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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
For the year ended December 31, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 0-25940
GLOWPOINT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0312442
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
225 LONG AVENUE
HILLSIDE, NJ 07205
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (973) 282-2000
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $.0001 Par Value Nasdaq National Market
Indicate by check mark whether the Registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicated by a check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the Registrant, based upon the closing sales price of the
Common Stock on the Nasdaq National Market of $1.97 on March 25, 2004 was
$54,607,409.
The number of shares of the Registrant's Common Stock outstanding as of
March 25, 2004 was 37,149,027.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the period
ended December 31, 2003 are incorporated by reference into Part III.
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TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business ..................................................................... 1
2. Properties ................................................................... 7
3. Legal Proceedings............................................................. 7
4. Submission of Matters to a Vote of Security Holders .......................... 7
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters......... 8
6. Selected Financial Data....................................................... 9
7. Management's Discussion and Analysis of Financial Condition and Results of 10
Operations..............................................................
7A. Quantitative and Qualitative Disclosures about Market Risk.................... 22
8. Financial Statements and Supplemental Data ................................... 23
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ............................................................. 24
9A. Controls and Procedures....................................................... 24
PART III
10. Directors and Executive Officers of the Registrant ........................... 25
11. Executive Compensation ....................................................... 25
12. Security Ownership of Certain Beneficial Owners and Management............... 25
13. Certain Relationships and Related Transactions ............................... 25
14. Principal Accountant Fees and Services Disclosure Required ................... 25
PART IV
15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................. 26
Signatures.............................................................. 29
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PART I
Item 1. Business
OVERVIEW
Glowpoint, Inc. ("Glowpoint", "us", or "we"), a Delaware corporation, provides
comprehensive feature-rich video communications services with telephone-like
reliability and ease-of-use on the industry's only carrier-grade, IP (Internet
Protocol) based subscriber network, the Glowpoint network, that is designed
exclusively for video communications. The network spans 14 points of presence,
or POPs, across three continents, enabling users to connect across the United
States, as well as to virtually any business center around the world. Since
launching its subscription service in late 2000, we have carried approximately
13 million minutes of video calls on behalf of over 270 customers. The growth of
subscriptions was fairly steady through early 2003, when it was determined that
separating the video communications service from the equipment sales side of the
business would open up a much larger distribution channel for our video
communication service. On September 23, 2003, we, formerly known as Wire One
Technologies, Inc., or Wire One, completed the sale of our videoconferencing
equipment business which had previously been central to our operations, in order
to focus solely on growing our video communications services. Our mission is to
significantly improve the ease-of-use, cost-effectiveness, functionalities and
quality of existing video communications in order to make it an integral part of
business communications. We were formed in May 2000 by the merger of All
Communications Corporation and View Tech, Inc. We changed our corporate name
from Wire One Technologies, Inc. to Glowpoint, Inc. in connection with the sale
of our video solutions business in September 2003.
Industry Overview
Videoconferencing has been a niche technology and application for over a decade.
The initial rollout of videoconferencing over IP, which was intended to replace
legacy Integrated Services Digital Network (ISDN) technology, was a first step
towards improving the quality and reducing the cost of videoconferencing. Since
it was first introduced, IP-based videoconferencing has made notable progress in
lowering service and hardware costs and increasing ease-of-use functionality.
IP-based videoconferencing, according to a 2003 research report issued by Frost
& Sullivan, is emerging as a powerful business collaboration tool offering
significant opportunities for service providers and cost savings to enterprises.
Videoconferencing services with value add-ons, such as web-based portals,
centralized management and monitoring, as well as, seamless connectivity between
disparate endpoints and networks, will continuously expand the end-user base.
While most major service providers have introduced IP-based videoconferencing
services, widespread adoption of IP videoconferencing has been hindered by (1)
large service providers' reluctance to fully commit to migrating to IP-based
service, which would cannibalize their ISDN businesses and (2) corporate
information technology managers' fear that running video applications over the
same network on which data is transmitted would slow down critical data
transfer. To overcome these challenges, many IP-based service providers are
continuing to improve and augment their existing services with features superior
to ISDN-based solutions, thus promoting the migration from ISDN to IP. In
addition, industry participants have designed innovative solutions to resolve
Quality of Service, or QoS, issues, including building a network that is
exclusively dedicated to video communications.
EVOLUTION OF IP-BASED VIDEOCONFERENCING. Prior to 1996, video transmitted over
IP networks was either experimental or proprietary because there were no
standards for transmitting video and the networks could not support the
real-time characteristics for delay and jitter that audio and video require.
Beginning in 2000, a number of network service providers began capitalizing on
the improvements in network data management and control by offering IP voice and
video services that favorably competed with ISDN-based video offerings. Relying
on several complementary technologies built into the latest network routers,
switches, and last-mile technologies, several companies began offering IP-based
services designed primarily for intra-company video communications. Today, IP
videoconferencing is usually marketed as having three major advantages over ISDN
videoconferencing services: (1) less expensive, (2) more reliable than ISDN
conferencing, and (3) delivery of better audio and video quality. IP
videoconferencing also provides significant management benefits. IP based video
systems are always connected to the packet-switched network. This constant
connectivity allows these systems to be remotely controlled and managed from a
central location. Large-scale conferencing environments often use an IP-based
product, called a gatekeeper,
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to control and track the usage of their videoconferencing systems, enabling
improved measurement of return on investment and convenient billing mechanisms.
MARKET MOVEMENT TO IP. Industry statistics indicate the movement to IP is
proceeding. In a survey of resellers performed in the third quarter of 2002 by
Wainhouse Research, median reseller videoconferencing equipment revenue from
sales into IP installations was 20% and the median IP related services revenue
percentage was 15%. These same resellers also reported that 38% of the group
videoconferencing units they sold went into IP installations. The implication is
that a significant number of less expensive group videoconferencing systems are
being sold, and they are being installed in IP video deployments. Wainhouse
Research found that cost is the primary IP video adoption driver. Companies
tend to transition from ISDN to IP due to the lower cast of transmitting video
communications over an IP-based network.
NEED FOR DEDICATED NETWORK. Despite the fact that many corporate entities
already have private networks theoretically capable of supporting IP video
communications, most are reluctant to run a video application over the same
network that supports its enterprise data and other applications. Among other
concerns, the video communications applications would be required to share
bandwidth with data applications (for example, e-mail and file transfers) on a
common network. Allocating enough bandwidth in a corporate local area network
or Intranet to handle real-time transmission of sounds and images, in addition
to data applications, is difficult and can significantly impede overall network
performance. In addition, most businesses already find it difficult to
effectively maintain and manage existing applications because of the shortage of
information technology and network personnel. As a result, businesses
increasingly require a solution employing a network dedicated to video, which
enables them to manage video communications isolated from their other
applications and existing communications infrastructure. An effective video
network must also be easily scalable in much the same way that a company can
simply add more phone lines as its employee base and operations grow. Moreover,
widespread adoption by both enterprise and consumer users requires a video
communications solution that provides the same reliability as public telephone
service. We believe that there exists a significant opportunity to provide an
IP-based video communications solution that is as scalable, dependable and,
ultimately, as commonplace as voice telephony.
PRODUCTS AND SERVICES
We offer customers a comprehensive portfolio of video communications
services, including video-conferencing, multi-point conferencing services and
webcasting:
VIDEOCONFERENCING. Our videoconferencing service allows subscribers to conduct
broadcast quality video calls with telephone-like ease-of-use and reliability.
Each subscription plan comes with a regular telephone number, which allows users
to make and receive calls without special codes or IP addresses. Our customers
can also receive audio calls from colleagues through our video communications
network. Each subscriber also has a unique, easy-to-use access code that makes
video conference calling spontaneous. Like telephone conference calls with a
participant dial-in number and security code, our Bridging-on-Demand allows
callers to dial in a subscribers' pre-assigned number whether or not the
participant is also on our video communications network. We offer four unlimited
video calling plans priced at $499 and $799 (for 512 Kbps) and $799 and $1,099
(for 1280 Kbps).
MULTI-POINT CONFERENCING SERVICES. Our multi-point conferencing services provide
multi-point video communications among three or more participants. These
services include Bridging-on-Demand, Advanced Conferencing Services and Premium
Conferencing Event Services.
o Bridging-on-Demand - Allows users to have spontaneous, multi-point
videoconferencing meetings regardless of the video hardware that each
participant is using. With a Bridging-on-Demand conference passcode,
users can participate on a conference call at a moment's notice
without reservation.
o Advanced Conferencing - Allows users to run multi-point
videoconferencing meetings with up to 20 participating locations.
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o Premium Conferencing - Allows users to run multi-point
videoconferencing meetings with more than 20 participating locations
WEBCASTING. Our Webcasting Service is a comprehensive, managed service that
brings together video-conferencing and streaming media capabilities on a single
platform, offering users a simple, cost-effective way to create live and
on-demand webcasts through standards-based videoconferencing systems (H.320 and
H.323). Our Webcasting Service provides an outsourced solution for small, medium
and large organizations that need to reach a global audience with engaging,
rich-media messages and presentations in a simple and cost-effective way over
the web.
Our video communications network provides customers with a high-quality platform
for video communications over IP and related applications. Our video
communications service offers subscribers substantially reduced transmission
costs and superior video communications quality, remote management of all
videoconferencing endpoints utilizing simple network management protocol, or
SNMP, gateway services to ISDN-based video communications equipment, video
streaming and store-and-forward applications from our network operations center,
or NOC.
To provide our video communications service, we have contracted with MCI, Cable
& Wireless and Equinix for access to their IP backbone networks and co-location
facilities. We have contracted with MCI, Covad Communications, New Edge
Networks, Allegiance Telecom and others, and plan to contract with additional
broadband access providers, for dedicated broadband access to our network using
either digital subscriber lines (DSL), or dedicated 1.5 Mbps (T1) or 45 Mbps
(T3) lines. Products manufactured by a number of leading IP video communications
and video networking equipment suppliers, including Polycom, Tandberg,
RADVision, Cisco Systems and Sony, are compatible with our video communications
service.
SALES AND MARKETING
We market and sell our services to all sectors including commercial, government,
medical and education sectors through resellers. The divestiture of our
equipment sales business has allowed us to contract with an expanded and
diversified base of distribution partners. While our divested equipment sales
business continues to be one of our resellers, we have recently added new
channel partners including Applied Global Technologies, Communication Management
Services, SPL Integrated Solutions, and VideoLink. We have begun training these
new resellers who are expected to begin marketing our services in the first
quarter of 2004. To attract additional resellers, we offer one of the most
strategic and comprehensive channel sales and distribution programs in the video
communications industry, designed to provide agents with both the tools and
training necessary to effectively market the service. Our resellers benefit from
dedicated account managers, competitive commissions and exclusive online
management tools. Our strategy is to provide resellers with a world-class
service offering along with the necessary training and tools to drive its
resellers' marketing efforts. A step towards this strategy is evident in our
recent launch of PartnerPoint, an online sale management tool available to our
resellers. PartnerPoint provides sales agents with product information, news,
marketing collateral, account information and sales tools necessary to perform
sales and marketing activities as well as manage the sales process. Potential
resellers include local network consulting companies, video application
resellers, network service providers, endpoint equipment manufacturers and
national videoconferencing solution providers.
CUSTOMERS
We have a stable, growing subscriber base of over 270 customers ranging
from Fortune 500 companies to federal, state and municipal government entities
to business and legal services firms to non-profit organizations. Vertical
market segmentation among our current customers is as follows: 33%
corporate, 20% technical, 15% finance, 9% education, 9% legal, 8% medical and 6%
government/non-profit. No single customer accounts for more than 10% of revenues
or accounts receivable.
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TECHNOLOGY
We employ a proprietary network architecture consisting of
state-of-the-art equipment co-located at MCI, C&W and Equinix data centers
across the country, connected by multiple dedicated high-speed DS3 circuits from
MCI, C&W and Qwest. The sites, each a Glowpoint POP, are connected in a ring
that virtually eliminates the risk of a single point of failure and provides
industry-leading throughput, scalability and mission-critical resiliency. All
equipment on the network complies with current H.323 (IP) standards.
Our network architecture was specially designed for the efficient and
cost-effective delivery of feature-rich video content. The network boasts a
fully deployed and sophisticated gatekeeper infrastructure that can support
thousands of video endpoints with redundancy. The design enables us to provide a
unique set of value-added services including, but not limited to, an exclusive
call detail-recording (CDR) feature that allows for billing on a call-by-call
basis for point-to-point, gateway and multipoint calls. Network IP providers
would have to install video-specific gatekeeper technology throughout their
networks to provide the additional functionality necessary to provide a similar
service capability. The sheer volume of traffic carried by the major carriers
would make such a project enormously expensive, and, most likely, cost
prohibitive. We also have developed a specialized configuration of software,
hardware and global positioning technology that enables us to accurately monitor
jitter, packet loss and latency, and maximize overall network performance.
With our origins in videoconferencing equipment sales and service, we gained an
understanding of the unique demands placed on a network by a videoconferencing
application. Large-carrier IP networks were simply not designed for
videoconferencing. Unlike a standard data application, video applications
immediately expose network performance limitations. This need for quality and
reliability prompted us to develop a parallel network exclusively dedicated to
videoconferencing applications, but designed using standard network concepts and
methodologies. We also understood that a network, alone, would not offer a
sustainable competitive advantage. For that, we needed to develop proprietary
software and a hardware-based service offering that leveraged our dedicated
network architecture, and enabled us to offer a superior quality, yet easy to
use system. In addition to the billing and reporting capabilities discussed
above, other features and services include operator assistance, call forwarding,
unassisted incoming and outgoing gateway calling, bridging-on-demand meeting
rooms, web-based scheduling, LDAP authentication services, firewall transport,
customer information center, data collection and statistical analysis tools. We
believe that the Glowpoint service offers a unique set of capabilities that will
be very difficult for competitors to match.
Glowpoint Solution
The Glowpoint network allows its customers to connect to virtually everywhere
across the country and around the globe and to users whether or not they are on
the Glowpoint network. We believe our service is superior to other
videoconferencing services because it is the only service provider focused on
three key factors that are essential to successful video communications: network
architecture, network management applications and hardware interoperability.
NETWORK ARCHITECTURE. The Glowpoint network is a secure, state-of-the-art
Multiple Protocol Layer Switching backbone with the critical redundancy and
reliability businesses demand for their critical applications. The Glowpoint
Network is built as a ring with mesh points to provide full redundancy on the
backbone. Each Glowpoint POP is built with redundant equipment and circuits,
allowing the network to achieve sub-second fail times and 99.99% availability.
We operate 14 POPs, 10 in the U.S. and one each at facilities in Toronto,
Canada; London, England; Puerto Rico and Tokyo, Japan. We offer the industry's
most aggressive Service Level Agreement (SLA) with a 99.99% QoS commitment.
Making a video call to a location not on the Glowpoint network is as simple as
dialing the video number, including those video numbers using old ISDN
technology. Complicated access codes are not required because the intelligence
built into the Glowpoint network makes the complex connections invisible. We are
currently the only service provider to offer unassisted incoming and outgoing
gateway services. The Glowpoint network supports SDSL, HDSL, Frac T1, DS3,
Sonet, ATM and Gigabit Ethernet options. The Glowpoint network also supports
H.323, H.320, and SIP. We peer with multiple carriers so users can connect to
users on any network, including the public internet.
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NETWORK MANAGEMENT APPLICATIONS. We have developed pioneering video network
management tools to provide a world-class customer experience. Some of our
patent-pending applications include:
o "000" Video Operator Service - Users can simply dial `000' to connect
to a live Glowpoint network operator.
o Unassisted Gateway Calling - Allows users to reach Glowpoint network
and non-Glowpoint network subscribers without any complicated dialing
instructions.
o Least-Cost International Routing - Our intelligent network selects the
least expensive option for international calls, resulting in great
savings, even on calls to ISDN users.
o Bridging-on-Demand - Allows users to conduct a spontaneous conference
call, including both video and audio participants.
HARDWARE INTEROPERABILITY. We continually test H.323 compliant equipment in our
network. The Glowpoint Certification Program was designed to provide us with the
opportunity to test and assess new equipment, options and configurations for use
in our network. The program sets strict standards for equipment performance at
several levels. Customers can be assured that Glowpoint Certified products
conform to the highest standards of H.323 compliancy as well as interoperability
with other leading manufacturers of similar products. Our certification team has
created a comprehensive test and evaluation methodology requiring that each
manufacturer's class of H.323 video communications equipment meet or exceed
performance, reliability and interoperability levels in the areas of video,
audio, data, feature and capability set. Leading equipment manufacturers like
Polycom, Tandberg, Sony and Radvision look to us as the industry leader to
provide technical feedback and certification to their products.
Network Operations Center
We maintain a state-of-the-art network operations center (NOC) at our
headquarters from which we monitor the operations of the Glowpoint network on a
24x7 basis. The NOC's primary functions are to monitor the network, manage and
support all backbone equipment, provide usage information for billing, provide
utilization data for capacity planning and provide value-added customer
services. Only usage information and authentication packets, rather than actual
video communications traffic, pass through the NOC. Technology in the NOC
includes gatekeepers, routers and switches, servers, firewalls and
load-balancing devices. The NOC uses redundant circuits to connect directly to
our backbone.
Research and Development
As of December 31, 2003, we employed a staff of 11 software and hardware
engineers who evaluate, test and develop proprietary applications. The costs of
this team of engineers totaled approximately $1.3 million, $1.0 million and $0.6
million for the years ended December 31, 2003, 2002 and 2001, respectively. To
augment these resources, we engage independent consultants from time-to-time. We
expect that we will continue to commit resources to research and development in
the future to further develop our proprietary network solution.
Intellectual Property
During the development of various aspects of the Glowpoint network, we developed
applications and services that previously were not available. As a result, we
have developed a significant stream of intellectual property, some of which have
already been submitted for U.S. patent protection. We anticipate additional
submissions in the future. To date, the following intellectual property have
been submitted for patent protection:
1. Glowpoint Network Architecture (how we built the network to support
video over IP).
2. Dial 000 operator services;
3. Billing/call detail gathering and processing including the creation of
a video centric invoice;
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4. Automated gateway routing incoming and outgoing;
5. Video specific SLA polling, performance gathering; and
6. Service Provider Firewall Traversal (VTS) process for video over IP.
We do not know whether any patent applications previously submitted will be
approved, whether patents will be issued from patent applications which we may
pursue or whether the scope of any patents issued will be sufficiently broad to
protect our technologies or processes. Competitors may successfully challenge
the validity and or scope of any such patents and or our trademarks.
To distinguish our service offerings from our competitors' services, we
have obtained certain trademarks and trade names for our services, and we
maintain certain advertising programs with industry organizations and standards
committees to promote our brands. We also protect certain details about our
processes, services and strategies as trade secrets, keeping confidential the
information that we believe provides us with a competitive advantage. We have
ongoing programs designed to maintain the confidentiality of such information.
We expect to protect our services and processes by asserting our intellectual
property rights where appropriate and prudent. We also will obtain patents,
copyrights and other intellectual property rights used in connection with our
business when practicable and appropriate.
EMPLOYEES
As of December 31, 2003, we had 71 full-time employees. Of these employees, 20
are involved in engineering and development, 16 in customer service, 11 in
providing network support, 8 in sales and marketing and 16 employees are
employed in corporate functions. None of our employees are represented by a
labor union. We believe that our employee relations are good.
COMPETITION
We compete primarily with providers of video communications transport services,
including AT&T, MCI, Sprint and some of the regional Bell operating companies
and carriers. In the future, competition may increase from new and existing
telecommunications services providers, which may include certain of our network
providers, many of which have greater financial resources than we do.
We compete primarily on the basis of our:
o sole focus on the video communications industry;
o breadth of service offerings;
o nationwide presence;
o technical expertise;
o knowledgeable sales, service and training personnel; and
o commitment to customer service and support.
More than just a provider of bandwidth for video communications, we have
developed a comprehensive approach to significantly improve videoconferencing to
the point that it has the potential to become an integral tool for business
communications. We have not only designed a network specifically for video
communications but also have continued to develop proprietary network
applications to ensure high quality, complete video communications. In addition,
through the Glowpoint Certification Program, we have developed expertise in the
area of hardware interoperability on a network. Our value-added services include
video operators, bridging/multi-point video, seamless connectivity from IP to
ISDN connections, on-line real-time billing, and call management. Our services
offer subscribers substantially reduced transmission costs and superior video
communications quality, remote monitoring, and management of all
videoconferencing subscriber locations utilizing SNMP
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for products that support SNMP, gateway services to ISDN-based video
communications equipment, video streaming and store-and-forward applications,
firewall transport services and encryption.
We believe that our ability to compete successfully will depend on a number of
factors both within and outside our control, including the adoption and
evolution of technologies relating to our business, the pricing policies of our
competitors and suppliers, our ability to hire and retain key technical and
management personnel and industry and general economic conditions.
Item 2. Properties
Our headquarters are located at 225 Long Avenue, Hillside, New Jersey 07205. The
landlord for this office is Vitamin Realty Associates, L.L.C. of which Eric
Friedman, a member of our Board of Directors until June 2001, is a member. These
premises consist of approximately 9,000 square feet of leased office space and
warehouse facilities. The term of this lease expires on April 30, 2005. The base
rental for the premises during the term of the lease is $162,000 per annum. In
addition, we are obligated to pay our share of the landlord's operating expenses
(that is, those expenses incurred by the landlord in connection with the
ownership, operation, management, maintenance and repair of the premises,
including, among other things, the cost of common-area electricity, operational
services and real estate taxes). The Hillside premises house our corporate
functions and our network operations center.
In addition to our headquarters we lease an office in Windham, New Hampshire
that houses our finance group and a technical facility in Camarillo, California
that houses our Multiview Network Services group, help desk and technical
personnel.
Item 3. Legal Proceedings
We are defending one suit in the ordinary course of business which is not
material to our business, financial condition or results of operations.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table presents historical trading information for our common stock
for the two most recent fiscal years:
GLOWPOINT
COMMON STOCK
--------------------
HIGH LOW
YEAR ENDED DECEMBER 31, 2002:
First Quarter........................................... $6.89 $4.23
Second Quarter.......................................... 4.75 1.74
Third Quarter........................................... 1.94 0.76
Fourth Quarter.......................................... 3.11 1.36
YEAR ENDED DECEMBER 31, 2003:
First Quarter........................................... 2.74 1.69
Second Quarter.......................................... 2.89 1.99
Third Quarter........................................... 3.65 2.57
Fourth Quarter.......................................... 3.18 1.30
On March 25, 2004, the last reported sale price of our common stock was $1.97
per share as reported on the Nasdaq National Market, and 37,149,027 shares of
our common stock were held by approximately 294 holders of record. American
Stock Transfer & Trust Company of Brooklyn, New York is the transfer agent and
registrar of our common stock.
Dividends
Our board of directors has never declared or paid any cash dividends on our
common stock and does not expect to do so for the foreseeable future.
The holders of record of our Series B preferred stock, which was issued in
January 2004, going forward, are entitled to receive, out of any assets at the
time legally available therefor and when and as declared by our board of
directors, dividends at the rate of eight percent (8%) of the stated value per
share of $24,000.00 per share per year from January 21, 2004 through July 21,
2005, increasing to twelve percent (12%) on July 22, 2005, payable annually at
our option in cash or, so long as we have available shares reserved for
issuance, in shares of common stock. Dividends on the Series B preferred stock
shall accrue and be payable annually. Dividends on the Series B preferred stock
are prior and in preference to any declaration or payment of any distribution on
any outstanding shares of junior stock.
Other than dividends to be paid on our Series B preferred stock, we currently
intend to retain any earnings to finance the growth and development of our
business. Our board of directors will make any future determination of the
payment of dividends based upon conditions then existing, including our
earnings, financial condition and capital requirements, as well as such economic
and other conditions as our board of directors may deem relevant. In addition,
the payment of dividends may be limited by financing arrangements into which we
may enter in the future.
Recent Sales of Unregistered Securities
On January 22, 2004, we issued (i) an aggregate of 203.667 of our series B
preferred stock and (ii) an aggregate of 250,000 shares of restricted common
stock in exchange for the cancellation and termination of all of our outstanding
8% subordinated convertible notes in the aggregate principal amount of
$4,888,000. The notes were held by institutional and other accredited investors.
We also reduced the exercise price of the warrants to purchase shares of our
common stock issued in connection with the notes from $3.25 to $2.75. Each share
of Series B preferred stock is convertible into 10,000 shares of common stock.
The securities issued in this transaction were exempt from registration under
the Securities Act by virtue of Section 3(a)(9) thereof.
On February 17, 2004, we issued 6,100,000 shares of our common stock and
warrants to purchase 1,830,000 shares of common stock to institutional and other
accredited investors. The warrant exercise price is $2.75 per share of common
stock. The gross proceeds from the offering were $13.7 million and are
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being used for general corporate purposes. The securities issued in this
transaction were exempt from registration under the Securities Act by virtue of
Section 4(2) thereof.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding the aggregate number of
securities to be issued under all of our stock options and equity-based plans
upon exercise of outstanding options, warrants and other rights and their
weighted-average exercise prices as of December 31, 2003. The securities issued
under equity compensation plans not approved by security holders consist
entirely of options issued with respect to individual compensation arrangements
for officers, directors, consultants and one employee. Specifically, we issued
most of these options to Richard Reiss, our chairman, and Leo Flotron, our
former president and chief operating officer, in connection with their
employment agreements. We issued the remainder of these options to two
consultants and two directors as compensation for services.
NUMBER OF SECURITIES
WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO EXERCISE PRICE OF FUTURE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE OUTSTANDING COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS, AND RIGHTS AND RIGHTS REFLECTING IN COLUMN (a))
- --------------------------------------- ------------------------- -------------------- -----------------------------
Equity compensation plans approved
by security holders .................. 3,983,366 $ 3.24 1,024,528
Equity compensation plans not
approved by security holders ......... 1,809,407 $ 2.86 --
--------- ------ ---------
Total ............................... 5,792,773 $ 3.12 1,024,528
========= ====== =========
Item 6. Selected Financial Data
The following selected consolidated financial information should be read in
conjunction with "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited consolidated financial
statements and footnotes included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS INFORMATION: (in thousands, except per share data)
Net revenues $ 10,311 $ 5,599 $ 3,480 $ 1,475 $ --
Cost of revenues 10,062 5,597 2,898 1,105 --
-------- -------- -------- -------- --------
Gross margin 249 2 582 370 --
-------- -------- -------- -------- --------
Operating expenses
Research and development 1,261 1,024 583 -- --
Selling 5,494 3,831 1,233 409 --
General and administrative 6,373 5,103 9,961 3,237 --
Restructuring -- 260 110 -- --
Impairment losses on other long-lived assets 1,379 -- -- -- --
Amortization of goodwill -- -- 102 -- --
-------- -------- -------- -------- --------
Total operating expenses 14,507 10,218 11,989 3,646 --
-------- -------- -------- -------- --------
Loss from continuing operations (14,258) (10,216) (11,407) (3,276) --
-------- -------- -------- -------- --------
Other (income) expense
Amortization of deferred financing costs 377 123 100 344 --
Interest income (7) (72) (77) (315) --
Interest expense 1,026 432 598 78 --
Amortization of discount on subordinated debentures 1,988 39 -- -- --
-------- -------- -------- -------- --------
Total other expenses, net 3,384 522 621 107 --
-------- -------- -------- -------- --------
Loss before income taxes (17,642) (10,738) (12,028) (3,383) --
Income tax provision -- -- 200 511 --
-------- -------- -------- -------- --------
Loss from continuing operations (17,642) (10,738) (12,228) (3,894) --
Loss from discontinued AV operations (1,173) (2,696) (396) -- --
Income (loss) from discontinued VS operations (3,624) (44,844) (1,566) 841 (528)
Income (loss) from discontinued Voice operations -- (287) (617) 521 1,592
Gain on sale of discontinued Voice operation -- -- 277 -- --
-------- -------- -------- -------- --------
Net income (loss) (22,439) (58,565) (14,530) (2,532) 1,064
Deemed dividends on series A convertible preferred stock -- -- (4,434) (13,723) --
-------- -------- -------- -------- --------
Net income (loss) attributable to common stockholders $(22,439) $(58,565) $(18,964) $(16,255) $ 1,064
======== ======== ======== ======== ========
9
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS INFORMATION: (in thousands, except per share data)
Loss from continuing operations per share
Basic $ (0.60) $ (0.37) $ (0.59) $ (0.30) $ --
========= ========= ========= ========= =========
Diluted $ (0.60) $ (0.37) $ (0.59) $ (0.30) $ --
========= ========= ========= ========= =========
Income (loss) from discontinued operations per share
Basic $ (0.16) $ (1.66) $ (0.11) $ 0.10 $ 0.22
========= ========= ========= ========= =========
Diluted $ (0.16) $ (1.66) $ (0.11) $ 0.10 $ 0.17
========= ========= ========= ========= =========
Deemed dividends per share
Basic $ -- $ -- $ (0.21) $ (1.07) $ --
========= ========= ========= ========= =========
Diluted $ -- $ -- $ (0.21) $ (1.07) $ --
========= ========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.76) $ (2.03) $ (0.91) $ (1.27) $ 0.22
========= ========= ========= ========= =========
Diluted $ (0.76) $ (2.03) $ (0.91) $ (1.27) $ 0.17
========= ========= ========= ========= =========
Weighted average number of common shares
and equivalents outstanding:
Basic 29,456 28,792 20,880 12,817 4,910
========= ========= ========= ========= =========
Diluted 29,456 28,792 20,880 12,817 6,169
========= ========= ========= ========= =========
BALANCE SHEET INFORMATION:
Cash and cash equivalents $ 4,185 $ 2,762 $ 1,689 $ 1,871 $ 60
Working capital 4,865 27,819 15,639 19,921 4,526
Total assets 23,987 61,502 104,499 84,372 10,867
Long-term debt (including current portion) 1,904 5,846 83 3,128 2,186
Series A mandatorily redeemable convertible
preferred stock -- -- -- 10,371 --
Total stockholders' equity 18,814 36,586 68,909 49,658 5,194
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our consolidated
financial statements and the notes thereto appearing elsewhere in this Annual
Report on Form 10-K. All statements contained herein that are not historical
facts, including, but not limited to, statements regarding anticipated future
capital requirements, our future development plans, our ability to obtain debt,
equity or other financing, and our ability to generate cash from operations, are
based on current expectations. 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 our actual results in future periods to differ materially from
such statements. These factors, risks and uncertainties include market
acceptance and availability of new video communication services, the
nonexclusive and terminable at will nature of sales agent agreements, rapid
technological change affecting demand for our services, competition from other
video communication service providers, and the availability of sufficient
financial resources to enable us to expand our operations, as well as other
risks detailed from time to time in our filings with the Securities and Exchange
Commission.
Overview
We provide comprehensive feature-rich video communications services with
telephone-like reliability and ease-of-use on the industry's only carrier-grade,
IP-based subscriber network, the Glowpoint network, that is designed exclusively
for video communications. Our network spans 14 points of presence (POPs) across
three continents, enabling users to connect across the United States, as well as
to virtually any business center around the world. Since launching our
subscription service in late 2000, the Glowpoint network has carried
approximately 13 million minutes of video calls on behalf of over 270 customers.
The growth of
10
subscriptions was fairly steady through early 2003, when it was determined that
separating the Glowpoint video communications service from the equipment sales
side of the business would open up a much larger distribution channel for our
video communciations service. At the time of the sale, we changed our name from
Wire One Technologies, Inc. to Glowpoint, Inc. In September 2003, we completed
the sale of our videoconferencing equipment business which had been central to
our operations, in order to focus solely on growing our video communications
services. Glowpoint's mission is to significantly improve the ease-of-use,
cost-effectiveness, functionalities and quality of existing video communications
in order to make it an integral part of business communications.
Wire One was formed on May 18, 2000 by the merger of All Communications
Corporation and View Tech, Inc. From July 2000 through November 2001, we made
several small acquisitions for a total of approximately $9.3 million in cash and
stock. In October 2001, we sold our Voice communications business for
approximately $2 million and in March 2003, we sold our audio-visual business
for approximately $0.8 million.
On September 23, 2003, we sold substantially all of the assets of our Video
Solutions (VS) business to an affiliate of Gores Technology Group (Gores), a
privately held international acquisition and management firm, in order to focus
solely on growing our Glowpoint network service. The VS segment included our
videoconferencing equipment distribution, system design and engineering,
installation, operation and maintenance activities and consisted of: a
headquarters and warehouse facility in Miamisburg, Ohio; a help desk operation
in Camarillo, California; 24 sales offices and demonstration facilities across
the United States; and a client list of approximately 3,000 active customers
with an installed base of approximately 22,000 video conferencing systems. As a
result, this segment is classified as a discontinued operation in the
accompanying financial statements with its assets and liabilities summarized in
single line items on the consolidated balance sheets and its results from
operations summarized in a single line item on the consolidated statement of
operations. See Note 3 for further information.
In the fourth quarter of 2003, we named a new Chief Executive Officer and
President of the Company, David C. Trachtenberg. Two themes guided our
activities in the fourth quarter: (1) back to basics and (2) distribution
diversification. Back to basics was designed to ensure focus on our operational
efficiencies. Distribution diversification focused on raising the visibility of
the Company and creating multi-partner sales momentum.
A key focus is making subscriber locations revenue producing as quickly as
possible. We reduced our subscriber location backlog from 246 at the end of the
third quarter of 2003 to 91 at the end of the fourth quarter of 2003. The
subscriber location backlog, which consists of locations under contract but not
yet installed, was reduced as a result of a more efficient provisioning process
which enabled us to get customers on our network and billable 20% faster than in
the prior quarter. Over half of the new subscriber locations ordered in the
fourth quarter were brought onto the Glowpoint network and made billable in the
same quarter. In addition, we identified over $300,000 in quarterly network
costs for elimination, most of which were gone by the end of the fourth quarter.
Finally, we began passing through the mandated federal 9.2% universal service
fee in December invoices. We managed a seamless transition to this billing
update through clear communication with our customers.
We are aware that we cannot become profitable by only cutting costs and that an
integral part of our strategy must be to increase sales. This begins with
products that our customers will use and that are profitable for us. We spent
the fourth quarter of 2003 creating and implementing a new product strategy to
drive profitable growth and to reflect our mission of making video
communications an integral business tool by making it easy, spontaneous and
affordable. These efforts culminated in the January 6, 2004 launch of our new
suite of the U.S.'s first "All You Can See" unlimited video calling plans. The
new strategy balances reducing the barriers to video communication's use with a
need to ensure that each new billable location on the Glowpoint network drives
profitable revenue. We attempted to simplify the decision-making process for our
customers by simplifying our plans. We discontinued our pay-as-you-go and hourly
plans. For one monthly subscription fee, our users get unlimited or "all you can
see" use of the Glowpoint network when they communicate with other Glowpoint
locations, regardless of where they are. We also bundled additional value into
the plans, like our direct dial video numbers, bridging on demand and dial 000
live video operator technology, so that our customers could use the Glowpoint
network in an easier and more spontaneous manner.
11
We also aligned our costs with our revenue by discontinuing our pay-as-you-go
plan, moving to annual contracts and pre-qualifying all locations quickly and
efficiently, so that we could match our underlying costs with revenues as
quickly as possible. We made it easier for our customers to use, and our
certified agents to sell the Glowpoint service by introducing fully automated
online tools such as CustomerPoint, a portal on our website for our customers,
and PartnerPoint, a portal on our website for our resellers. These tools will
ensure our ability to scale effectively with our growth and ensure quality
control for our sales partners and subscribers. Our fourth quarter 2003 product
realignment was designed to drive higher average variable gross margins for each
new billable location on the Glowpoint network. The impact to our results should
be evident over the course of 2004 as the new products take hold in our
distribution channel to become a larger percentage of our embedded billable
subscriber location base.
While our current subscribers are able to upgrade to the new products, we did
grandfather their existing billable subscriber locations. However, all new
Glowpoint locations ordered must be on the new pricing plans. Second, we honored
quotes using the legacy pricing through January 31, 2004. However, this should
only impact our orders through the Gores' affiliate, Wire One Technology, Inc.,
reseller channel, as we trained all new channels from the fourth quarter of 2003
and the first quarter of 2004 on our new plans only. Parallel with our
re-training and re-launching of Glowpoint within our important Wire One
distribution partnership, we signed Communications Management Services and
Applied Global Technologies as two new national partners. We continued to expand
our distribution channels in early 2004 with the addition of Videolink, Inc. and
Videre Conferencing as new partners.
The changes in the fourth quarter 2003 in operations and product strategy have
effectively positioned us for profitable growth. Thus, with a strong foundation,
we took the opportunity to reinforce our financial health. In January 2004, we
announced the exchange of $4.89 million of our outstanding notes for convertible
preferred stock, thus simplifying our capital structure. In February 2004, we
announced the closing of a $13.7 million private placement of common stock and
warrants.
12
Results of Operations
The following table sets forth, for the periods indicated, information derived
from our consolidated financial statements expressed as a percentage of our
revenues:
YEAR ENDED DECEMBER 31,
-----------------------------
2003 2002 2001
------ -------- ------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 97.6 100.0 83.3
------ -------- ------
Gross margin 2.4 0.0 16.7
------ -------- ------
Operating expenses
Research and development 12.2 18.3 16.8
Selling 53.3 68.4 35.4
General and administrative 61.8 91.1 286.2
Restructuring -- 4.7 3.2
Impairment losses on other long-lived assets 13.4 -- --
Amortization of goodwill -- -- 2.9
------ -------- ------
Total operating expenses 140.7 182.5 344.5
------ -------- ------
Loss from continuing operations (138.3) (182.5) (327.8)
------ -------- ------
Other (income) expense
Amortization of deferred financing costs 3.6 2.2 2.9
Interest income (0.1) (1.3) (2.2)
Interest expense 10.0 7.7 17.2
Amortization of discount on subordinated debentures 19.3 0.7 --
------ -------- ------
Total other expenses, net 32.8 9.3 17.9
------ -------- ------
Loss before income taxes (171.1) (191.8) (345.7)
Income tax provision -- -- 5.7
------ -------- ------
Loss from continuing operations (171.1) (191.8) (351.4)
Loss from discontinued AV operations (11.4) (48.2) (11.4)
Loss from discontinued VS operations (35.1) (800.9) (45.0)
Loss from discontinued Voice operations -- (5.1) (17.8)
Gain on sale of discontinued Voice operation -- -- 8.0
------ -------- ------
Net loss (217.6) (1,046.0) (417.6)
Deemed dividends on series A convertible preferred stock -- -- 127.4
------ -------- ------
Net loss attributable to common stockholders (217.6)% (1,046.0)% (545.0)%
====== ======== ======
13
YEAR ENDED DECEMBER 31, 2003 (2003 PERIOD) COMPARED TO YEAR ENDED DECEMBER 31,
2002 (2002 PERIOD).
NET REVENUES. Net revenues from continuing operations increased $4.7 million, or
84%, in the 2003 period to $10.3 million from $5.6 million for the 2002 period.
Subscription and related revenue increased $4.5 million, or 195%, in the 2003
period to $6.8 million from $2.3 million for the 2002 period. Non-subscription
revenue consisting of bridging, events and other one-time fees increased $0.2
million, or 6%, in the 2003 period to $3.5 million from $3.3 million for the
2002 period. The growth in subscription and related revenue was the result of
having, on average, 578 more billable subscriber locations in the 2003 period
than in the 2002 period and those billable subscriber locations each producing
an average of $752 per month in revenue. There were 839 average billable
subscriber locations in the 2003 period and 261 in the 2002 period. The average
monthly subscription and related revenue per subscriber location fell 9% from
$747 in the 2002 period to $680 in the 2003 period. The decline in average
monthly subscription and related revenue per subscriber location is the result
of the growth in the number of billable subscriber locations using the $199 per
month pay as you go plan. The $0.2 million increase in non-subscription revenue
resulted from the following: 1) a $0.5 million increase in H.323 bridging
revenue from $0.7 million in the 2002 period to $1.2 million in the 2003 period
resulting from increased billable subscriber locations; 2) a $0.2 million
increase in installation revenue from $0.1 million in the 2002 period to $0.3
million in the 2003 period due to the increase in installations from 397 in the
2002 period to 730 in the 2003 period; and 3) a $0.5 million decline in H.320
bridging revenue from $2.2 million in the 2002 period to $1.7 million in the
2003 period.
COST OF REVENUE. Cost of revenue increased $4.5 million, or 80%, in the 2003
period to $10.1 million from $5.6 million for the 2002 period. Infrastructure
costs (defined as backbone-related costs of network) increased $1.0 million, or
45%, in the 2003 period to $3.2 million from $2.2 million for the 2002 period.
This increase resulted from two factors: 1) the build-out of the network to
handle the video traffic of approximately 4,000 billable subscriber locations -
$0.6 million of the increase; and 2) the evolution of the network to gain
long-term cost efficiencies or as a result of backbone provider issues - $0.4
million of the increase. Access costs (defined as costs of connecting subscriber
locations to the network) increased $2.5 million, or 147%, in the 2003 period to
$4.2 million from $1.7 million for the 2002 period. The growth in access costs
was the result of having, on average, 578 more billable subscriber locations in
the 2003 period than in the 2002 period and those billable subscriber locations
each costing an average of $368 per month for access to the network. There were
839 average billable subscriber locations in the 2003 period and 261 in the 2002
period. The average monthly access costs per subscriber location fell 22% from
$539 in the 2002 period to $421 in the 2003 period. The decline in average
monthly access costs per subscriber location is the result of the growth in the
number of billable subscriber locations using the $199 per month pay as you go
plan and by the increasing use of DSL as the means of accessing the network.
Other costs of revenue include the personnel costs related to providing the
Glowpoint video communications service along with the ISDN network costs of
providing H.320 bridging services. These costs increased $0.9 million, or 53%,
in the 2003 period to $2.6 million from $1.7 million for the 2002 period. This
increase resulted primarily from three factors: 1) increased depreciation
related to increased equipment deployed in the network - $0.3 million; 2)
credits recorded in the September 2002 quarter of approximately $250,000 related
to refunds of previously paid infrastructure and access fees; and 3) a $0.2
million increase in installation costs from $0.1 million in the 2002 period to
$0.3 million in the 2003 period due to the increase in installations from 397 in
the 2002 period to 730 in the 2003 period. ISDN network costs fell $0.2 million
in line with the decline in H.320 bridging revenue.
GROSS MARGINS. Gross margins increased to approximately $0.2 million in the 2003
period from approximately $2,000 in the 2002 period. As a percentage of revenue,
gross margins increased in the 2003 period to 2.4%, as compared to 0.0% of net
revenues in the 2002 period. The primary cause of the increase in gross margin
is the increase in revenue ($1.9 million impact assuming a 40% marginal gross
margin on the additional $4.7 million in revenue). Offsetting items included the
increased fixed costs incurred to continue the build out of the network ($1.0
million), the costs to re-configure portions of the network that were incurred
($0.4 million) and the impact in the September 2002 quarter of approximately
$250,000 in refunds of previously paid infrastructure and access fees. We
believe that our gross margins will improve over the coming months and quarters
as the impact is felt from our fourth quarter product realignment which was
designed to drive average variable gross margins of 60 to 65 percent
14
for each new billable subscriber location on the Glowpoint network. The impact
to our results should be increasingly evident in 2004 as the new products take
hold in our distribution channel to become a larger percentage of our embedded
billable subscriber location base. We will also be focusing on minimizing our
cost per subscriber location in order to deliver the Glowpoint service in the
most efficient manner possible.
RESEARCH AND DEVELOPMENT. Research and development costs, which include the
costs of the personnel in this group, the equipment they use and their use of
the network for development projects, increased $0.3 million in the 2003 period
to $1.3 million from $1.0 million in the 2002 period but were down as a
percentage of revenue from 18.3% in the 2002 period to 12.2% of revenue in the
2003 period. The increase in expenses was primarily the result of adding two
full-time employees in the 2003 period. It is expected that research and
development costs will remain flat in coming quarters as we design and develop
new service offerings to meet customer demand, test new products and
technologies across the network and develop and enhance on-line tools to make
the customer/partner experience a satisfying and productive one.
SELLING. Selling expenses, which include sales salaries, commissions, overhead,
and marketing costs, increased $1.7 million to $5.5 million in the 2003 period,
from $3.8 million in the 2002 period but were down as a percentage of revenue
from 68.4% in the 2002 period to 53.3% of revenue in the 2003 period. The
primary component of the $1.7 million increase in costs is the $0.9 million of
marketing costs incurred in the 2003 period related to the NBA draft ($0.3
million) and customer trials ($0.6 million). The remainder of the variance
results from higher commissions and bonuses associated with higher revenue
levels ($0.3 million), increased consulting expenses to review and re-launch our
operations, product set, on-line tools and marketing, as well as to establish
the Webcast service infrastructure and upgrade and automate our customer service
systems ($0.2 million) and increased sales overhead (rent, depreciation,
telecommunications, insurance, travel and office expenses) ($0.3 million).
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $1.2
million in the 2003 period to $6.3 million from $5.1 million in the 2002 period.
General and administrative expenses as a percentage of net revenues for the 2003
period declined from 91.1% in the 2002 period to 61.8% in the 2003 period. The
primary components of the $1.2 million increase in costs were $0.6 million in
non-cash expense recorded in connection with the issuance of restricted stock
and warrants as compensation and for financing and consulting services, $0.2
million of severance, change of management and other payouts and $0.3 million of
additional professional fees incurred related to the search for a new CEO,
filing the proxy and holding the annual meeting in August, divestitures and
other corporate activities.
RESTRUCTURING. A restructuring charge of $260,000 was recorded in the 2002
period. This restructuring charge was related to severance and other
personnel-related costs and was taken to position us to realize $2.0 million in
annual operating expense savings.
IMPAIRMENT LOSSES ON OTHER LONG-LIVED ASSETS. In the third quarter of 2003, as a
result of our periodic evaluation of long-lived assets used in operations, we
determined that fixed assets with a net book of $1.4 million were no longer
being used in our IP video network and generating cash flows to support their
carrying values. In accordance with FASB Statement No. 144, these assets were
written down to their fair value.
OTHER (INCOME) EXPENSES. Other expenses increased $2.9 million to $3.4 million
in the 2003 period from $0.5 million in the 2002 period. The increase was
primarily due to the recognition of $2.0 million in amortization of discount on
the subordinated debentures issued in December 2002. The other major component
of this category, interest expense, increased $0.6 million to $1.0 million. This
increase was primarily due to higher interest expense on our line of credit
facility of $0.1 million and interest accrued on the subordinated debentures of
$0.6 million. Amortization of deferred financing costs increased $0.3 million to
$0.4 million in the 2003 period from $0.1 million in the 2002 period. In
addition to normal amortization recorded in the 2003 period, additional
accelerated amortization of $0.2 million was recorded to recognize the reduction
in the commitment amount of the line of credit that occurred in 2003.
INCOME TAXES. During the 2003 period, as we had done in the 2002 period, we
established a valuation allowance to offset the benefits of significant
temporary tax differences due to the uncertainty of their realization. These
deferred tax assets consist primarily of net operating losses carried forward in
the VTI merger, reserves and allowances, and stock-based compensation. Due to
the nature of the deferred tax assets, the related tax benefits, upon
realization, will be credited substantially to the goodwill asset or additional
paid-in capital, rather than to income tax expense.
15
DISCONTINUED OPERATIONS. In the 2003 period, we treated our AV division and VS
segment as discontinued operations because: 1) the operations and cash flows of
this division and segment have been eliminated from our ongoing operations as a
result of disposal transactions; and 2) we do not have any significant
continuing involvement in the operation of the division or the segment. We
incurred a loss from discontinued AV operations in the 2003 period of $1.2
million which was $1.5 million less than the $2.7 million loss incurred in the
2002 period. Loss from discontinued VS operations decreased $41.2 million in the
2003 period to $3.6 million from the $44.8 million loss incurred in the 2002
period which included $41.4 million of impairment losses on goodwill and
long-lived assets. Loss from discontinued voice operations decreased $0.3
million in the 2003 period to $0 from the $0.3 million loss incurred in the 2002
period.
NET LOSS. Net loss attributable to common stockholders decreased to $22.4
million, or $0.76 per basic and diluted share, from $58.6 million, or $2.03 per
basic and diluted share, for the 2002 period. Earnings before interest, taxes,
depreciation and amortization (EBITDA) from continuing operations is a
measurement tool management used to understand our results of operations. As
EBITDA from continuing operations does not include non-cash charges and the
results of discontinued operations, it serves as a more accurate gauge of our
current operating results. The following table provides a reconciliation of the
net loss attributable to common stockholders to EBITDA from continuing
operations.
YEARS ENDED DECEMBER 31,
----------------------------
2003 2002
------------ ------------
Net loss attributable to common stockholders $(22,438,938) $(58,565,183)
Depreciation and amortization 5,449,595 3,342,493
Amortization of deferred financing costs 376,596 122,680
Amortization of discount on subordinated debentures 1,987,550 --
Non-cash compensation 1,321,649 675,057
Impairment losses on long-lived assets 1,379,415 --
Interest expense, net 374,865 360,148
Loss from discontinued AV operations 1,173,067 2,696,223
Loss from discontinued VS operations 3,623,637 44,844,385
Loss from discontinued Voice operations -- 286,880
------------ ------------
EBITDA from continuing operations $ (6,752,564) $ (6,237,317)
============ ============
YEAR ENDED DECEMBER 31, 2002 (2002 PERIOD) COMPARED TO YEAR ENDED DECEMBER 31,
2001 (2001 PERIOD).
NET REVENUES. Net revenues from continuing operations increased $2.1 million, or
61%, in the 2002 period to $5.6 million from $3.5 million for the 2001 period.
Subscription and related revenue increased $2.1 million, or 770%, in the 2002
period to $2.3 million from $0.2 million for the 2001 period. Non-subscription
revenue consisting of bridging, events and other one-time fees increased $0.1
million, or 1%, in the 2002 period to $3.3 million from $3.2 million for the
2001 period. The growth in subscription and related revenue was the result of
having, on average, 234 more billable subscriber locations in the 2002 period
than in the 2001 period and those billable subscriber locations each producing
an average of $1,059 per month in revenue. There were 261 average billable
subscriber locations in the 2002 period and 27 in the 2001 period. The average
monthly subscription and related revenue per subscriber location fell 9% from
$817 in the 2001 period to $747 in the 2002 period. The decline in average
monthly subscription and related revenue per subscriber location is the result
of an increased number of DSL-supported locations (lower price point due to the
lower cost). The $0.1 million increase in non-subscription revenue resulted from
the following: 1) a $0.6 million increase in H.323 bridging revenue from $0.1
million in the 2001 period to $0.7 million in the 2002 period resulting from
increased billable subscriber locations; 2) a $0.2 million increase in
professional services revenue resulting from the NFL and NBA draft events and a
corporate event for a Fortune 500 company; and 3) a $0.8 million decline in
H.320 bridging revenue from $3.0 million in the 2001 period to $2.2 million in
the 2002 period.
16
COST OF REVENUE. Cost of revenue increased $2.7 million, or 93%, in the 2002
period to $5.6 million from $2.9 million for the 2001 period. Infrastructure
costs increased $1.3 million, or 155%, in the 2002 period to $2.2 million from
$0.9 million for the 2001 period. This increase resulted from the build-out of
the network to handle the video traffic of approximately 4,000 billable
subscriber locations. Access costs increased $1.5 million, or 781%, in the 2002
period to $1.7 million from $0.2 million for the 2001 period. The growth in
access costs was the result of having, on average, 234 more billable subscriber
locations in the 2002 period than in the 2001 period and those billable
subscriber locations each costing an average of $534 per month for access to the
network. There were 261 average billable subscriber locations in the 2002 period
and 27 in the 2001 period. The average monthly access costs per subscriber
location fell 9% from $595 in the 2001 period to $539 in the 2002 period. The
decline in average monthly access costs per subscriber location is the result of
the growth in the number of billable subscriber locations using the $199 per
month pay as you go plan and by the increasing use of DSL as the means of
accessing the network. Other costs of revenue include the personnel costs
related to providing the Glowpoint service along with the ISDN network costs of
providing H.320 bridging services. These costs decreased $0.1 million, or 6%, in
the 2002 period to $1.7 million from $1.8 million for the 2001 period. This
decrease resulted primarily from three factors: 1) in the September 2002 quarter
we recorded credits of approximately $250,000 related to refunds of previously
paid infrastructure and access fees; 2) increased depreciation related to
increased equipment deployed in the network - $0.2 million; and 3) ISDN network
costs fell $0.1 million in line with the decline in H.320 bridging revenue.
GROSS MARGINS. Gross margins decreased approximately $0.6 million in the 2002
period from approximately $0.6 million in the 2001 period to approximately
$2,000. As a percentage of revenue, gross margins decreased in the 2002 period
to 0%, as compared to 16.7% of net revenues in the 2001 period. The primary
causes of the decrease in gross margin were the increased fixed costs incurred
to continue the build out of the network ($1.3 million) and increased
depreciation related to increased equipment deployed in the network - $0.2
million offset by the increase in gross margin expected from the increase in
revenue ($0.8 million, assuming a 40% marginal gross margin on the additional
$2.1 million in revenue) and the impact in the September 2002 quarter of
approximately $250,000 in refunds of previously paid infrastructure and access
fees.
RESEARCH AND DEVELOPMENT. Research and development costs, which include the
costs of the personnel in this group, the equipment they use and their use of
the network for development projects, increased $0.4 million in the 2002 period
to $1.0 million from $0.6 million in the 2001 period and were up as a percentage
of revenue from 16.8% in the 2001 period to 18.3% of revenue in the 2002 period.
The increase in expenses was the result of adding three full-time employees in
the 2002 period and incurring increased telecommunications, depreciation and
rent costs.
SELLING. Selling expenses increased $2.6 million in the 2002 period to $3.8
million, from $1.2 million in the 2001 period and were up as a percentage of
revenue from 35.4% in the 2001 period to 68.4% of revenue in the 2002 period.
The primary cause for the $2.6 million increase in costs for the 2002 period is
the $1.7 million increase in salaries and benefits which was the result of
adding twenty full-time employees in the 2002 period. The remainder of the
variance results from higher commissions and bonuses associated with higher
revenue levels ($0.1 million), increased marketing expenses ($0.4 million) and
increased sales overhead (rent, depreciation, telecommunications, insurance,
travel and office expenses) ($0.4 million).
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased $4.9
million in the 2002 period to $5.1 million from $10.0 million in the 2001
period. General and administrative expenses as a percentage of net revenues for
the 2002 period declined from 286.2% in the 2001 period to 91.1% in the 2002
period. This category of expense was significantly impacted by non-recurring
charges that were recognized in the fourth quarter of 2001. The most significant
of these 2001 charges was the $4.0 million non-cash charge related to a
five-year extension of certain stock options granted to our then Chief Executive
Officer, the non-cash charge of $630,000 for accelerated amortization of
Glowpoint network-related capitalized costs and the $375,000 charge related to
the settlement of outstanding litigation. In the 2002 period a $0.2 million
non-cash charge related to the one-year extension of certain stock options
granted to our then Chief Operating Officer was incurred. The net impact of
these items accounts for the majority of the $4.9 million decrease.
17
RESTRUCTURING. A restructuring charge of $260,000 was recorded in the 2002
period. This restructuring charge was related to severance and other
personnel-related costs and was taken to position us to realize $2.0 million in
annual operating expense savings. A restructuring charge of $110,000 was
recorded in the 2001 period. This restructuring charge was related to severance
and other personnel-related costs and was taken to facilitate the relocation of
the Company's accounting and finance group from New Jersey to New Hampshire.
OTHER (INCOME) EXPENSES. Other expenses decreased $0.1 million to $0.5 million
in the 2002 period from $0.6 million in the 2001 period. One component of this
category, amortization of deferred financing costs, increased to $123,000 in the
2002 period as compared to $100,000 in the 2001 period. In addition, interest
income decreased in the 2002 period to $72,000 as compared to $77,000 in the
2001 period. Interest expense decreased in the 2002 period to $432,000 as
compared to $598,000 in the 2001 period. The decline in interest expense
resulted from having lower average outstanding loan balances in the 2002 period
versus the 2001 period and from the lower level of interest rates that existed
in the 2002 period versus the 2001 period.
INCOME TAXES. During the 2002 period, as we had done in the 2001 period, we
established a valuation allowance to offset the benefits of significant
temporary tax differences due to the uncertainty of their realization. These
deferred tax assets consist primarily of net operating losses carried forward in
the VTI merger, reserves and allowances, and stock-based compensation. Due to
the nature of the deferred tax assets, the related tax benefits, upon
realization, will be credited substantially to the goodwill asset or additional
paid-in capital, rather than to income tax expense.
DISCONTINUED OPERATIONS. In the 2002 period, we treated our audio-visual
integration division as a discontinued operation because: 1) the operations and
cash flows of this component have been eliminated from our ongoing operations as
a result of a disposal transaction; and 2) we do not have any significant
continuing involvement in the operation of the division after the disposal
transaction. We incurred a loss from discontinued operations relating to the
audio-visual integration division in the 2002 period of $2.7 million and a $0.4
million loss in the 2001 period. In addition, as a result of several
post-closing adjustments related to the sale of its voice communications
business, we incurred a $0.3 million loss from this discontinued operation in
the 2002 period. We incurred a $0.6 million loss from discontinued operations in
the 2001 period which 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. Net loss attributable to common stockholders increased to $58.6
million, or $2.03 per basic and diluted share in the 2002 period, from $19.0
million, or $0.91 per basic and diluted share, for the 2001 period. EBITDA from
continuing operations is a measurement tool management used to understand our
results of operations. As EBITDA from continuing operations does not include
non-cash charges and the results of discontinued operations, it serves as a more
accurate gauge of our current operating results. In addition, our primary
covenant with our asset-based lender was based on EBITDA results. The following
table provides a reconciliation of the net loss attributable to common
stockholders to EBITDA from continuing operations.
18
YEARS ENDED DECEMBER 31,
----------------------------
2002 2001
------------ ------------
Net loss attributable to common stockholders $(58,565,183) $(18,964,294)
Depreciation and amortization 3,342,493 2,789,274
Amortization of deferred financing costs 122,680 99,912
Amortization of goodwill -- 102,340
Non-cash compensation 675,057 4,442,316
Interest expense, net 360,148 521,219
Income taxes -- 200,000
Deemed dividends on Series A convertible preferred stock -- 4,433,904
Other non-recurring, non-cash items -- 1,165,000
Loss from discontinued VS operations 44,844,385 1,566,208
Loss from discontinued AV operations 2,696,223 395,697
Loss from discontinued Voice operations 286,880 617,389
Gain on sale of discontinued Voice operations -- (277,414)
------------ ------------
EBITDA from continuing operations $ (6,237,317) $ (2,908,449)
============ ============
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003, we had working capital of $4.9 million compared to $27.8
million at December 31, 2002, a decrease of approximately 83%. We had $4.5
million in cash and cash equivalents at December 31, 2003 compared to $2.8
million at December 31, 2002. The $22.9 million decrease in working capital
resulted primarily from the net pay down of $5.8 million of bank loans, the
funding of the $12.3 million cash loss from operations in the 2003 period, the
payment of approximately $1.1 million in legal, accounting and investment
banking fees associated with the sale of the VS operation and the purchase of
$2.4 million of furniture, equipment and leasehold improvements.
In January 2004, in exchange for the cancellation and termination of notes with
an aggregate face value of $4,888,000 and forfeiture of any and all rights of
collection, claim or demand under the notes, we issued to the holders of the
notes (i) an aggregate of 203.667 shares of Series B convertible preferred stock
and (ii) an aggregate of 250,000 shares of restricted common stock; and reduced
the exercise price of the warrants to purchase shares of our common stock issued
pursuant to the original purchase agreement from $3.25 to $2.75. As a result of
this exchange, the $3.1 million of discount on subordinated debentures as of
December 31, 2003 will be written off to expense in the first quarter of 2004.
In February 2004, we raised net proceeds of $12.5 million in a private placement
of 6,100,000 shares of our common stock at $2.25 per share. We also issued
1,830,000 warrants to purchase shares of our common stock at an exercise price
of $2.75 per share. The warrants expire on August 17, 2009. The warrants are
subject to certain anti-dilution protection. In addition, we issued to our
placement agent five-year warrants to purchase 427,000 shares of common stock at
an exercise price of $2.71 per share.
At December 31, 2003, we had a $7.5 million working capital credit facility with
JPMorgan Chase Bank. Borrowings under this facility bear interest at the
lender's base rate plus 1 1/2% per annum. At December 31, 2003, there were no
outstanding borrowings under this facility. Proceeds from the sale of the VS
segment were used to pay down the outstanding balance under the facility to
zero. The credit facility remained in place subsequent to the closing of the VS
sale transaction. In February 2004, this credit facility was terminated at our
request. As a result of the termination of this credit facility, the $85,000 of
unamortized deferred financing costs as of December 31, 2003 will be written off
to expense in the first quarter of 2004. The credit facility contained certain
financial and operational covenants. In 2003, we were in compliance with these
covenants.
The following summarizes our contractual cash obligations and commercial
commitments at December 31, 2003, and the effect such obligations are expected
to have on liquidity and cash flow in future periods.
19
--------- ---------- ---------- -------- ---------
Contractual Obligations Total 2004 2005 2006 2007
--------- ---------- ---------- -------- ---------
Purchase obligations (1) $6,309,880 $4,998,012 $1,139,026 $172,842 $ --
Operating lease obligations 321,055 264,336 56,719 -- --
Capital lease obligations 174,588 138,456 36,132 -- --
---------- ---------- ---------- -------- ---------
Total $6,805,523 $5,400,804 $1,231,877 $172,842 $ --
---------- ---------- ---------- -------- ---------
(1) Under agreements with providers of infrastructure and access circuitry for
our network, we are obligated to make payments under commitments ranging
from 0-3 years.
Future minimum rental commitments under all non-cancelable operating leases are
as follows:
Year Ending December 31
2004 .......................................................................... $264,336
2005 .......................................................................... 56,719
--------
$321,055
========
Future minimum lease payments under capital lease obligations at December 31,
2003 are as follows:
2004 .......................................................................... $ 138,456
2005 .......................................................................... 36,132
---------
Total minimum payments ........................................................ 174,588
Less amount representing interest ............................................. (8,434)
---------
Total principal ............................................................... 166,154
Less portion due within one year .............................................. (131,182)
---------
Long-term portion ............................................................. $ 34,972
=========
Net cash used by operating activities for the 2003 period was $6.5 million as
compared to net cash used in operations of $14.1 million during the 2002 period.
The primary source of operating cash in 2003 was the decrease in net assets of
discontinued operations of $7.6 million. We used this cash to fund the $12.3
million cash loss from operations and the $2.1 million increase in other current
assets.
In an effort to further develop our Glowpoint network solution, we employ a
staff of 11 software and hardware engineers who evaluate, test and develop
proprietary applications. Research and development costs, which include costs of
the personnel in this group, the equipment that they use and their use of the
network, totaled $1.3 million in the 2003 period. It is expected that research
and development costs will remain flat in coming quarters as we design and
develop new service offerings to meet customer demand, test new products and
technologies across the network and develop and enhance on-line tools to make
the customer/partner experience a satisfying and productive one.
Investing activities for the 2003 period included purchases of $2.4 million for
network, computer and videoconferencing equipment and leasehold improvements.
The Glowpoint network is currently built out to handle the anticipated level of
subscriptions for 2004. Although we anticipate current expansion of the network,
we have no significant commitments to make capital expenditures in 2004. In
addition, the sale of the VS segment yielded net proceeds of $16.2 million.
Financing activities in the 2003 period included net pay-downs under our
revolving credit line totaling $5.8 million.
Management believes, based on current circumstances, that we have adequate
capital resources to support current operating levels for at least the next
twelve months.
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.
20
REVENUE RECOGNITION
We recognize service revenue related to the Glowpoint network subscriber service
and the multi-point video and audio bridging services as service is provided. As
the non-refundable, upfront activation fees charged to the subscribers do not
meet the criteria as a separate unit of accounting, they are deferred and
recognized over the life of the customer contracts. Revenues derived from other
sources are recognized when services are provided or events occur.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We record an allowance for doubtful accounts based on specifically identified
amounts that we believe to be uncollectible. We also record additional
allowances based on certain percentages of our aged receivables, which are
determined based on historical experience and our assessment of the general
financial conditions affecting our customer base. If our actual collections
experience changes, revisions to our allowance may be required. After all
attempts to collect a receivable have failed, we write off the receivable
against the allowance.
PREPAID COMMISSIONS
Prior to the sale of the VS operation, we paid commissions to VS employees for
their efforts in obtaining year-long customer subscriptions on the Glowpoint
network. These costs have been recorded as prepaid commissions and are amortized
to selling expenses over the term of the related customer agreement. Payments
made to resellers for their efforts in obtaining customer subscriptions are
treated similarly in the accompanying consolidated financial statements. At
December 31, 2003 and 2002, the Company had deferred approximately $200,000 and
$111,000, respectively, related to prepaid commissions.
LONG-LIVED ASSETS
We evaluate impairment losses on long-lived assets used in operations, primarily
fixed assets, when events and circumstances indicate that the carrying value of
the assets might not be recoverable in accordance with FASB Statement No. 144
"Accounting for the Impairment or Disposal of Long-lived Assets". For purposes
of evaluating the recoverability of long-lived assets, the undiscounted cash
flows estimated to be generated by those assets are compared to the carrying
amounts of those assets. If and when the carrying values of the assets exceed
their fair values, the related assets will be written down to fair value.
In the third quarter of 2003, as a result of our periodic evaluation of
long-lived assets used in operations, we determined that fixed assets with a net
book of $1.4 million were no longer being used in our IP video network and
generating cash flows to support their carrying values. In accordance with FASB
Statement No. 144, these assets were written down to their fair value.
GOODWILL AND OTHER INTANGIBLE ASSETS
We follow Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets in accounting for goodwill and other
intangible assets. SFAS No. 142 requires, among other things, that companies no
longer amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS 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 indefinite useful lives. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142 (See Note 6).
21
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Securities and Exchange Commission ("SEC") published SAB
No. 104, Revenue Recognition. SAB No. 104 was effective upon issuance and
supersedes SAB No. 101, Revenue Recognition in Financial Statements, and
rescinds the accounting guidance contained in SAB No. 101 related to
multiple-element revenue arrangements that was superseded by EITF Issue No.
00-21. Accordingly, SAB No. 104 rescinds portions of the interpretive guidance
included in Topic 13 of the codification of staff accounting bulletins. While
the wording of SAB No. 104 has changed to reflect the guidance of EITF 00-21,
the revenue recognition principles of SAB No. 101 have remained largely
unchanged. The adoption of SAB No. 104 did not have a material effect on the
Company's financial position, results of operations, or cash flows.
In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
the guidance under this consensus did not have an impact on the Company's
financial position, results of operations or cash flows.
INFLATION
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
ITEM 7A. 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.
There are no other material qualitative or quantitative market risks particular
to us.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
GLOWPOINT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Report of Independent Certified Public Accountants...................... F-1
Consolidated Balance Sheets at December 31, 2003 and 2002............... F-2
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001..................................... F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2003, 2002 and 2001......................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001..................................... F-5
Notes to Consolidated Financial Statements.............................. F-7
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the
Stockholders of Glowpoint, Inc.
We have audited the accompanying consolidated balance sheets of Glowpoint, Inc.
and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Glowpoint, Inc. and
Subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the consolidated financial statements, on January 1,
2002 the Company changed its method of accounting for goodwill and other
intangible assets.
BDO Seidman, LLP
Boston, Massachusetts
February 24, 2004
F-1
GLOWPOINT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,184,897 $ 2,762,215
Escrowed cash 335,188 --
Accounts receivable, net of allowance for doubtful accounts of $71,620
and $25,000 at December 31, 2003 and 2002, respectively 2,305,552 1,277,891
Net assets of discontinued AV operations -- 807,067
Assets of discontinued VS operations -- 41,314,701
Other current assets 1,439,978 727,262
------------- -------------
Total current assets 8,265,615 46,889,136
Furniture, equipment and leasehold improvements 13,024,055 11,512,415
Goodwill-net 2,547,862 2,547,862
Other Assets 149,574 552,251
------------- -------------
Total assets $ 23,987,106 $ 61,501,664
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,368,484 $ 1,055,427
Accrued expenses 900,690 681,369
Liabilities of discontinued VS operations -- 17,333,120
Current portion of capital lease obligations 131,182 --
------------- -------------
Total current liabilities 3,400,356 19,069,916
------------- -------------
Noncurrent liabilities:
Bank loan payable -- 5,845,516
Capital lease obligations, less current portion 34,972 --
------------- -------------
Total noncurrent liabilities 34,972 5,845,516
------------- -------------
Total liabilities 3,435,328 24,915,432
------------- -------------
Commitments and contingencies
Subordinated debentures 4,888,000 4,888,000
Discount on subordinated debentures (3,149,805) (4,888,000)
------------- -------------
Subordinated debentures, net 1,738,195 --
------------- -------------
Stockholders' Equity:
Preferred stock, $.0001 par value;
5,000,000 shares authorized, none issued -- --
Common stock, $.0001 par value; 100,000,000 authorized;
30,543,672 and 28,931,660 shares issued, respectively 3,054 2,893
Treasury Stock, 39,891 shares at cost (239,742) (239,742)
Deferred compensation (1,650,607) (186,994)
Additional paid-in capital 137,449,109 131,319,368
Accumulated deficit (116,748,231) (94,309,293)
------------- -------------
Total stockholders' equity 18,813,583 36,586,232
------------- -------------
Total liabilities and stockholders' equity $ 23,987,106 $ 61,501,664
============= =============
See accompanying notes to consolidated financial statements
F-2
GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net revenues $ 10,310,744 $ 5,599,216 $ 3,479,907
Cost of revenues 10,061,881 5,596,801 2,898,460
------------ ------------ ------------
Gross margin 248,863 2,415 581,447
------------ ------------ ------------
Operating expenses
Research and development 1,261,485 1,024,060 582,930
Selling 5,493,905 3,830,489 1,232,876
General and administrative 6,372,677 5,103,373 9,960,680
Restructuring -- 260,000 110,000
Impairment losses on other long-lived assets 1,379,415 -- --
Amortization of goodwill -- -- 102,340
------------ ------------ ------------
Total operating expenses 14,507,482 10,217,922 11,988,826
------------ ------------ ------------
Loss from continuing operations (14,258,619) (10,215,507) (11,407,379)
------------ ------------ ------------
Other (income) expense
Amortization of deferred financing costs 376,596 122,680 99,912
Interest income (7,000) (71,644) (76,928)
Interest expense 1,026,469 431,792 598,147
Amortization of discount on subordinated debentures 1,987,550 39,360 --
------------ ------------ ------------
Total other expenses, net 3,383,615 522,188 621,131
------------ ------------ ------------
Loss before income taxes (17,642,234) (10,737,695) (12,028,510)
Income tax provision -- -- 200,000
------------ ------------ ------------
Loss from continuing operations (17,642,234) (10,737,695) (12,228,510)
Loss from discontinued AV operations (1,173,067) (2,696,223) (395,697)
Loss from discontinued VS operations (3,623,637) (44,844,385) (1,566,208)
Loss from discontinued Voice operations -- (286,880) (617,389)
Gain on sale of discontinued Voice operation -- -- 277,414
------------ ------------ ------------
Net loss (22,438,938) (58,565,183) (14,530,390)
Deemed dividends on series A convertible preferred stock -- -- (4,433,904)
------------ ------------ ------------
Net loss attributable to common stockholders $(22,438,938) $(58,565,183) $(18,964,294)
============ ============ ============
Loss from continuing operations per share:
Basic and diluted $ (0.60) $ (0.37) $ (0.59)
============ ============ ============
Loss from discontinued operations per share:
Basic and diluted $ (0.16) $ (1.66) $ (0.11)
============ ============ ============
Deemed dividends per share:
Basic and diluted $ -- $ -- $ (0.21)
============ ============ ============
Net loss attributable to common stockholders per share:
Basic and diluted $ (0.76) $ (2.03) $ (0.91)
============ ============ ============
Weighted average number of common shares and equivalents outstanding:
Basic and diluted 29,455,644 28,792,217 20,880,125
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Common Stock Treasury Deferred Paid in Accumulated
Shares Amount Stock Compensation Capital Deficit Total
---------- ------- ---------- ----------- ------------- ------------- -------------
Balance at December 31, 2000 17,299,725 $ 1,730 $ -- $(1,197,493) $67,633,846 $(16,779,816) $49,658,267
Amortization of deferred option
compensation -- -- -- 457,566 -- -- 457,566
Extension of expiration date of CEO
stock options -- -- -- -- 3,984,750 -- 3,984,750
Exercise of stock options 1,508,863 150 -- -- 1,589,212 -- 1,589,362
Issuance of common stock in
business acquisitions 1,282,063 128 -- -- 7,844,639 -- 7,844,767
Issuance of common stock 2,220,000 222 -- -- 9,851,039 -- 9,851,261
Common stock received in
satisfaction of debt (39,891) (3) (239,742) -- -- -- (239,745)
Conversion of series A preferred
stock (net of related costs
of $78,269) 3,021,429 302 -- -- 14,726,429 -- 14,726,731
Deemed dividends on series A
preferred stock -- -- -- -- -- (4,433,904) (4,433,904)
Net loss for the year -- -- -- -- -- (14,530,390) (14,530,390)
---------- ------- ---------- ----------- ------------ ------------- -------------
Balance at December 31, 2001 25,292,189 2,529 (239,742) (739,927) 105,629,915 (35,744,110) 68,908,665
Amortization of deferred option
compensation -- -- -- 292,191 -- -- 292,191
Forfeiture of deferred option
compensation -- -- -- 260,742 (260,742) -- --
Issuance of stock options for services -- -- -- -- 135,339 -- 135,339
Extension of expiration date of COO
stock options -- -- -- -- 206,663 -- 206,663
Exercise of stock options 158,482 16 -- -- 371,473 -- 371,489
Exercise of warrants 54,339 5 -- -- -- -- 5
Issuance of warrants for services -- -- -- -- 407,181 -- 407,181
Issuance of warrants in connection
with subordinated debentures -- -- -- -- 4,571,921 (39,360) 4,532,561
Issuance of shares in connection
with Private Placement 3,426,650 343 -- -- 20,257,618 -- 20,257,961
Net loss for the year -- -- -- -- -- (58,525,823) (58,525,823)
---------- ------- ---------- ----------- ------------ ------------- -------------
Balance at December 31, 2002 28,931,660 2,893 (239,742) (186,994) 131,319,368 (94,309,293) 36,586,232
Amortization of deferred option
compensation -- -- -- 161,446 -- -- 161,446
Forfeiture of deferred option
compensation -- -- -- 25,548 (25,548) -- --
Deferred compensation related to
the issuance of restricted stock 670,000 67 -- (1,945,200) 1,945,200 -- 67
Amortization of deferred compensation
from the issuance of restricted
stock -- -- -- 378,766 -- 378,766
Deferred compensation related to
the extension of the post-
termination exercise period of
stock options -- -- -- (2,233,834) 2,233,834 -- --
Amortization of deferred
compensation related to the
extension of the post-termination
exercise period of stock options -- -- -- 2,149,661 -- -- 2,149,661
Exercise of stock options 603,012 60 -- -- 630,875 -- 630,935
Exercise of warrants 96,183 10 -- -- -- -- 10
Issuance of warrants for services -- -- -- -- 775,151 -- 775,151
Issuance of shares in lieu of interest
on subordinated debentures 242,817 24 -- -- 570,229 -- 570,253
Net loss for the year -- -- -- -- -- (22,438,938) (22,438,938)
---------- ------- ---------- ----------- ------------ ------------- -------------
Balance at December 31, 2003 30,543,672 $ 3,054 $ (239,742) $(1,650,607) $137,449,109 $(116,748,231) $ 18,813,583
========== ======= ========== =========== ============ ============= =============
See accompanying notes to consolidated financial statements.
F-4
GLOWPOINT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from Operating Activities:
Net loss $(22,438,938) $(58,565,183) $(14,530,390)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,888,970 4,984,475 7,192,029
Amortization of deferred financing costs 376,596 122,680 99,912
Amortization of discount on subordinated debentures 1,987,550 39,360 --
Non cash compensation 4,008,076 675,057 4,442,316
Impairment losses on goodwill -- 40,012,114 --
Impairment losses on long-lived assets 1,379,415 1,357,806 --
Deferred income taxes -- -- 200,000
Loss on disposal of equipment -- 28,305 --
Increase (decrease) in cash attributable to changes
in assets and liabilities, net of effects of
acquisitions
Escrowed cash (335,188) -- --
Accounts receivable (1,027,661) 10,029,925 (10,691,984)
Inventory -- (2,401,306) 548,423
Net assets of discontinued AV operations 807,067 (807,067) --
Net assets of discontinued VS operations 6,761,095 -- --
Other current assets (2,147,440) (3,689,790) (1,637,533)
Other assets 52,151 (90,329) 46,880
Accounts payable (1,360,383) (3,247,953) (2,084,176)
Accrued expenses 219,320 (1,009,341) 182,412
Deferred revenue -- (27,009) 322,409
Other current liabilities -- (1,465,049) 564,293
------------ ------------ ------------
Net cash used by operating activities (6,829,370) (14,053,305) (15,345,409)
------------ ------------ ------------
Cash flows from Investing Activities:
Purchases of furniture, equipment and
leasehold improvements (2,399,297) (4,745,933) (7,981,050)
Proceeds from sale of furniture, equipment and leasehold
improvements -- 15,000 --
Costs related to acquisition of business
including cash acquired -- -- (175,513)
Proceeds from sale of discontinued VS operation 16,233,312 -- --
Proceeds from sale of discontinued Voice operation -- -- 1,008,692
Notes receivable from sale of discontinued Voice operation -- -- 1,008,691
------------ ------------ ------------
Net cash provided (used) by investing activities 13,834,015 (4,730,933) (6,139,180)
------------ ------------ ------------
Cash flows from Financing Activities:
Proceeds from common stock offering -- 20,257,961 9,851,261
Proceeds (costs) from issuance of subordinated debentures (249,355) 4,571,921 --
Issuance of common stock for cash assets
of GeoVideo Networks, Inc. -- -- 2,500,000
Costs of conversion of preferred stock -- -- (78,269)
Exercise of warrants and options, net 630,935 371,494 1,589,362
Proceeds from bank loans 75,545,455 78,894,947 87,748,581
Payments on bank loans (81,390,971) (83,677,513) (80,120,499)
Deferred financing costs (26,070) (505,074) (99,676)
Payments on capital lease obligations (91,957) (56,734) (87,293)
------------ ------------ ------------
Net cash provided (used) by financing activities (5,581,963) 19,857,002 21,303,467
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,422,682 1,072,764 (181,122)
Cash and cash equivalents at beginning of period 2,762,215 1,689,451 1,870,573
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,184,897 $ 2,762,215 $ 1,689,451
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 227,103 $ 182,176 $ 598,147
============ ============ ============
Taxes $ -- $ -- $ 2,274
============ ============ ============
F-5
Non-cash financing and investing activities:
During the year ended December 31, 2003 and 2002, the Company recorded non-cash
amortization of discount on subordinated debentures of $1,987,550 million
and $39,360, respectively.
During the year ended December 31, 2001, the Company recorded non-cash deemed
dividends on Series A mandatorily redeemable convertible preferred stock of
$4,433,904.
In June 2001, the Company acquired the non-cash assets of GeoVideo Networks,
Inc. for non-cash consideration of $2,500,000 in addition to issuing common
stock in exchange for $2,500,000 in cash assets.
In July 2001, the Company acquired the assets and certain liabilities of
Advanced Acoustical Concepts, Inc. for non-cash consideration of $793,750.
In November 2001, the Company acquired certain assets and liabilities of the
Axxis, Inc. videoconferencing division for non-cash consideration of
$2,051,017.
During the year ended December 31, 2001, the Company issued 3,021,429 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 $4.90 per share, the total value attributable to the
common stock was $14,805,000.
During the year ended December 31, 2001, the Company received 39,891 shares of
treasury stock common stock valued at $239,742 in satisfaction of
outstanding debt owed to the Company by former VTI directors and related
parties.
Equipment with costs totaling $258,110 was acquired under capital lease
arrangements during the year ended December 31, 2003.
See accompanying notes to consolidated financial statements.
F-6
GLOWPOINT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE 1 -- THE BUSINESS
Glowpoint, Inc. ("Glowpoint" or the "Company"), a Delaware corporation, provides
comprehensive feature-rich video communications services with telephone-like
reliability and ease-of-use on the industry's only carrier-grade, IP-based
subscriber network that is designed exclusively for video communications. The
network spans across three continents, enabling users to connect across the
United States, as well as to virtually any business center around the world. The
growth of subscriptions was fairly steady through early 2003, when it was
determined that separating the video communications service from the equipment
sales side of the business would open up a much larger distribution channel for
the Glowpoint network. On September 23, 2003, Glowpoint, formerly known as Wire
One Technologies, Inc. ("Wire One") completed the sale of its Video Solutions
(VS) business to Gores Technology Group ("Gores") business which had been
central to the Company's operations, in order to focus solely on growing its
video communications services. Glowpoint's mission is to significantly improve
the ease-of-use, cost-effectiveness, functionalities, and quality of existing
video communications in order to make it an integral part of business
communications.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, AllComm Products Corporation ("APC"), and VTC
Resources, Inc. ("VTC"). All material inter-company balances and transactions
have been eliminated in consolidation.
Use of estimates
Preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual amounts could differ
from the estimates made. Management periodically evaluates estimates used in the
preparation of the financial statements for continued reasonableness.
Appropriate adjustments, if any, to the estimates used are made prospectively
based upon such periodic evaluation.
Revenue recognition
The Company recognizes service revenue related to the Glowpoint network
subscriber service and the multi-point video and audio bridging services as
service is provided. Customer activation fees are deferred and recognized over
the life of the customer contract. Revenues derived from other sources are
recognized when services are provided or events occur.
Cash and cash equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less when purchased to be cash equivalents. The
Company's cash and cash equivalents consisted of $4.5 million and $2.8 million
at December 31, 2003 and 2002.
In September 2003, as a condition to closing the sale of its videoconferencing
equipment business, the Company set aside $335,000 in an interest-bearing escrow
account. These funds are restricted as to their use until certain calculations
required by the asset purchase agreement are performed and agreed between the
parties or determined by independent accountants and are included in escrowed
cash on the accompanying consolidated balance sheet at December 31, 2003.
F-7
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
and uncollateralized trade accounts receivable. The Company places its cash and
cash equivalents primarily in commercial checking accounts and money market
funds. Commercial bank balances may from time to time exceed federal insurance
limits; money market funds are uninsured.
The Company performs ongoing credit evaluations of its customers. No single
customer accounts for more than 10% of the Company's revenues or accounts
receivable. The Company records an allowance for doubtful accounts based on
specifically identified amounts that are believed to be uncollectible. The
Company also records additional allowances based on certain percentages of its
aged receivables, which are determined based on historical experience and an
assessment of the general financial conditions affecting its customer base. If
the Company's actual collections experience changes, revisions to its allowance
may be required. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
Prepaid Commissions
Prior to the sale of the VS operation, the Company paid commissions to VS
employees for their efforts in obtaining year-long customer subscriptions on the
Glowpoint network. These costs have been recorded as prepaid commissions and are
amortized to selling expenses over the term of the related customer agreement.
Payments made to resellers for their efforts in obtaining customer subscriptions
are treated similarly in the accompanying consolidated financial statements. At
December 31, 2003 and 2002, the Company had deferred approximately $200,000 and
$111,000, respectively, related to prepaid commissions.
Furniture, equipment and leasehold improvements
Furniture, equipment and leasehold improvements are stated at cost. Furniture
and equipment are depreciated over the estimated useful lives of the related
assets, which range from three to six years. Leasehold improvements are
amortized over the shorter of either the asset's useful life or the related
lease term. Depreciation is computed on the straight-line method for financial
reporting purposes. Furniture, equipment and leasehold improvements include
fixed assets subject to capital leases which are depreciated over the life of
the respective asset.
Long-lived assets
The Company evaluates impairment losses on long-lived assets used in operations,
primarily fixed assets, when events and circumstances indicate that the carrying
value of the assets, might not be recoverable in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 144 "Accounting for the
Impairment or Disposal of Long-lived Assets". 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 their fair values,
the related assets will be written down to fair value.
In the third quarter of 2003, as a result of our periodic evaluation of
long-lived assets used in operations, we determined that fixed assets with a net
book of $1.4 million were no longer being used in our IP video network and
generating cash flows to support their carrying values. In accordance with FASB
Statement No. 144, these assets were written down to their fair value.
Goodwill and other intangible assets
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets in accounting for goodwill and other
intangible assets. SFAS No. 142 requires, among other things, that companies no
longer amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS 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 indefinite useful lives. An
intangible asset with an indefinite useful life should be tested for impairment
in accordance with the guidance in SFAS No. 142 (See Note 6).
The following tables present a reconciliation of net income and earnings per
share for the year ended December 31, 2001, adjusted to exclude goodwill
amortization. Goodwill was not amortized in the years ended December 31, 2003
and 2002.
F-8
Year Ended
December 31,
2001
------------
Reported net loss attributable to common stockholders $(18,964,294)
Goodwill amortization - continuing operations 102,340
Goodwill amortization - discontinued operations 2,581,307
------------
Adjusted net loss attributable to common stockholders $(16,280,647)
============
Reported net loss per basic and diluted share $ (0.91)
Goodwill amortization - continuing operations 0.01
Goodwill amortization - discontinued operations 0.12
------------
Adjusted net loss per basic and diluted share $ (0.78)
============
Income taxes
The Company uses the liability method to determine its income tax expense or
benefit. Deferred tax assets and liabilities are computed based on temporary
differences between the financial reporting and tax bases of assets and
liabilities (principally certain accrued expenses, compensation expenses,
depreciation expense and allowance for doubtful accounts), and are measured
using the enacted tax rates that are expected to be in effect when the
differences are expected to reverse.
Earnings (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 subordinated debentures using the if-converted method. Diluted
loss per share for 2003, 2002 and 2001 is the same as basic loss per share,
since the effects of the calculation for those years were anti-dilutive.
YEARS ENDED DECEMBER 31,
-------------------------------------
2003 2002 2001
---------- ---------- ----------
Weighted average shares outstanding 29,455,644 28,792,217 20,880,125
Effect of dilutive options and warrants -- -- --
---------- ---------- ----------
Weighted average shares outstanding including
dilutive effect of securities 29,455,644 28,792,217 20,880,125
========== ========== ==========
Weighted average options and warrants to purchase 11,956,659, 11,143,590 and
9,535,609 shares of common stock during the years ended December 31, 2003, 2002
and 2001, respectively, and subordinated debentures convertible into 2,036,667
common shares in 2003 and 2002, were not included in the computation of diluted
earnings per share because the Company reported a net loss attributable to
common stockholders for these periods and their effect would have been
anti-dilutive.
F-9
Stock-Based Compensation
The Company periodically grants stock options to employees in accordance with
the provisions of its stock option plans, with the exercise price of the stock
options being set at the closing market price of the common stock on the date of
grant. The Company accounts for its employee stock-based compensation plans
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and accordingly accounts for employee stock-based
compensation utilizing the intrinsic value method. SFAS No. 123, "Accounting for
Stock-Based Compensation", establishes a fair value based method of accounting
for stock-based compensation plans. The Company has adopted the disclosure only
alternative under SFAS No. 123, which requires disclosure of the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been adopted
as well as certain other information.
The fair value of stock options or warrants issued in return for services
rendered by any non-employees is estimated on the date of grant using the
Black-Scholes pricing model and is charged to operations over the vesting period
or the terms of the underlying service agreements. The Company adjusts these
estimates for any increases in market price for each of its reporting periods.
In 2002, the Company adopted SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", which (i) amends SFAS No. 123, to
provide alterative methods of transition for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee
compensation (ii) amends the disclosure provisions of, SFAS No. 123 to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation
and (iii) amends APB opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. The Company
continues to account for employee stock-based compensation utilizing the
intrinsic value method. The additional disclosures required by SFAS No. 148 are
as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net loss attributable to common stockholders, $(22,438,938) $(58,565,183) $(18,964,294)
as reported
Add: stock based employee compensation
expense included in reported net loss, net of tax 2,311,107 292,191 457,566
Deduct: total stock based employee
compensation expense determined under the fair value
based method for all awards, net of tax (5,486,945) (6,125,125) (6,785,478)
------------ ------------ ------------
Pro forma net loss $(25,614,776) $(64,398,117) $(25,292,206)
============ ============ ============
Net loss per share:
Basic and diluted - as reported $ (0.76) $ (2.03) $ (0.91)
Basic and diluted - pro forma $ (0.87) $ (2.24) $ (1.21)
The weighted-average grant date fair value of options granted during 2003, 2002
and 2001 under the Black-Scholes option pricing model was $1.23, $1.90 and $2.70
per option, respectively.
The fair value of each option granted in 2003, 2002 and 2001 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
2003 2002 2001
---------- ---------- -----------
Risk fees interest rates.................................. 4.00% 3.89% 4.40%
Expected option lives..................................... 7.55 years 5.00 years 3.81 years
Expected volatility....................................... 79.32% 145.41% 115.9%
Expected dividend yields.................................. None None None
Fair value of financial instruments
Financial instruments reported in the Company's consolidated balance sheet
consist of cash, accounts receivable, accounts payable and bank loan payable,
the carrying value of which approximated fair value at December 31, 2003 and
2002. The fair value of the financial instruments disclosed are not necessarily
representative of the amount that could be realized or settled nor does the fair
value amount consider the tax consequences of realization or settlement.
Recent accounting pronouncements
In December 2003, the Securities and Exchange Commission ("SEC") published SAB
No. 104, Revenue Recognition. SAB No. 104 was effective upon issuance and
supersedes SAB No. 101, Revenue Recognition in Financial Statements, and
rescinds the accounting guidance contained in SAB No. 101 related to
multiple-element revenue arrangements that was superseded by EITF Issue No.
00-21. Accordingly, SAB No. 104 rescinds portions of the interpretive guidance
included in Topic 13 of the codification of staff accounting bulletins. While
the wording of SAB No. 104 has changed to reflect the guidance of EITF 00-21,
the revenue recognition principles of SAB
F-10
No. 101 have remained largely unchanged. The adoption of SAB No. 104 did not
have a material effect on the Company's financial position, results of
operations, or cash flows.
In November 2002, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Revenue
arrangements with multiple deliverables include arrangements which provide for
the delivery or performance of multiple products, services and/or rights to use
assets where performance may occur at different points in time or over different
periods of time. EITF Issue No. 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
the guidance under this consensus did not have an impact on the Company's
financial position, results of operations or cash flows.
NOTE 3 -- DISCONTINUED OPERATIONS
In September 2003, the Company completed the sale of all of the properties,
rights, interests and other tangible and intangible assets that relate in any
material respect to its VS segment to Gores pursuant to the terms of the asset
purchase agreement dated as of June 10, 2003. The Company is entitled to receive
total consideration of up to $24 million for the transaction, consisting of $21
million in cash, including $19 million received at closing and a $2 million
holdback, an unsecured $1 million promissory note maturing on December 31, 2004
and bearing an interest rate of 5% per annum and a $2 million earn-out based on
performance of the assets over the two years following the closing. Gores held
back $2 million to cover potential purchase price adjustments payable by
Glowpoint arising under the asset purchase agreement. The $2 million cash
holdback and the $1 million unsecured promissory note were not recorded on the
consolidated balance sheet as of December 31, 2003 as Gores had not yet
completed their evaluation of the acquired assets. A deferred gain on sale of
the VS operation totaling $646,000 was recorded and is a component of accrued
expenses on the accompanying consolidated balance sheet as of December 31, 2003.
Gores will also pay Glowpoint on each of June 30, 2004 and June 30, 2005
additional payments, not to exceed an aggregate of $2 million, equal to five
percent of the sum of (1) the amounts billed by Gores from the operation of the
VS segment by Gores after the closing, plus (2) the annual revenues derived from
the video solutions business of Pierce Technology Services, Inc. (formerly
Forgent Networks, Inc.) for such year in excess of $96 million. If Gores sells
substantially all of the assets of its video solutions business prior to June
30, 2005, whether by merger, sale of stock or sale of assets, for total
consideration greater than $35 million, Gores will pay the Company $2 million
less amounts previously paid. As partial consideration for the purchase of
assets, Gores assumed certain liabilities related to the VS segment, including
(1) all liabilities to be paid or performed after the closing date that arise
from or out of the performance or non-performance by Gores after the closing
date of any contracts included in the assets or entered into after June 10, 2003
and (2) the Company's accounts payable, customer deposits, deferred revenue and
accrued liabilities related to the VS segment.
The sale of the Company's VS segment was approved by stockholders at the
Company's 2003 Annual Meeting of Stockholders held Thursday, August 21, 2003.
The closing of the sale took place on September 23, 2003. The VS segment
included the Company's videoconferencing equipment distribution, system design
and engineering, installation, operation and maintenance activities consisting
of: a headquarters and warehouse facility in Miamisburg, Ohio; a help desk
operation in Camarillo, California; 24 sales offices and demonstration
facilities across the United States; and a client list of approximately 3,000
active customers with an installed base of approximately 22,000 video
conferencing systems. As a result, this segment is classified as a discontinued
operation in the accompanying financial statements, with its assets and
liabilities summarized in single line items on the consolidated balance sheets
and its results from operations summarized in a single line item on the
consolidated statement of operations.
Assets of discontinued VS operations consist of the following:
DECEMBER 31, 2002
-----------------
Accounts receivable ..................................................... $24,163,666
Inventory ............................................................... 8,122,996
Other current assets .................................................... 6,149,214
Fixed assets ............................................................ 2,684,264
Other assets ............................................................ 194,561
-----------
Total .............................................................. $41,314,701
===========
Liabilities of discontinued VS operations consist of the following:
DECEMBER 31, 2002
-----------------
Accounts payable ........................................................ $ 7,994,535
Accrued expenses ........................................................ 1,441,444
Deferred revenue ........................................................ 7,871,267
Other liabilities ....................................................... 25,874
-----------
Total .............................................................. $17,333,120
===========
F-11
Revenues and pretax loss from discontinued VS operations are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues $ 40,253,589 $ 77,148,861 $ 70,931,571
Pretax loss $ (3,623,637) $(44,844,385) $ (1,566,208)
In March 2003, the Company completed the sale of certain assets of its
Audio-Visual ("AV") component to Columbia, Maryland-based Signal Perfection
Limited ("SPL") for approximately $807,000, $250,000 of which was paid in cash
at the close of the transaction and the balance of which was paid in full. The
sale of the AV component was aimed at enabling the Company to focus more of its
resources to the development and marketing of its Glowpoint network and to its
video solutions business. As a consequence, this unit has been classified as a
discontinued operation in the accompanying consolidated financial statements,
with its net assets summarized in a single line item on the consolidated balance
sheets and its results from operations summarized in a single line item on the
consolidated statements of operations.
Net assets of discontinued AV operations consist of the following:
DECEMBER 31, 2002
-----------------
Inventory $300,000
Other current assets 507,067
--------
Total $807,067
========
Revenues and pretax loss from discontinued AV operations are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues $ 3,876,822 $ 17,260,642 $ 14,504,757
Pretax loss $ (1,173,067) $ (2,696,223) $ (395,697)
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 which was paid in
2002. The Company's sale of its voice communications unit was aimed at enabling
it to sharpen its focus on video solutions and on Glowpoint. As a consequence,
this unit has been classified as a discontinued operation in the accompanying
financial statements, with its results from operations summarized in a single
line item on the consolidated statements of operations.
Revenues and pretax loss from discontinued Voice operations are as follows:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues $ -- $ -- $ 5,383,145
Pretax loss $ -- $ (286,880) $ (617,389)
The pretax loss recorded in 2002 was the result of several post-closing
adjustments related to the settlement of liabilities with vendors and customers
for amounts in excess of those previously accrued.
F-12
NOTE 4 -- OTHER CURRENT ASSETS
Other current assets consist of the following:
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
Prepaid professional fees $ 163,925 $ --
Prepaid insurance 137,819 121,505
Prepaid maintenance contracts 127,640 67,506
Prepaid telecommunications costs 268,465 148,651
Prepaid commissions 199,571 111,375
Receivable from Gores Technology Group, net 209,688 --
Sales tax refunds receivable 138,603 --
Marketable equity securities 74,065 --
Security deposits -- 80,000
Related party loan receivable -- 69,960
Insurance claim receivable -- 49,156
Other current assets 120,202 79,109
---------- ----------
$1,439,978 $ 727,262
========== ==========
At December 31, 2003, the Company was owed $1,553,303 by Gores and owed Gores
$1,343,615, with this receivable and payable resulting from post-sale
transactions.
NOTE 5 -- FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
DECEMBER 31,
----------------------------- ESTIMATED
2003 2002 USEFUL LIFE
------------ ------------ -----------
Leasehold improvements $ 389,080 $ 370,813 5 Years
Office furniture and equipment 406,945 400,304 5 Years
Computer equipment and software 2,322,750 2,007,196 3 Years
Videoconferencing equipment 354,294 235,388 3 Years
Bridging equipment 1,244,063 1,244,063 5 Years
Network equipment 14,815,734 11,677,589 6 Years
Vehicles 220,316 268,736 5 Years
------------ ------------
19,753,182 16,204,089
Less: Accumulated depreciation (6,729,127) (4,691,674)
------------ ------------
$ 13,024,055 $ 11,512,415
============ ============
Depreciation expense was $3,115,863, $4,096,596 and $4,073,599 for the years
ended December 31, 2003, 2002 and 2001, respectively, which includes
depreciation expense of $32,832 for 2003, $57,937 for 2002 and $64,224 for 2001
on fixed assets subject to capital leases. The equipment under capital leases as
of December 31, 2003 had a cost of $258,110, accumulated depreciation of $32,832
and a net book value of $225,278.
NOTE 6 -- GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS 142 on January 1, 2002. As of this date, the Company
completed its Step 1 analysis and determined there was no impairment of its
existing goodwill. Subsequent to the completion of this initial transitional
goodwill impairment test, certain events and changes in circumstances caused the
Company to reevaluate the goodwill for possible impairment. The Company used a
fair value approach as of September 30, 2002 to reevaluate the existing goodwill
for impairment. The Company completed this valuation in the fourth quarter of
2002 and it resulted in an impairment of $40,012,114 of goodwill in accordance
with SFAS 142, which is included in loss from discontinued VS operations in the
accompanying consolidated statement of operations.
The Company's acquisitions to date have all been accounted for using the
purchase method. All future business combinations will be accounted for under
the purchase method, which may result in the recognition of goodwill and other
intangibles assets, some of which may subsequently be charged to operations,
either by amortization or impairment charges. For purchase business combinations
completed prior to June 30, 2001, the net carrying amount of goodwill was
$2,547,862 as of December 31, 2003. The Company completed its annual test of
goodwill and other
F-13
intangible assets for impairment in the fourth quarter of 2003 in accordance
with SFAS 142 and determined that no impairment existed.
NOTE 7 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
-------------------
2003 2002
-------- --------
Deferred gain on sale of VS operation $645,745 $ --
Accrued compensation 168,109 239,252
Accrued interest 24,791 52,510
Accrued restructuring -- 29,050
Sales tax payable -- 200,171
Customer deposits -- 128,016
Other 62,045 32,370
-------- --------
$900,690 $681,369
======== ========
NOTE 8 -- BANK LOAN PAYABLE AND LONG-TERM DEBT
Bank loan payable
In May 2002, the Company entered into a $25 million working capital credit
facility with JPMorgan Chase Bank and incurred $505,074 in deferred financing
costs. Under terms of the three-year agreement for this facility, loan
availability is based on (1) 80% of eligible accounts receivable and (2) the
lesser of 50% against eligible finished goods inventory or 80% against the net
eligible amount of the net orderly liquidation value by category of finished
goods inventory as determined by an outside appraisal firm, subject to an
inventory cap of $2 million. Borrowings bear interest at the lender's base rate
plus 1 1/2 % per annum. At December 31, 2003, the interest rate on the facility
was 5.50%. The credit facility contains certain financial and operational
covenants. For the period from July 1, 2002 through September 30, 2002 (the
"2002 Third Quarter"), the Company was in violation of the covenant requiring
the Company to meet a certain earnings before interest, taxes, depreciation and
amortization ("EBITDA") target for the three quarters ended September 30, 2002.
In November, 2002, the Company concluded an amendment to the credit facility to
cure noncompliance with the EBITDA covenant. As compensation for this amendment,
the Company granted 100,000 warrants with an exercise price of $1.99 to JPMorgan
Chase. The fair value of these warrants was determined to be $176,203 using the
Black-Scholes valuation method and this amount was charged to interest expense
in 2002. For the period from October 1, 2002 through December 31, 2002 ("2002
Fourth Quarter"), the Company was in violation of the covenant requiring the
Company to meet a certain EBITDA target for the four quarters ended December 31,
2002. In March 2003, the Company concluded an amendment to the credit facility
with JPMorgan Chase Bank to cure non-compliance with the EBITDA financial
covenant. As compensation for this amendment, the Company granted 100,000
warrants with an exercise price of $2.06 to JPMorgan Chase. The fair value of
these warrants was determined to be $187,210 using the Black Scholes valuation
method and this amount was charged to interest expense in 2003. Some additional
highlights of the amendment include: 1) a reduction in the commitment amount of
the line of credit from $25 million to $15 million; 2) revised EBITDA covenant
levels for the remainder of the term of the credit agreement; and, 3)
maintenance of the interest rate, loan fees and provisions of the borrowing
formula at the same levels as previously negotiated. In September 2003, the
Company signed a letter agreement with JP Morgan Chase to further reduce the
commitment amount of the line of credit from $15 million to $7.5 million. In
connection with these amendments, the Company wrote off approximately $188,000
of deferred financing costs in 2003. At December 31, 2003, there were no
borrowings outstanding under the facility. At December 31, 2002, the outstanding
borrowings were classified as non-current in the accompanying consolidated
balance sheet because the facility matures on May 31, 2005. In February 2004,
the working capital credit facility with JPMorgan Chase was terminated at the
Company's request. As a result of the termination of this credit facility, the
$85,000 of unamortized deferred financing costs as of December 31, 2003 will be
written off to expense in the first quarter of 2004.
F-14
Long-term debt
Long-term debt consists of the following:
DECEMBER 31,
-----------------------
2003 2002
---------- ----------
Bank loan payable $ -- $5,845,516
Capital lease obligations 166,154 --
---------- ----------
166,154 5,845,516
Less: current maturities 131,182 --
---------- ----------
$ 34,972 $5,845,516
========== ==========
NOTE 9 -- SUBORDINATED DEBENTURES
In December 2002, the Company raised net proceeds of $4.6 million in a private
placement of $4,888,000 principal amount of 8% convertible debentures. The
debentures, which are convertible into 2,036,677 shares of common stock at $2.40
per share, are subordinate to the Company's credit facility with JPMorgan Chase
Bank. The debentures mature in February 2004, or 90 days following the
expiration (in May 2005) or earlier termination of the credit facility,
whichever is later. The debentures were settled in January 2004, as discussed in
Note 20. The Company has the option of paying interest quarterly on the
debentures in the form of either cash or Glowpoint common stock. Investors in
the private placement also received five-year warrants to purchase 814,668
shares of common stock at an exercise price of $3.25 per share. The warrants are
subject to customary anti-dilution adjustments. The Company also issued to its
placement agent warrants to purchase 40,733 shares of common stock at an
exercise price of $0.001 per share with an expiration date of January 31, 2003.
Costs of the offering, including the fair value of the warrants, totaled
$2,519,000. This amount was recorded as a discount on subordinated debentures
and is being amortized over the period from the date of issuance to the August
2005 redemption date. In addition, in accordance with EITF No. 00-27, the
Company recorded additional discount on subordinated debentures of $2,369,000 to
reflect the beneficial conversion feature of the warrants. Accordingly, all of
the proceeds from this financing have been credited to stockholders' equity.
F-15
NOTE 10 -- STOCKHOLDERS' EQUITY
Initial Public Offering
In May 1997, the Company completed a public offering of 805,000 Units for $7.00
per Unit. Each Unit consisted of two shares of Common Stock and two Redeemable
Class A Warrants. The Warrants were exercisable for four years commencing one
year from the effective date of the offering, at a price of $4.25 per share. The
Company may redeem the Warrants at a price of $.10 per warrant, commencing
eighteen months from the effective date of the offering and continuing for a
four-year period, provided the price of the Company's Common Stock is $10.63 for
at least 20 consecutive trading days prior to issuing a notice of redemption.
The Company received proceeds from the offering of approximately $4,540,000, net
of related costs of registration.
In May 1997, the Company also issued to the underwriter of the public offering,
for nominal consideration, an option to purchase up to 70,000 Units. This option
was exercisable for a four-year period commencing one year from the effective
date of the offering, at a per Unit exercise price of $8.40 per Unit. The Units
were similar to those offered to the public. In March 2000, the Company received
$117,600 from the exercise of 28,000 Units.
On February 10, 2000, the Company announced its intention to redeem all
outstanding Class A warrants. From February through April 2000, the Company
raised net proceeds of approximately $8,047,000 from the exercise of 1,933,647
Class A warrants. All unexercised Class A warrants were redeemed in April 2000,
except for 112,000 Class A warrants underlying the options granted to the
underwriters.
Common Stock
In August 2001, the Company raised net proceeds of $9.9 million in a private
placement of 2,220,000 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 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.
In January 2002, the Company raised net proceeds of $20.3 million in a private
placement of 3,426,650 shares of its common stock at $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.
Preferred Stock
In December 1996, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to authorize the issuance of up to
1,000,000 shares of Preferred Stock. The authorized number of shares of
Preferred Stock to be issued was raised to 5,000,000 shares effective with the
merger with VTI. Except for the 2,450 shares of Series A preferred stock issued
in June 2000 and the 203.667 shares of Series B preferred stock issued in
January 2004 (see Note 20), the rights and privileges of the Preferred Stock
have not yet been designated.
In June 2000, the Company raised gross proceeds of $17.15 million in a private
placement of 2,450 shares of Series A mandatorily redeemable convertible
preferred stock. The preferred shares were convertible into up to 2,450,000
shares of common stock at a price of $7.00 per share, subject to adjustment.
Beginning on June 14, 2001, the preferred stockholders were able to choose an
alternative conversion price which equaled the higher of (i) 70% of the fixed
conversion price then in effect or (ii) the market price on any conversion date,
which was equal to the average of the closing sale prices of the Company's
common stock during the 20 consecutive trading days immediately preceding any
conversion date. Preferred stockholders were able, at their sole option, to have
their shares redeemed on the earlier of three years from the issuance date, or
the occurrence of a triggering event, as defined.
F-16
The redemption price was 110% of the stated value of $7,000 per share. None of
the triggering events has occurred to date. Investors in the private placement
also received five-year warrants to purchase a total of 857,500 shares of common
stock for $10.50 per share. The warrants are subject to certain anti-dilution
privileges. The Company has valued the warrants at $3,740,000 using the
Black-Scholes pricing model. The Company also issued to its placement agent
warrants to purchase 193,748 shares of common stock for $7.00 per share, and
warrants to purchase 67,876 shares of common stock for $10.50 per share. The
warrants expire on June 14, 2005. The Company has valued the warrants at
$1,410,000 using the Black-Scholes pricing model. At the issuance date, the
Company recorded a deemed dividend and an offsetting increase in additional
paid-in capital of approximately $8.1 million to reflect the beneficial
conversion feature of the preferred stock. During the fourth quarter of 2000, in
accordance with EITF No. 00-27, the Company recorded an additional deemed
dividend of $3.9 million to reflect the beneficial conversion feature of the
warrants.
Costs of the offering, including the fair value of the warrants, totaled
$6,150,000. This amount was recorded as a preferred stock discount and was being
amortized as a deemed dividend over the three-year period from the date of
issuance to the June 2003 redemption date. In addition, the 10% redemption
premium of $1,715,000 was being accreted as a deemed dividend into the carrying
value of the Series A mandatorily redeemable convertible preferred stock over
the same period.
The stockholders of Wire One Technologies, Inc. (now Glowpoint, Inc.) were
asked, in accordance with the requirements of Rule 4350(i)(1)(D) of the Nasdaq
Stock Market (the "Rule"), and approved, at the 2001 Annual Meeting of
Stockholders, the issuance by the Company of more than 20% of its common stock
upon the conversion of the Company's series A preferred and exercise of the
related warrants. The Rule restricted the Company from issuing more than 20% of
its outstanding shares of common stock at less than market value in any
transaction unless the Company obtained prior stockholder approval (the
"Exchange Cap"). As a consequence of receiving this approval, the Company was
able to issue 3,021,429 shares of its common stock upon conversion of the
remaining 2,115 shares of Series A preferred stock outstanding when, beginning
on June 14, 2001, each remaining holder of Series A preferred substituted an
"alternative conversion price" for the $7.00 fixed conversion price. The
alternative conversion price was equal to 70% of the fixed conversion price then
in effect. Upon conversion of the remaining 2,115 shares of Series A preferred
stock outstanding, the remaining $4,039,940 of un-accreted discount was
recognized in the Consolidated Statement of Operations as deemed dividends on
Series A convertible preferred stock.
NOTE 11 -- STOCK OPTIONS
Glowpoint 2000 Stock Incentive Plan
In September 2000, the Company adopted and approved the Glowpoint 2000 Stock
Incentive Plan (the "2000 Plan") and reserved up to 3,000,000 shares of Common
Stock for issuance thereunder. In May 2002, the Company's shareholders approved
an amendment to the 2000 Plan increasing the amount of shares available under
the plan to 4,400,000. The 2000 Plan permits the grant of incentive stock
options ("ISOs") to employees or employees of its subsidiaries. Non-qualified
stock options ("NQSOs") may be granted to employees, directors and consultants.
The Company issued 704,986 options during 2003 with exercise prices ranging from
$1.13 to $4.75 and vesting periods ranging from one to four years. The Company
had issued options totaling 1,640,505 and 2,227,450 in 2002 and 2001,
respectively. As of December 31, 2003, options to purchase a total of 3,079,604
shares were outstanding and 1,024,528 shares remained available for future
issuance under the 2000 Plan.
F-17
The exercise price of the Awards is established by the administrator of the plan
and, in the case of ISO's issued to employees who are less than 10% stockholders
the per share exercise price must be equal to at least 100% of the fair market
value of a share of the common stock on the date of grant or not less than 110%
of the fair market value of the shares in the case of an employee who is a 10%
stockholder. The administrator of the plan determines the terms and provisions
of each award granted under the 2000 Plan, including the vesting schedule,
repurchase provisions, rights of first refusal, forfeiture provisions, form of
payment, payment contingencies and satisfaction of any performance criteria.
Under the 2000 Plan, no individual will be granted ISO's corresponding to shares
with an aggregate exercise price in excess of $100,000 in any calendar year less
the aggregate exercise price of shares under other Company stock options granted
to that individual that vests in such calendar year. The 2000 Plan will
terminate in 2010.
Non-Plan Options
The Company issued a total of 167,500 options, outside the context of a stock
option plan, during 2001 to various employees, directors, and advisors. At
December 31, 2003, the total outstanding non-qualified options of this nature
were 1,809,407. The number of options has been adjusted to reflect the 1.65 to 1
conversion rate resulting from the May 18, 2000 merger with VTI.
1996 Stock Option Plan
In December 1996, the Board of Directors adopted the Company's Stock Option Plan
(the "1996 Plan") and reserved up to 500,000 shares of Common Stock for issuance
thereunder. In June 1998, the Company's shareholders approved an amendment to
the 1996 Plan increasing the amount of shares available under the plan to
2,475,000. The 1996 Plan provides for the granting of options to officers,
directors, employees and advisors of the Company. The exercise price of
incentive stock options ("ISOs") issued to employees who are less than 10%
stockholders shall not be less than the fair market value of the underlying
shares on the date of grant or not less than 110% of the fair market value of
the shares in the case of an employee who is a 10% stockholder. The exercise
price of restricted stock options shall not be less than the par value of the
shares to which the option relates. Options are not exercisable for a period of
one year from the date of grant. Under the 1996 Plan, no individual will be
granted ISO's corresponding to shares with an aggregate exercise price in excess
of $100,000 in any calendar year less the aggregate exercise price of shares
under other Company stock options granted to that individual that vest in such
calendar year. The 1996 Plan will terminate in 2006. No options were granted
under the 1996 Plan in 2003, 2002 and 2001. As of December 31, 2003, options to
purchase a total of 593,308 shares were outstanding and no shares remained
available for future issuance under the 1996 Plan. The number of options has
been adjusted to reflect the 1.65 to 1 conversion rate resulting from the merger
with VTI.
VTI Stock Option Plans
As part of the merger with VTI, the Company assumed the outstanding options of
the four stock option plans maintained by VTI. These plans generally require the
exercise price of options to be not less than the estimated fair market value of
the stock at the date of grant. Options vest over a maximum period of four years
and may be exercised in varying amounts over their respective terms. In
accordance with the provisions of such plans, all outstanding options become
immediately exercisable upon a change of control, as defined, of VTI. VTI had
authorized an aggregate of 1,161,000 shares of common stock to be available
under all the current option plans. The plans will terminate in 2009. Options
assumed as part of the merger with VTI totaled 361,605. No options were granted
under these Plans in 2003, 2002 and 2001. As of December 31, 2003, options to
purchase a total of 310,453 shares were outstanding and no shares remained
available for future issuance. The options have been adjusted to reflect the 2
for 1 reverse stock split approved by the VTI Board of Directors concurrent with
the merger with ACC.
F-18
A summary of options issued under Company plans and other options outstanding as
of December 31, 2003, and changes during fiscal 2001, 2002 and 2003 are
presented below:
WEIGHTED
AVERAGE
FIXED RANGE OF EXERCISE
OPTIONS PRICE PRICE
---------- ------------ --------
Options outstanding, December 31, 2000 5,847,974 $ 30 - 15.00 $ 2.50
Granted 2,394,950 $1.94 - 9.85 4.20
Exercised (1,508,863) $ .53 - 6.00 1.07
Forfeited (451,119) $.57 - 15.00 3.90
---------- ------------ --------
Options outstanding, December 31, 2001 6,282,942 $.30 - 12.75 $ 3.44
Granted 1,640,505 $1.00 - 5.48 2.10
Exercised (158,482) $ .76 - 4.40 2.36
Forfeited (755,544) $ .53 - 9.85 4.14
---------- ------------ --------
Options outstanding, December 31, 2002 7,009,421 $.30 - 12.75 $ 3.08
Granted (1) 704,986 $1.13 - 4.75 3.08
Exercised (603,012) $ .30 - 2.75 1.05
Forfeited (1,318,622) $1.00 - 9.85 3.79
---------- ------------ --------
Options outstanding, December 31, 2003 5,792,773 $.53 - 12.75 $ 3.12
========== ============ ========
Shares of common stock available for
future grant under Company plans 1,024,528
==========
(1) In January 2003 the Company granted a terminated employee 3,250 stock
options at an exercise price of $1.13, which was below the fair market
value of the Company's stock on the date of the grant. This was done to
correct an oversight in not granting the options while he was an
employee. The Company did not record compensation cost related to the
grant of these options as the impact was deemed to be immaterial to the
consolidated financial statements.
Additional information as of December 31, 2003 with respect to all outstanding
options is as follows:
OUTSTANDING EXERCISEABLE
------------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF PRICE OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
-------------- ----------- --------------- ----- ----------- -----
$ .53 - .57 665,199 .45 $ 0.56 665,199 $ 0.56
.64 - 2.20 786,649 4.72 $ 1.61 783,542 $ 1.61
2.33 - 3.00 343,350 4.16 $ 2.70 338,350 $ 2.70
3.03 - 4.00 2,987,400 4.76 $ 3.44 2,630,900 $ 3.45
4.06 - 5.50 905,375 3.55 $ 5.00 904,875 $ 5.00
5.73 - 12.75 104,800 1.17 $ 6.82 104,800 $ 6.82
--------- ----- ------- --------- -------
$ .53 - 12.75 5,792,773 3.97 $ 3.12 5,427,666 $ 3.11
========= ===== ======= ========= =======
The Company has elected to use the intrinsic value-based method of APB Opinion
No. 25 to account for all of its employee stock-based compensation plans.
Accordingly, at the date of grant no compensation cost was recognized in the
accompanying financial statements for stock options issued to employees because
the exercise price of each option equals or exceeds the fair value of the
underlying common stock as of the grant date for each stock option.
F-19
Non-cash compensation expense recognized in the Company's Statement of
Operations totaled $4,008,076, $675,057 and $4,442,316 in 2003, 2002 and 2001,
respectively. During the year ended December 31, 2003, the Company recorded
non-cash charges totaling $2,149,661 related to the extension of the
post-termination exercise period of stock options of former employees. The
Company recorded a non-cash interest charge of $570,253 related to shares of
common stock issued to subordinated debenture holders in lieu of cash interest
payments. Non-cash charges totaling $560,740 were recorded related to the
issuance of 100,000 warrants to the Company's current investment advisory firm
and the re-pricing of 220,000 warrants previously issued to its prior investment
advisory firm and its assigns. In addition, a non-cash charge of $378,766 was
recorded to recognize the value of restricted stock issued to employees,
directors and consultants as compensation and for consulting services that had
vested during 2003. In addition to this charge, the Company recorded a $187,210
non-cash charge to interest expense for the Black-Scholes value of 100,000
warrants issued to JP Morgan Chase Bank as compensation for amending its credit
agreement. The remaining $161,446 of non-cash compensation related to
amortization of deferred employee stock option compensation which originated in
the fourth quarter of 2000.
During the year ended December 31, 2002, the Company recorded a non-cash charge
of $206,663 related to a one-year extension of certain stock options originally
granted to the Company's COO in 1997 and that were scheduled to expire in
December 2002. The amount of the charge was calculated in accordance with FASB
Interpretation No. 44 "Accounting for Certain Transactions involving Stock
Compensation" which specifies that extending the maximum contractual life of an
award results in a new measurement of compensation cost at the date of
modification and that any intrinsic value at the modification date in excess of
the amount measured at the original measurement date must be recognized as
compensation cost immediately if the award is vested. The expiration date of the
123,750 fully-vested options with an exercise price of $0.53 per share was
extended for one year on December 9, 2002. The market price of the Company's
common stock on that day was $2.20 per share. In addition to this charge, the
Company recorded a $176,203 non-cash charge to interest expense for the
Black-Scholes value of 100,000 warrants issued to JP Morgan Chase Bank as
compensation for amending its credit agreement. The remaining $292,191 of
non-cash compensation related to amortization of deferred employee stock option
compensation which originated in the fourth quarter of 2000.
Also, during 2002, the Company entered into a severance and consulting
arrangement with the former president of the Company. Under the terms of the
severance arrangement, the Company granted the former president options to
purchase 84,000 shares of the Company's common stock at an exercise price of
$1.13 per share, which vests 50% upon the date of grant and 50% on July 31,
2003. The Company valued these shares using the Black-Scholes pricing model and
recorded an $86,736 non-cash charge to restructuring for the vested portion of
these shares. Under the terms of the consulting arrangement, the Company granted
an additional 50,000 options to purchase shares of the Company's common stock at
an exercise price of $3.00 per share, which vests 5,000 shares per month until
July 31, 2003. The Company also valued these shares using the Black-Scholes
pricing model and recorded a $48,603 non-cash charge to prepaid professional
fees for the vested portion of these shares.
During the year ended December 31, 2001, the Company recorded a non-cash charge
of $3,984,750 related to a five-year extension of certain stock options
originally granted to the Company's CEO in 1997 and that were scheduled to
expire in March 2002. The expiration date of the 1,237,500 fully-vested options
with an exercise price of $3.03 per share was extended for five years on
December 26, 2001. The market price of the Company's common stock on that day
was $6.25 per share. In addition to this charge, the Company recorded a charge
of $457,566 of non-cash compensation relating to the amortization of deferred
employee stock option compensation which originated in the fourth quarter of
2000.
F-20
During the years ended December 31, 2003, 2002 and 2001, the Company received
$630,935, $371,489 and $1,589,362 respectively from the exercise of stock
options.
At December 31, 2003, the Company had outstanding warrants which can be
converted into 5,654,481 shares of common stock, with exercise prices ranging
from $1.00 to $12.00 and expiration dates ranging from November 21, 2004 to
September 23, 2008. At December 31, 2003 these warrants have a weighted average
exercise price of $6.92 and a weighted average remaining contractural life of
2.6 years.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company's board of directors has approved employment agreements for a number
of its executive officers as follows:
President and Chief Executive Officer -- The Company entered into an agreement
with David Trachtenberg to serve as President and Chief Executive Officer having
a three-year term commencing October 15, 2003. Under the agreement, Mr.
Trachtenberg is entitled, in year 1, 2, and 3, respectively, to annual base
compensation of $315,000, $345,000 and $375,000. Mr. Trachtenberg is also
entitled to annual incentive compensation in an amount equivalent to fifty
percent (50%) of his then annual base salary subject to the achievement of goals
and metrics established by Mr. Trachtenberg and the Compensation Committee of
the Company's Board of Directors with such goals and metrics being updated on an
annual basis. The agreement provides for an award of 360,000 shares of
restricted Common Stock ("Restricted Stock") of the Company, the fair value of
which was determined to be $1,116,000. Compensation expense, of which $77,500
was recorded during the year ended December 31, 2003, will be recorded evenly
over the life of the employment agreement. Such Restricted Stock will be
forfeited if Mr. Trachtenberg's employment with the Company is terminated for
any reason with risk of forfeiture lapsing with respect to 120,000 shares on
each anniversary of the commencement of his employment. In addition, Mr.
Trachtenberg is also entitled to reimbursement for the costs of a car to conduct
Company business and for parking his car in New York City. Under the agreement,
the Company must secure and pay the premium on a $2,000,000 life insurance
policy payable to Mr. Trachtenberg's designated beneficiary. Either the Company
or Mr. Trachtenberg may terminate his employment with the Company at any time,
for any reason or no reason at all; however, if Mr. Trachtenberg is terminated
without cause or resigns for good reason or if he dies, he is entitled to one
year of his then annual base salary, one year of his then annual incentive
compensation, one year of continued reimbursement for his car and parking
expenses and one year of accelerated vesting on the Restricted Stock granted
under the employment agreement. If Mr. Trachtenberg's employment is terminated
with cause or if he voluntarily resigns, he is entitled to his base salary and
other benefits through the last day actually worked.
Executive Vice President and Chief Financial Officer -- The Company entered into
an agreement with Christopher Zigmont to serve as Executive Vice President -
Finance and Chief Financial Officer having a three-year term commencing January
1, 2001. Under the agreement, Mr. Zigmont is entitled, in years 1, 2, and 3
respectively, to annual base compensation of $175,000, $200,000 and $225,000 and
to a discretionary bonus. The agreement provides for a grant of an option to
purchase 150,000 shares of Company stock under the 2000 Plan, vesting in three
equal annual installments. On July 30, 2002, the agreement was amended to reduce
the annual base compensation to $190,000 for the remainder of year 2 and to
$213,750 in year 3. Effective January 1, 2003, the agreement was further amended
to reduce annual base compensation to $190,000 for the remaining term. Mr.
Zigmont continues to serve the Company under the terms and at the annual base
compensation of his expired amended employment agreement.
Executive Vice President and Chief Technology Officer -- The Company entered
into an agreement with Michael Brandofino to serve as Vice President and Chief
Technology Officer having a three-year term commencing January 1, 2001. Under
the agreement, Mr. Brandofino is entitled, in years 1, 2, and 3 respectively, to
annual base compensation of $165,000, $195,000 and $225,000 and to a
discretionary bonus. The agreement provides for a grant of an option to purchase
100,000 shares of Company stock under the 2000 Plan, vesting in three equal
annual installments. On April 24, 2002, Mr. Brandofino was named Executive Vice
President and Chief Technology Officer and his agreement was amended to extend
the term of the agreement by one year with annual base compensation of $235,000
in year 4. In addition, Mr. Brandofino was granted an additional option to
purchase 15,000 shares of Company stock under the 2000 Plan, vesting in three
equal installments. On July 30, 2002, the agreement was amended to reduce the
annual base compensation to $185,250 for the remainder of year 2 and to $213,750
and $223,250 in years 3 and 4, respectively. Effective January 1, 2003, the
agreement was further amended to reduce annual base compensation to $185,250
through December 31, 2003. Effective September 23, 2003, the agreement was
further amended to reset base compensation for the period October 1, 2003
through
F-21
December 31, 2003 at the annual rate of $225,000 and for the period January 1,
2004 through December 31, 2004 at the annual rate of $245,000. The agreement
also provided for a one-time guaranteed bonus of $35,000, payable on October 1,
2003 and a grant of an option to purchase 100,000 shares of the Company's common
stock under the 2000 Plan, vesting 50% on each of December 31, 2003 and 2004. In
addition, Mr. Brandofino's agreement stipulates that if the Company enters into
a Sale agreement during the term of the agreement and Mr. Brandofino realizes
less than $200,000 from the exercise of all outstanding options, then he is
entitled to a bonus in an amount equal to the difference between $200,000 and
the amount realized.
Operating Leases
The Company leases several facilities under operating leases expiring through
2005. Certain leases require the Company to pay increases in real estate taxes,
operating costs and repairs over certain base year amounts. Lease payments for
the years ended December 31, 2003, 2002 and 2001 were approximately $1,030,000,
$1,837,000 and $1,853,000, respectively. These amounts are inclusive of rent
expense that was related to the Company's discontinued VS and AV operations.
Future minimum rental commitments under all non-cancelable leases are as
follows:
Year Ending December 31
2004 ................................................................. $264,336
2005 ................................................................. 56,719
--------
$321,055
========
Capital Lease Obligations
The Company leases certain equipment under non-cancelable lease agreements.
These leases are accounted for as capital leases. The equipment under the
capital leases as of December 31, 2003 had a cost of $258,110, accumulated
depreciation of $32,832 and a net book value of $225,278.
Future minimum lease payments under capital lease obligations at December 31,
2003 are as follows:
2004 ................................................................. $ 138,456
2005 ................................................................. 36,132
---------
Total minimum payments ............................................... 174,588
Less amount representing interest .................................... (8,434)
---------
Total principal ...................................................... 166,154
Less portion due within one year ..................................... (131,182)
---------
Long-term portion .................................................... $ 34,972
=========
Legal Matters
The Company is defending one suit in the ordinary course of business which is
not material to the Company's business, financial condition or results of
operations.
F-22
NOTE 13 -- RESTRUCTURING CHARGE
During the year ended December 31, 2002, in accordance with Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)," the Company recorded a restructuring charge
of $960,000, of which $700,000 related to the discontinued VS operation. The
Company recognized this charge in the period in which (a) management having the
appropriate level of authority to involuntarily terminate employees approved and
committed the Company to a plan of termination and established the benefits that
current employees will receive upon termination, (b) the benefit arrangement was
communicated to employees and the communication of the benefit arrangement
included sufficient detail to enable employees to determine the type and amount
of benefits they would receive if they were terminated, (c) the plan of
termination specifically identified the number of employees to be terminated,
their job classifications or functions, and their locations and (d) the plan of
termination indicated that significant changes to the plan of termination are
not likely. The significant components of the restructuring charge are as
follows:
Employee termination costs $500,000
Facility exit costs 460,000
--------
$960,000
========
The employee termination costs relate to 84 employees and officers of the
Company terminated following the implementation of a cost savings plan. The
facility exit costs relate to the closing or downsizing of 19 sales offices.
During the year ended December 31, 2001, the Company recorded a restructuring
charge of $200,000, of which $90,000 related to the discontinued VS operation.
The significant components of the restructuring charge are as follows:
Employee termination costs $200,000
========
The employee termination costs relate to 23 employees of the Company terminated
following the implementation of a cost savings plan.
F-23
NOTE 14 -- INCOME TAXES
The income tax provision consists of the following:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Current:
Federal $ -- $ -- $ --
State -- -- --
------------ ------------ ------------
Total Current $ -- $ -- $ --
------------ ------------ ------------
Deferred:
Federal $ (6,923,914) $ (8,750,051) $ (2,567,680)
State (1,221,867) (1,544,127) (453,120)
Valuation allowance 8,145,781 10,294,178 3,220,800
------------ ------------ ------------
Total Deferred $ -- $ -- $ 200,000
------------ ------------ ------------
Income tax provision $ -- $ -- $ 200,000
============ ============ ============
The Company's effective tax rate differs from the statutory federal tax rate as
shown in the following table:
YEARS ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------ ------------ ------------
U.S. federal income taxes at the statutory rate $ (7,629,239) $(19,898,840) $ (4,940,200)
State taxes, net of federal effects (1,346,336) (3,511,560) (871,800)
Goodwill amortization/write-off -- 12,946,542 957,200
Nondeductible financing costs 795,020 -- --
Valuation allowance 8,145,781 10,294,178 3,220,800
Stock-based compensation -- 82,680 1,776,800
Other 34,774 87,000 57,200
------------ ------------ ------------
$ -- $ -- $ 200,000
============ ============ ============
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2003 and
2002 are presented below:
DECEMBER 31,
----------------------------
2003 2002
------------ ------------
Deferred tax assets:
Tax benefit of operating loss
carryforward $ 28,534,935 $ 18,212,485
Reserves and allowances 28,800 1,092,800
Goodwill -- 2,689,600
Fixed asset impairment charge 551,600 364,800
Stock based compensation 1,662,283 276,552
Other 202,092 117,880
------------ ------------
Total deferred tax assets $ 30,979,710 $ 22,754,117
============ ============
Deferred tax liabilities:
Depreciation 1,254,415 1,316,236
Goodwill 141,633 --
------------ ------------
Total deferred tax liabilities 1,396,048 1,316,236
------------ ------------
Sub-total 29,583,662 21,437,881
Valuation allowance (29,583,662) (21,437,881)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
F-24
During the periods presented, management maintained a valuation allowance to
offset the benefits of significant temporary tax differences due to the
uncertainty of their realization. These deferred tax assets consist primarily of
net operating losses carried forward in the VTI merger, reserves and allowances,
and stock based compensation. If the tax benefits currently offset by valuation
allowances are subsequently realized, approximately $7.2 million will be
credited to goodwill because these tax benefits relate to VTI operations prior
to the merger. In addition, approximately $3.0 million will be credited to
additional paid-in capital because these tax benefits relate to the exercise of
non-qualified stock options and disqualifying dispositions of incentive stock
options.
The Company and its subsidiaries file federal returns on a consolidated basis
and separate state tax returns. At December 31, 2003, the Company has net
operating loss (NOL) carry-forwards of approximately $78 million and $70 million
for federal and state income tax purposes, respectively. The federal NOL's have
a carryover period of 20 years and are available to offset future taxable
income, if any, through 2023. The utilization of approximately $18 million in
tax loss carryforwards is limited to approximately $2.6 million each year as a
result of an "ownership change" (as defined by Section 382 of the Internal
Revenue Code of 1986, as amended), which occurred in 2000.
NOTE 15 -- VALUATION ACCOUNTS AND RESERVES
The following table summarizes the activity in the allowance for doubtful
accounts:
Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Allowance for Doubtful Accounts:
Beginning Balance $ 285,000 $ 605,000 $ 470,000
Charged to cost and expenses 794,172 1,502,914 1,171,888
Deductions (1) (753,552) (1,822,914) (1,036,888)
Transferred with sale of VS operation (254,000) (260,000) (590,000)
----------- ----------- -----------
Ending Balance $ 71,620 $ 25,000 $ 15,000
=========== =========== ===========
Years Ended December 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Restructuring Reserves:
Beginning Balance $ 29,050 $ 200,000 $ --
Charged to costs and expenses
Continuing operations -- 260,000 110,000
Discontinued VS operations -- 700,000 90,000
Cash paid (29,050) (755,379) --
Non-cash expenses -- (125,000) --
Transferred to liabilities of
discontinued VS operations -- (250,571) --
----------- ----------- -----------
Ending Balance $ -- $ 29,050 $ 200,000
=========== =========== ===========
(1) Represents the amount of accounts written off
NOTE 16 -- PENSiON PlAN
On March 1, 1998 the Company adopted a 401(k) Retirement Plan (the "401(k)
Plan") under Section 401(k) of the Internal Revenue Code. The 401(k) Plan
covered substantially all employees who met minimum age and service
requirements. The 401(k) Plan was non-contributory on the part of the Company.
Effective with the merger with VTI, the Company assumed the 401(k) Plan of VTI,
combined its assets with those of the existing plan and began making
contributions to the plan. Employer contributions to the 401(k) Plan for the
years ended December 31, 2003, 2002 and 2001 were approximately $77,000,
$115,000 and $83,000, respectively.
F-25
NOTE 17 -- BUSINESS COMBINATIONS
Acquisition of GeoVideo
In June 2001, the Company acquired the assets of GeoVideo Networks, Inc.
("GeoVideo"), a New York-based developer of video communications software. Chief
among the assets, in addition to GeoVideo's cash on hand of $2,500,000, was
GeoVideo's browser, a software tool based upon proprietary Bell Labs technology
that allows up to six simultaneous, real-time, bi-directional high-bandwidth IP
video sessions to be conducted over a standard desktop PC. In exchange for the
acquired assets, the Company issued 815,661 shares of common stock, together
with warrants to purchase 501,733 additional shares of common stock at $5.50 per
share and 520,123 shares at $7.50 per share.
Purchase Price Allocation:
GeoVideo assets acquired $2,500,000
Goodwill 2,500,000
----------
Total $5,000,000
==========
Amortization expense for the years ended December 31, 2003, 2002 and 2001
totaled $0, $0 and $102,340, respectively.
Acquisition of Advance Acoustical Concepts, Inc.
In July 2001, the Company acquired the assets and certain liabilities of
Advanced Acoustical Concepts, Inc. ("AAC"), a privately held company founded in
1986 and based in Dayton, Ohio. The Company did not acquire any equity interest
in AAC. The acquired assets of AAC consisted of those related to complete
solution design and integration of video and audiovisual products into
cost-effective, ergonomic conferencing systems. These solutions were marketed by
AAC 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 its common stock with an assumed value of $5.46 per
share based on the then current market price. On the date of the acquisition,
the assets and liabilities were recorded at their fair values, with the excess
purchase consideration allocated to goodwill. None of this goodwill is expected
to be deductible for tax purposes due to the nature of this asset-based
acquisition.
The acquisition of assets from AAC was consummated to further expand the
Company's expertise in the field of audio-visual integration and to acquire a
customer base that had a demonstrated history of producing $10 or more million
in annual revenues for AAC. The results of the acquired operations are included
in the Consolidated Statements of Operations from July 17, 2001.
Purchase Price Allocation:
Cash $ 364,117
Accounts receivable 466,030
Inventory 654,297
Other assets 248,951
Accounts payable (2,350,395)
Notes and leases payable (253,640)
Accrued liabilities (206,710)
Deferred revenue (1,120,779)
Goodwill 2,991,879
-----------
Total $ 793,750
===========
Acquisition of Axxis, Inc.
In November 2001, the Company acquired certain assets and liabilities of the
video conferencing division of Axxis, Inc., a Kentucky-based designer of
audiovisual conferencing systems. In exchange for the acquired assets and
assumed liabilities, the Company issued 320,973 shares of common stock with an
assumed price per share of $6.39 per share based on the then current market
price. On the date of acquisition, the acquired assets and liabilities were
recorded at their fair values, with the excess purchase consideration allocated
to goodwill. None of this goodwill is expected to be deductible for tax purposes
due to the nature of this asset-based acquisition.
The acquisition of Axxis assets was consummated to further expand the Company's
expertise in the field of audio-visual integration and to acquire a customer
base that had a demonstrated history of producing $10 million or more in annual
revenues for Axxis. The results of the acquired operations are included in the
Consolidated Statements of Operations from October 1, 2001.
Purchase Price Allocation:
Earnings in excess of billings $ 630,617
Inventory 119,511
Accounts Payable (700,432)
Accrued vacation (49,696)
Accounts payable 2,051,017
-----------
Total $ 2,051,017
===========
F-26
NOTE 18 -- RELATED PARTIES
The landlord for the Company's Hillside, New Jersey office is Vitamin Realty
Associates, L.L.C. of which Eric Friedman, a member of the Company's Board of
Directors until June 2001, is a member. The lease, which was due to expire in
May 2002, was extended by amendment in April 2002. The current term is for three
years and expires on April 30, 2005. The current base rental for the premises
during the term of the lease is approximately $162,000 per year. In addition,
the Company must pay its share of the landlord's operating expenses (i.e., those
costs or expenses incurred by the landlord in connection with the ownership,
operation, management, maintenance, repair and replacement of the premises,
including, among other things, the cost of common area electricity, operational
services and real estate taxes). For the years ended December 31, 2003, 2002 and
2001, rent expense associated with this lease was $162,000, $252,000 and
$295,000, respectively.
The Company receives financial and tax services from an accounting firm in which
one of the Company's directors, Dean Hiltzik, is a partner. For the years ended
December 31, 2003, 2002 and 2001, the Company has incurred fees for these
services of approximately $24,000, $33,000 and $105,000, respectively. The
Company also entered into a Consulting Agreement with Mr. Hiltzik, dated January
2, 2001, for the provision of tax and financial services for one year. Mr.
Hiltzik received an immediately vested option to purchase 30,000 shares of
common stock at an exercise price of $3.94 per share pursuant to that agreement.
The Company receives management consulting services from Lewis Jaffe, former
Vice Chairman and President and current member of the Board of Directors. Under
the terms of a consulting agreement commencing July 22, 2002, through July 31,
2003, Mr. Jaffe provided Company management with assistance in the areas of
corporate development and investor relations. For his services, Mr. Jaffe was
granted an option to purchase 50,000 shares of Wire One common stock at an
average exercise price of $3.00 per share vesting in ten installments of 5,000
shares per month commencing September 30, 2002. On September 21, 2001, the
Company had entered into a one-year Consulting Agreement with Mr. Jaffe,
pursuant to which Mr. Jaffe served as a management consultant to the
F-27
Company in the areas of corporate development and investor relations. Mr. Jaffe
received an immediately vested option to purchase 30,000 shares of common stock
at an exercise price of $5.16 per share pursuant to that agreement.
In August, 2001, the Company made a loan to Christopher Zigmont, Executive Vice
President and Chief Financial Officer, in the amount of $210,000 with an 8.25%
rate of interest. The loan was extended to Mr. Zigmont, in connection with his
relocation to the East Coast at the Company's request, to facilitate the
purchase of his East Coast home pending the sale of his West Coast home. Mr.
Zigmont was required to repay the loan from proceeds of the sale of his West
Coast home or of any sale of shares acquired by him in connection with his
exercise of any Company stock option, but in no event later than one year after
the loan was made. Mr. Zigmont repaid the loan in full in October 2001.
In March, 2002, the Company made a recourse loan to Leo Flotron, then a member
of the Company's Board of Directors and the Company's President and Chief
Operating Officer, in the amount of $69,960 with a 5.25% rate of interest. The
Company extended the loan to Mr. Flotron to enable him to exercise stock 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 Company stock option, but
in no event later than one year after the loan was made. Mr. Flotron repaid the
loan in full in March 2003.
NOTE 19 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
2003 and 2002.
1st Quarter 2003 2002
Net revenues $ 2,226,858 $ 1,099,421
Gross margin (67,429) 129,880
Loss from continuing operations (2,588,771) (2,048,561)
Net loss (4,649,267) (2,558,508)
Net loss attributable to common stockholders (4,649,267) (2,558,508)
Net loss per share - basic and diluted (0.16) (0.09)
2nd Quarter
Net revenues $ 2,674,630 $ 1,258,556
Gross margin 70,310 52,250
Loss from continuing operations (2,981,822) (2,580,832)
Net loss (4,899,707) (4,317,217)
Net loss attributable to common stockholders (4,899,707) (4,317,217)
Net loss per share - basic and diluted (0.17) (0.15)
3rd Quarter
Net revenues $ 2,581,476 $ 1,525,494
Gross margin 93,185 85,270
Loss from continuing operations (4,400,922) (2,521,732)
Net loss (7,630,319) (4,385,905)
Net loss attributable to common stockholders (7,630,319) (4,385,905)
Net loss per share - basic and diluted (0.26) (0.15)
4th Quarter
Net revenues $ 2,827,781 $ 1,715,745
Gross margin 153,092 (264,985)
Loss from continuing operations (4,286,809) (3,064,381)
Net loss (5,259,350) (47,303,553)
Net loss attributable to common stockholders (5,259,350) (47,303,553)
Net loss per share - basic and diluted (0.18) (1.63)
In the fourth quarter of 2002, the Company recorded $41.4 million of impairment
losses on goodwill and other long-lived assets.
Net loss per share is computed independently for each of the quarters presented.
Therefore, the sum of the quarterly net loss per share figures in 2003 and 2002
does not equal the total computed for these years.
F-28
NOTE 20 -- SUBSEQUENT EVENTS
In January 2004, in exchange for the cancellation and termination of notes with
an aggregate face value of $4,888,000 and forfeiture of any and all rights of
collection, claim or demand under the notes, the Company agreed to give the
holders of the notes: (i) an aggregate of 203.667 shares of series B convertible
preferred stock; (ii) an aggregate of 250,000 shares of restricted common stock;
and (iii) a reduction of the exercise price of the warrants issued pursuant to
the original purchase agreement from $3.25 to $2.75. As a result of this
exchange, the $3.1 million of discount on subordinated debentures as of December
31, 2003 will be written off to expense in the first quarter of 2004.
In February 2004, the Company raised net proceeds of $12.5 million in a private
placement of 6,100,000 shares of its common stock at $2.25 per share. Investors
in the private placement were also issued 1,830,000 common stock purchase
warrants at an exercise price of $2.75 per share. The warrants expire five and a
half years after the closing date. The warrants are subject to certain
anti-dilution protection. The Company also issued to its placement agent
five-year warrants to purchase 427,000 shares of common stock at an exercise
price of $2.71 per share.
In February 2004, the working capital credit facility with JP Morgan Chase Bank
was terminated at the Company's request. As a result of the termination of this
credit facility, the $85,000 of unamortized deferred financing costs as of
December 31, 2003 will be written off to expense in the first quarter of 2004.
F-29
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by this annual report, management
concluded its evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. As of the end of the period, our
President and Chief Executive Officer and our Chief Financial Officer concluded
that we maintain disclosure controls and procedures that are effective in
providing reasonable assurance that information required to be disclosed in our
reports under the Securities Exchange Act of 1934 (Exchange Act) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including our President and Chief Executive Officer
and our Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Management necessarily applied its judgment in
assessing the costs and benefits of such controls and procedures, which, by
their nature, can provide only reasonable assurance regarding management's
control objectives.
(b) During the evaluation referred to in Item 9A(a) above, we have identified no
change in our internal control over financial reporting that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement for the period ended December 31,
2003, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2004.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement for the period ended December 31,
2003, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement for the period ended December 31,
2003, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement for the period ended December 31,
2003, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES DISCLOSURE REQUIRED
The information called for by this item is hereby incorporated by reference from
the Registrant's definitive Proxy Statement for the period ended December 31,
2003 and 2002, which Proxy Statement will be filed with the Securities and
Exchange Commission on or before the end of April 2004.
25
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. List of documents filed as part of this Report:
1. Financial Statements included in Item 8:
a) Report of Independent Certified Public Accountants
b) Consolidated Balance Sheets as of December 31, 2003 and 2002
c) Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001
d) Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2003, 2002 and 2001.
e) Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001
f) Notes to Consolidated Financial Statements
No schedules are included because the required information is
inapplicable or is presented in the consolidated financial statements
or related notes thereto.
2. Exhibits
The exhibits listed on the accompanying Index of Exhibits are filed as part of
this Annual Report.
B. Reports on Form 8-K.
1. On November 13, 2003, we furnished a Form 8-K containing a press
release announcing our results of operations and financial condition
for the three- and nine-month periods ended September 30, 2003.
2. On November 18, 2003, we furnished a Form 8-K containing the text of
the November 12, 2003, conference call to review the Company's 2003
third quarter results.
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Wire One Technologies, Inc. changing its name to
Glowpoint, Inc. (20)
3.3 Certificate of Designations, Preferences and Rights of Series B
Preferred Stock. (20)
3.4 Amended and Restated Bylaws. (20)
4.1 Specimen Common Stock Certificate. (20)
10.1 Glowpoint, Inc. 2000 Stock Incentive Plan. (3)
10.2 Placement Agent Agreement, dated January 2, 2002, between Registrant
and H.C. Wainwright & Co., Inc. (4)
10.3 Form of Purchase Agreement for the purchase and sale of Common Stock
and warrants to purchase Common Stock, dated January 10, 2002, between
Registrant and the purchasers party thereto. (4)
10.4 Form of Warrant to purchase Common Stock, dated January 10, 2002. (5)
10.5 Lease Agreement for premises located at 225 Long Avenue, Hillside, New
Jersey, dated March 20, 1997, between Registrant and Vitamin Realty
Associates, L.L.C. (6)
10.6 First Amendment to Lease Agreement, dated as of December 1997, between
Registrant and Vitamin Realty Associates, L.L.C. (1)
10.7 Second Amendment to Lease Agreement, dated as of December 20,1999,
between Registrant and Vitamin RealtyAssociates, L.L.C. (1)
10.8 Third Amendment to Lease Agreement, dated as of June 1, 2000, between
Registrant and Vitamin Realty Associates, L.L.C. (15)
10.9 Fourth Amendment to Lease Agreement, dated as of August 29, 2000,
between Registrant and Vitamin Realty Associates, L.L.C. (3)
10.10 Fifth Amendment to Lease Agreement, dated as of May 1, 2001, between
Registrant and Vitamin Realty Associates, L.L.C. (15)
10.11 Sixth Amendment to Lease Agreement, dated as of May 1, 2002, between
Registrant and Vitamin Realty Associates, L.L.C. (15)
10.12 Employment Agreement with Richard Reiss. (7)
10.13 Employment Agreement with Christopher Zigmont. (7)
10.14 Employment Agreement with Michael Brandofino. (7)
10.15 Amendment to Employment Agreement with Richard Reiss, dated as of
April 24, 2002. (8)
10.16 Amendment to Employment Agreement with Michael Brandofino, dated as of
April 24, 2002. (8)
10.17 Amendment to Employment Agreement with Richard Reiss, dated as of July
30, 2002. (9)
10.18 Amendment to Employment Agreement with Christopher Zigmont, dated as
of July 30, 2002. (9)
10.19 Amendment to Employment Agreement with Michael Brandofino, dated of
July 30, 2002. (9)
10.20 Consulting Agreement, dated July 22, 2002, between Registrant and
Lewis Jaffe. (9)
10.21 Warrant to Purchase Common Stock of Registrant issued to JPMorgan
Chase Bank on November 13, 2002. (16)
10.22 Form of Warrant to Purchase Shares of Common Stock of Registrant. (10)
10.23 Registration Rights Agreement dated as of December 17, 2002, between
Registrant and the Purchasers set forth therein. (10)
10.24 Note and Warrant Purchase Agreement dated as of December 17, 2002,
between Registrant and the Purchasers set forth therein. (10)
10.25 Amendment to Employment Agreement with Richard Reiss, dated as of
January 1, 2003. (11)
10.26 Amendment to Employment Agreement with Christopher Zigmont, dated as
of Januray 1, 2003. (11)
10.27 Amendment to Employment Agreement with Michael Brandofino, dated as of
January 1, 2003. (11)
27
10.28 Consulting Agreement with Kelly Harman, dated January 21, 2003. (11)
10.29 Asset Purchase Agreement, dated March 7, 2003, between Registrant and
Signal Perfection Limited. (15)
10.30 Asset Purchase Agreement, dated as of June 10, 2003, between
Registrant and Gores Technology Group. (12)
10.31 Amended and Restated Employment Agreement with Richard Reiss, dated as
of October 14, 2003. (13)
10.32 Amendment to Employment Agreement with Michael Brandofino, dated as of
September 23, 2003. (13)
10.33 Employment Agreement with David C. Trachtenberg, dated as of October
3, 2003. (13)
10.34 Restricted Stock Award to David C. Trachtenberg, dated as of October
4, 2003. (13)
10.35 Restricted Stock Award Agreement with Karen Basian, dated November 4,
2003, and with James Kuster, Michael Sternberg and Michael Toporek,
each dated August 22,, 2003. (13)
10.36 Warrant to Purchase Shares of Common Stock of Glowpoint, Inc. (14)
10.37 Common Stock Purchase Agreement between Registrant and the Purchasers
Listed on Exhibit A. (14)
10.38 Placement Agent Agreement, dated August 4, 2003, between Registrant
and Burham Hill Partners, as amended as of January 29, 2004. (20)
10.39 Restricted Stock Award Agreement with Dean Hiltzik, dated February 27,
2004. (20)
10.40 Amendment to Consulting Agreement with Kelly Harman, dated January 1,
2004. (20)
10.41 Employment Agreement with Joseph Laezza, dated as of March 11, 2004.
(20)
10.42 Employment Agreement with Stuart Gold, dated as of March 11, 2004.
(20)
10.43 Restricted Stock Award Agreement with Joseph Laezza, dated March 29,
2004. (20)
10.44 Restricted Stock Award Agreement with Stuart Gold, dated March 29,
2004. (20)
10.45 Form of Class A Warrant to Purchase Common Stock of Registrant. (17)
10.46 Form of Class B Warrant to Purchase Common Stock of Registrant. (17)
10.47 Form of Warrant to Purchase Common Stock, dated August 8, 2001. (18)
10.48 Form of Warrant to Purchase Common Stock, dated August 8, 2001. (18)
10.49 Form of Warrant to Purchase Common Stock, dated June 14, 2000. (19)
10.50 Warrant to Purchase Common Stock issued to JPMorgan Chase on March 6,
2003. (15)
10.51 Termination Agreement with Leo Flotron dated September 23, 2003. (13)
21.1 Subsidiaries of Glowpoint, Inc. (2)
23.1 Consent of BDO Seidman, LLP. (20)
31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
(20)
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
(20)
32.1 Section 1350 Certification of the Chief Executive Officer. (20)
32.2 Section 1350 Certification of the Chief Financial Officer. (20)
- ---------------------------
(1) Filed as an appendix to View Tech, Inc.'s Registration Statement on Form
S-4 (File No. 333-95145) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(Registration No. 333-42518), and incorporated herein by reference.
(3) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2000, and incorporated herein by
reference.
(4) Filed as an exhibit to Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 10, 2002, and
incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on January 15, 2002, and
incorporated herein by reference.
(6) Filed as an exhibit to Registrant's Registration Statement on Form SB-2
(Registration No. 333-21069), and incorporated herein by reference.
(7) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000, and incorporated herein by reference.
(8) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
fiscal year quarter ended March 31, 2002, and incorporated herein by
reference.
(9) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
fiscal year quarter ended June 30, 2002, and incorporated herein by
reference.
(10) Filed as an exhibit to Registrant's Current Report on Form 8-K, dated
December 23, 2002, and incorporated herein by reference.
(11) Filed as an exhibit to Registrant's Registration Statement on Form S-3
(Registration No. 333-103227), and incorporated herein by reference.
(12) Filed as an exhibit to Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 11, 2003, and incorporated
herein by reference
(13) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
fiscal year quarter ended September 30, 2003, and incorporated herein by
reference.
(14) Filed as an exhibit to Registrants's Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 26, 2004, and
incorporated herein by reference.
(15) Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, and incorporated herein by reference.
(16) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2002, and incorporated herein by
reference.
(17) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2001, and incorporated herein by reference.
(18) Filed as an exhibit to Registrant's Registration Statement on Form S-3
(Registration No. 333-69432) and incorporated herein by reference.
(19) Filed as an exhibit to Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 10, 2000, and incorporated
herein by reference.
(20) Filed herewith.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
GLOWPOINT, INC..
Date: March 30, 2004 By: /s/David C. Trachtenberg
------------------------------------
David C. Trachtenberg
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David Trachtenberg and Christopher Zigmont jointly and
severally, his or her attorneys-in-fact, each with the power of substitution,
for him or her in any and all capacities, to sign any amendments to this Report
on Form 10-K, and file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant as of
this 31st day of March 2004 in the capacities indicated.
SIGNATURE TITLE
/s/ David Trachtenberg Chief Executive Officer
- -------------------------- (Principal Executive Officer)
David Trachtenberg
/s/ Christopher Zigmont Chief Financial Officer
- -------------------------- (Principal Financial and Accounting Officer)
Christopher Zigmont
/s/ Richard Reiss Chairman
- --------------------------
Richard Reiss
/s/ Karen Basian Director
- --------------------------
Karen Basian
/s/ Dean Hiltzik Director
- --------------------------
Dean Hiltzik
/s/ Lewis Jaffe Director
- --------------------------
Lewis Jaffe
/s/ James Kuster Director
- --------------------------
James Kuster
/s/ Michael Toporek Director
- --------------------------
Michael Toporek
29