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 September 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
November 12, 2001 was 24,775,244.
WIRE ONE TECHNOLOGIES, INC
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements *
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 1
Consolidated Statements of Operations
For the Nine Months and Three Months Ended
September 30, 2001 and 2000 2
Consolidated Statements of Cash Flows
For the Nine Months Ended September 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 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
* 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
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 5,669,339 $ 1,870,573
Accounts receivable-net 30,474,453 24,665,143
Inventory 13,221,260 10,105,911
Deferred income taxes -- 200,000
Net assets of discontinued operations 1,732,847 3,080,964
Other current assets 1,554,087 1,315,432
------------------ -----------------
Total current assets 52,651,986 41,238,023
Furniture, equipment and leasehold improvements-net 9,851,443 6,726,562
Goodwill-net 40,238,429 36,065,945
Other assets 365,150 341,813
------------------ -----------------
Total assets $ 103,107,008 $ 84,372,343
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan payable $ 9,429,382 $ --
Accounts payable 13,568,405 11,290,803
Accrued expenses 2,121,309 2,568,627
Deferred revenue 7,738,710 7,287,690
Customer deposits -- 68,150
Current portion of capital lease obligations 55,796 101,643
------------------ -----------------
Total current liabilities 32,913,602 21,316,913
------------------ -----------------
Noncurrent liabilities:
Bank loan payable -- 3,000,000
Capital lease obligations, less current portion 26,259 26,067
------------------ -----------------
Total noncurrent liabilities 26,259 3,026,067
------------------ -----------------
Total liabilities 32,939,861 24,342,980
Commitments
Preferred stock, $.0001 par value;
5,000,000 shares authorized, no shares issued and outstanding -- 10,371,096
Stockholders' Equity:
Common Stock, $.0001 par value; 100,000,000 authorized;
24,187,858 and 17,299,725 shares outstanding, respectively 2,416 1,730
Treasury Stock (239,745) --
Additional paid-in capital 98,077,360 66,436,353
Accumulated deficit (27,672,884) (16,779,816)
------------------ -----------------
Total stockholders' equity 70,167,147 49,658,267
------------------ -----------------
------------------ -----------------
Total liabilities, preferred stock and stockholders' equity $ 103,107,008 $ 84,372,343
================== =================
See accompanying notes to consolidated financial statements.
Wire One Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenues
Video Solutions $ 57,471,787 $ 28,689,000 $ 21,650,787 $ 15,589,000
Video Network 2,483,798 846,684 664,194 617,305
------------ ------------ ------------ ------------
59,955,585 29,535,684 22,314,981 16,206,305
Cost of revenues
Video Solutions 39,265,069 19,482,000 15,352,068 10,572,000
Video Network 2,008,505 608,306 618,507 436,541
------------ ------------ ------------ ------------
41,273,574 20,090,306 15,970,575 11,008,541
Gross margin
Video Solutions 18,206,718 9,207,000 6,298,719 5,017,000
Video Network 475,292 238,378 45,687 180,764
------------ ------------ ------------ ------------
18,682,010 9,445,378 6,344,406 5,197,764
Operating expenses:
Selling 17,422,226 7,792,072 6,109,456 4,126,224
General and administrative 4,818,610 2,599,475 1,658,918 1,249,381
Amortization of goodwill 2,000,564 859,831 729,841 591,048
------------ ------------ ------------ ------------
Total operating expenses 24,241,400 11,251,378 8,498,215 5,966,653
------------ ------------ ------------ ------------
Loss from continuing operations (5,559,390) (1,806,000) (2,153,809) (768,889)
------------ ------------ ------------ ------------
Other (income) expense
Amortization of deferred
financing costs 62,735 334,410 40,974 9,055
Interest income (56,817) (291,508) (16,765) (146,573)
Interest expense 445,950 67,118 128,083 13,634
------------ ------------ ------------ ------------
Total other expenses, net 451,868 110,020 152,293 (123,884)
------------ ------------ ------------ ------------
Income tax provision 200,000 -- 200,000 --
------------ ------------ ------------ ------------
Loss from continuing operations (6,211,258) (1,916,020) (2,506,102) (645,005)
Income (loss) from discontinued
operations (247,907) 859,763 (142,421) 203,935
------------ ------------ ------------ ------------
Net loss (6,459,165) (1,056,257) (2,648,523) (441,070)
Deemed dividends on series A
convertible preferred stock 4,433,904 8,606,877 -- 427,322
------------ ------------ ------------ ------------
Net loss attributable
to common stockholders $(10,893,069) $ (9,663,134) $ (2,648,523) $ (868,392)
============ ============ ============ ============
Loss from continuing operation per
share (basic and diluted) $ (0.55) $ (0.93) $ (0.10) $ (0.06)
============ ============ ============ ============
Income (loss) from discontinued operations
per share (basic and diluted) $ (0.01) $ 0.08 $ (0.01) $ 0.01
============ ============ ============ ============
Net loss per share (basic and diluted) $ (0.56) $ (0.85) $ (0.11) $ (0.05)
============ ============ ============ ============
Weighted average number of
common shares
Basic and diluted 19,570,351 11,324,374 23,146,204 16,878,118
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
Wire One Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
-------------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,459,165) $ (1,056,257)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,718,478 2,073,208
Non cash compensation 326,589 130,002
Deferred income taxes 200,000 --
Discontinued operations 247,907 (859,763)
Increase (decrease) in cash attributable to changes in assets
and liabilities net of activity of acquired businesses:
Accounts receivable (5,512,323) (9,320,692)
Inventory (2,461,051) (3,322,999)
Other current assets (926,651) (946,366)
Other assets (81,663) 4,180
Accounts payable (72,793) (2,471,240)
Accrued expenses (865,473) 1,425
Income taxes payable -- (132,130)
Deferred revenue 162,842 1,681,557
Customer deposits (900,756) 244,082
------------ ------------
Net cash used in operating activities (11,624,059) (13,974,993)
------------ ------------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 1,100,210 825,217
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, equipment and leasehold improvements (5,393,589) (1,886,861)
Costs related to acquisition of businesses including cash acquired 66,468 (2,029,831)
------------ ------------
Net cash used by investing activities (5,327,121) (3,916,692)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common stock offering, net 10,069,328 --
Proceeds from preferred stock offering, net -- 16,150,000
Issuance of common stock for cash assets of GeoVideo
Networks, Inc. 2,500,000 --
Exercise of warrants and options, net 738,872 8,782,287
Payment of subordinated notes -- (1,500,000)
Deferred financing costs -- (74,314)
Proceeds from bank loans 62,199,731 3,350,000
Payments on bank loans (55,770,350) (7,035,185)
Payments on capital lease obligations (87,845) (90,273)
------------ ------------
Net cash provided by financing activities 19,649,736 19,582,515
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,798,766 2,516,047
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,870,573 60,019
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,669,339 $ 2,576,066
============ ============
Supplemental disclosures of cash flow information: Cash paid (received)
during the period for:
Interest $ 445,950 $ 67,118
============ ============
Income taxes $ 13,387 $ 7,798
============ ============
Non cash financing and investing activities:
During the nine month periods ended September 30, 2001 and 2000, the Company
recorded non-cash deemed dividends on Series A mandatorily redeemable
convertible preferred stock of $4,433,904 and $8,606,877, respectively.
On June 4, 2001, the Company acquired the non-cash assets of GeoVideo
Networks, Inc. for non-cash consideration of $2,500,000.
On July 17, 2001, the Company acquired the net assets of Advanced Acoustical
Concepts, Inc. for non-cash consideration of $793,750.
During the nine month period ended September 30, 2001, the Company issued
3,017,143 shares of $0.0001 par 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.
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 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 nine months ended September 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.
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Note 3 - Effect of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations ("FAS 141"), and No. 142,
Goodwill and Other Intangible Assets ("FAS" 142). FAS 141 requires the use
of the purchase method of accounting and prohibits the use of the
pooling-of-interest method of accounting for business combinations
initiated after June 30, 2001. FAS 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. FAS 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon
adoption of FAS 142, that the Company reclassifies, if necessary, the
carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible assets,
and cease amortization of intangible assets with an indefinite useful life.
An intangible asset with an indefinite useful life should be tested for
impairment in accordance with the guidance in FAS 142. FAS 142 is required
to be applied in fiscal years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized at that date, regardless of
when those assets were initially recognized. FAS 142 requires the Company
to complete a transitional goodwill impairment test six months from the
date of adoption. The Company is also required to reassess the useful lives
of other intangible assets within the first interim quarter after adoption
of FAS 142.
With respect to the Company's business combinations that were effected
prior to June 30, 2001, using the purchase method of accounting, the net
carrying amounts of the resulting goodwill as of September 30, 2001 was
$40,238,429. Amortization expense during the nine-month period ended
September 30, 2001 was $2,000,564. At present, the Company is currently
assessing, but has not yet determined, the impact that the adoption of FAS
141 and FAS 142 will have on its financial position and results of
operations.
In August 2001, The FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS 144"). The new guidance
resolves significant implementation issues related to FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("FAS 121"). FAS 144 supercedes FAS 121, but it
retains its fundamental provisions. It also amends Account Research
Bulletin No. 51, Consolidated Financial Statements, to eliminate the
exception to consolidate a subsidiary for which control is likely to be
temporary. FAS 144 retains the requirement of FAS 121 to recognize an
impairment loss only if the carrying amount of a long-lived asset within
the scope of FAS 144 is not recoverable from its undiscounted cash flows
and exceeds its fair value.
FAS 144 is effective for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The provisions of FAS 144 generally are to be applied
prospectively. The Company believes that the adoption of FAS 144 will not
have a material impact on the Company's financial position or results of
operations.
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Note 4 - 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.
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted average shares outstanding 19,570,351 11,324,374 23,146,204 16,878,118
Effect of dilutive options and warrants -- -- -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding
including dilutive effect of securities 19,570,351 11,324,374 23,146,204 16,878,118
---------- ---------- ---------- ----------
Weighted average options and warrants to purchase 9,266,960 and 10,219,135
shares of common stock were outstanding during the nine months and three
months ended September 30, 2001. Weighted average options and warrants to
purchase 7,237,816 and 6,269,919 shares of common stock were outstanding
during the nine months and three months ended September 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.
Note 5 - 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 September 30, 2001, the interest rate on the facility
was 6.50%. The credit facility contains certain financial and operational
covenants. For the period from July 1, 2001 through September 30, 2001
("2001 Third Quarter"), the Company was in violation of the earnings before
interest, taxes, depreciation and amortization ("EBITDA") and interest
coverage ratio covenants. On November 13, 2001, the Company received a
waiver from the lender regarding these requirements for the 2001 Third
Quarter. At September 30, 2001, the loan has been classified as current in
the accompanying balance sheet because this facility matures in less than
one year.
Note 6 - Acquisition of Advanced Acoustical Concepts, Inc.
In July 2001, the Company acquired the assets and certain liabilities of
Dayton, Ohio-based Advanced Acoustical Concepts, Inc. ("AAC"). The acquired
operations of AAC, a privately held company founded in 1986, specialized in
complete solution design and integration of video and audiovisual products
into cost effective, ergonomic conferencing systems. These solutions are
marketed to the commercial, medical, distance learning, legal and financial
industries. In exchange for the acquired assets and assumed liabilities,
Wire One issued 145,429 shares of Wire One common stock at an exercise
price of $5.46 per share. On the date of the acquisition, the assets and
certain liabilities were
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
Note 6 - Acquisition of Advanced Acoustical Concepts, Inc. (continued)
recorded at their fair values, with the excess purchase consideration
allocated to goodwill.
Purchase Price Allocation:
AAC assets acquired $ 1,733,395
AAC liabilities assumed (3,931,524)
Goodwill 2,991,879
-----------
$ 793,750
===========
Note 7 - Private Placement of Common Stock
In August 2001, the Company raised net proceeds of $10.1 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 at an exercise price of
$5.00 per share.
Note 8 - Related Party Transaction
In August 2001, the Company loaned its Chief Financial Officer $210,000 to
facilitate his relocation to the East Coast from his former residence in
California. The loan bears interest at the rate of 8.25% and matures on
August 14, 2002; however, the loan is required to be prepaid within 10 days
following his receipt of net proceeds from the sale of (i) his home in
Thousand Oaks, California, or (ii) any shares of the Company's common stock
acquired by him upon exercise of any option to purchase such shares under
any Company stock option plan.
Note 9 - Subsequent Events
On October 24, 2001, the Company completed the sale of its voice
communications business unit to Fairfield, New Jersey-based Phonextra, Inc.
for approximately $2,017,000, half of which was paid in cash at the close
of the transaction and the balance of which was paid in the form of a
promissory note self-amortizing over one year. The Company's sale of its
voice communications unit was aimed at enabling it to sharpen its focus on
video solutions and on Glowpoint, its subscriber-based IP network dedicated
to video communications traffic. As a consequence, this unit has been
classified as a discontinued operation in the third quarter financial
statements, with its net assets and results of operations summarized in
single line items on the Company's balance sheet and income statement.
Assets and liabilities to be disposed of consists of the following:
September 30, December 31,
2001 2000
----------- -----------
Accounts receivable $ 1,925,472 $ 2,949,026
Inventory 503,111 645,433
Prepaid expenses 44,047 --
Accounts payable (549,653) (513,495)
Accrued expenses (83,508) --
Customer deposits (106,622) --
----------- -----------
Total $ 1,732,847 $ 3,080,964
=========== ===========
Results of operations are as follows:
Nine Months Ended Three Months Ended
-------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues $ 5,032,898 $5,861,616 $ 1,966,394 $2,080,862
Costs and expenses 5,280,805 5,001,853 2,108,815 1,876,927
----------- ---------- ----------- ----------
Net income (loss) ($ 247,907) $ 859,763 ($ 142,421) $ 203,935
=========== ========== =========== ==========
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 market share leader, Polycom, Inc. ("Polycom") which accounts for
over 50% of the installed videoconferencing endpoints in the United States. 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 communications 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 3,000 customers who
collectively have approximately 15,000 videoconferencing endpoints.
The Company was formed on May 18, 2000 by the merger of ACC and VTI. VTI
(renamed Wire One Technologies, Inc. upon the merger) 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. 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. 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. 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 respective dates of each of these
acquisitions, the assets and certain liabilities of the acquired operations were
recorded at their fair values, with the excess purchase consideration allocated
to goodwill.
On October 24, 2001, the Company completed the sale of its voice communications
business unit to Fairfield, N.J.-based Phonextra, Inc. for approximately
$2,017,000, half of which was paid in cash at the close of the transaction and
the balance of which was paid in the form of a promissory note self-amortizing
over one year. The Company's sale of its voice communications unit was aimed at
enabling it to sharpen its focus on video solutions and on Glowpoint, its
subscriber-based IP network dedicated to video communications traffic. As a
consequence, this unit has been classified as a discontinued operation in the
third quarter financial statements, with its net assets and results from
operations summarized in single line items on the Company's balance sheet and
income statement.
Wire One Technologies, Inc.
Results of Operations
(Unaudited)
Nine Months Ended September 30, Three Months Ended September 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
-------------- -------------- ------------- -------------
Revenues
Video Solutions 95.9% 97.1% 97.0% 96.2%
Network Solutions 4.1% 2.9% 3.0% 3.8%
-------------- -------------- ------------- -------------
100.0% 100.0% 100.0% 100.0%
Cost of revenues
Video Solutions 68.3% 67.9% 70.9% 67.8%
Network Solutions 80.9% 71.8% 93.1% 70.7%
-------------- -------------- ------------- -------------
68.8% 68.0% 71.6% 67.9%
Gross margin
Video Solutions 31.7% 32.1% 29.1% 32.2%
Network Solutions 19.1% 28.2% 6.9% 29.3%
-------------- -------------- ------------- -------------
31.1% 32.0% 28.4% 32.1%
Operating expenses:
Selling 29.1% 26.4% 27.4% 25.5%
General and administrative 8.0% 8.8% 7.4% 7.7%
Amortization of goodwill 3.3% 2.9% 3.3% 3.6%
-------------- -------------- ------------- -------------
Total operating expenses 40.4% 38.1% 38.1% 36.8%
-------------- -------------- ------------- -------------
Loss from continuing operations 9.3% -6.1% -9.7% -4.7%
-------------- -------------- ------------- -------------
Other (income) expense
Amortization of deferred
financing costs 0.1% 1.2% 0.2% 0.1%
Interest income -0.1% -1.0% -0.1% -0.9%
Interest expense 0.8% 0.2% 0.5% 0.1%
-------------- -------------- ------------- -------------
Total other expenses, net 0.8% 0.4% 0.6% -0.7%
-------------- -------------- ------------- -------------
Income tax provision 0.3% 0.0% 0.9% 0.0%
-------------- -------------- ------------- -------------
Loss from continuing operations -10.4% -6.5% -11.2% -4.0%
Income (loss) from discontinued operations
operations -0.4% 2.9% -0.6% 1.3%
-------------- -------------- ------------- -------------
Net loss -10.8% -3.6% -11.8% -2.7%
Deemed dividends on series A convertible
preferred stock 7.4% 29.1% 0.0% 2.6%
-------------- -------------- ------------- -------------
Net loss attributable to common
stockholders -18.2% -32.7% -11.8% -5.3%
============== ============== ============= =============
Nine Months Ended September 30, 2001 ("2001 period") Compared to Nine Months
Ended September 30, 2000 ("2000 period") and Three Months Ended September 30,
2001 ("September 2001 quarter") Compared to Three Months Ended September 30,
2000 ("September 2000 quarter").
NET REVENUES. The Company reported net revenues of $60.0 million for the
2001 period, an increase of $30.5 million, or 103%, over the $29.5 million in
revenues reported for the 2000 period. Net revenues of $22.3 million for the
September 2001 quarter represent an increase of $6.1 million, or 38%, over the
$16.2 million reported for the September 2000 quarter. Although the operations
of acquired companies have now been fully integrated into the Company,
management estimates that approximately $11.0 million of the $30.5 million
increase in revenues for the 2001 period over the 2000 period related to the
core businesses in existence before contributions from VTI, 2CONFER, JBC and AAC
and $19.5 million in revenues from VTI, 2CONFER, JBC and AAC accounted for the
remainder of the growth. In addition, management estimates that approximately
$2.7 million of the $6.1 million increase in revenues for the September 2001
quarter over the September 2000 quarter related to core businesses in existence
before contributions from VTI, 2CONFER, JBC and AAC and $3.4 million in revenues
from VTI, 2CONFER, JBC and AAC accounted for the remainder of the growth.
Video solutions -- Sales of video communications products and services were
$57.5 million in the 2001 period, an increase of $28.8 million, or 100%, over
the $28.7 million in the the 2000 period. Net revenues of $21.7 million for the
September 2001 quarter represent an increase of $6.1 million, or 39%, over the
$15.6 million reported for the September 2000 quarter. Management estimates that
approximately $9.8 million of the $28.8 million increase in revenues for the
2001 period over the 2000 period related to the core businesses in existence
before contributions from VTI, 2CONFER, JBC and AAC and $19.0 million in
revenues from VTI, 2CONFER, JBC and AAC accounted for the remainder of the
growth. In addition, management estimates that approximately $2.7 million of the
$6.1 million increase in revenues for the September 2001 quarter over September
2000 quarter related to core businesses in existence before contributions from
VTI, 2CONFER, JBC and AAC and $3.4 million in revenues from VTI, 2CONFER, JBC
and AAC accounted for the remainder of the growth. 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. The
growth experienced in the September 2001 quarter resulted primarily from greater
than anticipated demand from the Company's corporate customers as well as
particularly strong performance in the Company's Federal Government sales unit.
Quarterly growth was positively impacted by the continuing migration of numerous
organizations to videoconferencing as an alternative to corporate travel.
Video network - Sales of video network services were $2.5 million in the
2001 period, an increase of $1.7 million, or 213%, over the $0.8 million in the
2000 period. Net revenues of $0.7 million for the September 2001 quarter
represent an increase of $0.1 million, or 8%, over the $0.6 million reported for
the September 2000 quarter. Management estimates that approximately $0.2 million
of the $1.7 million increase in revenues for the 2001 period over the 2000
period related to growth resulting from the introduction of the Glowpoint
network and $1.5 million in revenues from VTI's H.320 bridging service accounted
for the remainder of the growth. The $0.1 million increase in revenues for the
September 2001 quarter over the September 2000 quarter related to the
introduction of the Glowpoint network.
GROSS MARGINS. Gross margins were $18.7 million in the 2001 period, an
increase of $9.3 million over the 2000 period. Gross margins decreased in the
2001 period to 31.2% of net revenues, as compared to 32.0% of net revenues in
the 2000 period. This decrease resulted primarily from the decline in gross
margin in the video solutions business from 32.1% to 31.7% that was negatively
impacted by the third quarter gross margin performance of this business. Gross
margins were $6.3 million in the September 2001 quarter, an increase of $1.1
million over the September 2000 quarter.
Gross margins decreased in the September 2001 quarter to 28.4% of net
revenues, as compared to 32.1% of net revenues in the September 2000 quarter.
Approximately .7% of the decline from the September 2000 quarter to the
September 2001 quarter related to the network solutions business, which absorbed
fixed costs of the Glowpoint network against an as-of-yet relatively small
revenue figure for these activities. The video solutions business accounted for
the remaining 3.0% of the decline. This decline was the result of three
key-factors: the disproportionate amount of low-margin sales of large multipoint
bridge equipment in the current quarter's revenues accounting for 1.5% of the
3.7% decline in margin; the disproportionate amount of below normal-margin sales
to the Federal Government accounting for 0.5% of the decline; and the overall
competitive pressures in the market resulting from the relatively weak economy
accounting for the remaining 1.0% decline.
SELLING. Selling expenses, which include sales salaries, commissions,
overhead, and marketing costs, increased $9.6 million in the 2001 period to
$17.4 million from $7.8 million for the 2000 period. Selling expenses increased
$2.0 million to $6.1 million in the September 2001 quarter from $4.1 million for
the September 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, JBC and AAC. The increase in selling expenses as a
percentage of net revenues in the 2001 period and the September 2001 quarter
resulted from the continued expansion of the video solutions 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, in connection with
the introduction of its Glowpoint network the Company incurred $1.7 million in
recurring costs in the 2001 period and $0.7 million in recurring costs in the
September 2001 quarter offset by minimal recognized revenue from this new
service offering.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$2.2 million in the 2001 period to $4.8 million as compared to $2.6 million for
the 2000 period. General and administrative expenses increased $0.5 million to
$1.7 million in the September 2001 quarter from $1.2 million for the September
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 8.8% in
the 2000 period to 8.0% in the 2001 period and for the September 2001 quarter
declined as a percentage of revenues from 7.7% to 7.4%. Management continues to
leverage the general and administrative infrastructure costs of its Executive,
Finance, Legal and Human Resource groups over a greater revenue base.
AMORTIZATION OF GOODWILL. Amortization expense attributable to the VTI,
2CONFER, JBC, GeoVideo and AAC acquisitions for the 2001 period totaled
approximately $2.0 million as compared to $0.9 million in the 2000 period. The
increase is due to the 2001 period having a full impact of goodwill amortization
related to the VTI merger. Goodwill amortization totaled $0.7 million for the
September 2001 quarter as compared to $0.6 million in the September 2000 quarter
with the increase related to the JBC, GeoVideo and AAC acquisitions which were
consummated after September 30, 2000.
OTHER (INCOME) EXPENSES. Other expenses increased $342,000 to $452,000 in
the 2001 period from $110,000 in the 2000 period. The principal component of
this category, interest expense, increased approximately $379,000 to $446,000 in
the 2001 period as a result of increased borrowings under the Company's line of
credit and interest paid on vendor financed purchases. Other expenses increased
$276,000 to $152,000 in the September 2001 quarter from other income of $124,000
in the September 2000 quarter. An increase in interest expense of $114,000 and a
decrease in interest income of $130,000 account for the change as the Company
employed capital raised in June 2000 in acquisitions and investments in its
Glowpoint network and began borrowing under its line of credit to finance
operations.
INCOME TAXES. The Company incurred $200,000 of income tax expense in the
2001 period as compared to no income tax expense in the 2000 period as the
Company established a valuation allowance in the 2001 period to offset the tax
benefits of the current and prior periods' operating losses because realization
is considered uncertain.
DISCONTINUED OPERATIONS. The Company incurred a loss from discontinued
operations in the 2001 period of $248,000 as compared to income from
discontinued operations in the 2000 period of $860,000. A loss from discontinued
operations of $142,000 was incurred in the September 2001 quarter as compared to
income from discontinued operations of $204,000 in the September 2000 quarter.
These declines in income from discontinued operations resulted from lower
revenues to cover the fixed costs of the voice communications unit and higher
costs of revenues as competitive pressures reduced gross margins.
NET LOSS. The Company reported a net loss attributable to common
stockholders for the 2001 period of $(10.9) million, or $(.56) per diluted
share, as compared to a net loss attributable to common stockholders of $(9.7)
million, or $(.85) per diluted share for the 2000 period. After giving effect to
the $4.4 million in deemed dividends on its series A preferred stock, the
Company reported a net loss of $(6.5) million for the 2001 period. After giving
effect to the $8.6 million in deemed dividends on its Series A preferred stock,
the Company reported a net loss of $(1.1) million for the 2000 period. The
$(6.5) million net loss for the 2001 period primarily results from depreciation
and amortization charges totaling $5.0 million, net interest expense of $0.4
million and $1.7 million of costs related to the Glowpoint network service
offering. EBITDA for the 2001 period was $(0.6) million. The Company reported a
net loss attributable to common stockholders for the September 2001 quarter of
$(2.6) million, or $(.11) per diluted share, as compared to a net loss
attributable to common stockholders of $(0.9) million, or $(.05) per diluted
share for the September 2000 quarter. After giving effect to the $0.4 million in
deemed dividends on its Series A preferred stock, the Company reported a net
loss of $(0.4) million for the September 2000 quarter. The $(2.6) million net
loss for the 2001 period primarily results from depreciation and amortization
charges totaling $1.8 million, net interest expense of $0.2 million and $0.7
million of costs related to the Glowpoint network service offering. EBITDA for
the September 2001 quarter was $(0.3) million.
Liquidity and Capital Resources
At September 30, 2001, the Company had working capital of $19.7 million
compared to $19.9 million at December 31, 2000, a decrease of approximately
1.0%. The Company had $5.7 million in cash and cash equivalents at September 30,
2001 compared to $1.9 million at December 31, 2000. The $0.2 million decline in
working capital resulted from the following items: equity capital raised of
$13.3 million, offset by the purchase of $5.4 million of capital expenditures,
the pay-down of $3.0 million of long-term debt and funding $1.7 million in
Glowpoint network recurring costs.
Net cash used in operating activities for the 2001 period was $(11.6)
million as compared to net cash used in operations of $(14.0) million during the
2000 period. An increase in accounts receivable balances of $5.5 million,
inventory of $2.5 million and other current assets of $0.9 million were the
primary uses of operating cash in the 2001 period.
Investing activities for the 2001 period included purchases of $5.4 million
of network, bridging and computer equipment and software, primarily for the
Company's Glowpoint network.
Financing activities in the 2001 period included net borrowings under the
Company's revolving credit line totaling $6.4 million, the issuance of $2.5
million of common stock for the assets of GeoVideo and the issuance of common
stock in a private placement yielding net proceeds of $10.1 million.
The Company's credit facility contains certain financial and operational
covenants. For the period from July 1, 2001 through September 30, 2001 ("2001
Third Quarter"), the Company was in violation of the earnings before interest,
taxes, depreciation and amortization ("EBITDA") and interest coverage ratio
covenants. On November 13, 2001, the Company received a waiver from the lender
regarding these requirements for the 2001 Third Quarter. At September 30, 2001,
the loan has been classified as current in the accompanying balance sheet
because this facility matures in less than one year.
In August 2001, the Company raised net proceeds of $10.1 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 at an exercise price of $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.
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 September 2001, the court entered a judgment against
the Company in the amount of approximately $745,000, which includes an award to
Maxbase of approximately $92,000 of pre-judgment interest. The Company appealed
the court's judgment (including the underlying grant of summary judgment to
Maxabase that established the Company's liability); as a condition to its right
to appeal, the Company has posted a bond with the court in the amount of
$900,000 which includes an additional approximately $155,000 to cover additional
interest on the judgment, as well as Maxbase's attorneys' fees on the appeal
should Maxbase prevail. Based upon this, 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 July 17, 2001, the Company issued an aggregate of 145,429 shares of its
Common Stock at a price of $5.46 per share. The Company issued these
securities to the equity owners of Advanced Acoustical Concepts, Inc., in
exchange for certain assets of Advanced Acoustical Concepts, Inc. including
substantially all of its accounts receivable, its inventory, its fixed
assets and $364,117 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.
On August 8, 2001, the Company raised gross proceeds of $11.0 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 at an exercise price of
$5.00 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Material Agreements
10.1 Form of Subscription Agreement, dated August 8, 2001*
10.2 Form of Registration Rights Agreement, dated as of August 8, 2001*
10.3 Form of Warrant to Purchase Common Stock, dated August 8, 2001*
10.4 Form of Warrant to Purchase Common Stock, dated August 8, 2001*
* Filed as an exhibit to Wire One Technologies, Inc.'s Registration Statement
on Form S-3 (File No. 333-69432) and incorporated herein by reference.
(b) Reports on Form 8-K
Current Report on Form 8-K (File No. 000-25940) related to the acquisition
of Advanced Acoustical Concepts, Inc. filed on July 17, 2001 and amended on
October 3, 2001 and incorporated herein by reference.
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: November 14, 2001 By: /s/ Richard Reiss
------------------------------------
Richard Reiss, President and
Chief Executive Officer
Date: November 14, 2001 By: /s/ Christopher Zigmont
------------------------------------
Christopher Zigmont Chief Financial Officer
(principal financial and accounting officer)