SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 2002.
or
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
Commission file number: 0-25940
WIRE ONE TECHNOLOGIES, INC.
(Exact Name of registrant as Specified in its Charter)
Delaware 77-0312442
(State or other Jurisdiction of (I.R.S. Employer Number)
Incorporation or Organization)
225 Long Avenue, Hillside, New Jersey 07205
(Address of Principal Executive Offices)
973-282-2000
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
The number of shares outstanding of the registrant's Common Stock as of
August 9, 2002 was 28,955,051.
WIRE ONE TECHNOLOGIES, INC
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements *
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001................................1
Consolidated Statements of Operations
For the Six Months and Three Months Ended June 30, 2002 and 2001..2
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001....................3
Notes to Consolidated Financial Statements...............................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................14
Item 2. Changes in Securities and Use of Proceeds.............................14
Item 3. Defaults Upon Senior Securities.......................................14
Item 4. Submission of Matters to a Vote of Security Holders...................14
Item 5. Other Information.....................................................14
Item 6. Exhibits and Reports on Form 8-K......................................15
Signatures....................................................................16
* The Balance Sheet at December 31, 2001 has been taken from the audited
financial statements at that date. All other financial statements are
unaudited.
WIRE ONE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 7,362,531 $ 1,689,451
Accounts receivable-net 34,113,755 35,471,482
Inventory 11,217,767 10,218,796
Other current assets 8,473,430 3,824,276
------------- -------------
Total current assets 61,167,483 51,204,005
Furniture, equipment and leasehold improvements-net 11,577,819 10,857,547
Goodwill-net 42,558,509 42,163,844
Other assets 699,227 274,089
------------- -------------
Total assets $ 116,003,038 $ 104,499,485
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan payable $ -- $ 10,628,082
Accounts payable 14,302,332 12,297,914
Accrued expenses 4,091,324 3,218,890
Deferred revenue 6,256,387 7,898,277
Other current liabilities -- 1,465,049
Current portion of capital lease obligations 37,426 56,912
------------- -------------
Total current liabilities 24,687,469 35,565,124
Bank loan payable 8,479,354 --
Capital lease obligations, less current portion 13,129 25,696
------------- -------------
Total liabilities 33,179,952 35,590,820
------------- -------------
Commitments
Stockholders' Equity:
Preferred stock, $.0001 par value;
5,000,000 shares authorized, none outstanding -- --
Common Stock, $.0001 par value; 100,000,000 authorized;
28,955,051 and 25,292,189 shares outstanding,
respectively 2,895 2,529
Treasury stock (239,742) (239,742)
Additional paid-in capital 125,679,768 104,889,988
Accumulated deficit (42,619,835) (35,744,110)
------------- -------------
Total stockholders' equity 82,823,086 68,908,665
------------- -------------
------------- -------------
Total liabilities and stockholders' equity $ 116,003,038 $ 104,499,485
============= =============
See accompanying notes to consolidated financial statements.
1
Wire One Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues
Video Solutions $ 50,657,907 $ 35,819,593 $ 26,753,194 $ 19,315,214
Video Network 2,357,977 1,821,690 1,258,556 1,010,020
------------ ------------ ------------ ------------
53,015,884 37,641,283 28,011,750 20,325,234
------------ ------------ ------------ ------------
Cost of revenues
Video Solutions 36,773,956 23,913,516 19,744,587 12,953,018
Video Network 2,175,847 1,390,000 1,206,306 778,000
------------ ------------ ------------ ------------
38,949,803 25,303,516 20,950,893 13,731,018
------------ ------------ ------------ ------------
Gross margin
Video Solutions 13,883,951 11,906,077 7,008,607 6,362,196
Video Network 182,130 431,690 52,250 232,020
------------ ------------ ------------ ------------
14,066,081 12,337,767 7,060,857 6,594,216
------------ ------------ ------------ ------------
Operating expenses
Selling 15,929,335 11,312,958 8,264,331 5,830,607
General and administrative 3,843,783 3,159,693 1,965,721 1,832,571
Restructuring 960,000 -- 960,000 --
Amortization of goodwill -- 1,270,722 -- 642,526
------------ ------------ ------------ ------------
Total operating expenses 20,733,118 15,743,373 11,190,052 8,305,704
------------ ------------ ------------ ------------
Loss from continuing operations (6,667,037) (3,405,606) (4,129,195) (1,711,488)
------------ ------------ ------------ ------------
Other (income) expense
Amortization of deferred financing costs 59,695 21,761 45,938 12,379
Interest income (58,132) (40,052) (38,802) (24,112)
Interest expense 105,786 317,866 79,547 227,359
------------ ------------ ------------ ------------
Total other expenses, net 107,349 299,575 86,683 215,626
------------ ------------ ------------ ------------
Net loss from continuing operations (6,774,386) (3,705,181) (4,215,878) (1,927,114)
Income (loss) from discontinued operations (101,339) (105,460) (101,339) 144,382
------------ ------------ ------------ ------------
Net loss (6,875,725) (3,810,641) (4,317,217) (1,782,732)
Deemed dividends on series A convertible preferred stock -- 4,433,904 -- 4,039,940
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (6,875,725) $ (8,244,545) $ (4,317,217) $ (5,822,672)
============ ============ ============ ============
Net loss per share
Basic $ (0.24) $ (0.46) $ (0.15) $ (0.32)
============ ============ ============ ============
Diluted $ (0.24) $ (0.46) $ (0.15) $ (0.32)
============ ============ ============ ============
Weighted average number of diluted common shares
Basic 28,632,548 17,752,240 28,934,509 18,176,663
============ ============ ============ ============
Diluted 28,632,548 17,752,240 28,934,509 18,176,663
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
Wire One Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
----------------------------
2002 2001
------------ ------------
Cash flows from Operating Activities:
Net loss $ (6,875,725) $ (3,810,641)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,572,750 2,947,963
Non cash compensation 160,690 217,726
Discontinued operations -- 105,460
Increase (decrease) in cash attributable to changes in assets and
liabilities:
Accounts receivable 1,357,727 (3,003,248)
Inventory (1,393,635) 64,103
Other current assets (4,883,513) (456,755)
Other assets (484,832) (121,821)
Discontinued operations -- (3,487)
Accounts payable 2,004,417 1,184,380
Accrued expenses 872,434 (807,200)
Deferred revenue (1,641,890) 522,406
Other current liabilities (1,465,049) 44,807
------------ ------------
Net cash used in operating activities (9,776,626) (3,116,307)
------------ ------------
Cash flows From Investing Activities
Purchases of furniture, equipment and leasehold improvements (2,998,969) (4,255,531)
Costs related to acquisition of business including cash acquired -- (144,118)
------------ ------------
Net cash used by investing activities (2,998,969) (4,399,649)
------------ ------------
Cash Flows From Financing Activities
Proceeds from common stock offering 20,257,962 --
Issuance of common stock for cash assets of GeoVideo -- 2,500,000
Exercise of warrants and options, net 371,494 313,378
Proceeds from bank loans 11,498,264 38,099,731
Payments on bank loans (13,646,992) (34,221,298)
Payments on capital lease obligations (32,053) (62,647)
------------ ------------
Net cash provided by financing activities 18,448,675 6,629,164
------------ ------------
Increase (decrease) in Cash and Cash Equivalents 5,673,080 (886,792)
Cash and Cash Equivalents at Beginning of Period 1,689,451 1,870,573
------------ ------------
Cash and Cash Equivalents at End of Period $ 7,362,531 $ 983,781
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 105,786 $ 317,866
============ ============
Taxes $ -- $ 2,274
============ ============
Non cash financing and investing activities:
During the six months ended June 30, 2001, the Company recorded non-cash deemed
dividends on Series A mandatorily redeemable convertible preferred stock
of $4,433,904.
On June 4, 2001, the Company acquired the non-cash assets of GeoVideo Networks,
Inc. for non-cash consideration of $2,500,000.
During the six months ended June 30, 2001, the Company issued 3,017,143 shares
of $0.0001 par value common stock in exchange for 2,115 shares of Series A
mandatorily redeemable, convertible preferred stock. Based on the average
conversion price of $4.91 per share, the total value attributable to the
common stock was $14,805,000.
See accompanying notes to consolidated financial statements.
3
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Note 1 -- The Business and Merger with View Tech, Inc.
Wire One Technologies, Inc. ("Wire One" or the "Company") was formed by the
merger of All Communications Corporation ("ACC") and View Tech, Inc. ("VTI") on
May 18, 2000, with the former directors and senior management of ACC succeeding
to the management of Wire One. In connection with the merger, each former
shareholder of ACC received 1.65 shares of Wire One common stock for each share
of ACC common stock held by such former shareholder. The transaction has been
accounted for as a "reverse acquisition" using the purchase method of
accounting. The reverse acquisition method resulted in ACC being recognized as
the acquirer of VTI for accounting and financial reporting purposes. As a
result, ACC's historical results have been carried forward and VTI's operations
have been included in the financial statements commencing on the merger date.
Further, on the date of the merger, the assets and liabilities of VTI were
recorded at their fair values, with the excess purchase consideration allocated
to goodwill.
Wire One is engaged in the business of selling, installing and servicing video
communications systems, as well as an Internet-protocol-based network devoted to
video communications, to commercial and institutional customers located
principally within the United States. The Company is headquartered in Hillside,
New Jersey.
Note 2 -- Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the financial statements
and footnotes thereto included in the Company's Annual Report for the fiscal
year ended December 31, 2001 as filed with the Securities and Exchange
Commission.
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, AllComm Products Corporation ("APC"), VTC
Resources, Inc. ("VTC") and Wire One Travel Services, Inc. ("WOTS"). All
material intercompany balances and transactions have been eliminated in
consolidation. The Company does not segregate or manage its operations by
business segment.
Note 3 -- Effect of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and Other
Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. FAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of FAS 142, that the Company reclassifies, if necessary,
the carrying amounts of intangible assets and goodwill based on the criteria in
FAS 141.
4
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in FAS 142. FAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. FAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of FAS 142.
With respect to the Company's business combinations that were effected prior to
June 30, 2001, using the purchase method of accounting, the net carrying amount
of the resulting goodwill as of June 30, 2002 was $36,775,028. No amortization
expense was recorded in the six-month period ended June 30, 2002. Acquisitions
occurring subsequent to July 1, 2001 have been accounted for using the purchase
method of accounting. The Company is in the process of obtaining appraisals of
the assets acquired for the purpose of allocating the purchase price to all
tangible and intangible assets acquired. We have determined that our business
consists of two reporting units for purposes of assessing existing goodwill for
impairment. An impairment charge will be recognized for the amount, if any,
which the carrying amount of goodwill exceeds its implied fair value. We have
completed Step 1 of FAS 142 and deemed a potential impairment exists. We are in
the process of quantifying the impairment (Step 2 of FAS 142) and expect to
complete the process in the third quarter of 2002. We currently do not have any
reasonable estimate of the amount of impairment, which could range from $0 to
the entire goodwill being carried at $42,588,509.
The effect on 2001 reported net loss attributable to common stockholders and net
loss per share excluding goodwill amortization is as follows:
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net loss attributable to common stockholders $ (6,875,725) $ (8,244,545) $ (4,317,217) $ (5,822,672)
Goodwill amortization -- 1,270,722 -- 642,526
------------- ------------- ------------- -------------
Adjusted net loss attributable to common stockholders $ (6,875,725) $ (6,973,823) $ (4,317,217) $ (5,180,146)
============= ============= ============= =============
Reported net loss per share $ (0.24) $ (0.46) $ (0.15) $ (0.32)
Goodwill amortization -- 0.07 -- 0.04
------------- ------------- ------------- -------------
Adjusted net loss per share $ (0.24) $ (0.39) $ (0.15) $ (0.28)
============= ============= ============= =============
In August 2001, The FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS 144"). The new guidance
resolves significant implementation issues related to FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("FAS 121"). FAS 144 supercedes FAS 121, but it retains FAS 121's
fundamental provisions. It also amends Account Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidate a
subsidiary for which control is likely to be temporary. FAS 144 retains the
requirement of FAS 121 to recognize an impairment loss only if the carrying
amount of a long-lived asset within the scope of FAS 144 is not recoverable from
its undiscounted cash flows and exceeds its fair value.
FAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Company has early adopted the provisions of FAS 144 as of December 31, 2001
to recognize discontinued business operations in its financial statements.
Note 4 -- Loss Per Share
Basic loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding during
the period. In determining basic loss per share for the periods presented, the
effects of deemed dividends related to the Company's series A mandatorily
redeemable convertible preferred stock is added to the net loss.
Diluted loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted average number of common shares outstanding plus
the weighted-average number of net shares that would be issued upon exercise of
stock options and warrants using the treasury stock method and the deemed
conversion of preferred stock using the if-converted method.
Six Months Ended Three Months Ended
June 30, June 30,
--------------------- ------------------------
2002 2001 2002 2001
----- ----- ----- -----
Weighted average shares outstanding ......................... 28,632,548 17,752,240 28,934,509 18,176,663
Effect of dilutive options and warrants ..................... -- -- -- --
---------- ---------- ---------- ----------
Weighted average shares outstanding
including dilutive effect of securities ............... 28,632,548 17,752,240 28,934,509 18,176,663
========== ========== ========== ==========
Weighted average options and warrants to purchase 10,619,267 and 10,587,974
shares of common stock were outstanding during the six months and three months
ended June 30, 2002. Weighted average options and warrants to purchase 8,790,872
and 8,917,689 shares of common stock were outstanding during the six months
ended June 30, 2001. These options and warrants were not included in the
computation of diluted EPS because the Company reported a net operating loss for
these periods and their effect would have been antidilutive.
5
Note 5 -- Bank Loan Payable
In May 2002, the Company entered into a $25,000,000 working capital credit
facility with an asset-based lender. 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 $3,000,000. Borrowings bear interest at the
lender's base rate plus 3/4% per annum. At June 30, 2002, the interest rate on
the facility was 5.50%. The credit facility contains certain financial and
operational covenants. For the six month period ended June 30, 2002, the Company
was in violation of the covenant requiring the Company to meet a certain
earnings before interest, taxes, depreciation and amortization ("EBITDA")
target. On July 30, 2002, the Company received a waiver from the lender
regarding this requirement as part of an amendment to the credit agreement. At
June 30, 2002, $8,479,354 was outstanding under this facility and the loan has
been classified as long-term in the accompanying balance sheet because the
facility matures in more than one year.
Note 6 - Restructuring Charge
During the three month period ended June 30, 2002, the Company recorded a
restructuring charge of $960,000. The significant components of the
restructuring charge are as follows:
Employee termination costs $500,000.00
Facility exit costs 460,000.00
-----------
$960,000.00
===========
The employee termination costs relate to 84 employees and officers of the
Company, including Lewis Jaffe, President of the Company, who relinquished his
day-to-day operating responsibilities following the implementation of a cost
savings plan targeted to save approximately $7 million of operating expenses on
an annual basis. The facility exit costs relate to the closing or downsizing of
19 sales offices.
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto. The discussion of
results, causes and trends should not be construed to imply any conclusion that
such results or trends will necessarily continue in the future.
The statements contained herein, other than historical information, are or may
be deemed to be forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, and involve factors, risks and uncertainties
that may cause the Company's actual results in future periods to differ
materially from such statements. These factors, risks and uncertainties, include
the relatively short operating history of the Company; market acceptance and
availability of new products and services; the terminable-at-will and
nonexclusive nature of reseller agreements with manufacturers; rapid
technological change affecting products and services sold by the Company; the
impact of competitive products, services, and pricing, as well as competition
from other resellers and service providers; possible delays in the shipment of
new products; and the availability of sufficient financial resources to enable
the Company to expand its operations.
Overview
Wire One is a leading single source provider of video communications solutions
that encompass the entire video communications value chain. We are a leading
integrator for major video communications equipment manufacturers, including the
number one market share leader, Polycom, Inc. ("Polycom"), which accounts for
over 50% of the installed videoconferencing endpoints in the United States. In
December 2000, we introduced our Glowpoint network service, providing our
customers with two-way video communications with high quality of service. With
the introduction of Glowpoint, we now offer our customers a single point of
contact for all their video communications requirements. Furthermore, we believe
Glowpoint is the first dedicated network to provide two-way video communications
by utilizing a dedicated Internet protocol ("IP") backbone and broadband access.
The Company markets and sells its video communications products and services to
the commercial, federal and state government, medical and educational markets
through a direct sales force of account executives and telemarketers and through
resellers. These efforts are supported by sales engineers, a marketing
department, a call center and a professional services and engineering group. The
Company has sold its products and services to over 3,000 customers who
collectively have approximately 18,500 videoconferencing endpoints.
The Company was formed on May 18, 2000 by the merger of ACC and VTI. VTI
(renamed Wire One Technologies, Inc. upon the merger) was the surviving legal
entity in the merger. However, for financial reporting purposes, the merger has
been accounted for as a "reverse acquisition" using the purchase method of
accounting. Under the purchase method of accounting, ACC's historical results
have been carried forward and VTI's operations have been included in the
financial statements commencing on the merger date. Accordingly, all 2000
results through the merger date are those of ACC only. Further, on the date of
the merger, the assets and liabilities of VTI were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
We sell both products and services. Product revenue consists of revenue from the
sale of video communications equipment and is recognized at the time of
shipment, provided no significant obligations remain, collectibility is probable
and returns are estimable. Service revenue is derived from services rendered in
connection with the sale of new systems and the maintenance of previously
installed systems. Services rendered in connection with the sale of new systems
consist of engineering services related to system integration, technical
training and user training. The majority of the services are rendered at or
prior to installation, and all revenue is recognized when services are rendered.
Revenue related to extended
7
service contracts is deferred and recognized over the life of the extended
service period. Revenues related to providing network services (either H.323
Bridging or Glowpoint IP Network) are recognized on a monthly basis for services
rendered and detailed on a monthly bill.
In July 2000, we acquired the net assets of 2CONFER, LLC ("2CONFER"), a
Chicago-based provider of videoconferencing, audio and data solutions. The total
consideration was $800,000, consisting of $500,000 in cash and the remainder in
our common stock valued at the time of acquisition at $300,000. On the date of
the acquisition, the assets and liabilities of 2CONFER were recorded at their
fair values, with the excess purchase consideration allocated to goodwill.
In October 2000, we acquired the assets and certain liabilities of the Johns
Brook Company ("JBC") videoconferencing division, a New Jersey-based provider of
videoconferencing solutions. The total consideration was $635,000, consisting of
$481,000 in cash and the remainder in our common stock valued at the time of
acquisition at $154,000. On the date of the acquisition, the assets and certain
liabilities of the JBC videoconferencing division were recorded at their fair
values, with the excess purchase consideration allocated to goodwill.
In June 2001, we acquired the assets of GeoVideo Networks, Inc. ("GeoVideo"), a
New York-based developer of video communications software. Chief among the
assets, in addition to GeoVideo's cash on hand of $2,500,000, was GeoVideo's
browser, a software tool based upon proprietary Bell Labs technology that allows
up to six simultaneous, real-time, bi-directional high-bandwidth IP video
sessions to be conducted over a standard desktop PC. In exchange for the
acquired assets, we issued 815,661 shares of our common stock, together with
warrants to purchase 501,733 additional shares of our common stock at $5.50 per
share and 520,123 shares at $7.50 per share. On the date of acquisition the
assets of GeoVideo were recorded at their fair values, with the excess purchase
consideration allocated to goodwill.
In July 2001, we acquired the assets and certain liabilities of Advanced
Acoustical Concepts, Inc. ("AAC"), an Ohio-based designer of audiovisual
conferencing systems. The total consideration was $794,000, which was paid in
the form of our common stock valued at the time of acquisition. On the date of
acquisition, the assets and certain liabilities were recorded at their fair
values, with the excess purchase consideration allocated to goodwill. A final
appraisal of certain assets included in the acquisition has not been completed.
Pending the results of the appraisal, the allocation among the various
components of the purchase price may change; however, any such reallocation will
not materially affect our overall financial position or results of operations.
In October 2001, we completed the sale of our voice communications business unit
to Fairfield, N.J.-based Phonextra, Inc. for approximately $2,017,000, half of
which was paid in cash at the close of the transaction and the balance of which
was paid in the form of a promissory note self-amortizing over one year. The
sale of our voice communications unit was aimed at enabling us to sharpen our
focus on video solutions and on Glowpoint, our subscriber-based IP network
dedicated to video communications traffic. As a consequence, this unit has been
classified as a discontinued operation in the accompanying financial statements.
In November 2001, we acquired certain assets and liabilities of the video
conferencing division of Axxis, Inc. ("Axxis"), a Kentucky-based designer of
audiovisual conferencing systems. The total consideration was $2,051,000, which
was paid in the form of our common stock valued at the time of acquisition. On
the date of acquisition, the acquired assets and liabilities were recorded at
their fair values, with the excess purchase consideration allocated to goodwill.
A final appraisal of certain assets included in the acquisition has not been
completed. Pending the results of the appraisal, the allocation among the
various components of the purchase price may change; however, any such
reallocation will not materially affect our overall financial position or
results of operations.
8
Wire One Technologies, Inc.
Results of Operations
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2002 2001 2002 2001
---------- ----------- ---------- ------------
Revenues
Video Solutions 95.6% 95.2% 95.5% 95.0%
Video Network 4.4% 4.8% 4.5% 5.0%
---------- ---------- ---------- ----------
100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ----------
Cost of revenues
Video Solutions 72.6% 66.8% 73.8% 67.1%
Video Network 92.3% 76.3% 95.8% 77.0%
---------- ---------- ---------- ----------
73.5% 67.2% 74.8% 67.6%
---------- ---------- ---------- ----------
Gross margin
Video Solutions 27.4% 33.2% 26.2% 32.9%
Video Network 7.7% 23.7% 4.2% 23.0%
---------- ---------- ---------- ----------
26.5% 32.8% 25.2% 32.4%
---------- ---------- ---------- ----------
Operating expenses
Selling 30.0% 30.1% 29.5% 28.7%
General and administrative 7.3% 8.4% 7.0% 9.0%
Restructuring 1.8% 0.0% 3.4% 0.0%
Amortization of goodwill 0.0% 3.3% 0.0% 3.1%
---------- ---------- ---------- ----------
Total operating expenses 39.1% 41.8% 39.9% 40.8%
---------- ---------- ---------- ----------
Loss from continuing operations (12.6)% (9.0)% (14.7)% (8.4)%
---------- ---------- ---------- ----------
Other (income) expense
Amortization of deferred financing costs 0.1% 0.1% 0.2% 0.1%
Interest income (0.1)% (0.1)% (0.1)% (0.1)%
Interest expense 0.2% 0.8% 0.3% 1.1%
---------- ---------- ---------- ----------
Total other expenses, net 0.2% 0.8% 0.4% 1.1%
---------- ---------- ---------- ----------
Net loss from continuing operations (12.8)% (9.8)% (15.1)% (9.5)%
Income (loss) from discontinued operations (0.2)% (0.3)% (0.4)% 0.7%
---------- ---------- ---------- ----------
Net loss (13.0)% (10.1)% (15.5)% (8.8)%
Deemed dividends on series A convertible preferred stock 0.0% 11.8% 0.0% 19.9%
---------- ---------- ---------- ----------
Net loss attributable to common stockholders (13.0)% (21.9)% (15.5)% (28.7)%
========== ========== ========== ==========
9
Six Months Ended June 30, 2002 ("2002 period") Compared to Six Months Ended June
30, 2001 ("2001 period") and Three Months Ended June 30, 2002 ("June 2002
quarter") Compared to Three Months Ended June 30, 2001 ("June 2001 quarter").
NET REVENUES. The Company reported net revenues of $53.0 million for the
2002 period, an increase of $15.4 million, or 41%, over the $37.6 million in
revenues reported for the 2001 period. Net revenues of $28.0 million for the
June 2002 quarter represent an increase of $7.7 million, or 37.8%, over the
$20.3 million reported for the June 2001 quarter. Although the operations of
acquired companies have now been fully integrated into the Company, management
estimates that approximately $6.0 million of the $15.4 million increase in
revenues for the 2002 period over the 2001 period related to the core businesses
in existence before contributions from AAC and Axxis and $9.4 million in
revenues from AAC and Axxis accounted for the remainder of the growth.
Approximately $3.0 million of the $7.7 million increase in revenues for the June
2002 quarter over the June 2001 quarter related to the core businesses in
existence before contributions from AAC and Axxis and $4.7 million in revenues
from AAC and Axxis accounted for remainder of the growth.
Video solutions -- Sales of video communications products and services
were $50.6 million in the 2002 period, an increase of $14.8 million, or 41.4%,
over the $35.8 million in the 2001 period. Net revenues of $26.7 million for the
June 2002 quarter represent an increase of $7.4 million, or 38.5%, over the
$19.3 million reported for the June 2001 quarter. Management estimates that
approximately $5.4 million of the $14.8 million increase in revenues for the
2002 period over the 2001 period related to the core businesses in existence
before contributions from AAC and Axxis and $9.4 million in revenues from AAC
and Axxis accounted for the remainder of the growth. The growth experienced in
the 2002 period resulted from sales to both new and existing customers in the
commercial, government, medical and educational markets in each of the major
geographic regions in the United States in which the Company operates, with
particular strength experienced in the state and local government and education
sectors. Approximately $2.7 million of the $7.4 million increase in revenues for
the June 2002 quarter over the June 2001 quarter related to the core businesses
in existence before contributions from AAC and Axxis and $4.7 million in
revenues from AAC and Axxis accounted for the remainder of the growth.
Video network -- Sales of video network services were $2.4 million in the
2002 period, an increase of $0.6 million, or 29.4%, over the $1.8 million in the
2001 period. Net revenues of $1.3 million for the June 2002 quarter represent an
increase of $0.3, or 24.6%, over the $1.0 million reported for the June 2001
quarter. Management estimates that approximately $0.8 million of the $0.5
million net increase in revenues for the 2002 period over the 2001 period
related to growth resulting from the introduction of the Glowpoint network and a
$0.3 million decrease in revenues from VTI's H.320 bridging service accounted
for the remainder of the change.
GROSS MARGINS. Gross margins were $14.0 million in the 2002 period, an
increase of $1.7 million over the $12.3 million in the 2001 period. Gross
margins decreased in the 2002 period to 26.5% of net revenues, as compared to
32.8% of net revenues in the 2001 period. Gross margins were $7.1 million in the
June 2002 quarter, an increase of $0.5 million over the $6.6 million in the June
2001 quarter. Gross margins decreased in the June 2002 quarter to 25.2% of net
revenues, as compared to 32.4% of net revenues in the June 2001 quarter. In the
2002 period and the June 2002 quarter, the Company experienced a continuation of
a trend that has been experienced in recent quarters, namely, heightened
competitive pressure in the video solutions business resulting from the
relatively weak economy and downward pricing pressure instigated by heavy
competition for orders.
SELLING. Selling expenses, which include sales salaries, commissions,
overhead, and marketing costs, at $15.9 million in the 2002 period, were up $4.6
million from the $11.3 million reported for the 2002 period, but were down as a
percentage of revenue from 30.1% in the 2001 period to 30.0% in the 2002 period.
Selling expenses increased $2.4 million to $8.2 million, in the June 2002
quarter to 29.5% of revenue from $5.8 million, or 28.7% of revenue for the 2001
quarter. The year to date decline in expenses as a percentage of revenue was
achieved as the Company continued to make investments in staff and related costs
for the Glowpoint division and the video solutions business and increased its AV
custom integration business with the acquisitions of AAC and Axxis.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$0.7 million in the 2002 period to $3.8 million as compared to $3.1 million for
the 2001 period. General and administrative expenses as a percentage of net
revenues for the 2002 period declined from 8.4% in the 2001 period to 7.3% in
the 2002 period. General and administrative expenses increased $0.1 million to
$1.9 million in the June 2002 quarter from $1.8 million for the June 2001
quarter but declined as a percentage of net revenue
10
from 9.0% in the 2001 quarter to 7.0% in the 2002 quarter. Management continues
to leverage the general and administrative infrastructure costs of its
Executive, Finance, Legal and Human Resource groups over a greater revenue base.
RESTRUCTURING. A restructuring charge of $960,000 was recorded in the June
2002 quarter. Approximately half of the charge related to the costs of vacating
certain sales offices with the other half related to severance and other
personnel-related costs. This restructuring charge is being taken to position
the Company to realize approximately $7 million in annual operating expense
savings.
AMORTIZATION OF GOODWILL. Amortization expense was zero in the 2002 period
as the Company implemented the provisions of Financial Accounting Standards
Board Statement No. 142, Goodwill and Other Intangible Assets ("FAS 142").
Amortization expense was $1.3 million in the 2001 period and $0.6 million for
the June 2001 quarter.
OTHER (INCOME) EXPENSES. Other expenses decreased $192,000 to $107,000 in
the 2002 period from $299,000 in the 2001 period. The principal component of
this category, interest expense, decreased approximately $212,000 to $106,000 in
the 2002 period from $318,000 in the 2001 period. The decline in interest
expense resulted from paying down the outstanding balance under its prior bank
line of credit from the proceeds of its $20.3 million common stock offering
early in the 2002 period. For the June 2002 quarter, other expenses decreased
$129,000 to $87,000 from $216,000 in the June 2001 quarter.
DISCONTINUED OPERATIONS. As a result of some post-closing adjustments
related to the sale of its voice communications business, the Company incurred a
$101,000 loss from discontinued operations in the 2002 period. The Company
incurred a loss from discontinued operations in the 2001 period of approximately
$105,000. The loss from discontinued operations in the 2001 period resulted from
lower revenues to cover the fixed costs of the voice communications unit and
higher costs of revenues as competitive pressures reduced gross margins.
NET LOSS. The Company reported a net loss attributable to common
stockholders for the 2002 period of $(6.9) million, or $(.24) per diluted share,
as compared to a net loss attributable to common stockholders of $(8.3) million,
or $(.46) per diluted share for the 2001 period. The $(6.9) million net loss for
the 2002 period primarily results from depreciation and amortization charges
totaling $2.6 million and $2.0 million of costs related to the Glowpoint network
service offering. EBITDA from continuing operations for the 2002 period was
$(3.0) million. The $(8.2) million net loss for the 2001 period primarily
results from depreciation and amortization charges totaling $2.9 million, $4.4
million in deemed dividends on series A preferred stock, and $1.0 million of
costs related to the Glowpoint network service offering. EBITDA from continuing
operations for the 2001 period was $(0.2) million.
Liquidity and Capital Resources
At June 30, 2002, the Company had working capital of $36.5 million
compared to $15.6 million at December 31, 2001, an increase of approximately
133.3%. The Company had $7.4 million in cash and cash equivalents at June 30,
2002 compared to $1.7 million at December 31, 2001. The $20.9 million increase
in working capital resulted primarily from the January 2002 common stock
offering of $20.3 million, the reclassification of $8.5 million of bank debt
from current to long-term and, the $6.9 million net loss for the 2002 period.
Net cash used in operating activities for the 2002 period was $(9.8)
million as compared to net cash used in operations of $(3.1) million during the
2001 period. Increases in other current assets of $4.9 million and inventory of
$1.4 million and a cash loss from operations of $4.1 million were the primary
uses of operating cash in the 2002 period.
Investing activities for the 2002 period included purchases of $3.0
million of network equipment and computer equipment and software, primarily for
the Company's Glowpoint network.
Financing activities in the 2002 period included the issuance of common
stock in a public offering under a shelf registration yielding net proceeds of
$20.3 million and a net pay down of the Company's revolving credit line totaling
$2.1 million.
11
In May 2002, the Company entered into a $25 million working capital credit
facility with an asset based lender. 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 $3 million. Borrowings bear interest at the
lender's base rate plus 3/4% per annum. At June 30, 2002, $8.5 million was
outstanding under this facility and the loan has been classified as non-current
in the accompanying balance sheet because the facility matures in more than one
year. The credit facility contains certain financial and operational covenants.
For the six month period ended June 30, 2002, the Company was in violation of
the covenant requiring the Company to meet a certain earnings before interest,
taxes, depreciation and amortization ("EBITDA") target. On July 30, 2002, the
Company received a waiver from the lender regarding this requirement as part of
an amendment to the credit agreement.
Management believes, based upon current circumstances, that it has
adequate capital resources to support expected operating levels for the next
twelve months.
Critical accounting policies
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America. Preparing financial
statements in accordance with generally accepted accounting principles requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclose contingent assets and liabilities as of the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The following paragraphs include a discussion of
some critical areas where estimates are required.
Revenue recognition
We sell both products and services. Product revenue consists of revenue from the
sale of video communications equipment and is recognized at the time of
shipment, provided no significant obligations remain, collectibility is probable
and returns are estimable. Service revenue is derived from services rendered in
connection with the sale of new systems and the maintenance of previously
installed systems. Services rendered in connection with the sale of new systems
consist of engineering services related to system integration, technical
training and user training. The majority of the services are rendered at or
prior to installation, and all revenue is recognized when services are rendered.
Revenue related to extended service contracts is deferred and recognized over
the life of the extended service period.
Long-lived assets
We evaluate impairment losses on long-lived assets used in operations, primarily
fixed assets and goodwill, when events and circumstances indicate that the
carrying value of the assets and goodwill might not be recoverable. For purposes
of evaluating the recoverability of long-lived assets, the undiscounted cash
flows estimated to be generated by those assets would be compared to the
carrying amounts of those assets. If and when the carrying values of the assets
exceed these undiscounted cash flows, the related assets will be written down to
fair value. There were no impairment losses recorded in any of the periods
presented.
Recent pronouncements of the Financial Accounting Standards Board
In June 1998 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial
12
Accounting Standards ("FAS 133"). "Accounting for Derivative Instruments and
Hedging Activities", which became effective for the Company during the first
quarter of 2001. FAS 133 requires the recognition of all derivatives as either
assets or liabilities in our balance sheet and measurement of those instruments
at fair value. To date, we have not entered into any derivative or hedging
activities, and, as such, the adoption of FAS 133, as amended, has not had a
material effect on its consolidated financial statements.
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, Business Combinations ("FAS 141"), and No. 142, Goodwill and Other
Intangible Assets ("FAS 142"). FAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. FAS 141 also
requires that we recognize acquired intangible assets apart from goodwill if the
acquired intangible assets meet certain criteria. FAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of FAS 142, that we reclassify, if necessary, the carrying amounts of intangible
assets and goodwill based on the criteria in FAS 141.
FAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, FAS 142 requires that we identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in FAS 142. FAS 142 is required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
at that date, regardless of when those assets were initially recognized. FAS 142
requires us to complete a transitional goodwill impairment test six months from
the date of adoption. The Company is also required to reassess the useful lives
of other intangible assets within the first interim quarter after adoption of
FAS 142.
With respect to the Company's business combinations that were effected prior to
June 30, 2001, using the purchase method of accounting, the net carrying amount
of the resulting goodwill as of June 30, 2002 was $36,775,028. No amortization
expense was recorded in the six-month period ended June 30, 2002. Acquisitions
occurring subsequent to July 1, 2001 have been accounted for using the purchase
method of accounting. The Company is in the process of obtaining appraisals of
the assets acquired for the purpose of allocating the purchase price to all
tangible and intangible assets acquired. We have determined that our business
consists of two reporting units for purposes of assessing existing goodwill for
impairment. An impairment charge will be recognized for the amount, if any,
which the carrying amount of goodwill exceeds its implied fair value. We have
completed Step 1 of FAS 142 and deemed a potential impairment exists. We are in
the process of quantifying the impairment (Step 2 of FAS 142) and expect to
complete the process in the third quarter of 2002. We currently do not have any
reasonable estimate of the amount of impairment which could range from $0 to the
entire goodwill being carried at $42,588,509.
The effect on 2001 reported net loss attributable to common stockholders and net
loss per share excluding goodwill amortization is as follows:
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net loss attributable to common stockholders $ (6,875,725) $ (8,244,545) $ (4,317,217) $ (5,822,672)
Goodwill amortization -- 1,270,722 -- 642,526
------------- ------------- ------------- -------------
Adjusted net loss attributable to common stockholders $ (6,875,725) $ (6,973,823) $ (4,317,217) $ (5,180,146)
============= ============= ============= =============
Reported net loss per share $ (0.24) $ (0.46) $ (0.15) $ (0.32)
Goodwill amortization -- 0.07 -- 0.04
------------- ------------- ------------- -------------
Adjusted net loss per share $ (0.24) $ (0.39) $ (0.15) $ (0.28)
============= ============= ============= =============
In August 2001, the FASB issued FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("FAS 144"). The new guidance
resolves significant implementation issues related to FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("FAS 121"). FAS 144 supercedes FAS 121, but it retains FAS 121's
fundamental provisions. It also amends Account Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidate a
subsidiary for which control is likely to be temporary. FAS 144 retains the
requirement of FAS 121 to recognize an impairment loss only if the carrying
amount of a long-lived asset within the scope of FAS 144 is not recoverable from
its undiscounted cash flows and exceeds its fair value.
FAS 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The Company has early adopted the provisions of FAS 144 as of December 31, 2001
to recognize discontinued business operations in its financial statements.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to interest rate risk related to our cash equivalents
portfolio. The primary objective of our investment policy is to preserve
principal while maximizing yields. Our cash equivalents portfolio is short-term
in nature, therefore changes in interest rates will not materially impact our
consolidated financial condition. However, such interest rate changes can cause
fluctuations in our results of operations and cash flows.
We maintain borrowings under a $25 million working capital credit facility
with an asset based lender that are not subject to material market risk exposure
except for such risks relating to fluctuations in market interest rates. The
carrying value of these borrowings approximates fair value since they bear
interest at a floating rate based on the "prime" rate. There are no other
material qualitative or quantitative market risks particular to the Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is defending several suits or claims in the ordinary course of
business, none of which individually or in the aggregate is material to the
Company's business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting ("Annual Meeting") of Stockholders of Wire One
Technologies, Inc. was held on May 23, 2002.
The 24,916,903 shares of Common Stock ("Common Stock") present at the
Annual Meeting out of a then total of 28,933,801 shares outstanding and entitled
to vote acted as follows with respect to the following proposals with the
following results:
Proposal 1. (a) The election of Richard Reiss to the Board of Directors
was approved:
FOR AGAINST ABSTAIN
24,657,436 259,467 0
(b) The election of Dean Hiltzik to the Board of Directors was approved:
FOR AGAINST ABSTAIN
24,584,308 332,595 0
(c) The election of Lewis Jaffe to the Board of Directors was approved:
FOR AGAINST ABSTAIN
24,593,092 323,811 0
Proposal 2. The amendment to the 2000 Stock Incentive Plan was approved:
FOR AGAINST ABSTAIN
22,459,719 2,428,849 28,335
Proposal 3. The ratification of the appointment of BDO Seidman as
independent auditors was approved:
FOR AGAINST ABSTAIN
24,849,585 49,053 18,265
ITEM 5. OTHER INFORMATION
None.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Material Agreements
10.1 Amendment Agreement No. 1 to the Credit Agreement with JPMorgan
Chase Bank
10.2 Amendment to Richard Reiss Employment Agreement
10.3 Amendment to Leo Flotron Employment Agreement
10.4 Amendment to Jonathan Birkhahn Employment Agreement
10.5 Amendment to Christopher Zigmont Employment Agreement
10.6 Amendment to Michael Brandofino Employment Agreement
10.7 Amendment to Kelly Harman Employment Agreement
10.8 Lewis Jaffe Consulting Agreement
99.1 CEO Certification
99.2 CFO Certification
(b) Reports on Form 8-K
Current Report on Form 8-K (File No. 000-25940) related to the Company's
new $25 million, three-year senior secured revolving credit facility with
JPMorgan Chase Bank filed on June 10, 2002 and incorporated herein by
reference.
15
Signatures
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
WIRE ONE TECHNOLOGIES, INC.
Registrant
Date: August 14, 2002 By: /s/ Richard Reiss
--------------------------
Richard Reiss, Chief Executive Officer
Date: August 14, 2002 By: /s/ Christopher Zigmont
--------------------------
Christopher Zigmont, Chief Financial Officer
(principal financial and accounting officer)
16