10-Q 1 d52378_10-q.txt FORM 10-Q 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, 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 November 9, 2002 was 28,971,551. WIRE ONE TECHNOLOGIES, INC Index PART I--FINANCIAL INFORMATION Item 1. Consolidated Financial Statements * Consolidated Balance Sheets September 30, 2002 and December 31, 2001 ................................. 1 Consolidated Statements of Operations For the Nine Months and Three Months Ended September 30, 2002 and 2001 .. 2 Consolidated Statements of Cash Flows For the Nine Months Ended September 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 Item 4. Controls and Procedures ..................................................... 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings ........................................................... 15 Item 2. Changes in Securities and Use of Proceeds ................................... 15 Item 3. Defaults Upon Senior Securities ............................................. 15 Item 4. Submission of Matters to a Vote of Security Holders ......................... 15 Item 5. Other Information ........................................................... 15 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
September 30, 2002 December 31, 2001 ------------------ ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents .................................. $ 4,829,495 $ 1,689,451 Accounts receivable-net .................................... 26,326,638 35,471,482 Inventory .................................................. 11,791,287 10,218,796 Other current assets ....................................... 9,814,449 3,824,276 ------------- ------------- Total current assets ............................. 52,761,869 51,204,005 Furniture, equipment and leasehold improvements-net ............ 12,392,466 10,857,547 Goodwill-net ................................................... 42,558,509 42,163,844 Other assets ................................................... 731,588 274,089 ------------- ------------- Total assets ..................................... $ 108,444,432 $ 104,499,485 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank loan payable .......................................... $ -- $ 10,628,082 Accounts payable ........................................... 11,886,723 12,297,914 Accrued expenses ........................................... 2,281,417 3,218,890 Deferred revenue ........................................... 6,791,246 7,898,277 Other current liabilities .................................. -- 1,465,049 Current portion of capital lease obligations ............... 31,650 56,912 ------------- ------------- Total current liabilities ........................ 20,991,036 35,565,124 Bank loan payable .............................................. 8,940,691 -- Capital lease obligations, less current portion ................ 6,565 25,696 ------------- ------------- Total liabilities ................................ 29,938,292 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; 28,971,551 and 25,292,189 shares outstanding, respectively ................................... 2,895 2,529 Treasury stock ............................................. (239,742) (239,742) Additional paid-in capital ................................. 125,748,727 104,889,988 Accumulated deficit ........................................ (47,005,740) (35,744,110) ------------- ------------- Total stockholders' equity ....................... 78,506,140 68,908,665 ------------- ------------- Total liabilities and stockholders' equity ....... $ 108,444,432 $ 104,499,485 ============= =============
See accompanying notes to consolidated financial statements. 1 Wire One Technologies, Inc. Consolidated Statements of Operations (Unaudited)
Nine Months Ended Sept. 30, Three Months Ended Sept. 30, ------------------------------ ------------------------------ 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenues Video Solutions ................................ $ 72,620,758 $ 57,471,787 $ 21,962,851 $ 21,650,787 Video Network .................................. 3,883,471 2,483,798 1,525,494 664,194 ------------ ------------ ------------ ------------ 76,504,229 59,955,585 23,488,345 22,314,981 ------------ ------------ ------------ ------------ Cost of revenues Video Solutions ................................ 53,658,725 39,265,069 16,884,770 15,352,068 Video Network .................................. 3,616,072 2,008,506 1,440,224 618,507 ------------ ------------ ------------ ------------ 57,274,797 41,273,575 18,324,994 15,970,575 ------------ ------------ ------------ ------------ Gross margin Video Solutions ................................ 18,962,033 18,206,718 5,078,081 6,298,719 Video Network .................................. 267,399 475,292 85,270 45,687 ------------ ------------ ------------ ------------ 19,229,432 18,682,010 5,163,351 6,344,406 ------------ ------------ ------------ ------------ Operating expenses Selling ........................................ 23,467,390 17,422,226 7,538,055 6,109,456 General and administrative ..................... 5,691,746 4,818,610 1,847,963 1,658,918 Restructuring .................................. 960,000 -- -- -- Amortization of goodwill ....................... -- 2,000,564 -- 729,841 ------------ ------------ ------------ ------------ Total operating expenses ........................... 30,119,136 24,241,400 9,386,018 8,498,215 ------------ ------------ ------------ ------------ Loss from continuing operations .................... (10,889,704) (5,559,390) (4,222,667) (2,153,809) ------------ ------------ ------------ ------------ Other (income) expense Amortization of deferred financing costs ....... 106,456 62,735 46,762 40,974 Interest income ................................ (68,045) (56,817) (9,913) (16,765) Interest expense ............................... 182,176 445,950 76,389 128,084 ------------ ------------ ------------ ------------ Total other expenses, net .......................... 220,587 451,868 113,238 152,293 ------------ ------------ ------------ ------------ Income tax provision ............................... -- 200,000 -- 200,000 ------------ ------------ ------------ ------------ Net loss from continuing operations ................ (11,110,291) (6,211,258) (4,335,905) (2,506,102) Loss from discontinued operations .................. (151,339) (247,907) (50,000) (142,421) ------------ ------------ ------------ ------------ Net loss ........................................... (11,261,630) (6,459,165) (4,385,905) (2,648,523) Deemed dividends on series A convertible preferred stock ................................... -- 4,433,904 -- -- ------------ ------------ ------------ ------------ Net loss attributable to common stockholders ....... $(11,261,630) $(10,893,069) $ (4,385,905) $ (2,648,523) ============ ============ ============ ============ Net loss from continuing operations per share (basic and diluted)............................. $ (0.39) $ (0.32) $ (0.15) $ (0.11) ============ ============ ============ ============ Loss from discontinued operations per share (basic and diluted)............................. $ 0.00 $ (0.01) $ 0.00 $ 0.00 ============ ============ ============ ============ Deemed dividends per share (basic and diluted)...... $ 0.00 $ (0.23) $ 0.00 $ 0.00 ============ ============ ============ ============ Net loss per share (basic and diluted).............. $ (0.39) $ (0.56) $ (0.15) $ (0.11) ============ ============ ============ ============ Weighted average number of common shares (basic and diluted)............................. 28,731,560 19,570,351 28,942,177 23,146,204 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 2 Wire One Technologies, Inc. Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, ------------------------------- 2002 2001 ------------------------------- Cash F1ows From Operating Activities: Net loss ...................................................................... $(11,261,630) $ (6,459,165) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................................... 3,917,624 4,718,478 Non cash compensation ....................................................... 230,409 326,589 Deferred income taxes ....................................................... -- 200,000 Discontinued operations ..................................................... 151,339 247,907 Increase (decrease) in cash attributable to changes in assets and liabilities: Accounts receivable ..................................................... 9,144,844 (5,512,323) Inventory ............................................................... (2,774,005) (2,461,051) Other current assets .................................................... (6,359,056) (926,651) Other assets ............................................................ (563,955) (81,663) Discontinued operations ................................................. -- 1,100,210 Accounts payable ........................................................ (1,134,620) (72,793) Accrued expenses ........................................................ (937,473) (865,473) Deferred revenue ........................................................ (1,107,031) 162,842 Other current liabilities ............................................... (1,465,049) (900,756) ------------ ------------ Net cash used in operating activities ............................... (12,158,603) (10,523,849) ------------ ------------ Cash Flows From Investing Activities Purchases of furniture, equipment and leasehold improvements .................. (3,598,265) (5,393,589) Costs related to acquisition of business including cash acquired .............. -- 66,468 ------------ ------------ Net cash used by investing activities ............................... (3,598,265) (5,327,121) ------------ ------------ Cash Flows From Financing Activities Proceeds from common stock offering ........................................... 20,257,962 10,069,328 Issuance of common stock for cash assets of GeoVideo .......................... -- 2,500,000 Exercise of warrants and options, net ......................................... 370,735 738,872 Proceeds from bank loans ...................................................... 47,072,644 62,199,731 Payments on bank loans ........................................................ (48,760,035) (55,770,350) Payments on capital lease obligations ......................................... (44,394) (87,845) ------------ ------------ Net cash provided by financing activities ........................... 18,896,912 19,649,736 ------------ ------------ Increase in Cash and Cash Equivalents ............................................. 3,140,044 3,798,766 Cash and Cash Equivalents at Beginning of Period .................................. 1,689,451 1,870,573 ------------ ------------ Cash and Cash Equivalents at End of Period ........................................ $ 4,829,495 $ 5,669,339 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ...................................................................... $ 182,176 $ 445,950 ============ ============ Taxes ......................................................................... $ -- $ 13,387 ============ ============
Non cash financing and investing activities: During the nine months ended September 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 nine months ended September 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 September 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 nine months ended September 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. 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 4 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 September 30, 2002 was $36,775,028. No amortization expense was recorded in the nine-month period ended September 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 fourth 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:
Nine Months Ended Sept. 30, Three Months Ended Sept. 30, 2002 2001 2002 2001 -------------- -------------- -------------- -------------- Reported net loss attributable to common stockholders ............... $ (11,261,630) $ (10,893,069) $ (4,385,905) $ (2,648,523) Goodwill amortization ............... -- 2,000,564 -- 729,841 -------------- -------------- -------------- -------------- Adjusted net loss attributable to common stockholders ............... $ (11,261,630) $ (8,892,505) $ (4,385,905) $ (1,918,682) ============== ============== ============== ============== Reported net loss per share ......... $ (0.39) $ (0.56) $ (0.15) $ (0.11) Goodwill amortization ............... -- 0.11 -- 0.03 -------------- -------------- -------------- -------------- Adjusted net loss per share ......... $ (0.39) $ (0.45) $ (0.15) $ (0.08) ============== ============== ============== ==============
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. In July 2002, the FASB issued FASB Statement No. 146, Accounting for the Costs Associated with Exit or Disposal Activities. This statement requires companies to recognize costs associated with exit or disposal activities only when liabilities for those costs are incurred rather than at the date of a commitment to an exit or disposal plan. FASB No. 146 also requires companies to initially measure liabilities for exit and disposal activities at their fair values. FASB No. 146 replaces Emerging Issues Task Force (EITF) Issues No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and EITF No. 88-10, Costs Associated with Lease Modification or Termination. The provisions of FASB No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company anticipates the adoption of this statement will not have a material effect on its consolidated financial position or results of operations. 5 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.
Nine Months Ended Three Months Ended September 30, September 30, ------------------------- ------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Weighted average shares outstanding ........... 28,731,560 19,570,351 28,942,177 23,146,204 Effect of dilutive options and warrants ....... -- -- -- -- ---------- ---------- ---------- ---------- Weighted average shares outstanding including dilutive effect of securities ... 28,731,560 19,570,351 28,942,177 23,146,204 ========== ========== ========== ==========
Weighted average options and warrants to purchase 10,818,595 and 11,241,703 shares of common stock were outstanding during the nine months and three months ended September 30, 2002. Weighted average options and warrants to purchase 9,266,960 and 10,219,135 shares of common stock were outstanding during the nine months and three months ended September 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. 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 $2,000,000. Borrowings bear interest at the lender's base rate plus 1 1/2% per annum. At September 30, 2002, the interest rate on the facility was 5.50%. The credit facility contains certain financial and operational covenants. For the nine month period ended September 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. During October 2002, the credit agreement was amended to cure this covenant violation. During November 2002, the credit agreement was further amended to adjust EBITDA targets, the interest rate and fees on the facility and the inventory cap and other provisions relating to loan availability. At September 30, 2002, $8,940,691 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 Facility exit costs 460,000 -------- $960,000 ======== 6 The employee termination costs relate to 84 employees and officers of the Company terminated following the implementation of a cost savings plan. The facility exit costs relate to the closing or downsizing of 19 sales offices. The following table summarizes the activity against the restructuring charge: Restructuring charge $960,000 Cash paid (452,009) -------- Balance at September 30, 2002 $507,991 ======== 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 20,000 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 7 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. 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. 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)
Nine Months Three Months Ended Sept. 30, Ended Sept. 30, ------------------- ------------------- 2002 2001 2002 2001 ------ ------ ------ ------ Revenues Video Solutions 94.9% 95.9% 93.5% 97.0% Video Network 5.1% 4.1% 6.5% 3.0% ------ ------ ------ ------ 100.0% 100.0% 100.0% 100.0% ------ ------ ------ ------ Cost of revenues Video Solutions 73.9% 68.3% 76.9% 70.9% Video Network 93.1% 80.9% 94.4% 93.1% ------ ------ ------ ------ 74.9% 68.8% 78.0% 71.6% ------ ------ ------ ------ Gross margin Video Solutions 26.1% 31.7% 23.1% 29.1% Video Network 6.9% 19.1% 5.6% 6.9% ------ ------ ------ ------ 25.1% 31.2% 22.0% 28.4% ------ ------ ------ ------ Operating expenses Selling 30.7% 29.1% 32.1% 27.4% General and administrative 7.4% 8.1% 7.9% 7.4% Restructuring 1.2% 0.0% 0.0% 0.0% Amortization of goodwill 0.0% 3.3% 0.0% 3.3% ------ ------ ------ ------ Total operating expenses 39.3% 40.5% 40.0% 38.1% ------ ------ ------ ------ Loss from continuing operations (14.2)% (9.3)% (18.0)% (9.7)% ------ ------ ------ ------ Other (income) expense Amortization of deferred financing costs 0.2% 0.1% 0.2% 0.2% Interest income (0.1)% (0.1)% 0.0% (0.1)% Interest expense 0.2% 0.8% 0.3% 0.6% ------ ------ ------ ------ Total other expenses, net 0.3% 0.8% 0.5% 0.7% ------ ------ ------ ------ Income tax provision 0.0% 0.3% 0.0% 0.9% ------ ------ ------ ------ Net loss from continuing operations (14.5)% (10.4)% (18.5)% (11.3)% Loss from discontinued operations (0.2)% (0.4)% (0.2)% (0.6)% ------ ------ ------ ------ Net loss (14.7)% (10.8)% (18.7)% (11.9)% Deemed dividends on series A convertible preferred stock 0.0% 7.4% 0.0% 0.0% ------ ------ ------ ------ Net loss attributable to common stockholders (14.7)% (18.2)% (18.7)% (11.9)% ====== ====== ====== ======
9 Nine Months Ended September, 2002 ("2002 period") Compared to Nine Months Ended September 30, 2001 ("2001 period") and Three Months Ended September 30, 2002 (" September 2002 quarter") Compared to Three Months Ended September 30, 2001 ("September 2001 quarter"). NET REVENUES. The Company reported net revenues of $76.5 million for the 2002 period, an increase of $16.5 million, or 27.6%, over the $60.0 million in net revenues reported for the 2001 period. Net revenues of $23.5 million for the September 2002 quarter represent an increase of $1.2 million, or 5.3%, over the $22.3 million reported for the September 2001 quarter. Although the operations of acquired companies have now been fully integrated into the Company, management estimates that approximately $4.5 million of the $16.5 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 $12.0 million in revenues from AAC and Axxis accounted for the remainder of the growth. The $1.2 million increase in revenues for the September 2002 quarter over the September 2001 quarter resulted from a $2.6 million increase in revenues from AAC and Axxis and a $1.4 million decrease in revenues from core businesses in existence before contributions from AAC and Axxis. Video solutions -- Sales of video communications products and services were $72.6 million in the 2002 period, an increase of $15.1 million, or 26.4%, over the $57.5 million in the 2001 period. Net revenues of $22.0 million for the September 2002 quarter represent an increase of $0.3 million, or 1.4%, over the $21.7 million reported for the September 2001 quarter. Management estimates that approximately $3.1 million of the $15.1 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 $12.0 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 government sector. The $.3 million increase in revenues for the September 2002 quarter over the September 2001 quarter resulted from a $2.6 million increase in revenues from AAC and Axxis and a $2.3 million decrease in revenues from core businesses in existence before contributions from AAC and Axxis. Video network -- Sales of video network services were $3.9 million in the 2002 period, an increase of $1.4 million, or 56.4%, over the $2.5 million in the 2001 period. Net revenues of $1.5 million for the September 2002 quarter represent an increase of $0.8 million, or 129.7%, over the $0.7 million reported for the September 2001 quarter. Management estimates that the $1.4 million net increase in revenues for the 2002 period over the 2001 period related to approximately $1.7 million of revenues resulting from the introduction of the Glowpoint network offset by a $0.3 million decrease in revenues from VTI's H.320 bridging service. GROSS MARGINS. Gross margins were $19.2 million in the 2002 period, an increase of $0.5 million over the $18.7 million in the 2001 period. Gross margins decreased in the 2002 period to 25.1% of net revenues, as compared to 31.2% of net revenues in the 2001 period. Gross margins were $5.2 million in the September 2002 quarter, a decrease of $1.1 million from the $6.3 million in the September 2001 quarter. Gross margins decreased in the September 2002 quarter to 22.0% of net revenues, as compared to 28.4% of net revenues in the September 2001 quarter. In the 2002 period and the September 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, were $23.4 million in the 2002 period, an increase of $6.0 million from the $17.4 million reported for the 2002 period. Selling expenses increased in the 2002 period to 30.7% of net revenues, as compared to 29.1% of net revenues in the 2001 period. The year-to-date increase in expenses as a percentage of revenue primarily resulted from a $1.0 million increase in Glowpoint-related expenses and a $2.4 million increase in expenses resulting from the AAC and Axxis acquisitions. Selling expenses were $7.5 million, or 32.1% of net revenues, in the September 2002 quarter, an increase of $1.4 million over the $6.1 million, or 27.4% of net revenues, in the September 2001 quarter. The increase in expenses as a percentage of revenue for the quarter primarily resulted from a $0.3 million increase in Glowpoint-related expenses and a $0.6 million increase in expenses resulting from the AAC and Axxis acquisitions. 10 GENERAL AND ADMINISTRATIVE. General and administrative expenses increased $0.9 million in the 2002 period to $5.7 million as compared to $4.8 million for the 2001 period. General and administrative expenses as a percentage of net revenues for the 2002 period declined to 7.4% in the 2002 period from 8.1% in the 2001 period. General and administrative expenses increased $0.2 million to $1.9 million, or 7.9% of net revenues, in the September 2002 quarter from $1.7 million, or 7.4% of net revenues, for the September 2001 quarter. In the 2002 period, management continued 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 2002 period. Approximately half of the charge related to the costs of vacating certain sales offices with the other half related to severance and other personnel costs. 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 $2.0 million in the 2001 period and $0.7 million for the September 2001 quarter. OTHER (INCOME) EXPENSES. Other expenses decreased $231,000 to $221,000 in the 2002 period from $452,000 in the 2001 period. The principal component of this category, interest expense, decreased approximately $264,000 to $182,000 in the 2002 period from $446,000 in the 2001 period. The decline in interest expense resulted from paying down the outstanding balance under our prior bank line of credit from the proceeds of our $20.3 million common stock offering early in the 2002 period. For the September 2002 quarter, other expenses decreased $39,000 to $113,000 from $152,000 in the September 2001 quarter, principally as a result of the decline in interest expense. DISCONTINUED OPERATIONS. As a result of some post-closing adjustments related to the sale of its voice communications business, the Company incurred a $151,000 loss from discontinued operations in the 2002 period. The Company incurred a loss from discontinued operations in the 2001 period of approximately $248,000. 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 $(11.3) million, or $(.39) per diluted share, as compared to a net loss attributable to common stockholders of $(10.9) million, or $(.56) per diluted share, for the 2001 period. The $(11.3) million net loss for the 2002 period results primarily from depreciation and amortization charges totaling $3.9 million and $2.9 million of costs related to the Glowpoint network service offering. EBITDA from continuing operations for the 2002 period was $(5.8) million. The $(10.9) million net loss for the 2001 period results primarily from depreciation and amortization charges totaling $4.7 million, $4.4 million in deemed dividends on series A preferred stock, and $1.9 million of costs related to the Glowpoint network service offering. EBITDA from continuing operations for the 2001 period was $(0.6) million. Liquidity and Capital Resources At September 30, 2002, the Company had working capital of $31.8 million compared to $15.6 million at December 31, 2001, an increase of approximately 103.2%. The Company had $4.8 million in cash and cash equivalents at September 30, 2002 compared to $1.7 million at December 31, 2001. The $16.2 million increase in working capital resulted primarily from the January 2002 common stock offering of $20.3 million, the reclassification of $8.9 million of bank debt from current to long-term and the $11.3 million net loss for the 2002 period. Net cash used in operating activities for the 2002 period was $(12.2) million as compared to net cash used in operations of $(10.5) million during the 2001 period. Increases in other current assets of $6.4 11 million and inventory of $2.8 million and a cash loss from operations of $7.1 million were the primary uses of operating cash in the 2002 period, offset somewhat by a $9.1 million reduction in accounts receivable. Investing activities for the 2002 period included purchases of $3.6 million of network equipment and computer equipment and software, primarily for the 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 paydown of $1.7 million under the Company's revolving credit line. 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 $2 million. Borrowings bear interest at the lender's base rate plus 1 1/2% per annum. At September 30, 2002, $8.9 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 2002 period, the Company was in violation of the covenant requiring the Company to meet a specified earnings before interest, taxes, depreciation and amortization ("EBITDA") target. During October 2002, the credit agreement was amended to cure this covenant violation. During November 2002, the credit agreement was further amended to adjust EBITDA targets, the interest rate and fees on the facility and the inventory cap and other provisions relating to loan availability. Management believes, based on current circumstances, that the Company has adequate capital resources to support its 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. 12 Recent pronouncements of the Financial Accounting Standards Board In June 1998 the Financial Accounting Standards Board ("FASB") issued Statement of Financial 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 September 30, 2002 was $36,775,028. No amortization expense was recorded in the nine-month period ended September 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 fourth 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: 13
Nine Months Ended September 30, Three Months Ended September 30, 2002 2001 2002 2001 Reported net loss attributable to common stockholders $ (11,261,630) $ (10,893,069) $ (4,385,905) $ (2,648,523) Goodwill amortization -- 2,000,564 -- 729,841 -------------- -------------- -------------- -------------- Adjusted net loss attributable to common stockholders $ (11,261,630) $ (8,982,505) $ (4,385,905) $ (1,918,682) ============== ============== ============== ============== Reported net loss per share $ (0.39) $ (0.56) $ (0.15) $ (0.11) Goodwill amortization -- 0.10 -- 0.03 -------------- -------------- -------------- -------------- Adjusted net loss per share $ (0.39) $ (0.46) $ (0.15) $ (0.08) ============== ============== ============== ==============
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. In July 2002, the FASB issued FASB Statement No. 146, Accounting for the Costs Associated with Exit or Disposal Activities. This statement requires companies to recognize costs associated with exit or disposal activities only when liabilities for those costs are incurred rather than at the date of a commitment to an exit or disposal plan. FASB No. 146 also requires companies to initially measure liabilities for exit and disposal activities at their fair values. FASB No. 146 replaces Emerging Issues Task Force (EITF) Issues No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and EITF No. 88-10, Costs Associated with Lease Modification or Termination. The provisions of FASB No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company anticipates the adoption of this statement will not have a material effect on its consolidated financial position or results of operations. 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 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 and 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. Item 4. Controls and Procedures Based on the Company's most recent evaluation, which was completed within 90 days of the filing of this Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as amended) are effective. There have been no significant changes in internal controls or in other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiences and material weaknesses. 14 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 None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10 Material Agreements 10.1 Waiver and Amendment Agreement No. 2 10.2 Warrant to Purchase Common Stock 10.3 Amendment Agreement No. 3 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 public disclosure of the following information in accordance with Rule 100 of Regulation FD of the Securities Act of 1933 (as amended): In an interview in early October 2002 to Wainhouse Research and published on October 23, 2002, in the Wainhouse Research Bulletin, Leo Flotron, Wire One's President and Chief Operating Officer, stated that as of the date of the interview, Wire One had "north of 800" endpoints on its Glowpoint network. 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: November 14, 2002 By: /s/ Richard Reiss -------------------------------------- Richard Reiss, Chief Executive Officer Date: November 14, 2002 By: /s/ Christopher Zigmont -------------------------------------- Christopher Zigmont, Chief Financial Officer (principal financial and accounting officer) 16 WIRE ONE TECHNOLOGIES, INC. CERTIFICATION I, Richard Reiss, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wire One Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Richard Reiss ----------------------------------- Richard Reiss Chief Executive Officer WIRE ONE TECHNOLOGIES, INC. CERTIFICATION I, Christopher A. Zigmont, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wire One Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 By: /s/ Christopher A. Zigmont -------------------------------------- Christopher A. Zigmont Executive Vice President and Chief Financial Officer