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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, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
Commission file number: 0-25940
WIRE ONE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0312442
(State or Other Jurisdiction of (I.R.S. Employer
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 $2.00 on June 30, 2002 was
$57,819,962.
The number of shares of the Registrant's Common Stock outstanding as of
March 25, 2003 was 29,054,189.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the period
ended December 31, 2002 are incorporated by reference into Part III.
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TABLE OF CONTENTS
ITEM PAGE
- ---- -----
PART I
1. Business......................................................... 1
2. Properties....................................................... 6
3. Legal Proceedings................................................ 6
4. Submission of Matters to a Vote of Security Holders.............. 6
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters................................... 7
6. Selected Financial Data.......................................... 8
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 9
7A. Quantitative and Qualitative Disclosures about Market
Risk.................................................. 20
8. Financial Statements and Supplemental Data....................... 21
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 22
PART III
10. Directors and Executive Officers of the Registrant............... 22
11. Executive Compensation........................................... 22
12. Security Ownership of Certain Beneficial Owners and
Management............................................ 22
13. Certain Relationships and Related Transactions................... 22
14. Controls and Procedures.......................................... 23
PART IV
15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................... 23
Signatures............................................ 24
i
PART I
Item 1. Business
OVERVIEW
Wire One Technologies, Inc., a Delaware corporation, was formed in May 2000 by
the merger of All Communications Corporation ("ACC"), a reseller and integrator
of video, voice and network communications design and service solutions into
View Tech, Inc. ("VTI"), a provider of video, voice and data communications
equipment and services.
Wire One is a leading single source provider of video communications solutions
that encompass the entire video communications value chain. We are a leading
integrator for major video communications equipment manufacturers, including the
number one market share leader, Polycom, Inc., as well as Tandberg, RADVision,
Cisco Systems, Sony and others. We integrate equipment from these manufacturers
into comprehensive video and network solutions and resell them to end users and
resellers. Our current customer base includes over 3,000 companies with
approximately 21,000 videoconferencing endpoints. We also operate our Glowpoint
network service, which provides our customers with two-way video communications
with high quality of service. With Glowpoint, which we believe to be the first
subscriber network to provide such communications by utilizing an Internet
network and broadband access dedicated solely to transporting video using the
H.323 Internet Protocol standard, we offer our customers a single point of
contact for all their video communications requirements.
Industry Overview
In today's fast-paced business environment, many companies seek more efficient
and cost effective ways to communicate with an increasingly mobile and widely
distributed network of employees, customers, suppliers and partners. Video
communications technology enables two or more parties in different locations to
use audio and video to communicate simultaneously in real time. Moreover, video
provides an effective means of communication that offers the benefit of
face-to-face interaction when participants are unable to meet in a common
location.
Historically, video communications involved point-to-point communication from
designated rooms equipped with large, expensive equipment. Users were forced to
tolerate cumbersome set-up procedures, which often required the assistance of a
trained technician. Moreover, bandwidth constraints and room availability often
limited the functionality, usability and reliability of these systems.
Video Communications Evolution
In recent years, video equipment manufacturers have been building smaller
devices and units for use with personal computers and also adopted standards to
help improve compatibility and user acceptance. Many of the older room systems
have been replaced as most users migrated to video communications systems based
upon Integrated Services Digital Network ("ISDN") standards. Although superior
to earlier technologies, ISDN still has several shortcomings, including high
transmission costs and poor quality of service ("QoS"), due primarily to the
fact that ISDN is fundamentally a narrowband technology. We believe that the low
quality and high cost of video communications using ISDN has impeded the growth
of the video communications market. More recently, the development of IP has
promised new standards for broadband communications, and the industry has
accordingly adopted IP-standards-based technologies that provide guaranteed QoS
and lower transmission costs than ISDN. We expect the ability to perform video
communications over IP will increase user adoption and help make two-way video
communications widespread in the enterprise and, ultimately, the consumer
markets.
1
IP-based Video Communications
While many business users have private networks that could theoretically support
IP video communications, most are reluctant to run a video communications
application over the same networks that also support enterprise data and other
applications. Among other concerns, the video communications application would
be required to share bandwidth with data applications (for example, e-mail and
file transfers) on the common network. Allocating enough bandwidth in a
corporate local area network ("LAN") or intranet to handle real-time
transmission of sounds and images in addition to such data applications is
difficult and can create congestion that impedes overall network performance. In
addition, most businesses already find it difficult to effectively maintain and
manage existing applications due to 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 are a single source provider of video products and services that assists
customers located principally in the United States with systems design and
engineering, procurement, installation, operation and maintenance of their video
communications systems. We offer our customers video communications products
from leading manufacturers such as Polycom (which distributes products under the
Polycom, PictureTel and Accord brands, among others), Tandberg, RADVision, Cisco
Systems and Sony and provide a comprehensive suite of video and data services
including engineering, installation, customized training, on-site technical
assistance and maintenance. We also operate our Glowpoint network subscriber
service, which provides our customers with two-way video communications with
high quality of service utilizing a dedicated Internet Protocol ("IP") backbone
and broadband access. Lastly, we sell multi-point video and audio bridging
services through our Multiview Network Services program. We employ
state-of-the-art conferencing servers that provide seamless connectivity for all
switched digital networks.
Video Communications and Data Products
We market and sell a full range of video, audio and data products and systems
from Polycom, Tandberg, VCON Telecommunications, Ltd., Sony Electronics, Inc.,
Gentner Communications, Inc. and Extron Electronics, Inc. principally in the
United States. We also distribute data products from companies such as Adtran,
Lucent, Initia and RADVision to provide our customers with remote access into
LANs, permitting them to acquire bandwidth on demand and to digitally transmit
data. We configure single- or multi-vendor video and data conferencing platforms
for our clients and integrate systems and components into a complete solution
designed to suit each customer's particular communications requirements.
2
Video Communications Services
After designing a customer's video communications solution, we deliver, install
and test the communications equipment. When the system is functional, we provide
training to all levels of our customer's organization, including executives,
managers, management information systems and data-processing administrators and
technical staff. Training includes instruction in system operation, as well as
the planning and administration of meetings. By means of thorough training, we
help to ensure that our customers understand the functionality of their systems
and are able to apply the technology effectively.
Our OneCare service covers a customer's entire video communications system
deployment for a fixed fee. OneCare encompasses installation and maintenance
services that provide comprehensive customer support after the sale and help
ensure that our customers experience reliable, effortless video communications.
Our installation service places minimal demands on a customer's time and
resources. Our maintenance service provides technical support representatives
and engineers, a help desk offering 24x7 responsiveness, nationwide on-site
diagnostic repair and replacement service, nationwide network trouble
coordination and a video test facility.
We also provide advanced telecommunications consulting and engineering services
through our ProServices department. Our engineers have in-depth experience with
networks, microprocessors, software development and IT management, as well as
the design, deployment and repair of video telecommunications products and
technology. Our engineers use this experience to provide expert advice and
assistance in evaluating and deploying the appropriate visual communications
technology to meet a customer's project goals and objectives. These services
include application consulting and network design, laboratory testing, product
application and industry research, and technology trial assistance.
We also sell multi-point video and audio bridging services through our Multiview
Network Services program. We employ state-of-the-art conferencing servers that
provide seamless connectivity for all switched digital networks at an affordable
rate. Because of the significant expense associated with procuring multi-point
conferencing equipment, our customers typically elect instead to use our
Multiview Network Services as and when bridging is required.
Glowpoint
Our Glowpoint network provides customers with a high-quality platform for video
communications over IP and related applications. The Glowpoint service offers
subscribers substantially reduced transmission costs and superior video
communications quality, remote management of all videoconferencing endpoints
utilizing simple network management protocol ("SNMP"), gateway services to
ISDN-based video communications equipment, video streaming and store-and-forward
applications from our network operations center ("NOC").
To provide our Glowpoint service, we have contracted with MCI/WorldCom
Communications and Cable & Wireless for access to their IP backbone networks and
co-location facilities. We have contracted with WorldCom, Covad Communications,
New Edge Networks, Allegiance Telecom and others, and plan to contract with
additional broadband access providers, for dedicated broadband access to the
Glowpoint 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 Glowpoint.
SALES AND MARKETING
We market and sell our products and services to the commercial, government,
medical and educational sectors through a direct sales force of account
executives as well as through resellers. Sales to resellers are made on terms
with respect to pricing, payment and returns that are consistent with those
offered to end user customers. No price protection or similar arrangement is
offered, nor are the obligations as to payment contingent on the resale of the
equipment purchased by the reseller. There are no special rights to return
equipment granted to resellers, nor are we obligated to repurchase reseller
inventory. These efforts are supported by sales engineers, a marketing
department and a professional services and engineering group. As of December 31,
2002, we had 61 account executives and 31 additional sales management,
engineering, administrative and marketing personnel.
3
Our marketing department concentrates on activities that will generate leads for
our sales force and create brand awareness for Wire One and the Glowpoint
network, including direct marketing campaigns, select advertising, public
relations, participation in trade shows and the coordination of seminars
throughout the country. We host these seminars to demonstrate video
communications systems to prospective customers and to educate them on
technological advancements in video and data communications. We also provide our
sales force with ongoing training to ensure that it has the necessary expertise
to effectively market and promote our business and solutions.
In conjunction with manufacturer-sponsored programs, we provide existing and
prospective customers with sales, advertising and promotional materials. We
maintain up-to-date systems for demonstration purposes in all of our sales
offices and demonstration facilities.
Our technical and training personnel periodically attend installation and
service training sessions offered by video communications manufacturers to
enhance their knowledge and expertise in the installation and maintenance of the
systems.
CUSTOMERS
We have sold our products and services to over 3,000 customers, which
collectively have approximately 21,000 videoconferencing endpoints. These
customers operate in each of the following market sectors: commercial, medical,
educational and governmental. No single customer accounts for more than 5% of
our revenues. We maintained a backlog of firm sales orders with related revenue
totaling $1.1 million and $1.8 million at December 31, 2002 and 2001,
respectively. We expect that the sales orders in the backlog at December 31,
2002 will be fulfilled within the current fiscal year. The size of the backlog
varies depending on the nature of the equipment underlying the sales orders and
whether or not the orders are received with enough time available to procure and
ship the equipment prior to the end of the fiscal period.
TECHNOLOGY
The Glowpoint network
Glowpoint employs a proprietary network architecture consisting of
state-of-the-art equipment co-located at WorldCom and Cable & Wireless data
centers across the country, each one constituting a Glowpoint point of presence
("POP"), and dedicated capacity on WorldCom's and Cable & Wireless' high
performance, redundant backbones. This backbone network connects all of
Glowpoint's POPs, using multiple high-speed OC-3 and OC-12 lines, which
virtually eliminate the risk of a single point of failure. Our POPs consist of
the best available technology from multiple vendors combined in a proprietary
architecture and co-located in a secure and monitored environment. This
configuration of equipment at the POPs and their locations distributed across
the country is expected to provide industry-leading throughput, scalability and
mission-critical resiliency. All equipment on the network complies with current
H.323 (IP) standards.
Currently, we have 13 POPs strategically located throughout the United States,
as well as in the UK, Canada and Japan. We have contracted with WorldCom, Covad,
Allegiance Telecom and others, and plan to contract with additional broadband
access providers, for dedicated broadband access to the Glowpoint network using
either DSL, T1 or T3.
Network operations center
We maintain a state-of-the-art NOC at our headquarters from which we monitor the
operations of Glowpoint 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, passes 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.
4
Research and Development
As of December 31, 2002, we employed a staff of 12 software and hardware
engineers who evaluate, test and develop proprietary applications. The costs of
this team of engineers in the year ended December 31, 2002 totaled approximately
$1 million. In the years ended December 31, 2001 and 2000, the costs related to
this team of engineers totaled $1 million and $120,000, 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.
EMPLOYEES
As of December 31, 2002, we had 328 full-time employees. Of these employees, 241
are employed in our video solutions segment (comprised of 92 sales account
executives, engineers, management, administrative and marketing personnel; 66
audio/visual integration employees; 58 employees involved in providing
installation and maintenance services, technical services and customer support;
and 25 employees in order processing and fulfillment); 48 are employed in our
network solutions segment; and the remaining 39 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 manufacturers and resellers of video communications
systems, some of which are larger, have longer operating histories and have
greater financial resources and industry recognition than us. These competitors
include FVC.com, Tandberg and VTEL Corporation.
We also compete with providers of video communications transport services,
including AT&T Corporation, WorldCom, Sprint Corporation and some other of the
regional Bell operating companies and carriers. In the future, competition may
increase from new and existing resellers, from manufacturers that choose to sell
direct to end users and from existing and new telecommunications services
providers, which may include certain of our suppliers or 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 video product and service offerings;
o relationships with video equipment manufacturers;
o nationwide presence;
o technical expertise;
o knowledgeable sales, service and training personnel; and
o commitment to customer service and support.
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.
5
Item 2. Properties
Our headquarters are located at 225 Long Avenue, Hillside, New Jersey 07205.
These premises consist of approximately 19,000 square feet of 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 are utilized for
executive functions and our Glowpoint operations.
We also lease premises of approximately 49,000 square feet for our distribution
and audio-visual integration operations in Miamisburg, Ohio. The term of this
lease expires on December 31, 2007. The base rental for the premises during the
term of the lease is currently approximately $172,000 per annum. In addition, we
are obligated to pay our share of the landlord's operating expenses. We believe
that this space will be adequate to meet our needs resulting from anticipated
growth in our company.
In addition to our headquarters and our distribution/audio-visual facilities, we
have an office in Windham, New Hampshire, that houses our finance and human
resources group; a technical facility in Camarillo, California that houses our
Multiview Network Services group, help desk and technical personnel; and sales
and demonstration offices in Scottsdale, Arizona; Irvine, Rancho Cordova, San
Ramon and San Francisco, California; Englewood, Colorado; Danbury and Norwalk,
Connecticut; Atlanta, Georgia; Rolling Meadows, Illinois; Indianapolis, Indiana;
Louisville, Kentucky; Boston, Massachusetts; Detroit, Michigan; Bloomington,
Minnesota; Little Falls, New Jersey; New York, New York; Durham, North Carolina;
Portland, Oregon; Dallas and Houston, Texas; Salt Lake City, Utah; Manassas,
Virginia and Bellevue, Washington.
Item 3. Legal Proceedings
We are defending several suits or claims in the ordinary course of business,
none of which individually or in the aggregate is material to our business,
financial condition or results of operations.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The following table presents historical trading information for Wire One's
common stock for the two most recent fiscal years:
WIRE ONE
COMMON STOCK
----------------------
HIGH LOW
YEAR ENDING DECEMBER 31, 2001:
First Quarter........................................ $4.88 $2.00
Second Quarter....................................... 6.50 1.66
Third Quarter........................................ 6.30 3.90
Fourth Quarter....................................... 9.95 5.17
YEAR ENDING 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
On March 25, 2003, the last reported sale price of Wire One common stock was
$2.04 per share as reported on the Nasdaq National Market, and 29,054,189 shares
of Wire One common stock were held by approximately 187 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. 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.
7
Recent Sales of Unregistered Securities
We issued subordinated convertible notes bearing interest at the rate of eight
percent per annum in the aggregate principal amount of $4,888,000 and warrants
to purchase an aggregate of 814,668 shares of common stock pursuant to a Note
and Warrant Purchase Agreement dated as of December 17, 2002. We may pay the
interest on the notes in cash or in common stock at our option. Upon the
conversion of the notes at the initial conversion price of $2.40 per share,
2,036,667 shares of common stock would be issuable. The warrants are exercisable
for 814,668 shares of common stock at the initial exercise price of $3.25 per
share. We sold these securities to four institutional accredited investors
pursuant to the exemption from registration provided by Section 4(2) of the Act.
H.C. Wainwright & Co. acted as our placement agent and received an aggregate fee
of $293,280 and warrants to purchase 40,733 shares of our common stock. We have
used or will use the proceeds from the offering for general corporate purposes,
including funding of capital expenditures and working capital requirements.
In November 2001, we acquired certain assets and liabilities of the video
conferencing division of Axxis, Inc. We did not acquire any equity interest in
Axxis. In consideration for the acquired assets and assumed liabilities, we
issued 320,973 shares of common stock with an assumed price per share of $6.39,
or an aggregate of $2,051,017. We issued these securities to Axxis pursuant to
the exemption from registration provided by Section 4(2) of the Act.
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, with specific
reference to Footnote 2 - Summary of Significant Accounting Policies, Footnote 4
- - Discontinued Operations and Footnote 18 - Business Combinations.
Year Ended December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------ ------- -------
Statement of Operations Information: (in thousands, except per share data)
Net revenues
Video solutions
Equipment $ 61,398 $ 55,638 $ 39,280 $ 11,601 $ 5,640
Service 15,751 15,294 7,679 797 496
Network solutions 5,599 3,480 1,475 -- --
-------- ------- ------- ------ ------
82,748 74,412 48,434 12,398 6,136
-------- ------- ------- ------ ------
Cost of revenues
Video solutions
Equipment 47,406 38,332 26,283 8,029 3,704
Service 8,618 8,914 5,271 549 317
Network solutions 5,597 2,898 1,105 -- --
-------- ------- ------- ------ ------
61,621 50,144 32,659 8,578 4,021
-------- ------- ------- ------ ------
Gross margin
Video solutions
Equipment 13,992 17,306 12,997 3,572 1,936
Service 7,133 6,380 2,408 248 179
Network solutions 2 582 370 -- --
-------- ------- ------- ------ ------
21,127 24,268 15,775 3,820 2,115
-------- ------- ------- ------ ------
8
Year Ended December 31,
----------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------ ------- -------
Statement of Operations Information: (in thousands, except per share data)
Operating expenses
Selling 25,698 22,112 12,588 2,487 1,634
General and administrative 8,159 12,195 4,121 1,765 1,310
Restructuring 960 250 -- -- --
Impairment losses on goodwill 40,012 -- -- -- --
Impairment losses on other
long-lived assets 1,358 -- -- -- --
Amortization of goodwill -- 2,684 1,501 -- --
-------- ------- ------- ------ ------
Total operating expenses 76,187 37,241 18,210 4,252 2,944
-------- ------- ------- ------ ------
Loss from continuing operations (55,060) (12,973) (2,435) (432) (829)
-------- ------- ------- ------ ------
Other (income) expense
Amortization of deferred financing costs 123 100 344 43 19
Interest income (72) (77) (315) (23) (56)
Interest expense 432 598 78 181 57
Amortization of discount on
subordinated debentures 39 -- -- -- --
-------- ------- ------- ------ ------
Total other expenses, net 522 621 107 201 20
-------- ------- ------- ------ ------
Loss before income taxes (55,582) (13,594) (3,564) (423) (849)
Income tax (benefit) provision -- 200 511 (105) 3
-------- ------- ------- ------ ------
Net loss from continuing operations (55,543) (13,794) (3,053) (528) (852)
Loss from discontinued AV operations (2,696) (396) -- -- --
Income (loss) from discontinued Voice operations (287) (617) 521 1,592 75
Gain on sale of discontinued Voice operation -- 277 -- -- --
-------- ------- ------- ------ ------
Net income (loss) (58,565) (14,530) (2,532) 1,064 (777)
Deemed dividends on series A convertible
preferred stock -- 4,434 13,723 -- --
-------- ------- ------- ------ ------
Net income (loss) attributable to common
stockholders $ (58,565) $(18,964) $(16,255) $1,064 $ (777)
======== ======= ======= ====== ======
Net loss from continuing operations per share
Basic $ (1.93) $ (0.66) $ (0.24) $(0.11) $ (0.18)
======== ======= ======= ====== ======
Diluted $ (1.93) $ (0.66) $ (0.24) $(0.09) $ (0.18)
======== ======= ======= ====== ======
Income (loss) from discontinued operations
per share
Basic $ (0.10) $ (0.04) $ 0.04 $ 0.32 $ 0.02
======== ======= ======= ====== ======
Diluted $ (0.10) $ (0.04) $ 0.04 $ 0.26 $ 0.02
======== ======= ======= ====== ======
Deemed dividends per share
Basic $ -- $ (0.21) $ (1.07) $ -- $ --
======== ======= ======= ====== ======
Diluted $ -- $ (0.21) $ (1.07) $ -- $ --
======== ======= ======= ====== ======
Net income (loss) per share:
Basic $ (2.03) $ (0.91) $ (1.27) $ .22 $ (0.16)
======== ======= ======= ====== ======
Diluted $ (2.03) $ (0.91) $ (1.27) $ .17 $ (0.16)
======== ======= ======= ====== ======
Weighted average number of common shares
and equivalents outstanding:
Basic 28,792 20,880 12,817 4,910 4,910
======== ======= ======= ====== ======
Diluted 28,792 20,880 12,817 6,169 4,910
======== ======= ======= ====== ======
Balance Sheet Information:
Cash and cash equivalents $ 2,762 $ 1,689 $ 1,871 $ 60 $ 326
Working capital 24,940 15,639 19,921 4,526 5,702
Total assets 61,502 104,499 84,372 10,867 8,923
Long-term debt (including current portion) 5,871 83 3,128 2,186 2,444
Series A mandatorily redeemable convertible
preferred stock -- -- 10,371 -- --
Total stockholders' equity 36,586 68,909 49,658 5,194 3,968
9
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 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 our relatively
short operating history; market acceptance and availability of new products and
services; the terminable-at-will and nonexclusive nature of reseller agreements
with manufacturers; rapid technological change affecting products and services
sold by us; the impact of competitive products, services, and pricing, as well
as competition from other resellers and service providers; possible delays in
the shipment of new products; and the availability of sufficient financial
resources to enable us to expand its operations.
Overview
Wire One is a single source provider of video products and services that assists
customers located principally in the United States with systems design and
engineering, procurement, installation, operation and maintenance of their video
communications systems. We offer our customers video communications products
from leading manufacturers such as Polycom (which distributes products under the
Polycom, PictureTel and Accord brands, among others), Tandberg, RADVision, Cisco
Systems and Sony and provide a comprehensive suite of video and data services
including engineering, installation, customized training, on-site technical
assistance and maintenance. We also operate our Glowpoint network subscriber
service, which provides our customers with two-way video communications with
high quality of service utilizing an Internet network and broadband access
dedicated solely to transporting video using the H.323 IP standard. Lastly, we
sell multi-point video and audio bridging services through our Multiview Network
Services program. We employ state-of-the-art conferencing servers that provide
seamless connectivity for all switched digital networks.
We market and sell products and services to the commercial, government, medical
and educational sectors through a direct sales force of account executives as
well as through resellers. Sales to resellers are made on terms with respect to
pricing, payment and returns that are consistent with those offered to end user
customers. No price protection or similar arrangement is offered, nor are the
obligations as to payment contingent on the resale of the equipment purchased by
the reseller. There are no special rights to return equipment granted to
resellers, nor are we obligated to repurchase reseller inventory. These efforts
are supported by sales engineers, a marketing department, and a professional
services and engineering group. We have sold our products and services to over
3,000 customers who collectively have approximately 21,000 videoconferencing
endpoints.
Product revenue consists of revenue from the sale of video communications
equipment and is recognized at the time of shipment, provided that the price is
fixed and determinable, no significant obligations remain, collectibility is
probable and returns are estimable. Revenue is recognized at the time of
shipment since the terms of shipment are FOB shipping point and legal title to
the equipment passes to the customer at this time. Post shipment obligations
such as installation and training are considered relatively insignificant given
the underlying nature of the equipment and of its installation.
Service revenue is derived from services rendered in connection with the sale of
new systems and the maintenance of previously installed systems. Services
rendered in connection with the sale of new systems consist of engineering
services related to system integration, installation, technical training and
user training. Most of these services are rendered at or prior to installation
and all revenue is recognized only after the services have been rendered.
Revenue related to extended service contracts is deferred and recognized over
the life of the extended service period. Revenue related to the Glowpoint
network subscriber service and the multi-point video and audio bridging services
we offer are recognized through a monthly billing process after services have
been rendered.
Wire One was formed on May 18, 2000 by the merger of ACC and VTI. VTI was the
surviving legal entity in the merger. However, for financial reporting purposes,
the merger has been accounted for as a "reverse acquisition" using the purchase
method of accounting. Under the purchase method of accounting, ACC's historical
results have been carried forward and VTI's operations have been included in the
financial statements commencing on the merger date. Accordingly, all 1999
results as well as 2000 results through the merger date are those of ACC only.
Further, on the date of the merger, the assets and liabilities of VTI were
recorded at their fair values, with the excess purchase consideration allocated
to goodwill.
In July 2000, we acquired the net assets of 2CONFER, LLC, a Chicago-based
provider of videoconferencing, audio and data solutions. The total consideration
was $800,000, consisting of $500,000 in cash and the remainder in our common
stock valued at the time of acquisition at $300,000. On the date of the
acquisition, the assets and liabilities of 2CONFER were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
10
In October 2000, we acquired the assets and certain liabilities of the Johns
Brook Company ("JBC") videoconferencing division, a New Jersey-based provider of
videoconferencing solutions. The total consideration was $635,000, consisting of
$481,000 in cash and the remainder in our common stock valued at the time of
acquisition at $154,000. On the date of the acquisition, the assets and certain
liabilities of the JBC videoconferencing division were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
In June 2001, we acquired the assets of GeoVideo Networks, Inc., a New
York-based developer of video communications software. Chief among the assets,
in addition to GeoVideo's cash on hand of $2,500,000, was GeoVideo's browser, a
software tool based upon proprietary Bell Labs technology that allows up to six
simultaneous, real-time, bi-directional high-bandwidth IP video sessions to be
conducted over a standard desktop PC. In exchange for the acquired assets, we
issued 815,661 shares of our common stock, together with warrants to purchase
501,733 additional shares of our common stock at $5.50 per share and 520,123
shares at $7.50 per share. On the date of acquisition the assets of GeoVideo
were recorded at their fair values, with the excess purchase consideration
allocated to goodwill.
In July 2001, we acquired the assets and certain liabilities of Advanced
Acoustical Concepts, Inc. ("AAC"), an Ohio-based designer of audiovisual
conferencing systems. The total consideration was $794,000, which was paid in
the form of our common stock valued at the time of acquisition. On the date of
acquisition, the assets and certain liabilities were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
In October 2001, we completed the sale of our 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 requiring equal periodic
payments of principal and interest over its one year term. The sale of our voice
communications unit was aimed at enabling us to sharpen our focus on video
solutions and on Glowpoint, our subscriber-based IP network dedicated to video
communications traffic. As a consequence, this unit has been classified as a
discontinued operation in the accompanying financial statements, with its
results from operations summarized in a single line item on our statement of
operations.
In November 2001, we acquired certain assets and liabilities of the video
conferencing division of Axxis, Inc., a Kentucky-based designer of audiovisual
conferencing systems. The total consideration was $2,051,000, which was paid in
the form of our common stock valued at the time of acquisition. On the date of
acquisition, the acquired assets and liabilities were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
In March 2003, we completed the sale of certain assets and liabilities of the
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 the form of
a promissory note payable in five equal consecutive monthly payments commencing
on April 15, 2003. The sale of our AV component was aimed at enabling us to
focus more of our resources on the development and marketing of our Glowpoint
network, and to our video solutions business. As a consequence, this unit has
been classified as a discontinued operation in the accompanying financial
statements, with its net assets summarized in a single line item on our
consolidated balance sheets and its results from operations summarized in a
single line item on our consolidated statements of operations. See footnote 4 to
the consolidated financial statements for further information.
11
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,
----------------------------
2002 2001 2000
----- ----- -----
Net revenues
Video solutions
Equipment 74.2% 74.8% 81.1%
Service 19.0 20.5 15.9
Network solutions 6.8 4.7 3.0
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Cost of revenues
Video solutions
Equipment 77.2 68.9 66.9
Service 54.7 58.3 68.6
Network solutions 100.0 83.3 74.9
----- ----- -----
74.5 67.4 67.4
----- ----- -----
Gross margin
Video solutions
Equipment 22.8 31.1 33.1
Service 45.3 41.7 31.4
Network solutions -- 16.7 25.1
----- ----- -----
25.5 32.6 32.6
----- ----- -----
Operating expenses
Selling 31.0 29.7 26.0
General and administrative 9.8 16.7 8.5
Restructuring 1.2 -- --
Impairment losses on goodwill 48.0 -- --
Impairment losses on other long-lived assets 0.2 -- --
Amortization of goodwill -- 3.6 3.10
----- ----- -----
Total operating expenses 92.0 50.0 37.6
----- ----- -----
Loss from continuing operations (66.5) (17.4) (5.0)
----- ----- -----
Other (income) expense
Amortization of deferred financing costs 0.1 0.1 0.7
Interest income -- -- (0.7)
Interest expense 0.5 0.7 0.2
Amortization of discount on subordinated
debentures -- -- --
----- ----- -----
Total other expenses, net 0.6 0.8 0.2
----- ----- -----
Loss before income taxes (67.1) (18.2) (5.2)
Income tax provision -- .03 1.1
----- ----- -----
Net loss from continuing operations (67.1) (18.5) (6.3)
Loss from discontinued AV operations (3.3) (0.5) --
Income (loss) from discontinued Voice operations (0.3) (0.8) 1.1
Gain on sale of discontinued Voice operation -- 0.3 --
----- ----- -----
Net loss (70.7) (19.5) (5.2)
Deemed dividends on series A convertible preferred stock -- 6.0 28.3
----- ----- -----
Net loss attributable to common stockholders (70.7)% (25.5)% (33.5)%
===== ===== =====
Year Ended December 31, 2002 ("2002 period") Compared to Year Ended December 31,
2001 ("2001 period").
NET REVENUES. We reported total net revenues of $82.7 million for the 2002
period, an increase of $8.3 million, or 11%, over the $74.4 million in revenues
reported for the 2001 period. This revenue growth was achieved despite operating
in what was a very challenging information technology and telecom spending
environment. Sales of video communications products amounted to 74% of total net
revenues in the 2002 period, revenues related to video services totaled 19% and
video network revenues accounted for the remaining 7% of total net revenues.
12
Video solutions -- Sales of video communications products were $61.4
million in the 2002 period, an increase of $5.8 million, or 10%, over the $55.6
million in the 2001 period. We sold 4,821 videoconferencing endpoints in the
2002 period, an increase of 11% over the 4,345 endpoints sold in the 2001
period. In 2002, we were again named Polycom's Reseller of the Year. We added
Sony's new videoconferencing product to our multi-vendor platform and expanded
our relationship with Tandberg in an effort to diversify our product mix and
offer more hardware manufacturers to customers. The growth that we experienced
in the 2002 period resulted from sales to new customers, $7.9 million, offset
slightly by a decline in sales to existing customers of $2.1 million. In the
2002 period, approximately 40% of sales of video communications products were to
new customers. We experienced growth in the 2002 period in the following
sectors: commercial enterprises, $1.5 million, and governmental, $6.1
million; offset by declines in sales to medical institutions, $0.7 million and
educational institutions, $1.1 million. Revenues related to video services were
$15.8 million in the 2002 period, an increase of $0.5 million, or 3%, over the
$15.3 million in the 2001 period. The revenue growth experienced in the 2002
period resulted from a $0.3 million increase in on-site technical support
revenue as a result of our providing more on-site technicians to assist our
customers in managing their video enterprises and from increased installation
revenue of $0.2 million related to the increased product sales. Service contract
revenues were flat year to year, but as a result of increased efforts to sign up
existing customers for renewal contracts and positive momentum built in the
second half of the 2002 period, we expect that service contract revenues should
increase in the 2003 period.
Video network -- Sales of video network services were $5.6 million in the
2002 period, an increase of $2.1 million, or 61%, over the $3.5 million in the
2001 period. $2.8 million of the $2.1 million increase in revenues for the 2002
period over the 2001 period related to growth in Glowpoint network services with
a $0.7 million decline in revenues from the H.320 bridging service accounting
for the remainder of the change in revenues. The growth in Glowpoint network
services revenue was the result of having on average 312 more video endpoints on
the network in the 2002 period versus the 2001 period and those endpoints
producing $660 per month in revenue (accounting for approximately $2.5 million
of the $2.8 million increase) and in having 590 endpoints installed on the
network in the 2002 period (accounting for $0.3 million of the increase). The
decline in H.320 bridging revenues is the result of: 1) several customers
purchasing equipment to enable their own multi-point video calling capability,
$0.3 million of the decline; 2) year to year bridging service utilization
declines on the part of a number of existing customers, $0.3 million; and 3)
several customers transferring from H.320 bridging to IP bridging made possible
by the Glowpoint network, $0.1 million. These customers became Glowpoint
subscribers during the year and utilized the full range of Glowpoint services,
including IP bridging.
GROSS MARGINS. Gross margins were $21.1 million in the 2002 period, a
decrease of $3.2 million over the 2001 period. Gross margins decreased in the
2002 period to 25.5% of net revenues, as compared to 32.6% of net revenues in
the 2001 period. The primary cause of the overall decline in gross margins was
the decline in gross margins on sales of video communications products. Gross
margins on sales of video communications products declined from 31.1% in the
2001 period to 22.8% in the 2002 period. This decrease is attributable to
overall competitive pressures in the video solutions market resulting from the
relatively weak economy, decreased spending for information technology and
telecom and downward pricing pressure initiated by competitors. Most video
communications products that we sell suffered year-over-year gross margin
declines. Gross margins related to video service revenues increased from 41.7%
in the 2001 period to 45.3% in the 2002 period. This increase is attributable to
cost reduction measures implemented in late July of 2002. These cost reductions
were the result of implementation of new management information systems that now
allow help desk calls from customers to be handled more efficiently and enable
us to better utilize our technicians. We expect the gross margins on sales of
video communications products to continue to be under pressure in the first half
of the 2003 period as a difficult economic environment persists, but anticipate
improvement in the second half of the 2003 period as economic uncertainties are
clarified, competitor video product inventory levels decline and new products
from manufacturers are introduced to the market.
13
Gross margins related to video network revenues declined from 16.7% in the
2001 period to 0.0% in the 2002 period. The decline is the result of increased
fixed costs incurred in the 2002 period as the network has been built out to
handle the video traffic of over 2,000 video endpoints. At the end of the 2002
period there were 765 video endpoints on the network. Gross margins related to
video network revenues should improve over the course of the 2003 period as we
anticipate that more video endpoints will be installed on the network and
minimal further fixed costs related to the operation of the network are
incurred.
SELLING. Selling expenses, which include sales salaries, commissions and
overhead and marketing costs, increased $3.6 million in the 2002 period to $25.7
million from $22.1 million for the 2001 period. Increases in selling expenses
are attributable to increases in the number of sales personnel and their related
costs such as commissions, facilities, travel and telecommunications which
totaled $2.0 million and the $1.0 million of additional personnel, facilities,
travel, marketing and telecommunications costs related to the Glowpoint
division. We began the 2001 period with 98 sales and marketing employees and
ended it with 100 personnel dedicated to these functions. The number of sales
and marketing employees increased to 121 by the mid-point of the 2002 period and
was subsequently reduced to 92 by the end of the 2002 period. Selling expenses
as a percentage of net revenues for the 2002 period were 31.0%, an increase of
1.3%, from 29.7% in the 2001 period. Selling costs of the Glowpoint division as
a percentage of revenues increased 1.6% from the 2001 period to the 2002 period
and remaining selling expenses as a percentage of revenue declined 0.3% for the
same period.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
$4.0 million in the 2002 period to $8.2 million as compared to $12.2 million for
the 2001 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 Chief
Executive Officer, the one-time non-cash charge of $630,000 for accelerated
amortization of Glowpoint-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 Chief Operating Officer was incurred. If these one-time
charges are subtracted from their respective periods, adjusted general and
administrative expenses are $7.2 million for the 2001 period and $8.0 million
for the 2002 period. The $0.8 million increase in adjusted general
administrative expenses is due to a $0.3 million increase in bad debt expense, a
$0.2 million increase in depreciation on corporate-level assets and a $0.3
million increase in personnel expense. We began the 2001 period with 30 finance
and administrative employees and ended it with 38 personnel dedicated to these
functions. The number of finance and administrative employees was up slightly to
39 by the end of the 2002 period. Adjusted general and administrative expenses
as a percentage of net revenues for the 2002 period were 9.6%, a decrease of
0.1%, from 9.7% in the 2001 period.
RESTRUCTURING. We recorded a restructuring charge of $960,000 in June of
the 2002 period. $500,000 of the charge was for employee termination costs that
relate to the 84 employees that were terminated following the implementation of
the cost savings plan. $460,000 of the charge was for facility exit costs that
relate to the closing or downsizing of 19 sales offices. The charge was taken as
part of a plan that has resulted in annual cost savings of $7 million.
Specific measures included the following: 1) reducing our overall workforce
by 84 employees, or approximately 20% of our headcount at that time; 2)
minimizing existing facility lease obligations by closing, re-locating or
downsizing 19 of our U.S. regional sales offices; 3) implementing a salary
reduction program, including executive salary reductions of 10% for our Chief
Executive Officer and our Chief Operating Officer; 4) enhancing operating
efficiencies by implementing new operating processes, management information
systems and technology; and 5) negotiating more favorable terms from numerous
service providers and other vendors supplying us with goods and services.
14
The workforce reductions affected every area of our business including: 1)
audio-visual integration operations, including technicians and engineering
personnel; 2) video solutions operations, including field and help desk
technicians; 3) order processing and fulfillment, including consolidation of all
warehouse operations in Miamisburg, Ohio; 4) finance, accounting and information
technology; and 5) sales and marketing, including call center and administrative
personnel and account executives. The closing, re-locating and downsizing of
regional sales offices has left us with a continued nationwide presence through
our 24 sales offices and demonstration facilities. The new operating processes,
management information systems and technology that have been implemented have
enabled us to more efficiently originate, process and fulfill video
communications product sales orders and to deliver the full range of video
services that we have provided in the past. We have not changed our product and
service offerings in any way as a result of this cost savings plan. All of the
cost savings measures were implemented by September 30, 2002 with the most
significant measures implemented by early August of 2002. We achieved full
realization of these cost savings in our fiscal fourth quarter of 2002.
IMPAIRMENT LOSSES ON GOODWILL AND OTHER LONG-LIVED ASSETS. Impairment
losses on goodwill and other long-lived assets were $41.4 million in the 2002
period as we implemented the provisions of Financial Account Standards Board
("FASB") Statement No. 142, Goodwill and Other Intangible Assets ("FAS142") and
Financial Account Standards Board Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS144"). Amortization of goodwill
recorded in the 2001 period was $2.7 million. An impairment loss of $40.0
million related to the goodwill of the Video Solutions reporting unit was
recorded in the 2002 period. This non-cash impairment charge was recognized for
the amount that the carrying amount of goodwill exceeded its implied fair value.
An impairment loss of $1.4 million related to long-lived assets was also
recorded in the 2002 period.
OTHER (INCOME) EXPENSES. 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 component 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 component after the disposal
transaction. We incurred a loss from discontinued operations relating to the
audio-visual integration component 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 INCOME (LOSS). We reported a net loss attributable to common
stockholders for the 2002 period of $(58.6) million, or $(2.03) per diluted
share, as compared to net loss attributable to common stockholders of $(19.0)
million, or $(0.91) per diluted share for the 2001 period. The $(58.6) million
net loss for the 2002 period resulted primarily from $41.4 million of impairment
losses on goodwill and other long-lived assets, depreciation and amortization
charges of $5.1 million, non-cash compensation of $0.7 million, a $1.0 million
restructuring charge, $3.9 million of Glowpoint direct expenses and a $2.7
million loss from discontinued AV operations. EBITDA from continuing operations
for the 2002 period was $(6.9) million. The $(19.0) million net loss for the
2001 period resulted primarily from depreciation and amortization charges of
$7.1 million, non-cash compensation of $4.4 million, $4.4 million of deemed
dividends on Series A preferred stock, a $0.2 million restructuring charge, $2.9
million of Glowpoint direct expenses and a $0.4 million loss from discontinued
AV operations. EBITDA from continuing operations for the 2001 period was $(0.2)
million.
15
Year Ended December 31, 2001 ("2001 period") Compared to Year Ended December 31,
2000 ("2000 period").
NET REVENUES. We reported net revenues of $74.4 million for the 2001
period, an increase of $26.0 million over the $48.4 million in revenues reported
for the 2000 period. Although the operations of acquired companies have now been
fully integrated, management estimates that revenues from the core businesses,
meaning the Company's video solutions and network solutions businesses, in
existence before contributions from acquired operations accounted for $16.3
million of the $26.0 million increase, or 62.7%, with acquisitions accounting
for $9.7 million of the increase, or 37.3%.
Video solutions -- Sales of video communications products and services were
$70.9 million in the 2001 period, an increase of $24.0 million, or 51%, over the
$46.9 million in the 2000 period. Management estimates that approximately $15.2
million of the $24.0 million increase in revenues for the 2001 period over the
2000 period, or 63.3%, related to the core businesses in existence before
contributions from acquired operations and $8.8 million in revenues, or 36.7%,
from acquired operations accounted for the remainder of the growth. The growth
experienced in the 2001 period resulted from sales to both new and existing
customers in the commercial, governmental, medical and educational markets
throughout the United States.
Video network -- Sales of video network services were $3.5 million in the
2001 period, an increase of $2.0 million, or 136%, over the $1.5 million in the
2000 period. This increase in revenues consisted of $0.4 million in revenues
resulting from the introduction of the Glowpoint network and $1.6 million in
revenues from the acquired H.320 bridging service of VTI.
GROSS MARGINS. Gross margins were $24.3 million in the 2001 period, an
increase of $8.5 million from $15.8 million for the 2000 period. Gross margins
remained at 32.6% of net revenues for both the 2001 and 2000 periods. An
increase in the gross margins on video service from 31.4% in the 2000 period to
41.7% in the 2001 period helped to mitigate the decline in gross margins on
sales of video communications products from 33.1% in the 2000 period to 31.1% in
the 2001 period. The margin decline on sales of products was primarily caused by
the disproportionate amount of sales of high dollar, low-margin multipoint
bridge equipment in 2001 revenues.
SELLING. Selling expenses, which include sales salaries, commissions,
overhead, and marketing costs, increased $9.5 million in the 2001 period to
$22.1 million from $12.6 million for the 2000 period. Increases in selling
expenses are attributable to increases in the number of sales personnel and
their related costs, such as commissions, facilities, travel and
telecommunications, which totaled $4.8 million, the costs of additional sales
offices resulting from acquisitions since May 2000 totaling $0.9 million and the
$2.5 million of personnel, facilities, travel, marketing and telecommunications
costs related to the Glowpoint division not yet covered by revenues. Selling
expenses as a percentage of net revenues for the 2001 period were 29.7%, an
increase from 26.0% in the 2000 period. This increase is primarily attributable
to the $2.5 million of expenses of the Glowpoint division, which amounted to
3.4% of net revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$8.1 million in the 2001 period to $12.2 million as compared to $4.1 million for
the 2000 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 charges were the $4.0 million charge related to a
five-year extension of certain stock options granted to our Chief Executive
Officer in 1997, the one-time non-cash charge of $630,000 for accelerated
amortization of Glowpoint-related capitalized costs and the $375,000 charge
related to the settlement of outstanding litigation. If these one-time charges
are subtracted from the 2001 period, adjusted general and administrative
expenses are $7.2 million in the 2001 period. The $3.1 million increase in
adjusted general and administrative expenses is due to a $0.4 million increase
in bad debt expense, a $0.7 million increase in depreciation on corporate-level
assets, a $0.8 million increase in personnel expense and a $0.5 million increase
in professional and other corporate fees. Adjusted general and administrative
expenses as a percentage of net revenues for the 2001 period were 9.7%, an
increase of 1.2%, from 8.5% in the 2000 period.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased $1.2 million in the
2001 period to $2.7 million as compared to $1.5 million for the 2000 period. The
increase was the result of a full year of amortization related to the VTI,
2CONFER, and JBC acquisitions ($1.1 million of the increase) and goodwill
amortization related to the acquisition of GeoVideo of $0.1 million.
OTHER (INCOME) EXPENSES. The principal component of this category,
amortization of deferred financing costs, decreased to $100,000 in the 2001
period as compared to $343,000 in the 2000 period. The decrease reflects the
absence from the 2001 period of the amortization of $305,000 related to the
issuance of warrants to former VTI subordinated debt holders. In addition
interest income decreased in the 2001 period to $77,000 as compared to $315,000
in the 2000 period. The decrease reflects decreased funds invested during the
2001 period as the capital raised in prior periods was deployed in operations.
Interest expense increased in the 2001 period to $598,000 as compared to $78,000
in the 2000 period. During the 2001 period we expanded our use of our line of
credit to fund our operations with the result being a significant increase in
interest expense.
16
INCOME TAXES. During 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. We incurred a loss from discontinued AV operations
in the 2001 period of $396,000. Since the AV division evolved as a result of
2001 acquisitions, there is no corresponding activity in this component for the
2000 period. We incurred a loss from discontinued Voice division operations in
the 2001 period of $617,000 as compared to income from discontinued Voice
division operations in the 2000 period of $521,000. The decline in income from
discontinued Voice division operations resulted from lower revenues to cover the
fixed costs of the voice communications unit and higher costs of revenues as
competitive pressures reduced gross margins.
NET LOSS. We reported a net loss attributable to common stockholders for
the 2001 period of $(19.0) million, or $(0.91) per diluted share, as compared to
loss attributable to common stockholders of $(16.3) million, or $(1.27) per
diluted share for the 2000 period. Before giving effect to the aggregate $4.4
million in deemed dividends on Series A convertible preferred stock in the 2001
period and $13.7 million in deemed dividends in the 2000 period, we reported a
net loss of $(14.5) million for the 2001 period and $(2.5) million for the 2000
period.
Liquidity and Capital Resources
At December 31, 2002, we had working capital of $24.9 million compared to
$15.6 million at December 31, 2001, an increase of approximately 59%. At
December 31, 2002, we had $2.8 million in cash and cash equivalents compared to
$1.7 million at December 31, 2001 (of which $900,000 was restricted as to its
use -- see footnote 2 to the consolidated financial statements). The $9.3
million increase in working capital resulted primarily from the January 2002
common stock offering of $20.3 million, the December 2002 convertible debenture
offering of $4.5 million, the net pay down of $4.8 million of bank loans and the
funding of the $11.3 million cash loss from operations in the 2002 period.
In January 2002, we raised net proceeds of $20.3 million in a private
placement of 3,426,650 shares of our 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. $12 million of the proceeds
from the offering were used to pay down the bank line of credit to zero. The
remaining proceeds were used to fund the continuing development and marketing of
our Glowpoint video communications network and for general corporate purposes.
17
In May 2002, we entered into a $25 million working capital credit facility
with JPMorgan Chase Bank. 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, 2002, the interest rate on the
facility was 5.75%. The credit facility contains certain financial and
operational covenants. For the period from October 1, 2002 period through
December 31, 2002 ("2002 Fourth Quarter"), we were in violation of the covenant
requiring us to meet a certain earnings before interest, taxes, depreciation and
amortization ("EBITDA") target for the four quarters ended December 31, 2002. In
March 2003, we concluded an amendment to the credit facility with JPMorgan
Chase Bank to cure non-compliance with the EBITDA financial covenant arising
from the fourth quarter results. 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. At December 31, 2002, $5.8 million was outstanding under the
facility and the loan has been classified as non-current in the accompanying
consolidated balance sheet because the facility matures in more than one year.
In December 2002, we 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 2,036,667 shares of common stock at $2.40
per share, are subordinate to our 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. We have
the option of paying interest on the debentures in the form of either cash or
Wire One common stock. The debentures will automatically convert into common
stock if Wire One shares trade above $4.80 for 10 consecutive trading days. If
we elect to prepay the debentures prior to maturity, the holders may instead
elect to convert the debentures into common stock, in which event the holders
will receive, in addition to the shares issuable upon the conversion, the
remaining interest payable under the debentures through maturity, payable in the
form of common stock based upon the conversion price. 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. We also issued to its placement agent
warrants to purchase 40,733 shares of common stock at an exercise price of
$0.001 per share and an expiration date of January 31, 2003.
Future minimum rental commitments under all non-cancelable operating leases are
as follows:
Year Ending December 31
2003................................................. $1,424,132
2004................................................. 947,764
2005................................................. 683,775
2006................................................. 580,320
2007 and thereafter.................................. 337,733
---------
$3,973,724
=========
Future minimum lease payments under capital lease obligations at December 31,
2002 are as follows:
2003............................................... $27,957
-------
Total minimum payments............................. 27,957
Less amount representing interest.................. (2,083)
-------
Total principal.................................... 25,874
Less portion due within one year................... (25,874)
-------
Long-term portion.................................. $ --
=======
Net cash used in operating activities for the 2002 period was $14.0 million
as compared to net cash used by operations of $15.5 million during the 2001
period. The primary source of operating cash in 2002 was the net decrease in
accounts receivable of $10.0 million, which resulted from improved collection
efforts and lower fourth quarter sales in the current year versus the prior
year. We used this cash and cash raised through financing activities to fund
the $11.3 million cash loss from operations, $5.7 million in payments on
outstanding accounts payable and other current liabilities, $4.5 million in cash
needed for audio-visual integration business and $2.4 million in inventory
purchases required for video solutions business.
18
Investing activities for the 2002 period included purchases of $1.3 million
for computer and demonstration equipment and leasehold improvements for the core
business and $3.4 million for computer, network and office equipment related to
the Glowpoint division. The Glowpoint network is currently built out to handle
the anticipated level of subscriptions for 2003. Although we anticipate current
expansion of the Glowpoint network and our core business, we have no significant
commitments to make capital expenditures for Glowpoint or the core business in
2003.
Financing activities in the 2002 period included net pay downs under our
revolving credit line totaling $4.8 million, issuance of common stock in a
private placement yielding net proceeds of $20.3 million and issuance of
subordinated debentures yielding net proceeds of $4.5 million.
Management believes, based upon current circumstances, 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 disclosure of 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. You should also
review Note 2 to the financial statements for further discussion of significant
accounting policies.
Revenue recognition
We sell products and services to the commercial, government, medical and
educational sectors through a direct sales force of account executives as well
as through resellers. Sales to resellers are made on terms with respect to
pricing, payment and returns that are consistent with those offered to end user
customers. No price protection or similar arrangement is offered, nor are the
obligations as to payment contingent on the resale of the equipment purchased by
the reseller. There are no special rights to return equipment granted to
resellers, nor are we obligated to repurchase reseller inventory.
Product revenue consists of revenue from the sale of video communications
equipment and is recognized at the time of shipment, provided that the price is
fixed and determinable, no significant obligations remain, collectibility is
probable and returns are estimable. Revenue is recognized at the time of
shipment since the terms of shipment are FOB shipping point and legal title to
the equipment passes to the customer at this time. Post shipment obligations
such as installation and training are considered relatively insignificant given
the underlying nature of the equipment and of its installation.
Service revenue is derived from services rendered in connection with the sale of
new systems and the maintenance of previously installed systems. Services
rendered in connection with the sale of new systems consist of engineering
services related to system integration, installation, technical training and
user training. Most of these services are rendered at or prior to installation
and all revenue is recognized only after the services have been rendered.
Revenue related to extended service contracts is deferred and recognized over
the life of the extended service period. Revenue related to the Glowpoint
network subscriber service and the multi-point video and audio bridging services
offered by us are recognized through a monthly billing process after services
have been rendered.
19
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 and goodwill might not be recoverable. For purposes of evaluating
the recoverability of long-lived assets, the undiscounted cash flows estimated
to be generated by those assets would be compared to the carrying amounts of
those assets. If and when the carrying values of the assets exceed their fair
values, the related assets will be written down to fair value.
Goodwill and other intangible assets
In June 2001, the FASB finalized FASB Statements No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also required that we
recognize acquired intangible assets apart from goodwill if they meet certain
criteria. SFAS 141 applies to all business combinations initiated after June 30,
2001 and for purchase business combinations completed on or after July 1, 2001.
The FASB also requires, upon adoption of SFAS 142, that we classify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 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 an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized.
A fair value approach was used to test existing goodwill for impairment. The
effective date of the fair value determinations for the impairment of goodwill
was September 30, 2002. The market approach was the method used to determine the
fair value of the video solutions reporting unit. Under this approach, the
quoted market prices in active markets are used as the basis for the measurement
of impairment. The valuation for purposes of measuring impairment indicated by
our stock price was also supplemented by the valuation indicated by a portfolio
of comparable publicly traded companies. The above valuation resulted in an
impairment of $40,012,114 of goodwill in accordance with SFAS No. 142 as of
September 30, 2002.
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, 2002. Measurement of impairment of goodwill and
other intangible assets in accordance with SFAS 142 are discussed elsewhere in
this report.
Recent pronouncements of the Financial Accounting Standards Board
In July 2002, the FASB issued FASB Statement No. 146, Accounting for the Costs
Associated with Exit or Disposal Activities. This statement requires companies
to recognize costs associated with exit or disposal activities only when
liabilities for those costs are incurred rather than at the date of a commitment
to an exit or disposal plan. FASB No. 146 also requires companies to initially
measure liabilities for exit and disposal activities at their fair values. FASB
No. 146 replaces Emerging Issues Task Force (EITF) Issues No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) and EITF No.
88-10, Costs Associated with Lease Modification or Termination. The provisions
of FASB No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. We anticipate the adoption of this statement will not
have a material effect on its consolidated financial position or results of
operations.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("FAS 148"), which (i) amends FAS Statements No. 123, "Accounting for
Stock-Based Compensation," to provided alternative 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 FAS
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.
Items (ii) and (iii) of the new requirements in FAS 148 are effective for
financial statements for fiscal years ending after December 15, 2002. We have
adopted the increased disclosure requirements of FAS 148 for the fiscal year
ended December 31, 2002. We will continue to use the intrinsic value method of
accounting for stock-based employee compensation.
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.
We maintain borrowings under a $15 million working capital credit facility with
an asset based lender that are not subject to material market risk exposure
except for such risks relating to fluctuations in market interest rates. The
carrying value of these borrowings approximates fair value since they bear
interest at a floating rate based on the "prime" rate. There are no other
material qualitative or quantitative market risks particular to us.
20
Item 8. Financial Statements and Supplementary Data
WIRE ONE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
-----
Report of Independent Certified Public Accountants.................... F-1
Consolidated Balance Sheets at December 31, 2002 and 2001............. F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000.................................. F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2002, 2001 and 2000...................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000................................ F-5
Notes to Consolidated Financial Statements............................ F-7
21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the
Stockholders of Wire One Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Wire One
Technologies, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. 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 Wire One
Technologies, Inc. and Subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
BDO Seidman, LLP
Boston, Massachusetts
March 7, 2003
F-1
Wire One Technologies, Inc.
Consolidated Balance Sheets
December 31,
-----------------------------
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,762,215 $ 1,689,451
Accounts receivable-net 25,441,557 35,471,482
Inventory-net 8,122,996 10,218,796
Net assets of discontinued operations 807,067 --
Other current assets 6,876,476 3,824,276
----------- ------------
Total current assets 44,010,311 51,204,005
Furniture, equipment and leasehold improvements-net 14,196,679 10,857,547
Goodwill-net 2,547,862 42,163,844
Other assets 746,812 274,089
----------- ------------
Total assets $61,501,664 $104,499,485
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan payable $ -- $ 10,628,082
Accounts payable 9,049,961 12,297,914
Accrued expenses 2,122,813 3,218,890
Deferred revenue 7,871,268 7,898,277
Other current liabilities -- 1,465,049
Current portion of capital lease obligations 25,874 56,912
------------ ------------
Total current liabilities 19,069,916 35,565,124
------------ ------------
Noncurrent liabilities:
Bank loan payable 5,845,516 --
Capital lease obligations, less current portion -- 25,696
------------ ------------
Total noncurrent liabilities 5,845,516 25,696
------------ ------------
Total liabilities 24,915,432 35,590,820
------------ ------------
Commitments and contingencies
Subordinated debentures 4,888,000 --
Discount on subordinated debentures (4,888,000) --
----------- ----------
Subordinated debentures, net -- --
----------- ----------
Stockholders' Equity:
Preferred stock, $.0001 par value;
5,000,000 shares authorized, none issued -- --
Common stock, $.0001 par value; 100,000,000 authorized;
28,931,660 and 25,292,189 shares issued, respectively 2,893 2,529
Treasury Stock, 39,891 shares at cost (239,742) (239,742)
Additional paid-in capital 131,132,374 104,889,988
Accumulated deficit (94,309,293) (35,744,110)
----------- ----------
Total stockholders' equity 36,586,232 68,908,665
----------- ----------
Total liabilities and stockholders' equity $ 61,501,664 $104,499,485
=========== ==========
See accompanying notes to consolidated financial statements
F-2
Wire One Technologies, Inc.
Consolidated Statements of Operations
Year Ended December 31,
-------------------------------------------
2002 2001 2000
---------- ---------- ----------
Net revenues
Video solutions
Equipment $ 61,397,947 $ 55,637,782 $ 39,280,000
Service 15,750,914 15,293,789 7,679,000
Network solutions 5,599,216 3,479,907 1,475,108
------------ ------------ ------------
82,748,077 74,411,478 48,434,108
------------ ------------ ------------
Cost of revenues
Video solutions
Equipment $ 47,406,394 $ 38,331,779 $ 26,283,377
Service 8,618,078 8,914,044 5,270,530
Network solutions 5,596,801 2,898,460 1,104,940
------------ ------------ ------------
61,621,273 50,144,283 32,658,847
------------ ------------ ------------
Gross margin
Video solutions
Equipment $ 13,991,553 $ 17,306,003 $ 12,996,623
Service 7,132,836 6,379,745 2,408,470
Network solutions 2,415 581,447 370,168
------------ ------------ ------------
21,126,804 24,267,195 15,775,261
------------ ------------ ------------
Operating expenses
Selling 25,697,999 22,111,672 12,587,676
General and administrative 8,158,777 12,245,463 4,121,303
Restructuring 960,000 200,000 --
Impairment losses on goodwill 40,012,114 -- --
Impairment losses on other long-lived assets 1,357,806 -- --
Amortization of goodwill -- 2,683,647 1,500,857
------------ ------------ ------------
Total operating expenses 76,186,696 37,240,782 18,209,836
------------ ------------ ------------
Loss from continuing operations (55,059,892) (12,973,587) (2,434,575)
------------ ------------ ------------
Other (income) expense
Amortization of deferred financing costs 122,680 99,912 343,792
Interest income (71,644) (76,928) (314,986)
Interest expense 431,792 598,147 78,056
Amortization of discount on subordinated debentures 39,360 -- --
------------ ------------ ------------
Total other expenses, net 522,188 621,131 106,862
------------ ------------ ------------
Loss before income taxes (55,582,080) (13,594,718) (2,541,437)
Income tax provision -- 200,000 511,239
------------ ------------ ------------
Net loss from continuing operations (55,582,080) (13,794,718) (3,052,676)
Loss from discontinued AV operations (2,696,223) (395,697) --
Income (loss) from discontinued Voice operations (286,880) (617,389) 520,747
Gain on sale of discontinued Voice operation -- 277,414 --
------------ ------------ ------------
Net loss (58,565,183) (14,530,390) (2,531,929)
Deemed dividends on series A convertible preferred stock -- 4,433,904 13,723,206
------------ ------------ ------------
Net loss attributable to common stockholders $(58,565,183) $(18,964,294) $(16,255,135)
------------ ------------ ------------
Net loss from continuing operations per share
Basic and diluted $ (1.93) $ (0.66) $ (0.24)
============ ============ ============
Income (loss) from discontinued operations per share
Basic and diluted $ (0.10) $ (0.04) $ 0.04
============ ============ ============
Deemed dividends per share
Basic and diluted $ -- $ (0.21) $ (1.07)
============ ============ ============
Net loss attributable to common stockholders per share
Basic and diluted $ (2.03) $ (0.91) $ (1.27)
============ ============ ============
Weighted average number of common shares
and equivalents outstanding:
Basic and diluted 28,792,217 20,880,125 12,817,158
============ ============ ============
See accompanying notes to consolidated financial statements.
F-3
Wire One Technologies, Inc.
Consolidated Statements of Stockholders' Equity
Additional
Common Stock Treasury Paid in Accumulated
Shares Amount Stock Capital Deficit Total
------- ------- ------- ------- ------- -------
Balance at December 31, 1999 4,910,000 $5,229,740 $ -- $ 488,759 $ (524,681) $5,193,818
Issuance of stock options
for services -- -- -- 238,865 -- 238,865
Exercise of Class A warrants
(net of related costs
of $171,238) 1,933,647 8,218,000 -- (171,238) -- 8,046,762
Exercise of stock options 362,501 489,883 -- 184,215 -- 674,098
Exercise of Underwriters'
options 28,000 117,600 -- -- -- 117,600
Tax benefit from exercise of stock
options -- -- -- 354,001 -- 354,001
Securities issued - VTI merger 9,681,966 -- -- 31,339,258 -- 31,339,258
Issuance of warrants in connection
with preferred stock -- -- -- 5,150,000 -- 5,150,000
Adjustment for $ .0001 par value -- (14,053,531) -- 14,053,531 -- --
Issuance of common stock in
business acquisitions 48,611 5 -- 453,995 -- 454,000
Conversion of series A
preferred stock 335,000 33 -- 2,344,967 -- 2,345,000
Deemed dividends on series A
preferred stock -- -- -- 12,000,000 (13,723,206) (1,723,206)
Net loss for the year -- -- -- -- (2,531,929) (2,531,929)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 17,299,725 1,730 -- 66,436,353 (16,779,816) 49,658,267
Issuance of stock options
for services -- -- -- 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) 104,889,988 (35,744,110) 68,908,665
Issuance of stock options
for services -- -- -- 427,530 -- 427,530
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 shares in connection
with private placement 3,426,650 343 -- 20,257,618 -- 20,257,961
Issuance of warrants in connection
with subordinated debentures -- -- -- 4,571,921 -- 4,571,921
Net loss for the year -- -- -- -- (58,565,183) (58,565,183)
----------- ----------- ---------- ------------- ------------ -------------
Balance at December 31, 2002 28,931,660 $ 2,893 $ (239,742) $ 131,132,374 $(94,309,293) $ 36,586,232
=========== =========== ========== ============= ============ =============
See accompanying notes to consolidated financial statements.
F-4
Wire One Technologies, Inc.
Consolidated Statements of Cash Flows
Year Ended December 31,
-------------------------------------------------
2002 2001 2000
------------- ------------ ------------
Cash flows from Operating Activities:
Net loss $(58,565,183) $(14,530,390) $(2,531,929)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impairment losses on goodwill 40,012,114 -- --
Impairment losses on long-lived assets 1,357,806 -- --
Depreciation and amortization 5,146,515 7,100,094 3,270,691
Non cash compensation 675,057 4,442,316 238,865
Deferred income taxes -- 200,000 276,482
Discontinued voice operations -- 617,389 (520,747)
Gain on sale of discontinued voice operations -- (277,414) --
Loss on disposal of equipment 28,305 -- --
Increase (decrease) in cash attributable to changes
in assets and liabilities, net of effects of
acquisitions
Accounts receivable 10,029,925 (10,746,876) (12,830,761)
Inventory (2,401,306) 548,423 (7,352,640)
Net assets of discontinued AV operations (807,067) -- --
Other current assets (3,689,790) (1,801,140) (517,207)
Other assets (90,329) (52,795) 307,236
Discontinued voice operation -- -- 691,574
Accounts payable (3,247,953) (2,084,176) 2,553,164
Accrued expenses (1,009,341) 182,412 (259,451)
Income taxes payable -- -- (124,372)
Deferred revenue (27,009) 322,409 3,528,336
Other current liabilities (1,465,049) 556,394 (20,255)
------------ ------------ -----------
Net cash used in operating activities (14,053,305) (15,523,354) (13,291,014)
------------ ------------ -----------
Cash flows from Investing Activities:
Purchases of furniture, equipment and
leasehold improvements (4,745,933) (7,981,050) (4,323,095)
Costs related to acquisition of business
including cash acquired -- (175,513) (2,519,185)
Proceeds from sale of furniture, equipment and leasehold
improvements 15,000 -- --
Proceeds from sale of discontinued voice operation -- 1,172,299 --
Note receivable from sale of discontinued voice operation -- 845,084 --
------------ ------------ -----------
Net cash used in investing activities (4,730,933) (6,139,180) (6,842,280)
------------ ------------ -----------
Cash flows from Financing Activities:
Proceeds from issuance of subordinated debentures 4,571,921 -- --
Proceeds from common stock offering 20,257,961 9,851,261 --
Proceeds from preferred stock offering -- -- 16,142,890
Deferred financing costs (505,074) -- (74,314)
Issuance of common stock for cash assets
of GeoVideo Networks, Inc. -- 2,500,000 --
Exercise of warrants and options, net 371,494 1,589,362 8,838,460
Proceeds from bank loans 78,894,947 87,748,581 6,350,000
Payments on bank loans (83,677,513) (80,120,499) (5,488,602)
Repayment of bank loans of acquired companies -- -- (2,186,508)
Payments on capital lease obligations (56,734) (87,293) (138,078)
Repayment of subordinated notes -- -- (1,500,000)
------------ ------------ -----------
Net cash provided by financing activities 19,857,002 21,481,412 21,943,848
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents 1,072,764 (181,122) 1,810,554
Cash and cash equivalents at beginning of period 1,689,451 1,870,573 60,019
------------ ------------ -----------
Cash and cash equivalents at end of period $ 2,762,215 $ 1,689,451 $ 1,870,573
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 255,589 $ 598,147 $ 78,056
------------ ------------ -----------
Taxes $ -- $ 2,274 $ 155,304
------------ ------------ -----------
F-5
Non cash financing and investing activities:
During the year ended December 31, 2002, the Company recorded non-cash
amortization of discount on subordinated debentures of $39,360.
During the years ended December 31, 2001 and 2000, the Company recorded non-cash
deemed dividends on Series A mandatorily redeemable convertible preferred
stock of $4,433,904 and $13,723,206, respectively.
On May 18, 2000, the Company acquired the net assets of View Tech, Inc. in a
merger transaction accounted for as a purchase for non-cash consideration
of $31,339,258. In July 2000, the Company acquired the net assets of
2CONFER, LLC for $800,000, consisting of $500,000 in cash and $300,000 in
Company common stock valued at the time of acquisition. In October 2000,
the Company acquired the assets and certain liabilities of the Johns Brook
Company videoconferencing division for $635,000, consisting of $481,000 in
cash and $154,000 in Company common stock valued at the time of the
acquisition. 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, 2000, the
Company issued 335,000 shares of $0.0001 par common stock in exchange for
335 shares of Series A mandatorily redeemable convertible preferred stock.
Based on the conversion price of $7.00 per share, the total value
attributable to the common stock was $2,345,000.
During the year ended December 31, 2001, the Company received 39,891 shares of
common stock valued at $239,745 in satisfaction of outstanding debt owed to
the Company by former VTI directors and related parties.
Equipment with costs totaling $121,541 was acquired under capital lease
arrangements during the year ended December 31, 2000.
See accompanying notes to consolidated financial statements.
F-6
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1 -- The Business and Merger with View Tech, Inc.
Wire One Technologies, Inc. ("Wire One" or the "Company") was formed by the
merger of All Communications Corporation ("ACC") and View Tech, Inc. ("VTI") on
May 18, 2000, with the former directors and senior management of ACC succeeding
to the management of Wire One. In connection with the merger, each former
shareholder of ACC received 1.65 shares of Wire One common stock for each share
of ACC common stock held by them. The transaction has been accounted for as a
"reverse acquisition" using the purchase method of accounting. The reverse
acquisition method resulted in ACC being recognized as the acquirer of VTI for
accounting and financial reporting purposes. As a result, ACC's historical
results have been carried forward and VTI's operations have been included in the
financial statements commencing on the merger date. Accordingly, all 2000
results through the merger date are those of ACC only. Further, on the date of
the merger, the assets and liabilities of VTI were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
Wire One is a single source provider of video products and services that assists
customers located principally in the United States with systems design and
engineering, procurement, installation, operation and maintenance of their video
communications systems. The Company offers its customers video communications
products from leading manufacturers such as Polycom (which distributes products
under the Polycom, PictureTel and Accord brands, among others), Tandberg,
RADVision, Cisco Systems and Sony and provide a comprehensive suite of video and
data services including engineering, installation, customized training, on-site
technical assistance and maintenance. The Company also operates its Glowpoint
network subscriber service, which provides its customers with two-way video
communications with high quality of service utilizing an Internet network and
broadband access dedicated solely to transporting video using the H.323 Internet
Protocol standard. Finally, the Company sells multi-point video and audio
bridging services through its Multiview Network Services program. The Company
employs state-of-the-art conferencing servers that provide seamless connectivity
for all switched digital networks. No single customer accounts for more than 10%
of the Company's revenues. Approximately 4% of revenues in 2002 were derived
from customers and U.S. customer affiliates located outside of the United
States. The Company, headquartered in Hillside, New Jersey, operates a
distribution facility in Miamisburg, Ohio and maintains 24 sales offices and
demonstration facilities across the United States. During 2000 and 2001, the
Company did not segregate or manage its operations by business segments. In
2002, the Company managed its operations in two business segments, video
solutions and network solutions.
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"), VTC
Resources, Inc. ("VTC") and Wire One Travel Services, Inc. ("WOTS"). All
material intercompany 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 statement 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. It is reasonably possible that changes may
occur in the near term that would affect management's estimates with respect to
the allowance for doubtful accounts receivable and inventory reserves.
F-7
Revenue recognition
The Company sells products and services to the commercial, government, medical
and educational sectors through a direct sales force of account executives as
well as through resellers. Sales to resellers are made on terms with respect to
pricing, payment and returns that are consistent with those offered to end user
customers. No price protection or similar arrangement is offered, nor are the
obligations as to payment contingent on the resale of the equipment purchased by
the reseller. There are no special rights to return equipment granted to
resellers, nor are we obligated to repurchase reseller inventory.
Product revenue consists of revenue from the sale of video communications
equipment and is recognized at the time of shipment, provided that the price is
fixed and determinable, no significant obligations remain, collection is
probable and returns are estimable. Revenue is recognized at the time of
shipment because the terms of shipment are FOB shipping point and legal title to
the equipment passes to the customer at this time. Post-shipment obligations,
such as installation and training, are considered relatively insignificant given
the underlying nature of the equipment and of its installation.
Service revenue is derived from services rendered in connection with the sale of
new systems and the maintenance of previously installed systems. Services
rendered in connection with the sale of new systems consist of engineering
services related to system integration, installation, technical training and
user training. Most of these services are rendered at or prior to installation
and all revenue is recognized only after the services have been rendered.
Revenue related to extended service contracts is deferred and recognized over
the life of the extended service period. Revenue related to the Glowpoint
network subscriber service and the multi-point video and audio bridging services
offered by the Company are recognized through a monthly billing process after
services have been rendered.
Cash and cash equivalents
The Company considers all highly liquid debt instruments with a maturity of
three months or less when purchased to be cash equivalents. During 2001,
$900,000 of the cash and cash equivalents balance was restricted as to its use.
After losing an approximately $745,000 judgment in the Maxbase litigation (note
13), the Company was required to set aside these funds in an interest-bearing
account as it filed its appeal of this judgment. The restrictions on $275,000
were lifted when the Company settled the case and paid $625,000 in early 2002.
The $625,000 had been expensed in previous periods.
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 5% of our revenues. The Company records an
allowance for doubtful accounts based on specificially identified amounts that
we believe 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 our 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.
Most of the products sold by the Company are purchased under non-exclusive
dealer agreements with various manufacturers, including Polycom for video
communications equipment. The agreements typically specify, among other things,
sales territories, payment terms and reseller prices. All of the agreements
permit early termination on short notice with or without cause. The termination
of any of the Company's dealer agreements, or their renewal on less favorable
terms than currently in effect, could have a material adverse impact on the
Company's business.
F-8
Inventory
Inventory, consisting of finished goods and spare parts, is valued at the lower
of cost (determined on a first in, first out basis) or market. Reserves are
provided to reflect estimated future requirements and to state these inventories
at the lower of cost or market and are based upon a review of total inventory on
hand.
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 five 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 and on the modified accelerated cost recovery system for
income tax purposes.
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 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.
Goodwill and other intangible assets
In June 2001, the FASB finalized FASB Statements No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also required that we
recognize acquired intangible assets apart from goodwill if they meet certain
criteria. SFAS 141 applies to all business combinations initiated after June 30,
2001 and for purchase business combinations completed on or after July 1, 2001.
The FASB also requires, upon adoption of SFAS 142, that we classify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 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 an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized.
A fair value approach was used to test existing goodwill for impairment. The
effective date of the fair value determinations for the impairment of goodwill
was September 30, 2002. The market approach was the method used to determine the
fair value of the video solutions reporting unit. Under this approach, the
quoted market prices in active markets are used as the basis for the measurement
of impairment. The valuation for purposes of measuring impairment indicated by
our stock price was also supplemented by the valuation indicated by a portfolio
of comparable publicly traded companies. The above valuation resulted in an
impairment of $40,012,114 of goodwill in accordance with SFAS No. 142 as of
September 30, 2002.
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, 2002. Measurement of impairment of goodwill and
other intangible assets in accordance with SFAS 142 are discussed elsewhere in
this report.
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 basis 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.
F-9
Earnings per share
Basic loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding during
the period. In determining basic loss per share for the periods presented, the
effects of deemed dividends related to the Company's series A mandatorily
redeemable convertible preferred stock is added to the net loss.
Diluted loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding, plus
the weighted average number of net shares that would be issued upon exercise of
stock options and warrants using the treasury stock method and the deemed
conversion of preferred stock using the if-converted method. Diluted loss per
share for 2002, 2001 and 2000 is the same as basic loss per share, since the
effects of the calculation for those years were anti-dilutive.
Years Ended December 31,
-------------------------------------
2002 2001 2000
----------- ----------- ----------
Weighted average shares outstanding 28,792,217 20,880,125 12,817,158
Effect of dilutive options and warrants -- -- --
----------- ----------- ----------
Weighted average shares outstanding including
dilutive effect of securities 28,792,217 20,880,125 12,817,158
----------- ----------- ----------
Weighted average options and warrants to purchase 11,143,590, 9,535,609 and
7,507,204 shares of common stock during the years ended December 31, 2002, 2001
and 2000, respectively, and preferred stock convertible into 2,115,000 common
shares in 2000, 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.
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. We account for our stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
accordingly account for employee stock-based compensation utilizing the
intrinsic value method. FAS No. 123, "Accounting for Stock-Based Compensation",
establishes a fair value based method of accounting for stock-based compensation
plans. We have adopted the disclosure only alternative under FAS No. 123, which
requires disclosure of the pro forma effects on earnings and earnings per share
as if FAS 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 December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("FAS 148"), which (i) amends FAS Statement No. 123, "Accounting for Stock-Based
Compensation," 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, FAS 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.
Items (ii) and (iii) of the new requirements in FAS 148 are effective for
financial statements for fiscal years ending after December 15, 2002. We have
adopted FAS 148 for the fiscal year ended December 31, 2002 and continue to
account for stock-based compensation utilizing the intrinsic value method. The
additional disclosures required by FAS 148 are as follows (in thousands):
Years Ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net loss attributable to common stockholders, as reported $(58,565,183) $(18,964,294) $(16,255,135)
Add: stock based employee compensation
expense included in reported net loss, net of tax 292,191 457,566 108,863
Deduct: total stock based employee
compensation expense determined under the fair value based
method for all awards, net of tax (6,125,125) (6,785,478) (1,341,762)
------------ ------------ ------------
Pro forma net loss $(64,398,117) $(25,292,206) $(17,488,034)
============ ============ ============
Loss per share:
Basic and diluted - as reported $ (2.03) $ (0.91) $ (1.27)
Basic and diluted - pro forma $ (2.24) $ (1.21) $ (1.36)
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, 2002 and
2001. 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.
F-10
Recent pronouncements of the Financial Accounting Standards Board
In July 2002, the FASB issued FASB Statement No. 146, Accounting for the Costs
Associated with Exit or Disposal Activities. This statement requires companies
to recognize costs associated with exit or disposal activities only when
liabilities for those costs are incurred rather than at the date of a commitment
to an exit or disposal plan. FASB No. 146 also requires companies to initially
measure liabilities for exit and disposal activities at their fair values. FASB
No. 146 replaces Emerging Issues Task Force (EITF) Issues No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring) and EITF No.
88-10, Costs Associated with Lease Modification or Termination. The provisions
of FASB No. 146 are effective for exit or disposal activities that are initiated
after December 31, 2002. The Company anticipates the adoption of this statement
will not have a material effect on its consolidated financial position or
results of operations.
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. The Company generally enters into arrangements for multiple
deliverables that occur at different points in time when it is contracted to
provide installation services. EITF Issue No. 00-21 is effective for the Company
beginning October 1, 2003. The Company has not completed the evaluation of the
impact of this EITF.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure"
("FAS 148"), which (i) amends FAS Statements No. 123, "Accounting for
Stock-Based Compensation," to provided alternative 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 FAS
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.
Items (ii) and (iii) of the new requirements in FAS 148 are effective for
financial statements for fiscal years ending after December 15, 2002. We have
adopted the increased disclosure requirements of FAS 148 for the fiscal year
ended December 31, 2002. We will continue to use the intrinsic value method of
accounting for stock-based employee compensation.
Note 3 -- Inventory
Inventory consists of the following:
December 31,
--------------------------------
2002 2001
----------- -----------
Finished Goods $ 6,458,648 $ 7,708,595
Spare Parts 3,743,441 3,443,710
----------- -----------
10,202,089 11,152,305
Reserves (2,079,093) (933,509)
----------- -----------
Total $ 8,122,996 $10,218,796
=========== ===========
The Company is a distributor of videoconferencing equipment manufactured by
others. It does not manufacture any equipment; therefore, it does not have raw
materials or work-in-progress inventories. Its inventory consists of finished
goods purchased from video conferencing equipment manufacturers and spare parts
held to satisfy its obligations under its OneCare service contracts. The cost
of finished goods and spare parts is the purchase price paid to the
manufacturers of the items. As a result, no labor, overhead or general and
administrative costs are included in inventory.
Note 4 -- Discontinued Operations
In March 2003, the Company completed the sale of certain assets and liabilities
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 the form of a promissory note payable in five equal consecutive monthly
payments commencing on April 15, 2003. 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 subscriber-based IP network, Glowpoint, and to its video
solutions business. As a consequence, this unit has been classified as a
discontinued operation in the accompanying 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 2001
--------- ----------
Inventory $ 300,000 $ --
Other current assets 507,067 --
--------- ----------
Total $ 807,067 $ --
========= ==========
F-11
Revenues and pretax loss from discontinued AV operations are as follows:
Year Ended December 31,
----------------------------------------------
2002 2001 2000
------------- ------------ ----------
Revenues $ 17,260,642 $ 14,504,757 $ --
Pretax loss $ (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, its
subscriber-based IP network dedicated to video communications traffic. As a
consequence, this unit has been classified as a discontinued operation in the
accompanying financial statements, with its results from operations summarized
in a single line item on our consolidated statements of operations.
Revenues and pretax income (loss) from Voice division discontinued operations
are as follows:
Year Ended December 31,
----------------------------------------------
2002 2001 2000
------------- ------------ ----------
Revenues $ -- $ 5,383,145 $7,599,131
Pretax income (loss) $ (286,880) $ (617,389) $ 520,747
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.
Note 5 -- Other Current Assets
Other current assets consist of the following:
December 31,
-----------------------------
2002 2001
----------- ----------
Costs and earnings in excess of billings $4,028,518 $1,279,823
Prepaid maintenance contracts 902,897 494,593
Prepaid professional fees 259,330 --
Other prepaid expenses 876,494 375,532
Receivables from suppliers 600,227 321,286
Note receivable - Phonextra -- 845,084
Other receivables 209,010 507,958
---------- ----------
$6,876,476 $3,824,276
========== ==========
Note 6 -- Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements consist of the following:
December 31,
-------------------------- Estimated
2002 2001 Useful Life
----------- ----------- -----------
Leasehold improvements $ 708,057 $ 535,000 5 Years
Office furniture and equipment 784,600 1,348,722 5 Years
Computer equipment and software 3,711,920 3,288,819 3 Years
Demonstration equipment 3,772,997 4,001,072 3 Years
Bridging equipment 1,244,063 790,309 5 Years
Network equipment 11,249,867 6,725,596 5 Years
Vehicles 268,736 271,732 5 Years
---------- -----------
21,740,240 16,961,250
Less: Accumulated depreciation (7,543,561) (6,103,703)
----------- -----------
$14,196,679 $10,857,547
=========== ===========
F-12
Depreciation expense was $4,096,596, $4,073,599 and $1,426,385 for the years
ended December 31, 2002, 2001 and 2000, respectively, which includes
depreciation expense of $57,937 for 2002, $64,224 for 2001 and $56,216 for 2000
on fixed assets subject to capital leases.
Note 7 -- Goodwill and Other Intangible Assets
In June 2001, the FASB finalized FASB Statements No. 141, "Business
Combinations" (SFAS 141), and No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interest method of accounting for business
combinations initiated after June 30, 2001. SFAS 141 also required that we
recognize acquired intangible assets apart from goodwill if they meet certain
criteria. SFAS 141 applies to all business combinations initiated after June 30,
2001 and for purchase business combinations completed on or after July 1, 2001.
The FASB also requires, upon adoption of SFAS 142, that we classify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 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 an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized.
A fair value approach was used to test existing goodwill for impairment. The
effective date of the fair value determinations for the impairment of goodwill
was September 30, 2002. The market approach was the method used to determine the
fair value of the video solutions reporting unit. Under this approach, the
quoted market prices in active markets are used as the basis for the measurement
of impairment. The valuation for purposes of measuring impairment indicated by
our stock price was also supplemented by the valuation indicated by a portfolio
of comparable publicly traded companies. The above valuation resulted in an
impairment of $40,012,114 of goodwill in accordance with SFAS No. 142 as of
September 30, 2002.
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, 2002. Measurement of impairment of goodwill and
other intangible assets in accordance with SFAS 142 are discussed elsewhere in
this report.
Note 8 -- Accrued Expenses
Accrued expenses consist of the following:
December 31,
----------------------------
2002 2001
---------- ----------
Accrued compensation $1,393,955 $1,776,253
Accrued restructuring 279,621 200,000
Accrued interest 40,028 --
Accrued litigation -- 675,000
Sales tax payable 200,171 513,482
Customer deposits 128,016 --
Other 81,022 54,155
----------- ----------
$ 2,122,813 $3,218,890
=========== ==========
Note 9 -- Bank Loan Payable and Long-Term Debt
Bank loan payable
In June 2000, the Company entered into a $15 million working capital credit
facility with an asset-based lender. Under terms of the two-year agreement for
this facility loan availability was based on up to 75% of eligible accounts
receivable and 50% of inventory, subject to an inventory cap of $5 million.
Borrowings bear interest at the lender's base rate plus 1/2% per annum. In May
2002, the outstanding loan balance was paid off with borrowings under a new
working capital credit facility.
F-13
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, 2002, the interest rate on the facility
was 5.75%. 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 arising from the fourth quarter results. 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. At December 31, 2002, $5,845,516 was
outstanding under the facility, and the loan has been classified as non-current
in the accompanying consolidated balance sheet because the facility matures on
May 31, 2005.
Long-term debt
Long-term debt consists of the following:
December 31,
------------------------------
2002 2001
---------- ---------
Bank loan payable $5,845,516 $ --
Capital lease obligations 25,874 82,608
---------- ---------
5,871,390 82,608
Less: current maturities 25,874 56,912
---------- ---------
$5,845,516 $ 25,696
========== =========
Note 10 -- 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 Company has the option of paying interest on the
debentures in the form of either cash or Wire One common stock. The debentures
will automatically convert into common stock if Wire One shares trade above
$4.80 for 10 consecutive trading days. If the Company elects to prepay the
debentures prior to maturity, the holders may instead elect to convert the
debentures into common stock, in which event the holders will receive, in
addition to the shares issuable upon the conversion, the remaining interest
payable under the debentures through maturity, payable in the form of common
stock based upon the conversion price. 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-14
Note 11 -- 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 are 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
is 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
are 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, 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-15
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. 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 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 12 -- Stock Options
Wire One 2000 Stock Incentive Plan
In September 2000, the Company adopted and approved the Wire One 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 1996 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 1,640,505 options during 2002 with exercise prices ranging
from $1.00 to $5.48 and vesting periods ranging from one to four years. It had
issued options totaling 2,227,450 and 587,124 in 2001 and 2000, respectively. As
of December 31, 2002, options to purchase a total of 3,743,479 shares were
outstanding and 652,021 shares remained available for future issuance under the
2000 Plan.
The 2000 Plan provides for the grant of options, including ISOs, NQSOs, stock
appreciation rights, dividend equivalent rights, restricted stock, performance
units, performance shares or any combination thereof (collectively, "Awards").
The exercise price of the Awards is established by the administrator of the plan
and, in the case of ISO's the per share exercise price must be equal to at least
100% of fair market value of a share of the common stock on the date of grant.
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.
F-16
Non-qualified options
The Company issued a total of 0, 167,500 and 70,125 options, outside the context
of a stock option plan, during 2002, 2001 and 2000 respectively, to various
employees, directors, and advisors, with exercise prices ranging from $1.00 to
$5.48 per share and immediate vesting. At December 31, 2002, the total
outstanding non-qualified options of this nature were 2,054,377. 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. Options granted under the
1996 Plan in 2002, 2001 and 2000 were 0, 0 and 334,848 respectively. As of
December 31, 2002, options to purchase a total of 887,963 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. Options granted under
these Plans in 2002, 2001 and 2000 (since the merger date) were 0, 0 and
189,503, respectively. As of December 31, 2002, options to purchase a total of
323,602 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-17
A summary of options issued under Company plans and other options outstanding as
of December 31, 2002, and changes during fiscal 2000, 2001 and 2002 are
presented below:
Weighted
Average
Fixed Range of Exercise
Options Price Price
---------- ------------- ----------
Options outstanding, December 31, 1999......... 4,791,600 $ .30 - 4.81 $ 1.63
Assumed as part of VTI merger.................. 361,605 $ .50 - 15.00 4.31
Granted........................................ 1,181,600 $4.06 - 8.18 5.26
Exercised...................................... (486,831) $ .57 - 3.85 1.23
----------
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
Cancelled...................................... (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
Cancelled...................................... (755,544) $ .53 - 9.85 4.14
---------- -------------
Options outstanding, December 31, 2002......... 7,009,421 $ .30 - 12.75 $ 3.08
========== ============
Shares of common stock available for
future grant under Company plans............... 652,021
----------
Additional information as of December 31, 2002 with respect to all outstanding
options is as follows:
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range Of Price Outstanding Life (In Years) Price Exercisable Price
------------- --------- --------------- --------- ----------- ---------
$ .30 - .57 795,249 0.97 $ 0.53 795,249 $ 0.53
.64 - 2.20 1,486,398 7.65 $ 1.50 471,393 $ 1.43
2.33 - 3.00 312,500 5.71 $ 2.72 191,008 $ 2.73
3.03 - 4.00 2,718,550 6.32 $ 3.48 1,831,197 $ 3.28
4.06 - 5.50 1,569,705 8.01 $ 4.90 808,268 $ 4.98
5.73 -12.75 127,019 2.93 $ 7.06 127,019 $ 7.06
---------- ---- -------- --------- ---------
$ .30 - 12.75 7,009,421 6.29 $ 3.08 4,224,134 $ 2.97
========== ==== ======== ========= =========
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, no compensation cost has been 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. The weighted-average grant
date fair value of options granted during 2002, 2001 and 2000 under the
Black-Scholes option pricing model was $1.90, $2.70 and $2.03 per option,
respectively.
The fair value of each option granted in 2002, 2001 and 2000 is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
2002 2001 2000
------- ------- -------
Risk free interest rates.............. 3.89% 4.40% 5.39%
Expected option lives................. 5.00 years 3.81 years 2.23 years
Expected volatility................... 145.41% 115.9% 126.2%
Expected dividend yields.............. None None None
F-18
Non-cash compensation expense recognized in the Company's Statement of
Operations totaled $675,057, $4,442,316 and $238,865 in 2002, 2001 and 2000,
respectively. During the year ended December 31, 2002, the Company recorded a
one-time, 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 one-time,
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.
During the year ended December 31, 2000, the Company recorded $108,863 of
non-cash employee stock option compensation relating to 337,134 stock options
with a three year vesting period granted to employees at an exercise price of
$5.50 per share on September 15, 2000. The market price of the Company's common
stock was $9.38 per share on that day. In addition, $130,002 of compensation
expense was recognized for options granted to non-employees for services
rendered to the Company.
During the years ended December 31, 2002, 2001 and 2000, the Company received
$371,489, $1,589,362 and $674,098, respectively from the exercise of stock
options.
F-19
Note 13 -- Commitments and Contingencies
Employment Agreements
The Company's board of directors has approved employment agreements for a number
of its executive officers as follows:
Chairman and Chief Executive Officer -- The Company entered into an agreement
with Richard Reiss to serve as President and Chief Executive Officer having a
three-year term commencing January 1, 2001. Under the agreement, Mr. Reiss is
entitled, in year 1, 2, and 3, respectively, to annual base compensation of
$345,000, $410,000 and $480,000, and to a formula bonus (payable in quarterly
installments, subject to satisfaction of the condition that the Company's gross
revenues from continuing operations during a given quarter increase over such
revenues from the corresponding quarter of the preceding year) of $135,000,
$165,000 and $195,000 annually. The agreement provides for a grant of an option
to purchase 300,000 shares of Company stock under the 2000 Plan, vesting in
three equal annual installments. Mr. Reiss has the right to terminate the
agreement, with a full payout of all base and potential formula bonus
compensation for the balance of the term (but in no event less than 1 year) and
acceleration of his unvested stock options, upon a Corporate Transaction or a
Change of Control (as those terms are defined under the 2000 Plan) or a
termination by the Corporation without cause. Under the agreement, the Company
must secure and pay the premium on a $2,500,000 life insurance policy payable to
Mr. Reiss's designated beneficiary. The Company charges the cost of the premium
to expense as incurred and has not recorded the cash surrender value of the
policy as an asset on its consolidated balance sheet. On April 24, 2002, Mr.
Reiss was named Chairman and Chief Executive Officer and his agreement was
amended to subject the formula bonus to satisfaction of the condition that the
Company has $500,000 in "EBITDA" from continuing operations during a given
quarter in addition to the gross revenue condition. On July 30, 2002, the
agreement was amended to reduce annual base compensation to $369,000 for the
remainder of year 2 and to $432,000 in year 3. Effective January 1, 2003, the
agreement was further amended to reduce annual base compensation to $330,000 and
the formula bonus was replaced with a discretionary bonus for the remaining
term.
President and Chief Operating Officer -- The Company entered into an agreement
with Leo Flotron to serve as Chief Operating Officer having a three-year term
commencing January 1, 2001. Under the agreement, Mr. Flotron is entitled, in
years 1, 2, and 3 respectively, to annual base compensation of $325,000,
$375,000 and $425,000 and to a discretionary bonus. The agreement provides for a
grant of an option to purchase 240,000 shares of Company stock under the 2000
Plan, vesting in three equal annual installments. Mr. Flotron has the right to
terminate the agreement, with a full payout of all base compensation for the
balance of the term (but in no event less than 1 year) and acceleration of his
unvested stock options, upon a Corporate Transaction or a Change of Control (as
defined under the 2000 Plan) or a termination by the Corporation without cause.
On July 30, 2002, Mr. Flotron was named President and Chief Operating Officer
and his agreement was amended to reduce annual base compensation to $337,500 for
the remainder of year 2 and to $382,500 in year 3. Effective January 1, 2003,
the agreement was further amended to reduce annual base compensation to $300,000
for the remaining term.
Vice Chairman and President -- The Company entered into an agreement with Lewis
Jaffe to serve as Vice Chairman and President having a two-year term commencing
April 24, 2002. Under the agreement, Mr. Jaffe is entitled to annual base
compensation of $250,000 and to a formula bonus of $20,000 (payable quarterly,
subject to satisfaction of the condition that the Company's gross revenue from
continuing operations during a given quarter increase over such revenues from
the corresponding quarter of the preceding year and that the Company has at
least $500,000 in "EBITDA" resulting from such operations for that quarter). The
agreement provides for a grant of an option to purchase 250,000 shares of
Company stock under the 2000 Plan, vesting in two equal annual installments. On
July 22, 2002, this agreement was terminated simultaneously with the
commencement of a consulting agreement providing for Mr. Jaffe's continued
assistance in the areas of corporate development and investor relations through
July 31, 2003, for the right to retain 50,000 of the stock options granted under
his employment agreement. See Note 12 for further discussion of the Company's
treatment of these options in accordance with FIN 44 and APB 25.
F-20
Executive Vice President Business Affairs and General Counsel -- The Company
entered into an agreement with Jonathan Birkhahn to serve as Executive Vice
President Business Affairs and Legal Council., having a three-year term
commencing on November 30, 2000. Under the agreement, Mr. Birkhahn is entitled
to annual base compensation of $235,000, $260,000 and $285,000 in years 1, 2 and
3, respectively, as well as to a discretionary bonus. The agreement provides for
a grant of an option to purchase 250,000 shares under the 2000 Plan, vesting in
four equal installments as follows: after six months, after one year, after two
years and after three years. The agreement was amended on July 30, 2002, to
reduce the annual base compensation to $247,000 for the remainder of year 2 and
to $270,050 in year 3. Effective January 31, 2003, the agreement was terminated
simultaneously with the commencement of a consulting agreement providing for Mr.
Birkhahn's continued assistance in the administration of the Company's legal and
business affairs for a fee of $11,500 per month through November 30, 2003. The
stock options granted under the employment agreement will continue to vest
provided that Mr. Birkhahn continues to serve the Company as a consultant or as
a member of the Company's Board of Directors. Mr. Birkhahn terminated the
consulting agreement effective March 18, 2003; however, he will continue to
serve as a member of the Board of Directors.
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.
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.
Vice President - Marketing -- The Company entered into an agreement with Kelly
Harman to serve as Vice President - Marketing having a three-year term
commencing on January 1, 2001. Under the agreement, Ms. Harman is entitled, in
years 1, 2, and 3 respectively, to annual base compensation of $150,000,
$175,000 and $200,000 and to a discretionary bonus. The agreement provides for a
grant of an option to purchase 50,000 shares under the 2000 Plan, vesting in
three equal installments. On July 30, 2002, the agreement was amended to reduce
annual base compensation to $166,250 for the remainder of year 2 and to $190,000
in year 3. Effective January 31, 2003, the agreement was terminated
simultaneously with the commencement of a consulting agreement providing for Ms.
Harman's continued assistance in the development, marketing and sales of the
Company's products and services for a fee of $8,000 per month through December
31, 2003. The stock options granted under the employment agreement will continue
to vest provided that Ms. Harman continues to serve the Company as a consultant.
Operating Leases
The Company leases various facilities under operating leases expiring through
2007. 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, 2002, 2001 and 2000 were approximately $1,837,000,
$1,853,000 and $1,315,000, respectively.
F-21
Future minimum rental commitments under all non-cancelable leases are as
follows:
Year Ending December 31
2003.................................................... $1,424,132
2004.................................................... 947,764
2005.................................................... 683,775
2006.................................................... 580,320
2007 ................................................... 337,733
---------
$3,973,724
=========
Capital Lease Obligations
The Company leases certain vehicles and equipment under non-cancelable lease
agreements. These leases are accounted for as capital leases. The equipment
under the capital leases as of December 31, 2002 had a cost, accumulated
depreciation and net book value of $0.
Future minimum lease payments under capital lease obligations at December 31,
2002 are as follows:
2003.................................................... $27,957
-------
Total minimum payments.................................. 27,957
Less amount representing interest....................... (2,083)
-------
Total principal......................................... 25,874
Less portion due within one year........................ (25,874)
-------
Long-term portion....................................... $ --
=======
Legal Matters
In September 1997, the Company entered into an exclusive distribution agreement
with Maxbase, Inc. ("Maxbase"), the manufacturer of "MaxShare 2," a patented
bandwidth-on-demand line-sharing device. The Company identified performance
problems with the MaxShare 2 product in certain applications, and believed that
MaxBase had a contractual obligation to correct any technical defects in the
product.
In July, 1998, MaxBase filed a complaint against the Company alleging that the
Company had failed to meet its required minimum purchase obligations thereunder.
Maxbase claimed damages of approximately $1,350,000 in lost profits, as well as
unspecified punitive and treble damages. The Company filed a number of
counterclaims, which were dismissed by the court.
In February 2001, the court granted Maxbase's motion for summary judgment on
liability for breach of contract, and the plaintiff subsequently dropped all of
its other claims. The court, following a trial to determine damages, entered an
approximately $745,000 judgment in favor of Maxbase. After filing an appeal of
that judgment, the Company determined in December 2001 that it would be able to
settle the case for $625,000, accrued an additional $375,000 in litigation
reserves in 2001 and formally settled the case in early 2002. The additional
litigation reserves were recorded in general and administrative expenses in the
statement of operations.
The Company is defending several other suits or claims in the ordinary course of
business, none of which individually or in the aggregate is material to the
Company's business, financial condition or results of operations.
F-22
Note 14 -- 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. 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 will receive if they are
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.
The following table summarizes the activity against the restructuring charge:
Restructuring charge $ 960,000
Cash paid (555,379)
Non-cash expenses (125,000)
---------
Accrual Balance at December 31, 2002 $ 279,621
=========
During the year ended December 31, 2001, the Company recorded a restructuring
charge of $200,000. 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.
The following table summarizes the activity against the restructuring charge:
Restructuring charge $ 200,000
Cash paid (200,000)
---------
Accrual Balance at December 31, 2002 $ --
=========
F-23
Note 15 -- Income Taxes
The income tax provision consists of the following:
Year Ended December 31,
--------------------------------------------
2002 2001 2000
----------- ------------ ------------
Current:
Federal $ -- $ -- $ 196,712
State -- -- 38,045
----------- ------------ -----------
Total Current -- -- 234,757
----------- ------------ -----------
Deferred:
Federal (8,750,051) (2,567,680) (318,432)
State (1,544,127) (453,120) (20,769)
Valuation Allowance 10,294,178 3,220,800 615,683
----------- ------------ -----------
Total Deferred -- 200,000 276,482
----------- ------------ -----------
Income tax provision $ -- $ 200,000 $ 511,239
=========== ============ ===========
The Company's effective tax rate differs from the statutory federal tax rate as
shown in the following table:
Year Ended December 31,
-------------------------------------------
2002 2001 2000
----------- ------------ ----------
U.S. federal income taxes at
the statutory rate $(19,898,840) $(4,940,200) $ (687,035)
State taxes, net of federal effects (3,511,560) (871,800) (80,828)
Goodwill amortization/write-off 12,946,542 957,200 578,800
Valuation allowance 10,294,178 3,220,800 615,683
Stock-based compensation 82,680 1,776,800 --
Other 87,000 57,200 84,619
----------- ------------ -----------
$ -- $ 200,000 $ 511,239
=========== ============ ===========
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 2002 and
2001 are presented below:
December 31,
-----------------------------
2002 2001
----------- ------------
Deferred tax assets:
Tax benefit of operating loss
carryforward $18,212,485 $ 9,688,420
Reserves and allowances 1,092,800 1,233,600
Goodwill 2,689,600 --
Fixed asset impairment charge 364,800 --
Stock option compensation 276,552 83,701
Depreciation 13,600 72,400
Other 117,880 112,382
----------- -----------
Total deferred tax assets 22,767,717 11,190,503
----------- -----------
Deferred tax liabilities:
Depreciation 1,329,836 --
Goodwill -- 46,800
----------- -----------
Total deferred tax liabilities 1,329,836 46,800
----------- -----------
Sub-total 21,437,881 11,143,703
Valuation allowance (21,437,881) (11,143,703)
----------- -----------
Net deferred tax assets -- --
=========== ===========
F-24
During the 2001 period, management 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. 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 $2.8 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, 2002, the Company has net
operating loss (NOL) carry-forwards of approximately $47 million and $39 million
for federal and state income tax purposes, respectively. The federal NOL has a
carryover period of 20 years and is available to offset future taxable income,
if any, through 2021. The utilization of the $47 million in tax loss
carryforwards is limited to approximately $2.4 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 16 -- Valuation Accounts and Reserves
The following table summarizes the activity in the allowance for doubtful
accounts and inventory reserve accounts:
Year Ended December 31,
---------------------------------------
2002 2001 2000
----------- ----------- -----------
Allowance for Doubtful Accounts:
Beginning Balance $ 605,000 $ 470,000 $ 115,000
Charged to cost and expenses 1,502,914 1,171,888 568,107
Deductions (1) (1,822,914) (1,036,888) (213,107)
----------- ----------- -----------
Ending Balance $ 285,000 $ 605,000 $ 470,000
=========== =========== ===========
Inventory Reserves:
Beginning Balance $ 933,509 $ 988,916 --
Charged to cost and expenses 1,145,584 580,002 988,916
Deductions (2) -- (635,409) --
----------- ----------- -----------
Ending Balance $ 2,079,093 $ 933,509 $ 988,916
=========== =========== ===========
(1) Represents the amount of accounts written off
(2) Represents inventory written off and disposed of
Note 17 -- 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, 2002, 2001 and 2000 were approximately $115,000,
$83,000 and $56,000, respectively.
F-25
Note 18 -- Business Combinations
Merger With View Tech, Inc.
On May 18, 2000 the merger of ACC and VTI was consummated in a transaction that
has been accounted for as a "reverse acquisition" using the purchase method. The
reverse acquisition method resulted in ACC being recognized as the acquirer of
VTI for accounting and financial reporting purposes.
The value of VTI shares exchanged was computed using a five-day average share
price with a midpoint of December 28, 1999, the date of the merger announcement.
The number of shares used in the computation is based on the VTI shares
outstanding as of May 18, 2000.
Following are schedules of the purchase price and purchase price allocation:
Purchase Price:
Value of VTI shares exchanged................................... $ 28,466,308
Value of VTI options and warrants............................... 2,872,950
Direct mergers costs............................................ 1,008,059
------------
Total purchase price............................................ $ 32,347,317
============
Purchase Price Allocation:
VTI assets acquired............................................. $ 11,583,008
VTI liabilities assumed......................................... (13,923,289)
Goodwill........................................................ 34,687,598
------------
Total........................................................... $ 32,347,317
============
The VTI assets acquired and liabilities assumed were recorded at their fair
values on May 18, 2000. Amortization expense for the years ended December 31,
2002, 2001 and 2000 totaled $0, $2,444,907 and $1,447,877, respectively.
The following summarized unaudited pro forma information for the year ended
December 31, 2000 assumes the merger of the ACC and VTI occurred on
January 1, 2000. This information is not reflective of the impact of
discontinuance of AV operations in 2002 as discussed in Note 4.
Year End
December 31,
2000
------------
Net revenues.................................... $ 68,273,027
Operating loss.................................. (4,098,157)
Net loss attributable to common stockholders.... (7,990,307)
Loss per share:
Basic............................... $ (.46)
Diluted............................. $ (.46)
The unaudited pro forma operating results reflect pro forma adjustments for the
amortization of intangibles of $811,143 for the year ended December 31, 2000
arising from the merger and other adjustments. These pro forma operating results
also reflect the effects of the series A preferred stock issued in June of 2000
as if the financing occurred on January 1, 2000. Pro forma results of operations
are not necessarily indicative of the results of operations that would have
occurred had the merger been consummated at the beginning of 2000, or of the
future results of the combined entity.
F-26
The Company recognized net revenues of $1,047,000 from transactions with VTI
during the year ended December 31, 2000. Such amounts have been eliminated in
preparing the pro forma information.
Acquisition of 2CONFER, LLC
In July 2000, the Company acquired the net assets of 2CONFER, LLC, a
Chicago-based provider of videconferencing, audio and data solutions. The total
consideration was $800,000, consisting of $500,000 in cash and the remainder in
Company common stock valued at the time of acquisition. Assets consisted
primarily of accounts receivable, fixed assets and goodwill.
Purchase Price Allocation:
2CONFER assets acquired....................................... $ 1,024,730
2CONFER liabilities assumed................................... (1,424,730)
Goodwill...................................................... 1,200,000
-----------
Total............................. $ 800,000
===========
The 2CONFER assets acquired and liabilities assumed were recorded at their fair
values as of July 1, 2000. Amortization expense for the years ended December 31,
2002, 2001 and 2000 totaled $0, $87,912 and $43,150, respectively.
Acquisition of Johns Brook Co.
In October 2000, the Company acquired the assets and certain liabilities of
Johns Brook Co., Inc.'s videoconferencing division, a New Jersey-based provider
of videoconferencing solutions. The total consideration was $635,000, consisting
of $481,000 in cash and $154,000 in the Company's common stock valued at the
time of acquisition. Assets consisted primarily of accounts receivable, fixed
assets, and goodwill.
Purchase Price Allocation:
JBC assets acquired............................................ $ 1,281,194
JBC liabilities assumed........................................ (1,194,065)
Goodwill....................................................... 547,871
-----------
Total.............................. $ 635,000
===========
The JBC assets acquired and liabilities assumed were recorded at their fair
values as of October 1, 2000. Amortization expense for the years ended December
31, 2002, 2001 and 2000 totaled $0, $48,488 and $9,830, respectively.
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, Wire One 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.
F-27
Purchase Price Allocation:
GeoVideo assets acquired $2,500,000
Goodwill 2,500,000
----------
Total $5,000,000
==========
The following summarized unaudited pro forma information for the years ended
December 31, 2000 and 2001 assumes that the acquisition of GeoVideo by the
Company occurred on January 1, 2000. This information is not reflective of the
impact of discontinuance of AV operations in 2002 as discussed in Note 4.
Year Ended December 31,
----------------------------
2000 2001
---------- ----------
Net revenues $ 48,434,108 $ 88,916,234
Operating loss (7,834,575) (15,169,284)
Net loss attributable to common stockholders (21,655,135) (20,764,294)
Loss per share:
Basic $ (1.69) $ (0.99)
Diluted $ (1.69) $ (0.99)
Pro forma results of operations are not necessarily indicative of the results of
operations that would have occurred had the acquisition been consummated at the
beginning of 2000, or of the future results of the combined entity.
Amortization expense for the years ended December 31, 2002 and 2001 totaled $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
==========
F-28
The following summarized unaudited pro forma information for the years ended
December 31, 2000 and 2001 assumes that the acquisition of assets of AAC
occurred on January 1, 2000. This information is not reflective of the impact of
discontinuance of AV operations in 2002 as discussed in Note 4.
Year Ended December 31,
-------------------------------
2000 2001
------------- -------------
Net revenues $ 58,633,207 $ 93,203,562
Operating loss (3,185,247) (13,723,105)
Net loss attributable to common
stockholders (17,383,047) (19,605,602)
Loss per share:
Basic $ (1.34) $ (.93)
Diluted $ (1.34) $ (.93)
Pro forma results of operations are not necessarily indicative of the results of
operations that would have occurred had the acquisition been consummated at the
beginning of 2000, or of the future results of the combined entity.
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. The Company did not acquire any equity
interest in Axxis. In exchange for the acquired assets and assumed liabilities,
Wire One 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)
Goodwill 2,051,017
-----------
Total $ 2,051,017
===========
F-29
The following summarized unaudited pro forma information for the years ended
December 31, 2000 and 2001 assumes that the acquisition of assets of Axxis
occurred on January 1, 2000. This information is not reflective of the impact of
discontinuance of AV operations in 2002 as discussed in Note 4.
Year Ended December 31,
--------------------------------
2000 2001
------------- -------------
Net revenues $ 60,960,382 $ 97,068,528
Operating loss (2,131,227) (14,072,956)
Net loss attributable to common
stockholders (16,226,248) (19,629,376)
Loss per share:
Basic $ (1.24) $ (.93)
Diluted $ (1.24) $ (.93)
Pro forma results of operations are not necessarily indicative of the results of
operations that would have occurred had the acquisition been consummated at the
beginning of 2000, or of the future results of the combined entity.
In the fourth quarter of 2002 the Company completed the process of quantifying a
goodwill impairment loss and a $40.0 million charge was recorded. The effect on
reported net loss attributable to common stockholders and diluted net
loss per share of excluding goodwill amortization in accordance with
SFAS 142 for the years ended December 31, 2001 and 2000 is as follows:
2001 2000
------------- -------------
Reported net loss attributable
to common stockholders ....................... $ (18,964,294) $ (16,255,135)
Goodwill amortization .......................... 2,683,647 1,500,857
------------- -------------
Adjusted net loss attributable
to common stockholders ....................... $ (16,280,647) $ (14,754,278)
============= =============
Reported diluted net loss per share ............ $ (0.91) $ (1.27)
Goodwill amortization .......................... 0.13 0.12
------------- -------------
Adjusted diluted net loss per share ............ $ (0.78) $ (1.15)
============= =============
Note 19 -- 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, 2002, 2001 and
2000, rent expense associated with this lease was $252,000, $295,000 and
$225,000, 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, 2002, 2001 and 2000, the Company has incurred fees for these
services of approximately $33,000, $105,000 and $99,000, 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 provides 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 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.
F-30
In March, 2002, the Company made a recourse loan to Leo Flotron, 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 20 -- Business Segments
The Company follows SFAS No. 131 Disclosures about Segments of a Business
Enterprise and Related Information, which establishes standards for reporting
information about operating segments. Operating segments are defined as
components of a company about which separate financial information is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and to assess financial performance.
Prior to 2002, the Company was engaged in one business, providing customers with
a single source for video products and services. During fiscal 2002, the
Company's direct investment in the Glowpoint Network has increased and the
financial results of the Network Solutions segment became more material to the
Company so that the Company determined that it was in two reportable segments
for fiscal 2002 and, accordingly reported two operating segments, Video
Solutions and Network Solutions.
Video Solutions Segment
The Video Solutions segment sells and markets a full range of video, audio and
data products and systems from Polycom, Tandberg, VCON Telecommunications, Ltd.
("VCON"), Sony Electronics, Inc., Gentner Communications, Inc. and Extron
Electronics, Inc. principally in the United States. The Company also distributes
data products from companies such as Adtran, Lucent, Initia and RADVision to
provide its customers with remote access into LANs, permitting them to acquire
bandwidth on demand and to digitally transmit data. The Company configures
single- or multi-vendor video and data conferencing platforms for its clients
and integrates systems and components into a complete solution designed to suit
each customer's particular communications requirements. After designing a
customer's video communications solution, it delivers, installs and tests the
communications equipment. When the system is functional, the Company provides
training to all levels of its customers' organizations, including executives,
managers, management information systems and data-processing administrators and
technical staff. Training includes instruction in system operation, as well as
the planning and administration of meetings. By means of thorough training, the
Company helps to ensure that its customers understand the functionality of their
systems and are able to apply the technology effectively. The Company's OneCare
service covers a customer's entire video communications system deployment for a
fixed fee. OneCare encompasses installation and maintenance services that
provide comprehensive customer support after the sale and help ensure that
customers experience reliable, effortless video communications. The Company's
installation service places minimal demands on a customer's time and resources.
The Company's maintenance service provides technical support representatives and
engineers, a help desk offering 24x7 responsiveness, nationwide on-site
diagnostic repair and replacement service, nationwide network trouble
coordination and a video test facility.
Network Solutions Segment
The Network Solutions Segment is composed of the following two components: 1)
Glowpoint network services and 2) Multiview Network Services. The Glowpoint
network provides customers with a high-quality platform for video communications
over IP and related applications. The Glowpoint service offers subscribers
substantially reduced transmission costs and superior video communications
quality, remote management of all videoconferencing endpoints utilizing simple
network management protocol ("SNMP"), gateway services to ISDN-based video
communications equipment, video streaming and store-and-forward applications
from our network operations center ("NOC"). The Company also sells multi-point
video and audio bridging services through its Multiview Network Services
program. The Company employs state-of-the-art conferencing servers that provide
seamless connectivity for all switched digital networks at an affordable rate.
F-31
The following table provides 2002 financial information by segment which is used
by the chief operating decision maker in assessing segment performance. The
Company allocated direct costs to each business segment based on management's
analysis of each segment's resource needs.
VSB VNB Total
----------- ----------- -----------
Revenues $77,148,861 $ 5,599,216 $82,748,077
Segment loss $48,008,252 $ 7,534,468 $55,542,720
Impairment losses on goodwill and
other long-lived assets $41,369,920 $ -- $41,369,920
Depreciation and amortization $ 3,616,456 $ 1,530,059 $ 5,146,515
Interest expense, net $ 64,106 $ 296,042 $ 360,148
Total assets $49,567,296 $11,934,368 $61,501,664
Expenditures for long-lived assets $ 919,636 $ 3,826,297 $ 4,745,433
The following table provides 2001 financial information that was available by
segment:
VSB VNB Total
----------- ----------- -----------
Revenues $70,931,571 $ 3,479,907 $74,411,478
Cost of revenue $47,245,823 $ 2,898,460 $50,144,283
Gross margin $23,685,748 $ 581,447 $24,267,195
Note 21 -- Quarterly Financial Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
2002 and 2001.
Quarterly Financial Data
2002 2001
---------- ----------
1st Quarter
Net revenues $ 19,192,185 $ 16,315,370
Gross margin 6,132,100 5,582,538
Loss from continuing operations (2,118,091) (1,651,106)
Net loss (2,558,508) (2,027,909)
Net loss attributable to common stockholders (2,558,508) (2,421,873)
Net loss per share $ (0.09) $ (0.14)
2nd Quarter
Net revenues $ 24,125,466 $ 18,525,234
Gross margin 6,569,651 6,227,057
Loss from continuing operations (3,405,189) (1,688,867)
Net loss (4,317,217) (1,782,732)
Net loss attributable to common stockholders (4,317,217) (5,822,672)
Net loss per share $ (0.15) $ (0.32)
3rd Quarter
Net revenues $ 19,425,938 $ 18,100,445
Gross margin 4,765,535 5,530,425
Loss from continuing operations (3,412,707) (1,978,279)
Net loss (4,385,905) (2,648,523)
Net loss attributable to common stockholders (4,385,905) (2,648,523)
Net loss per share $ (0.15) $ (0.11)
4th Quarter
Net revenues $ 20,004,488 $ 21,470,429
Gross margin 3,659,518 6,927,175
Loss from continuing operations (46,123,905) (7,655,335)
Net loss (47,264,193) (8,071,226)
Net loss attributable to common stockholders (47,303,553) (8,071,226)
Net loss per share $ (1.63) $ (0.33)
F-32
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 2002 and 2001
does not equal the total computed for these years.
Note 22 -- Subsequent Events
In March 2003, the Company concluded an amendment to its existing credit
facility with JPMorgan Chase Bank to cure non-compliance with certain financial
covenants arising from the fourth quarter results. 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 to bring the commitment amount in line
with Wire One's forecasted need for credit over the balance of the term of the
agreement; 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 March 2003, the Company completed the sale of certain assets and liabilities
of the 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 the form of a promissory note payable in five equal consecutive monthly
payments commencing on April 15, 2003. The sale of its AV component was aimed at
enabling the Company to focus more of its resources on the development and
marketing of its subscriber-based IP network, Glowpoint, and to its video
solutions business. As a consequence, this unit has been classified as a
discontinued operation in the accompanying 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.
F-33
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
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,
2002, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2003.
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,
2002, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2003.
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,
2002, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2003.
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,
2002, which Proxy Statement will be filed with the Securities and Exchange
Commission on or before the end of April 2003.
Item 14. Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined
in Rule 13a-14(c) and 15d-14 of the Rules promulgated under the Securities
Exchange Act of 1934, as amended) as of a date within 90 days of the filing date
of this report, our Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of our disclosure controls and procedures and have
concluded that these disclosure controls and procedures are effective. This
conclusion is based on their evaluation as of the evaluation date. There were no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
22
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:
-Report of Independent Certified Public Accountants
-Consolidated Balance Sheets as of December 31, 2002 and 2001
-Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000
-Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000.
-Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000
-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.
None.
23
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 Certificate of Amendment of View Tech, Inc. changing its name to
Wire One Technologies, Inc. (2)
3.3 Amended and Restated Bylaws. (1)
4.1 Specimen Common Stock Certificate. (2)
10.1 Wire One Technologies, Inc. 2000 Stock Incentive Plan. (3)
10.2 Asset Purchase Agreement, dated July 21, 2000, among Wire One
Technologies, Inc., 2Confer L.L.C. and its members. (2)
10.3 Asset Purchase Agreement, dated October 6, 2000, among Wire One
Technologies, Inc., Johns Brook Co., Inc. and its stockholders, as
amended. (6)
10.4 Asset Purchase Agreement, dated May 30, 2001, among Wire One
Technologies, Inc., GeoVideo Networks, Inc., Thomas Weisel Capital
Partners LLC, Crest Communications Partners LP, East River
Ventures II LP and Lucent Technologies, Inc. (4)
10.5 Form of Class A Warrant to Purchase Common Stock of Wire One
Technologies, Inc. (4)
10.6 Form of Class B Warrant to Purchase Common Stock of Wire One
Technologies, Inc. (4)
10.7 Asset Purchase Agreement, dated as of July 17, 2001, among Wire
One Technologies, Inc., Advanced Acoustical Concepts, Inc.,
Lawrence F. Miller, William Othick and Wayne Lippy. (5)
10.8 Form of Subscription Agreement, dated August 8, 2001. (6)
10.9 Form of Warrant to Purchase Common Stock, dated August 8, 2001.
(6)
10.10 Form of Warrant to Purchase Common Stock, dated August 8, 2001.
(6)
10.11 Form of Registration Rights Agreement dated as of August 8, 2001
between Wire One Technologies, Inc. and the investors listed on
the signature pages thereto. (6)
10.12 Asset Purchase Agreement, dated as of November 26, 2001, among
Wire One Technologies, Inc., Axxis, Inc. and the shareholders of
Axxis, Inc. listed on the signature page thereto. (7)
10.13 Placement Agreement, dated January 2, 2002, between Wire One
Technologies, Inc. and H.C. Wainwright & Co., Inc. (8)
10.14 Form of Purchase Agreement for the purchase and sale of Common
Stock and warrants to purchase Common Stock, dated January 10,
2002, between Wire One Technologies, Inc. and the purchasers party
thereto. (8)
10.15 Form of Warrant to purchase Common Stock, dated January 10, 2002.
(9)
24
10.16 Lease Agreement for premises located at 225 Long Avenue, Hillside,
New Jersey, dated March 20, 1997, between All Communications
Corporation and Vitamin Realty Associates, L.L.C. (10)
10.17 First Amendment to Lease Agreement, dated as of December 1997,
between All Communications Corporation and Vitamin Realty
Associates, L.L.C. (1)
10.18 Second Amendment to Lease Agreement, dated as of December 20,
1999, between All Communications Corporation and Vitamin Realty
Associates, L.L.C. (1)
10.19 Fourth Amendment to Lease Agreement, dated as of August 29, 2000,
between All Communications Corporation and Vitamin Realty
Associates, L.L.C. (3)
10.20 Amended and Restated Loan and Security Agreement, dated as of June
1, 2000, among Wire One Technologies, Inc., AllComm Products Corp.
and Summit Commercial/Gibraltar Corp. (2)
10.21 Form of Warrant to purchase Common Stock, dated June 14, 2000.
(11)
10.22 Employment Agreement with Richard Reiss. (12)
10.23 Employment Agreement with Leo Flotron. (12)
10.24 Employment Agreement with Jonathan Birkhahn. (12)
10.25 Employment Agreement with Christopher Zigmont. (12)
10.26 Employment Agreement with Michael Brandofino. (12)
10.27 Employment Agreement with Kelly Harman. (12)
10.28 Amendment to Employment Agreement with Richard Reiss, dated as of
April 24, 2002. (13)
10.29 Lease Agreement for premises located at 4600 Lyons Road,
Miamisburg, Ohio, dated December, 21, 2002, between Wire One
Technologies, Inc. and Key Property Development Corporation. (13)
10.30 First Amendment to Lease Agreement, dated as of February 11, 2003,
between Wire One Technologies, Inc., Key Property Development
Corporation and Maue-Lyons Associates, Ltd. (13)
10.31 Employment Agreement with Lewis Jaffe, dated as April 24, 2003.
(13)
10.32 Amendment to Employment Agreement with Michael Brandofino, dated
as of April 24, 2002. (13)
10.33 Credit Agreement dated as of May 31, 2002, among Wire One
Technologies, Inc., as Borrower, The Lenders Party hereto, and
JPMorgan Chase Bank, as Administrative and Collateral Agent and
Arranger. (14)
10.34 Amendment Agreement No. 1 to the Credit Agreement with JPMorgan
Chase Bank. (15)
10.35 Amendment to Employment Agreement with Richard Reiss, dated as of
July 30, 2002. (15)
25
10.36 Amendment to Employment Agreement with Leo Flotron, dated as of
July 30, 2002. (15)
10.37 Amendment to Employment Agreement with Jonathan Birkhahn, dated as
of July 30, 2002. (15)
10.38 Amendment to Employment Agreement with Christopher Zigmont, dated
as of July 30, 2002. (15)
10.39 Amendment to Employment Agreement with Michael Brandofino, dated
as of July 30, 2002. (15)
10.40 Amendment to Employment Agreement with Kelly Harman, dated as of
July 30, 2002. (15)
10.41 Consulting Agreement, dated July 22, 2002, between Wire One
Technologies, Inc. and Lewis Jaffe. (15)
10.42 Waiver and Amendment Agreement No. 2 to the Credit Agreement with
JPMorgan Chase Bank. (16)
10.43 Warrant to Purchase Common Stock of Wire One Technologies, Inc.
issued to JPMorgan Chase Bank on November 13, 2002. (16)
10.44 Amendment Agreement No. 3 to the Credit Agreement with JPMorgan
Chase Bank. (16)
10.45 Form of Subordinated Convertible Promissory Note. (17)
10.46 Form of Warrant to Purchase Shares of Common Stock of Wire One
Technologies, Inc. (17)
10.47 Registration Rights Agreement dated as of December 17, 2002,
between Wire One Technologies, Inc. and the Purchasers set forth
therein. (17)
10.48 Note and Warrant Purchase Agreement dated as of December 17, 2002,
between Wire One Technologies, Inc. and the Purchasers set forth
therein. (17)
10.49 Amendment to Employment Agreement with Richard Reiss, dated as of
January 1, 2003. (18)
10.50 Amendment to Employment Agreement with Leo Flotron, dated as of
January 1, 2003. (18)
10.51 Amendment to Employment Agreement with Christopher Zigmont, dated
as of January 1, 2003. (18)
10.52 Amendment to Employment Agreement with Michael Brandofino, dated
as of January 1, 2003. (18)
10.53 Consulting Agreement with Jonathan Birkhahn, dated January 21,
2003. (18)
10.54 Consulting Agreement with Kelly Harman, dated January 21, 2003.
(18)
10.55 Third Amendment to Lease Agreement, dated as of June 1, 2000,
between All Communications Corporation and Vitamin Realty
Associates, L.L.C. (19)
10.56 Fifth Amendment to Lease Agreement, dated as of May 1, 2001,
between Wire One Technologies, Inc. and Vitamin Realty Associates,
L.L.C. (19)
26
10.57 Sixth Amendment to Lease Agreement, dated as of May 1, 2002,
between Wire One Technologies, Inc. and Vitamin Realty Associates,
L.L.C. (19)
10.58 Amendment No. 4 to the Credit Agreement with JPMorgan Chase Bank.
(19)
10.59 Asset Purchase Agreement, dated March 7, 2003, between Wire One
Technologies, Inc. and Signal Perfection Limited. (19)
21.1 Subsidiaries of Wire One Technologies, Inc. (2)
23.1 Consent of BDO Seidman, LLP. (19)
99.1 CEO Certification (19)
99.2 CFO Certification (19)
- --------
(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 Wire One Technologies, Inc.'s Registration Statement
on Form S-1 (Registration No. 333-42518), and incorporated herein by
reference.
(3) Filed as an exhibit to Wire One Technologies, Inc.'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 Wire One Technologies, Inc.'s Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30, 2001, and incorporated
herein by reference.
(5) Filed as an exhibit to Wire One Technologies, Inc.'s Current Report on Form
8-K filed with the Securities and Exchange Commission on August 1, 2001,
and incorporated herein by reference.
(6) Filed as an exhibit to Wire One Technologies, Inc.'s Registration Statement
on Form S-3 (Registration No. 333-69432), and incorporated herein by
reference.
(7) Filed as an exhibit to Wire One Technologies, Inc.'s Registration Statement
on Form S-3 (Registration No. 333-74484), and incorporated herein by
reference.
(8) Filed as an exhibit to Wire One Technologies, Inc.'s Current Report on Form
8-K filed with the Securities and Exchange Commission on January 10, 2002,
and incorporated herein by reference.
(9) Filed as an exhibit to Wire One Technologies, Inc.'s Current Report on Form
8-K filed with the Securities and Exchange Commission on January 15, 2002,
and incorporated herein by reference.
(10) Filed as an exhibit to All Communications Corporation's Registration
Statement on Form SB-2 (Registration No. 333-21069), and incorporated
herein by reference.
(11) Filed as an exhibit to Wire One Technologies, Inc.'s Current Report on Form
8-K, dated June 10, 2000, and incorporated herein by reference.
(12) Filed as an exhibit to Wire One Technologies, Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 2000, and incorporated herein
by reference.
(13) Filed as an exhibit to Wire One Technologies, Inc.'s Quarterly Report on
Form 10-Q for the fiscal year quarter ended March 31, 2002, and
incorporated herein by reference.
27
(14) Filed as an exhibit to Wire One Technologies, Inc.'s Current Report on Form
8-K filed with the Securities and Exchange Commission on June 11, 2003, and
incorporated herein by reference.
(15) Filed as an exhibit to Wire One Technologies, Inc.'s Quarterly Report on
Form 10-Q for the fiscal year quarter ended June 30, 2002, and incorporated
herein by reference.
(16) Filed as an exhibit to Wire One Technologies, Inc.'s Quarterly Report on
Form 10-Q for the fiscal year quarter ended September 30, 2002, and
incorporated herein by reference.
(17) Filed as an exhibit to Wire One Technologies, Inc.'s Current Report on Form
8-K, dated December 23, 2003, and incorporated herein by reference.
(18) Filed as an exhibit to Wire One Technologies, Inc.'s Registration Statement
on Form S-3 (Registration No. 333-103227), and incorporated herein by
reference.
(19) 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.
WIRE ONE TECHNOLOGIES, INC.
Date: March 31, 2003 By:/s/Richard Reiss
-----------------------------
Richard Reiss
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Richard Reiss 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 2003 in the capacities indicated.
Signature Title
/s/ Richard Reiss Chairman and Chief Executive Officer (Principal Executive Officer)
- -------------------
Richard Reiss
/s/ Christopher Zigmont Chief Financial Officer (Principal Financial and Accounting Officer)
- -------------------
Christopher Zigmont
/s/ Leo Flotron President, Chief Operating Officer and Director
- -------------------
Leo Flotron
/s/ Jonathan Birkhahn Director /s/ Dean Hiltzik Director
- ------------------- -------------------
Jonathan Birkhahn Dean Hiltzik
/s/ Lewis Jaffe Director /s/ James Kuster Director
- ------------------- -------------------
Lewis Jaffe James Kuster
/s/ Peter N. Maluso Director Director
- ------------------- -------------------
Peter N. Maluso Michael Sternberg
/s/ Michael Toporek Director
- -------------------
Michael Toporek
29
CERTIFICATIONS
I, Richard Reiss, certify that:
1. I have reviewed this annual report on Form 10-K of Wire One
Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
30
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Richard Reiss
-------------------------
Chief Executive Officer
31
I, Christopher A. Zigmont, certify that:
1. I have reviewed this annual report on Form 10-K of Wire One
Technologies, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
32
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Christopher A. Zigmont
------------------------------
Executive Vice President and
Chief Financial Officer
33