VICOM, INC.
ANNUAL REPORT
1997
**NOTICE OF ANNUAL MEETING**
The Annual Meeting of Shareholders will be held at VICOM, Incorporated
headquarters, 9449 Science Center Drive, New Hope, Minnesota 55428,
10:00 a.m. central time on Wednesday, June 24, 1998. Formal notice and proxy
forms are enclosed with this report to shareholders of record as of May
15, 1998. We look forward to your attendance.
CONTENTS PAGE
Report of Management 1
Financial Data 2
Corporate Profile 3
Management's Discussion and Analysis 3-6
Financial Statements Table of Contents 7
Report of Independent Auditor's 8
Financial Statements 9-12
Notes to Financial Statements 13-24
REPORT OF MANAGEMENT:
April 28, 1998
To Our Shareholders:
The management of Vicom, Incorporated is primarily responsible for the
information and representations contained in this annual report. The
financial statements and related notes were prepared in accordance with
generally accepted accounting principles and include amounts that are based
on management's best judgments and estimates. The other financial
information included in this annual report is consistent with that in the
financial statements.
The year 1997 was a year of changes and improvements for Vicom as we continued
to make efforts to properly position ourselves in a dynamic high tech
industry.
Vicom financial results for 1997 reflect in part, these changes and
improvements. The company made several large PBX sales in 1997 which is
indicative of its future focus.
On the product front, the Company continues to benefit from a strong product
line including Cisco, Tadiran, NEC, Hitachi, Active Voice, and ABS TALKX.
In addition to our products, the Company, in 1997, continued to
refine its voice processing, voice mail, line analysis, and networking
services.
We look forward to an exciting 1998, as we strive in earnest to capitalize
on the changes and investments made in 1997.
Sincerely,
Steven Bell
President
<TABLE>
FINANCIAL HIGHLIGHTS
Statement of Income (Loss) Data: FOR THE YEAR ENDED DECEMBER 31, 1997
<CAPTION>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Revenues $6,639,026 $5,514,532 $6,378,838 $4,965,848 $3,998,170
Cost of Goods Sold $4,095,990 $3,929,573 $4,750,024 $3,440,258 $3,016,057
Gross Profit $2,543,036 $1,584,959 $1,628,814 $1,525,590 $982,113
Operating Expenses $2,317,388 $2,617,620 $1,515,090 $1,521,059 $1,453,128
Other Expense
(Income) $141,471 $108,130 ($374,686) $114,040 ($9,511)
Income (Loss) Before
Income Taxes and
Extraordinary Items$84,177 ($1,140,791)$488,410 ($109,509) ($461,504)
Income Taxes
(Benefit) $28,000 ------- $352,000 ($34,400) ($128,800)
Income (Loss) Before
Extraordinary
Items $56,177 ($1,140,791)$136,410 ($75,109) ($332,704)
Extraordinary Items -------- ---------- ---------- $497,000 ---------
Net Income (Loss) $56,177 ($1,140,791)$136,410 $421,891 ($332,704)
Earnings (Loss) Per
Common Share:
Income (Loss) Before
Extraordinary items $.03 ($.55) $.06 ($.03) ($.16)
Extraordinary Items ------ ------ --- $.23 ---------
Net Income (Loss) $.03 ($.55) $.06 $.20 ($.16)
Weighted Average
Number of Common
Shares Outstanding2,098,944 2,084,279 2,107,020 2,140,531 2,109,615
Balance Sheet Data:
Cash and Cash
Equivalents $--------- $--------- $--------- $61,425 $6,883
Total Assets $4,418,239 $3,994,584 $4,596,536 $4,500,939 $3,522,359
Total Liabilities $3,444,447 $3,101,969 $2,560,043 $2,580,243 $2,023,553
Stockholders'
Equity $973,792 $892,615 $2,036,493 $1,920,696 $1,498,806
</TABLE>
CORPORATE PROFILE
Vicom, Incorporated (the "Company") is a business telecommunications company
which sells, installs, and services private telephone and interconnect
systems, voice mail systems, and other related communication systems, for
commercial, professional, and institutional users located in Minnesota,
Nebraska, and Ohio. The telephone interconnect systems include both key
and private branch exchange (PBX) systems. The Company has programs to
allow end users to either rent, lease-purchase or outright purchase the
systems.
The Company was organized in 1975 under the laws of the State of Minnesota.
The Company's offices are located at 9449 Science Center Drive, New Hope,
Minnesota 55428. Its telephone number is (612) 504-3000.
The Company currently provides telephone equipment and service to more than
2,000 customers, with approximately 20,000 lines (furnished to users by U.S.
West and other line providers) and approximately 40,000 telephones in service.
Telecommunication systems distributed by the Company are intended to provide
users with flexible, cost-effective alternatives to systems available from
major telephone companies such as those formerly comprising the Bell System
and from other interconnect telephone companies. The systems include
equipment and components manufactured or supplied by other companies. Service
of systems provides a significant portion of the Company's revenues. The
Company has separate divisions which offer data networking, voice mail, and
line analysis services, and a wholly owned subsidiary , Vicom Midwest
Telecommunication Systems, Inc., which sells, installs, and services
telecommunication equipment in Nebraska and Ohio.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management believes that the following commentary and table appropriately
discuss and analyze the comparative results of operations and the financial
condition of the Company for the periods covered.
Liquidity and Capital Resources
Cash and cash equivalents were $0 at December 31, 1997, and December 31,
1996. The Company, on an ongoing basis, generates cash via collection of
accounts receivable and collection of notes receivable to meet its cash
requirements.
The Company's net investment in sales-type leases is $1,401 at December 31,
1997, compared to $7,225 at December 31, 1996 . The small amount in the
investment reflects the Company's continued efforts to shift its business
more towards cash sales.
Accounts receivable, prior to the allowance for doubtful accounts, have
increased during the year due to an overall increase in revenues, while
inventories increased due to the same reason.
The equipment and leasehold improvements (net) reflect the Company's policy
of depreciating equipment principally by the straight-line method over the
estimated useful lives of the related asset.
The Company's other assets represent prepaid expenses (including advertising,
rent and insurance), a note receivable generated from the sale of assets in
Iowa, notes receivable generated from the sale of inventory, and life
insurance surrender value.
The increase in accounts payable to $1,309,669 at December 31, 1997, from
$902,115 at December 31, 1996 reflects the Company's results from operations.
Total accrued liabilities at December 31, 1997 were $112,858 compared with
$191,031 at December 31, 1996. These accrued liabilities include,
salaries and commissions, customer deposits, accrued interest, insurance,
vacation, and miscellaneous accruals.
Deferred service revenue represents the unearned portion of service
contracts, which generally run for one year. The decrease in the deferred
service revenue reflects an decrease in the service contract income portion
of service and rental revenues for 1997.
Notes payable and installment obligations payable at December 31, 1997 were
$1,429,848 compared to $1,449,848 at December 31, 1996. The short-term
portion of these balances represented $755,412 and $1,125,248 respectively.
The Company's capital lease obligations and installment obligations represent
obligations payable to individuals and several lending institutions which bear
interest at rates which are primarily from 10-12%. The decreases
in capital lease obligations and installment obligations reflect the Company's
decreased use of this type of financing.
Stockholder's equity at year end 1997 is $973,792 compared to $892,615 at year
end 1996. The increase in equity in 1997 was due to net
income of $84,177 and an issuance of $25,000 in common stock.
Results of Operations
Revenues for 1997 were $6,639,026, an increase of 20.4% from the $5,514,532
in 1996. Revenues in 1995 equalled $6,378,838. Equipment sales in 1997
increased to $4,035,570 (60.8% of Revenues) from $3,085,165 (55.9% of
Revenues) in 1996 and $4,372,428 (68.5% of Revenues) in 1995. Service and
Rental Revenue was $2,445,705 in 1997 compared to $2,234,505 in 1996 and
$2,006,410 in 1995. The cash sales portion of equipment sales
in 1997, 1996, and 1995 as a percentage, were 100%, 99.8% and 99.5%
respectively. This reflects a continuing trend towards replacing sales type
lease business with more cash sales as opposed to carrying the leased paper
in-house. Included in the Equipment sales are Voice Mail sales of $494,329
in 1997, $522,344 in 1996, and $584,703 in 1995.
The cost of goods sold as a percentage of sales in 1997, 1996, and 1995 were
61.7%, 71.3% and 74.5% respectively.
The operating expenses for 1997, 1996, and 1995 were $2,317,388, $2,617,620,
and $1,515,090 respectively. For the year 1997, the company made certain
adjustments to the allowance for doubtful accounts and bad debt expense.
The effect of the adjustments amount to a decrease of $75,000. In addition,
the company also made an adjustment to decrease its reserve for inventory
obsolescence by $10,000. For the year 1996, the Company increased its
allowance for doubtful accounts by $75,000 which had the effect of increasing
the operating expenses to $2,617,620. For 1995, the Company decreased its
allowance for doubtful accounts by $530 which decreased the operating
expenses to $1,515,090. The Company will continue to review its operating
expenses to reduce them in proportion to the revenue the Company is
generating.
In 1997, operating income was $225,647, an increase from the $1,032,661 loss
in 1996, and $113,724 profit in 1995.
Other income and expense represents primarily life insurance proceeds, finance
income, amortization of unearned income on the net investment
in sales-type leases, and long-term interest expense on the installment
obligations. Short-term interest expense and service charge income are
examples of the items that are also included in other income and expense.
In 1995 the Company reduced its deferred tax assets by $348,000 primarily
because of a reevaluation of the valuation allowance against deferred
tax assets. In 1994 the company recognized deferred income tax benefits of
$34,400 against the losses on continuing operations. Net deferred income
tax assets represent managements best expectations as to the net future benefit
of net operating loss and tax credit carryforwards.
The following event affected net income for 1995. In October of 1995, Mr.
Douglas Sause, a Director of the Company passed away. The Company realized
a gain of $519,931 net of related taxes, from the proceeds of the life
insurance policy for Mr. Sause.
In 1997, there was net income of $56,177 as compared to a net loss of
$1,140,791 in 1996 and net income $136,410 in 1995.
The Company will continue to strive for profitability through operations in
future periods focusing on those products and markets which have the
best growth and margin potential and will continue to strive for material
increases in service revenue.
The following table sets forth, for the last 5 years, the percentages that
certain financial data bear to sales.
<TABLE>
Selected Financial Data
PERCENT OF SALES-YEAR ENDED DECEMBER 31,
<CAPTION>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
Revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 61.7% 71.3% 74.5% 69.3% 75.4%
Gross Profit 38.3% 28.7% 25.5% 30.7% 24.6%
Operating Expenses 34.9% 47.5% 23.8% 30.6% 36.3%
Other Expense
(Income) 2.1% 2.0% (5.9%) 2.3% (.2%)
Income (Loss) Before
Income Taxes and
Extraordinary Items 1.3% (20.7%) 7.7% (2.2%) (11.5%)
Income Taxes
(Benefit) .4% -- 5.5% (.7%) (3.2%)
Income (Loss) Before
Extraordinary Items 1.3% (20.7%) 2.1% (1.5%) (8.3%)
Extraordinary Items ------- ------- ------- 10.0% -------
Net Income (Loss) 1.3% (20.7%) 2.1% 8.5% (8.3%)
</TABLE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of operations 3
Consolidated statements of stockholders' equity 4
Consolidated statements of cash flows 5
Notes to consolidated financial statements 6-15
INDEPENDENT AUDITOR'S REPORT - SUPPLEMENTARY INFORMATION 16
Valuation and qualifying accounts 17
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Vicom, Incorporated and Subsidiary
New Hope, Minnesota
We have audited the accompanying consolidated balance sheets of VICOM,
INCORPORATED AND SUBSIDIARY as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of VICOM, INCORPORATED AND SUBSIDIARY as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
LURIE, BESIKOF, LAPIDUS & CO., LLP
March 24, 1998
<TABLE>
VICOM, INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<CAPTION>
<S> <C> <C>
ASSETS 1997 1996
CURRENT ASSETS
Accounts receivable, net of allowance of
$40,000 and $115,000 $1,407,715 $999,614
Inventories, net of allowance of $250,000
and $260,000 1,590,571 1,442,623
Other 148,293 119,547
TOTAL CURRENT ASSETS 3,146,579 2,561,784
PROPERTY AND EQUIPMENT 738,431 891,329
NONCURRENT ASSETS
Deferred income taxes 299,200 327,200
Other 234,029 214,271
533,229 541,471
$4,418,239 $3,994,584
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks issued in excess of deposits $108,104 $104,464
Notes and installment obligations payable
- current maturities 755,412 1,125,248
Accounts payable 1,362,200 902,115
Accrued liabilities:
Salaries and commissions 24,232 77,762
Other 88,626 113,269
Deferred service revenue 431,437 454,511
TOTAL CURRENT LIABILITIES 2,770,011 2,777,369
NOTES AND INSTALLMENT OBLIGATIONS PAYABLE 674,436 324,600
STOCKHOLDERS' EQUITY 973,792 892,615
$4,418,239 $3,994,584
</TABLE>
See notes to consolidated financial statements.
<TABLE>
VICOM, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997, 1996 and 1995
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
REVENUES $6,639,026 $5,514,532 $6,378,838
COSTS AND EXPENSES 6,413,378 6,547,193 6,265,114
OPERATING INCOME (LOSS) 225,648 (1,032,661) 113,724
OTHER INCOME (EXPENSE), net (141,471) (108,130) 374,686
INCOME (LOSS) BEFORE INCOME TAXES 84,177 (1,140,791) 488,410
INCOME TAX PROVISION 28,000 - 352,000
NET INCOME (LOSS) $56,177 ($1,140,791) $136,410
NET INCOME (LOSS) PER COMMON
SHARE - BASIC $.03 ($.55) $.06
WEIGHTED AVERAGE SHARES OUTSTANDING 2,098,944 2,084,279 2,107,020
</TABLE>
See notes to consolidated financial statements.
<TABLE>
VICOM, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Retained
Common Stock * Earnings Treasury Stock
Shares Amount (Deficit) Shares Amount Total
BALANCE, DECEMBER 31, 1994 2,143,531 $1,297,631 $625,565 (3,000) ($2,500)$1,920,696
Net income - 1995 - - 136,410 - - 136,410
Repurchased stock (56,120) (20,613) - - - (20,613)
Retired treasury stock (3,000) (2,500) - 3,000 2,500 -
BALANCE, DECEMBER 31, 1995 2,084,411 1,274,518 761,975 - - 2,036,493
Net loss - 1996 - - (1,140,791) - - (1,140,791)
Repurchased stock (3,175) (3,776) 689 - - (3,087)
BALANCE, DECEMBER 31, 1996 2,081,236 1,270,742 (378,127) - - 892,615
Net income - 1997 - - 56,177 - - 56,177
Issuance of stock 25,000 25,000 - - - 25,000
BALANCE, DECEMBER 31, 1997 $2,106,236 $1,295,742 ($321,950) - - $973,792
</TABLE>
* Authorized 50,000,000 shares, no par value
See notes to consolidated financial statements.
<TABLE>
VICOM, INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
OPERATING ACTIVITIES
Net income (loss) $56,177 ($1,140,791) $136,410
Adjustments to reconcile net income (loss)
to cash provided (used) by operating
activities:
Depreciation 251,725 174,772 115,802
Loss on investments - 15,000 -
Deferred income taxes 28,000 - 348,000
Changes in operating assets and liabilities:
Accounts receivable (408,101) (66,816) (176,617)
Inventories (147,948) 364,853 (110,871)
Other assets (44,845) 332,963 (219,088)
Accounts payable and accrued expenses381,912 41,463 (263,486)
Deferred service revenue (23,074) 197,308 78,602
Net cash provided (used)
by operating activities 93,846 (81,248) (91,248)
INVESTING ACTIVITIES
Purchases of property and equipment (75,706) (278,594) (177,018)
Proceeds from investments - 361,400 267,407
Collections on notes receivable 41,704 45,963 60,267
Issuance of notes receivable (45,363) - (210,109)
Net cash provided (used) by
investing activities (79,365) 128,769 (59,453)
FINANCING ACTIVITIES
Checks issued in excess of deposits 3,640 89,633 14,831
Net borrowings (payments) under
credit agreements 78,329 88,031 (111,507)
Principal payments on
installment obligations (121,450) (222,098) (395,999)
Proceeds from issuance of
installment obligations - - 602,564
Proceeds from issuance
(repurchase of) of common 25,000 (3,087) (20,613)
Net cash provided (used) by
financing activities (14,481) (47,521) 89,276
DECREASE IN CASH - - (61,425)
CASH
Beginning of year - - 61,425
End of year $ - $ - $ -
</TABLE>
See notes to consolidated financial statements.
VICOM, INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies -
The Company
Operations consist primarily of selling and servicing telecommunication
equipment. Vicom, Incorporated is a full range provider of communications
solutions that include business telephone systems, voice processing products,
and other integration products and services, primarily to customers in
Minnesota.
Principles of Consolidation
The consolidated financial statements include the accounts of Vicom,
Incorporated and its wholly-owned subsidiary Vicom Midwest Telecommunication
Systems, Inc. (collectively referred to as the "Company"). All significant
intercompany accounts and transactions are eliminated.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts and disclosures in the
financial statements and accompanying notes. Actual results could differ
from these estimates. Significant management estimates relate to the
allowances for doubtful accounts, inventory obsolescence, doubtful
utilization of prepaid advertising, and valuation of deferred income tax
assets.
Inventories
Inventories, consisting principally of purchased telecommunication equipment
and parts, are stated at the Lower of cost or market, with cost determined
using an average cost method. Nonmonetary exchanges of inventory items with
third parties are recorded at net book value of the items exchanged with no
gains or losses recognized.
Property and Equipment
Equipment and leasehold improvements are stated at cost. Equipment is
depreciated principally by the straight-line method over three to eight
years, the estimated useful lives of the related assets. Leasehold
improvements are depreciated over the shorter of the life of the improvement
or the term of the respective lease.
Revenue and Cost Recognition
Equipment maintenance contracts, sold as part of new equipment installation
packages, are recognized as equipment sales. Revenue from equipment
maintenance contracts sold separately is deferred and recognized on a
straight-line basis over the term of each contract. The costs of service
under the contracts are charged to expense as incurred.
For any significant long-term contracts, revenue is recognized under the
percentage of completion method. The amount of revenue recognized is the
portion that the cost expended to date bears to the anticipated final total
contract cost, based on current estimates of cost to complete. Contract cost
includes all labor and materials unique to or installed in the project, as
well as subcontract costs. Revenue earned on contracts in progress in excess
of billings is classified as inventories.
Warranty costs incurred on new equipment sales are substantially reimbursed
by the equipment suppliers.
Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of cash, investments, and trade receivables. The Company
restricts cash and investments to financial institutions with high credit
standing. Credit risk on trade receivables is minimized as a result of the
large and diverse nature of the Company's nationwide customer base.
Accounting for Stock-Based Compensation
The Company accounts for employee stock options under Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and
provides the pro forma disclosures required by Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting For Stock-Based
Compensation. Options and warrants to nonemployees are recorded as required
by SFAS No. 123.
Net Income (Loss) Per Common Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share. SFAS No. 128 specifies the compilation,
presentation and disclosure requirements for earnings per share
for entities with publicly held common stock or potential common stock.
The requirements of this statement are effective for interim and annual
periods ending after December 15, 1997. All prior years were restated.
Net income (loss) per common share-basic is determined by dividing the net
income (loss) by the weighted average number of shares of common stock
outstanding. Options and warrants to purchase common stock were not included
in the computation of per share amounts as the effect was antidilutive.
Therefore, basic and diluted earnings per share are the same.
Advertising Expenses
The Company expenses advertising costs as incurred. Sales brochures and
materials are recorded as prepaid expenses until they are consumed or
determined as obsolete. Advertising expenses were approximately $22,000,
$304,000, and $70,000 for 1997, 1996 and 1995, respectively.
Reclassifications
Certain reclassifications were made to the 1996 and 1995 financial statements
to present them on a basis comparable with 1997. The reclassifications had
no effect on previously reported net income (loss), shareholders' equity, or
net cash flows.
Recent Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The requirements of this
statement will be effective for both interim and annual periods beginning
after December 15, 1997. Management does not believe the implementation of
SFAS No. 130 will have a material effect on the financial statements
2. Property and Equipment -
Property and equipment are as follows:
<TABLE>
<S> <C> <C>
1997 1996
Cost:
Leasehold improvements $69,829 $62,829
Equipment - owned 1,083,545 1,049,022
Equipment under capital leases 337,947 314,825
1,491,321 1,426,676
Less accumulated depreciation and amortization:
Leasehold improvements 24,252 8,302
Equipment - owned 570,735 435,662
Equipment under capital lease 157,903 91,383
752,890 535,347
$738,431 $891,329
</TABLE>
Amortization expense on equipment under capital leases is included in
depreciation expense.
3. Other Assets -
<TABLE>
<S> <C> <C>
Other assets are as follows: 1997 1996
Current assets:
Notes receivable - current maturities $64,192 $64,210
Prepaid expenses and other 84,101 55,337
$148,293 $119,547
Noncurrent assets:
Notes receivable, less current maturities $216,515 $212,838
Prepaid expenses and other, net
of allowance of $292,000 17,514 1,433
$234,029 $214,271
</TABLE>
4. Notes and Installment Obligations Payable -
Notes and installment obligations payable are as follows:
<TABLE>
<S> <C> <C>
1997 1996
Notes payable to banks, interest at 9.5%
to prime (8.5% at December 31, 1997) $403,306 $514,734
plus 3%, due April 1998, collateralized
by substantially all Company assets, two
stockholder/officer guarantees, and an
agreement which requires the Company to
meet certain financial covenants.
Capital lease obligations, monthly
installments including
interest at 4.8% to 27.2% through 2002. 307,867 406,196
Notes payable to related parties,
interest at 9% to 12%,
due through December 1999, unsecured. 378,000 -
Notes payable to related parties, interest
at 10% to 15%, due on demand, unsecured. 62,400 384,885
Notes payable to individuals, interest at
10% to 12%, due through December 1999,
unsecured. 253,274 33,900
Notes payable to individuals, interest at
10% to 12%, due on demand, unsecured. 25,000 110,133
Subtotal 1,429,848 1,449,848
Less current maturities 755,412 1,125,248
TOTAL $674,436 $324,600
</TABLE>
4. Notes and Installment Obligations Payable - (continued)
<TABLE>
Future maturities are as follows:
<CAPTION>
<S> <C>
Year Amount
1998 $755,412
1999 578,821
2000 51,056
2001 27,605
2002 16,954
$1,429,848
</TABLE>
Interest expense for 1997, 1996, and 1995 was $189,869, $150,031, and
$164,966, respectively (approximately $38,000, $50,000, and $40,000 to
related parties, respectively).
5. Stockholders' Equity -
Stock Options
In 1997, the Company adopted the 1997 Stock Option Plan which permits the
issuance of incentive stock options to key employees and agents. The Plan
reserves 700,000 shares of common stock for issuance and provides that the
term and vesting of each grant be determined by the Board of Directors.
Under the Plan, the exercise price of the stock options may not be less than
the fair market value of the stock on the grant date, and the options are
exercisable for a period not to exceed ten years from grant date
limits the annual aggregate fair market value of stock granted under the
Plan to $600,000, plus unused carryovers.
A previous stock option plan was allowed to expire, and no options were
granted or exercised under that plan after December 31, 1993.
<TABLE>
<CAPTION>
1997 stock option activity was as follows:
Weighted Average
<S> <C> <C> <C>
Exercise Fair
Options Price Value
OUTSTANDING, December 31, 1996 - $ - $ -
Granted 278,000 .88 .20
Terminated 33,500 .94 .24
OUTSTANDING, December 31, 1997 244,500 .88 .19
</TABLE>
5. Stockholders' Equity - (continued)
Stock Options (continued)
No options outstanding at December 31, 1997, were exercisable. The options
have a weighted average contractual life of approximately 4.5 years.
If the Company recognized employee stock option compensation expense based on
the grant date fair value consistent with the method prescribed by SFAS No.
123, net income for 1997 would be approximately $25,000 ($.01 per share) less
than reported.
The fair value of stock options is the estimated present value at grant date
using the Black-Scholes Option-Pricing Model with the following weighted
average assumptions:
Risk-free interest rate 6.08%
Expected life 5 years
Expected volatility 0%
Expected dividend rate 0%
<TABLE>
Stock Warrants
Stock warrant activity was as follows:
<CAPTION>
Weighted Average
<S> <C> <C> <C>
Exercise Fair
Warrants Price Value
OUTSTANDING, December 31, 1995 - $ - $-
Granted 99,999 2.00 0
OUTSTANDING, December 31, 1996 99,999 2.00 0
Granted 135,000 .75 .21
OUTSTANDING, December 31, 1997 234,999 1.28 .12
</TABLE>
The warrants granted in 1996 were issued to an investment banker to assist
the Company in promoting its business plans to the investment community and
building stock value. The warrants granted in 1997 were issued in connection
with a note payable.
All warrants outstanding at December 31, 1997 were exercisable and had a
weighted average contractual life of approximately 3.5 years.
Because the warrants issued to nonemployees were nominal in amount, the
effects were not recorded in the financial statements.
The fair value of stock warrants is the estimated present value at grant date
using the Black-Scholes Option-Pricing Model with the following weighted
average assumptions:
<TABLE>
<S> <C> <C>
1997 1996
Risk free interest rate 6.50% 6.50%
Expected life 5 years 3 years
Expected volatility 0% 0%
Expected dividend rate 0% 0%
</TABLE>
6. Income Taxes -
<TABLE>
<CAPTION>
The income tax provision is as follows:
<S> <C> <C> <C>
1997 1996 1995
Current $ - $- $4,000
Deferred 28,000 - 348,000
$28,000 $- $352,000
</TABLE>
<TABLE>
<CAPTION>
Components of net deferred income tax assets are as follows:
<S> <C> <C>
1997 1996
Deferred income tax assets:
Net operating loss carryforwards $2,966,000 $3,167,000
Tax credits carryforwards 226,000 259,000
Nondeductible allowances 233,000 265,000
3,425,000 3,691,000
Less valuation allowance 3,072,800 3,338,800
352,200 352,200
Deferred income tax liabilities:
Equipment depreciation 53,000 25,000
Net deferred income tax assets $299,200 $327,200
</TABLE>
Income tax computed at the U.S. federal statutory rate reconciled to the
effective tax rate is as follows:
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Statutory rate (benefit) 34.0% (34.0%) 34.0%
State income tax - - .1
Change in valuation allowance (.7) - 38.0
Net operating loss not recognized - 34.0 -
Effective rate 33.3 % - % 72.1%
</TABLE>
6. Income Taxes - (continued)
Tax credits are accounted for on the flow-through method, which recognizes
the benefit in the year of utilization. The Company has the following net
operating loss and tax credit carryforwards at December 31, 1997, for federal
income tax purposes:
<TABLE>
<S> <C> <C>
Year of
Expiration Net Operating Loss Tax Credits
1998 $206,000 $36,000
1999 48,000 88,000
2000 871,000 102,000
2001 307,000 -
2002 3,152,000 -
2004 1,050,000 -
2005 599,000 -
2007 501,000 -
2008 59,000 -
2009 22,000 -
2011 595,000 -
2012 5,000 -
$7,415,000 $226,000
</TABLE>
7. Related Party Transactions -
The Company leases vans under operating leases from an entity owned by a
relative of a stockholder/officer. During 1997, 1996, and 1995 the Company
paid rent of approximately $14,000, $26,000, and $60,000, respectively, to
this related entity. Rental commitments to this related entity were not
significant at December 31, 1997.
8. Life Insurance Proceeds -
In 1995, a Company Director died. The Company received $520,000 from the
proceeds of a life insurance policy. The proceeds were classified as other
income.
9. Employee Benefit Plan -
The Company has a 401(k) profit sharing plan covering employees over age 21
who work at least 1,000 hours in a year. Employee contributions are limited
to the maximum amount allowable by the Internal Revenue Code. Company
contributions are discretionary. Company contributions were $ -0- , $2,669,
and $2,146 in 1997, 1996, and 1995, respectively.
10. Commitments -
Starting in September 1996, the Company leases facilities under a related
party operting lease, expiring in 2006. In addition to basic monthly rent of
the higher of $9,000 or 1.5% of revenues, the Company must pay building
maintenance costs and real estate taxes. The Company also has the option to
renew the lease for two additional five year periods. Total facilities rent
expense for 1997, 1996, and 1995 was approximately $151,000, $206,000, and
$144,000, respectively. Basic rent charged by the related party in 1997 and
1996 was $99,000 and $36,000, respectively.
Minimum rent commitments are as follows:
Year Amount
1998 $108,000
1999 108,000
2000 108,000
2001 108,000
2002 108,000
Thereafter 396,000
$936,000
11. Supplementation Disclosures of Cash Flow Information -
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Cash paid for:
Interest $194,262 $145,638 $176,681
Income taxes 3,000 5,516 3,257
Capitalized lease
equipment purchase 23,121 347,589 68,757
</TABLE>
12. Significant Suppliers -
In 1997, 1996, and 1995, the Company purchased materials from three major
suppliers as follows:
<TABLE>
<S> <C> <C> <C>
Supplier A B C
1997 42% 5% 7%
1996 35 16 13
1995 48 26 18
</TABLE>
13. Financial Statement Adjustments -
The Company made net reductions (increases) to the allowances for doubtful
accounts, inventory obsolescence and doubtful utilization of prepaid
advertising as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Reduction (Increase) to Allowances Doubtful
Utilization Net Income (Loss)
Doubtful Inventory of Prepaid Per Common Share
Year Accounts Obsolescence Advertising Before After
1997 $75,000 $10,000 $ - $ - $.03
1996 (75,000) (176,000) (292,000) (.29) (.55)
1995 530 96,000 - .02 .06
</TABLE>
The reductions (increases) to the inventory obsolescence allowance result
from the highly technological nature of the Company's inventories. In 1996,
the allowance was increased due to anticipated obsolescence of maintained
inventories. In 1997 and 1995, the allowance was reduced due to disposals of
previously determined obsolete inventories.
The Company has fully reserved prepaid advertising at a barter exchange
company due to the questionable nature of any ultimate realization.
INDEPENDENT AUDITOR'S REPORT - SUPPLEMENTARY INFORMATION
Board of Directors and Stockholders
Vicom, Incorporated and Subsidiary
New Hope, Minnesota
Our report on our audits of the basic consolidated financial statements of
VICOM, INCORPORATED
AND SUBSIDIARY for 1997, 1996, and 1995 appears on page 1.
Those 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 18 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 fai
LURIE, BESIKOF, LAPIDUS & CO., LLP
March 24, 1998
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<S> <C> <C> <C> <C>
Charged
Balance at (Credited) to Balance
Beginning Costs and at End
Description of Year Expenses Deductions of Year
ALLOWANCE DEDUCTED FROM
ASSET TO WHICH IT APPLIES
Allowance for doubtful accounts -
accounts receivable:
1997 $115,000 $20,493 $95,493(A) $40,000
1996 40,000 84,000 9,000(A) 115,000
1995 40,530 (530) - 40,000
Allowance for inventory obsolescence:
1997 260,000 - 10,000(B) 250,000
1996 84,000 176,000 - 260,000
1995 180,000 - 96,000(B) 84,000
Allowance for doubtful utilization of
prepaid advertising:
1997 292,000 - - 292,000
1996 - 292,000 - 292,000
1995 - - - -
Allowance for doubtful accounts -
contracts:
1997 2,769 - 2,769(C) -
1996 2,769 - - 2,769
1995 3,210 (441) - 2,769
Allowance for maintenance:
1997 - - - -
1996 - - - -
1995 5,734 (5,734) - -
</TABLE>
(A) Write-off uncollectible trade receivables
(B) Write-off obsolete inventory
(C) Reversal
See independent auditor's report - supplementary information and notes to
consolidated financial statements.
