-equivalent remuneration approximated or exceeded $100,000 during the
Company's last three fiscal years ending December 31, 2003.
Page 27
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Long Term Compensation
------------------------- -----------------------
Name And Principal Year Salary Bonus Other Restricted Securities LTIP All Other
Position ($) ($) Annual Stock Underlying Payouts Compensation
Compensation Award(s) Options/ ($) ($)
------------------ ------ -------- ------- ------------- ----------- ---------- --------- ------------
($) ($) SARs
(#)
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Awards Payouts
James L. Mandel 2003 $250,727 $125,000 -0- -0- 300,000 -0- -0-
Chief Executive Officer 2002 $149,874 $100,000 -0- -0- -0 -0- -0-
2001 $131,346 -0- -0- -0- 500 -0- -0-
Steven Bell 2003 $120,484 -0- -0- -0- 50,000 -0- -0-
Chief Financial Officer 2002 $99,014 -0- -0- -0- 10,500 -0- -0-
2001 $108,365 -0- -0- -0- 500 -0- -0-
Dave Ekman 2003 $111,154 -0- -0- -0- -0- -0- -0-
Chief Information Officer 2002 $93,695 -0- -0- -0- -0- -0- -0-
2001 $100,614 -0- -0- -0- 500 -0- -0-
Directors Fees
There were no cash fees paid to Directors in 2003. Outside Directors
receive a stock option of 30,000 shares at market price upon joining the Vicom
Board. Additional awards or options to Directors are determined by the Board's
Compensation Committee.
OPTION GRANTS DURING 2003
The following table provides information regarding stock options
granted during fiscal 2003 to the named executive officers in the Summary
Compensation Table.
Number of Percent of
Securities Total Options
Underlying Granted to Exercise or Potential Realizable Value at Assumed
Options Employees in Base Price Expiration Annual Rates of Stock Price
Name Granted (#) Fiscal Year (%) ($/Share) Date Appreciation for Option Term (1)
--------------- ---------- --------------- ----------- ------------ ---------------------------------------
5% 10%
-------- -----
James L. Mandel 300,000 46.3 $1.50 1/8/2013 -0- $258,092
Steven M. Bell 50,000 7.7 $1.10 1/8/2013 $19,115 $63,015
Dave Ekman -0- -0- - - - -
(1) The "potential realizable value" shown represents the potential gains based
on annual compound stock price appreciation of 5% and 10% from the date of
grant through the full option terms, net of exercise price, but before taxes
associated with exercise. The amounts represent certain assumed rates of
appreciation only, based on the Securities and Exchange Commission rules.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the common stock, overall market conditions and the option
holders, continued employment through the vesting period. The amounts
reflected in this table may not necessarily be achieved and do not reflect
the Company's estimate of future stock price growth.
Each option represents the right to purchase one share of common stock.
The options shown in this table are all non-qualified stock options. To the
extent not already exercisable, the options generally become exercisable in the
event of a merger in which Vicom is not the surviving corporation, a transfer of
all shares of stock of Vicom, a sale of substantially all the assets, or a
dissolution or liquidation, of Vicom.
Page 28
Aggregated Option Exercises in 2003 and Year End Option Values
--------------------------------------------------------------
The following table provides information as to options exercised by the
named executive officers in the Summary Compensation Table during fiscal 2003
and the number and value of options at December 31, 2003.
Shares Acquired
On Exercise Value (1)
Name ----------- Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- ------------------------- -------------------------
Number of Value of Unexercised
Unexercised Options at In-The-Money Options at
December 31, 2003 December 31, 2003
----------------- -----------------
James L. Mandel............ -0- -0- 450,500 -0- $554,115 $0
Steven M. Bell............. -0- -0- 57,166 3,334 $70,314 $4,100
David Ekman............. -0- -0- 150,500 -0- $185,115 $0
(1) Value is calculated on the basis of the difference between the option
exercise price and $1.23, the fair market value of the Company's common
stock at December 31, 2003 as quoted on the NASDAQ, multiplied by the
number of shares underlying the option.
Other Compensation and Long-Term Incentive Plans
The Company has no long-term incentive plans and issued no long-term
incentive awards during 2003.
The Company has an employment agreement with Mr. Steven Bell,
President, for the term beginning January 2002 and expiring December 2004. Mr.
Bell's compensation is not directly tied to the Company's performance. The
agreement states that annual base salary for Mr. Bell will be between $125,000
and $135,000 per year. Other key provisions of the contract include an agreement
by Mr. Bell to keep confidential information secret both during and after
employment by the Company and covenants not to compete with the Company for one
year from the date of termination of employment. The contract also provides Mr.
Bell with 75,000 stock options at market price, vested over a three year period.
The Company maintains key man life insurance policies in the amount of
$1,000,000 each on the lives of Steven Bell and Marvin Frieman, former Director.
The Company is the beneficiary of these policies and has adopted a plan to pay
fifty percent of all life insurance proceeds to the spouse or surviving children
of each such individual.
The Company also has a three year employment agreement, from January
2002 to December 2004, with James L. Mandel, Chief Executive Officer, the terms
of which involve an annual base salary of $200,000 and a stock option of 300,000
shares at $1.50 per share, vested over a three year period. Mr. Mandel's job
responsibilities involve developing company business plans, developing expansion
and growth opportunities and directing other executive officers.
Page 29
1999 STOCK COMPENSATION PLAN
1999 STOCK COMPENSATION PLAN
The total number of shares of stock reserved for awards to employees
under the Plan is 1.8 million shares. The purpose of the plan is to promote the
interest of the Company and its shareholders by providing employees of the
company with an opportunity to receive a proprietary interest in the Company and
thereby develop a stronger incentive to contribute to the Company's continued
success and growth. The plan is administered by a Committee of the Board of
Directors. Awards pursuant to the 1999 plan may be in the form of either a
restricted stock grant, which means that stock issued will vest over a three
year vesting period, or stock options.
Options granted under the Plan may be either "incentive" stock options
within the meaning of Section 422 of the Internal Revenue Code ("IRC") or
"nonqualified" stock options that do not qualify for special tax treatment under
the IRC. No incentive stock option may be granted with a per share exercise
price less than the fair market value of a share of the Company's common stock
on the date the option is granted; in the case of any shareholder owning 10
percent or more of the common stock to whom an incentive stock option has been
granted under the Plan, the exercise price thereof is required to be not less
than 110 percent of the fair market value of the common stock on the date the
option is granted. Options are not transferable. An optionee, or his or her
personal representative, may exercise his or her option for a period of ninety
(90) days following termination of employment, disability or death. The term of
each option, which is fixed by the Committee, may not exceed 10 years from the
date the option is granted, or 5 years in the case of incentive stock options
granted to shareholder owing 10 percent or more of the common stock to whom
options have been granted. Options may be made exercisable in whole or in
installments as determined by the Committee or Board. The Committee or Board may
cancel an option of an employee who has been terminated for cause or takes
employment with a competitor. The closing sale price of a share of the Company's
common stock was $1.96 on April 22, 2004.
Federal Income Tax Matters
Options. Incentive stock options granted under the 1999 plan are
intended to qualify for favorable tax treatment under Section 422 of the
Internal Revenue Code of 1986, as amended. Under Section 422, an optionee
recognizes no taxable income when the option is granted. Further, the optionee
generally will not recognize any taxable income when the option is exercised if
he or she has at all times from the date of the option's grant until three
months before the date of exercise been an employee of the Company. The Company
ordinarily is not entitled to any income tax deduction upon the grant or
exercise of an incentive stock option. Certain other favorable tax consequences
may be available to the optionee if he or she does not dispose of the shares
acquired upon the exercise of an incentive stock option for a period of two
years from the granting of the option and one year from the receipt of the
shares.
Under present law, an optionee will not realize any taxable income on
the date a nonqualified option is granted pursuant to the 1999 plan. Upon
exercise of the option, however, the optionee must recognize, in the year of
exercise, ordinary income equal to the difference between the option price and
the fair market value of the Company's common stock on the date of exercise.
Upon the sale of the shares, any resulting gain or loss will be treated as
capital gain or loss. The Company will receive an income tax deduction in its
fiscal year in which nonqualified options are exercised equal to the amount of
ordinary income recognized by those optionees exercising options, and must
withhold income and other employment related taxes on such ordinary income.
Restricted Stock Awards. Generally, no income is taxable to the
recipient of a restricted stock award in the year the award is granted. Instead,
the recipient will recognize compensation taxable as ordinary income equal to
the fair market value of the shares in the year in which the transfer
restrictions lapse. Alternatively, if a recipient makes a "Section 83(b)"
election, the recipient will, in the year that the restricted stock award is
granted, recognize compensation taxable as ordinary income equal to the fair
market value of the shares on the date of the award. The Company normally will
receive a deduction equal to the amount of compensation the recipient is
required to recognize as ordinary taxable income, and must comply with
applicable tax withholding requirements.
2000 NON-EMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
The total number of shares reserved for awards under the Plan is
300,000 shares. The purpose of the 2000 Directors' Plan is to enable the
Company, through the grant of non-qualified stock options to non-employee
("outside") Directors of the Company, to attract and retain highly-qualified
outside Directors and, by providing them with such a stock-based incentive, to
motivate them to promote the best interests of the Company and its shareholders.
For the purposes of the Plan, outside Directors are Directors who, at the time
of granting of options under the Plan, are not and for the prior twelve months
have not been employees of the
Page 30
Company or any of its subsidiaries.
All grants will provide for an exercise price equal to 100% of the fair
market value of a Share at the date of the grant. Options will become
exercisable approximately one year after date of grant and will expire ten years
after date of grant, subject to earlier exercise and termination in certain
circumstances. If an outside Director ceases to be a Director due to death, any
of his outstanding options that have not yet become exercisable will accelerate,
and all of his outstanding Options will remain exercisable for various specified
periods of time up to a maximum of approximately one year. If an outside
Director ceases to be a Director due to disability, all of his or her
outstanding options not fully vested will immediately terminate, and those that
are fully vested will remain exercisable for various specified periods of time
up to a maximum of approximately one year. If an outside Director ceases to be a
Director for any other reason, all of his or her outstanding options not fully
vested will immediately terminate, and those that are fully vested will remain
exercisable for 90 days.
The closing sale price of a share of the Company's common stock was $1.96 on
April 22, 2004.
Federal Income Tax Matters
Under present law, an optionee will not realize any taxable income on
the date a nonqualified option is granted pursuant to the 2000 Directors' Plan.
Upon exercise of the option, however, the optionee must recognize, in the year
of exercise, ordinary income equal to the difference between the option price
and the fair market value of the Company's common stock on the date of exercise.
Upon the sale of the shares, any resulting gain or loss will be treated as
capital gain or loss. The Company will receive an income tax deduction in its
fiscal year in which nonqualified options are exercised equal to the amount of
ordinary income recognized by those optionees exercising options, and must
withhold income and other employment related taxes on such ordinary income.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan ("the ESPP") was adopted by
the Vicom shareholders in August 2000. The purpose of the ESPP is to provide
eligible employees with an opportunity to increase their proprietary interest in
the success of Vicom by purchasing Common Stock from Vicom on favorable terms
and to pay for such purchase through payroll deductions. The aggregate number of
shares of stock available for purchase under the ESPP is 400,000. The ESPP is
intended to qualify under section 423 of the Internal Revenue Code. The
provisions of the ESPP shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
The ESPP is administered by a committee of Vicom's board of
directors. The committee consists exclusively of one or more directors of Vicom
who are appointed by the Board. The committee interprets the ESPP and makes all
other policy decisions relating to the operation of the ESPP. The committee may
adopt such rules, guidelines and forms as it deems appropriate to implement the
ESPP. The committee's determination under the ESPP are final and binding on all
persons.
The ESPP Year consists of a twelve-month period commencing on
January 1 and ending on December 31. Notwithstanding the foregoing, the first
ESPP Year will be a short year commencing on the effective date of the ESPP and
ending on December 31, 2000.
EMPLOYEE BENEFITS PLANS
Vicom has 401(k) profit sharing plans covering substantially all
full-time employees. Employee contributions are limited to the maximum amount
allowable by the Internal Revenue Code of 1986, as amended. Vicom made no
significant discretionary contributions in years 1999, 1998 and 1997.
CERTAIN TRANSACTIONS
The following is a summary of all significant related party
transactions for the three years ended December 31, 2003.
Rangeline Capital is an entity managed and co-owned by David Weiss,
Director. In 2002 and 2003, Rangeline made equipment purchases from the Company.
In both years, those purchases comprised less than 5% of Company annual
revenues.
Vicom and its subsidiaries lease principal offices located at 2000 44th
Street SW, Fargo, ND 58013 and 9449 Science Center Drive, New Hope, Minnesota
55428. The 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
Page 31
square feet. The New Hope base rent ranges from $16,000 to $17,653 per month.
Both the New Hope and main Fargo leases have provisions that call for the
tenants to pay net operating expenses, including property taxes, related to the
facilities. Both offices have office, warehouse and training facilities. The
main Fargo property is owned in part by David Ekman. The New Hope property was
owned jointly by Steven Bell and Marvin Frieman prior to its sale in August,
2003 to an independent third party.
Interest and dividend expense paid by Vicom to related parties was
approximately $225,966 in 2003, $228,000 in 2002 and $3,000 in 2001. Related
parties include the Company's Chairman, Chief Executive Officer, President and
the President's mother.
Page 32
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information as of June 2, 2004
concerning the beneficial ownership of Vicom's common stock by (i) each director
of Vicom, (ii) the Named Executive Officers, (iii) the persons known by Vicom to
own more than 5% of Vicom's outstanding common stock, and (iv) all directors and
executive officers as a group. Except as otherwise indicated, the persons named
in the table have sole voting and investment power with respect to all shares of
common stock owned by them. The following table also provides information as of
June 2, 2004 regarding the beneficial ownership of shares of Vicom's common
stock which can be obtained by the selling shareholders by exercising warrants
held by them and is adjusted to reflect the sale of all their shares. The
information regarding ownership of shares of common stock after the offering
assumes that all of the shares registered under this prospectus have been sold.
The selling shareholders may actually sell all, some or none of the shares held
by them.
--------------------------------------- ------------------------------------------------------- ------------- ----------------------
Shares Beneficially Shares Beneficially
Owned Prior Shares Owned After
To Offering (1) To Be Sold Offering (20)
--------------------------------------- ------------------------------------------------------- ------------- ----------------------
Shares Total
Underlying Number of Total
Beneficial Owner Shares2 Warrants Shares Percent3 Number Percent
--------------------------------------- ------------ ------------ ---------------- ------------ ------------- -------------- -------
Steven Bell 0 0 589,063(4) 2.3% 0 589,0635 2.3
9449 Science Center Drive
New Hope, MN 55428
0 0 89,600(6) * 0 89,6007 *
Frank Bennett
301 Carlson Parkway - Suite 120
Minnetonka, Minnesota 55305
0 0 70,100(8) * 0 70,1009 *
Jonathan Dodge
715 Florida Avenue South - Suite 402
Golden Valley, MN 55426
0 0 1,751,583(10) 7.0% 0 1,751,58311 7.0%
David Ekman
2000 44th Street SW
Fargo, ND 58103
0 0 19,000(12) * 0 19,00013 *
Eugene Harris
225 South Meramec - Suite 722
St. Louis, MO 63105
0 0 464,133(14) 2.0% 0 464,13315 1.8%
James L. Mandel
9449 Science Center Drive
New Hope, MN 55428
0 0 1,369,686(16) 5.5% 0 1,369,68617 5.5%
Donald Miller
1924 Cocoplum Way
Naples, FL 34105
0 0 122,726(18) * 0 122,72619 *
David Weiss
10829 Olive Blvd.
Suite 203
St. Louis, MO 63141
All Directors and executive officers 0 0 4,475,891 18.0% 0 4,475,891 18.0%
as a group (eight persons)
--------------------------
*Less than one percent
1 Each person has sole voting and sole dispositive power with respect to all
outstanding shares, except as noted.
2 Excludes shares underlying warrants.
3 Based on an average of 24,763,322 shares outstanding at June 2, 2004, and
25,317,822 shares outstanding after the exercise of warrants. Each figure
showing the percentage of outstanding shares owned beneficially has been
calculated by treating as outstanding and owned the shares which could be
purchased by the indicated person within 60 days upon the exercise of stock
options and warrants (including the warrants).
4 Includes vested options to acquire 35,500 shares of common stock. Mr.
Bell's Beneficial Ownership does include 31,250 shares of common stock
owned by his spouse as to which Mr. Bell disclaims his beneficial
ownership.
5 Includes vested options to acquire 35,500 shares of common stock. Mr.
Bell's Beneficial Ownership does include 31,250 shares of common stock
owned by his spouse as to which Mr. Bell disclaims his beneficial
ownership.
6 Includes vested options to purchase 69,600 shares of common stock.
7 Includes vested options to purchase 69,600 shares of common stock.
8 Includes vested options to acquire 69,600 shares of common stock.
9 Includes vested options to acquire 69,600 shares of common stock.
10 Includes vested options to purchase 150,500 shares of common stock.
11 Includes vested options to purchase 150,500 shares of common stock.
12 Mr. Harris's beneficial ownership does include 19,000 shares owned by his
spouse as to which Mr. Harris disclaims his beneficial ownership.
13 Mr. Harris's beneficial ownership does include 19,000 shares owned by his
spouse as to which Mr. Harris disclaims his beneficial ownership.
14 Includes vested options to purchase 300,500 shares of common stock.
15 Includes vested options to purchase 300,500 shares of common stock.
16 Includes warrants and vested options to purchase 878,700 shares of common
stock.
17 Includes warrants and vested options to purchase 878,700 shares of common
stock.
18 Includes vested options to purchase 69,600 shares of common stock.
19 Includes vested options to purchase 69,600 shares of common stock.
Page 33
------------------------------------- -------------------------------------------------------- -------------- ----------------------
Shares Beneficially Shares Beneficially
Owned Prior To Offering (20) Shares Owned After
------------------------------------------------------- To Be Sold Offering (20)
---------- --------
Shares Total
Underlying Number of Total
Beneficial Owner Shares21 Warrants Shares Percent22 Number Percent
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Ahlberg, Daniel B. & Linda 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Alice Ann Corporation 30,000 9,900 39,900 * 39,900 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Allison, Robert 40,000 13,200 53,200 * 53,200 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Bergren, Gary 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Brown, David C./Carole A. 25,000 8,250 33,250 * 33,250 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Brown, Pamela Trustee 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Brust Limited Partnership 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Campbell, Craig L. IRA 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Char, Danton S. 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Char, Devron H. 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Char, Devron H. & Valerice C. 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Chudnofsky, Ann 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Clipper, Gary E. & Leslie 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Cobb, Elliott A. & Jean E. 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Cramer, M. Elizabeth 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Dahl, Christopher T. 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Dalsin, Mark & Linda 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Dalsin, Stephen B. & Teresa 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Davis, Gary B. 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Ellis Family Limited Partnership 40,000 13,200 53,200 * 53,200 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Ellis, John D. 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Geraci, Joseph 0 5,000 5,000 * 5,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Gonyea, Dennis D. 30,000 9,900 39,900 * 39,900 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Hale, Sandra J. 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Industricorp & Co FBO TC Corp 200,000 66,000 266,000 1.0% 266,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Kennedy, Maria C. 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Kennedy, William R. 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Kinney, E. Robert 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Kinney, Margaret Velie 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Malettis Partners LP 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
MB Partnership 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Miller, Thomas W. IRA Rollover 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Molinsky, Richard 50,000 16,500 66,500 * 66,500 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Oak Ridge Financial 0 5,000 5,000 * 5,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Perkins Capital Mgmt Profit Sharing 30,000 9,900 39,900 * 39,900 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Perkins Foundation 10,000 3,300 13,300 * 13,300 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Perkins, Richard Trustee 30,000 9,900 39,900 * 39,900 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray as custodian FBO 30,000 9,900 39,900 * 39,900 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Bradley Erickson IRA
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray as custodian FBO 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
------------------
*Less than one percent
20 Each person has sole voting and sole dispositive power with respect to all
outstanding shares, except as noted.
21 Excludes shares underlying warrants.
22 Based on an average of 24,763,322 shares outstanding at June 2, 2004, and
25,317,822 shares outstanding after the exercise of warrants.
Each figure showing the percentage of outstanding shares owned beneficially has
been calculated by treating as outstanding and owned the shares which could be
purchased by the indicated person within 60 days upon the exercise of stock
options and warrants (including the warrants).
Page 34
Shares Total
Underlying Number of Total
Beneficial Owner Shares21 Warrants Shares Percent(22) Number Percent
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Charles Pappas IRA
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray as custodian FBO Dan 20,000 6,600 26,600 * 26,600 0 0
Lastavich IRA
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray as custodian FBO J. 20,000 6,600 26,600 * 26,600 0 0
Richard Gilliland IRA
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray as custodian FBO 20,000 6,600 26,600 * 26,600 0 0
James B. Wallace
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray as custodian FBO 25,000 8,250 33,250 * 33,250 0 0
Michael Wilcox IRA
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray as custodian FBO 30,000 9,900 39,900 * 39,900 0 0
Robert Clayburgh IRA
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray FBO Daniel S. Perkins 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Piper Jaffray FBO Patrice M. 15,000 4,950 19,950 * 19,950 0 0
Perkins IRA
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Potter, John T. 25,000 8,250 33,250 * 33,250 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Provident Premier Master Fund Ltd 200,000 66,000 266,000 1.0% 266,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Pyramid Partners 100,000 33,000 133,000 * 133,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Roitenberg Trust 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Rooney, John F. 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Seel, Paul C. & Nancy JTWROS 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Skone, E. Terry 30,000 9,900 39,900 * 39,900 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Strickland, Edward & Margaret 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
USB Piper Jaffray FBO Mark Halsten 15,000 4,950 19,950 * 19,950 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Villafana, Manuel A. 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Voight, Donald O. & Janet M. TTEE 20,000 6,600 26,600 * 26,600 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Westrum, David M. TTEE 30,000 9,900 39,900 * 39,900 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Winer, Norman 100,000 33,000 133,000 * 133,000 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
All Selling Shareholders as a Group 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
TOTAL 1,650,000 554,500 2,204,500 8.0% 2,204,500 0 0
------------------------------------- ------------- ------------- ---------------- ----------- -------------- -------------- -------
Page 35
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledges, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o Ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
o Block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o Purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o An exchange distribution in accordance with the rules of the applicable
exchange;
o Privately negotiated transactions;
o Settlement of short sales;
o Broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
o A combination of any such methods of sale; and
o Any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders may from time to time pledge or grant a
security interest in some or all of the shares of common stock owned by them
and, if they default in the performance of their secured obligations, the
pledges or secured parties may offer and sell the shares of common stock from
time to time under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of Selling Stockholders to include the pledgee, transferee or
other successors in interest as Selling Stockholders under this prospectus.
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. Oak Ridge
Financial, one of the Selling Shareholders is a broker-dealer. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The Selling Stockholders have
informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.
The Company is required to pay all fees and expenses incident to the
registration of the shares. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Page 36
DESCRIPTION OF SECURITIES
Capital Structure
The Articles of Incorporation of Vicom authorize Vicom to issue 50
million shares of capital stock, which have no par value. However, the shares
have a par value of one cent per share for the purpose of a statute or
regulation imposing a tax or fee based upon the capitalization of a corporation.
As of June 2, 2004 there were 24,763,322 shares of common stock outstanding, 2.5
million shares reserved for issuance under our stock plans, 7,678,938 shares of
common stock reserved for issuance under outstanding warrants, 1,055,155 shares
of common stock issuable upon the conversion of shares of our Classes A through
E cumulative convertible Preferred Stock and 941,558 shares upon conversion of a
note payable.
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.
Warrants
The warrants being registered hereunder have a three year
term with each warrant allowing the warrant
holder to purchase one share of Vicom common stock for $2.21 per share.
MARKET PRICE OF VICOM'S COMON AND RELATED STOCKHOLDER 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, 2002 and
December 31, 2003, and for the quarter ended March 31, 2004 as provided by
Nasdaq.
Quarter Ended High Bid Low Bid
------------- -------- -------
March 31, 2002 ............................... 1.90 1.37
June 30, 2002 ................................ 1.75 .80
September 30, 2002 ........................... .92 .52
December 31, 2002 ............................ 1.12 .50
March 31, 2003 ............................... 1.37 .77
June 30, 2003 ................................ 2.49 1.03
September 30, 2003 ........................... 2.20 1.52
December 31, 2003 ............................ 1.85 1.23
March 31, 2004 ............................... 1.68 1.04
As of June 2, 2004, Vicom had 679 shareholders of record of its common
stock and 24,763,322 shares of common stock outstanding. As of that date, eight
shareholders held a total of 27,931 of Class A Preferred, two shareholders held
8,700 shares of Class B Preferred, five shareholders held a total of 125,400
shares of Class C Preferred, and eight shareholders held a total of 77,650
Page 37
shares of Class E Preferred.
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.
In the first quarter of 2003, $72,000 worth of Class C Preferred Stock
was issued to an officer of the Company in a conversion of accounts payable.
Also in the first quarter of 2003, $76,500 worth of Class E Preferred Stock was
issued to a member of the Board for his purchase of Multiband assets.
In the third quarter of 2003 $25,000 worth of Class B Preferred Stock
was purchased by an accredited investor.
In addition, during 2003 $133,100 worth of Class C Preferred Stock was
redeemed.
The holders of the Class A Preferred, Class B Preferred, Class C
Preferred, Class D Preferred and Class E Preferred (collectively, "Preferred
Stock") are entitled to receive, as and when declared by the Board, out of the
assets of the Company legally available for payment thereof, cumulative cash
dividends calculated based on the $10.00 per share stated value of the Preferred
Stock. The per annum dividend rate is eight percent (8%) for the Class A
Preferred and ten percent (10%) for the Class B Preferred and Class C Preferred,
fourteen percent (14%) for the Class D Preferred and fifteen percent (15%) in
the Class E Preferred, to be paid in kind. Dividends on the Class A Preferred,
Class C Preferred and Class D Preferred are payable quarterly on March 31, June
30, September 30, and December 31 of each year. Dividends on the Class B
Preferred are payable monthly on the first day of each calendar month. Dividends
on the Preferred Stock accrue cumulatively on a daily basis until the Preferred
Stock is redeemed or converted.
In the event of any liquidation, dissolution or winding up of Vicom,
the holders of the Class A Preferred and Class B Preferred will be entitled to
receive a liquidation preference of $10.50 per share, and the holders of the
Class C Preferred, Class D Preferred and Class E Preferred will be entitled to
receive a liquidation preference of $10.00 per share, each subject to
adjustment. Any liquidation preference shall be payable out of any net assets of
Vicom remaining after payment or provision for payment of the debts and other
liabilities of Vicom.
Vicom may redeem the Preferred Stock, in whole or in part, at a
redemption price of $10.50 per share for the Class A Preferred and the Class B
Preferred and $10.00 per share for the Class C Preferred, Class D Preferred and
Class E Preferred (subject to adjustment, plus any earned and unpaid dividends)
on not less than thirty days' notice to the holders of the Preferred Stock,
provided that the closing bid price of the common stock exceeds $4.00 per share
(subject to adjustment) for any ten consecutive trading days prior to such
notice. Upon Vicom's call for redemption, the holders of the Preferred Stock
called for redemption will have the option to
Page 38
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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 302A.251 of the Minnesota statutes, a corporation shall,
unless prohibited or limited by its Articles of Incorporation or Bylaws,
indemnify its directors, officers, employees and agents against judgments,
penalties, fines, settlements and reasonable expenses, including attorneys' fees
and disbursements, incurred by such person who was, or is threatened to be, made
a party to a proceeding by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation if generally, with
respect to the acts or omissions of the person complained of in the proceeding,
the person (i) has not been indemnified by another organization with respect to
the same acts or omissions; (ii) acted in good faith; (iii) received no improper
personal benefit; (iv) in the case of a criminal proceeding, had no reasonable
cause to believe the conduct was unlawful; and (v) reasonably believed the
conduct was in the best interest of the corporation or, in certain
circumstances, reasonably believed that the conduct was not opposed to the best
interests of the corporation. Minnesota corporate law also provides that a
corporation may purchase and maintain insurance on behalf of any indemnified
party against any liability asserted against such person, whether or not the
corporation would have been required to indemnify the person against liability
under the provisions of Minnesota corporate law. Vicom's Articles of
Incorporation provide for indemnification pursuant to Minnesota statutes. We
also have directors' and officers' insurance in the amount of $3,000,000 per
occurrence.
LEGAL MATTERS
The validity of the shares of common stock being offered by this
prospectus will be passed upon for us by Steven M. Bell, Esq. of New Hope,
Minnesota.
EXPERTS
Financial statements of Vicom included in this prospectus for the years
ended December 31, 2003, 2002 and 2001 have been audited by Virchow, Krause &
Company, LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of such firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We will be filing annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission
under File No. 0-13529. You may read and copy any document in our public files
at the SEC's offices at:
o Judiciary Plaza
450 Fifth Street, NW
Room 1024
Washington, D.C. 20549
o 500 West Madison Street
Suite 1400
Chicago, Illinois 60606
o 3475 Lenox, N.E.
Suite 1000
Atlanta, Georgia 30326
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
the SEC's website at http://www.sec.gov, through the SEC's electronic data
gathering analysis and retrieval system, EDGAR. Our common stock is traded on
the NASDAQ Stock Market under the symbol "VICM." Information about us is also
available from the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement that we filed with
the SEC. You should rely only on the information provided in this prospectus or
any supplement. We have not authorized anyone else to provide you with different
information. You
Page 39
should not assume that the information in this prospectus or any supplement is
accurate as of any date other than the date on the front of that document.
Page 40
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which we have filed with the Commission, are
incorporated by reference in this Prospectus:
o our Annual Report on Form 10-K for the fiscal year ended December
31, 2003;
o our proxy statement for the 2002 Annual Meeting of Shareholders;
o our quarterly reports on Form 10-Q for the quarters ended
September 30, 2003, June 30, 2003 and March 31, 2004;
o our Forms 8-K filed May 24, 2004, March 17, 2004, December 16,
2003, September 24, 2003, October 26, 2001 and 8-K/A filed
November 5, 2001; and
o the description of our common stock contained in our Registration
Statement on Form 10.
All documents we file in the future pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering are also incorporated by reference and are an
important part of this Prospectus. Any statement contained in a document
incorporated by reference in this Prospectus shall be modified or superseded for
purposes of this Prospectus to the extent that a statement contained in this
Prospectus or in any other subsequently filed document which is incorporated by
reference modifies or supersedes such statement.
We will provide without charge to each person to whom this Prospectus
is delivered, upon request, a copy of any or all documents that have been or may
be incorporated by reference in the Prospectus (other than exhibits to such
documents which are not specifically incorporated by reference into such
documents). Your requests should be directed to our Chief Financial Officer at
our principal executive offices at:
9449 Science Center Drive
New Hope, Minnesota 55428
Telephone Number (763) 504-3000
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
All statements contained in this Prospectus and the documents we
incorporate be reference that are not statements of historical fact are
"forward-looking statements". Sometimes these statements contain words like
"believe", "belief", "plan", "anticipate", "expect", "estimate", "may", "will",
or similar terms. Forward-looking statements involve known or unknown
uncertainties and other factors that could cause actual results to be materially
different from historical results or from any future results expressed or
implied by the forward-looking statements. The "Risk Factors" section summarizes
certain of the material risks and uncertainties that could cause our actual
results, performance or achievements to differ materially from what we have said
in this Prospectus and the documents we incorporate by reference. The Risk
Factors apply to all of our forward-looking statements. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements, which speak only as of the date of this Prospectus. We will not
revise these forward-looking statements to reflect events or circumstances after
the date of this Prospectus or to reflect the occurrence of unanticipated
events.
Page 41
Index to Financial Statements.
Vicom, Inc. and Subsidiaries - Consolidated Balance Sheets as of March 31, 2004,
December 31, 2003 and 2002 and Consolidated Statements of Operations,
Consolidated Stockholders' Equity and Consolidated Cash Flows for the Years
Ended December 31, 2003, 2002 and 2001 and for the Three Months ended March 31,
2004 and 2003.
Description Pages
----------- -----
Independent Auditor's Report F2
Consolidate Balance Sheets F3
Consolidated Statements of Operations F4
Consolidated Statements of Stockholders' Equity F5
Consolidated Statements of Cash Flows F11
Notes to Consolidated Financial Statements F12
F1
Independent Auditor's Report
----------------------------
REPORT OF INDEPENDENT AUDITORS
To Stockholders, Board of Directors, and Audit Committee
Vicom, Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheets of Vicom,
Incorporated and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management as well
as evaluating the overall financial statement presentation. We believe that our
audits 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
February 16, 2004
F2
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Three Months
Years Ended December Ended March 31,
----------------------------------- ---------------
2003 2002 2004
---------------- ---------------- ---------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,945,960 $ 540,375 $ 1,602,593
Certificate of deposit 250,000 - 250,000
Accounts receivable, net 1,658,114 1,948,004 2,039,841
Inventories, net 1,973,817 1,463,658 1,951,218
Other current assets 96,550 226,774 103,152
---------------- ---------------- -------
Total Current Assets 6,924,441 4,178,811 5,946,804
---------------- ---------------- ---------
PROPERTY AND EQUIPMENT, NET 3,589,704 3,248,973 3,369,071
---------------- ---------------- ---------
OTHER ASSETS
Goodwill 2,748,879 2,748,879 2,761,245
Other assets 639,861 170,653 1,039,508
---------------- ---------------- ---------
Total Other Assets 3,388,740 2,919,532 3,800,753
---------------- ---------------- ---------
TOTAL ASSETS $ 13,902,885 $ 10,347,316 $ 13,116,625
================ ================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of cash in bank $ 147,398 $ - $ 142,775
Wholesale line of credit 976,314 1,290,383 1,453,725
Current portion of long-term debt 998,813 321,589 919,032
Current portion of note payable - stockholder 81,554 - 99,080
Current portion of capital lease obligations 54,939 59,570 56,143
Accounts payable 1,771,699 1,735,931 1,663,419
Accrued liabilities 1,459,705 714,479 1,101,155
Deferred service obligations and revenue 315,227 309,729 332,255
---------------- ---------------- ---------------
Total Current Liabilities 5,805,649 4,431,681 5,756,584
LONG-TERM LIABILITIES
Long-term debt, net 2,087,156 3,114,006 2,127,691
Other long term debt 222,700
Note payable - stockholder, net of current portion 32,837 - 16,576
Capital lease obligations, net of current portion 142,898 159,344 128,329
---------------- ---------------- ---------------
Total Liabilities 8,068,540 7,705,031 8,251,880
---------------- ---------------- ---------------
MINORITY INTEREST IN SUBSIDIARY 26,634 - -
---------------- ---------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Cumulative convertible preferred stock, no par value:
8% Class A (27,931, 27,831, and 27,931 shares issued
and outstanding, $293,276, $292,226 and $293,276
liquidation preference) 419,752 418,252 419,752
10% Class B (8,700, 6,200 and 8,700 shares issued and
outstanding, $91,350, $65,100 and $91,350 liquidation 62,000
preference) 62,000 62,000
10% Class C (125,400, 131,510 and 125,400 shares
issued and outstanding, $1,254,000, $1,315,100 and 1,611,105
$1,254,000 liquidation preference) 1,611,105 1,699,407
15% Class E (77,650, 70,000 and 77,650 shares issued
and outstanding, $776,500, $700,000 and $776,500
liquidation preference) 438,964 395,778 438,964
Common stock, no par value (19,036,805, 13,110,477and
19,450,294 shares issued; 19,019,786, 13,065,410 and 8,230,982
19,440,150 shares outstanding) 7,726,505 4,465,832
Stock subscriptions receivable (418,085) (633,195) (415,085)
Options and warrants 30,514,872 26,632,299 30,514,872
Unamortized compensation (217,210) (682,089) (88,136)
Accumulated deficit (34,330,192) (29,715,999) (35,909,709)
---------------- ---------------- ---------------
Total Stockholders' Equity 5,807,711 2,642,285 4,864,745
---------------- ---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,902,885 $ 10,347,316 $ 13,116,625
================ ================ ================
See accompanying notes to consolidated financial statements.
F3
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2003, 2002 and 2001, Three Months Ended March
31, 2004 and 2003 (unaudited)
Years Ended December 31 Three Months Ended March 31,
----------------------------------------------- ------------------------------
2003 2002 2001 2004 2003
--------------- ---------------- ------------- ------------ ------------
(unaudited) (unaudited)
REVENUES 22,640,421 $ 24,540,969 $ 32,260,777 $ 5,747,474 $ 5,871,762
--------------- ---------------- ------------ ------------ ------------
COST AND EXPENSES
Cost of products and services 15,952,019 18,036,750 25,295,186 4,348,949 4,310,702
Selling, general and administrative 10,184,709 9,337,292 10,962,739 2,596,953 2,235,996
--------------- ---------------- ------------- ------------ ------------
Total costs and expenses 26,136,728 27,374,042 36,257,925 6,945,802 6,546,698
--------------- ---------------- ------------ ------------ ------------
LOSS FROM OPERATIONS (3,496,307) (2,833,073) (3,997,148) (1,198,328) (674,936)
--------------- ---------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (897,704) (1,604,512) (1,446,868) (321,377) (225,687)
Interest income 16,309 64,083 63,717 2,841 (65,496)
Other income (20,668) (64,557) 54,747 (318,536) (291,183)
--------------- ---------------- ------------ ------------ ------------
Total Other Expense (902,063) (1,604,986) (1,328,404) (642,754) (582,366)
--------------- ---------------- ------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST IN SUBSIDIARY (4,398,370) (4,438,059) (5,325,552) (1,516,864) (966,119)
Minority interest in subsidiary 33,366 - - 0 0
NET LOSS (4,365,004) (4,438,059) (5,325,552) (1,516,864) (966,119)
Preferred stock dividends 248,689 153,578 432,669 (62,653) (56,471)
--------------- ---------------- ------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,613,693) $ 4,591,637) $ (5,758,221) (1,579,517) (1,022,590)
=============== ================ ============= ============ ============
LOSS PER COMMON SHARE- BASIC AND DILUTED $ (0.29) $ (0.39) $ (0.66) $ (.08) $ (.08)
=============== ================ ============= ------------ ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - BASIC
AND DILUTED 16,112,231 11,735,095 8,762,814 19,280,632 13,418,333
=============== ================ ============= ------------ ------------
See accompanying notes to consolidated financial statements.
F4
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002, and 2001
Cumulative Convertible Preferred Stock
8% Class A 10% Class B 10% Class C
-------------------------- ----------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 2000
-- $ -- 22,836 $ 218,869 150,810 $ 1,951,003
Stock issued:
Cash 32,050 320,500 -- -- -- --
Stock subscriptions
receivable -- -- -- -- -- --
Acquisition
of assets 10,640 106,400 -- -- -- --
Purchase of
intangible asset -- -- -- -- -- --
Guarantee of
debt financing -- -- -- -- -- --
Conversion of
accounts payable 3,500 35,000 -- -- -- --
Conversion of
accrued liabilities 9,631 96,306 -- -- -- --
Conversion of
notes payable 5,804 58,044 -- -- -- --
Conversion of
preferred stock (31,000) (310,000) (13,150) (131,500) (7,800) (78,000)
Conversion of
dividends payable 6,030 60,300 -- -- -- --
Redemption of
preferred stock (7,783) (77,830) (986) (369) (3,500) (35,000)
Discount on preferred
stock related to -- 145,147 -- -- -- (37,556)
warrants
Interest receivable
on stock subscription -- -- -- -- -- --
receivable
Warrants issued: -- --
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Debt -- -- -- -- -- --
Deferred compensation
expense related to
stock options issued
below fair market
value -- -- -- -- -- --
Deferred compensation
expense -- -- -- -- -- --
Restricted stock: -- --
Issued -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Repricing of warrants -- -- -- -- -- --
Embedded value with
Pyramid Trading
warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 2001
28,872 433,867 8,700 87,000 139,510 1,800,447
Stock issued:
Cash -- -- -- -- -- --
Reduction of
stock subscriptions -- -- -- -- -- --
receivable for
fees related to
equity
transactions
Acquisition of assets 1,859 18,590 -- -- -- --
Guarantee of
debt financing -- -- -- -- -- --
14% Class D 15% Class E
-------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
BALANCES, December 31, 2000
72,500 $ 802,813 -- $ --
Stock issued:
Cash -- -- -- --
Stock subscriptions
receivable -- -- -- --
Acquisition
of assets -- -- -- --
Purchase of
intangible asset -- -- -- --
Guarantee of
debt financing -- -- -- --
Conversion of
accounts payable -- -- -- --
Conversion of
accrued liabilities -- -- -- --
Conversion of
notes payable 10,000 100,000 -- --
Conversion of
preferred stock -- -- -- --
Conversion of
dividends payable -- -- -- --
Redemption of
preferred stock (42,500) (425,000) -- --
Discount on preferred
stock related to -- (60,313) -- --
warrants
Interest receivable
on stock subscription -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- --
Common stock -- -- -- --
Debt -- -- -- --
Deferred compensation
expense related to
stock options issued
below fair market
value -- -- -- --
Deferred compensation
expense -- -- -- --
Restricted stock:
Issued -- -- -- --
Forfeited -- -- -- --
Amortization expense -- -- -- --
Repricing of warrants -- -- -- --
Embedded value with
Pyramid Trading
warrants -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCES, December 31, 2001
40,000 417,500 -- --
Stock issued:
Cash -- -- 10,000 100,000
Reduction of
stock subscriptions -- -- -- --
receivable for
fees related to
equity
transactions
Acquisition of assets 1,859 18,590 -- -- -- --
Guarantee of
debt financing -- -- -- -- -- --
See accompanying notes to consolidated financial statements.
F5
8% Class A 10% Class B 10% Class C
-------------------------- ----------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
Services rendered -- -- -- -- -- --
Conversion of accounts payable -- -- -- -- -- --
Conversion of notes payable and accrued
interest -- -- -- -- -- --
Conversion of accrued interest -- -- -- -- -- --
Conversion of preferred stock -- -- (2,500) (25,000) (2,500) (25,000)
Redemption of preferred stock (2,900) (29,000) -- -- (5,500) (55,000)
Discount on preferred stock related to
warrants issued -- (5,205) -- -- -- (21,040)
Interest receivable on stock subscription -- -- -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
Debt -- -- -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- -- -- --
Deferred compensation expense -- -- -- -- -- --
Restricted stock:
Issued and outstanding -- -- -- -- -- --
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 2002 27,831 418,252 6,200 62,000 131,510 1,699,407
Stock issued:
Cash 100 1,000 2,500 25,000 -- --
Exercise of warrants -- -- -- -- -- --
Cashless exercise of warrants -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Reduction of stock subscriptions -- -- -- -- -- --
receivable for fees related to equity
transactions
Acquisition of assets -- -- -- -- -- --
Conversion of accounts payable -- -- -- -- 7,200 72,000
Conversion of notes payable -- -- -- -- -- --
Conversion of accrued interest -- -- -- -- -- --
Conversion of preferred stock -- -- -- -- (4,000) (40,000)
Conversion of dividends payable -- -- -- -- -- --
Redemption of preferred stock -- -- -- -- (9,310) (93,100)
Intrinsic value of convertible feature -- 500 -- -- -- (27,202)
Discount on preferred stock related to
warrants issued -- -- -- (25,000) -- --
Stock subscriptions receivable:
Cash payments -- -- -- -- -- --
Increase reserve -- -- -- -- -- --
Interest collected -- -- -- -- -- --
Warrants issued:
Preferred stock -- -- -- -- -- --
Common stock -- -- -- -- -- --
14% Class D 15% Class E
-------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Services rendered -- -- -- --
Conversion of accounts payable -- -- -- --
Conversion of notes payable and accrued
interest (30,000) (300,000) 60,000 600,000
Conversion of accrued interest -- -- -- --
Conversion of preferred stock (10,000) (100,000) -- --
Redemption of preferred stock -- -- -- --
Discount on preferred stock related to
warrants issued -- (17,500) -- (304,222)
Interest receivable on stock subscription -- -- -- --
receivable
Warrants issued:
Preferred stock -- -- -- --
Common stock -- -- -- --
Debt -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- --
Deferred compensation expense -- -- -- --
Restricted stock:
Issued and outstanding -- -- -- --
Forfeited -- -- -- --
Amortization expense -- -- -- --
Embedded value with Pyramid Trading warrants -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
--------- ----------- ----------- -----------
BALANCES, December 31, 2002 -- -- 70,000 395,778
Stock issued:
Cash -- -- -- --
Exercise of warrants -- -- -- --
Cashless exercise of warrants -- -- -- --
Exercise of stock options -- -- -- --
Reduction of stock subscriptions -- -- -- --
receivable for fees related to equity
transactions
Acquisition of assets -- -- 7,650 76,500
Conversion of accounts payable -- -- -- --
Conversion of notes payable -- -- -- --
Conversion of accrued interest -- -- -- --
Conversion of preferred stock -- -- -- --
Conversion of dividends payable -- -- -- --
Redemption of preferred stock -- -- -- --
Intrinsic value of convertible feature -- -- -- --
Discount on preferred stock related to
warrants issued -- -- -- (33,314)
Stock subscriptions receivable:
Cash payments -- -- -- --
Increase reserve -- -- -- --
Interest collected -- -- -- --
Warrants issued:
Preferred stock -- -- -- --
Common stock -- -- -- --
See accompanying notes to consolidated financial statements.
F6
8% Class A 10% Class B 10% Class C
-------------------------- ----------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
Debt -- -- -- -- -- --
Services rendered -- -- -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- -- -- --
Deferred compensation expense -- -- -- -- -- --
Restricted stock:
Forfeited -- -- -- -- -- --
Amortization expense -- -- -- -- -- --
Embedded value with Laurus warrants -- -- -- -- -- --
Preferred stock dividends -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, December 31, 2003 27,931 $ 419,752 8,700 $ 62,000 125,400 $ 1,611,105
=========== =========== =========== =========== =========== ===========
14% Class D 15% Class E
-------------------------- -------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Debt -- -- -- --
Services rendered -- -- -- --
Deferred compensation expense related to
stock options issued below fair market value -- -- -- --
Deferred compensation expense -- -- -- --
Restricted stock:
Forfeited -- -- -- --
Amortization expense -- -- -- --
Embedded value with Laurus warrants -- -- -- --
Preferred stock dividends -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCES, December 31, 2003 -- $ -- 77,650 $ 438,964
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F7
Common Stock Stock Options
---------------------------- Subscriptions and Unamortized
Shares Amount Receivable Warrants Compensation
-------------- ------------- ------------- -------------- ---------------
BALANCES, December 31, 2000 8,137,181 $ 1,340,074 $ - $ 14,347,833 $ (278,138)
Stock issued:
Cash 1,092,953 421,566 - - -
Stock subscriptions receivable 800,000 610,000 (610,000) - -
Acquisition of assets 87,000 261,000 - - -
Purchase of intangible assets 50,000 83,750 - - -
Guarantee of debt financing 100,000 120,000 - - -
Conversion of accounts payable - - - - -
Conversion of accrued liabilities 10,000 9,007 - - -
Conversion of notes payable 20,000 50,000 - - -
Conversion of preferred stock 382,027 528,742 - - -
Conversion of dividends payable - - - - -
Redemption of preferred stock - - - - -
Discount on preferred stock
related to warrants - - - - -
Interest receivable on
stock subscription receivable - - (21,619) - -
Warrants issued:
Preferred stock - - - 87,403 -
Common stock - - - 544,683 -
Debt - - - 1,382,126 -
Deferred compensation
expense related to stock
options issued below
fair market value 1,244,250 (1,244,250)
Deferred compensation expense - - - - 239,461
Restricted stock
Issued 83,000 308,145 - - (308,145)
Forfeited (82,711) (289,180) - - 289,180
Amortization expense - - - - 92,749
Repricing of warrants - - - 6,919,692 -
Embedded value with
Pyramid Trading warrants - - - 431,925 -
Preferred stock dividends - - - - -
Net loss - - - - -
-------------- ------------- ------------ ------------- ---------------
BALANCES, December 31, 2001 10,679,450 3,443,104 (631,619) 24,957,912 (1,209,143)
Stock issued:
Cash 1,548,120 274,414 7,850 - -
Reduction of stock
subscriptions receivable for
fees related to equity transactions - (40,563) 40,563 - -
Acquisition of assets - - - (18,590) -
Guarantee of debt financing 25,000 14,750 - - -
Services rendered 35,214 27,700 - - -
Conversion of accounts payable 7,500 7,255 - - -
Conversion of notes payable
and accrued interest 554,569 460,001 - - -
Conversion of accrued interest 117,787 119,881 - - -
Accumulated
Deficit Total
------------- ----------
BALANCES, December 31, 2000 $(12,506,102) $ 5,876,352
Stock issued:
Cash - 742,066
Stock subscriptions receivable - -
Acquisition of assets - 367,400
Purchase of intangible assets - 83,750
Guarantee of debt financing - 120,000
Conversion of accounts payable - 35,000
Conversion of accrued liabilities - 105,313
Conversion of notes payable - 208,044
Conversion of preferred stock - 9,242
Conversion of dividends payable - 60,300
Redemption of preferred stock - (538,199)
Discount on preferred stock
related to warrants 68,948 116,226
Interest receivable on
stock subscription receivable - (21,619)
Warrants issued:
Preferred stock - 87,403
Common stock - 544,683
Debt - 1,382,126
Deferred compensation
expense related to stock
options issued below
fair market value - -
Deferred compensation expense - 239,461
Restricted stock
Issued - -
Forfeited - -
Amortization expense - 92,749
Repricing of warrants (6,919,692) -
Embedded value with
Pyramid Trading warrants - 431,925
Preferred stock dividends (432,669) (432,669)
Net loss (5,325,552) (5,325,552)
------------- ------------
BALANCES, December 31, 2001 (25,115,067) 4,184,001
Stock issued:
Cash - 382,264
Reduction of stock
subscriptions receivable for
fees related to equity transactions - -
Acquisition of assets - -
Guarantee of debt financing - 14,750
Services rendered - 27,700
Conversion of accounts payable - 7,255
Conversion of notes payable
and accrued interest - 760,001
Conversion of accrued interest - 119,881
See accompanying notes to consolidated financial statements.
F8
Stock Options
Common Stock Subscriptions and Unamortized
----------------------------
Shares Amount Receivable Warrants Compensation
-------------- ------------- ------------- -------------- ---------------
Conversion of preferred stock 140,000 150,000 - - -
Redemption of preferred stock - - - - -
Discount on preferred stock related to warrants
issued - - - - -
Interest receivable on stock subscription
receivable - - (49,989) - -
Warrants issued:
Preferred stock - - - 324,324 -
Common stock - - - 575,119 -
Debt - - - 879,382 -
Deferred compensation expense related to stock
options issued below fair market value - 53,745 - (53,345) 4,307
Deferred compensation expense - - - - 78,292
Restricted stock:
Issued and outstanding 22,434 21,255 - - (21,255)
Forfeited (19,597) (65,710) - - 65,710
Amortization expense - - - - 400,000
Embedded value with Pyramid Trading warrants - - - (32,503) -
Preferred stock dividends - - - - -
Net loss - - - - -
-------------- ------------- ------------ -------------- ---------------
BALANCES, December 31, 2002 13,110,477 4,465,832 (633,195) 26,632,299 (682,089)
Stock issued:
Cash 4,477,279 1,947,197 - - -
Exercise of warrants 258,790 262,030 - - -
Cashless exercise of warrants 141,529 - - - -
Exercise of stock options 3,000 3,750 - - -
Reduction of stock subscriptions receivable - (36,977) 36,977 - -
for fees related to equity transactions
Acquisition of assets - - - - -
Conversion of accounts payable 85,000 120,690 - - -
Conversion of notes payable 654,202 762,000 - - -
Conversion of accrued interest 63,539 66,172 - - -
Conversion of preferred stock 66,666 40,000 - - -
Conversion of dividends payable 187,164 113,209 - - -
Redemption of preferred stock - - - - -
Intrinsic value of convertible feature - - - - -
Discount on preferred stock related to warrants - - - - -
issued
Stock subscriptions receivable:
Cash payments - - 105,806 - -
Increase reserve - - 71,000 - -
Interest collected - - 1,327 - -
Warrants issued:
Preferred stock - - - 58,314 -
Common stock - - - 2,050,507 -
Debt - - - 883,711 -
Services rendered - - - 321,920 -
Deferred compensation expense related to stock
options issued below fair market value - - - - 367
Deferred compensation expense - - - - 47,114
Restricted stock:
Accumulated
Deficit Total
------------- ----------
Conversion of preferred stock - -
Redemption of preferred stock - (84,000)
Discount on preferred stock related to warrants
issued (9,295) (357,262)
Interest receivable on stock subscription
receivable - (49,989)
Warrants issued:
Preferred stock - 324,324
Common stock - 575,119
Debt - 879,382
Deferred compensation expense related to stock
options issued below fair market value - 4,707
Deferred compensation expense - 78,292
Restricted stock:
Issued and outstanding - -
Forfeited - -
Amortization expense - 400,000
Embedded value with Pyramid Trading warrants - (32,503)
Preferred stock dividends (153,578) (153,578)
Net loss (4,438,059) (4,438,059)
------------- -------------
BALANCES, December 31, 2002 (29,715,999) 2,642,285
Stock issued:
Cash - 1,973,197
Exercise of warrants - 262,030
Cashless exercise of warrants - -
Exercise of stock options - 3,750
Reduction of stock subscriptions receivable - -
for fees related to equity transactions
Acquisition of assets - 76,500
Conversion of accounts payable - 192,690
Conversion of notes payable - 762,000
Conversion of accrued interest - 66,172
Conversion of preferred stock - -
Conversion of dividends payable - 113,209
Redemption of preferred stock - (93,100)
Intrinsic value of convertible feature (500) (27,202)
Discount on preferred stock related to warrants - (58,314)
issued
Stock subscriptions receivable:
Cash payments - 105,806
Increase reserve - 71,000
Interest collected - 1,327
Warrants issued:
Preferred stock - 58,314
Common stock - 2,050,507
Debt - 883,711
Services rendered - 321,920
Deferred compensation expense related to stock
options issued below fair market value - 367
Deferred compensation expense - 47,114
Restricted stock:
See accompanying notes to consolidated financial statements.
F9
Common Stock Stock Options
---------------------------- Subscriptions and Unamortized
Shares Amount Receivable Warrants Compensation
-------------- ------------- ------------- -------------- ---------------
Forfeited (10,841) (17,398) - - 17,398
Amortization expense - - - - 400,000
Embedded value with Laurus warrants - - - 568,121 -
Preferred stock dividends - - - - -
Net loss - - - - -
-------------- ------------- ------------ -------------- ---------------
BALANCES, December 31, 2003 19,036,805 $ 7,726,505 $ (418,085) $ 30,514,872 $ (217,210)
============== ============= ============ ============== ===============
Accumulated
Deficit Total
------------- ------------
Forfeited - -
Amortization expense - 400,000
Embedded value with Laurus warrants - 568,121
Preferred stock dividends (248,689) (248,689)
Net loss (4,365,004) (4,365,004)
-------------- -------------
BALANCES, December 31, 2003 $(34,330,192) $ 5,807,711
============= =============
See accompanying notes to consolidated financial statements.
F10
VICOM, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, Three Months Ended March 31,
--------------------------------------------- ---------------------------
2003 2002 2001 2004 2003
------------- ------------- ------------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,365,004) $ (4,438,059) $ (5,325,552) $ (1,516,864) $ (966,119)
Adjustments to reconcile net loss to cash flows
from operating activities:
Depreciation and amortization 996,379 1,115,457 1,410,764 363,327 214,132
Amortization of deferred compensation 447,481 482,999 332,210 112,641 120,190
Amortization of original issue discount 405,248 1,103,314 797,169 188,979 114,616
Write off of notes receivable and investment 19,069 60,000 - - -
Reserve for stock subscriptions and interest
receivable 71,000 - - - -
Impairment reserve on property and equipment - 119,480 - - -
Common stock issued for services - 27,700 - 19,887 321,920
Loss on sale of property and equipment 79,394 31,412 846 0 74,137
Interest receivable on stock subscription
receivable 1,327 (49,989) (21,619) 0 (10,826)
Warrants issued for services 321,920 - 87,403 - -
Warrants issued with debt conversion - 183,903 - - -
Discount on preferred stock related to warrants - - (33,178) - -
Minority interest in subsidiary (33,366) - - - -
Changes in operating assets and liabilities:
Accounts receivable, net 289,890 576,509 3,087,313 (385,460) (65,526)
Inventories, net (509,762) 182,783 705,050 22,599 (29,704)
Other current assets 70,264 (205,483) 47,031 (10,028) (225,568)
Other assets (143,101) 43,210 - (37,171) 600
Wholesale line of credit (314,069) (34,424) (708,533) 477,411 187,910
Accounts payable and accrued liabilities 122,403 38,344 (978,479) (459,736) (234,476)
Deferred service obligations and revenue (39,321) (106,877) 97,465 17,028 26,029
------------- ------------- ------------- ------------- -----------
Net Cash Flows from Operating Activities (2,580,248) (869,721) (502,110) (1,207,387) (472,685)
------------- ------------- ------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment 15,492 1,239,313 60,019 151 -
Purchases of property and equipment (526,936) (1,275,434) (1,884,945) (39,659) (92,285)
Payments received on notes receivable - - 59,084 3,000 5,000
Payments for investment in joint venture (64,878) - - - -
Purchase of certificate of deposit (250,000) - - - -
------------- ------------- ------------- ------------- -----------
Net Cash Flows from Investing Activities (826,322) (36,121) (1,765,842) (36,508) (87,285)
------------- ------------- ------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in checks issued in excess of cash in bank 147,398 - - (4,623) 0
Proceeds from long-term debt and warrants issued
with long-term debt 1,659,726 1,172,064 1,919,650 - -
Proceeds from note payable - stockholder 124,000 - - - -
Payments received on stock subscriptions receivable 105,806 6,786 - - -
Payments on long-term debt (200,768) (131,605) (461,808) (31,867) (53,260)
Payments on note payable - stockholder (9,609) - - (9,735) 0
Payments on capital lease obligations (75,301) (937,828) (315,770) (19,723) (20,474)
Proceeds from issuance of stock and warrants 4,023,704 949,533 1,270,612 0 481,391
Redemption of preferred stock (93,100) (84,000) (538,199) 0 (2,100)
Preferred dividends (135,481) (153,578) (143,167) (33,524) (50,521)
Exercise of stock options 3,750 - - - -
Exercise of warrants 262,030 - - 0 78,130
------------- ------------- ------------- ------------- -----------
Net Cash Flows from Financing Activities 5,812,155 821,372 1,731,318 (99,472) 433,166
------------- ------------- ------------- ------------- -----------
Net Change in Cash and Cash Equivalents 2,405,585 (84,470) (536,634) (1,343,367) (126,804)
CASH AND CASH EQUIVALENTS - Beginning of Year 540,375 624,845 1,161,479 2,945,960 540,375
------------- ------------- ------------- ------------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 2,945,960 $ 540,375 $ 624,845 $ 1,602,593 $ 413,571
============= ============= ============= ============= ===========
See accompanying notes to consolidated financial statements.
F11
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
--------------------------------------------------------------------------------
Nature of Business
Vicom, Inc. (the Company) was incorporated in Minnesota in September 1975. The
Company provides voice, data and video services to business, government and
multi-dwelling customers. The Company's products and services are sold to
customers located throughout the United States of America.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern that contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For
the years ended December 31, 2003, 2002, and 2001, the Company incurred net
losses of $4,365,004, $4,438,059 and $5,325,552, respectively. At December 31,
2003, the Company had an accumulated deficit of $34,330,192. The Company's
ability to continue as a going concern is dependent on it ultimately achieving
profitability and/or raising additional capital. Management intends to obtain
additional debt or equity capital to meet all of its existing cash obligations
and fund commitments on planned Multiband projects; however, there can be no
assurance that the sources will be available or available on terms favorable to
the Company. Management anticipates that the impact of the actions listed below
will generate sufficient cash flows to pay current liabilities, long-term debt
and capital lease obligations and fund the Company's future operations:
1. Continued reduction of operating expenses by controlling payroll,
professional fees and other general and administrative expenses.
2. Solicit additional equity investment in the Company by either issuing
preferred or common stock.
3. Continue to market Multiband services and acquire additional multi-dwelling
unit customers.
4. Control capital expenditures by contracting Multiband services and
equipment through a landlord-owned equipment program.
5. Establish market for wireless internet services.
Principles of Consolidation
The consolidated financial statements include the accounts of Vicom,
Incorporated (Vicom) and its wholly owned subsidiaries, Corporate Technologies,
USA, Inc. (CTU), and Multiband, Inc. (Multiband) which provides voice, data and
video services to residential multi-dwelling units. In February 2003, the
Company formed a 50% owned subsidiary, Multiband USA, Inc. (MB USA) with Pace
Electronics, Inc. (PACE) a video wholesaler, and provides the same services as
Multiband). As part of the subsidiary agreement, the Company has the right to
elect two of the three board of directors and, at its sole option and
discretion, shall have the right, but not the obligation to convert one Vicom
common share for every ten shares of Multiband USA issued to PACE (Notes 2 and
17). Based on the Company's control of the subsidiary, the operating results
have been consolidated. All significant intercompany transactions and balances
have been eliminated in consolidation.
On January 1, 2004, the Company merged Multiband into CTU.
Revenues and Cost Recognition
The Company earns revenues from five sources: 1) Video and computer technology
products which are sold but not installed, 2) Voice, video and data
communication products which are sold and installed, 3) Service revenues related
to communication products which are sold and both installed and not installed 4)
Multiband user charges to multiple dwelling units, and 5) MB USA user charges to
timeshares.
F12
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Revenues from video and computer technology products, which are sold but not
installed, are recognized when delivered and the customer has accepted the terms
and has the ability to fulfill the terms. Product returns and customer discounts
are netted against revenues.
Customers contract for both the purchase and installation of voice and data
networking technology products and certain video technologies products on one
sales agreement, as installation of the product is essential to the
functionality of the product. Revenues are recognized when the products are
delivered and installed and the customer has accepted the terms and has the
ability to fulfill the terms.
Service revenues related to technology products including consulting, training
and support are recognized when the services are provided. Service revenues
accounted for less than 10% of total revenues for the years ended December 31,
2003, 2002 and 2001. The Company, if the customer elects, enters into equipment
maintenance agreements for products sold once the original manufacturer's
warranty has expired. Revenues from all equipment maintenance agreements are
recognized on a straight-line basis over the terms of each contract. Costs for
services are expensed as incurred.
Multiband and MB USA user charges are recognized as revenues in the period the
related services are provided.
Warranty costs incurred on new product sales are substantially reimbursed by the
equipment suppliers.
Cash and Cash Equivalents
The Company includes as cash equivalents, investments with original maturities
of three months or less when purchased, which are readily convertible into known
amounts of cash. The Company deposits its cash in high credit quality financial
institutions. The balances, at times, may exceed federally insured limits.
Certificate of Deposit
The Company has a certificate of deposit which matures in October 2004.
Accounts Receivable
The Company reviews customers' credit history before extending unsecured credit
and establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers and other information. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. Invoices are due 30 days after
presentation. Accounts receivable over 30 days are considered past due. The
Company does not accrue interest on past due accounts receivable. Receivables
are written off only after all collection attempts have failed and are based on
individual credit evaluation and specific circumstances of the customer.
Accounts receivable are shown net of an allowance for uncollectible accounts of
$223,000 and $236,000 at December 31, 2003 and 2002, respectively. Accounts
receivable over 90 days were $433,000 and $331,000 at December 31, 2003 and
2002, respectively.
F13
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Inventories
Inventories, consisting principally of purchased telecommunication, networking
and computer equipment and parts, are stated at the lower of cost or market.
Cost is determined using an average cost method for telecommunication and
networking equipment and the first-in, first-out (FIFO) method for computer
equipment. Nonmonetary exchanges of inventory items with third parties are
recorded at the net book value of the items exchanged with no gains or losses
recognized.
Property and Equipment
Property, equipment and leasehold improvements are recorded at cost.
Improvements are capitalized while repairs and maintenance costs are charged to
operations when incurred. Property and equipment is depreciated or amortized
using the straight-line method over estimated useful lives ranging from three to
seven years. Leasehold improvements are amortized using the straight-line method
over the shorter of the lease term or the estimated useful life of the assets.
Debt Issuance Costs
Debt issuance costs are amortized over the life of the loan of approximately
three years using the straight-line method, which approximates the interest
method.
Goodwilll and Other Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of
identifiable net assets acquired and was being amortized using the straight-line
method over ten years. Accumulated amortization was $782,278 at December 31,
2003 and 2002.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations",
effective for acquisitions initiated on or after July 1, 2001, and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and includes guidance on the initial recognition and measurement of goodwill and
other intangible assets arising from business combinations. SFAS No. 142
indicates that goodwill (and intangible assets deemed to have indefinite lives)
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company adopted SFAS No. 142 effective January 1, 2002. The Company
performed the required goodwill impairment test during the years ended December
31, 2003 and 2002.
F14
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
As part of compliance with this standard, the Company obtained an independent
appraisal to assess the fair value of its business units to determine whether
goodwill carried on its books was impaired and the extent of such impairment, if
any for the years ended December 31, 2003 and 2002. For the year ended December
31, 2003, the independent appraisal used the discounted future returns method to
measure the fair value of its business units rather than the income method which
was used for 2002. The method of valuation was changed due to the Company
changing its business model and historical results, which are used for the
income method, would not accurately evaluate the value of future economic
benefits. Under the discounted future returns method, future benefits over a
period of time are estimated and then discounted back to present value. For the
year ended December 31, 2002, the independent appraisal used the income method
to measure the fair value of its business units. Under the income method, value
is dependent on the present value of future economic benefits to be derived from
ownership. Future net cash flows available for distribution are discounted at
market-based rates of return to provide indications of value. The independent
appraiser used a discount factor of 16.8% and 18.35% for the years ended
December 31, 2003 and 2002, respectively. Based upon this independent appraisal,
the Company determined that its current goodwill balances were not impaired as
of December 31, 2003 and 2002.
Components of intangible assets are as follows:
December 31, 2003 December 31, 2002
------------------------------ -----------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------- ------------- ------------- -------------
Intangible assets subject to amortization
Domain name $ 83,750 $ 39,083 $ 83,750 $ 22,333
Access contracts 60,000 13,334 - -
Debt issuance costs 115,500 3,208 - -
Customer cable lists 300,000 - - -
------------- ------------- ------------- -------------
Total $ 559,250 $ 55,625 $ 83,750 $ 22,333
============= ============= ============= =============
Intangible assets not subject to amortization
Goodwill $ 3,531,157 $ 782,278 $ 3,531,157 $ 782,278
============= ============= ============= =============
Amortization of intangible assets was $33,291, $16,750 and $5,583 for the years
ended December 31, 2003, 2002 and 2001, respectively. Estimated amortization
expense of intangible assets for the years ending December 31, 2004, 2005, 2006,
2007, and 2008 is $135,250, $135,250, $113,125, $60,000 and $60,000,
respectively. The Company's loss attributable to common stockholders, excluding
goodwill amortization expense, for the years ended December 31, 2003, 2002 and
2001 would have been as follows had we adopted SFAS No. 142 on January 1, 2000:
2003 2002 2001
--------------- -------------- ---------------
Loss attributable to common stockholders - as reported $ (4,613,693) $ (4,591,637) $ (5,758,221)
SFAS No. 142 amortization adjustment - - 345,600
Loss attributable to common stockholders - as adjusted (4,613,693) (4,591,637) (5,412,621)
Basic and diluted net loss per share - as reported (0.29) (0.39) (0.66)
Basic and diluted net loss per share - adjusted (0.29) (0.39) (0.62)
F15
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Intangible Assets
The Company amortizes a domain name acquired during the year ended December 31,
2001 over its estimated useful life of five years using the straight-line
method. The Company amortizes access contracts acquired during the year ended
December 31, 2003 over the estimate useful life of three years using the
straight-line method. The Company will amortize the customer cable lists
acquired on December 31, 2003 over five years beginning January 1, 2004.
Advertising Costs
Advertising costs are charged to expense as incurred. Advertising costs were
$146,906, $104,788 and $230,629 for the years ended December 31, 2003, 2002 and
2001, respectively, and are included in selling, general and administrative
expenses in the consolidated statements of operations.
Shipping and Handling Costs
In accordance with Emerging Issues Task Force (EITF) Issue 00-10, "Accounting
for Shipping and Handling Fees and Costs," the Company is including shipping and
handling revenues in revenues and shipping and handling costs in cost of
products and services.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the expected
future tax consequences attributable to temporary differences between the
financial statement and income tax reporting bases of assets and liabilities.
Deferred tax assets are reduced by a valuation allowance to the extent that
realization is not assured.
Stock-Based Compensation
In accordance with Accounting Principles Board (APB) Opinion No. 25 and related
interpretations, the Company uses the intrinsic value-based method for measuring
stock-based compensation cost which measures compensation cost as the excess, if
any, of the quoted market price of the Company's common stock at the grant date
over the amount the employee must pay for the stock. The Company's general
policy is to grant stock options at fair value at the date of grant. Options and
warrants issued to nonemployees are recorded at fair value, as required by SFAS
No. 123 "Accounting for Stock-Based Compensation," (SFAS No. 123), using the
Black Scholes pricing model. The Company has adopted the disclosure only
provision of SFAS No. 148, "Accounting for Stock-Based Compensation."
Pursuant to APB No. 25 and related interpretations, $447,481, $482,999 and
$332,210 of compensation cost has been recognized in the accompanying
consolidated statements of operations for the years ended December 31, 2003,
2002 and 2001, respectively. Had compensation cost been recognized based on the
fair values of options at the grant dates consistent with the provisions of SFAS
No. 123, the Company's loss attributable to common stockholders and basic and
diluted loss per common share would have increased to the following pro forma
amounts for the years ended December 31:
F16
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
2003 2002 2001
---------------- ---------------- ----------------
Loss attributable to common stockholders $ (4,613,693) $ (4,591,637) $ (5,758,221)
Pro forma loss attributable to common shares $ (5,363,381) $ (4,915,649) $ (6,131,692)
Basic and diluted net loss per share:
As reported $ (0.29) $ (0.39) $ (0.66)
Pro forma loss attributable to common shares $ (0.33) $ (0.42) $ (0.70)
Stock-based compensation:
As reported $ 447,481 $ 482,999 $ 332,210
Pro forma $ 749,688 $ 324,012 $ 373,471
In determining the compensation cost of the options granted during fiscal 2003,
2002, and 2001, as specified by SFAS No. 123, the fair value of each option
grant has been estimated on the date of grant using the Black-Scholes option
pricing model and the weighted average assumptions used in these calculations
are summarized as follows:
2003 2002 2001
------------------ ------------------ -----------------
Risk-free interest rate 3.00% 4.40% 5.00%
Expected life of options granted 10 years 10 years 10 years
Expected volatility range 170% 170% 110%
Expected dividend yield 0% 0% 0%
Net Loss per Common Share
Basic net loss per common share is computed by dividing the loss attributable to
common stockholders by the weighted average number of common shares outstanding
for the reporting period. Diluted net loss per common share is computed by
dividing loss attributable to common stockholders by the sum of the weighted
average number of common shares outstanding plus all additional common stock
that would have been outstanding if potentially dilutive common shares related
to common share equivalents (stock options, stock warrants, convertible
preferred shares, and issued but not outstanding restricted stock) had been
issued. All options, warrants, convertible preferred shares, and restricted
stock outstanding during the years ended December 31, 2003, 2002 and 2001 were
anti-dilutive.
Recently Issued Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," effective for contracts entered
into or modified after June 30, 2003. This amendment clarifies when a contract
meets the characteristics of a derivative, clarifies when a derivative contains
a financing component and amends certain other existing pronouncements. The
adoption of SFAS No. 149 did not have a material effect on the Company's
consolidated financial statements.
F17
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
lnstruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS No. 150 requires the classification as a
liability of any financial instruments with a mandatory redemption feature, an
obligation to repurchase equity shares, or a conditional obligation based on the
issuance of a variable number of its equity shares. The Company does not have
any financial instruments as defined by SFAS No. 150. The adoption of SFAS No.
150 did not have a material effect on the Company's consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifies the
requirements for a guarantor's accounting for and disclosure of certain
guarantees issued and outstanding. The initial recognition and initial
measurement provisions of FIN 45 are applicable to guarantees issued or modified
after December 31, 2002. The disclosure requirements of FIN 45 are effective for
financial statements for periods ending after December 15, 2002. The adoption of
FIN 45 did not effect the Company's consolidated financial statements.
In December 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" (FIN 46R). This standard
replaces FIN 46, Consolidation of Variable Interest Entities" that was issued in
January 2003. FIN 46R modifies or clarifies various provisions of FIN 46. FIN
46R addresses the consolidation of business enterprises of variable interest
entities (VIEs), as defined by FIN 46R. FIN 46R exempts certain entities from
its requirements and provides for special effective dates for entities that have
fully or partially applied FIN 46 prior to issuance of FIN 46R. Otherwise,
application of FIN 46R is required in financial statements of public entities
that have interest in structures commonly referred to as special purpose
entities for periods ending after December 15, 2003. Application by the Company
for all other types of VIEs is required in financial statements for periods
ending no later than the quarter ended January 31, 2005. The Company does not
expect the adoption of FIN 46R to have a material effect on the Company's
consolidated financial statements.
Management's Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant management estimates relate to the allowances for doubtful accounts,
inventory obsolescence, and stock subscriptions and interest receivable,
property and equipment estimated useful lives, goodwill carrying value and the
valuation of deferred income tax assets.
Financial Instruments
The carrying amounts for all financial instruments approximates fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments. The fair value of capital lease obligations, note
payable-stockholder and long-term debt approximates the carrying amounts based
upon the Company's expected borrowing rate for debt with similar remaining
maturities and comparable risk.
F18
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Reclassifications
Certain accounts in the prior years' consolidated financial statements have been
reclassified for comparative purposes to conform with the presentation in the
current year consolidated financial statements. These reclassifications had no
effect on net loss or stockholders' equity.
--------------------------------------------------------------------------------
NOTE 2 - Business Acquisitions
--------------------------------------------------------------------------------
During February 2003, the Company incorporated a new subsidiary, MB USA. This
subsidiary was formed as a 50% owned joint venture agreement with PACE (Note 1).
The reason for the joint venture with PACE is to continue to expand the
Company's services related to multi-users of voice, data and video services.
On April 25, 2003, the Company, through MB USA, purchased certain video
equipment assets, related rights to video subscribers and rights of access
agreements from Suncoast Automation, Inc. (Suncoast). The purchase price was
allocated to the acquired assets and assumed certain liabilities based on the
estimated fair values as of the acquisition date. The purchase price was
allocated to assets and liabilities acquired as follows:
Property and equipment $ 504,224
Access contracts 60,000
Capital lease obligations (54,224)
-----------------
Net purchase price $ 510,000
=================
The net purchase price of $510,000 consisted entirely of cash paid. The
consolidated results of operations on an unaudited pro forma basis are not
presented separately as the results do not differ significantly from historical
amounts presented herein.
On December 31, 2003, the Company purchased certain customer lists from Florida
Cable, Inc. (Florida Cable) for $300,000 which was paid to Florida Cable on
January 2, 2004. In addition, the Company agreed to lease from Florida Cable
equipment used in the operation of the cable television systems for six months
for $1.00. After the six month lease period has expired, the Company has agreed
to purchase the equipment for $165,000. If the Company fails to pay the $165,000
in full, all rights and title of the customer lists mentioned above will revert
back to Florida Cable. At December 31, 2003, the Company has recorded the
$165,000 liability associated with the contingent purchase of equipment.
F19
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 3 - Property and Equipment
--------------------------------------------------------------------------------
Property and equipment consisted of the following at December 31:
2003 2002
---------------- -----------------
Leasehold improvements $ 764,064 $ 732,931
Property and equipment - owned 5,318,243 4,230,560
Property and equipment under capital lease obligations
428,749 456,124
---------------- -----------------
6,511,056 5,419,615
Less accumulated depreciation and amortization (2,921,352) (2,170,642)
---------------- -----------------
$ 3,589,704 $ 3,248,973
================ =================
Depreciation and amortization expense on property and equipment was $948,796,
$981,985 and $1,019,581 for the years ended December 31, 2003, 2002 and 2001,
respectively.
--------------------------------------------------------------------------------
NOTE 4 - Other Assets
--------------------------------------------------------------------------------
Other assets consisted of the following at December 31:
2003 2002
---------------- -----------------
Other current assets:
Current portion of notes receivable $ 2,983 $ 52,977
Prepaid expenses and other 93,567 173,797
---------------- -----------------
Total other current assets $ 96,550 $ 226,774
================ =================
Noncurrent assets:
Debt issuance costs, net $ 112,292 $ -
Access contracts, net 46,666 -
Domain name, net 44,667 61,417
Customer cable lists 300,000 -
Prepaid expenses and other 136,236 109,236
---------------- -----------------
Total other assets $ 639,861 $ 170,653
================ =================
At December 31, 2003 and 2002, the Company had notes receivable of $2,983 and
$52,977, respectively. The remaining note was due in December 2003 with interest
of 12% and was unsecured.
F20
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 5 - Accrued Liabilities
--------------------------------------------------------------------------------
Accrued liabilities consisted of the following at December 31:
2003 2002
--------------- -----------------
Payroll and related taxes $ 514,516 $ 398,415
Accrued preferred stock dividends 277,928 138,288
Payable - Florida Cable 465,000 -
Other 202,261 177,776
---------------- -----------------
$ 1,459,705 $ 714,479
================ =================
--------------------------------------------------------------------------------
NOTE 6 - Wholesale Line of Credit
--------------------------------------------------------------------------------
At December 31, 2003, the Company has a $1,750,000 wholesale line of credit
agreement with a financial institution, which expires on December 1, 2004, for
the purchase of certain resale merchandise from certain suppliers. Interest is
generally at 0% (if paid within certain terms of up to 45 days), and the
wholesale line of credit is collateralized by the accounts receivable up to
$300,000 as well as all of the inventory financed and the $1,450,000 letters of
credit. The wholesale line of credit agreement is an agreement between the
Company, financial institution, and certain vendors of the Company. The Company
receives no funds from the financial institution, but pays the financial
institution rather than certain vendors. The balance outstanding was $976,314 at
December 31, 2003.
At December 31, 2002, the Company had a $1,450,000 wholesale line of credit
agreement with a different financial institution, which expired with 30 day
notice by either party, for the purchase of certain resale merchandise from
certain suppliers. Interest was generally at 0% (if paid within certain terms,
generally 30 days), and the wholesale line of credit was collateralized by the
related inventories, accounts receivable and the $1,450,000 letters of credit.
The wholesale line of credit agreement was an agreement between the Company,
financial institution, and certain vendors of the Company. The Company received
no funds from the financial institution, but paid the financial institution
rather than certain vendors The balance outstanding was $1,290,383 at December
31, 2002.
F21
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 7 - Long-term Debt
--------------------------------------------------------------------------------
Long-term debt consisted of the following at December 31:
2003 2002
---------------- ---------------
Note payable - Pyramid Trading Limited Partnership,
net of unamortized original issue discount and
beneficial conversion of note payable into common
stock of $59,557 and $59,250 at December 31, 2003 and
2002, respectively, quarterly interest payments at
10% (effective interest rate of 54.2%) through May
2004, monthly principal payments of $40,000, due May
2004, unsecured.
$ 140,443 $ 902,971
Debenture payable - Convergent Capital Partners I,
L.P., net of original issue discount of $432,504 and
$595,295 at December 31, 2003 and 2002, respectively,
monthly interest only payments through July 2005,
monthly installments of $102,273 including interest
at 14% (effective interest rate 18.4%) thereafter,
due May 2007, secured by substantially all of the
assets of the Company.
1,967,496 1,804,705
Demand debenture payable - Convergent Capital
Partners I, L.P., monthly interest only payments at
14% through May 2007, due on demand or May 2007,
secured by substantially all of the assets of the
Company.
100,000 100,000
Note payable - Lexus Tower Limited Partnership,
monthly installments of $5,987 including interest at
8.4%, due November 2010, secured by certain assets of
the Company.
379,332 418,872
Note payable - Laurus Master Fund LTD, net of
unamortized original issue discount and beneficial
conversion of note payable into common stock of
$1,208,847 at December 31, 2003, monthly installments
of $45,455 beginning in March 2004, including
interest at prime rate plus 3% but not less than 7%
(7% at December 31, 2003) (effective interest rate of
174.6%), due through November 2006, secured by
certain assets of the Company.
291,153 -
Notes payable, interest at 5.25% to 20% due through May
2007, secured by certain assets of the Company. 207,545 209,047
---------------- --------------
Total long-term debt 3,085,969 3,435,595
Less: current portion (998,813) (321,589)
---------------- --------------
Long-term debt, net $ 2,087,156 $ 3,114,006
================ ===============
F22
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Future maturities of long-term debt are as follows for the years ending December
31:
2004 $ 998,813
2005 1,113,898
2006 1,838,008
2007 650,923
2008 59,072
Thereafter 126,163
------------------
Total future minimum payments 4,786,877
Less: original issue discounts and beneficial
conversion feature (1,700,908)
------------------
Total long-term debt 3,085,969
Less: current portion (998,813)
------------------
Long-term debt, net $ 2,087,156
==================
In 2000, the Company entered into a $2,250,000 debenture agreement with
Convergent Capital Partners I, L.P., with interest at 14% payable monthly and
monthly payments of $102,273 from August 1, 2003 through June 1, 2005. The
timing of repayment was changed to August 2005 through May 2007 as part of the
amendment made in 2002. The debenture is secured by substantially all Company
assets. In connection with this debenture, the Company issued 150,000 five-year
warrants to purchase common stock at prices ranging from $1.50 to $5.20 per
share. The proceeds of $2,250,000 were allocated between the debenture and the
warrant based on the relative fair values of the securities at the time of
issuance. The warrants were valued using the Black Scholes pricing model. The
resulting original issue discount, the fair value of the warrants, is being
amortized over the life of the debenture using the straight-line method, which
approximates the interest method.
In 2002, the Company amended the debenture agreement with Convergent Capital
Partners I, L.P., and borrowed an additional $150,000 with interest at 14%
payable monthly and monthly principal payments from August 2005 through May
2007. In connection with this debenture, the Company issued an additional
500,000 seven-year warrants to purchase common stock at $1.10 per share. The
additional warrants were valued using the Black Scholes pricing model. The
resulting original issue discount, the fair value of the warrants, is being
amortized over the life of the debenture using the straight-line method, which
approximates the interest method. The Company was in violation of certain
covenants of this debt agreement. A waiver was obtained from the lender. The
debenture payable may be redeemed at the Company's option at a premium declining
ratably thereafter to par value in April 2005.
In January 2001, the Company borrowed $1,500,000 from Pyramid Trading Limited
Partnership and issued a five-year warrant to the lender to purchase 375,000
common shares at $4.00 per share through January 2003. The debt is also
convertible into common stock of the Company at a conversion rate of $4.75 per
share through January 2003. The proceeds of $1,500,000 were allocated between
the note and the fair value of the warrants using the Black Scholes pricing
model. An additional 375,000 five-year warrants were issued in April 2002 and
the fair value of the warrants was expensed as additional interest expense as of
December 31, 2002. The resulting original issue discount, the fair value of the
warrants, and the beneficial conversion of the note payable into common stock as
defined in EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible
Instruments"(EITF 00-27), is being amortized over the life of the note using the
straight-line method, which approximates the interest method.
F23
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
In February 2003, the Company reached an agreement to convert $962,000 of its
note payable with Pyramid Trading Limited Partnership to equity and to extend
the due date to May 2004. Terms of the conversion state that the note will be
converted to equity over a 14 month period at a price generally equivalent to a
10% discount to market price. The Company issued an additional 253,000 five-year
warrants at an exercise price of $1.00 with the note payable extension. These
warrants, valued at $208,447 using the Black Scholes pricing model, are being
expensed over the remaining term of the note agreement. During the year ended
December 31, 2003, the Company converted principal and accrued interest totaling
$828,172 into 717,741 shares of common stock.
During 2002, the Company borrowed $600,000 and issued a five-year warrant to one
of its directors to purchase 120,000 common shares at $1.50 per share. The
proceeds of $600,000 were allocated between the note and the fair value of the
warrants using the Black Scholes pricing model. The resulting original issue
discount, the fair value of the warrants, was being amortized over the life of
the note using the straight-line method which approximates the interest method.
In December 2002, the lender converted the note payable into 60,000 shares of
Class E convertible preferred stock. The remaining unamortized original issue
discount amount was expensed at the time of the conversion.
In November 2003, the Company borrowed $1,500,000 and issued a three-year
warrant to the lender to purchase 535,000 common shares at $2.21 per share
through November 2006. The debt is also convertible into common stock of the
Company at a conversion rate of $1.40 per share through November 2006. The
proceeds of $1,500,000 were allocated between the note, the intrinsic value of
the conversion option, and the fair value of the warrants using the Black
Scholes pricing model. The resulting original issue discount, the fair value of
the warrant, and the beneficial conversion of the note payable into common stock
as defined in EITF 00-27 is being amortized over the life of the note using the
straight-line method, which approximates the interest method.
Interest expense related to long-term debt with related parties for the years
ended December 31, 2003, 2002, and 2001 was approximately $0, $228,000 and
$3,000, respectively.
--------------------------------------------------------------------------------
NOTE 8 - Capital Lease Obligations
--------------------------------------------------------------------------------
The Company has lease financing facilities for property, equipment and leasehold
improvements. Leases outstanding under these agreements bear interest at an
average rate of 8.25% and expires through October 2007. The obligations are
secured by the property under lease. Total cost and accumulated amortization of
the leased equipment was $428,749 and $221,432 at December 31, 2003 and $456,124
and $219,332 at December 31, 2002. Amortization expense related to these
obligations is included in depreciation expense.
F24
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Future minimum capital lease payments are as follows for the years ending
December 31:
2004 $ 69,556
2005 69,556
2006 56,457
2007 34,610
------------------
Total 230,179
Less: amounts representing interest (32,342)
------------------
Present value of future minimum lease payments 197,837
Less: current portion (54,939)
------------------
Capital lease obligations, net of current portion $ 142,898
==================
--------------------------------------------------------------------------------
NOTE 9 - Note Payable - Stockholder
--------------------------------------------------------------------------------
On June 30, 2003, the Company borrowed $124,000 from a stockholder of the
Company with monthly payments of $5,600 including interest at 7.85%, due in June
2005, and unsecured. The balance due at December 31, 2003 is $114,391 of which
$81,554 is due in 2004 and $32,837 is due in 2005. Interest expense related to
this note payable - stockholder for the year ended December 31, 2003 was
approximately $1,600.
--------------------------------------------------------------------------------
NOTE 10 - Stockholders' Equity
--------------------------------------------------------------------------------
Capital Stock Authorized
The articles of incorporation authorize the Company to issue 50,000,000 shares
of no par capital stock. Authorization to individual classes of stock are
determined by a Board of Directors resolution. The authorized classes of stock
at December 31, 2003 are the following: 275,000 shares of Class A cumulative
convertible preferred stock, 60,000 shares of Class B cumulative convertible
preferred stock, 250,000 shares of Class C cumulative convertible preferred
stock, 250,000 shares of Class D cumulative convertible preferred stock, and
400,000 shares of Class E cumulative convertible preferred stock.
F25
Cumulative Convertible Preferred Stock
Dividends on Class A, Class B, Class C, Class D, and Class E cumulative
convertible preferred stock are cumulative and payable quarterly at 8%, 10%,
10%, 14%, and 15% per annum, respectively. Cumulative convertible preferred
stock can be converted into common shares at any time as follows: Class A and
Class B - five shares, Class C - two shares, Class D - two and one-half shares,
and Class E - eight shares. The intrinsic value of any beneficial conversion
option is recorded as preferred stock dividends at the time of preferred stock
issuance. Dividends on Class B preferred are cumulative and payable monthly at
10% per annum. The dividends are based on $10 per share for all preferred
shares. The Class B preferred was offered to certain note payable holders at a
conversion of $10 per Class B preferred share. All preferred stock is
non-voting. Warrants to purchase shares of the Company's common stock were given
with the issuance of Class A, Class B, Class D, and Class E preferred stock and
were valued at fair value using the Black Scholes pricing model. The Company
may, but is not obligated to, redeem the preferred stock at $10.50 per share for
Class A and Class B and $10.00 per share for Class C, Class D, and Class E,
whenever the Company's common stock price exceeds certain defined criteria as
defined in the preferred stock agreements. Upon the Company's call for
redemption, the holders of the preferred stock called for redemption have the
option to convert each preferred share into shares of the Company's common
stock. Holders of preferred stock cannot require the Company to redeem their
shares. The liquidation preference is the same as the redemption price for each
class of preferred stock.
Stock Compensation Plans
The Company has a 1999 Stock Compensation Plan, which permits the issuance of
restricted stock and stock options to key employees and agents. All outstanding
incentive stock options granted under the prior 1997 Stock Options Plan continue
until all agreements have expired. There are 2,500,000 shares of common stock
reserved for issuance through restricted stock, non-qualified stock option
awards and incentive stock option awards. The Plans also provide that the term
of each award be determined by the Board of Directors. Under the Plans, the
exercise price of incentive stock options may not be less than the fair market
value of the stock on the award date, and the options are exercisable for a
period not to exceed ten years from award date.
The Company also has a 2000 Non-employee Director Stock Compensation Plan, which
permits the issuance of stock options for 300,000 shares of common stock to
non-employee directors. The exercise price of the stock options is the fair
market value of the stock on the award date, and the options are exercisable for
a period not to exceed ten years from award date.
Employee Stock Purchase Plan
The Company has a 2000 Employee Stock Purchase Plan, which allows for the sale
of 400,000 shares of Company common stock to qualified employees. At December
31, 2003, no shares were issued under the Plan.
F26
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Stock Subscriptions Receivable
The Company has stock subscriptions receivable including interest receivable
totaling $418,085 and $633,195 due to the Company at December 31, 2003 and 2002,
respectively, from the issuance of common stock. Monthly interest only payments
at interest ranging from 9% to 10% were required through December 2003 at which
time any unpaid stock subscription receivable was due. The receivables are
secured by the common stock issued. At December 31, 2003, the Company has
reserved $71,000 related to stock subscriptions and interest receivable deemed
to be uncollectible. The Company does not record interest receivable on the
outstanding receivable balance once they have determined it to be uncollectible.
Restricted Stock
The Company awards restricted common shares to selected employees. Recipients
are not required to provide any consideration other than services. Company share
awards are subject to certain restrictions on transfer, and all or part of the
shares awarded may be subject to forfeiture upon the occurrence of certain
events, including employment termination. The intrinsic value at the date of
grant related to the shares awarded is generally amortized over three years, the
vesting term of the awards. Compensation expense recorded during the years ended
December 31, 2003, 2002, and 2001 in connection with the amortization of the
award cost was $47,119, $78,292 and $92,749, respectively.
Restricted stock activity is as follows for the years ended December 31:
2003 2002 2001
---------- ----------- ----------
Outstanding, January 1 45,066 75,337 113,829
Issued - 22,434 83,000
Vested (17,204) (33,107) (38,781)
Forfeited (10,843) (19,598) (82,711)
---------- ----------- ---------
Outstanding, December 31 17,019 45,066 75,337
========== =========== =========
Stock Options
Stock option activity is as follows for the years ended December 31:
Options Weighted-Average Exercise Price
-------------------------------------------- -------------------------------------
2003 2002 2001 2003 2002 2001
------------- ------------ ----- ----- ------------ ----------- ----------
Outstanding, January 1 1,093,157 1,050,024 1,145,507 $ 2.45 $ 2.55 $ 2.31
Granted 747,775 249,300 839,500 1.35 0.96 1.20
Exercised (3,000) - (615,933) 1.25 - 0.51
Forfeited (180,500) (206,167) (319,050) 4.49 1.86 2.11
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, December 31 1,657,432 1,093,157 1,050,024 $ 1.81 $ 2.45 $ 2.55
============= ============ ============ ============ =========== ===========
The weighted-average grant-date fair value of options granted during the years
ended December 31, 2003, 2002, and 2001 was $1.20, $0.86 and $2.94,
respectively.
F27
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Options outstanding and exercisable as of December 31, 2003, are as follows:
Outstanding Exercisable
---------------------------------------------------- -------------------------------------
Weighted - Average Weighted-
----------------------------
Remaining Average
Range of Exercise Prices Exercise Contractual Exercise Price
Options Price Life-Years Options
--------------------------- ------------------- ----------- -------------- ----------------- ----------------
$.60 255,000 $ 0.60 6.43 255,000 $ 0.60
$.93 to $1.38 409,800 1.15 9.18 256,433 1.24
$1.43 to $2.08 688,766 1.67 7.90 620,658 1.68
$2.50 to $2.88 140,000 2.67 6.81 140,000 2.67
$3.98 to $5.38 109,666 4.48 6.67 92,166 4.57
$6.00 to $6.75 54,200 6.60 6.24 46,900 6.57
----------------- ---------- ------------- ----------------- --------------
$.60 to $6.75 1,657,432 $ 1.81 7.76 1,411,157 $ 1.85
================= ========== ============= ================= ==============
Stock Warrants
Stock warrants activity is as follows for the years ended December 31:
Outstanding Weighted - Average Exercise Price
----------------- ------------ ---------------------------------------
2003 2002 2001 2003 2002 2001
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, January 1 4,327,396 9,564,450 8,093,464 $ 2.05 $ 2.37 $ 8.71
Granted 3,687,447 2,546,690 9,483,530 1.53 1.46 2.32
Exercised (556,881) - - 1.53 - -
Forfeited (36,088) (7,783,744) (8,012,544) 3.59 2.25 8.75
------------- ------------ ------------ ------------ ----------- -----------
Outstanding, December 31 7,421,874 4,327,396 9,564,450 $ 1.83 $ 2.05 $ 2.37
============= ============ ============ ============ =========== ===========
The weighted-average grant-date fair value of warrants granted during the years
ended December 31, 2003, 2002 and 2001 was $1.10, $1.00 and $1.79, respectively.
Warrants outstanding and exercisable as of December 31, 2003, are as follows:
Weighted - Average
----------------------------------
Remaining
Range of Exercise Exercise Price Contractual
Prices Warrants Life-Years
------------------------ ------------------- --------------- ----------------
$.85 to $1.25 2,465,997 $ 1.02 4.13
$1.50 to $2.25 3,946,432 1.90 2.49
$2.40 to $3.56 501,025 2.52 3.15
$4.00 to $5.20 508,420 4.16 2.45
----------------- ------------- --------------
$.85 to $5.20 7,421,874 $ 1.83 3.08
================= ============= ==============
F28
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Stock warrants issued for the years ended December 31 were awarded for:
2003 2002 2001
----------- ----------- ---------
Warrant repricing - - 8,012,544
Common stock 1,812,259 728,357 441,642
Services rendered 941,288 103,333 455,756
Preferred stock 145,900 420,000 48,588
Debt issuance and guarantees 788,000 1,295,000 525,000
----------- ----------- ---------
3,687,447 2,546,690 9,483,530
=========== =========== =========
During the year ended December 31, 2003, 298,091 warrants were exercised with a
weighted average exercise price of $1.05. Based on the warrant agreements, these
warrants were exercised in lieu of cash with the warrant holder receiving
141,529 shares of common stock.
During the year ended December 31, 2003, the Company issued 400,000 five-year
warrants with a weighted-average exercise price of $0.85 for services related to
investor relations. These warrants were valued at $321,920 using the Black
Scholes pricing model. During 2003, the Company issued 541,288 five-year
warrants with a weighted-average exercise price of $1.02 for services related to
equity financing.
During the year ended December 31, 2002, the Company issued 103,333 three-to
five-year warrants with a weighted-average exercise price of $1.56 for services
related to equity financing.
During the year ended December 31, 2001, the Company issued 455,756 one-to
five-year warrants with a weighted-average exercise price of $2.16 for services
related to equity financing. During 2001, the Company issued 48,588 two-to
five-year warrants with a weighted-average exercise price of $3.69 for services
related to preferred stock financing which were valued at $87,403 using the
Black Scholes pricing model.
On August 2, 2001, the Company approved the repricing of all outstanding
warrants issued at $8.75 to $2.25. The expiration date of these warrants was
extended to October 11, 2002. The Company recorded $6,919,692 to the accumulated
deficit related to the change in warrant value using the Black Scholes pricing
model.
All warrants were recorded at fair value using the Black Scholes pricing model.
The fair value of stock warrants is the estimated present value at grant date
using the Black Scholes pricing model with the following weighted-average
assumptions:
2003 2002 2001
--------- ------------ --------
Risk-free interest rate 2.37% 3.90% 5.30%
Expected life 3.4 years 4.5 years 4.5 years
Expected volatility 170% 151.3% 94.3%
Expected dividend rate 0% 0% 0%
F29
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 11 - Income Taxes
--------------------------------------------------------------------------------
The Company has generated federal and state net operating losses of
approximately $23,469,000 and $10,382,000, respectively, which, if not used,
will begin to expire in 2004. Future changes in the ownership of the Company may
place limitations on the use of these net operating loss carryforwards.
The Company has recorded a full valuation allowance against its deferred tax
asset due to the uncertainty of realizing the related benefits. The change in
the valuation allowance was $1,722,000, $402,000, and $1,757,200 for the years
ended December 31, 2003, 2002 and 2001, respectively.
Components of net deferred income taxes are as follows at December 31:
2003 2002
------------- -----------
Deferred income tax assets:
Net operating loss carryforwards $ 9,387,000 $ 7,633,000
Goodwill 65,000 90,000
Asset valuation reserves 285,000 231,000
Accrued liabilities 55,000 69,000
------------- -----------
9,792,000 8,023,000
Less valuation allowance (9,674,000) (7,952,000)
------------- -----------
118,000 71,000
Deferred income tax liabilities - depreciation (118,000) (71,000)
------------- -----------
Net deferred income tax assets $ - $ -
============= ==========
Income tax computed at the federal statutory rate reconciled to the effective
tax rate is as follows for the years ended December 31:
2003 2002 2001
------- --------- -------
Federal statutory tax rate benefits (35.0) % (35.0) % (35.0) %
State tax, net of federal benefit (5.0) (5.0) (5.0)
Change in valuation allowance 39.6 36.1 33.0
Other 0.4 3.9 7.0
------- --------- -------
Effective tax rate 0.0 % 0.0 % 0.0 %
======= ========= =======
F30
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
The Company has the following net operating loss carryforwards at December 31,
2003, for income tax purposes:
Federal Net State Net
Year of Expiration Operating Loss Operating Loss
------------------ -------------- ------------------
2004 $ 1,050,000 $ 1,050,000
2005 599,000 599,000
2007 501,000 501,000
2008 59,000 57,000
2009 22,000 22,000
2011 595,000 575,000
2012 25,000 -
2018 1,122,000 1,096,000
2019 1,585,000 992,000
2020 4,839,000 1,587,000
2021 4,726,000 1,435,000
2022 4,353,000 1,230,000
2023 3,993,000 1,238,000
------------------ -----------------
$ 23,469,000 $ 10,382,000
================== =================
Under Internal Revenue Code Section 382, utilization of federal losses expiring
prior to 2019 are limited to approximately $375,000 each year.
F31
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 12 - Supplemental Cash Flows Information
--------------------------------------------------------------------------------
2003 2002 2001
----------------- ---------------- -----------------
Cash paid for interest $ 436,061 $ 512,167 $ 1,286,155
Noncash investing and financing transactions:
Repricing of warrants - - 6,919,692
Stock options issued below fair market value
- - 1,244,250
Stock options issued for commissions earned
- 53,745 -
Stock subscriptions receivable received for
stock - - 610,000
Issuance of preferred and common stock for
acquisition of assets 76,500 18,590 386,000
Current liabilities converted to stock 192,690 59,755 225,613
Common stock issued for guarantee of debt
- 14,750 120,000
Issuance of stock for intangible asset - - 83,750
Purchase of customer lists and equipment
through payable to Florida Cable 465,000 - -
Notes payable and accrued interest converted
to common and preferred stock
828,172 1,164,882 227,009
Capitalized lease equipment purchases - 174,986 -
Conversion of preferred stock to common stock
40,000 150,000 528,742
Conversion of preferred stock into note payable
- 400,000 -
Reduction of stock subscription receivable
related to commission earned on equity
transactions 36,977 40,563 -
Warrants issued related to modifications of
long-term debt 208,447 528,650 -
Conversion of preferred stock dividends into
common stock 113,209 - -
--------------------------------------------------------------------------------
NOTE 13 - Retirement Savings Plan
--------------------------------------------------------------------------------
The Company has 401(k) profit sharing plan covering substantially all full-time
employees. Employee contributions are limited to the maximum amount allowable by
the Internal Revenue Code. The Company made no discretionary contributions for
any of the years presented.
F32
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 14 - Commitments and Contingencies
--------------------------------------------------------------------------------
Operating leases
Office space was leased from an LLC which an officer of the Company was partial
owner of through August 2003. In addition to basic monthly rents ranging from
$16,640 to $17,653, the Company paid building maintenance costs, real estate
taxes and assessments. During 2003, the Company converted $72,000 of accrued
rent into 7,200 shares of Class C preferred stock. At December 31, 2003 and
2002, accrued rent of $56,560 and $141,060, respectively, was owed to this
related party. In August 2003, the Company signed a new lease agreement with an
unrelated party disclosed below.
The Company has various other operating leases for its corporate office space,
vehicles and various equipment with lease terms expiring in August 2017. The
monthly base rents range from $69,736 to $83,325, net of payments received from
subleases. In July 2003, the Company entered into an agreement to sublease a
portion of their office space through August 2008 for approximately $5,000 per
month.The leases contain provisions for payments of real estate taxes, insurance
and common area costs.
Total rent expense for the years ended December 31, 2003, 2002 and 2001
including common area costs and real estate taxes was approximately $578,000,
$566,000 and $689,000, respectively. Rent expense with related parties for
December 31, 2003, 2002, 2001 was approximately $59,000, $462,000 and $561,000,
respectively.
Future minimum rental payments, net of payments received from subleases, are as
follows for the years ending December 31:
Year Amount
----- -----------------
2004 $ 534,000
2005 512,000
2006 516,000
2007 541,000
2008 587,000
Thereafter 4,509,000
-----------------
$ 7,199,000
Legal proceedings
The Company is involved in legal actions in the ordinary course of its business.
Although the outcome of any such legal actions cannot be predicted, management
believes that there is no pending legal proceedings against or involving the
Company for which the outcome is likely to have a material adverse effect upon
the Company's consolidated financial position, results of operations, or cash
flows.
F33
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
--------------------------------------------------------------------------------
NOTE 15 - Significant Customers and Suppliers
--------------------------------------------------------------------------------
One customer represented approximately 16%, 13%, and 15% of revenues for the
years ended December 31, 2003, 2002, and 2001, respectively.
The Company purchased materials from major suppliers approximately as follows
for the years ended December 31:
Supplier
----------------------------------------------
A B C
------------- -------------- -------------
2003 61% 4% 8%
2002 58% 6% 12%
2001 38% 19% 12%
The Company had revenues from companies that are associated with a director, who
was elected to the board of directors during 2003, of approximately $1,124,000,
$636,000, and $0 for the years ended December 31, 2003, 2002, and 2001,
respectively. In addition, the Company had accounts receivable outstanding from
these companies of approximately $142,000, $171,000, and $0 at December 31,
2003, 2002, and 2001, respectively.
--------------------------------------------------------------------------------
NOTE 16 - Business Segments
--------------------------------------------------------------------------------
The CTU subsidiary functions as one segment for integrated voice, video, data
networking and computer technologies products and services, under one management
structure, with one management financial reporting system, and having one
unified marketing name.
With the start up of Multiband in February 2000, the Company added the segment
providing voice, data, and video services to residential multi-dwelling units.
MB USA's business model is similar to Multiband.
Segment disclosures are as follows:
Multiband/
Vicom CTU MB USA Total
-------------- ---------------- --------------- ---------------
Year Ended December 31, 2003:
Revenues $ - $ 21,199,303 $ 1,441,118 $ 22,640,421
Loss from operations (1,941,271) (339,369) (1,215,667) (3,496,307)
Identifiable assets 5,691,867 5,254,221 2,956,797 13,902,885
Depreciation and amortization 45,789 432,364 518,226 996,379
Capital expenditures 13,342 424,047 89,547 526,936
F34
VICOM, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Vicom CTU Multiband Total
-------------- ---------------- -------------- ---------------
Year Ended December 31, 2002:
Revenues $ - $ 23,963,748 $ 577,221 $ 24,540,969
Income (loss) from operations (1,810,241) 172,689 (1,195,521) (2,833,073)
Identifiable assets 3,151,891 5,282,233 1,913,192 10,347,316
Depreciation and amortization 142,426 482,390 490,641 1,115,457
Capital expenditures 2,126 814,464 458,844 1,275,434
Vicom CTU Multiband Total
-------------- ---------------- -------------- --------------
Year Ended December 31, 2001:
Revenues $ - $ 32,011,187 $ 249,590 $ 32,260,777
Loss from operations (2,079,592) (299,553) (1,618,003) (3,997,148)
Identifiable assets 3,171,968 5,786,796 3,250,917 12,209,681
Depreciation and amortization 418,655 550,075 442,034 1,410,764
Capital expenditures 6,900 491,532 1,386,513 1,884,945
Segment disclosures are provided by entity to the extent practicable under the
Company's accounting system.
--------------------------------------------------------------------------------
NOTE 17 - Subsequent Events
--------------------------------------------------------------------------------
On January 1, 2004, the Company entered into a stock purchase agreement with
URON, Inc. (URON) to purchase all of the outstanding capital stock of URON for a
total purchase price of 350,000 shares of the Company's common stock to be
issued in installments as follows: a) 180,000 shares issued at closing, b)
170,000 shares held in escrow. The common shares issued to URON were valued at
fair market value on the date of the agreement which was $1.31 per share for a
purchase price of $458,500. The terms of the escrow are as follows: 50,000
shares to be released upon URON providing the Company with documentation
satisfactory to the Company of a release from a certain vendor or any related
entity of all liabilities incurred to a certain vendor by URON; 120,000 shares
to be released in 40,000 share increments upon the Company's receipt of
distributable gross profits, generated by certain customers, in increments of
$75,000 cash. The escrow shall be terminated 24 months after the date of the
agreement and any shares not released will be rescinded to the Company. The
Company must register all shares issued within one year from the date of
issuance. The reason for the purchase of URON is to continue to expand the
Company's services related to voice, data and video services. The Company is
acquiring the customer lists of URON and will be amortizing them over their
estimated useful lives of three years.
In January 2004, the Company purchased the remaining 50% ownership of MB USA
from Pace, by issuing 30,000 shares of common stock valued at $39,300 (Note 2).
F35
REPORT OF INDEPENDENT AUDITORS ON SUPPLEMENTARY INFORMATION
To Stockholders, Board of Directors, and Audit Committee
Vicom, Incorporated and subsidiaries
New Hope, Minnesota
Our report on our audits of the basic consolidated financial statements of
Vicom, Incorporated and subsidiaries for the years ended December 31, 2003, 2002
and 2001 appears on page 1. The audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. The
supplementary information on page 36 is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. Such information has been subjected to the auditing procedures
applied in the audits of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ VIRCHOW, KRAUSE & COMPANY, LLP
Minneapolis, Minnesota
February 16, 2004
Page 42
VICOM, INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2003, 2002 and 2001
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
Column A Column B Column C Column D Column E
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
Additions Charged
Balance at to Costs and Balance at End of
Description Beginning of Year Expenses Deduction Year
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
ALLOWANCE DEDUCTED FROM ASSET TO WHICH IT
APPLIES
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
Allowance for doubtful accounts receivable :
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2003 $236,000 - $13,000 (A) $223,000
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2002 178,000 58,000 - $236,000
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2001 159,000 141,000 122,000 (A) $178,000
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
Notes receivable:
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2003 30,000 - $30,000 (A) -
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2002 - $30,000 - $30,000
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2001 - -
- -
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
Stock subscriptions and interest receivable:
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2003 - $71,000 - $71,000
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2002 - - - -
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
2001 - - - -
--------------------------------------------- ------------------- --------------------- -------------------- -------------------
(A) Write-off uncollectible receivables
Page 43
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth expenses and costs payable by the
Registrant expected to be incurred in connection with the issuance and
distribution of the securities described in this registration statement. All
amounts are estimated except for the Securities and Exchange Commission's
registration fee.
Amount
------
Registration fee under Securities Act................. $371.00
Selling Agent's commissions........................... $0.00
Legal fees and expenses............................... $12,011.00
Accounting fees and expenses.......................... $4,410.00
Printing expenses..................................... $2,000.00
Registrar and transfer agent fees..................... $0.00
Miscellaneous expenses................................ $1,208.00
Total.............................................. $20,000.00
Item 14. Indemnification of Directors and Officers
Section 302A.521 of the Minnesota Statutes empowers a Minnesota
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
Article VII of the Registrant's Articles of Incorporation eliminates
the liability of directors of the Registrant to the Registrant or its
shareholders for monetary damages for breach of fiduciary duty except for any
breach of a director's duty of loyalty to the Registrant or its shareholders,
for acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, under Sections 302A.559 of the Minnesota Statutes
(relating to illegal distributions) or Section 80A.23 of the Minnesota Statutes
(relating to securities law violations), for any transaction from which the
director derived an improper personal benefit; or for any act or omission
occurring prior to May 22, 1987, which is the date that this provision in the
Registrant's Articles became effective.
The above discussion of Section 302A.521 and of the Registrant's
Articles of Incorporation is not intended to be exhaustive and is respectively
qualified in its entirety by such statute and the Articles of Incorporation. The
Registrant has insurance in the amount of $1,000,000 per occurrence insuring its
directors and officers and those of its subsidiaries against certain liabilities
they may incur in their capacity as directors and officers.
Item 15. Recent Sales of Unregistered Securities
During the last three years the registrant has issued various
securities, described in more detail in the Company's forms 10Q and 10K filed
during those periods that were not registered under the Securities Act. The
Securities were offered and sold by us in reliance upon the exemptions provided
under Section 4(2) under the Securities Act relating to sales not involving any
public offering, and/or Rule 506 of Regulation D under the Securities Act. The
certificates representing the Securities sold bear a restrictive legend that
prohibits transfer without registration or an applicable exemption. All
purchasers signed agreements stating that they were purchasing for investment
purposes only in which contain restrictions on the transfer of the Securities
sold.
Page 44
Item 16. Exhibits
The following documents are filed as exhibits to this registration
statement:
Exhibit No. Description
2.1 Asset Purchase Agreement and related documents with Enstar Networking
Corporation dated December 31, 1998(1)
2.2 Agreement and Plan of Merger with Ekman, Inc. dated December 29, 1999(1)
3.1 Amended and Restated Articles of Incorporation of Vicom, Inc.(1)
3.2 Restated Bylaws of Vicom, Incorporated(1)
3.3 Articles of Incorporation of Corporate Technologies, USA, Inc.(1)
3.4 Bylaws of Corporate Technologies, USA, Inc.(1)
4.1 Certificate of Designation of the Relative Rights, Restrictions and
Preferences of 8% Class A Cumulative Convertible Preferred Stock and 10%
Class B Cumulative Convertible Preferred Stock dated December 9, 1998(1)
4.2 Form of Warrant Agreement(1)
4.3 Warrant Agreement with James Mandel dated December 29, 1999(1)
4.4 Warrant Agreement with Marvin Frieman dated December 29, 1999(1)
4.5 Warrant Agreement with Pierce McNally dated December 29, 1999(1)
4.6 Warrant Agreement with Enstar, Inc. dated December 29, 1999(1)
4.7 Warrant Agreement with David Ekman dated December 29, 1999(1)
4.8 Certificate of Designation of the Relative Rights, Restrictions and
Preferences of 10% Class C Cumulative Convertible Stock(6)
4.9 Certificate of Designation of the Relative Rights, Restrictions and
Preferences of 14% Class D Cumulative Convertible Stock(2)
4.10 Certificate of Designation of the Relative Rights, Restrictions and
Preferences of 15% Class E Cumulative Convertible Stock(2)
4.11 Securities Purchase Agreement Dated September 18, 2003(6)
4.12 Secured Convertible Note Agreement (7)
5.1 Opinion of Steven M. Bell, Esq.(6)
10.1 Vicom Lease with Marbell Realty dated June 20, 1996(1)
10.2 Employment Agreement with Marvin Frieman dated October 1, 1996(1)
10.3 Employment Agreement with Steven Bell dated October 1, 1996(1)
10.4 Employment Agreement with James Mandel dated August 14, 1998(1)
10.5 Vicom Associate Agreement with NEC America, Inc. dated June 1999(1)
10.6 Loan Agreement with Wells Fargo dated June 17, 1999(1)
10.7 Employment Agreement with David Ekman dated December 29, 1999(1)
10.8 Debenture Loan Agreement with Convergent Capital dated March 9, 2000(1)
10.9 Corporate Technologies, USA, Inc. lease with David Ekman dated January 19,
2000(1)
10.10Amendment dated July 11, 2000 to debenture loan agreement with Convergent
Capital dated March 9, 2000.(2)
10.11 Corporate Technologies agreement with Siemens dated December 14, 2001(4)
10.12 Note with Pyramid Trading, L.P. (4)
10.14 Employment Agreement of Steven M. Bell dated January, 1, 2002(5)
10.15 Employment Agreement of James Mandel dated January 1, 2002(5)
19.1 2000 Non-Employee Director Stock Compensation Plan(3)
19.2 2000 Employee Stock Purchase Plan(3)
21.1 List of subsidiaries of the registrant(1)
23.1 Consent of Virchow, Krause & Company, LLP(8)
24.1 Power of Attorney (included on signature page of original registration
statement)
31 Section 906 of Sarbanes-Oxley Act of 2002 - James Mandel
32 Section 906 of Sarbanes-Oxley Act of 2002 - Steven Bell
(1) Previously filed as the same exhibit to the Registrant's Registration
Statement on Form 10, as amended.
(2) Previously filed as the same exhibit to the original Registration Statement
on Form S-1 filed on August 11, 2000 and declared effective on August 18,
2000.
(3) Previously filed as the same exhibit to Registrant's Proxy Statement on
Form 14A, filed on July 31, 2000.
Page 45
(4) Previously filed as the same exhibit to the original Registration Statement
on Form S-1 filed on August 15, 2001 and declared effective on August 20,
2001.
(5) Previously filed as the same exhibit to Registrant's Form 10-Q, filed May
15, 2002
(6) Previously filed as the same exhibit to registrant's Form 8-K filed
September 24, 2003.
(7) Previously filed as the same exhibit to Registrant's Form 8-K filed
December 16, 2003.
(8) Filed herewith.
Page 46
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement.
(iii)To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1993, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities
Act of 1993, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Page 47
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement on Form S-3 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
Hope, State of Minnesota, on July 9, 2004.
VICOM, INCORPORATED
By: /s/ Steven M. Bell
---------------------------------------
President and Chief Financial Officer
Pursuant to the requirements of the Securities Act, this registration
statement on Form S-3 has been signed by the following persons in their
capacities indicated as of July 9, 2004
Signature Title
Steven. M. Bell President, Chief Financial Officer and Director
/s/ Steven M. Bell (Principal Financial and Accounting Officer)
Frank Bennett
/s/ Frank Bennett Director
Jonathan Dodge
/s/ Jonathan Dodge Director
David Ekman
/s/ David Ekman Director
Eugene Harris
/s/ Eugene Harris Director
James L. Mandel
/s/ James L. Mandel Chief Executive Officer and Director
(Principal Executive Officer)
Donald Miller
/s/ Donald Miller Director and Chairman
David Weiss
/s/ David Weiss Director
*By:
Steven M. Bell
Attorney-in-Fact
Page 48