SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2000.
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
October 31, 2000 was 17,210,827.
<PAGE>
WIRE ONE TECHNOLOGIES, INC
Index
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements *
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations
For the Nine Months and Three Months ended
September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
Legal Proceedings 16
Changes in Securities 16
Defaults Upon Senior Securities 16
Submission of Matters to a Vote of Security Holders 16
Other Information 16
Exhibits and Reports on Form 8-K 16
Signatures 17
* The Balance Sheet at December 31, 1999 has been taken from the audited
financial statements at that date. All other financial statements are
unaudited.
<PAGE>
WIRE ONE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,576,066 $ 60,019
Accounts receivable-net 23,552,417 6,128,221
Inventory 7,397,585 3,602,238
Deferred income taxes 531,131 230,083
Other current assets 1,836,715 161,947
------------ ------------
Total current assets 35,893,914 10,182,508
Furniture, equipment and leasehold improvements-net 4,641,989 621,443
Goodwill-net 35,072,154 --
Other assets 326,763 63,353
------------ ------------
Total assets $ 75,934,820 $ 10,867,304
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loan payable $ -- $ 2,138,602
Accounts payable 6,140,243 2,022,687
Accrued expenses 2,572,042 891,033
Income taxes payable -- 124,372
Deferred revenue 5,490,390 403,524
Customer deposits 332,487 44,919
Current portion of capital lease obligations 84,952 30,905
------------ ------------
Total current liabilities 14,620,114 5,656,042
Noncurrent liabilities:
Capital lease obligations, less current portion 90,563 17,444
------------ ------------
Total liabilities 14,710,677 5,673,486
Commitments
Series A mandatorily redeemable convertible preferred stock 11,497,377 --
STOCKHOLDERS' EQUITY
Preferred stock, $.0001 par value;
5,000,000 shares authorized, 2,450 shares issued and outstanding -- --
Common Stock, $.0001 par value; 100,000,000 authorized;
16,953,052 and 4,910,000 shares outstanding, respectively 1,695 5,229,740
Additional paid-in capital 59,912,886 488,759
Accumulated deficit (10,187,815) (524,681)
------------ ------------
Total stockholders' equity 49,726,766 5,193,818
------------ ------------
Total liabilities, series A preferred stock and stockholders' equity $ 75,934,820 $ 10,867,304
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
-1-
<PAGE>
WIRE ONE TECHNOLOGIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 18,287,167 $ 6,669,783 $ 35,397,300 $ 15,908,891
Cost of revenues 12,345,638 4,507,656 23,632,170 10,917,374
------------ ------------ ------------ ------------
Gross margin 5,941,529 2,162,127 11,765,130 4,991,517
Operating expenses:
Selling 4,666,054 1,366,972 9,252,061 3,318,047
General and administrative 1,249,381 441,386 2,599,475 1,159,772
Amortization of goodwill 591,048 -- 859,831 --
------------ ------------ ------------ ------------
Total operating expenses 6,506,483 1,808,358 12,711,367 4,477,819
------------ ------------ ------------ ------------
Income (loss) from operations (564,954) 353,769 (946,237) 513,698
------------ ------------ ------------ ------------
Other (income) expenses
Amortization of deferred financing costs 9,055 12,243 334,410 30,894
Interest income (146,573) (3,968) (291,508) (18,135)
Interest expense 13,634 38,650 67,118 134,762
------------ ------------ ------------ ------------
Total other (income) expenses, net (123,884) 46,925 110,020 147,521
------------ ------------ ------------ ------------
Income (loss) before income taxes (441,070) 306,844 (1,056,257) 366,177
Income tax provision (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) (441,070) 306,844 (1,056,257) 366,177
Deemed dividends on Series A convertible preferred stock
(427,322) -- (8,606,877) --
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders $ (868,392) $ 306,844 $ (9,663,134) $ 366,177
============ ============ ============ ============
Net income (loss) per share:
Basic $ (.05) $ .06 $ (.85) $ .07
============ ============ ============ ============
Diluted $ (.05) $ .05 $ (.85) $ .06
============ ============ ============ ============
Weighted average number of common shares and equivalents:
Basic 16,878,118 4,910,000 11,324,374 4,910,000
============ ============ ============ ============
Diluted 16,878,118 6,176,834 11,324,374 5,771,478
============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
-2-
<PAGE>
WIRE ONE TECHNOLOGIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (1,056,257) $ 366,177
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 2,073,208 241,304
Loss on disposal of equipment 1,832
Non cash compensation 130,002 65,201
Increase (decrease) in cash attributable
to changes in operating assets and liabilities net
of effects from purchase of View Tech, Inc. and 2CONFER, LLC
Accounts receivable (9,645,989) (1,437,924)
Inventory (2,470,525) (1,299,757)
Other current assets (946,366) (263,455)
Other assets 4,180 --
Accounts payable (3,032,963) 2,369,152
Accrued expenses 1,425 100,047
Income taxes payable (132,130) (2,860)
Deferred revenue 1,681,557 143,140
Customer deposits 244,082 264,845
------------ ------------
Net cash (used in) provided by operating activities (13,149,776) 547,702
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements (1,886,861) (119,755)
Costs related to acquisition of business including cash acquired (2,029,831) --
------------ ------------
Net cash used in investing activities (3,916,692) (119,755)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from preferred stock offering, net 16,150,000 --
Exercise of warrants and options, net 8,782,287 --
Payment of subordinated notes (1,500,000) --
Financing costs (74,314) (17,500)
Proceeds from bank loans 3,350,000 10,205,000
Payments on bank loans (7,035,185) (10,639,702)
Payments on capital lease obligations (90,273) (20,094)
------------ ------------
Net cash provided by (used in) financing activities 19,582,515 (472,296)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,516,047 (44,349)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 60,019 325,915
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,576,066 $ 281,566
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 67,118 $ 134,762
============ ============
Income taxes $ 7,798 $ 3,332
============ ============
</TABLE>
Non cash financing and investing activities:
During the nine months ended September 30, 2000, the Company recorded
non-cash deemed dividends on Series A mandatorily redeemable convertible
preferred stock of $8,606,877.
On May 18, 2000, the Company acquired the net assets of View Tech, Inc. in
a merger transaction accounted for as a purchase for non-cash consideration
of $31,339,258.
See Notes to Consolidated Financial Statements
-3-
<PAGE>
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September, 30, 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 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 estimated fair values, with the excess purchase consideration
allocated to goodwill.
Wire One is a single source provider of video products and services that
assist customers with the design, installation, maintenance and operation
of their videoconferencing systems from its 25 offices throughout the
United States. The Company offers customers videoconferencing products from
leading manufacturers such as Accord Telecommunications, Inc., PictureTel
Corporation, Polycom, Inc., SONY Electronics, Inc. and VCON
Telecommunications, Ltd. and provide a comprehensive suite of video and
data services including installation, bridging, on-site technical
assistance, customized training, engineering and maintenance.
Note 2 - Basis of Presentation
The accompanying unaudited financial statements of the Company have been
prepared in accordance with generally accepted accounting principles 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 generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000. For further information, refer to the financial
statements and footnotes thereto included in VTI's and ACC's Annual Reports
for the fiscal year ended December 31, 1999 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 and VTC
Resources, Inc. All intercompany balances and transactions have been
eliminated in consolidation. The Company does not segregate or manage its
operations by business segment.
Note 3 - Income (loss) per share
Basic net income (loss) per share is calculated by dividing net income
(loss) attributable to common stock by the weighted average number of
common shares outstanding during the
-4-
<PAGE>
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September, 30, 2000
period. In determining basic loss per share in the 2000 periods, the
effects of deemed dividends on Series A mandatorily redeemable convertible
preferred stock are added to the net loss. Diluted net income (loss) per
share is calculated by dividing net income (loss) attributable to common
stock 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 16,878,118 4,910,000 11,324,374 4,910,000
Effect of dilutive options and warrants -- 1,266,834 -- 861,478
---------- ---------- ---------- ----------
Weighted average shares outstanding
including dilutive effect of securities 16,878,118 6,176,834 11,324,374 5,771,478
========== ========== ========== ==========
</TABLE>
The weighted average options and warrants to purchase 7,237,816 and
6,269,919 shares of common stock were outstanding during the nine months
and three months ended September 30, 2000, respectively and preferred stock
convertible into 2,450,000 common shares were not included in the
computation of diluted EPS because the Company reported a net operating
loss for these periods and their effect would have been antidilutive.
Note 4 - 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 final allocation of the purchase price may differ from that reflected
in the unaudited September 30, 2000 financial statements after a more
extensive review of the fair market values of the assets and liabilities
has been completed as of the acquisition date. When such a review is
completed, a portion of the purchase price may be ascribed to intangible
assets (other than goodwill) that have shorter amortization lives than the
life ascribed to goodwill in preparing the accompanying September 30, 2000
financial statements. Thus, the resulting incremental amortization charges,
if any, from that portion of the purchase price ascribed to other
intangible assets could be materially different from the amortization
expense presented in the pro forma financial statements.
Following is a schedule of the purchase price, estimated purchase price
allocation and the annual amount of goodwill amortization to be recognized
prospectively:
-5-
<PAGE>
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September, 30, 2000
Purchase Price:
Value of securities issued $31,339,258
Direct merger costs 1,008,059
-----------
Total purchase price $32,347,317
-----------
The value of securities issued was determined as follows:
Value of VTI shares exchanged (relinquished) $28,466,308
Value of VTI options and warrants 2,872,950
-----------
Total value of securities issued $31,339,258
-----------
The value of VTI shares 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 View Tech
shares outstanding as of May 18, 2000.
Estimated 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 are derived from the
historical balance sheet of VTI as of May 18, 2000. The Company estimates
at this time that the annual amortization of goodwill (based on an
amortization period of 15 years) will approximate $2,312,000. Amortization
expense for the nine months and three months ended September 30, 2000
totaled $839,831 and $571,048, respectively.
The following summarized unaudited pro forma information for the nine
months ended September 30, 2000 assumes the merger of the ACC and VTI
occurred on January 1, 2000.
Nine Months
Ended
September 30,
2000
------------
Net revenues $ 47,637,088
Operating loss (3,213,592)
Net loss (4,814,661)
Basic and diluted loss per share (.40)
-6-
<PAGE>
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September, 30, 2000
The unaudited pro forma operating results reflect estimated pro forma
adjustments for the amortization of intangibles of $1,734,000 for the nine
months ended September 30, 2000 arising from the merger and other
adjustments. These pro forma operating results do not reflect the effects
of the series A preferred stock issued in June 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.
Acquisition of 2CONFER, LLC
In July 2000, the Company acquired the net assets of 2CONFER, LLC
("2CONFER"), a Chicago-based provider of videoconferencing, audio and data
solutions. The total consideration was $800,000, consisting of $500,000 in
cash and the remainder in Company common stock valued at the time of
acquisition. Assets consisted primarily of accounts receivables, fixed
assets and goodwill and other intangibles.
Estimated Purchase Price Allocation:
2CONFER assets acquired $ 1,024,730
2CONFER liabilities assumed (1,424,730)
Goodwill 1,200,000
-----------
$ 800,000
===========
The 2CONFER assets acquired and liabilities assumed are derived from the
historical balance sheet of 2CONFER, LLC as of July 1, 2000. The Company
estimates at this time that the annual amortization of goodwill (based on
an amortization period of 15 years) will approximate $80,000. Amortization
expense for the nine months and three months ended September 30, 2000
totaled $20,000.
Note 5 - Bank Loan Payable
In June 2000, the Company renewed its credit facility with Summit
Commercial Gibraltar Corp., a division of Summit Bancorp. Under the terms
of the two-year agreement, loan availability was increased to $15,000,000,
based on up to 75% of eligible accounts receivable and 50% of eligible
inventory, subject to an inventory cap of $5,000,000. Borrowings accrue
interest at the lender's base rate plus 1/2% per annum. The credit facility
contains certain financial and operational covenants. The Company was in
compliance with those covenants at September 30, 2000. At September 30,
2000, there were no borrowings outstanding under this credit facility.
Note 6 - Private Placement of Preferred Stock
In June 2000, the Company raised gross proceeds of $17.15 million in a
private placement of 2,450 shares of its Series A mandatorily redeemable
convertible preferred stock. The preferred shares are 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 may
choose an alternative conversion price which equals the higher of (i) 70%
of the fixed conversion price then in effect or (ii) the market price on
any conversion date, which is equal to the average of the closing prices of
Company common stock during the 20 consecutive trading days immediately
preceding any conversion date. Preferred stockholders may, at their option,
have the Company redeem their shares at the earlier of three years from the
issuance date, or the occurrence of a triggering event, as defined. The
redemption price is 110% of the stated value of $7,000 per share. None of
the triggering events have occurred to date. The preferred shares will
convert automatically if the Company's shares trade at $12.50 or above for
twenty consecutive trading days and the underlying shares have been
registered. The Company registered the shares in September 2000. At the
issuance date, the Company recorded a deemed dividend charge and an
offsetting increase in additional paid-in capital of approximately $8.1
million to reflect the beneficial conversion price of the preferred stock
as compared to the prevailing market price of the common stock.
-7-
<PAGE>
WIRE ONE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September, 30, 2000
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 protection. 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.
Costs of the offering, including the fair value of the warrants, totaled
$6,150,000. This amount has been recorded as a preferred stock discount and
is 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 is being accreted as a deemed dividend
into the carrying value of the series A mandatorily redeemable convertible
preferred stock over the same period. Such combined accretion totaled
$497,377 and $427,322 for the nine months and three months ended September
30, 2000, respectively.
Based on the lowest possible conversion price of $4.90, the maximum number
of shares issuable upon conversion of the series A preferred would be
3,500,000 shares of common stock. The rules of the Nasdaq National Market
only allow the Company to issue up to 20% of its outstanding shares of
common stock upon conversion of the series A preferred stock and exercise
of the related warrants without prior stockholder approval. Wire One has
not sought nor does it intend to seek such stockholder approval for this
issuance in the future. Based on the 16,570,641 shares of common stock
outstanding on June 14, 2000, the original date of issuance of the series A
preferred and related warrants, the Company is only able to issue 3,314,128
shares of its common stock upon conversion of the series A preferred.
Accordingly, beginning on June 14, 2001, if all shares of series A
preferred stock were converted at the lowest possible conversion price and
all of the related warrants were simultaneously exercised, the Company
could be required to redeem up to 730 shares of its series A preferred
stock at a price of $7,700 per share for an aggregate purchase price of
$5,621,000.
Note 7 - Stock Option Plan
In September 2000, the Company adopted and approved the Wire One 2000 Stock
Incentive Plan ("the Plan"). The Plan permits the grant of "incentive stock
options" ("ISOs") to any employees or employees of its subsidiaries.
Non-qualified stock options may be granted to employees, directors and
consultants. As of October 27, 2000, options to purchase a total of 485,474
shares were outstanding, and 2,514,526 shares remained available for future
grant under the Plan. The Company has issued approximately 1,609,000
options that are not governed by the Plan.
The Plan provides for the grant of options, including incentive stock
options and non-qualified stock options, stock appreciation rights,
dividend equivalent rights, restricted stock, performance units,
performance shares or any combination thereof (collectively, the "Awards").
The exercise price of Awards is established by the Compensation Committee
and, in the case of incentive stock options the exercise price must be
equal to at least 100% of the fair market value of a share of the common
stock on the date of grant. The Compensation Committee determines the terms
and provisions of each award granted under the Plan, including the vesting
schedule, repurchase provisions, rights of first refusal, forfeiture
provisions, form of payment, payment contingencies and satisfaction of any
performance criteria.
Note 8 - Subsequent Events
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 and other intangibles.
The acquisition of the assets and certain liabilities of Johns Brook Co.,
Inc.'s videoconferencing division is not considered to be a significant
acquisition and, accordingly, pro forma results of operations disclosures
are not required.
-8-
<PAGE>
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; the non-binding and nonexclusive nature of
reseller agreements with manufacturers; rapid technological change affecting
products sold by the Company; the impact of competitive products and pricing, as
well as competition from other resellers; 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. The Company offers
its customers videoconferencing products from leading manufacturers such as
Accord Telecommunications, Inc. ("Accord"), PictureTel Corporation
("PictureTel"), Polycom, Inc. ("Polycom"), SONY Electronics, Inc. ("SONY") and
VCON Telecommunications, Ltd. ("VCON") and provide a comprehensive suite of
video and data services including installation, bridging, on-site technical
assistance, customized training, engineering and maintenance. Wire One is the
number one channel partner for Polycom, a leading video equipment manufacturer,
and a leading channel partner for the other major manufacturers.
The Company markets and sells its video and data 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 2,500 customers who
collectively have approximately 12,000 videoconferencing endpoints.
The Company 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
quarterly and year-to-date 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 estimated fair values, with the excess
purchase consideration allocated to goodwill.
-9-
<PAGE>
In July 2000, the Company acquired the net assets of 2CONFER, a Chicago-based
provider of videoconferencing, audio and data solutions. The total consideration
was $800,000, consisting of $500,000 in cash and the remainder in Company common
stock of $300,000 valued at the time of acquisition. On the date of the
acquisition, the assets and liabilities of 2CONFER were recorded at their
estimated fair values, with the excess purchase consideration allocated to
goodwill.
By the end of this year, Wire One expects to introduce its Glowpoint network
service ("Glowpoint"). The Company believes Glowpoint will be the first
dedicated network to provide video communications by utilizing a dedicated
Internet Protocol ("IP") backbone and broadband access and, ultimately, will
offer the same reliability as a telephone call. Glowpoint subscribers can
utilize the Glowpoint network to make videoconference calls on demand for a
fixed monthly fee.
Over 90% of the applications utilizing video technology are Integrated Services
Digital Network ("ISDN") standards-based. ISDN technology has several
shortcomings, including poor quality of service ("QoS") and high transmission
costs. In recent years, providers of video services have sought to replace older
ISDN systems with newer IP-based technologies. By introducing Glowpoint, the
Company is providing the first end-to-end IP-based video network that it
believes will make video communications as reliable and commonplace as voice
telephony.
To provide its Glowpoint service, the Company has strategic relationships with
Exodus Communications ("Exodus") for its IP backbone network and with Covad
Communications ("Covad") and other broadband access providers for dedicated
broadband access to the Glowpoint network. The Company will also use dedicated
IP circuits ("T1"). Leading IP videoconferencing and video networking equipment
suppliers, including Cisco Systems, Polycom, RADVision and VCON, have already
announced that their products will be compatible with Glowpoint.
Glowpoint employs a proprietary network architecture over dedicated capacity on
a high performance redundant backbone. This backbone network connects all of
Glowpoint's points of presence ("POPs"), using multiple high-speed OC-3 and
OC-12 lines which virtually eliminate the risk of a single point of failure.
Glowpoint's POPs consist of the best available equipment from multiple vendors
combined in a unique proprietary architecture. This configuration of equipment
at its POPs is expected to provide industry-leading throughput, scalability and
mission-critical resiliency. Wire One also maintains a state-of-the-art network
operations center ("NOC") from which it monitors the operations of the network
on a 24x7 basis.
-10-
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated financial statements expressed as a percentage
of the Company's revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 67.5 67.6 66.8 68.6
----- ----- ----- -----
Gross margin 32.5 32.4 33.2 31.4
Operating expenses:
Selling 25.6 20.5 26.1 20.9
General and administrative 6.8 6.6 7.3 7.3
Amortization of goodwill 3.2 0.0 2.4 0.0
----- ----- ----- -----
Total operating expenses 35.6 27.1 35.8 28.2
----- ----- ----- -----
Income (loss) from operations (3.1) 5.3 (2.7) 3.2
----- ----- ----- -----
Other (income) expenses
Amortization of deferred
financing costs 0.0 0.2 0.9 0.2
Interest income (0.8) (0.1) (0.8) (0.1)
Interest expense 0.1 0.6 0.2 0.9
----- ----- ----- -----
Total other expenses, net (0.7) 0.7 0.3 1.0
----- ----- ----- -----
Income (loss) before income taxes (2.4) 4.6 (3.0) 2.3
Income tax provision (benefit) 0.0 0.0 0.0 0.0
----- ----- ----- -----
Net income (loss) (2.4) 4.6 (3.0) 2.3
Deemed dividends on Series A
convertible preferred stock (2.3) 0.0 (24.3) 0.0
----- ----- ----- -----
Net income (loss) attributable to
common stockholders (4.7)% 4.6% (27.3)% 2.3%
===== ===== ===== =====
</TABLE>
-11-
<PAGE>
Nine Months Ended September 30, 2000 ("2000 period") Compared to Nine Months
Ended September 30, 1999 ("1999 period") and Three Months Ended September 30,
2000 Compared to Three Months Ended September 30, 1999.
NET REVENUES. The Company reported net revenues of $35.4 million for the
2000 period, an increase of $19.5 million over revenues reported for the 1999
period. Net revenues of $18.3 million for the September 2000 quarter represent
an increase of $11.6 million over revenues reported for the September 1999
quarter. Although VTI operations have now been fully integrated into the
Company, management estimates that revenues from the core businesses in
existence before contributions from VTI and 2CONFER have grown approximately 25
to 30%, with revenues from VTI and 2CONFER accounting for the remainder of the
growth experienced in the quarter and nine months ended September 30, 2000.
Videoconferencing - Sales of videoconferencing equipment were $29.5 million
in the 2000 period, an increase of $21.5 million over the 1999 period. Sales for
the quarter ended September 30, 2000 were $16.2 million, an increase of $12.9
million over the comparable 1999 quarter. Management estimates that revenues
from the core videoconferencing business before contributions from VTI and
2Confer have grown approximately 80 to 90%, with revenues from VTI and 2Confer
accounting for the remainder of the growth experienced in the quarter and nine
months ended September 30, 2000. Particular strength was noted in sales to
federal and state government agencies under government contracts such as the
State of California contract.
Voice communications - Sales of voice communications products and services
were $5.9 million in the 2000 period, a $2.0 million decrease from the 1999
period. Sales for the quarter ended September 30, 2000 were $2.1 million, a $1.3
million decrease from the comparable 1999 quarter. These period-to-period
declines in the voice communications division were the result of declines in
revenue from three significant customers. Business with these three customers
fluctuates from quarter to quarter depending upon their respective capital
expenditure budgets, acquisition strategy, and other factors. These declines
should not be considered permanent in nature.
GROSS MARGINS. Gross profits were $11.8 million in the 2000 period, an
increase of $6.8 million over the 1999 period. Gross profits for the quarter
ended September 30, 2000 were $5.9 million, an increase of $3.7 million over the
comparable 1999 quarter. Gross margins increased in the 2000 period to 33% of
net revenues, as compared to 31% of net revenues in the 1999 period. The
increase is attributable to inventory purchase discounts negotiated with
videoconferencing equipment manufacturers and increases in higher margin revenue
sources such as video maintenance contracts and installation services.
SELLING. Selling expenses, which include sales salaries, commissions,
overhead, and marketing costs, increased $6.0 million in the 2000 period to $9.3
million from $3.3 million for the 1999 period. Selling expenses for the quarter
ended September 30, 2000 increased $3.3 million to $4.7 million as compared to
$1.4 million for the comparable 1999 quarter. Increases in selling expenses are
attributable to increases in the number of sales personnel and their related
costs and the costs of additional sales offices brought about by the merger with
VTI and the acquisition of 2CONFER. The increase in selling expenses as a
percentage of net revenues in the 2000 period and the quarter ended September
30, 2000 resulted from the decline in voice communications revenues combined
with relatively fixed selling costs in that division, as well as, from the
expansion of the videoconferencing division on a national basis. Prior to the
merger, ACC focused its videoconferencing business on customers in the Eastern
United States. This national expansion resulted in increased rent and related
office expenses, depreciation, travel and delivery expenses as a percentage of
revenue.
-12-
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.4 million in the 2000 period to $2.6 million as compared to $1.2 million for
the 1999 period. General and administrative expenses for the quarter ended
September 30, 2000 increased $0.8 million to $1.2 million as compared to $0.4
million for the comparable 1999 quarter. The inclusion of VTI general and
administrative expenses from the merger date through the end of the reporting
period was the significant factor behind these increases. General and
administrative expenses as a percentage of net revenues for 2000 period and the
quarter ended September 30, 2000 remained relatively constant though, as this
cost category grew in proportion to the growth in revenues.
AMORTIZATION OF GOODWILL. The Company has allocated approximately $34.7
million of the VTI merger purchase consideration to goodwill. Amortization
expense for the 2000 period totaled $0.8 million. The Company estimates at this
time that the annual amortization expense (based on an amortization period of 15
years) will approximate $2.3 million. In addition, as a result of the
acquisition of the net assets of 2CONFER, LLC on July 1, 2000, $1.2 million of
goodwill and $20,000 of amortization was recorded in the quarter ended September
30, 2000. The Company estimates at this time that the annual amortization
expense (based on an amortization period of 15 years) will approximate $80,000.
OTHER (INCOME) EXPENSES. The principal component of this category,
amortization of deferred financing costs, increased to $334,000 in the 2000
period as compared to $31,000 in the 1999 period. The increase reflects the
amortization of $305,000 related to the issuance of warrants to former VTI
subordinated debt holders. These costs were fully amortized as of September 30,
2000. In addition, interest income increased in the 2000 period to $292,000 as
compared to $18,000 in the 1999 period. The increase reflects interest earned on
the proceeds received from the Company's private placement of 2,450 shares of
its series A convertible preferred stock and related warrants (the "Private
Placement") in the second quarter of 2000 and the proceeds received from the
Company's warrant call in the first quarter of 2000.
INCOME TAXES. During the 2000 period, the Company has 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.
During the 1999 period, the Company reversed the valuation allowance
established in 1998 in an amount sufficient to offset tax expense provided on
pre-tax income.
-13-
<PAGE>
NET INCOME (LOSS). The Company reported a net loss attributable to common
stockholders for the 2000 period of $(9.7) million, or $(.85) per diluted share,
as compared to net income attributable to common stockholders of $0.4 million,
or $.06 per diluted share for the 1999 period. The net loss attributable to
common stockholders for the quarter ended September 30, 2000 was $(0.9) million,
or $(.05) per diluted share, as compared to net income attributable to common
stockholders of $0.3 million, or $.05 per diluted share for the comparable 1999
quarter. The 2000 period contained a non-recurring deemed dividend and
offsetting increase in additional paid-in capital of $8.1 million to reflect the
beneficial conversion price of preferred stock issued in the Private Placement
in the second quarter of 2000 as compared to the prevailing market value of the
common stock. In addition, a $0.5 million deemed dividend was recorded in the
period to amortize the costs of the Private Placement. Costs of $6.15 million
incurred in connection with the private placement, including the fair value of
warrants, have been recorded as a preferred stock discount and will be amortized
as a deemed dividend over the three-year period from the date of issuance to the
current redemption date. The Company reported a net loss of $(1.1) million for
the 2000 period as compared to net income of $0.4 million for the 1999 period
and for the quarter ended September 30, 2000 it reported a net loss of $(0.4)
million as compared to net income of $0.3 million for the comparable 1999
quarter.
Liquidity and Capital Resources
At September 30, 2000, the Company had working capital of $21.3 million
compared to $4.5 million at December 31, 1999, an increase of approximately
370%. In addition, the Company had $2.6 million in cash and cash equivalents
compared to $60,000 at December 31, 1999. This improved working capital position
resulted primarily from the Private Placement that raised $16.15 million in net
cash proceeds.
The Company currently has a $15.0 million credit facility with New
York-based Summit Commercial Gibraltar Corp., a division of Summit Bancorp.
Borrowings under this facility will bear interest at the lender's base rate plus
1/2% per annum. The Company has not borrowed funds under this line of credit to
date.
On June 14, 2000 the Company completed the Private Placement with a select
group of institutional and strategic investors led by Peconic Fund, Ltd., an
affiliate of Ramius Capital Group, and Polycom, Inc. The Company raised gross
proceeds of $17.15 million in the Private Placement. A one-time, non-cash deemed
dividend of approximately $8.1 million was recognized in the second quarter of
2000. Other offering costs are being amortized over a three-year period as a
deemed dividend and will reduce net income attributable to common stockholders.
The amortization of these costs totaled $0.4 million in the quarter ended
September 30, 2000. The proceeds of the private placement are being used to fund
internal growth, acquisitions and expansions into emerging video applications
technologies, including further development and installation of its Glowpoint
network.
Net cash used in operating activities for the 2000 period was $(13.1)
million as compared to net cash provided by operations of $0.5 million during
the 1999 period. Sources of operating cash in 2000 included deferred revenue and
customer deposits. Increases in accounts receivable of $9.6 million resulting
from sales growth, purchase of inventory totaling $2.5 million and payments on
accounts payable balances with vendors of $3.0 million were the primary uses of
operating cash in the 2000 period.
Investing activities for the 2000 period included purchases of $1.0 million
for bridging, computer and demonstration equipment for the core business and
$0.9 million for network equipment related to the Glowpoint network that the
Company is developing. In addition, cash costs incurred in connection with
mergers and acquisitions totaled $2.0 million.
-14-
<PAGE>
Financing activities in the 2000 period included the Private Placement
totaling $16.15 million in net proceeds, proceeds from the exercise of warrants
and options totaling $8.8 million, the net repayment of the outstanding balance
of the Company's revolving credit line totaling $3.1 million, and the $1.5
million of VTI subordinated notes that were outstanding.
Management believes that it has adequate capital resources to support
current operating levels for the next twelve months. The Company is considering
raising up to $50 million in a private placement of its common stock in the
fourth quarter of 2000, if market conditions are acceptable to the Company. In
the event that the Company completes a financing transaction, the proceeds will
be used for capital expenditures, acquisitions, and the continued development
and expansion of the Glowpoint network. There can be no assurance that
additional financing will be available on terms acceptable to the Company, if at
all.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has exposure to interest rate risk related to its cash equivalents
portfolio. The primary objective of the Company's investment policy is to
preserve principal while maximizing yields. The Company's cash equivalents
portfolio is short-term in nature, therefore changes in interest rates will not
materially impact the Company's consolidated financial condition. However, such
interest rate changes can cause fluctuations in the Company's results of
operations and cash flows.
The Company's $15 million secured credit facility has an interest rate based on
the lender's prime rate. The Company currently has no borrowings outstanding
under the facility. If the Company should draw on the facility, interest rate
fluctuations could have an impact on the Company's results of operations and
cash flows.
-15-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
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 the Wire One
Technologies, Inc. was held on September 15, 2000.
The 12,016,573 shares of Common Stock ("Common Stock") present at the
Annual Meeting out of a then total of 16,879,716 shares outstanding and
entitled to vote acted as follows with respect to the following proposals
with the following results:
1. (a) The election of Eric Friedman to the Board of Directors was
approved:
For: 11,865,308 Against: 0 Abstain: 151,265 Broker Non-Votes: 0
(b) The election of Andrea Grasso to the Board of Directors was
approved:
For: 11,865,308 Against: 0 Abstain: 151,265 Broker Non-Votes: 0
2. The adoption of the Wire One Technologies, Inc. 2000 Stock Incentive
Plan was approved,
For: 8,202,665 Against: 518,701 Abstain: 59,995 Broker Non-Votes: 0
3. The ratification of the appointment of BDO Seidman as independent
auditors was approved.
For: 11,981,334 Against: 22,884 Abstain: 11,855 Broker Non-Votes: 0
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.9 Wire One Technologies, Inc. 2000 Stock Incentive Plan
10.37 Fourth Amendment to Lease
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
-16-
<PAGE>
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: October 31, 2000 By: /s/ Richard Reiss
-----------------------------------
Richard Reiss,
President and Chief Executive
Officer
Date: October 31, 2000 By: /s/ Christopher Zigmont
-----------------------------------
Christopher Zigmont
Chief Financial Officer
(principal financial and accounting officer)
-17-
<PAGE>
Exhibit Index
Exhibit No. Description
----------- -----------
4.9 Wire One Technologies, Inc. 2000
Stock Incentive Plan
10.37 Fourth Amendment to Lease
27 Financial Data Schedule
-18-
