10-Q 1 d23878_10-q.txt 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. 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. WIRE ONE TECHNOLOGIES, INC. CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements -1- WIRE ONE TECHNOLOGIES, INC CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See Notes to Consolidated Financial Statements -2- WIRE ONE TECHNOLOGIES, INC CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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- 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- 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.

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- 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- 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- 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- 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- 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- 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:

-11- 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- 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- 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- 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- 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- 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- 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-

ALL COMMUNICATIONS CORP/NJ 10-Q