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 March 31, 2002.
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
May 9, 2002 was 28,933,801.
WIRE ONE TECHNOLOGIES, INC
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements *
Consolidated Balance Sheets
March 31, 2002 and December 31, 2001 1
Consolidated Statements of Operations
For the Three Months Ended March 31, 2002 and 2001 2
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
* The Balance Sheet at December 31, 2001 has been taken from the audited
financial statements at that date. All other financial statements are
unaudited.
Wire One Technologies, Inc.
Consolidated Balance Sheets
March 31, 2002 December 31, 2001
-------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,236,468 $ 1,689,451
Accounts receivable-net 31,320,859 35,471,482
Inventory 10,817,974 10,218,796
Other current assets 6,322,856 3,824,276
------------- -------------
Total current assets 51,698,157 51,204,005
Furniture, equipment and leasehold improvements-net 11,037,565 10,857,547
Goodwill-net 42,166,097 42,163,844
Other assets 401,071 274,089
------------- -------------
Total assets $ 105,302,890 $ 104,499,485
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan payable $ -- $ 10,628,082
Accounts payable 9,421,330 12,297,914
Accrued expenses 1,878,975 3,218,890
Deferred revenue 6,868,479 7,898,277
Other current liabilities -- 1,465,049
Current portion of capital lease obligations 45,246 56,912
------------- -------------
Total current liabilities 18,214,030 35,565,124
Capital lease obligations, less current portion 19,694 25,696
------------- -------------
Total liabilities 18,233,724 35,590,820
------------- -------------
Commitments
Stockholders' Equity:
Preferred stock, $.0001 par value;
5,000,000 shares authorized, none outstanding
Common Stock, $.0001 par value; 100,000,000 authorized;
28,933,801 and 25,292,189 shares outstanding,
respectively 2,892 2,529
Treasury stock (239,745) (239,742)
Additional paid-in capital 125,608,637 104,889,988
Accumulated deficit (38,302,618) (35,744,110)
------------- -------------
Total stockholders' equity 87,069,166 68,908,665
------------- -------------
------------- -------------
Total liabilities and stockholders' equity $ 105,302,890 $ 104,499,485
============= =============
See accompanying notes to consolidated financial statements.
1
Wire One Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Revenues
Video Solutions $ 23,904,714 $ 16,504,379
Video Network 1,099,421 811,670
------------ ------------
25,004,135 17,316,049
------------ ------------
Cost of revenues
Video Solutions 17,029,369 10,960,498
Video Network 969,541 612,000
------------ ------------
17,998,910 11,572,498
------------ ------------
Gross margin
Video Solutions 6,875,345 5,543,881
Video Network 129,880 199,670
------------ ------------
7,005,225 5,743,551
------------ ------------
Operating expenses
Selling 7,665,004 5,482,351
General and administrative 1,878,063 1,327,122
Amortization of goodwill -- 628,196
------------ ------------
Total operating expenses 9,543,067 7,437,669
------------ ------------
Loss from continuing operations (2,537,842) (1,694,118)
------------ ------------
Other (income) expense
Amortization of deferred financing costs 13,757 9,382
Interest income (19,330) (15,940)
Interest expense 26,239 90,507
------------ ------------
Total other expenses, net 20,666 83,949
------------ ------------
Income tax (benefit) provision -- --
------------ ------------
Net loss from continuing operations (2,558,508) (1,778,067)
Loss from discontinued operations -- (249,842)
------------ ------------
Net loss (2,558,508) (2,027,909)
Deemed dividends on series A convertible preferred stock -- 393,964
------------ ------------
Net loss attributable to common stockholders $ (2,558,508) $ (2,421,873)
============ ============
Net loss per share:
Basic $ (0.09) $ (0.14)
============ ============
Diluted $ (0.09) $ (0.14)
============ ============
Weighted average number of diluted common shares
Basic 28,323,809 17,327,577
============ ============
Diluted 28,323,809 17,327,577
============ ============
See accompanying notes to consolidated financial statements.
2
Wire One Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
------------ ------------
Cash flows from Operating Activities:
Net loss $ (2,558,508) $ (2,027,909)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,208,867 1,356,518
Non cash compensation 105,704 108,863
Discontinued operations -- 249,842
Increase (decrease) in cash attributable to changes in assets and
liabilities:
Accounts receivable 4,150,623 525,835
Inventory (599,178) 373,519
Other current assets (2,578,580) (202,632)
Other assets (140,739) (20,000)
Discontinued operations -- 471,770
Accounts payable (2,876,584) (1,339,038)
Accrued expenses (1,339,915) (1,008,080)
Deferred revenue (1,029,798) 511,173
Other current liabilities (1,465,049) (68,150)
------------ ------------
Net cash used by operating activities (7,123,157) (1,068,289)
------------ ------------
Cash flows From Investing Activities
Purchases of furniture, equipment and leasehold improvements (1,295,128) (2,538,590)
Costs related to acquisition of business including cash acquired (2,253) (94,293)
------------ ------------
Net cash used by investing activities (1,297,381) (2,632,883)
------------ ------------
Cash Flows From Financing Activities
Proceeds from common stock offering 20,257,962 --
Exercise of warrants and options, net 355,344 99,568
Proceeds from bank loans 3,018,910 16,545,482
Payments on bank loans (13,646,992) (14,532,633)
Payments on capital lease obligations (17,669) (38,807)
------------ ------------
Net cash provided by financing activities 9,967,555 2,073,610
------------ ------------
Increase (decrease) in Cash and Cash Equivalents 1,547,017 (1,627,562)
Cash and Cash Equivalents at Beginning of Period 1,689,451 1,870,573
------------ ------------
Cash and Cash Equivalents at End of Period $ 3,236,468 $ 243,011
============ ============
Supplement disclosures of cash flow information:
Cash paid during the period for:
Interest $ 26,239 $ 90,507
============ ============
Taxes $ -- $ 11,330
============ ============
Non cash financing and investing activities:
During the three months ended March 31, 2001 the Company recorded non-cash
deemed dividends on Series A mandatorily redeemable convertible preferred
stock of $393,964.
See accompanying notes to consolidated financial statements.
3
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
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.
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 three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2002. 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, 2001 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 -- 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
4
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 March 31, 2002 was
$36,775,028. No amortization expense was recorded for the three-month
period ended March 31, 2002. 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 FAS 121's 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 Company has early adopted the provisions of FAS 144 as of
December 31, 2001 to recognize discontinued business operations in its
financial statements.
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.
5
Three Months Ended
March 31,
--------------------------
2002 2001
---------- ----------
Weighted average shares outstanding 28,323,809 17,327,577
Effect of dilutive options and warrants -- --
---------- ----------
Weighted average shares outstanding
including dilutive effect of securities 28,323,809 17,327,577
========== ==========
Weighted average options and warrants to purchase 10,650,907 shares of
common stock were outstanding during the three months ended March 31,
2002. Weighted average options and warrants to purchase 8,375,556 shares
of common stock and preferred stock convertible into 2,115,000 common
shares were outstanding during the three months ended March 31, 2001.
These options, warrants and convertible preferred stock 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 March 31, 2002, the interest rate on the
facility was 5.25%. The credit facility contains certain financial and
operational covenants. For the period from January 1, 2002 through March
31, 2002 ("2002 First Quarter"), the Company was in violation of the
earnings before interest, taxes, depreciation and amortization ("EBITDA")
and interest coverage ratio covenants. On April 30, 2002, the Company
received a waiver from the lender regarding these requirements for the
2002 First Quarter. At March 31, 2002, there were no outstanding
borrowings under this facility and the loan has been classified as current
in the accompanying balance sheet because the facility matures in less
than one year.
Note 6 -- Private Placement of Common Stock
In January 2002, the Company raised net proceeds of $20.3 million in a
private placement of 3,526,500 shares of its common stock at a price of
$6.25 per share. Investors in the private placement also received
five-year warrants to purchase 864,375 shares of common stock at an
exercise price of $10.00 per share. The warrants are subject to certain
anti-dilution protection.
Note 7 -- Related Party Transaction
In March 2002, Wire One made a recourse loan to Leo Flotron, our Chief
Operating Officer and a member of our Board of Directors, in the amount of
$69,960 with a 5.25% per annum rate of interest. We extended the loan to
Mr. Flotron to enable him to exercise options (scheduled to expire
imminently) to purchase 33,000 shares of common stock. Mr. Flotron is
required to repay the loan from the proceeds of any sale of shares
acquired by him in connection with his exercise of any Wire One stock
option, but in no event later than one year after the loan was made.
6
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.
7
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 17,000 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.
We sell both products and services. Product revenue consists of revenue from the
sale of video communications equipment and is recognized at the time of
shipment, provided no significant obligations remain, collectibility is probable
and returns are estimable. Service revenue is derived from services rendered in
connection with the sale of new systems and the maintenance of previously
installed systems. Services rendered in connection with the sale of new systems
consist of engineering services related to system integration, technical
training and user training. The majority of the services are rendered at or
prior to installation, and all revenue is recognized when services are rendered.
Revenue related to extended service contracts is deferred and recognized over
the life of the extended service period. Revenues related to providing network
services (either H.323 Bridging or Glowpoint IP Network) are recognized on a
monthly basis for services rendered and detailed on a monthly bill.
In July 2000, we 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
our common stock valued at the time of acquisition at $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.
In October 2000, we 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 our common stock valued at the time of
acquisition at $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.
8
In June 2001, we 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, we issued 815,661 shares of our common stock, together with
warrants to purchase 501,733 additional shares of our common stock at $5.50 per
share and 520,123 shares at $7.50 per share. On the date of acquisition the
assets of GeoVideo were recorded at their fair values, with the excess purchase
consideration allocated to goodwill. A final appraisal of certain assets
included in the acquisition has not been completed. Pending the results of the
appraisal, the allocation among the various components of the purchase price may
change; however, any such reallocation will not materially affect our overall
financial position or results of operations.
In July 2001, we 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 our 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. A final
appraisal of certain assets included in the acquisition has not been completed.
Pending the results of the appraisal, the allocation among the various
components of the purchase price may change; however, any such reallocation will
not materially affect our overall financial position or results of operations.
In October 2001, we completed the sale of our 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
sale of our voice communications unit was aimed at enabling us to sharpen our
focus on video solutions and on Glowpoint, our subscriber-based IP network
dedicated to video communications traffic. As a consequence, this unit has been
classified as a discontinued operation in the accompanying financial statements.
In November 2001, we acquired certain assets and liabilities of the video
conferencing division of Axxis, Inc. ("Axxis"), a Kentucky-based designer of
audiovisual conferencing systems. The total consideration was $2,051,000, which
was paid in the form of our common stock valued at the time of acquisition. On
the date of acquisition, the acquired assets and liabilities were recorded at
their fair values, with the excess purchase consideration allocated to goodwill.
A final appraisal of certain assets included in the acquisition has not been
completed. Pending the results of the appraisal, the allocation among the
various components of the purchase price may change; however, any such
reallocation will not materially affect our overall financial position or
results of operations.
9
Wire One Technologies, Inc.
Results of Operations
(Unaudited)
Three Months Ended March 31,
----------------------------
2002 2001
----- -----
Revenues
Video Solutions 95.6% 95.3%
Video Network 4.4 4.7
----- -----
100.0 100.0
----- -----
Cost of revenues
Video Solutions 71.2 66.4
Video Network 88.2 75.4
----- -----
72.0 66.8
----- -----
Gross margin
Video Solutions 28.8 33.6
Video Network 11.8 24.6
----- -----
28.0 33.2
----- -----
Operating expenses
Selling 30.7 31.7
General and administrative 7.5 7.7
Amortization of goodwill 0.0 3.6
----- -----
Total operating expenses 38.2 43.0
----- -----
Loss from continuing operations (10.2) (9.8)
----- -----
Other (income) expense
Amortization of deferred financing costs 0.0 0.1
Interest income (0.1) (0.1)
Interest expense 0.1 0.5
----- -----
Total other expenses, net 0.0 0.5
----- -----
Income tax (benefit) provision 0.0 0.0
----- -----
Net loss from continuing operations (10.2) (10.3)
Loss from discontinued operations 0.0 (1.4)
----- -----
Net loss (10.2) (11.7)
Deemed dividends on series A convertible preferred stock 0.0 2.3
----- -----
Net loss attributable to common stockholders (10.2)% (14.0)%
===== =====
10
Three Months Ended March 31, 2002 ("2002 period") Compared to Three Months Ended
March 31, 2001 ("2001 period").
NET REVENUES. The Company reported net revenues of $25.0 million for the
2002 period, an increase of $7.7 million, or 45%, over the $17.3 million in
revenues reported for the 2001 period. Although the operations of acquired
companies have now been fully integrated into the Company, management estimates
that approximately $3.0 million of the $7.7 million increase in revenues for the
2002 period over the 2001 period related to the core businesses in existence
before contributions from AAC and Axxis and $4.7 million in revenues from AAC
and Axxis accounted for the remainder of the growth.
Video solutions -- Sales of video communications products and services
were $23.9 million in the 2002 period, an increase of $7.4 million, or 45%, over
the $16.5 million in the 2001 period. Management estimates that approximately
$2.7 million of the $7.4 million increase in revenues for the 2002 period over
the 2001 period related to the core businesses in existence before contributions
from AAC and Axxis and $4.7 million in revenues from AAC and Axxis accounted for
the remainder of the growth. The growth experienced in the 2002 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.
Video network -- Sales of video network services were $1.1 million in the
2002 period, an increase of $0.3 million, or 35%, over the $0.8 million in the
2001 period. Management estimates that approximately $0.4 million of the $0.3
million net increase in revenues for the 2002 period over the 2001 period
related to growth resulting from the introduction of the Glowpoint network and a
$0.1 million decrease in revenues from VTI's H.320 bridging service accounted
for the remainder of the change.
GROSS MARGINS. Gross margins were $7.0 million in the 2002 period, an
increase of $1.3 million over the 2001 period. Gross margins decreased in the
2002 period to 28.0% of net revenues, as compared to 33.2% of net revenues in
the 2001 period. This decrease resulted primarily from the decline in gross
margin in the video solutions business from 33.6% to 28.8%. In the 2002 period,
the Company experienced a continuation of a trend that has been experienced in
recent quarters, namely, the overall competitive pressures in the video
solutions business resulting from the relatively weak economy and downward
pricing pressure instigated by heavy competition for orders.
SELLING. Selling expenses, which include sales salaries, commissions,
overhead, and marketing costs, at $7.7 million in the 2002 period, were up $2.2
million from the $5.5 million reported for the 2001 period, but were down as a
percentage of revenue from 31.7% in the 2001 period to 30.7% in the 2002 period.
The decline was achieved as the Company continued to make investments in staff
and related costs for the Glowpoint division and the video solutions business
and increased its sales infrastructure with the acquisitions of AAC and Axxis.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$0.6 million in the 2002 period to $1.9 million as compared to $1.3 million for
the 2001 period. General and administrative expenses as a percentage of net
revenues for the 2002 period declined from 7.7% in the 2001 period to 7.5% in
the 2002 period. 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 was zero in the 2002 period
as the Company implemented the provisions of Financial Accounting Standards
Board Statement No. 142, Goodwill and Other Intangible Assets ("FAS 142").
Amortization expense in the 2001 period was $0.6 million.
OTHER (INCOME) EXPENSES. Other expenses decreased $63,000 to $21,000 in the
2002 period from $84,000 in the 2001 period. The principal component of this
category, interest expense, decreased approximately $64,000 to $26,000 in the
2002 period from $90,000 in the 2001 period. The decline in interest expense
resulted from paying down the outstanding balance under its bank line of credit
from the proceeds of its $20.3 million common stock offering early in the 2002
period.
11
DISCONTINUED OPERATIONS. With the sale of its voice communications business
in the fourth quarter of 2001, the Company had no results from discontinued
operations reported in the 2002 period. The Company incurred a loss from
discontinued operations in the 2001 period of approximately $250,000. The loss
from discontinued operations in the 2001 period 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 2002 period of $(2.5) million, or $(.09) per diluted share,
as compared to a net loss attributable to common stockholders of $(2.4) million,
or $(.14) per diluted share for the 2001 period. The $(2.5) million net loss for
the 2002 period primarily results from depreciation and amortization charges
totaling $1.3 million and $0.9 million of costs related to the Glowpoint network
service offering. EBITDA from continuing operations for the 2002 period was
$(1.2) million. The $(2.4) million net loss for the 2001 period primarily
results from depreciation and amortization charges totaling $1.5 million, $0.4
million in deemed dividends on series A preferred stock, a $0.25 million loss on
discontinued operations and $0.5 million of costs related to the Glowpoint
network service offering. EBITDA from continuing operations for the 2001 period
was $(0.2) million.
Liquidity and Capital Resources
At March 31, 2002, the Company had working capital of $33.5 million
compared to $15.6 million at December 31, 2001, an increase of approximately
114.7%. The Company had $3.2 million in cash and cash equivalents at March 31,
2002 compared to $1.7 million at December 31, 2001. The $17.9 million increase
in working capital resulted primarily from the January 2002 common stock
offering of $20.3 million, less the $2.5 million net loss for the 2002 period.
Net cash used in operating activities for the 2002 period was $(7.1)
million as compared to net cash used in operations of $(1.1) million during the
2001 period. An increase in inventory of $0.6 million and decreases in accounts
payable of $2.9 million, accrued expenses of $1.3 million, other current
liabilities of $1.5 million and negative EBITDA of $1.2 million were the primary
uses of operating cash in the 2002 period.
Investing activities for the 2002 period included purchases of $1.3 million
of network equipment and computer equipment and software, primarily for the
Company's Glowpoint network.
Financing activities in the 2002 period included the issuance of common
stock in a private placement yielding net proceeds of $20.3 million and a net
pay down of the Company's revolving credit line totaling $10.6 million.
In January 2002, the Company raised net proceeds of $20.3 million in a
private placement of 3,526,500 shares of its common stock at a price of $6.25
per share. Investors in the private placement also received five-year warrants
to purchase 864,375 shares of common stock at an exercise price of $10.00 per
share. The warrants are subject to certain anti-dilution protection. $12.0
million of the proceeds from the offering were used to pay down its bank line of
credit to zero. The remaining proceeds are being used to fund the continuing
development and marketing of our Glowpoint video communications network and for
general corporate purposes.
We currently have a $15.0 million working capital credit facility with an
asset-based lender. Borrowings under this facility bear interest at the lender's
base rate plus 1/2% per annum. At March 31, 2002, there were no outstanding
borrowings under this facility. The Company's credit facility contains certain
financial and operational covenants. For the period from January 1, 2002 through
March 31, 2002 ("2002 First Quarter"), the Company was in violation of the
earnings before interest, taxes, depreciation and amortization ("EBITDA") and
interest coverage ratio covenants. On April 30, 2002, the Company received a
waiver from the lender regarding these requirements for the 2002 First Quarter.
At March 31, 2002, the loan has been classified as current in the accompanying
balance sheet because this facility matures in less than one year.
Management believes, based upon current circumstances, that it has adequate
capital resources to support expected operating levels for the next twelve
months.
12
Critical accounting policies
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements in accordance with generally accepted accounting principles requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclose contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following paragraphs include a
discussion of some critical areas where estimates are required.
Revenue recognition
We sell both products and services. Product revenue consists of revenue from the
sale of video communications equipment and is recognized at the time of
shipment, provided no significant obligations remain, collectibility is probable
and returns are estimable. Service revenue is derived from services rendered in
connection with the sale of new systems and the maintenance of previously
installed systems. Services rendered in connection with the sale of new systems
consist of engineering services related to system integration, technical
training and user training. The majority of the services are rendered at or
prior to installation, and all revenue is recognized when services are rendered.
Revenue related to extended service contracts is deferred and recognized over
the life of the extended service period.
Long-lived assets
We evaluate impairment losses on long-lived assets used in operations, primarily
fixed assets and goodwill, when events and circumstances indicate that the
carrying value of the assets and goodwill might not be recoverable. For
purposes of evaluating the recoverability of long-lived assets, the undiscounted
cash flows estimated to be generated by those assets would be compared to the
carrying amounts of those assets. If and when the carrying values of the assets
exceed these undiscounted cash flows, the related assets will be written down to
fair value. There were no impairment losses recorded in any of the periods
presented.
13
Recent pronouncements of the Financial Accounting Standards Board
In June 1998 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS 133"). "Accounting for Derivative
Instruments and Hedging Activities", which became effective for the Company
during the first quarter of 2001. FAS 133 requires the recognition of all
derivatives as either assets or liabilities in our balance sheet and measurement
of those instruments at fair value. To date, we have not entered into any
derivative or hedging activities, and, as such, the adoption of FAS 133, as
amended, has not had a material effect on its consolidated financial statements.
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 we 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 we reclassify, 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 we 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 us 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 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 December 31, 2001 was $36,775,028. Amortization expense
for the year ended December 31, 2001 was $2,683,647. At present, we are
currently assessing, but have not yet determined, the impact that the adoption
of FAS 141 and FAS 142 will have on our 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 FAS 121's
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 Company has early adopted the provisions of FAS 144 as of December 31, 2001
to recognize discontinued business operations in its financial statements.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to interest rate risk related to our cash equivalents
portfolio. The primary objective of our investment policy is to preserve
principal while maximizing yields. Our cash equivalents portfolio is short-term
in nature, therefore changes in interest rates will not materially impact our
consolidated financial condition. However, such interest rate changes can cause
fluctuations in our results of operations and cash flows.
We maintain borrowings under a $15 million working capital credit facility
with an asset based lender 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
The Company is defending several suits or claims in the ordinary course of
business, none of which individually or in the aggregate is material to the
Company's business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2002, the Company raised net proceeds of $20.3 million in a
private placement of 3,526,500 shares of its common stock at a price of $6.25
per share. Investors in the private placement also received five-year warrants
to purchase 864,375 shares of common stock at an exercise price of $10.00 per
share. The warrants are subject to certain anti-dilution protection.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Material Agreements
10.1 Amendment to Richard Reiss Employment Agreement
10.2 Lease Agreement, Corporex Center, Miamisburg, Ohio
10.3 First Amendment to Lease Agreement, Corporex Center, Miamisburg,
Ohio
10.4 Lewis Jaffe Employment Agreement
10.5 Amendment to Michael Brandofino Employment Agreement
(b) Reports on Form 8-K
None
16
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: May 15, 2002 By: /s/ Richard Reiss
-----------------------------
Richard Reiss, President and
Chief Executive Officer
Date: May 15, 2002 By: /s/ Christopher Zigmont
-----------------------------
Christopher Zigmont, Chief Financial Officer
(principal financial and accounting officer)
17