SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 2001.
or
/_/ Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission file number: 0-25940
WIRE ONE TECHNOLOGIES, INC.
(Exact Name of registrant as Specified in its Charter)
Delaware 77-0312442
(State or other Jurisdiction of (I.R.S. Employer Number)
Incorporation or Organization)
225 Long Avenue, Hillside, New Jersey 07205
(Address of Principal Executive Offices)
973-282-2000
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 [_]
The number of shares outstanding of the registrant's Common Stock as of
August 10, 2001 was 21,444,104.
WIRE ONE TECHNOLOGIES, INC
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements *
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000 1
Consolidated Statements of Operations
For the Six Months and Three Months Ended June 30, 2001 and 2000 2
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2001 and 2000 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
* The Balance Sheet at December 31, 2000 has been taken from the audited
financial statements at that date. All other financial statements are
unaudited.
WIRE ONE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
---------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 983,781 $ 1,870,573
Accounts receivable-net 30,411,374 27,614,169
Inventory 10,613,891 10,751,344
Deferred income taxes 200,000 200,000
Other current assets 1,772,187 1,315,432
------------ ------------
Total current assets 43,981,233 41,751,518
Furniture, equipment and leasehold improvements-net 9,394,660 6,726,562
Goodwill-net 37,439,341 36,065,945
Other assets 373,826 341,813
------------ ------------
Total assets $ 91,189,060 $ 84,885,838
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan payable $ 6,878,433 $ --
Accounts payable 12,811,257 11,804,298
Accrued expenses 1,761,427 2,568,627
Deferred revenue 7,810,096 7,287,690
Customer deposits 112,958 68,150
Current portion of capital lease obligations 65,063 101,643
------------ ------------
Total current liabilities 29,439,234 21,830,408
------------ ------------
Noncurrent liabilities:
Bank loan payable -- 3,000,000
Capital lease obligations, less current portion -- 26,067
------------ ------------
Total noncurrent liabilities -- 3,026,067
------------ ------------
Total liabilities 29,439,234 24,856,475
Commitments and Contingencies
Preferred stock, $.0001 par value; 5,000,000 shares authorized,
Series A mandatorily redeemable convertible preferred stock,
no shares outstanding -- 10,371,096
Stockholders' Equity:
Common stock, $.0001 par value; 100,000,000 authorized;
21,427,604 and 17,299,725 shares outstanding, respectively 2,140 1,730
Additional paid-in capital 86,772,047 66,436,353
Accumulated deficit (25,024,361) (16,779,816)
------------ ------------
Total stockholders' equity 61,749,826 49,658,267
------------ ------------
------------ ------------
Total liabilities and stockholders' equity $ 91,189,060 $ 84,885,838
============ ============
See accompanying notes to consolidated financial statements.
WIRE ONE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenues $40,707,108 $17,110,133 $21,963,586 $11,126,626
Cost of revenues 27,810,639 11,286,532 14,860,514 7,440,321
------------ ------------ ------------ ------------
Gross margin 12,896,469 5,823,601 7,103,072 3,686,305
Operating expenses:
Selling 11,977,120 4,586,007 6,195,081 3,167,314
General and administrative 3,159,693 1,350,094 1,832,571 766,413
Amortization of goodwill 1,270,722 268,783 642,526 268,783
------------ ------------ ------------ ------------
Total operating expenses 16,407,535 6,204,884 8,670,178 4,202,510
------------ ------------ ------------ ------------
Loss from operations (3,511,066) (381,283) (1,567,106) (516,205)
------------ ------------ ------------ ------------
Other (income) expense:
Amortization of deferred financing costs 21,761 325,355 12,379 313,113
Interest income (40,052) (144,935) (24,112) (114,987)
Interest expense 317,866 53,484 227,359 30,001
------------ ------------ ------------ ------------
Total other expenses, net 299,575 233,904 215,626 228,127
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss before income taxes (3,810,641) (615,187) (1,782,732) (744,332)
Income tax benefit -- -- -- (53,400)
------------ ------------ ------------ ------------
Net loss (3,810,641) (615,187) (1,782,732) (690,932)
Deemed dividends on series A convertible preferred stock 4,433,904 8,179,555 4,039,940 8,179,555
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $(8,244,545) $(8,794,742) $(5,822,672) $(8,870,487)
============ ============ ============ ============
Net loss per share:
Basic $(0.46) $(1.03) $(0.32) $(0.76)
============ ============ ============ ============
Diluted $(0.46) $(1.03) $(0.32) $(0.76)
============ ============ ============ ============
Weighted average number of diluted common shares:
Basic 17,752,240 8,501,608 18,176,663 11,717,591
============ ============ ============ ============
Diluted 17,752,240 8,501,608 18,176,663 11,717,591
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
WIRE ONE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,810,641) $ (615,187)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,947,963 939,384
Non cash compensation 217,726 86,668
Increase (decrease) in cash attributable to changes in assets and
liabilities net of activity of acquired businesses:
Accounts receivable (2,797,205) (1,398,171)
Inventory 137,453 (946,558)
Other current assets (456,755) 190,962
Other assets (121,821) 7,650
Accounts payable 1,006,959 (2,084,884)
Accrued expenses (807,200) (216,377)
Income taxes payable -- (124,372)
Deferred revenue 522,406 631,515
Customer deposits 44,808 205,367
------------ ------------
Net cash used in operating activities (3,116,307) (3,324,003)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, equipment and leasehold improvements (4,255,531) (1,386,685)
Costs related to acquisition of businesses including cash acquired (144,118) (2,006,979)
------------ ------------
Net cash used in investing activities (4,399,649) (3,393,664)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from preferred stock offering, net -- 16,279,860
Issuance of common stock for cash assets of GeoVideo 2,500,000 --
Exercise of warrants and options, net 313,378 8,654,238
Payment of subordinated notes -- (1,500,000)
Deferred financing costs -- (65,112)
Proceeds from bank loans 38,099,731 3,350,000
Payments on bank loans (34,221,298) (6,426,783)
Tax benefit of exercise of stock options -- 53,000
Payments on capital lease obligations (62,647) (22,825)
------------ ------------
Net cash provided by financing activities 6,629,164 20,322,378
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (886,792) 13,604,711
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,870,573 60,019
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 983,781 $ 13,664,730
============ ============
Supplemental disclosures of cash flow information: Cash paid during
the period for:
Interest $ 277,814 $ 53,484
============ ============
Income taxes $ 2,274 $ 147,946
============ ============
Non cash financing and investing activities:
During the six months ended June 30, 2001 and 2000, the Company recorded
non-cash deemed dividends on Series A mandatorily redeemable convertible
preferred stock of $4,433,904 and $8,179,555, respectively.
On June 4, 2001, the Company acquired the non-cash assets of GeoVideo Networks,
Inc. for non-cash consideration of $2,500,000.
During the six months ended June 30, 2001, the Company issued 3,017,143
shares of $0.0001 par value common stock in exchange for 2,115 shares of
Series A mandatorily redeemable convertible preferred stock. Based on the
average conversion price of $4.91 per share, the total value attributable
to the common stock was $14,805,000.
On May 18, 2000, the Company acquired the net assets of View Tech, Inc. in a
merger transaction accounted for as a purchase for non-cash consideration
of $31,339,258.
See accompanying notes to consolidated financial statements.
3
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
Note 1 - The Business and Merger with View Tech, Inc.
Wire One Technologies, Inc. ("Wire One" or the "Company") was formed by the
merger of All Communications Corporation ("ACC") and View Tech, Inc.
("VTI") on May 18, 2000, with the former directors and senior management of
ACC succeeding to the management of Wire One. In connection with the
merger, each former shareholder of ACC received 1.65 shares of Wire One
common stock for each share of ACC common stock held by such former
shareholder. The transaction has been accounted for as a "reverse
acquisition" using the purchase method of accounting. The reverse
acquisition method resulted in ACC being recognized as the acquirer of VTI
for accounting and financial reporting purposes. As a result, ACC's
historical results have been carried forward and VTI's operations have been
included in the financial statements commencing on the merger date.
Accordingly, the 2000 results through the merger date are those of ACC
only. Further, on the date of the merger, the assets and liabilities of VTI
were recorded at their fair values, with the excess purchase consideration
allocated to goodwill.
Wire One is engaged in the business of selling, installing and servicing
video and voice communications systems, as well as an
Internet-protocol-based network devoted to video communications, to
commercial and institutional customers located principally within the
United States. The Company is headquartered in Hillside, New Jersey.
Note 2 - Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six months ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. For
further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report for the fiscal year ended
December 31, 2000 as filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, AllComm Products Corporation ("APC"),
VTC Resources, Inc. ("VTC") and Wire One Travel Services, Inc. ("WOTS").
All material intercompany balances and transactions have been eliminated in
consolidation. The Company does not segregate or manage its operations by
business segment.
Note 3 - Loss Per Share
Basic loss per share is calculated by dividing net loss attributable to
common stockholders by the weighted average number of common shares
outstanding during the period. In determining basic loss per share for the
periods presented, the effects of deemed dividends related to the Company's
series A mandatorily redeemable convertible preferred stock is added to the
net loss.
Diluted loss per share is calculated by dividing net loss attributable to
common stockholders by the weighted average number of common shares
outstanding plus the weighted-average number of net shares that would be
issued upon exercise of stock options and warrants using the treasury stock
method and the deemed conversion of preferred stock using the if converted
method.
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
Weighted average shares outstanding 17,752,240 8,501,608 18,176,663 11,717,591
Effect of dilutive options and warrants -- -- -- --
---------- --------- ---------- ----------
Weighted average shares outstanding
including dilutive effect of securities 17,752,240 8,501,608 18,176,663 11,717,591
---------- --------- ---------- ----------
Weighted average options and warrants to purchase 8,790,872 and 8,917,689 shares
of common stock were outstanding during the six months and three months ended
June 30, 2001. Weighted average options and warrants to purchase 7,808,768 and
6,141,909 shares of common stock were outstanding during the six months and
three months ended June 30, 2000. These options and warrants were not included
in the computation of diluted EPS because the Company reported a net operating
loss for these periods and their effect would have been antidilutive.
4
Note 4 - Bank Loan Payable
In June 2000, the Company entered into a $15,000,000 working capital credit
facility with its asset-based lender. Under terms of the two-year agreement
for this facility, loan availability is based on up to 75% of eligible
accounts receivable and 50% of eligible inventory, subject to an inventory
cap of $5,000,000. Borrowings bear interest at the lender's base rate plus
1/2% per annum. At June 30, 2001, the interest rate on the facility was
8.25%. The credit facility contains certain financial and operational
covenants. For the period from April 1, 2001 through June 30, 2001 ("2001
Second Quarter"), the Company was in violation of the interest coverage
ratio covenant. On August 13, 2001, the Company received a waiver from the
lender regarding this requirement for the 2001 Second Quarter. At June 30,
2001, the loan has been classified as current in the accompanying balance
sheet because this facility matures in less than one year.
Estimated Purchase Price Allocation:
GeoVideo assets acquired $2,500,000
Goodwill 2,500,000
----------
$5,000,000
==========
Note 5 - Acquisition of GeoVideo Networks, Inc.
In June 2001, the Company acquired the assets of GeoVideo Networks, Inc.
("GeoVideo"), a New York-based developer of video communications software.
Chief among the assets, in addition to GeoVideo's cash on hand of
$2,500,000, was GeoVideo's browser, a software tool based upon proprietary
Bell Labs technology that allows up to six simultaneous, real-time,
bi-directional high-bandwidth IP video sessions to be conducted over a
standard desktop PC. In exchange for the acquired assets, Wire One issued
815,661 shares of Wire One common stock, together with warrants to purchase
501,733 additional shares of Wire One common stock at $5.50 per share and
520,123 shares at $7.50 per share.
Note 6 - Subsequent Events
In July 2001, the Company acquired the assets and certain liabilities of
Advanced Acoustical Concepts, Inc. ("AAC"), an Ohio-based designer of
audiovisual conferencing systems. The total consideration was $794,000,
which was paid in the form of Company common stock valued at the time of
acquisition. On the date of acquisition, the assets and certain liabilities
were recorded at their fair values, with the excess purchase consideration
allocated to goodwill.
In August 2001, the Company raised gross proceeds of $11 million in a
private placement of 2,200,000 shares of its common stock at a price of
$5.00 per share. Investors in the private placement also received five-year
warrants to purchase 814,000 shares of Wire One common stock at an exercise
price of $6.25 per share. The warrants are subject to certain anti-dilution
protection. The Company also issued to its placement agent five-year
warrants to purchase 220,000 shares of common stock for $5.00 per share.
5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
The statements contained herein, other than historical information, are or may
be deemed to be forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, and involve factors, risks and uncertainties
that may cause the Company's actual results in future periods to differ
materially from such statements. These factors, risks and uncertainties, include
the relatively short operating history of the Company; market acceptance and
availability of new products and services; the terminable-at-will and
nonexclusive nature of reseller agreements with manufacturers; rapid
technological change affecting products and services sold by the Company; the
impact of competitive products, services, and pricing, as well as competition
from other resellers and service providers; possible delays in the shipment of
new products; and the availability of sufficient financial resources to enable
the Company to expand its operations.
Overview
Wire One is a leading single source provider of video communications solutions
that encompass the entire video communications value chain. We are a leading
integrator for major video communications equipment manufacturers, including the
number one and number two market share leaders, Polycom, Inc. ("Polycom") and
PictureTel Corporation ("PictureTel"), respectively, which together account for
over 50% of the installed videoconferencing endpoints in the United States. We
also offer voice communications products manufactured by Lucent Technologies,
Inc. ("Lucent") and the Business Telephone Systems Division of Panasonic
Communications and Systems Company ("Panasonic"), among others. In December
2000, we introduced our Glowpoint network service, providing our customers with
two-way video communications with high quality of service. With the introduction
of Glowpoint, we now offer our customers a single point of contact for all their
video communications requirements. Furthermore, we believe Glowpoint is the
first dedicated network to provide two-way video communications by utilizing a
dedicated Internet protocol ("IP") backbone and broadband access.
The Company markets and sells its video and data products and services to the
commercial, federal and state government, medical and educational markets
through a direct sales force of account executives and telemarketers and through
resellers. These efforts are supported by sales engineers, a marketing
department, a call center and a professional services and engineering group. The
Company has sold its products and services to over 2,500 customers who
collectively have approximately 13,000 videoconferencing endpoints.
The Company was formed on May 18, 2000 by the merger of ACC and VTI. VTI was the
surviving legal entity in the merger. However, for financial reporting purposes,
the merger has been accounted for as a "reverse acquisition" using the purchase
method of accounting. Under the purchase method of accounting, ACC's historical
results have been carried forward and VTI's operations have been included in the
financial statements commencing on the merger date. Accordingly, all 2000
results through the merger date are those of ACC only. Further, on the date of
the merger, the assets and liabilities of VTI were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
In July 2000, the Company acquired the net assets of 2CONFER, LLC ("2CONFER"), a
Chicago-based provider of videoconferencing, audio and data solutions. The total
consideration was $800,000, consisting of $500,000 in cash and the remainder in
Company common stock valued at the time of acquisition of $300,000. On the date
of the acquisition, the assets and liabilities of 2CONFER were recorded at their
fair values, with the excess purchase consideration allocated to goodwill.
6
In October 2000, the Company acquired the assets and certain liabilities of the
Johns Brook Company ("JBC") videoconferencing division, a New Jersey-based
provider of videoconferencing solutions. The total consideration was $635,000,
consisting of $481,000 in cash and the remainder in Company common stock valued
at the time of acquisition of $154,000. On the date of the acquisition, the
assets and certain liabilities of the JBC videoconferencing division were
recorded at their fair values, with the excess purchase consideration allocated
to goodwill.
In June 2001, the Company acquired the assets of GeoVideo Networks, Inc.
("GeoVideo"), a New York-based developer of video communications software. The
total consideration was $5,000,000, which was paid in the form of Company common
stock and warrants to purchase Company common stock valued at the time of the
acquisition. On the date of the acquisition, the assets of GeoVideo were
recorded at their fair values, with the excess purchase consideration allocated
to goodwill.
In July 2001, the Company acquired the assets and certain liabilities of
Advanced Acoustical Concepts, Inc. ("AAC"), an Ohio-based designer of
audiovisual conferencing systems. The total consideration was $794,000, which
was paid in the form of Company common stock valued at the time of the
acquisition. On the date of the acquisition, the assets and certain liabilities
of the AAC were recorded at their fair values, with the excess purchase
consideration allocated to goodwill.
Results of Operations
Six Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 68.3% 66.0% 67.7% 66.9%
----- ----- ----- -----
Gross margin 31.7% 34.0% 32.3% 33.1%
Operating expenses:
Selling 29.4% 26.8% 28.2% 28.4%
General and administrative 7.8% 7.9% 8.3% 6.9%
Amortization of goodwill 3.1% 1.5% 2.9% 2.4%
----- ----- ----- -----
Total operating expenses 40.3% 36.2% 39.4% 37.7%
----- ----- ----- -----
Loss from operations -8.6% -2.2% -7.1% -4.6%
----- ----- ----- -----
Other (income) expense:
Amortization of deferred financing costs 0.1% 1.9% 0.1% 2.8%
Interest income -0.1% -0.8% -0.1% -1.0%
Interest expense 0.8% 0.3% 1.0% 0.3%
----- ----- ----- -----
Total other expenses, net 0.8% 1.4% 1.0% 2.1%
----- ----- ----- -----
----- ----- ----- -----
Loss before income taxes -9.4% -3.6% -8.1% -6.7%
Income tax benefit 0.0% 0.0% 0.0% -0.5%
----- ----- ----- -----
Net loss -9.4% -3.6% -8.1% -6.2%
Deemed dividends on series A convertible preferred stock 10.9% 47.8% 18.4% 73.5%
----- ----- ----- -----
Net loss attributable to common stockholders -20.3% -51.4% -26.5% -79.7%
===== ===== ===== =====
7
Six Months Ended June 30, 2001 ("2001 period") Compared to Six Months Ended June
30, 2000 ("2000 period") and Three Months Ended June 30, 2001 Compared to Three
Months Ended June 30, 2000.
NET REVENUES. The Company reported net revenues of $40.7 million for the
2001 period, an increase of $23.6 million, or 138%, over the $17.1 million in
revenues reported for the 2000 period. Net revenues of $22.0 million for the
June 2001 quarter represent an increase of $10.9 million, or 98%, over the $11.1
million reported for the June 2000 quarter. Although the operations of acquired
companies have now been fully integrated into the Company, management estimates
that revenues for the 2001 period from the core businesses in existence before
contributions from VTI, 2CONFER and JBC grew approximately 66%, with revenues
from VTI, 2CONFER and JBC accounting for the remainder of the growth.
Video communications -- Sales of video communications products and services
were $37.6 million in the 2001 period, an increase of $24.3 million, or 182%,
over the 2000 period. Net revenues of $20.3 million for the June 2001 quarter
represent an increase of $10.7 million, or 111%, over the $9.6 million reported
for the June 2000 quarter. Management estimates that revenues for the 2001
period from the core video communications integration business before
contributions from its acquired companies grew approximately 105%, with revenues
from VTI, 2Confer and JBC accounting for the remainder of the growth
experienced. The growth experienced in the 2001 period resulted from sales to
both new and existing customers in the commercial, government, medical and
educational markets in each of the major geographic regions in the United States
in which the Company operates.
Voice communications -- Sales of voice communications products and services
were $3.1 million in the 2001 period, a $0.7 million decrease from the 2000
period. Net revenues of $1.7 million for the June 2001 quarter represent an
increase of $0.2 million, or 13%, over the $1.5 million reported for the June
2001 quarter. This decline in revenues of the voice communications division for
the 2001 period was the result of declines in revenue from three significant
customers and due to revenues in the 2000 period related to Y2K telephone system
upgrades that did not recur in the 2001 period.
GROSS MARGINS. Gross margins were $12.9 million in the 2001 period, an
increase of $7.1 million over the 2000 period. Gross margins decreased in the
2001 period to 31.7% of net revenues, as compared to 34.0% of net revenues in
the 2000 period. Gross margins were $7.1 million in the June 2001 quarter, an
increase of $3.4 million over the June 2000 quarter. Gross margins decreased in
the June 2001 quarter to 32.3% of net revenues, as compared to 33.1% of net
revenues in the June 2000 quarter. The decrease in the 2001 period is
attributable to the gross margin in the voice communications decreasing from 42%
to 20%, as a result of high margin Y2K upgrade jobs not recurring in the 2001
period and the fixed costs related to the distribution and service components of
this business being incurred during the 2001 period against a sharply lower
amount of revenue. Gross margin in the video communications business was 32.6%
in the 2001 period as compared to the 31.8% gross margin achieved in the 2000
period. The increase is attributable to inventory purchase discounts negotiated
with videoconferencing equipment manufacturers and increases in higher margin
revenue sources such as consulting and technical services, video maintenance
contracts and installation services.
SELLING. Selling expenses, which include sales salaries, commissions,
overhead, and marketing costs, increased $7.4 million in the 2001 period to
$12.0 million from $4.6 million for the 2000 period. Selling expenses increased
$3.0 million to $6.2 million in the June 2001 quarter from $3.2 million for the
June 2000 quarter. Increases in selling expenses are attributable to increases
in the number of sales personnel and their related costs and the costs of
additional sales offices brought about by the merger with VTI and the
acquisitions of 2CONFER and JBC. The increase in selling expenses as a
percentage of net revenues in the 2001 period resulted from the decline in voice
communications revenues combined with relatively fixed selling costs in that
division, as well as from the continued expansion of the video communications
division on a national basis. Prior to the merger, ACC focused its video
communications business on customers in the Eastern United States. This national
expansion has resulted in increased rent and related office expenses,
depreciation, travel and delivery expenses as a percentage of revenue. In
addition, the Company has introduced its Glowpoint network and incurred $1.0
million in recurring costs in the 2001 period offset by minimal recognized
revenue from this new service offering.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.8 million in the 2001 period to $3.2 million as compared to $1.4 million for
the 2000 period. General and adminstrative expenses increased $1.0 million in
the June 2001 quarter from $0.8 million for the June 2000 quarter. The inclusion
of VTI general and administrative expenses from the merger date through the end
of the reporting period was the significant factor behind these increases.
General and administrative expenses as a percentage of net revenues for 2001
period declined as a percentage of revenues from 7.9% in the 2000 period to 7.8%
in the 2001 period.
AMORTIZATION OF GOODWILL. Amortization expense attributable to the VTI,
2CONFER, JBC and GeoVideo acquisitions for the 2001 period totaled approximately
$1.3 million as compared to $0.3 million in the 2000 period. Goodwill
amortization totaled $0.6 million for the June 2001 quarter as compared to $0.3
million in the June 2000 quarter.
8
OTHER (INCOME) EXPENSES. The principal component of this category, interest
expense, increased approximately $264,000 to $318,000 in the 2001 period as a
result of increased borrowings under the Company's line of credit and interest
paid on vendor financed purchases.
INCOME TAXES. The Company incurred no income tax expense in the 2001
period. The Company established a valuation allowance in the 2001 period to
offset the tax benefits of the current period operating loss because realization
is considered uncertain. The Company does, however, currently maintain a
$200,000 deferred income tax asset on its balance sheet which it does believe to
be realizable within the next twelve months. The Company realized an income tax
benefit in the June 2000 quarter.
NET LOSS. The Company reported a net loss attributable to common
stockholders for the 2001 period of $(8.2) million, or $(.46) per diluted share,
as compared to a net loss attributable to common stockholders of $(8.8) million,
or $(1.03) per diluted share for the 2000 period. After giving effect to the
$4.4 million in deemed dividends on series A preferred stock, the Company
reported a net loss of $(3.8) million for the 2001 period. After giving effect
to the $8.2 million in deemed dividends on Series A preferred stock, the Company
reported a net loss of $(0.6) million for the 2000 period. The $(3.8) million
net loss for the 2001 period primarily results from depreciation and
amortization charges totaling $2.8 million, net interest expense of $0.3 million
and $1.0 million of costs related to the Glowpoint network service offering.
EBITDA for the 2001 period was $(0.3) million.
Liquidity and Capital Resources
At June 30, 2001, the Company had working capital of $14.5 million compared
to $19.9 million at December 31, 2000, a decrease of approximately 27%. The
Company had $1.0 million in cash and cash equivalents at June 30, 2001 compared
to $1.9 million at December 31, 2000. The $5.4 million decline in working
capital resulted from reclassifying the Company's bank loan payable from
long-term to current liabilities as of June 30, 2001 ($3.0 million impact) and
funding its operating activities out of working capital ($2.4 million impact).
Net cash used in operating activities for the 2001 period was $(3.1)
million as compared to net cash used in operations of $(3.3) million during the
2000 period. Sources of operating cash in 2001 included increases in accounts
payable of $1.0 million and in deferred revenue of $0.5 million. An increase in
accounts receivable balances of $2.8 million and payments of accrued expenses of
$0.8 million were the primary uses of operating cash in the 2001 period.
Investing activities for the 2001 period included purchases of $4.3 million
of network, bridging and computer equipment, primarily for the Glowpoint
division. In addition, cash costs incurred in connection with prior consummated
mergers and acquisitions totaled $0.1 million.
Financing activities in the 2001 period included net borrowings under the
Company's revolving credit line totaling $3.9 million and the issuance of $2.5
million of common stock for the assets of GeoVideo.
The Company's credit facility contains certain financial and operational
covenants. For the 2001 Second Quarter, the Company was in violation of the
interest coverage ratio covenant. On August 13, 2001, the Company received a
waiver from the lender regarding this requirement for the 2001 Second Quarter.
At June 30, 2001, the loan has been classified as current in the company's
balance sheet because this facility matures in less than one year.
In August 2001, the Company raised gross proceeds of $11 million in a
private placement of 2,200,000 shares of its common stock at a price of $5.00
per share. Investors in the private placement also received five-year warrants
to purchase 814,000 shares of Wire One common stock at an exercise price of
$6.25 per share. The warrants are subject to certain anti-dilution protection.
The Company also issued to its placement agent five-year warrants to purchase
220,000 shares of common stock for $5.00 per share.
Management believes, based upon current circumstances, that it has adequate
capital resources to support expected operating levels for the next twelve
months.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to interest rate risk related to its cash equivalents
portfolio. The primary objective of the Company's investment policy is to
preserve principal while maximizing yields. The Company's cash equivalents
portfolio is short-term in nature, therefore changes in interest rates will not
materially impact the Company's consolidated financial condition. However, such
interest rate changes can cause fluctuations in the Company's results of
operations and cash flows.
The Company maintains borrowings under a $15 million working capital credit
facility with Summit Commercial/Gibraltar Corp. that are not subject to material
market risk exposure except for such risks relating to fluctuations in market
interest rates. The carrying value of these borrowings approximates fair value
since they bear interest at a floating rate based on the "prime" rate. There are
no other material qualitative or quantitative market risks particular to the
Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As more fully set forth in Item 3 of the Company's Report on Form 10-K for
the year ended December 31, 2001, the Company is the defendant in a lawsuit
brought by Maxbase, Inc. ("Maxbase") in New Jersey state court. In June
2001, following a trial on Maxbase's breach of contract claim, the court,
which heard the case without a jury, issued an opinion awarding Maxbase
damages totaling approximately $650,000. In connection with its application
for a judgement based upon that opinion, Maxbase has requested an
additional award of approximately $94,000, representing pre-judgement
interest. The Company is contesting the plaintiff's application for
pre-judgement interest and in any event plans to appeal the court's opinion
(including the underlying grant of summary judgement to Maxbase that
established the Company's liability). Based upon this opinion, the Company
has previously accrued $250,000 related to this matter but has recorded no
further accrual as the Company believes that the claims made by MaxBase are
without merit. The Company does not anticipate that this proceeding will in
any event have a material adverse effect on its business, financial
condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 4, 2001, the Company issued an aggregate of 815,661 shares of its
Common Stock, five-year warrants to purchase an aggregate of 501,733 shares
of its Common Stock at a price of $5.50 per share and five-year warrants to
purchase an aggregate of 520,123 shares of its common stock at a price of
$7.50 per share. The Company issued these securities to the equity owners
of GeoVideo Networks, Inc. in exchange for certain assets of GeoVideo
Networks, Inc., including substantially all of its intellectual property
assets, its fixed information technology assets and $2,500,000 in cash. The
offer and sale of these securities were exempt from registration under the
Securities Act of 1933 in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act and Rule 506 under the
Securities Act as a transaction not involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting ("Annual Meeting") of Stockholders of Wire One
Technologies, Inc. was held on May 25, 2001.
The 16,067,465 shares of Common Stock ("Common Stock") present at the
Annual Meeting out of a then total of 17,317,544 shares outstanding and
entitled to vote acted as follows with respect to the following proposals
with the following results:
1. (a) The election of Leo Flotron to the Board of Directors was
approved:
For: 15,989,516 Against: 78,044 Abstain: 0 Broker Non-Votes: 0
(b) The election of Peter Maluso to the Board of Directors was
approved:
For: 15,989,516 Against: 78,044 Abstain: 0 Broker Non-Votes: 0
2. The issuance by the Company of more than 20% of its common stock upon
conversion of shares of series A convertible preferred stock and
exercise of the related warrants was approved:
For: 9,161,481 Against: 293,246 Abstain: 15,038
Broker Non-Votes: 6,597,795
3. The ratification of the appointment of BDO Seidman as independent
auditors was approved.
For: 15,960,708 Against: 93,206 Abstain: 13,646
Broker Non-Votes: 0
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.44 Asset Purchase Agreement, made as of the 30th day of May, 2001, by
and among Wire One Technologies, Inc., GeoVideo Networks, Inc., Thomas
Weisel Capital Partners LLC, Crest Communications Partners LP, East River
Ventures II LP, and Lucent Technologies, Inc.
10.45 Class A Warrant to Purchase Common Stock of Wire One Technologies,
Inc.
10.46 Class B Warrant to Purchase Common Stock of Wire One Technologies,
Inc.
(b) Reports on Form 8-K
None.
10
Signatures
In accordance with 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.
WIRE ONE TECHNOLOGIES, INC.
Registrant
Date: August 14, 2001 By: /s/ Richard Reiss
------------------------
Richard Reiss,
President and Chief Executive Officer
Date: August 14, 2001 By: /s/ Christopher Zigmont
------------------------
Christopher Zigmont
Chief Financial Officer
(principal financial and accounting officer)
11