VICOM INC, 10-Q, 2000-11-14

VICOM INC
10-Q, 2000-11-14
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One) /x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE PERIOD ENDING SEPTEMBER 30, 2000
OR
/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
	FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0 - 1325

VICOM, INCORPORATED

(Exact name of registrant as specified in its charter)

MINNESOTA

(State or other jurisdiction of incorporation or organization)

41 - 1255001

(IRS Employer Identification No.)

9449 Science Center Drive, New Hope, Minnesota 55428

(Address of principal executive offices)

Telephone (763) 504-3000 Fax (763) 504-3060

www.vicominc.net Internet

(Registrant's telephone number, facsimile number, and Internet address)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes /x/ No / /

On October 30, 2000, there were 7,928,219 shares outstanding of the registrant's common stock, par value $.01 per share, and 188,360 outstanding shares of the registrant's convertible preferred stock.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VICOM, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Months Ended						Nine Months Ended
		September 30, 2000			September 30, 1999			September 30, 2000			September 30, 1999
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUES		$	10,219,008		$	3,189,197		$	28,624,886		$	12,397,994

COSTS AND EXPENSES
	Cost of products and services		7,868,109			2,157,892			22,181,052			9,242,352
	Selling, general and administrative		2,501,869			1,465,764			8,154,184			3,752,672

			10,369,978			3,623,656			30,335,236			12,995,024

LOSS FROM OPERATIONS			(150,970	)		(434,459	)		(1,710,350	)		(597,030	)

OTHER EXPENSE
	Interest expense		(133,669	)		(64,670	)		(446,820	)		(149,543	)
	Miscellaneous income (expense)		169,834			(38,772	)		—			(1,928	)

			36,165			(25,988	)		(446,820	)		(151,471	)

LOSS BEFORE INCOME TAXES			(114,805	)		(460,447	)		(2,157,170	)		(748,501	)
INCOME TAX PROVISION			0			0			0			0
NET LOSS		$	(114,805	)	$	(460,447	)	$	(2,157,170	)	$	(748,501	)

LOSS PER SHARE—
BASIC AND DILUTED		$	(.01	)	$	(.13	)	$	(.32	)	$	(.22	)

WEIGHTED AVERAGE SHARES OUTSTANDING—BASIC AND DILUTED			7,738,599			3,426,887			6,695,499			3,426,887

See notes to condensed consolidated financial statements

VICOM, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2000 AND DECEMBER 31, 1999

			September 30, 2000			December 31, 1999
			(unaudited)
ASSETS
CURRENT ASSETS
	Cash		$	637,973		$	204,365
	Accounts receivable, net allowance of $75,000 and $140,000			6,353,275			5,369,221
	Inventories, net allowance of $370,000 and $330,000			2,288,457			1,801,596
	Costs and estimated earnings in excess of billings			94,751			232,725
	Other			384,303			154,766

		TOTAL CURRENT ASSETS		9,758,759			7,762,673

PROPERTY AND EQUIPMENT Net of accumulated depreciation of $1,105,643 and $1,372,118			$	2,424,571		$	1,324,080

NONCURRENT ASSETS
	Goodwill, net of accumulated amortization of $351,907 and $101,604			2,997,808			3,249,111
	Other			214,663			262,881

				3,212,471			3,511,992

			$	15,395,801		$	12,598,745

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Checks issued in excess of deposits		$	—		$	126,297
	Notes and installment obligations payable—current maturities			2,557,532			4,246,433
	Accounts payable			4,071,644			4,503,451
	Other liabilities			766,551			977,513
	Due to ENStar, Inc.			108,499			207,170
	Deferred service obligations and revenue			409,288			584,716

		TOTAL CURRENT LIABILITIES		7,913,514			10,645,580

NOTES AND INSTALLMENT OBLIGATIONS PAYABLE				358,443			926,821

COMMITMENTS AND CONTINGENCIES				—			—
STOCKHOLDERS' EQUITY
	Preferred stock, liquidation preference of $10.50 per share:
		8% Class A cumulative convertible—no par value, (issued and outstanding—0 and 2,550 shares)		—			23,638
		10% Class B cumulative convertible—no par value (issued and outstanding—22,836 and 37,550 shares)		218,869			359,893
		10% Class C cumulative convertible—no par value (issued and outstanding—153,310 and—0 shares)		1,533,100			—
	Common stock—no par value (issued 8,113,108 and 4,984,845 shares; outstanding 7,913,169 and 4,784,906 shares)			1,783,137			4,551,745
	Options and warrants			13,380,200			217,028
	Unamortized compensation			(186,823	)		(258,659	)
	Accumulated deficit			(9,604,639	)		(3,867,301	)

				7,123,844			1,026,344

			$	15,395,801		$	12,598,745

See notes to condensed consolidated financial statements.

VICOM, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR NINE MONTHS ENDED SEPTEMBER, 2000 AND 1999

(Unaudited)

					NINE MONTHS ENDED SEPTEMBER 30,
					2000			1999
OPERATING ACTIVITIES
	Net loss				$	(2,157,170	)	$	(748,501	)
	Adjustments to reconcile net loss to net cash provided (used) by operating activities
		Depreciation				452,163			192,015
		Amortization				398,781			41,184
		Gain on sales of property and equipment				(5,234	)		—
		Changes in operating assets and liabilities:
			Accounts receivable			(976,320	)		652,178
			Inventories			(486,861	)		391,688
			Costs, estimated earnings, and billings			137,974			—
			Other assets			(115,974	)		(82,509	)
			Accounts payable and other liabilities			(741,439	)		294,550
			Deferred service obligations and revenue			(175,428	)		(542,511	)

				Net cash provided (used) by operating activities		(3,669,508	)		198,094

INVESTING ACTIVITIES
	Purchases of property and equipment					(1,409,830	)		(331,671	)
	Proceeds from sales of property and equipment					62,410			—
	Issuance of note receivable					(96,897	)		—
	Collections on notes receivable					31,551			28,375

				Net cash used by investing activities		(1,412,766	)		(303,296	)

FINANCING ACTIVITIES
	Decrease in checks issued in excess of deposits					(126,297	)		(164,662	)
	Net increase in bank line of credit					942,600			773,007
	Proceeds from notes and installment obligations payable					144,907			—
	Payments on notes and installment obligations payable					(987,326	)		(459,091	)
	Collections on subscription receivable					458,250			—
	Proceeds from issuance of stock and warrants					5,703,704			25,000
	Stock issuance costs					(596,579	)		(42,945	)
	Preferred stock dividends					(23,377	)		(26,107	)

				Net cash provided by financing activities		5,515,882			105,202

INCREASE IN CASH						433,608			—
CASH
	Beginning of period					204,365			—

	End of period				$	637,973		$	—

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
	Interest paid				$	430,023		$	158,575
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
	Capitalized equipment purchases				$	200,000			—
	Notes payable converted to stock and warrants issued				$	2,633,100		$	25,500
	Subscriptions receivable on common stock				$	458,250		$	—
	Warrant dividends				$	13,255,869		$	—
	Refinancing of debt				$	1,603,189		$	—
	Conversion of preferred to common stock				$	107,522		$	—

See notes to condensed consolidated financial statements

VICOM, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to fairly present the operating results for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the operating results to be expected for the full fiscal year.

Certain Financing Activities

In March 2000, Vicom's subsidiary, Corporate Technologies, USA, Inc. (CTU), entered into a $2,250,000 debenture/loan agreement with Convergent Capital (Convergent), requiring interest at prime plus 4% (plus 6% if in default) and due on December 31, 2000. The loan proceeds were used to pay off a previous CTU line of credit due March 31, 2000. Convergent, as additional consideration in the transaction, was given a warrant with a term of seven years to purchase 40,000 shares of Vicom's common stock at a price of $5.20 per share.

On July 11, 2000, the Convergent agreement was amended to extend the due date to June 1, 2005. The terms of the amended agreement require interest only payments for 36 months from July 11, 2000 and thereafter 22 equal monthly payments of principal and interest until the loan is paid in full. The amended agreement also requires interest at 14% annually (16% annually if Vicom is in default). Convergent, as additional consideration for extending the loan, was issued a warrant with a term of seven years to purchase 110,000 shares of Vicom common stock at a price of $4.18 per share.

In order to enhance liquidity, Vicom, in the quarter ended September 30, 2000, issued 72,810 shares of 10% Class C Convertible preferred stock in the amount of $728,100.

Loss Per Share

Loss per share-basic is determined by dividing net income loss plus the preferred stock dividends by the weighted average common shares outstanding. Net loss per common share-diluted is computed by dividing net loss plus the preferred stock dividends by the weighted average common shares outstanding and the common share equivalents (stock options, stock warrants, convertible preferred shares, and issued but not outstanding restricted stock). Common share equivalents are not included in the computations as their effects were anti-dilutive.

FORWARD-LOOKING STATEMENTS

From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, product pricing, management for growth, integration of acquisitions, technological developments, new products, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements including those made in this statement. In order to comply with the terms of the Private Securities Litigation Reform Act, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or Company's forward-looking statements.

The risks and uncertainties that may affect the operations, performance, developments and results of the Company's business include the following: national and regional economic conditions; pending and future legislation affecting IT and telecommunications industries; market acceptance of the Company's products and services; the Company's products and services; the Company's continued

ability to provide integrated communication solutions for customers in a dynamic industry; and other competitive factors.

Because these and other factors could affect the Company's operating results, past financial performance should not necessarily be considered as a reliable indicator of future performance and anticipated future period results.

ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

GENERAL

Vicom is the parent corporation of three wholly-owned subsidiaries, Corporate Technologies, USA, Inc. (CTU), MultiBand, Inc. (MultiBand) and Vicom Midwest Telecommunications Systems, Inc. (VMTS). VMTS was not active as of September 30, 2000. In late 1999, to expand its range of computer product and service offerings, Vicom formed CTU to acquire the stock of Ekman, Inc. Vicom incorporated MultiBand in February 2000 to provide voice, data and video services to residential multi-dwelling units (MDUs). MultiBand is in the start-up phase.

Vicom has provided clients with telecommunications products and services since its inception in 1975. As of September 30, 2000, we were providing telephone equipment and service to more than 1,000 customers, with approximately 10,000 telephones in service. In addition, CTU provides computer products and services to approximately 3,500 customers. The telecommunications systems we distribute are intended to provide customers with flexible, cost-effective alternatives as compared to systems available from major telephone companies, including those formerly comprising the Bell System, and from other interconnected telephone companies.

Vicom and CTU provide 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, North Dakota, South Dakota and Nebraska. Vicom purchases products and equipment from NEC America, Inc. ("NEC"), Cisco Systems, Inc., Nortel Networks Corp., ECI Telecommunications, Inc. ("ECI"), and other manufacturers of communications and electronic products and equipment. We use these products to design telecommunications systems to fit our customers' specific needs and demands.

RESULTS OF OPERATIONS

Revenues

Revenues increased 220% to $10,219,008 in the quarter ended September 30, 2000, as compared to $3,189,197 for the quarter ended September 30, 1999. For the nine months period ended September 30, 2000, revenues increased 131% to $28,624,886 as compared to $12,397,994 for the similar period last year. Both increases in revenues are directly attributed to the Company's acquisition of Ekman, Inc. in late 1999.

Gross Margin

The Company's gross margin increased 128% or $1,319,594 to $2,350,899 for the quarter ended September 30, 2000, as compared to $1,031,305 for the similar quarter last year. The gross margin increase is due to the aforementioned acquisition of Ekman, Inc. For the quarter ended September 30, 2000, as a percent of total revenues, gross margin was 23% as compared to 32% for the similar period last year. The decrease in the gross margin percentage is primarily due to increased sales of personal computer products, which sales have lesser gross margins than the Company's traditionally based telephone equipment sales

For the nine month period ended September 30, 2000, the Company's gross margin increased 104% or $3,288,192 to $6,443,834 as compared to $3,155,642 for the similar period last year. The gross margin increase is due to the aforementioned acquisition of Ekman, Inc. For the nine month period ended September 30, 2000, as a percent of total revenues, gross margin was 23% as compared to 25%

for the similar period last year. The decrease in the gross margin percentage is primarily due to increased sales year to date of personal computer products, which sales have lesser gross margins than the Company's traditionally based telephone equipment sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 71% to $2,501,869 in the quarter ended September 30, 2000, compared to $1,465,764 in the prior year quarter. This increase in expenses is primarily related to increased payroll due to acquisitions and start-up expenses for the Company's MultiBand, Inc. subsidiary. Selling, general and administrative expenses were, as a percentage of revenues, 24% for the quarter ended September 30, 2000 and 46% for the similar period a year ago.

For the nine-month period, these expenses increased 117% to $8,154,184 compared to $3,752,672 in the prior year period. The increase in expenses is primarily related to increased payroll due to acquisitions and start-up expenses for the Company's MultiBand, Inc. subsidiary. For the nine month period ended September 30, 2000, selling, general and administrative expenses were, as a percentage of revenues, 28% and 30% for the similar period a year ago.

Interest Expense

Interest expense was $133,669 for the quarter ended September 30, 2000, versus $64,670 for the similar period a year ago, reflecting an increased Company debt load due to acquisition related debt and increased bank borrowings. It was $446,820 for the nine month ended September 30, 2000, and $149,543 for the similar period a year ago.

Net Loss

In the third quarter of fiscal 2000, the Company incurred a net loss of $114,805 compared to a net loss of $460,447 for the third fiscal quarter of 1999. The nine month period ended September 30, 2000, resulted in a net loss of $2,157,170 compared to a net loss of $748,501 for the similar period last year.

Liquidity and Capital Resources

Available working capital, for the nine months ended September 30, 2000, increased over the similar period last year due to proceeds from issuance of stock and exercise of outstanding warrants, which helped offset Vicom's net operating loss. Vicom experienced a significant decrease in accounts payable for the period ended September 30, 2000 versus last year's period, primarily due to the aforementioned proceeds, which were used to reduce payables. Accounts receivables increased materially for the period ended September 30, 2000 compared to the prior year period due to a significant increase in revenues resulting from the acquisition of Ekman, Inc. in late 1999.

Inventories year to date increased over last year's prior period inventories due to the aforementioned revenue increases. Net borrowings under credit agreements increased materially for the nine months ended September 30, 2000 compared to the prior year's period due to debenture financing with a lender, the proceeds of which were used to pay off a bank line of credit.

Management of Vicom believes that, for the near future, cash generated by sales of stock, exercise of warrants, and existing credit facilities, in aggregate, are adequate to meet the anticipated liquidity and capital resource requirements of its business.

Capital Expenditures

The Company used $1,409,830 for capital expenditures during the nine months ended September 30, 2000, as compared to $331,671 in the similar period last year. These year to date 2000 expenditures were primarily for construction in process items, which totaled $978,810 and related to the

start up of MultiBand. The balance of year to date 2000 expenditures, $431,020, consisted of equipment acquired for internal uses such as vehicles, office furniture, computer systems and demonstration systems. For the similar period last year, substantially all capital expenditures consisted of equipment acquired for internal use.

IMPACT OF YEAR 2000

The Company has experienced no significant system problems since January 1, 2000. In addition, the Company is not aware of any material problems being experienced by its suppliers and business partners. The Company believes it has adequately addressed the Year 2000 issue related to its internal systems and that it did not and will not have a material impact on its business, financial condition or its results of operations.

ITEM 3. QUANTITIVE AND QUALITIVE DISCLOSURE ABOUT MARKET RISK

Vicom is not subject to any material interest rate risk as any current lending agreements are at a fixed rate of interest.

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

a.

An Annual Meeting of Vicom shareholders was held on August 10, 2000.

b.

The meeting resulted in the re-election for one year of the following individuals as follows:

Nominee		For		Against
Steven Bell		4,101,666		0
Jonathan Dodge		4,101,666		0
David Ekman		4,101,666		0
Marvin Frieman		4,101,666		0
Paul Knapp		4,101,666		0
James L. Mandel		4,101,666		0
Pierce McNally		4,101,666		0
Mark Mekler		4,101,666		0
Manuel A. Villafana		4,101,666		0

c.

Voting to ratify Lurie, Beskiof, Lapidus & Co., LLP as independent auditors of Vicom for the fiscal year ended December 31, 1999:

For		Against		Abstain
4,096,666		0		5,000

d.

Voting to approve an amendment to Vicom's 1999 Stock Compensation Plan to change the total number of stock shares reserved for awards under the plan to 2.5 million:

For		Against		Abstain
4,092,916		6,250		2,500

e.

Voting to approve Vicom's 2000 non-employee Director Stock Compensation Plan:

For		Against		Abstain
4,094,166		5,000		2,500

f.

Voting to approve Vicom's 2000 employee stock Purchase Plan:

For		Against		Abstain
4,094,166		5,000		2,500

ITEM 5. LEGAL PROCEEDINGS

As of September 30, 2000, Vicom was not engaged in any material pending legal proceedings.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): Exhibits

(b): Reports on Form 8-K.

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VICOM, INC. Registrant
Date: November 14, 2000	By:	/s/ JAMES L. MANDEL James L. Mandel Chief Executive Officer
Date: November 14, 2000	By:	/s/ STEVEN M. BELL Steven M. Bell Chief Executive Officer (Principal Financial and Accounting Officer)

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
SIGNATURES