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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM________ TO ________
Commission File Number 000-29053
Telaxis Communications Corporation
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(Exact name of registrant as specified in its charter)
Massachusetts 04-2751645
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20 Industrial Drive East
South Deerfield, MA 01373
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(Address of principal executive offices)
(413) 665-8551
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(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 Par Value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of February 28, 2001, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Company was $22,034,565.
Shares of voting and non-voting common equity held by each executive officer,
key employee and director identified in Item 10 below and by each person who
beneficially owns 10% or more of the outstanding common stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. The aggregate market value has been computed based on a price per
share of $1.63, which is the average of the high and low sales prices on
February 28, 2001. On such date, the Company had 16,742,023 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed with
the Securities and Exchange Commission in connection with the registrant's 2001
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Form 10-K.
PART I
This Annual Report on Form 10-K contains forward-looking statements as
defined by federal securities laws. Forward-looking statements are predictions
that relate to future events or our future performance and are subject to known
and unknown risks, uncertainties, assumptions, and other factors that may cause
actual results, outcomes, levels of activity, performance, developments, or
achievements to be materially different from any future results, outcomes,
levels of activity, performance, developments, or achievements expressed,
anticipated or implied by these forward-looking statements. Forward-looking
statements should be read in light of the cautionary statements and important
factors described in this Form 10-K, including Item 7--Management's Discussion
and Analysis of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements. We undertake no obligation to update or revise any
forward-looking statement to reflect events, circumstances or new information
after the date of this Form 10-K or to reflect the occurrence of unanticipated
events.
Item 1. Business.
Overview
We develop and supply broadband wireless access products. Using our
products, network service providers can bridge the "last mile" between the
telecommunications backbone and a subscriber's premises wirelessly to deliver
high-speed integrated voice, video and data services to their customers. To
date, we have developed our products for use in point-to-multipoint wireless
access systems. In this structure, a single base station (or hub) provides
two-way connectivity to the customer premises equipment (or CPE) located at
multiple subscribers' premises out to a range of approximately two to three
miles. This structure allows a network service provider to enter markets quickly
and economically and then expand its network efficiently as the number of
subscribers grows. We have recently expanded the scope of our business to
include products for use in point-to-point wireless access systems.
We were formed as a Massachusetts corporation in January 1982 under the
name "Millitech Corporation." In 1995, we began focusing on the broadband
wireless access market. In August 1999, we decided to focus all of our resources
on this market and to dispose of our historical millimeter-wave products
business. That disposition occurred in February 2000, shortly after the initial
public offering of our stock. See Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations, Overview and Item 8-Financial
Statements and Supplementary Data, Note 2 to Financial Statements. In December
1999, we changed our name to "Telaxis Communications Corporation" to reflect our
new focus on the broadband wireless access market.
Industry Background
The Growing Demand for Broadband Communications
The amount of data being transmitted over the Internet and private
communications networks is increasing rapidly due to the growing number of users
accessing these networks and the increasing range of data-intensive activities
for which they use these networks. Businesses increasingly use the Internet to
enhance their reach to customers and suppliers with applications such as
electronic commerce, supply chain management, web hosting, global marketing and
customer support. Businesses are also using the Internet to create data networks
among corporate sites, remote offices and telecommuters in order to facilitate
employee communications, e-mail, file sharing, and research and analysis.
Consumers use the Internet to communicate, collect and publish information,
conduct retail purchases and access online entertainment. These network-based
business and consumer activities require the transmission of increasingly large
amounts of data quickly and reliably. As a result, broadband access is becoming
increasingly important.
2
Deregulation and Competition are Driving Deployment of Broadband Access
Technologies
Global telecommunications deregulation is creating significant competition
among providers of advanced communications services, thereby accelerating the
deployment of broadband access technologies. In the United States, incumbent
telephone companies such as BellSouth, SBC Communications, US West (now a part
of Qwest Communications International), and Verizon were, until recently, the
exclusive providers of the copper wire connections between their network
backbones and subscribers. The federal Telecommunications Act of 1996
intensified the competitive environment in the United States by requiring
telephone companies to lease portions of their networks, including the last
mile, to competing carriers. Additionally, telephone companies and cable
operators are seeking to expand their service offerings by entering each others'
markets. Similar deregulation and competition are occurring in many regions of
the world. To compete in this environment, many network service providers seek
to differentiate themselves and maximize revenue per subscriber by offering
integrated voice, video and data services, which require broadband access.
Developing Regions are Installing Communications Infrastructure
In many parts of the world, communication services are either inadequate or
non-existent due to the lack of existing infrastructure. A number of countries,
such as Argentina and Colombia, in developing regions have privatized their
state-owned telecommunications monopolies and opened their markets to
competitive network service providers. In constructing new networks, many
network service providers deploy broadband access technologies to expand the
services they offer and maximize revenue.
Traditional Network Access Solutions Have Limitations
To meet the growing demand for high-speed data transmission, many network
service providers have installed high-speed fiber optic transmission equipment,
switches and routers in the Internet backbone and in interoffice networks. While
the network backbone is capable of delivering data at very high speeds, a
bottleneck exists in the last mile, which was originally built to provide
traditional analog telephone service.
Along the fiber optic network backbone, data moves at speeds up to 10
billion bits per second, or 10 Gbps, over a single channel of a Dense Wavelength
Division Multiplexed, or DWDM, optical fiber, each of which can accommodate many
such channels. Subscribers have traditionally connected to the backbone using
dial-up analog modems, which transmit data at rates up to 56.6 thousand bits per
second, or 56.6 Kbps, or using integrated services digital network, or ISDN,
modems, which transmit data at rates up to 128 Kbps. At these modem speeds,
several minutes are often required to access a media-rich web site, and several
hours may be required to transfer or download large files. This bottleneck
frustrates subscribers and limits the capability of network service providers to
satisfy the demand for high-speed Internet access, multimedia entertainment,
real-time telecommuting and branch office inter-networking. Additionally, the
continued growth in both the number of analog modem users and their time spent
connected to the Internet compounds the congestion experienced on many networks.
Where subscribers require higher-speed connections, network service
providers have traditionally deployed copper-based T1 services in the United
States and E1 services internationally. A T1 line is a high-capacity, dedicated
telecommunications line which can support data transmission rates of up to 1.5
million bits per second, or 1.5 Mbps, which is 26.5 times the speed of analog
modems. An E1 line can support data transmission rates of up to 2.0 Mbps, or 35
times the speed of analog modems. Although T1 and E1 services have met the
broadband access needs of many large businesses, these services are either
unavailable to or prohibitively expensive for many small businesses, remote
offices, telecommuters and consumers.
Alternative Access Solutions are Emerging
Because analog and ISDN modem technologies do not satisfy the high-speed access
needs of many subscribers, and T1 or E1 access is often unavailable or
prohibitively expensive, alternative access solutions have been developed such
as:
3
Digital Subscriber Line. Digital subscriber line, or DSL, technology
improves the data transmission rate of a telephone company's existing copper
wire network. However, most deployments offer either high-speed asymmetrical
services or slower symmetrical services. Asymmetrical data rates provide higher
transmission speeds from the network to the subscriber and lower speeds from the
subscriber to the network. Symmetrical data rates provide equal transmission
speeds to and from the subscriber. Digital subscriber line transmission rates
are limited by the length and quality of available copper wires and by the
number of wires in a bundle that are used for data transmission. As the number
increases, interference among the wires in the bundle also increases.
Cable. Two-way cable modems enable data services (typically asymmetrical)
to be delivered over a network originally designed to provide television service
to residential subscribers. Cable networks connect to the home using coaxial
cable, which has greater transmission capacity than the copper wires used by
telephone companies. However, these networks often are costly to upgrade for
two-way data services and few businesses have coaxial cable connections. The
data rate available to each subscriber in a service area typically decreases as
the number of subscribers increases.
Fiber Optic Cable. Fiber offers the highest data transmission rate of any
access solution, but is the most costly to deploy. Corporations and institutions
use fiber connections where critical operations require these data rates.
Satellite. Broadband satellite solutions enable asymmetrical, two-way
access services. These solutions use broadcast satellite technology for
high-speed transmissions from the network service provider to the subscriber,
but generally use slower wire-based connections to transmit data from the
subscriber to the network service provider. The data rate available to each
subscriber in a service area decreases as usage increases.
Point-to-Point Wireless. Point-to-point wireless technology enables
symmetrical data services using a dedicated link between a subscriber and a
network. However, the network service provider must install dedicated equipment
at each end of a link for each new subscriber. Therefore, economies of scale, in
this case the ability to reduce installation costs as the number of subscribers
increases, are limited.
Laser. Like point-to-point wireless technology, laser technology enables
symmetrical data services using a dedicated link between a subscriber and a
network. However, laser technology transmits data by means of beams of light. In
addition to the need for dedicated equipment at each end of a link for each new
subscriber, lasers typically operate only over short distances, require very
precise aiming of the equipment, and experience degradation of the transmission
in inclement weather.
Broadband Point-to-Multipoint Wireless. Point-to-multipoint wireless
technology enables a single hub to support multiple CPEs rather than requiring
dedicated equipment at each end of a link for each new subscriber. Broadband
point-to-multipoint wireless access technology enables network service providers
to enter a market economically and quickly using a single hub and a small number
of CPEs without the need to install wire, cable or fiber. They can then add
subscribers rapidly and cost-effectively, as each installed hub can support
multiple CPEs.
Mass Deployment of Broadband Point-to-Multipoint Solutions Presents Challenges
Broadband point-to-multipoint wireless access equipment typically must be
tailored for frequency requirements that vary from country to country and within
each country. A further complication is caused by the lack of universal
standards for equipment specifications and protocols. As a result, suppliers of
broadband point-to-multipoint wireless access equipment face challenges in
achieving economies of scale and developing cost-effective products suitable for
deployment to many subscribers.
Conventional industry practice traditionally has been to build broadband
point-to-multipoint wireless access equipment using multiple modules connected
by small metal pipes and wires. This approach requires considerable hand
assembly and tuning and is not well suited to automated manufacturing.
Therefore, assembly is often outsourced to low-cost labor environments, which
greatly reduces the ability to deliver tailored products in a timely fashion.
4
An opportunity exists to substantially reduce the cost of broadband
point-to-multipoint wireless access equipment by integrating the functionality
of multiple conventional modules onto printed circuit boards, thereby enabling
the use of low-cost manufacturing processes. However, major technical
difficulties have plagued the development and production of printed circuit
boards that operate at high frequencies and at high data rates because they
typically generate distorted or unwanted signals.
Strategy
Our objective is to be the leading worldwide provider of radio frequency,
or RF, products for broadband wireless access systems. Our strategy to
accomplish this objective is to:
Expand our position in the global market for point-to-multipoint RF
products with our next-generation planar products. Our strategy is to secure new
customer relationships by delivering next-generation planar RF products to
network system integrators to meet their performance requirements while reducing
equipment size and cost. These next-generation, planar products take advantage
of our years of experience in developing and shipping thousands of planar
products to arrive at a more highly integrated, planar architecture than we have
used in the past. This architecture enables automated pick and place assembly
and interconnection of planar circuit elements on a single, die-cast metal plate
with no internal connectors or wires and with a minimum of specialty electronic
components. The architecture also enables automated functional and thermal
testing of completed products.
Use our next-generation, planar architecture to develop RF products for
high-data-rate, point-to-point wireless access systems. A rapidly growing
segment of the wireless access industry is for point-to-point radios that
provide high data rates of 155 Mbps or greater and that operate at frequencies
up to 40 gigahertz, or GHz. These systems are addressing a need for broadband
access at data rates that are generally not available except with fiber optic
cable or lasers. The RF equipment historically incorporated into these systems
uses relatively expensive, modular architectures with high material and labor
costs. Opportunity exists to reduce the cost of point-to-point wireless access
equipment by applying our printed circuit board technology developed for
point-to-multipoint wireless access products. This product technology and the
associated manufacturing equipment and processes can be applied to
point-to-point products, which should enable improved margins or more
competitive pricing for suppliers of these systems.
Exploit our recently announced Virtual Fiber Radio(TM) to expand our
product offerings beyond our traditional RF products. Our new Virtual Fiber
Radio(TM), or VFR, will enable us to address a new segment of the wireless
access market in the millimeter-wave spectrum above 40 GHz. By using the large
amounts of unallocated spectrum above 40 GHz, the VFR is less complex than
traditional millimeter-wave radios that are constrained to limited amounts of
spectrum in licensed bands below 40 GHz. As a result, we expect that the VFR
will be smaller and lower cost than traditional point-to-point, millimeter-wave
radios.
Expand strategic relationships with network system integrators. We believe
successful deployment of broadband wireless access equipment requires close
working relationships with network system integrators. We have established
relationships with Alacatel and Marconi for product development and supply. Our
relationships with key industry leaders offer us insight into market
requirements and deployment trends, which shapes development of our long-term
product strategy. We intend to build upon our existing relationships and
establish new relationships with network system integrators to increase
distribution of our products and build brand awareness.
Establish brand identity. We intend to establish brand awareness with
network service providers and to build upon our position in the broadband
point-to-multipoint wireless access equipment market. Historically, our products
have been sold primarily under private label by prominent network system
integrators. In the future, we intend to increasingly brand or co-brand our
products to build name recognition. In addition, we plan to invest in a broad
range of marketing programs, including participation in trade shows, advertising
in print publications, direct marketing to major customers and web-based
marketing.
5
Products
We presently develop and supply RF hub and CPE products for
point-to-multipoint wireless access networks. Our products operate at various
frequencies ranging from 24 GHz to 44 GHz and are available with a range of
interfaces, including hybrid fiber coax, or HFC, and Digital Audio-Visual
Council, or DAVIC. Initially, we developed and supplied products using a
flexible, modular architecture, consistent with conventional industry practice.
The advantage of this approach was that it allowed us to deliver a tailored
solution very rapidly for network service provider site demonstrations and
initial stages of deployment. However, this type of product was fairly
expensive. Therefore, we have focused our efforts on developing RF products
based on a planar, printed circuit board architecture. The advantage of this
approach is that it results in lower cost products. However, developing planar
products is technically challenging and tends to take longer than for modular
products.
We are also developing our Virtual Fiber RadioTM and anticipate the
adaptation of our point-to-multipoint, planar technology to the development of
point-to-point wireless access products.
Point-to-Multipoint CPE Products
We have concentrated our development efforts on the CPE unit. Because
multiple CPEs are supported by each hub in a point-to-multipoint deployment,
cost reduction of the CPE has the most significant impact on the ability of a
network service provider to deploy broadband access services to its customers on
a cost-effective basis. Our next-generation, planar CPE is a highly integrated
unit using single-board, planar architecture that enables highly automated,
cost-effective manufacturing.
Point-to-Multipoint Hub Products
Each hub provides two-way connectivity to multiple CPEs out to a range of
approximately two to three miles. For some customers, our planar hub consists of
separate transmitter and receiver units that are deployed together to provide
two-way connectivity. For other customers, our planar hub consists of a single
unit that performs both transmit and receive functions. Like the planar CPEs,
our planar hubs are highly integrated units using single-board, planar
architecture that enables highly automated, cost-effective manufacturing. This
design approach enables network service providers to lower their costs of
deployment in commercial service buildouts.
Point-to-Point Products
Our point-to-multipoint printed circuit board technology can be adapted to
develop RF products for point-to-point wireless access systems. The RF equipment
historically incorporated into these systems uses relatively expensive, modular
architectures with high material and labor costs. We believe that the technology
and skill base we have acquired through our developing and supplying thousands
of planar point-to-multipoint products will enable us to develop cutting-edge,
cost-effective point-to-point RF products. Our plan is to adapt our
point-to-multipoint CPE technology for use at each end of a point-to-point radio
link, thereby providing a more cost effective RF product than is commonly used
in point-to-point wireless access systems.
Virtual Fiber Radio(TM)
We are currently developing our Virtual Fiber Radio(TM) to operate at
frequencies above 40 GHz. This patent-pending product is being designed to
enable direct fiber optic connection to wireless transceiver units and
transparently transmit fiber optic signals over a wireless link without the use
of conventional modems. We are currently developing prototype Virtual Fiber
Radios(TM) and expect to have the prototypes available in 2001.
Customers
We sell our products primarily to network system integrators, primarily
Alcatel. The network system integrators in turn develop complete broadband
network solutions for their customers, the network service providers.
Occasionally, we sell our products directly to network service providers.
6
For the year ended December 31, 2000, sales to Alcatel represented 93% of
sales. For the year ended December 31, 1999, sales to Alcatel (then known as
Newbridge Networks) represented 88% of sales and sales to Convergence
Communications represented 6% of sales.
Our relationship with Alcatel began in 1998. In that year, we entered into
product development and reseller agreements with Newbridge Networks. In those
agreements, we agreed to develop, manufacture, and sell broadband wireless
access products to Newbridge Networks. Newbridge Networks was acquired by
Alcatel in May 2000. Following the acquisition, we continued to supply the same
products to Alcatel for a period of time. However, in the fourth quarter of
2000, Alcatel changed the approval processes relating to product development and
production from the approval processes used by Newbridge Networks prior to its
acquisition by Alcatel. In addition, Alcatel stated it would not accept any
additional products from us until the new approval processes had been completed.
These changes caused us to suspend production of products for Alcatel. We are
currently addressing the open issues with Alcatel. However, our relationship
with Alcatel remains unsettled, and the timing of completion of the new approval
processes and resumption of production remains uncertain. We cannot predict
when, if at all, the open issues will be resolved and when, if at all, we will
resume shipping products to Alcatel.
We also have a relationship with Marconi. Marconi has chosen us to develop
and supply 28 GHz point-to-multipoint hubs and CPEs for the European market, and
we are in the process of developing those products. The relationship may be
expanded to address other frequency bands, other markets, and different types of
products (such as point-to-point products).
We previously developed and supplied broadband wireless access products to
Motorola. Motorola has informed us that it has decided to discontinue its
efforts to develop, sell and deploy high-frequency point-to-multipoint wireless
access networks. Therefore, we agreed with Motorola to cancel the remaining
deliveries contemplated under our agreement with Motorola.
We also previously developed and supplied broadband wireless access
products to LG Information & Communications. Our agreement with LG Information &
Communications for commercial deliveries of these products was conditional on LG
Information & Communications being able to obtain satisfactory modems to work
with our products. Since LG Information & Communications was not able to obtain
satisfactory modems, our agreement with LG Information & Communications for
commercial deliveries has been cancelled. We are currently negotiating with LG
Information & Communications concerning the payment of the account receivable of
approximately $950,000 arising from our delivery of prototype products to them.
We have had a joint development program underway with Adaptive Broadband.
The goal of that program was to create a product that combined the strengths of
the two companies - the modem and lower frequency skills of Adaptive Broadband
with our high frequency skills. Adaptive Broadband recently announced a
restructuring of its business to concentrate on lower frequencies. Therefore, we
believe that the joint development program will be discontinued.
Manufacturing
We have developed extensive expertise in automated assembly and testing of
planar wireless access products that operate at high frequencies. In addition,
we have installed an automated shop floor control system and an automated data
collection and analysis system. We have focused these capabilities on the
development of manufacturing strategies for high-volume production of
cost-effective broadband wireless access products. We develop our automated
manufacturing processes and automated test equipment concurrently with the
design and development of our products. We use our internal final assembly and
automated test facility to validate our manufacturing processes in a carefully
controlled environment. For high-volume production, we are supplementing our
manufacturing capacity by establishing relationships with manufacturing
partners. We have signed an agreement with C-MAC Industries for them to
manufacture our products for us. Given that we have suspended production of
products for our major customer Alcatel, C-MAC Industries is not currently
manufacturing any products for us.
7
Electronic components and raw materials used in our products are generally
obtained from a large number of suppliers. Some components are standard items
and others are manufactured to our specifications. We obtain certain components
from a single source or limited number of sources. We typically do not have
supply agreements of a term longer than one year with these vendors. In 2000, we
experienced increasing demand for the components and raw materials used in our
products, and in some cases we were put on allocation due to shortages. As a
result, we purchased or committed to purchase quantities sufficient to meet our
expected production requirements. However, our actual production requirements
were lower than we had anticipated. This caused us to have substantial excess
inventory on hand and to negotiate with numerous suppliers for the cancellation
of open orders. See Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations, Safe Harbor for Forward-Looking Statements.
Marketing, Sales and Customer Service
The global communications equipment industry is dominated by a limited
number of network system integrators. As a result, we focus our marketing
efforts on network system integrators and their customers, the network service
providers. Our marketing activities target technical experts and product
managers who heavily influence purchase decisions. We build brand awareness
through several promotional programs, including participation in trade shows,
speaking at industry forums, Web-based communication and promotion, and
publication of press releases.
Our sales approach is to start by establishing a technical relationship
with a potential customer. We then assign an account manager to develop the
relationship. The relationships typically involve product development and supply
and supporting our customer in their efforts to sell wireless access systems
using our products. A key element of our sales approach is to be highly
responsive to customers' needs. We provide customer service in the following
areas:
o System engineering. We provide engineering support for system site
demonstrations, site surveys, specification development, integration of
third-party equipment, installation and follow-on test support.
o Problem resolution. We provide prompt responses to customer problem
reports, including telephone support, field service, and repair or
replacement of equipment.
o Field support. Our customer service personnel are on call to provide
global field support. We provide field support primarily for site
demonstrations and initial deployments.
o Repairs. We maintain a repair center staffed with technicians who work
directly with our quality assurance team to analyze failures and repair
equipment.
Currently, we conduct all customer support activities from our South
Deerfield, Massachusetts headquarters. We may establish support centers closer
to our major customer deployments. Customer support is ancillary to the sale of
our products and is not currently considered to be a separate revenue-generating
line of business.
Additional description concerning our sales activities, including
geographical sales information, is contained below in Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Item 8--Financial Statements and Supplementary Data, Notes 1 and 16 to Financial
Statements.
8
Research and Development
The goal of our development activities is to reduce the cost and increase
the functionality of our products, while adapting them to the frequency and
interface specifications required for new markets. Our experience in
millimeter-wave and microwave technologies enables us to develop cost-effective
broadband wireless access products. As a result of our experience over the past
three years in developing over twenty-five planar RF products, we are now
developing the next generation of products that are more highly integrated than
our previous products. We also are continuing to advance our core competencies
and to extend these core competencies to meet rapidly changing market needs. For
example, we are developing our Virtual Fiber RadioTM and anticipate the
adaptation of our point-to-multipoint, planar technology to the development of
point-to-point wireless access products. See Item 1--Business, Products above.
Our multidisciplinary research and development team consists of engineers
and scientists whose specialties include microwave engineering, millimeter-wave
engineering, electrical engineering, mechanical engineering, chemistry, physics,
computer science and materials science. We also maintain close working
relationships with the University of Massachusetts and various technical
organizations.
We also have entered into relationships with other companies when we
believe they have skills that could benefit us. We initially entered into a
joint design and manufacturing agreement with California Amplifier. In this
agreement, California Amplifier agreed to manufacture our existing CPEs, to
assist us in designing improvements to lower the cost of our existing CPEs, and
to manufacture the redesigned CPEs. In 2000, we replaced that agreement with an
agreement by which we paid California Amplifier a one-time license fee and
obtained rights to use the technology they had developed in any of our products.
We continue to consider similar relationships in appropriate circumstances.
Additional description concerning our research and development activities,
including research and development expense for fiscal years 2000, 1999, and 1998
and customer-sponsored research activities, is contained below in Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8--Financial Statements and Supplementary Data, Note 1 to
Financial Statements.
Competition
The market for broadband point-to-multipoint wireless access equipment is
rapidly evolving and highly competitive. A number of large telecommunications
equipment suppliers, such as Alcatel, Ericsson and Nortel Networks, as well as a
number of smaller companies, have developed or are developing products that
compete with ours. Many of our competitors are substantially larger than we are
and have significantly greater financial, sales, marketing, distribution,
technical, manufacturing and other resources. These competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties to increase their ability to gain market share rapidly. We
expect to face increasing competitive pressures from both current and future
competitors in the markets we serve.
The rapid technological developments within the network equipment industry
result in frequent changes to our group of competitors. The principal
competitive factors in our market include price; ability to manufacture and
distribute products; product performance, features and inter-operability;
product development speed; product availability; relationships with network
system integrators and network service providers; technical support and customer
service; and brand recognition.
Broadband point-to-multipoint wireless access solutions are also competing
with other high-speed solutions such as digital subscriber lines, cable, fiber,
other high-speed wire, laser, satellite and point-to-point wireless
technologies. Many of these alternative technologies can take advantage of
existing installed infrastructure and have achieved significantly greater market
acceptance and penetration than broadband point-to-multipoint wireless access
technologies. We expect to face increasing competitive pressures from both
current and future technologies in the broadband access market.
9
Intellectual Property
We rely on a combination of patent, copyright, trademark, and trade secret
laws, as well as confidentiality agreements, to establish and protect our
proprietary rights. Our success depends to a significant degree upon the
preservation and protection of our product designs and other proprietary
technology. Although we employ a variety of intellectual property in the
development and manufacturing of our products, we believe that none of our
intellectual property is individually critical to our current operations.
However, taken as a whole, we believe our intellectual property rights are
significant. See Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations, Safe Harbor for Forward-Looking Statements.
We have been granted one material United States patent, which relates to
our antenna and transceiver designs and will remain in force until September
2018. In addition, we have eleven United States patent applications pending. We
have been granted two counterpart foreign patents and have counterpart patents
pending in ten international jurisdictions. We plan to continue to pursue
intellectual property protection in foreign countries (primarily in the form of
international patents) in instances where the technology covered is considered
important enough to justify the added expense.
We have eleven United States trademark applications pending. In addition,
we have trademark applications pending in eleven international jurisdictions.
Employees
On February 28, 2001, we had 163 employees, including 54 in manufacturing,
66 in engineering, 11 in quality assurance, 7 in sales, marketing and customer
service, and 25 in finance and administration. We are not a party to any
collective bargaining agreement. We believe that relations with our employees
are good.
Item 2. Properties.
We lease approximately 63,000 square feet of facilities comprised of two
buildings in South Deerfield, Massachusetts. One building is used primarily for
engineering and the second primarily for manufacturing. The term of the lease
for the two buildings expires in October 2005. We also lease approximately
10,200 square feet in Richardson, Texas, which is used primarily for
engineering. The term of the Texas lease expires in December 2006.
Item 3. Legal Proceedings.
We are not currently a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders during the three months
ended December 31, 2000.
10
PART II
Item 5. Market for Company's Common Equity and Related Stockholder Matters.
Market Information
On February 2, 2000, we completed an initial public offering ("IPO") of our
common stock. Our common stock is quoted on the Nasdaq Stock Market's National
Market, under the symbol "TLXS". For all periods prior to the IPO, there was no
established public trading market for our common stock.
The following table shows the high and low bid prices of our common stock
for each indicated fiscal period as reported by The Nasdaq Stock Market:
Fiscal Year 2000 High Low
- ---------------- ---- ---
First Quarter (ended 3/31/00) $120.25 $43.563
Second Quarter (ended 6/30/00) $ 79.438 $17.063
Third Quarter (ended 9/30/00) $ 36.125 $ 4.063
Fourth Quarter (ended 12/31/00) $ 7.50 $ 0.688
As of February 28, 2001, the number of stockholders of record of our Common
Stock was approximately 279.
We have never declared or paid any cash dividends on any class of our
common equity. We currently intend to retain any future earnings to fund the
development and growth of our business. In addition, under our credit
facilities, we generally cannot pay cash dividends without our creditors'
consent. Therefore, we currently do not anticipate paying cash dividends in the
foreseeable future.
Recent Sales of Unregistered Securities
We issued or sold the following unregistered securities in the three months
ended December 31, 2000:
o An aggregate of 62,500 shares of common stock at $1.00 per share in
December 2000 to a warrant holder upon the exercise of warrants.
The sale described above was completed without registration under the
Securities Act in reliance upon the exemptions contained in Section 4(2) of the
Securities Act and/or Rule 506 of Regulation D promulgated under the Securities
Act for transactions not involving a public offering.
The sale of the securities described above did not involve the use of an
underwriter, and no commissions were paid in connection with the sale of the
securities described above.
Use of Proceeds from Registered Offerings
On February 1, 2000, the Securities and Exchange Commission declared
effective a Form S-1 Registration Statement (File No. 333-87885) filed by us in
connection with an initial public offering of 4,600,000 shares of our common
stock, par value $.01 per share. The offering of common stock commenced on
February 2, 2000 and closed on February 7, 2000 with all of the 4,600,000 shares
sold at a price of $17.00 per share for an aggregate price of $78.2 million. All
shares were sold by Telaxis; there were no selling stockholders. Credit Suisse
First Boston was the lead managing underwriter of the offering, and Banc of
America Securities LLC and CIBC World Markets Corp. were co-managers of the
offering.
The gross proceeds of the offering were approximately $78.2 million. We
incurred approximately $7.1 million of expenses in connection with the offering,
of which approximately $5.5 million represented underwriting discounts and
commission, and $1.6 million represented offering costs, including legal fees,
accounting fees, underwriters' out-of-pocket expenses and printing expenses.
11
We received approximately $71.1 million of net proceeds from the offering.
Those net proceeds will be used for general corporate purposes. Pending such
use, the net proceeds have been invested in short-term, interest-bearing,
investment grade securities or direct or guaranteed obligations of the U.S.
government. From the time of receipt through December 31, 2000, we have applied
our net proceeds from the offering toward working capital, financing capital
expenditures, and funding operating losses. Net cash used from the offering
through December 31, 2000 for operating activities totaled $30.1 million.
Item 6. Selected Financial Data.
Set forth below is certain historical selected financial data with respect
to the Company which has been derived from the audited financial statements of
the Company for each of the respective years. We have never declared or paid any
cash dividends.
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of Operations Data
Sales ............................... $ 24,753 $ 9,720 $ 2,386 $ 1,733 $ 201
Loss from continuing operations ..... (37,634) (8,293) (11,253) (6,712) (2,239)
Basic and diluted loss per share from
continuing operations ............. (2.54) (13.68) (22.87) (14.16) (4.15)
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
Total assets ........................ $ 65,538 $ 25,297 $ 14,955 $ 20,059 $ 10,728
Long-term debt and capital lease
obligations, net of current portion 3,225 2,385 1,047 1,690 3,257
Total liabilities ................... 15,439 11,925 6,753 9,632 7,823
Redeemable preferred stock .......... -- 47,793 32,793 25,425 12,465
Total stockholders' (deficit) equity 50,099 (34,421) (24,591) (14,998) (9,560)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
We develop and supply broadband wireless access products used by network
service providers to deliver integrated voice, video and data services to
business and residential subscribers. We sell our products primarily to network
system integrators, which include our products in broadband wireless systems
sold to network service providers. Our planar products, based on a printed
circuit board design, can be mass-produced using low-cost, highly automated
manufacturing techniques. These planar products address a network service
provider's need for cost-effective deployment to many subscribers.
We commenced operations in 1982 and have derived the significant majority
of our sales from our millimeter-wave products business segment prior to 1999.
Millimeter waves are electromagnetic waves having wavelengths between one and
ten millimeters. In August 1999, we adopted a plan to focus all of our resources
on our broadband point-to-multipoint wireless access business segment and to
dispose of the millimeter-wave products segment. We decided to dispose of this
segment because it would have required us to reallocate financial and management
resources from the more attractive broadband point-to-multipoint wireless access
business segment. The segment was sold on February 8, 2000. As a result, we have
presented the operations of the millimeter-wave products segment as a
discontinued operation in our financial statements. The following management's
discussion and analysis focuses on our ongoing broadband point-to-multipoint
wireless access business.
12
We anticipate that network system integrators for point-to-point wireless access
networks will accept the point-to-point RF products we intend to develop based
on our point-to-multipoint wireless access product experience. We also
anticipate that our recently announced Virtual Fiber RadioTM will become an
important part of our business.
Our first prototype broadband point-to-multipoint wireless access equipment
was evaluated in a trial in 1995. Before receiving our first volume order for
equipment in June 1999, virtually all of our shipments of products were for site
demonstrations and initial commercial deployments.
For the year ended December 31, 2000, approximately 93% of our sales were
to a customer located in Canada and 4% of our sales were to customers located in
the United States. For the year ended December 31, 1999, approximately 88% of
our sales were to a customer located in Canada, and 12% of our sales were to
customers located in the United States. For the year ended December 31, 1998,
approximately 48% of our sales were to customers located in the United States,
30% of our sales were to a customer located in Canada, 12% of our sales were to
a customer located in Ecuador, and 10% of our sales were to customers located in
other countries, including South Korea, England and Australia. We expect that
sales to customers located outside the United States will continue to be
significant.
Results of Operations
The following table provides continuing operations data as a percentage of
sales for the periods presented. The percentages may not add due to rounding.
Year Ended December 31,
-----------------------
2000 1999 1998
Sales ................................................... 100.0% 100.0% 100.0%
Cost of Sales ........................................... 119.6 93.0 315.0
Charges relating to excess inventory on hand and on order 71.7 -- --
------ ----- ------
Gross margin (loss) ..................................... (91.3) 7.0 (215.0)
Operating expenses
Research and development, net ......................... 34.8 50.1 209.3
Selling, general and administrative ................... 36.5 37.2 127.7
------ ----- ------
Total operating expenses ............................ 71.3 87.3 337.1
Operating loss .......................................... (162.6) (80.3) (552.1)
Other income (expense) .................................. 10.6 (5.0) 31.7
------ ----- ------
Loss from continuing operations before income taxes ..... (152.0) (85.3) (520.3)
Income tax benefit ...................................... -- -- (48.7)
------ ----- ------
Loss from continuing operations ......................... (152.0)% (85.3)% (471.6)%
====== ===== ======
Years Ended December 31, 2000, 1999 and 1998
Sales
Sales increased 155% to $24.8 million in 2000 from $9.7 million in 1999.
Sales increased 307% from $2.4 million in 1998 to $9.7 million in 1999. The
increase in sales in each period primarily reflects an increase in shipments of
our planar products to approximately $23.4 million in 2000 from $8.2 million in
1999 and $500,000 in 1998. Sales in units of our planar products were 13,709 in
2000, 3,755 in 1999 and 207 in 1998.
Cost of Sales
Cost of sales consists of component and material costs, direct labor costs,
warranty costs, overhead related to manufacturing our products and customer
support costs. Cost of sales increased $20.6 million to $29.6 million in 2000
from $9.0 million in 1999. Cost of sales increased $1.5 million to $9.0 million
in 1999 from $7.5 million in 1998. The increase in cost of sales from 1999 to
2000 and from 1998 to 1999 was attributable primarily to
13
increased shipments of our planar products. Gross margins were a negative 91% in
2000, a positive 7% in 1999 and a negative 215% in 1998. The decline in gross
margin from 1999 to 2000 was primarily a result of charges of $17.7 million
related to excess inventory on hand and on order. These charges are the result
of the ongoing evaluation of the relationship with a major customer, Alcatel.
Excluding the effect of the charges related to excess inventory on hand and on
order, gross margin for the year ended December 31, 2000 would have been
negative 20%. This portion of the negative gross margin was principally due to
increases in equipment and personnel to support the forecasted delivery
requirements of our customers, the costs associated with qualification and
initial production at our contract manufacturing location in Canada, and the
effects of significant reductions in production volume in the second half of
2000. The improvement in gross margin from 1998 to 1999 resulted from increased
efficiencies attributable to larger order and production volumes as the
transition began to occur from trial and initial qualification to full scale
network deployments.
In the third quarter of 2000, we incurred a charge of $1.9 million to
reserve for obsolete inventory which resulted from changes in product
configuration and shifts in customer demand. In the fourth quarter of 2000, the
$17.7 million charge related to excess inventory on hand and on order resulted
from significant declines in requirements for Alcatel. Procurements and
commitments for material placed earlier in 2000 were reviewed and evaluated in
the context of the Alcatel relationship, resulting in a write down to their
expected net realizable value.
In 1998 we purchased various components and materials for certain equipment
designs in advance of production in order to accelerate development and testing
for rapid product deployment. Higher costs were incurred for low volume
purchases and accelerated deliveries from suppliers to support the accelerated
development schedules. During a review of the value of the total material costs
for certain products compared to the estimated future selling prices, we reduced
selected inventory amounts to their expected net realizable value.
Research and Development Expenses
Research and development expenses consist primarily of personnel and
related costs associated with our product development efforts. These include
costs for development of products and components, test equipment and related
facilities. Gross research and development expenses increased 56% to $9.2
million in 2000 from $6.0 million in 1999. Our gross research and development
expenses were $6.0 million in 1998. The increase from 1999 to 2000 reflects
significant investments to further enhance our planar product design to
accommodate low cost, high volume manufacturing and expand our designs for
additional customer requirements. These activities required us to substantially
increase the size of our research and development staff by 50% to 72 personnel
at the end of 2000 from 48 at the end of 1999. Additionally, customer funding of
development projects decreased 43% to $612,000 in 2000 compared to $1.1 million
in 1999. From 1998 to 1999 we increased our research and development staff by 6
personnel. Partially offsetting this increase was a reassignment of 4 personnel
to our customer support group and elimination of a senior management position.
Some of our customers have provided funding to offset our development costs for
specific products. Net of customer reimbursements, our research and development
expenses increased 77% to $8.6 million in 2000 from $4.9 million in 1999 and
decreased 2% from $5.0 million in 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of employee
salaries and associated costs for selling, marketing, customer support,
information systems, finance, legal, and administration. Selling, general and
administrative expenses increased 150% to $9.0 million in 2000 from $3.6 million
in 1999. Selling and marketing expenses increased 19% to $3.6 million in 1999
from $3.0 million in 1998. These increases were primarily related to expenses to
support the Company's growth and operation as a public company. The Company
increased personnel in these functional areas by 10% to 56 in 2000 from 51 in
1999. The Company increased spending for travel, trade shows, and consulting in
an effort to expand its customer base. Additionally, the Company incurred
increased expenditures for recruitment of technical personnel and senior
management positions.
14
Other Income (Expense)
Other income (expense) consists of interest and dividends earned on cash, cash
equivalents and marketable securities offset by interest expense and
miscellaneous non-operating expenses. Total other income increased 641% to $2.6
million in income in 2000 from $484,000 in expense in 1999. Total other expense
increased 164% to $484,000 in expense in 1999 from $757,000 in income in 1998.
The change in other expense from 1999 to other income in 2000 was primarily due
to interest and dividends earned on proceeds from the Company's initial public
offering. Other income for 1998 included the recognition of $997,000 in income
related to the termination of a development contract with a customer. Interest
expense increased in 1999 by $283,000 to $756,000 in 1999 from $473,000 in 1998
primarily due to the amortization of $284,000 for a discount on subordinated
promissory notes.
Income Tax Benefit
No tax benefit has been recorded in 2000 and 1999 due to the uncertainty in
deducting current losses against future taxable income. We have recorded an
income tax benefit in 1998 from continuing operations because the loss from
continuing operations offsets income from discontinued operations.
Liquidity and Capital Resources
Since 1997, we have financed our operations primarily through the sale of
redeemable preferred stock, from proceeds of our initial public offering in
February 2000 and, to a much lesser extent, from cash generated by our
discontinued operations. We have also issued subordinated notes and used
equipment lease financing and bank lines of credit to provide cash. Our long
term debt agreements in effect at December 31, 2000 contain certain financial
covenants of which the most restrictive are the maintenance of a minimum
debt-to-equity ratio and various profitability requirements. The 2000 events of
default disclosed in the footnotes to the financial statements relate to the
failure to meet a minimum sales revenue growth requirement, required under our
line of credit facility in effect during 2000. The line of credit expired on
November 30, 2000 and was not renewed by the Company. We raised net proceeds of
$12.9 million in 1999 from the issuance of redeemable preferred stock.
On February 7, 2000 the Company completed an initial public offering of
4,600,000 shares of its common stock at $17.00 per share under the terms and
conditions contained in an underwriting agreement dated February 1, 2000 with
various underwriters. We received net proceeds from our initial public offering
of $71.1 million, after underwriting discounts and commission and offering
costs, to be used primarily for general corporate purposes.
At December 31, 2000, we had cash and cash equivalents of $27.9 million and
marketable securities of $13.1 million. As of December 31, 2000, our line of
credit facility, which was collateralized by substantially all of our assets,
had expired and was not renewed by the Company. The agreement for the line of
credit facility had required the Company to comply with certain covenants,
including minimum working capital, minimum revenue growth, and tangible net
worth.
At December 31, 2000, we had approximately $1.7 million in long-term debt,
of which $250,000 is due through June 2003 with an interest rate of 10%, and
$1,487,000 is due through November 2003 with an interest rate of 12%.
At December 31, 2000, we had approximately $3.6 million in capital lease
obligations, which are due through 2003.
Cash used in operating activities in 2000 was $30.4 million compared to
$9.6 million in 1999 and $8.5 million in 1998. Cash used in operating activities
has primarily represented funding of our net losses and inventory build to meet
expected future production requirements.
Cash used in investing activities in 2000 was $17.8 million compared to
$2.5 million in 1999 and $3.7 million in 1998. In 2000, the amount principally
related to the purchase of marketable securities and the purchase of equipment.
In 1999 and 1998, these amounts related primarily to the purchase of equipment
used in our manufacturing and research and development activities.
15
Cash provided by financing activities in 2000 was $69.5 million compared to
$16.1 million in 1999 and $4.5 million in 1998. The financing activities in 2000
consisted primarily of the proceeds from our initial public offering. The
financing activities for 1999 consisted primarily of the sale of redeemable
preferred stock and the issuance of term notes collateralized by equipment. In
1998, financing activities consisted primarily of the issuance of redeemable
preferred stock.
Our future cash requirements will depend upon a number of factors,
including the timing and level of research and development activities and sales
and marketing campaigns, and our ability to significantly increase our sales
orders and manufacturing volumes and improve our gross margin. We believe that
our cash, cash equivalent and marketable securities balances at December 31,
2000 will provide sufficient capital to fund our operations for at least 12
months. Thereafter, we may require additional capital to fund our operations. In
addition, from time to time we evaluate opportunities to acquire complementary
technologies or companies. Should we identify any of these opportunities, we may
need to raise additional capital to fund the acquisitions and our operations.
There can be no assurance that additional financing will be available to us on
favorable terms or at all.
Disclosures About Market Risk
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed below
in "Safe Harbor for Forward-Looking Statements."
As of December 31, 2000, we had cash and cash equivalents of $27.9 million.
Substantially all of these amounts consisted of highly liquid investments with
remaining maturities at the date of purchase of less than 90 days. As of
December 31, 2000, we had marketable securities of $13.1 million which consisted
of municipal and government bonds and commercial paper with maturities through
June 2001. These investments are exposed to interest rate risk and will decrease
in value if market interest rates increase. We believe a hypothetical increase
or decrease in market interest rates by 10 percent from the December 31, 2000
rates would not cause the fair value of these investments to decline
significantly, since the Company's investments mature within one year. Although
an immediate increase in interest rates would not have a material effect on our
financial condition or results of operations, declines in interest rates over
time will reduce our interest income.
At December 31, 2000, the Company's portfolio of marketable securities
included a $2.5 million investment in commercial paper issued by Pacific Gas &
Electric. Subsequent to the balance sheet date, the fair value of that
investment has declined. The subsequent decline in fair market value was not
recorded in the financial statements at December 31, 2000 because the Company
believes the decline to be temporary.
We do not own any material equity investments. Therefore, we do not
currently have any direct equity price risk.
Currently, all sales to international customers are denominated in United
States dollars and, accordingly, we are not currently exposed to foreign
currency exchange rate risks.
Safe Harbor for Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements as
defined by federal securities laws which are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, intentions, projections, developments, future
events, performance or products, underlying assumptions and other statements
which are other than statements of historical facts. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "intends," "plans," "anticipates," "contemplates,"
"believes," "estimates," "predicts," "projects," "potential," "continue," and
other similar terminology or the negative of these terms. From time to time, we
may publish or otherwise make available forward-looking statements of this
nature. All such forward-looking statements, whether written or oral, and
whether made by us or on our behalf, are expressly qualified by the cautionary
statements described in this Form 10-K, including those set forth below, and any
other cautionary statements which may accompany the forward-
16
looking statements. In addition, we undertake no obligation to update or revise
any forward-looking statement to reflect events, circumstances or new
information after the date of this Form 10-K or to reflect the occurrence of
unanticipated events, and we disclaim any such obligation.
We believe that the forward-looking statements included in this Form 10-K
have a reasonable basis. However, forward-looking statements are only
predictions that relate to future events or our future performance and are
subject to known and unknown risks, uncertainties, assumptions, and other
factors that may cause actual results, outcomes, levels of activity,
performance, developments, or achievements to be materially different from any
future results, outcomes, levels of activity, performance, developments, or
achievements expressed, anticipated or implied by these forward-looking
statements. As a result, we cannot guarantee future results, outcomes, levels of
activity, performance, developments, or achievements, and there can be no
assurance that our expectations, intentions, anticipations, beliefs or
projections will result or be achieved or accomplished.
In addition to other factors and matters discussed elsewhere in this Form
10-K, in our periodic reports and other filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include,
without limitation, the following:
o Relationship with Alcatel. One customer, Alcatel, accounted for 93% of
our sales for the year ended December 31, 2000 and 88% of our sales for
the year ended December 31, 1999. Our relationship with Alcatel began
in 1998 when we agreed to develop and supply products for Newbridge
Networks. Newbridge Networks was acquired by Alcatel in May 2000.
Alcatel does produce products very similar to ours and could decide to
stop procuring products from us. In the fourth quarter of 2000, Alcatel
changed the approval processes relating to product development and
production. As a result, we suspended production of products for
Alcatel. We cannot predict when, if at all, we will resume volume
production of products for Alcatel. Failure to resume production would
have a negative impact on our expected sales and a negative impact on
the value of the inventory we have procured to produce products for
Alcatel, as well as a negative overall impact on our business.
o Limited Number of Customers. Our customers are primarily a small number
of network system integrators, and the loss of one or more of them
could limit our ability to generate sales and adversely affect our
business. We have no long-term purchase commitments or exclusive
purchase agreements with these or any other customers. Because there
are a relatively small number of network system integrators with the
resources and technical expertise necessary to offer broadband wireless
access systems, and because these network system integrators
extensively test and evaluate products such as ours before making a
purchase decision, we may be unable to replace our network system
integrators quickly. Since we typically have to develop custom products
for each customer, there is typically a period of months between the
time we obtain a new customer and the time we start shipping production
quantities of products to that customer. Moreover, because we may be
able to supply only a few network system integrators due to capacity
constraints, we may be unable to reduce our dependence on a few
customers.
o Limited Capital. Our operations to date have required substantial
amounts of capital. As of the end of December 2000, we had
approximately $41 million in cash, cash equivalents, and marketable
securities. While we believe that our cash on hand will be sufficient
to meet our working capital and capital expenditure needs for at least
the next twelve months, we may need or want to raise additional
capital. Our capital requirements will depend on numerous factors,
including the commercial acceptance of our products, the demand for our
products, potential changes in strategic direction, and the costs of
our research and development efforts. Additional financing may not be
available on favorable terms, if at all. If we cannot raise the
additional capital we may need or want on acceptable terms, we may not
achieve our business goals. If additional funds are raised through the
issuance of equity securities, the percentage ownership of our current
stockholders may be reduced, the value of their holdings of our
17
stock may be diluted, and such equity securities may have rights,
privileges or preferences senior to those of our common stock.
Alternatively, we may need to incur substantial debt or contingent
obligations, which could adversely affect our cash flow, results of
operations, financial condition, and business. Depending on the
investors in any equity or debt offering, we may injure our existing
business relationships with suppliers and customers.
o Inability to Predict Date of Profitability. We have incurred
substantial losses and may not be profitable in the future. We cannot
predict when we will become profitable. Our failure to achieve
profitability within the time frame investors expect may cause the
market price of our stock to decline.
o Fluctuation in Quarterly Results. Our sales and operating results are
likely to fluctuate significantly and may fail to meet or exceed the
expectations of securities analysts or investors, causing our stock
price to fall. Factors that could cause our quarterly results to
fluctuate include our relationship with Alcatel, the timing and size of
orders for our products, the mix of our product sales (which we expect
will shift over time generally toward our less profitable customer
premises equipment), the hiring and loss of personnel, timing of
expenditures for research and development activities, our lengthy sales
cycle which makes it difficult to predict our future business
operations and make plans for the future, our manufacturing capacity
constraints and our ability to fulfill orders, our inability to obtain
components and test and manufacturing equipment at the prices and times
and in the quantities we need, the timing of our investments in
additional manufacturing capacity, unexpected poor assembly or test
yields for our products, price competition, new product introductions
by us or by our competitors, disruptions in delivery of products
manufactured by subcontractors or of components or subsystems provided
by third-party suppliers, seasonal factors that may affect capital
spending by customers, such as the varying fiscal year ends of
customers, political instability, regulatory developments, conditions
affecting the telecommunications industry generally or general economic
conditions, acquisitions and other factors described in this section.
o Stock Price Volatility. The market price of our common stock has been
volatile and is likely to remain volatile. Potential reasons for
volatility include our financial performance or the performance of our
competitors, technological innovations or other trends in our industry,
successes or failures at significant product evaluations or site
demonstrations, the introduction of new products by us or our
competitors, the arrival or departure of key personnel, acquisitions,
strategic alliances or joint ventures involving us or our competitors,
announcements by our customers, announcements by us concerning our
relationship with our existing or new customers, changes in estimates
of our performance or recommendations by securities analysts, decisions
by major participants in the communications industry, decisions by
investors to de-emphasize investment categories, groups or strategies
that include our company or industry, and market conditions in the
industry, the financial markets and the economy as a whole.
o Qualified Personnel. Our success depends in part on our ability to
attract, hire, train, retain and motivate qualified technical,
production, management, marketing, sales, and other personnel with
appropriate levels of capabilities. We believe that a significant level
of expertise is required to develop and market our products
effectively. Recruiting qualified personnel is an intensely competitive
and time-consuming process. We compete for such personnel with a number
of other companies, many of which have substantially greater resources
than us. There can be no assurance that we will be successful in
attracting and retaining the personnel we require to conduct and expand
our business and operations successfully on a timely basis. Our ability
to attract, hire, retain and motivate our personnel may be adversely
impacted by our current business uncertainty, the recent reductions in
the size of our workforce, and our lower stock price (since we grant
many of our personnel options to buy our stock). The failure to
attract, hire, train, retain and motivate qualified personnel in the
future would have a material adverse effect on our business, financial
condition and results of operations.
18
o Dependence on Key Personnel. Our performance is substantially dependent
on the performance of our executive officers and other key employees.
We have key-man life insurance only on John Youngblood. We do not
currently have a succession plan in place. Loss of the services of any
of our key executive officers or other key employees could have a
material adverse effect on our business, financial condition and
results of operations.
o Reliance on Third-Party Suppliers. Our products include single-source
and other critical components, and our inability to obtain these
components at the prices we desire could halt production and could hurt
our sales and lower our margins. Further, our inability to obtain these
components in the quantities and at the times we desire could hurt our
ability to expand our business as rapidly as we would like. We
typically do not have any supply agreements of a term longer than one
year with these vendors. Inability to develop alternative sources for
these components or to obtain sufficient quantities of components could
result in delays or reductions in product shipments. In the event of a
reduction or interruption in the supply of a key component, a
significant amount of time could be required to qualify alternative
suppliers and receive an adequate flow of replacement components.
Reconfiguration of our products to adapt to new components may also be
required and could entail substantial time and expense. In addition,
because the process of manufacturing certain of these components is
extremely complex, our reliance on the suppliers of these components
exposes us to potential production difficulties and quality variations,
which could negatively affect the cost and timely delivery of our
products. Given the reduction in our anticipated production in 2000, we
had to negotiate with numerous suppliers concerning inventory we had
ordered from them. This fluctuation in our business may make them
unwilling or reluctant to supply components to us in the future.
o Product Improvements. The market for telecommunications products and
services is subject to rapid technological change, evolving industry
standards, rapid changes in customer requirements and frequent product
and service introductions and enhancements. We expect our competitors
to continue to improve the performance of their current products and to
introduce new products or new technologies that may supplant or provide
lower-cost alternatives to our products. To be competitive, we must
continue to invest significant resources in research and development,
sales and marketing and customer support. We may be unable to achieve
the continuing cost reductions and technological improvements required
for our products to remain competitive. Market acceptance of our
products, and our success, will depend in part on our ability to reduce
the per-unit cost of our products. There can be no assurance that we
will be able to keep pace with competitive pricing pressures or
technological developments.
o Difficulties in Developing New Products. We may be unable to develop
new technology and new products (including, without limitation, our
contemplated Virtual Fiber RadioTM and point-to-point RF products) with
the features, performance, cost and other characteristics as currently
contemplated or as desired by our customers or the market in general.
Any new technology and new products we develop may not gain the market
acceptance we anticipated. Development of new technology and new
products may take longer than we expect, take more resources than we
expect, and distract us from other portions of our business.
o Difficulties in New Business Lines. We are contemplating the possible
expansion of our business beyond just producing products for the
broadband wireless point-to-multipoint market. For example, we are
developing our Virtual Fiber RadioTM and contemplating the development
of RF products for point-to-point wireless access systems. We may be
unable to realize the anticipated benefits from expanding the scope of
our business. We may be unable to successfully expand into new areas of
business. We may incur unanticipated costs or liabilities in attempting
to enter those new business areas. We may injure our existing business
relationships with suppliers and customers by expanding the scope of
our business.
19
o Delays in Development or Manufacture of Products. We may not be able to
develop or manufacture our products as quickly as our customers require
or would like. This manufacturing constraint could cause us to lose
sales, damage our reputation, incur financial liabilities, and
jeopardize our long-term prospects.
o Difficulty in Estimating Costs. A large proportion of our sales are
made pursuant to contracts that require delivery of products over
several quarters or years. Typically the prices of products sold under
these contracts are based largely on our estimate of our cost to
develop and supply these products. Many times we need to make our
estimates before we obtain experience in developing or manufacturing
the products. If we incur higher costs than estimated in performing
under these contracts, it could have a material adverse effect on our
results of operation and financial condition.
o Recent Focus on Current Business. We have only recently focused on the
broadband wireless access market and, as a result, it is difficult to
predict our future prospects in this market based on our limited
history. Historically, our operations focused on a business segment
that we discontinued in August 1999. The commercial market for our
broadband wireless access products did not emerge until recently and is
developing slower than we had initially anticipated. Therefore, there
is limited financial data that can be used to evaluate our prospects in
this market.
o Intellectual Property Protection. Our future success will depend in
part on our ability to protect our proprietary product and
manufacturing process designs and other proprietary technology. Our
intellectual property rights, and our ability to enforce those rights,
may be inadequate to prevent others from using our technology or
substantially similar technology they may independently develop. The
use of that technology by others could eliminate any competitive
advantage we have, cause us to lose sales and otherwise harm our
business. A significant portion of our proprietary technology is
know-how, and employees with know-how may depart before transferring
their know-how to other employees. Moreover, the laws of other
countries where we market our products may afford even less protection
for our intellectual property. If we resort to legal proceedings to
enforce our intellectual property rights, the proceedings could be
burdensome and costly and divert the efforts of our technical and
management personnel, even if we were to prevail.
o Intellectual Property Infringement Claims. From time to time, third
parties may assert patent, copyright, trademark and other intellectual
property rights to technologies and in various jurisdictions that are
important to our business. In addition, third parties may assert
intellectual property right infringement claims against us. Any such
assertions, with or without merit, could be costly and time-consuming,
result in litigation (in which we may or may not prevail), divert the
efforts of our technical and management personnel, cause product
shipment delays, require us to develop new technology, or require us to
enter into royalty or licensing agreements, any of which could have an
adverse effect on our reputation, business, results of operations and
financial condition. Royalty or licensing agreements, if required, may
not be available on terms acceptable to us, if at all. In addition, we
typically agree to indemnify our customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks
or copyrights of third parties. Any requirement for us to indemnify a
customer could have a material adverse effect on our reputation,
business, results of operations and financial condition.
o Warranty and Product Liability Claims. Our business and financial
condition could be adversely affected by warranty or product liability
claims. Products as complex as ours frequently contain undetected
errors, defects or failures, especially when first introduced or when
new versions are released. The occurrence of such errors, defects or
failures could result in product returns and other losses and
liabilities for us or our customers. Such occurrence could also result
in the loss of or delay in market acceptance of our products. Due to
the relatively recent introduction of many of our products, we have
limited experience with the problems that could arise with these
products.
20
o Failure of Our Customers to Sell Complete Access Solutions. The failure
of our network system integrators to develop and sell broadband
wireless access solutions that include our products would harm our
sales. Even if our products meet all of our network system integrator
needs, other factors may impede the success of their broadband wireless
access solutions.
o Difficulty in Network Service Providers Obtaining Sufficient Funding.
Ultimately, there must be a customer who wants and who can pay for our
products or a system using our products. Many of the potential ultimate
users of our products are emerging companies with unproven business
models. We believe it has gotten more difficult for these companies to
obtain the needed funds to purchase our products or a system using our
products for at least two reasons. First, it is more difficult for
companies like these to raise funds in the capital markets due to
general economic conditions. Second, the large system integrators
appear to be reducing the amount of vendor financing they are willing
to extend. The inability of these emerging companies to succeed could
have a material adverse impact on our business, results of operations
and financial condition.
o New Industry. The broadband wireless access industry is new, and its
future is uncertain. If significant demand for this technology does not
develop, we will not be able to generate significant sales. Many
factors will influence the success or failure of broadband wireless
access technology, including its capacity to handle growing demands for
faster transmission of increasing amounts of video, voice and data, its
cost-effectiveness and performance compared to other forms of broadband
access, whose prices and performance continue to improve, its
reliability and security, whether the products can be manufactured in
sufficient volume, its suitability for a sufficient number of
geographic regions, the availability of sufficient frequencies for
network service providers to deploy products at commercially reasonable
rates, the availability on reasonable terms of sufficient site
locations for network service providers to install products at
commercially reasonable rates, and safety and environmental concerns
regarding broadband wireless transmissions.
o Continued Industry Growth. Our future success is dependent in part upon
the continued growth of the telecommunications industry, particularly
with regard to the Internet, and of demand for high-speed
telecommunications products. There can be no assurance that this growth
will continue or that the deregulation, privatization and economic
globalization of the worldwide telecommunications market that has
resulted in increased competition and escalating demand for new
technologies and services will continue in a manner favorable to us.
Regulatory and legislative changes could adversely affect our business.
o Competing Access Technologies. Many competing technologies may serve
our target market, and if the broadband point-to-multipoint technology
upon which our current products are based does not succeed as a
solution for broadband access, we would not be able to sustain or grow
our business. Other high-speed solutions include digital subscriber
lines, cable, fiber, other high-speed wire, laser, satellite, and
point-to-point wireless technologies. New products or new technologies
may be developed that supplant or provide lower-cost alternatives to
our products.
o Competition. The broadband wireless access industry is intensely
competitive, and our failure to compete effectively could hurt our
sales and reduce our margins. A number of large telecommunications
equipment suppliers, such as Alcatel, Ericsson and Nortel Networks, as
well as a number of smaller companies, have developed or are developing
products that compete with ours. Many of our competitors are
substantially larger than we are and have significantly greater
financial, sales, technical, manufacturing and other resources.
o Government Regulation. Radio communications are subject to regulation
by the United States and foreign laws and international treaties. Our
products must conform to domestic and foreign requirements established
to avoid interference among users of millimeter-wave frequencies. In
addition, domestic and foreign authorities regulate the allocation of
portions of the radio frequency spectrum. Products can be marketed in a
specific jurisdiction only if permitted by specific frequency
allocation
21
and regulations. As our customers enter new markets, we sometimes have
to adapt our products rapidly to the frequency and regulatory
requirements that exist in those markets, and we may incur significant
costs making the necessary modifications. The governmental regulatory
process may change or impose additional requirements on our products,
which could require a revision to our products, a costly and
time-consuming process. Future regulatory developments could also
adversely affect our development and introduction of new products and
technology.
o Dependence on Third-Party Manufacturers. We expect to rely on
independent manufacturers to provide full turnkey manufacturing of our
products. We currently have qualified only one independent manufacturer
for our products. We have only limited experience qualifying and
dealing with this type of highly specialized, third-party manufacturer,
and our failure to obtain satisfactory performance from third-party
manufacturers could cause us to lose sales or expose us to product
quality issues. Few third-party manufacturers have the technical
capabilities to meet our quality standards and production goals.
Therefore, it may be difficult and time-consuming to engage additional
or replacement third-party manufacturer or manufacturers if our current
manufacturer were to experience financial, operational, production, or
quality assurance difficulties or allocate production resources to
others in lieu of us or experience a catastrophic event that resulted
in a reduction or interruption of that company's ability to provide
manufacturing services to us.
o International Issues. We expect to derive a substantial portion of our
sales from international sources, and risks and difficulties associated
with international operations could result in lower sales and less
favorable terms with our customers. These difficulties and risks
include licenses, tariffs and other trade barriers imposed on products
such as ours, political and economic instability, currency fluctuation,
and compliance with a wide variety of complex laws and treaties
relating to telecommunications equipment.
o Investment Risk. As of the end of December 2000, we had approximately
$41 million in cash, cash equivalents and marketable securities. We
have engaged investment managers to assist us with investing these
funds. While we believe we have a conservative investment policy,
events could occur that result in the value of our investments
declining. In particular, we believe that the value of our investment
in commercial paper of Pacific Gas & Electric has declined.
o Accounts Receivable. We may, under certain circumstances, be unable to
enforce a policy of receiving payment within a limited number of days
of issuing invoices. For example, customers may be unwilling or unable
to pay for products on a timely basis if they are dissatisfied with the
product or if they are experiencing financial difficulty or if their
customer cancelled their order. Any inability to timely collect our
receivables could cause us to be short of cash to fund operations,
could result in our having to negotiate for only a partial payment of
certain accounts receivable, or could ultimately require us to
write-off as uncollectible certain accounts receivable, which could
have a material adverse effect on our business, results of operations
and financial condition. In particular, we are currently negotiating
with LG Information & Communications concerning the payment of the
account receivable of approximately $950,000 arising from our delivery
of prototype products to them.
o Future Stock Sales. Future sales of common stock by our existing
stockholders could cause our stock price to fall. In February 2000 we
completed the initial public offering of our common stock. In
connection with that initial public offering, substantially all of our
pre-initial public offering stockholders signed an agreement not to
transfer their securities for a period of 180 days after the initial
public offering. That lock-up period expired in July 2000. We believe
that a number of our pre-IPO stockholders have sold their shares, but
that a number of pre-IPO stockholders continue to hold their shares. If
those stockholders decided to sell their shares, a substantial amount
of our common stock would become available for sale in the public
market. This could cause the market price of our common stock to fall.
Similarly the perception among investors that these sales will occur
could produce the same effect. Sales of shares received upon exercise
of our outstanding warrants will become available for sale in the
public market pursuant to Rule 144. We have filed a registration
statement on Form S-8 pursuant
22
to which we registered 3,729,724 shares of our common stock that may be
issued pursuant to the exercise of our outstanding stock options and
stock options that we may grant in the future. The exercise of some
outstanding warrants and options will result in dilution to holders of
our common stock. The sale of shares issued upon exercise of warrants
or options could cause our stock price to fall. The sale of shares by
our directors and officers could cause the market price of our common
stock to fall. Similarly the perception among investors that these
sales will occur could produce the same effect.
o Anti-Takeover Defenses. We have anti-takeover defenses that could
discourage, delay or prevent an acquisition of our company, which could
depress our stock price or lessen any premium over market price that an
acquirer might otherwise pay.
o Acquisition and Investment Risk. As part of our business strategy, we
expect to continue to review potential acquisitions and investment
opportunities that could complement our current product offerings,
augment our market coverage, enhance our technical capabilities or that
may otherwise offer growth or synergistic opportunities. Our business
and financial condition and the market price of our common stock may be
adversely affected by our acquisition of, or significant investment in,
companies, products or technologies that we believe are complementary.
There can be no assurance that we would be successful in overcoming the
risks and other issues typically encountered in any such transactions,
including the difficulties associated with assimilating the personnel,
technology and operations of acquired companies, the potential
disruption of our ongoing business, diversion of management's attention
from our business, the potential injury to existing business
relationships with suppliers and customers, unanticipated costs or
liabilities associated with the transactions, and the risks that we
will otherwise not realize the expected benefits of the transactions.
Furthermore, future transactions could result in the issuance of
dilutive equity securities, the incurrence of debt or contingent
liabilities, or amortization expenses related to goodwill and other
intangible assets.
The items described above, either individually or in some combination,
could have a material adverse impact on our reputation, business, need for
additional capital, current and contemplated products gaining market acceptance,
development of new products and new areas of business, cash flow, results of
operations, financial condition, stock price, viability as an ongoing company,
results, outcomes, levels of activity, performance, developments, or
achievements. Given these uncertainties, investors are cautioned not to place
undue reliance on forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
See Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations, Disclosures about Market Risk.
Item 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants ......................................... 24
Balance Sheets ............................................................ 25
Statements of Operations and Comprehensive Loss ........................... 26
Statement of Changes in Stockholders' (Deficit) Equity .................... 27
Statements of Cash Flows .................................................. 28
Notes to Financial Statements ............................................. 29
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Telaxis Communications Corporation
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Telaxis
Communications Corporation (formerly known as Millitech Corporation, the
"Company") at December 31, 2000, and 1999, and the results of its operations and
its cash flows, for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 14(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
Hartford, Connecticut
February 14, 2001
24
TELAXIS COMMUNICATIONS CORPORATION
BALANCE SHEETS
(in thousands, except share data)
Pro Forma
---------
December 31, December 31, December 31,
2000 1999 1999
------------ ------------ ------------
(unaudited
-see Note 1)
Assets
Current assets
Cash and cash equivalents ..................................................... $ 27,865 $ 6,603 $ 6,603
Marketable securities ......................................................... 13,158 -- --
Trade accounts receivable, less allowance for doubtful
accounts ($250 in 2000 and $57 in 1999) ...................................... 2,836 2,900 2,900
Other accounts receivable ..................................................... 297 -- --
Inventories ................................................................... 7,838 7,101 7,101
Net assets to be disposed of .................................................. -- 1,954 1,954
Other current assets .......................................................... 486 170 170
------------ ------------ ------------
Total current assets ......................................................... 52,480 18,728 18,728
Property, plant and equipment, net ............................................ 12,751 6,444 6,444
Intangible assets, net of accumulated amortization ............................ 198 -- --
Other assets .................................................................. 109 125 125
------------ ------------ ------------
Total assets ................................................................. $ 65,538 $ 25,297 $ 25,297
============ ============ ============
Liabilities, Redeemable Preferred Stock and Stockholders' (Deficit) Equity
Current liabilities
Line of credit ................................................................ $ -- $ 500 $ 500
Accounts payable .............................................................. 8,156 4,305 4,305
Customer prepayments .......................................................... 218 285 285
Accrued expenses .............................................................. 1,770 2,319 2,319
Current maturities of long-term debt .......................................... 507 1,149 1,149
Current maturities of capital lease obligations ............................... 1,563 982 982
------------ ------------ ------------
Total current liabilities .................................................... 12,214 9,540 9,540
Long-term debt ................................................................. 1,180 1,578 1,578
Capital lease obligations ...................................................... 2,045 807 807
------------ ------------ ------------
Total liabilities ............................................................ 15,439 11,925 11,925
Commitments and contingencies
Redeemable Preferred Stock
Redeemable preferred stock, Class A, $.01 par value; $3.25 redemption value;
authorized 0 shares (3,090,323 in 1999) ; issued and outstanding 0 shares
(3,045,696 in 1999)........................................................... -- -- 9,899
Redeemable preferred stock, Class B, $.01 par value; $3.25 redemption value;
authorized 0 shares (789,677 in 1999); issued and outstanding 0 shares
(789,677 in 1999)............................................................. -- -- 2,566
Redeemable preferred stock, Class D, $.01 par value; $1.80 redemption value;
authorized 0 shares (7,200,000 in 1999); issued and outstanding 0 shares
(7,200,000 in 1999) .......................................................... -- -- 12,960
Redeemable preferred stock, Class E, $.01 par value; $2.25 redemption value;
authorized 0 shares (11,000,000 in 1999); issued and outstanding 0 shares
(9,941,508 in 1999) .......................................................... -- -- 22,368
------------ ------------ ------------
-- -- 47,793
Stockholders' (Deficit) Equity
Preferred stock, $.01 par value; authorized 4,500,000 shares in 2000 and 1999;
none issued .................................................................. -- -- --
Common stock, $.01 par value; authorized 100,000,000 shares in 2000 and 1999;
issued and outstanding 16,734,673 shares (843,872 shares in 1999) ............ 167 113 8
Additional paid-in capital .................................................... 124,740 48,912 1,224
Notes receivable .............................................................. (331) (281) (281)
Accumulated deficit ........................................................... (74,318) (35,205) (35,205)
Deferred stock compensation ................................................... (159) (167) (167)
------------ ------------ ------------
Total stockholders' (deficit) equity ......................................... 50,099 13,372 (34,421)
------------ ------------ ------------
Total liabilities, redeemable preferred stock and stockholders' (deficit) equity $ 65,538 $ 25,297 $ 25,297
============ ============ ============
The accompanying notes are an integral part of these financial statements.
25
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
Year ended December 31,
-------------------------------------------
2000 1999 1998
-------- -------- --------
Sales .............................................................. $ 24,753 $ 9,720 $ 2,386
Cost of sales ...................................................... 29,610 9,041 7,517
Charges relating to excess inventory on hand and on order .......... 17,744 -- --
-------- -------- --------
Gross margin (loss) ................................................ (22,601) 679 (5,131)
Operating expenses
Research and development, net ..................................... 8,623 4,870 4,993
Selling, general and administrative ............................... 9,029 3,618 3,048
-------- -------- --------
Total operating expenses ......................................... 17,652 8,488 8,041
-------- -------- --------
Operating loss ..................................................... (40,253) (7,809) (13,172)
-------- -------- --------
Other income (expense)
Interest and other expense ........................................ (624) (756) (473)
Income from contract cancellation ................................. -- -- 997
Interest and other income ......................................... 3,243 272 233
-------- -------- --------
Total other income (expense) ..................................... 2,619 (484) 757
-------- -------- --------
Loss from continuing operations before income taxes ................ (37,634) (8,293) (12,415)
Income tax benefit ................................................. -- -- (1,162)
-------- -------- --------
Loss from continuing operations .................................... (37,634) (8,293) (11,253)
-------- -------- --------
Discontinued operations:
Income from operations of MMWP segment, net of taxes .............. -- 258 1,724
Loss on disposition of MMWP segment, including stock
compensation expense of $2,848 for 2000 .......................... (1,479) (1,900) --
-------- -------- --------
Income (loss) from discontinued operations ......................... (1,479) (1,642) 1,724
-------- -------- --------
Net loss and comprehensive loss .................................... $(39,113) $ (9,935) $ (9,529)
======== ======== ========
Basic and diluted earnings (loss) per share from:
Continuing operations ............................................. $ (2.54) $ (13.68) $ (22.87)
-------- -------- --------
Discontinued operations ........................................... $ (0.10) $ (2.71) $ (3.50)
-------- -------- --------
Net loss .......................................................... $ (2.64) $ (16.39) $ (19.37)
======== ======== ========
Shares used in computing basic and diluted earnings (loss) per share 14,816 606 492
======== ======== ========
The accompanying notes are an integral part of these financial statements.
27
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands, except share data)
Common Stock Additional
-------------------- Paid-in Notes Deferred Stock Accumulated
Shares Amount Capital Receivable Compensation Deficit Total
------ ------ ------- ---------- ------------ ------- -----
Balances, December 31, 1997...... 983,394 $ 10 $ 733 $ -- $ -- $ (15,741) $ (14,998)
Exercise of common stock
options......................... 4,526 -- 2 -- -- -- 2
Other ........................... -- -- (66) -- -- -- (66)
Net loss ........................ -- -- -- -- -- (9,529) (9,529)
---------- ----- -------- ------ ------ --------- ---------
Balances, December 31, 1998...... 987,920 10 669 -- -- (25,270) (24,591)
Sale of common stock............. 229,074 2 522 (281) (225) -- 18
Issuance of preferred stock
warrants ....................... -- -- 140 -- -- -- 140
Issuance of common stock
warrants ....................... -- -- 266 -- -- -- 266
Exercise of common stock
options ........................ 427,526 4 219 -- -- -- 223
Exercise of warrants ............ 39,150 -- 19 -- -- -- 19
Amortization of deferred stock
compensation ................... -- -- -- -- 58 -- 58
Offering costs .................. -- -- (780) -- -- -- (780)
Other ........................... -- -- 161 -- -- -- 161
Net loss ........................ -- -- -- -- -- (9,935) (9,935)
Reverse stock split ............. (839,798) (8) 8 -- -- -- --
---------- ----- --------- ------ ------ --------- ---------
Balances, December 31, 1999...... 843,872 8 1,224 (281) (167) (35,205) (34,421)
Sale of common stock ........... 4,600,000 46 78,154 -- -- -- 78,200
Exercise of common stock
options ........................ 507,101 5 721 (67) -- -- 659
Exercise of warrants ............ 295,295 3 130 -- -- -- 133
Amortization of deferred stock
compensation ................... -- -- -- -- 56 -- 56
Offering costs .................. -- -- (6,330) -- -- -- (6,330)
Other ........................... -- -- 3,153 17 (48) -- 3,122
Conversion of preferred
stock .......................... 10,488,405 105 47,688 -- -- -- 47,793
Net loss ........................ -- -- -- -- -- (39,113) (39,113)
---------- ----- --------- ------ ------ --------- ---------
Balances, December 31, 2000 ..... 16,734,673 $ 167 $ 124,740 $ (331) $ (159) $ (74,318) $ 50,099
========== ===== ========= ====== ====== ========= =========
The accompanying notes are an integral part of these financial statements.
27
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net loss ...................................................................... $ (39,113) $ (9,935) $ (9,529)
Adjustments to reconcile net loss to net cash utilized by operating activities:
Depreciation and amortization ................................................ 3,644 2,808 2,076
Loss (gain) on disposition of MMWP segment ................................... (1,369) 1,900 --
Non-cash compensation expense ................................................ 3,161 290 --
Loss (gain) on the disposal of property and equipment ........................ (5) 21 --
Provision for excess inventory on hand and on order .......................... 17,744 -- --
Changes in assets and liabilities
Accounts receivable ......................................................... 64 (1,198) (269)
Other accounts receivable ................................................... (297) -- --
Contracts in progress ....................................................... -- 40 (54)
Inventories ................................................................. (13,486) (6,557) 69
Other current assets ........................................................ (361) (28) (1)
Accounts payable and accrued expenses ....................................... (360) 2,721 32
Customer prepayments ........................................................ (67) 328 (824)
Income taxes payable ........................................................ -- (2) (13)
-------- -------- --------
Net cash utilized by operating activities ................................... (30,445) (9,612) (8,513)
-------- -------- --------
Cash flows from investing activities
Purchase of marketable securities ............................................. (24,529) -- --
Sale of marketable securities ................................................. 11,371 -- --
Proceeds from sale of discontinued operations ................................. 1,990 -- --
Additions to property and equipment ........................................... (6,342) (2,409) (3,706)
Reduction (addition) to intangible and other assets ........................... (246) (104) 20
-------- -------- --------
Net cash utilized by investing activities ................................... (17,756) (2,513) (3,686)
-------- -------- --------
Cash flows from financing activities
Proceeds from note payable .................................................... -- 2,000 --
Net (repayment) borrowing under line of credit ................................ (500) 500 (1,500)
Proceeds from long-term debt .................................................. -- 2,401 --
Repayments of long-term debt and capital lease obligations .................... (2,716) (1,217) (1,264)
Issuance of common stock upon exercise of options and warrants ................ 792 242 2
Issuance of redeemable preferred stock ........................................ -- 13,000 7,368
Issuance of common stock ...................................................... 78,200 -- --
Stock issuance costs .......................................................... (6,330) (833) (66)
Repayment of notes receivable ................................................. 17 -- --
-------- -------- --------
Net cash provided by financing activities ................................... 69,463 16,093 4,540
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........................... 21,262 3,968 (7,659)
Cash and cash equivalents at beginning of period ............................... 6,603 2,635 10,294
-------- -------- --------
Cash and cash equivalents at end of period ..................................... $ 27,865 $ 6,603 $ 2,635
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during period for interest .......................................... $ 555 $ 361 $ 240
Non-cash investing and financing activities:
Equipment acquired under capital leases ...................................... 3,474 1,164 689
Conversion of redeemable preferred stock ..................................... 47,793 -- --
Issuance of preferred stock for subordinated promissory note ................. -- 2,000 --
Notes receivable for issuance of common stock ................................ 67 281 --
Commitments recorded in accounts payable for inventory on order .............. 4,995 -- --
The accompanying notes are an integral part of these financial statements.
28
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
We develop and supply broadband wireless access products used by network
service providers to deliver integrated voice, video and data services to
business and residential customers. We sell our products primarily to network
system integrators that include our products in broadband wireless systems sold
to network service providers.
We commenced operations in 1982 and have derived the significant majority
of our sales from our millimeter-wave products business segment. In August 1999,
we adopted a plan to focus all of our resources on our broadband
point-to-multipoint wireless access business segment and to dispose of the
millimeter-wave products segment. As a result, we have presented the operations
of the millimeter-wave products segment as a discontinued operation in our
financial statements (see Note 2).
On October 13, 1999, the stockholders voted to change the name of the
Company from Millitech Corporation to Telaxis Communications Corporation. The
stockholders also voted to amend the automatic conversion provisions for the
Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock by
reducing the minimum public offering price upon an initial public offering of
the Company's stock required to trigger automatic conversion to common stock
from $9.75 per share to $4.50 per share.
Pro Forma Balance Sheet (Unaudited)
The outstanding shares of the Company's preferred stock Class A, B, D and E
automatically convert to common stock upon a public offering resulting in gross
proceeds of at least $15,000,000 and with an offering price of at least $4.50
per share. All of our outstanding preferred stock converted into common stock
upon the closing of our initial public offering on February 7, 2000. These
conversions have been reflected in the unaudited pro forma balance sheet as of
December 31, 1999.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
Marketable Securities
The Company has invested the proceeds from its initial public offering in
accordance with its corporate cash management policy. Marketable securities are
classified as available-for-sale and are carried at cost plus accrued interest,
which approximates fair value. The Company's investments consist of municipal
and government bonds, and commercial paper. At December 31, 2000, all of the
Company's securities matured within to twelve months.
The carrying value of the Company's investments by major security type, as
of December 31, 2000, consisted of the following (in thousands):
Description 2000
- ----------- -------
Auction Rate Preferred ................................... $ 1,003
Municipal Bonds .......................................... 2,000
U.S. Government Securities ............................... 10,155
-------
$13,158
=======
29
Revenue Recognition
Sales under short-term contracts and for stock items are recognized when
deliveries are made. Sales under cost-reimbursement contracts are recorded as
costs are incurred and include estimated earned fees in the proportion that
costs incurred to date bear to total estimated costs.
Sales under certain fixed-price and fixed-price incentive contracts are
recorded utilizing the percentage of completion method, in which costs and
estimated gross margin are recorded as the work is performed. Income is accrued
based upon the percentage that costs incurred to date bear to estimated total
costs after giving effect to the most recent estimates of costs and funding at
completion.
Fees under certain contracts may be increased or decreased under cost or
performance incentive provisions which measure actual performance against
established targets or specific criteria. Incentive fee awards or penalties are
included in sales or cost of sales at the time the amounts can be reasonably
determined.
As some contracts extend over one or more years, revisions in cost and
profit estimates during the course of the work are reflected in the accounting
period in which the facts which require the revision become known. At the time a
loss on a contract becomes known, the entire amount of the estimated ultimate
loss on the contract is accrued.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, cash equivalents,
marketable securities and trade accounts receivable. The Company places its cash
investments with high-quality financial institutions. The Company extends credit
to its customers based on an evaluation of the customer's financial condition
and history and generally does not require collateral. The Company has
historically incurred minimal credit losses. At December 31, 2000 and 1999
approximately 75% and 92%, respectively, of accounts receivable was due from one
customer. Investments are placed in instruments with institutions that have
"Investment Grade" ratings or better. The Company has established policies for
investment of its cash that attempt to maintain safety and liquidity. The
Company has not realized any significant losses on cash equivalents or
marketable securities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income. For
the years ended December 31, 2000, 1999 and 1998 comprehensive loss equaled net
loss.
Research and Development
The Company incurs research and development costs in the exploration of
commercially viable applications of its millimeter-wave and microwave
technology.
The Company also incurs research and development costs under
customer-funded contracts. Costs of approximately $1,788,000, $1,156,000 and
$1,727,000 are recorded net of the associated customer funding of approximately
$612,000, $1,068,000 and $986,000 for the years ended December 31, 2000, 1999
and 1998, respectively. Significant terms of customer-funded research and
development arrangements include granting the customer a non-exclusive,
royalty-free right and license to use and distribute the product and its related
sales and technical literature that is developed by the Company under the
agreement. The Company is not obligated to repay any of the funds received under
these contracts.
30
Inventories
Inventories are stated at the lower of cost (standard cost, which
approximates actual) or market. As of December 31, 2000 and 1999, the Company
had recorded inventory reserves of $1,640,000 and $1,797,000, respectively, to
reserve for obsolete inventory. During 2000, the Company recorded a charge of
approximately $17,744,000 to adjust inventory to its expected net realizable
value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of the
assets as follows:
Asset Life
----- ----
Machinery and equipment 3 to 7 years
Furniture and fixtures 7 to 10 years
Leasehold improvements 3 to 10 years
Equipment under capital leases 3 to 7 years
Leasehold improvements and equipment under capital leases are amortized
over the lesser of the life of the lease or the useful lives of the improvements
or equipment.
When assets are sold or retired, the related cost and accumulated
depreciation are removed from their respective accounts and any resulting gain
or loss is included in income.
Intangible Assets
Intangible assets are recorded at cost and are amortized using the
straight-line method over their expected useful life, which is five years.
Intangible assets as of December 31, 2000 consisted of the following
(in thousands):
2000
-------
Proprietary technology $ 216
Less: accumulated amortization (18)
-------
$ 198
=======
Under Financial Accounting Standards Board ("FASB") Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company reviews long-lived assets and certain identifiable
intangibles for impairment at each reporting date based on the expected future
cash flows of the assets compared to the carrying value of the asset. To the
extent that such carrying value exceeds expected future cash flows, a writedown
in intangibles is recorded.
Income Taxes
Deferred tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In the accompanying statement of operations for the year ended December 31,
1998, the Company has recorded an income tax expense attributable to
discontinued operations based upon its pretax income. Since the Company's
continuing losses exceed its income from discontinued operations, an income tax
benefit has been recorded against continuing operations only to the extent of
the income tax expense attributable to discontinued operations in accordance
with SFAS No. 109, Accounting for Income Taxes. Tax expense also includes the
impact of any changes in deferred tax assets and liabilities.
31
Reverse Stock Split
On December 16, 1999, the stockholders voted to effect a one for two
reverse split of the Company's outstanding common stock effective as of that
date. The terms of the then-outstanding preferred stock, preferred stock
warrants, common stock options and common stock warrants provide for a similar
one for two adjustment on their conversion and exercise amounts and prices,
respectively. The December 31, 1999 balance sheet and the accompanying shares
outstanding, the per share earnings (loss) amounts for the years ended December
31, 1998 and 1999 and the footnote disclosures related to common stock warrants
and options have been adjusted to reflect this reverse stock split.
Earnings Per Share
Earnings per share has been computed by dividing the loss from continuing
operations, income (loss) from discontinued operations and net loss by the
weighted average common shares outstanding. No effect has been given to the
exercise of common stock options, stock warrants, convertible notes, and
redeemable preferred stock, since the effect would be antidilutive on continuing
operations for all reporting periods. The following table presents the
calculation of historical per share amounts (in thousands, except per share
data):
Year Ended December 31,
-------------------------------------
2000 1999 1998
Historical:
Loss from continuing operations ........................... $ (37,634) $ (8,293) $ (11,253)
========= ======== =========
Weighted average shares of common stock outstanding ....... 14,816 606 492
========= ======== =========
Basic and diluted loss per share from continuing operations $ (2.54) $ (13.68) $ (22.87)
========= ======== =========
Income (loss) from discontinued operations ................ $ (1,479) $ (1,642) $ 1,724
========= ======== =========
Weighted average shares of common stock outstanding ....... 14,816 606 492
========= ======== =========
Basic and diluted income (loss) per share from discontinued
operations ............................................... $ (0.10) $ (2.71) $ 3.50
========= ======== =========
Net loss .................................................. $ (39,113) $ (9,935) $ (9,529)
========= ======== =========
Weighted average shares of common stock outstanding ....... 14,816 606 492
========= ======== =========
Basic and diluted net loss per share ...................... $ (2.64) $ (16.39) (19.37)
========= ======== =========
Derivative Instruments
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The statement
requires recognition of all derivatives at fair value in the financial
statements. FASB Statement No. 137, Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133, an
amendment of FASB Statement No. 133, defers implementation of Statement No. 133
until fiscal years beginning after June 15, 2000. Implementation of the standard
will not have a significant effect on the Company's financial statements.
Reclassification
Certain prior years amounts have been reclassified to conform to the
current year's presentation.
32
2. Discontinued Operations
In August 1999, the Board of Directors voted and authorized management to
dispose of the Company's millimeter-wave products (MMWP) business segment. This
segment consisted of the development and manufacture of millimeter-wave
components and assemblies, including antennas and quasi-optical products,
multiplexer products, and passive waveguide products. On February 8, 2000 the
Company completed the sale of substantially all of the assets of the MMWP
segment to Millitech, LLC for approximately $3.6 million.
Accordingly, the Company has restated its historical financial statements
to present the MMWP segment's operating results as a discontinued operation. The
results of the MMWP operations have been segregated from continuing operations
and reported as a separate line item in the statement of operations and
comprehensive loss.
As a result of the sale, the Company received proceeds of $2.0 million and
a subordinated note for $1.2 million with interest on the principal at 12%. The
principal is payable in five equal semi-annual payments of $50,000 beginning on
July 1, 2002 through July 1, 2004. On December 31, 2004, the entire remaining
principal balance of $960,000 plus accrued interest is due. Interest is payable
semi-annually on the first days of January and July of each year during the term
of the note, beginning July 1, 2000. The Company has fully reserved this
subordinated note. For the year ended December 31, 2000, the Company recorded
stock compensation expense of $2.8 million as a result of the accelerated
vesting of incentive stock options for employees who left the Company and were
hired by Millitech, LLC, and a gain on disposition of approximately $1,369,000
as a result of reassessing the net realizable value of certain assets and
liabilities related to the divestiture.
The assets and liabilities of the MMWP segment at December 31, 1999,
consisting primarily of accounts receivable, inventories, equipment, accounts
payable and accrued expenses, have been segregated as net assets to be disposed
of in the amount of $1,954,000 in the accompanying balance sheet.
Sales for the MMWP segment were $770,000, $8,312,000 and $12,211,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. The provision
for income taxes was $0, $0 and $1,162,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
3. Inventories
Inventories consist of the following (in thousands):
December 31,
-------------------------
2000 1999
------ ------
Finished goods ............................. $1,405 $ 95
Parts and subassemblies .................... 4,960 3,257
Work in process ............................ 1,473 3,749
------ ------
$7,838 $7,101
====== ======
33
4. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
December 31,
------------------------
2000 1999
-------- --------
Machinery and equipment .......................... $ 15,952 $ 9,803
Furniture and fixtures ........................... 820 679
Leasehold improvements ........................... 2,117 1,970
Equipment under capital leases ................... 6,624 3,469
-------- --------
25,513 15,921
Less accumulated depreciation and amortization ... (12,762) (9,477)
-------- --------
$ 12,751 $ 6,444
======== ========
The net book value of all equipment under capital leases was approximately
$3,728,000 and $1,677,000 at December 31, 2000 and 1999, respectively.
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was approximately $3,515,000, $2,482,000 and $1,903,000, respectively.
5. Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31,
-------------------
2000 1999
------ ------
Accrued payroll, commissions and related expenses .... $1,071 $ 978
Accrued warranty expense ............................. 412 530
Accrued contract costs ............................... -- 168
Deferred revenue ..................................... 94 --
Accrued liabilities on discontinued operations ....... -- 350
Other accrued expenses ............................... 193 293
------ ------
$1,770 $2,319
====== ======
6. Lines of Credit
In August 1999, the Company entered into a revolving line of credit
agreement with a bank. The agreement provided for an initial borrowing of up to
$1,000,000, which was increased by $500,000 upon the Company's raising an
additional $3,000,000 in stockholders' equity and increased by $500,000 upon
receipt of a machinery and equipment appraisal, for a total amount available of
$2,000,000. On June 9, 2000, the Company revised the agreement with the bank to
increase the line of credit to $5,000,000 and extend the expiration of the line
from August 19, 2000 to November 30, 2000. Interest was payable on the
outstanding balance of the line at prime plus 1%. Prime was 8.5% at December 31,
1999. The line was collateralized by substantially all of the assets of the
Company. The Company was not in compliance with certain covenants of the line
during the year ended December 31, 2000 and obtained waivers from the bank. The
line of credit expired on November 30, 2000 and was not renewed by the Company.
34
In connection with the revolving line of credit agreement, the bank
received a warrant to purchase 44,445 shares of the Company's Class E preferred
stock at $2.25 per share (see Note 13). The warrants were recorded at their fair
market value of $71,699 resulting in debt issuance costs of $71,699. These costs
were amortized over the term of the line of credit. The warrant was exercised on
August 11, 2000.
7. Notes Payable
In April 1999, the Company received $1,000,000 in proceeds from
subordinated promissory notes to certain preferred stockholders, common
stockholders, officers and directors as bridge financing. The notes bore
interest at 9.75% and were to be paid in full at the earlier of December 31,
1999 or the sale of the Company's equity securities having an aggregate sales
price of at least $5,000,000. The note holders received warrants for the
purchase of 100,000 shares of the Company's common stock at an exercise price of
$1.00 per share (see Note 13). The warrants were recorded at their fair value of
$72,012 resulting in a discount to the notes of $72,012. This discount was fully
amortized as interest expense when the notes were refinanced in September 1999.
The remaining outstanding warrants expire in July 2007.
In July 1999, the Company received an additional $1,000,000 in proceeds
from subordinated promissory notes issued to certain preferred stockholders,
common stockholders, officers and directors as bridge financing. The notes bore
interest at 9.75% and were to be paid in full on the earlier of December 31,
1999 or the sale of the Company's equity securities having an aggregate sales
price of at least $5,000,000. The note holders received warrants for the
purchase of 100,000 shares of the Company's common stock at an exercise price of
$1.00 per share (see Note 13). The warrants were recorded at their fair value of
$178,712 resulting in a discount to the notes of $178,712. This discount was
fully amortized as interest expense when the notes were refinanced in September
1999. The remaining outstanding warrants expire in July 2007.
The subordinated promissory notes required repayment on the earlier of
December 31, 1999 or at the time of sale of at least $5,000,000 of equity
securities. In September 1999, at the noteholders' election, $2,000,000 of such
notes were repaid through the issuance of $2,000,000 of Class E preferred stock
(888,889 shares with a value of $2.25 per share), which converted to 444,444
shares of common stock upon the Company's initial public offering on February 7,
2000 (see Note 1).
35
8. Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31,
--------------------
2000 1999
------- -------
Uncollateralized subordinated note, due December 2000, quarterly
principal payments of $87,500 with interest at 10% ................ $ -- $ 612
Uncollateralized subordinated note, due June 2003, monthly principal
payments of $8,333 with interest at 10% (see Note 14) ............. 250 350
Collateralized equipment notes, due April 2003 and November 2003,
monthly principal and interest payments of $48,612, with
interest at 12% ................................................... 1,487 1,836
------- -------
1,737 2,798
Less unamortized debt discount ..................................... (50) (71)
Less current portion ............................................... (507) (1,149)
------- -------
$ 1,180 $ 1,578
======= =======
The maturities of long-term debt outstanding are as follows (in thousands):
December 31,
2000
------
2001 ................ $ 528
2002 ................ 583
2003 ................ 626
------
$1,737
======
In May 1999, the Company entered into a senior loan and security agreement
which provides for the issuance of up to $2,000,000 in promissory notes. As of
December 31, 2000 and 1999, $1,487,000 and $1,836,000, respectively, in
promissory notes were outstanding against this agreement. The notes are
collateralized by machinery, equipment, intangible and other assets of the
Company. The notes require an additional interest compensation payment at the
end of the term of the notes. The payment, at the option of the Company, is
either 12.5% of the original principal of the note, or six months of payments in
the amount of 2.43% of the original principal of the note. In conjunction with
these notes, the Company issued 44,445 Class E preferred stock warrants (see
Note 13). The warrants were recorded at their fair value of $68,787 resulting in
a discount to the notes of $68,787. This discount will be amortized over the
term of the notes of four years and amounted to $17,196 and $10, 747 during 2000
and 1999, respectively. The warrants were exercised on July 31, 2000.
In June 1999, the Company paid the balance of its uncollateralized
subordinated note due June 1999 and issued a new uncollateralized subordinated
note due June 2003 to the same lender totaling $400,000. The previous note due
June 1999 required monthly payments of $5,833 with interest at 10%. In
conjunction with the new note due June 2003, the Company issued 20,000 common
stock warrants that expire July 2007 (see Note 13). The warrants were recorded
at their fair value of $14,977 resulting in a discount to the note of $14,977.
This discount will be amortized over the term of the note of four years and
amounted to $3,744 and $2,028 during 2000 and 1999, respectively. The Company
also extended the duration of the lender's outstanding Class A preferred stock
warrants to June 2003 (see Note 13).
The subordinated notes contain various covenants, including a
debt-to-equity ratio. In 1999, the lenders permanently modified certain covenant
requirements. The Company was in compliance with all revised covenants as of and
for the year ended December 31, 2000.
36
9. Leases
The Company leases its operating facility and certain equipment under
operating and capital leases which extend through 2006. Certain leases include
renewal options.
Future minimum annual lease payments under these lease agreements at
December 31, 2000 are as follows (in thousands):
Operating Capital
Year ending Leases Leases
2001 ......................................... $ 586 $ 1,827
2002 ......................................... 568 1,682
2003 ......................................... 568 493
2004 ......................................... 594 --
2005 ......................................... 469 --
2006 ......................................... 88 --
------ -------
Future minimum lease payments ................ $ 2,873 $ 4,002
========
Less amount representing interest ............ (394)
-------
Present value of net minimum lease payments .. 3,608
Less current portion ......................... (1,563)
-------
Long-term portion............................. $ 2,045
=======
The Company has a five-year operating lease for its primary operating
facility which extends through October 2005 and contains a five year renewal
option. The building lease requires the Company to pay utilities, insurance,
maintenance costs and real estate taxes. The building is leased from an
affiliate of stockholders of the Company.
In addition, the Company leases equipment under various leases for periods
ranging from one to five years. Some of these leases contain options to purchase
the equipment at the termination of the lease at a price equal to fair market
value.
Total rental expense charged to operations under operating leases was
approximately $581,000, $650,000 and $624,000 for the years ended December 31,
2000, 1999 and 1998, respectively.
10. Incentive Compensation Plan
The Company maintains an incentive compensation plan. All payouts are at
the Board of Directors' discretion. The Company recorded compensation expense of
approximately $518,000 for the year ended December 31, 2000. No compensation
expense was recognized under this plan for the years ended December 31, 1999 and
1998.
37
11. Income Taxes
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Continuing operations:
Current tax expense (benefit):
Federal ............................................. $ (8,212) $ (3,071) $ (4,998)
State ............................................... (2,095) (551) (1,032)
-------- -------- --------
(10,307) (3,622) (6,030)
-------- -------- --------
Deferred tax expense (benefit):
Federal ............................................. 8,212 3,071 4,110
State ............................................... 2,095 551 758
-------- -------- --------
10,307 3,622 4,868
-------- -------- --------
Income tax benefit related to continuing operations .... -- -- (1,162)
Discontinued operations:
Current tax expense:
Federal ............................................. $ -- $ (508) $ 888
State ............................................... -- (148) 274
-------- -------- --------
-- (656) 1,162
-------- -------- --------
Deferred tax expense:
Federal ............................................. -- 508 --
State ............................................... -- 148 --
-------- -------- --------
Income tax expense related to discontinued operations . -- 656 1,162
-------- -------- --------
Total income tax expense ............................... $ -- $ -- $ --
======== ======== ========
The provision for income taxes differs from the amount computed utilizing
the federal statutory rate of 34% as follows:
Year ended December 31,
-------------------------------
2000 1999 1998
---- ---- ----
Federal Statutory rate ................. (34.0)% (34.0)% (34.0)%
State taxes, net of federal effect ..... (6.3) (6.0) (7.6)
Other .................................. 0.0 0.3 (2.2)
Change in valuation allowance .......... 40.3 39.7 43.8
----- ----- ----
0.0% 0.0% 0.0%
===== ===== ====
38
The tax effects of temporary differences that give rise to deferred tax
assets (liabilities) at December 31, 2000 and 1999 are as follows (in
thousands):
2000 1999
--------------------- ----------------------
Current Noncurrent Current Noncurrent
------- ---------- ------- ----------
Inventory reserves $ 8,963 $ -- $ 1,504 $ --
Discontinued operations -- -- 759 --
Vacation liability 248 -- 200 --
Warranty 166 -- 212 --
Allowance for doubtful accounts 101 -- 108 --
Accrued contract costs -- -- 40 --
Unearned compensation 21 -- 23 --
Deferred revenue 38 -- -- --
Other 148 (85) 85 (85)
Investment -- (173) -- (173)
Depreciation/Amortization -- 58 -- 196
Tax credit carryovers -- 1,272 -- 612
Net operating loss carryforwards -- 19,202 -- 10,318
-------- --------- ------- ---------
Gross deferred tax benefit 9,685 20,274 2,931 10,868
Valuation allowance (9,685) (20,274) (2,931) (10,868)
-------- --------- ------- ---------
$ -- $ -- $ -- $ --
======== ========= ======= =========
At December 31, 2000, the Company has approximately $48,725,000
($26,667,000 in 1999) of net operating loss carryforwards and $540,000 ($348,000
in 1999) of investment and research and development tax credit carryforwards
available for federal income tax purposes. There are approximately $44,302,000
of net operating losses ($22,224,000 in 1999) and approximately $732,000 in
investment and research and development tax credit carryforwards available in
2000 ($266,000 in 1999) for state tax purposes.
Expiration of these carryforwards commenced in 1999 and will continue
through 2015. It is possible that the net operating loss carryforward amounts
that may be used in a single year may be limited.
12. Preferred Stock
On February 7, 2000 the Company completed an initial public offering of
4,600,000 shares of its common stock at $17.00 per share. The offering resulted
in net proceeds to the Company of $71.1 million after deducting underwriters
commission and offering expenses. Simultaneously, with the closing of the
initial public offering, all of the Company's then outstanding convertible
preferred stock was automatically converted into an aggregate of 10,488,405
shares of common stock.
As of December 31, 1999 the Company had issued and outstanding Class A, B,
D and E preferred stock (see Note 1). Each of the classes had redemption rights,
a liquidation preference, conversion rights, and dividend rights as of December
31, 1999:
o Each Class A, B, D and E share may be converted at the option of the
holder into a share of common stock at a ratio of two shares of
preferred to one share of common. Conversion would occur automatically
upon a public offering of common stock resulting in gross proceeds of
at least $15,000,000 and with an offering price of at least $4.50 per
share. Each Class D and E share would automatically be converted into
common stock upon the conversion of 90% or more of the authorized stock
of the class.
o The Class A, B, D and E shares have a liquidation preference in the
amount of $3.25, $3.25, $1.80 and $2.25, respectively, plus all
declared and unpaid dividends.
39
o The holders of Class A, B, D and E shares are entitled to receive, when
and as declared by the Board of Directors, non-cumulative annual cash
dividends of $.26, $.26, $.144 and $.18 per share, respectively. No
dividends have been declared by the Board of Directors.
o Certain of the classes of preferred stock have liquidation rights,
voting rights and cash dividend rights in preference to the other
preferred stock.
o The Company shall offer to redeem the Class A and Class B preferred
shares at the rate of 20% per year at $3.25 per share, plus an amount
equal to all declared and unpaid dividends. All Class A and Class B
redemptions can be waived at the option of two-thirds of the respective
Class A or Class B preferred stockholders. As part of the agreement in
1998 to issue Class E preferred stock, the Class A and Class B
preferred stockholders elected to postpone their redemption rights
until 2003.
o On October 21, 2003 and on the first and second anniversaries thereof,
the Company shall offer to redeem from each Class D and Class E
preferred holder, a maximum of one-third, two-thirds and one hundred
percent, respectively, of the total number of shares held by each
stockholder at a price equal to the greater of $1.80 and $2.25,
respectively, plus all declared and unpaid dividends, or the fair
market value as determined by the Board of Directors. The Class D
preferred stockholders agreed to postpone their redemption from 2002 to
2003 as part of the 1998 Class E preferred stock issuance.
During 1998, the Company issued 3,274,841 shares of Class E preferred stock
at $2.25 per share for an aggregate of $7,368,000. In September 1999, the
Company issued 6,666,667 shares of Class E preferred stock with a value of
$15,000,000. Cash proceeds were $13,000,000 and $2,000,000 of subordinated
promissory notes were retired through the issuance of $2,000,000 (888,889 shares
at a value of $2.25 per share) of Class E preferred stock.
The Company recorded all of its outstanding Class A, B, D, and E redeemable
preferred stock at the maximum redemption amount as of each balance sheet date
presented.
40
13. Stock Warrants
The Company has issued stock warrants for its preferred and common stock as
follows:
Class A Class E
Preferred Stock Preferred Stock Common Stock
---------------------- ------------------------ ----------------------
Exercise Exercise Exercise
Number of Price Per Number of Price Per Number of Price Per
Shares Share Shares Share Shares Share
------ ----- ------ ----- ------ -----
Exercisable at December 31, 1997 28,000 $ 3.25 -- $ -- 962,500 $ 1.00
Granted ........................ -- -- -- -- -- --
------- -------- ------- -------- --------- --------
Exercisable at December 31, 1998 28,000 3.25 -- -- 962,500 1.00
Granted ........................ -- -- 88,890 2.25 220,000 1.00
Exercised ...................... -- -- -- -- (19,575) 1.00
------- -------- ------- -------- --------- --------
Exercisable at December 31, 1999 28,000 3.25 88,890 2.25 1,162,925 1.00
Reverse stock split ............ (14,000) 6.50 (44,445) 4.50 -- --
Exercised ...................... -- -- (44,445) 4.50 (264,404) 1.00
Conversion ..................... (14,000) 6.50 -- -- 14,000 6.50
------- -------- ------- -------- --------- --------
Exercisable at December 31, 2000 -- $ -- -- $ -- 912,521 $ 1.08
======= ======== ======= ======== ========= ========
The Company issued 20,000 common stock warrants during 1999 in conjunction
with a subordinated note of $400,000 (see Note 8). In addition, 200,000 common
stock warrants were issued during the year ended December 31, 1999 in
conjunction with the bridge financing (see Note 7).
The outstanding common stock warrants have an exercise price of $1.00 and
expire as follows:
Expiration
Number of Warrants Date
------------------ ----
14,000 ............................. June 2003
630,464 ............................. September 2006
268,057 ............................. July 2007
14. Stock Options and Common Stock Issued
The Company has stock option plans that provide for the granting of options
to employees, directors and consultants. The plans permit the granting of
options to purchase a maximum of 3,460,359 shares of common stock at various
prices and require that the options be exercisable at the prices and at the
times as determined by the Board of Directors, not to exceed ten years from date
of issuance.
As of December 31, 2000, 687,002 options are available for issuance under these
plans. Employee stock options granted prior to September 2000 generally have a
vesting requirement of four years whereby 20% of the options granted vest at the
time of issuance and the remainder vest at a rate of 20% per year on the
anniversary date of the issuance. Employee stock options granted in September
2000 and thereafter provide for vesting in the amount of 25% of the grant upon
the first anniversary of the date of grant and quarterly vesting in the amount
of 6.25% of the grant on the first day of each January, April, July and October
following the first anniversary of the date of grant until the option has fully
vested.
41
The aggregate stock option activity for these plans is as follows:
Weighted
Number of average exercise
Shares price
--------- --------
Balance, December 31, 1997 (372,850 exercisable) ... 652,100 $ 1.00
Granted ........................................ 940,387 1.00
Exercised ...................................... (2,263) 1.00
Canceled or expired ............................ (352,864) 1.00
--------- --------
Balance, December 31, 1998 (677,503 exercisable) ... 1,237,360 1.00
Granted ........................................ 801,735 5.02
Exercised ...................................... (213,763) 1.04
Canceled or expired ............................ (78,569) 1.08
--------- --------
Balance, December 31, 1999 (834,498 exercisable) ... 1,746,763 2.83
Granted ........................................ 1,556,346 7.92
Exercised ...................................... (372,101) 1.43
Canceled or expired ............................ (157,651) 8.55
--------- --------
Balance, December 31, 2000 (845,652 exercisable) ... 2,773,357 $ 5.55
========= ========
The following table summarizes information about stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------- --------------------------------
Number Weighted Average
Outstanding Remaining Number Weighted
at Contractual Life Weighted Average Exercisable at Average
Exercise Price 12/31/00 (years) Exercise Price 12/31/00 Exercise Price
-------------- -------- ------- -------------- -------- --------------
$ 1.00 - $ 2.50 1,857,658 8.2 $ 1.41 628,787 $ 1.29
$ 4.47 - $ 6.83 522,403 9.0 $ 6.07 68,577 $ 4.50
$ 8.00 - $ 12.60 193,468 9.0 $ 11.10 83,072 $ 11.20
$ 28.50 - $ 31.28 75,356 9.6 $ 30.26 37,944 $ 30.82
$ 40.25 116,972 9.3 $ 40.25 25,772 $ 40.25
$ 61.50 7,500 9.1 $ 61.50 1,500 $ 61.50
The weighted average contractual life of options outstanding at December
31, 2000 is 8.5 years.
During the year ended December 31, 1999, the Company issued 112,500 shares
of restricted common stock at $2.50 per share to an officer in exchange for a
note receivable. The note bears interest at 6.25% and matures in September 2009.
In the event the individual is no longer employed by the Company, the Company
retains the right to repurchase the shares. This repurchase right expires at a
rate of 20% upon issuance and 20% per year each anniversary date of the
issuance. The Company recognized $225,000 in unearned compensation for the
difference between the fair value of the stock and the purchase price in this
transaction. For the years ended December 31, 2000 and 1999 respectively, the
Company recognized approximately $45,000 and $58,000 in compensation expense.
The Company recognized $257,000 in non-cash compensation expense during the
year ended December 31, 2000 as a result of accelerated vesting of stock options
on the retirement of an employee. The Company granted options to non-employees
during the year ended December 31, 1999 and accordingly recognized $212,000 in
non-cash compensation expense.
The Company applies APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock-based
compensation plans. Had compensation cost for the Company's stock option plans
been determined under SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's pro forma net loss and net loss per share would have been as follows:
42
Year ended December 31,
---------------------------------------
2000 1999 1998
--------- -------- --------
(in thousands, except per share data)
Net loss:
As reported .......... $ (39,113) $ (9,935) $ (9,529)
Pro forma ........... (40,939) (10,533) (9,662)
Net loss per share
As reported .......... (2.64) (16.39) (19.37)
Pro forma ............ (2.76) (17.38) (19.64)
The above pro forma effects may not be representative of the effects for
future years, as option grants typically vest over several years and additional
options are generally granted each year.
The fair value of each option grant has been estimated on the date of grant
using the minimum value pricing model with the following weighted average
assumptions:
2000 1999 1998
---- ---- ----
Risk-free interest rate .. 5.54% 6.12% 5.58%
Expected life ............ 6 years 6 years 8 years
Volatility ............... 100% 28% 0%
Dividend yield ........... -- -- --
The weighted average fair value of those options granted in 2000, 1999 and
1998 was $3.92, $3.17 and $0.18, respectively.
15. Common and Preferred Stock Reserved
As a result of the outstanding stock warrants, and stock option plans, the
Company has reserved 4,230,131 shares of common stock at December 31, 2000 and
15,708,284 shares of common stock, 28,000 shares of Class A preferred stock, and
88,890 shares of Class E preferred stock as of December 31, 1999.
During the year ended December 31, 1999, the stockholders voted to
authorize 4,500,000 shares of preferred stock $.01 par value, to increase the
authorized shares of the Class E preferred stock to 11,000,000 and to increase
the authorized shares of common stock to 100,000,000. No additional shares were
authorized during the year ended December 31, 2000.
16. Segment Information
During 1998, the Company adopted the provisions of FASB Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. FASB
Statement No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers. Prior to
the Company's decision to discontinue its millimeter-wave products (MMWP)
business segment (see Note 2), the Company developed and manufactured products
in two business segments, the MMWP and broadband wireless access (BWA) segments.
As a result of this decision, the Company now operates in only the BWA segment.
Products of the BWA segment include hub and customer premises equipment.
The BWA segment's sales by country are (in thousands):
Year ended December 31,
-----------------------------------
2000 1999 1998
-------- ------- -------
United States .............. $ 1,020 $ 1,156 $ 1,153
Canada...................... 22,999 8,560 713
Other countries ............ 734 4 520
-------- ------- -------
$ 24,753 $ 9,720 $ 2,386
======== ======= =======
The Company's research and production facilities and accompanying
long-lived assets are located in the United States.
43
Sales to individual customers in excess of 10% of total BWA segment
revenues are presented in the following table (in thousands):
Year ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Individual customers in excess of 10% of revenues:
Customer A ........................... $ -- $ -- $ 296
Customer B ........................... -- -- 614
Customer C ........................... 22,999 8,560 713
-------- -------- --------
22,999 8,560 1,623
Other customers ........................... 1,754 1,160 763
-------- -------- --------
Total sales ........................... $ 24,753 $ 9,720 $ 2,386
======== ======== ========
17. Employee Savings and Profit-Sharing Plan
The Company sponsors an employee savings and profit-sharing plan for all
employees. Full-time employees become eligible for participation after one-half
year of service. The Company provides a 60% (50% in 1998) matching of employee
contributions, up to a maximum of $2,000. An additional contribution is
determined at the discretion of the Board of Directors.
The Company's contributions to this plan for matching of employee
contributions amounted to approximately $235,000, $236,000 and $191,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
18. Related-Party Transactions
The Company had sales to a stockholder of approximately $186,000,
$1,355,000 and $953,000 during 2000, 1999 and 1998, respectively. Included in
accounts receivable at December 31, 1999 are approximately $343,000 due from
these sales. These transactions comprise subcontracts associated with the
stockholder's contracts with the U.S. Government, and are contracted under
federal contracting guidelines. The sales and related accounts receivable from
this customer are included in discontinued operations.
The Company held a promissory note receivable of $250,000 as the result of
a 1996 license and sales agreement with a limited liability company ("LLC")
established and partly owned by a former stockholder/employee. The Company also
owns a 19.9% interest in the LLC. At December 31, 2000 and 1999, the Company has
reserved for the entire amount due on the note receivable of approximately
$200,000, and has no value assigned to its 19.9% interest in the LLC. The
Company has obtained a judgment against the LLC in the amount of approximately
$378,000. In October 1999, the Company renegotiated that transaction with the
LLC and involved Millivision, L.L.C., a joint venture between the LLC and one
other entity. The Company released the LLC and the former stockholder/employee
from substantially all claims, including the $378,000 judgment, and the LLC
released any claims to the intellectual property relating to the Company's
contraband detection systems business. Millivision agreed to pay the Company
royalties in the minimum amount of $200,000. The LLC, Millivision and the former
stockholder/employee also agreed not to compete with the Company with respect to
broadband wireless telecommunications equipment.
19. Contingencies
The Company is subject to potential liability under contractual and other
matters and various claims and legal actions which are pending or may be
asserted. These matters arise in the ordinary course and conduct of the business
of the Company. While the outcome of all of the pending and potential claims and
legal actions against the Company cannot be forecast with certainty, management
believes that such matters should not result in any liabiltiy which would have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
44
20. Selected Quarterly Financial Data (unaudited)
The following tables present unaudited quarterly financial information for
the eight quarters ended December 31, 2000 (in thousands, except per share
data). The statement of operations data have been derived from our unaudited
financial statements. In management's opinion, these statements have been
prepared on substantially the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial information in accordance
with generally accepting accounting principles. The results for any quarter are
not necessarily indicative of results for any future period.
Quarter Ended
--------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000
-------- -------- -------- --------
Sales ............................................ $ 6,316 $ 8,731 $ 8,095 $ 1,611
Cost of sales .................................... 6,514 8,543 10,225 4,328
Charges relating to excess inventory on hand
and on order ................................... -- -- -- 17,744
Gross margin (loss) .............................. (198) 188 (2,130) (20,461)
Loss from continuing operations .................. (3,583) (4,569) (5,896) (23,586)
Income (loss) from discontinued operations ....... (2,848) 496 534 339
Net loss ......................................... (6,431) (4,073) (5,362) (23,247)
Basic and diluted loss per share from
continuing operations ........................... (0.37) (0.28) (0.36) (1.41)
Basic and diluted income (loss) per share
from discontinued operations .................... (0.29) 0.03 0.03 0.02
Basic and diluted net loss per share ............. (0.66) (0.25) (0.32) (1.39)
Quarter Ended
--------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
-------- -------- -------- --------
Sales ............................................ $ 1,177 $ 1,585 $ 2,742 $ 4,216
Cost of sales .................................... 1,650 1,162 2,291 3,938
Charges relating to excess inventory on hand
and on order ................................... -- -- -- --
Gross margin (loss) .............................. (473) 423 451 278
Loss from continuing operations .................. (2,148) (1,720) (2,079) (2,346)
Income (loss) from discontinued operations ....... 358 (1,891) (109) --
Net loss ......................................... (1,790) (3,611) (2,188) (2,346)
Basic and diluted loss per share from
continuing operations ........................... (4.34) (3.44) (3.44) (2.86)
Basic and diluted income (loss) per share
from discontinued operations .................... 0.72 (3.78) (0.18) (0.00)
Basic and diluted net loss per share ............. (3.62) (7.22) (3.62) (2.86)
21. Subsequent Event
At December 31, 2000, the Company's portfolio of marketable securities
included a $2.5 million investment in commercial paper issued by Pacific Gas &
Electric. Subsequent to the balance sheet date, the fair value of the investment
has declined. The subsequent decline in fair market value has not been recorded
in the financial statements at December 31, 2000 because the Company believes
the decline to be temporary.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
45
PART III
Item 10. Directors and Executive Officers of the Company.
Information appearing under the captions "Board of Directors, Executive
Officers and Key Employees" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive proxy statement for our 2001 Annual Meeting of
Stockholders (the "2001 Proxy Statement") is hereby incorporated by reference.
Item 11. Executive Compensation.
Information appearing under the caption "Executive Compensation" in our
2001 Proxy Statement is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Our Directors and Management" in our 2001 Proxy Statement
is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
Information appearing under the caption "Material Relationships and Related
Party Transactions" in our 2001 Proxy Statement is hereby incorporated by
reference.
46
PART IV
Item 14. Financial Statements, Schedules, Reports on Form 8-K and Exhibits.
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
See Index to Financial Statements under Item 8--Financial Statements and
Supplementary Data.
2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because they are
not required, not applicable, or the information to be included in the financial
statement schedules is included in the financial statements or the notes
thereto.
3. Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
We did not file any reports on Form 8-K during the three months ended
December 31, 2000.
47
TELAXIS COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1998, 1999 and 2000
(in thousands)
Column C
Column A Column B Additions Column D Column E
- ------------------------------- ---------- ---------------------- ----------- ----------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description Of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- ------
1998
Inventory reserve ............. $ 786 $ 1,492 $ -- $ (45) $ 2,233
Allowance for doubtful accounts 210 176 -- (18) 368
Warranty reserve .............. 342 284 -- (134) 492
------- ------- ------- ------- -------
$ 1,338 $ 1,952 $ -- $ (197) $ 3,093
======= ======= ======= ======= =======
1999
Inventory reserve ............. $ 2,233 $ 420 $ (625) $ (231) $ 1,797
Allowance for doubtful accounts 368 104 (415) -- 57
Warranty reserve .............. 492 38 -- -- 530
------- ------- ------- ------- -------
$ 3,093 $ 562 $(1,040) $ (231) $ 2,384
======= ======= ======= ======= =======
2000
Inventory reserve ............. $ 1,797 $ 1,895 $ (2,052) $ -- $ 1,640
Allowance for doubtful accounts 57 193 -- -- 250
Warranty reserve .............. 530 180 (298) -- 412
------- ------- ------- ------- -------
$ 2,384 $ 2,268 $(2,350) $ -- $ 2,302
======= ======= ======= ======= =======
48
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated as of February 8, 2000, between the
Company and MMW Acquisition, LLC.*
3.1 Restated Articles of Organization of the Company, as amended.***
3.2 Amended and Restated By-laws of the Company.**
4.1 Form of certificate evidencing ownership of Common Stock of the
Company.***
10.1 1986 Stock Plan of the Company.
10.2 1987 Stock Plan of the Company.
10.3 1988 Stock Plan of the Company.
10.4 1996 Stock Plan of the Company.
10.5 1997 Stock Plan of the Company.
10.6 1999 Stock Plan of the Company.
10.7 Employment Agreement by and between the Company and John L.
Youngblood dated as of December 19, 2000.*****
10.8 Employment Agreement by and between the Company and Ransom D.
Reynolds dated as of December 19, 2000.*****
10.9 Employment Agreement by and between the Company and Dennis C. Stempel
dated as of December 19, 2000.*****
10.10 Employment Agreement by and between the Company and David L. Renauld
dated as of December 19, 2000.*****
10.11 Employment Agreement by and between the Company and Kenneth R. Wood
dated as of December 19, 2000.*****
10.12 Reseller Agreement by and between the Company and Newbridge Networks
Corporation dated August 7, 1998.+
10.13 Professional Services Agreement by and between the Company and
Newbridge Networks Corporation dated August 7, 1998.+
10.14 Supplemental Agreement between the Company and Alcatel Networks
Corporation dated September 14, 2000.++
10.15 Agreement and License between the Company and California Amplifier,
Inc. dated as of August 25, 2000.****
10.16 Lease by and between the Company and O'Leary-Vincunas LLC dated
November 1, 2000.*****
10.17 Fourth Amended and Restated Registration Rights Agreement dated
September 17, 1999.**
10.18 Registration Rights Agreement by and between the Company and Boston
Federal Savings Bank dated August 20, 1999.
10.19 Purchase Agreement by and between the Company and Massachusetts
Technology Development Corporation dated June 1988.**
10.20 First Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated December
28, 1988.***
10.21 Second Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated June 17,
1999.***
10.22 Employee Stock Purchase Agreement by and between the Company and
Mervyn Fitzgerald dated September 16, 1999.***
49
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.23 Tax Agreement by and between the Company and Mervyn Fitzgerald dated
September 16, 1999.***
10.24 Form of Indemnification Agreement, a substantially similar version of
which was entered between the Company and each of Mssrs. Doyle,
Fleming, Paladino, Norbury, Youngblood, Renauld, Reynolds, and
Stempel on September 18, 2000 and between the Company and Ms.
Armitage on October 31, 2000.****
23.1 Consent of PricewaterhouseCoopers LLP.*****
27.1 Financial Data Schedule.*****
- --------
All non-marked Exhibits listed above are incorporated herein by reference to the
exhibits to Form S-1 filed with the Commission on September 27, 1999 (File No.
333-87885).
* Incorporated herein by reference to the exhibits to Form 8-K filed
with the Commission on February 11, 2000.
** Incorporated herein by reference to the exhibits to Amendment No. 1
to Form S-1 filed with the Commission on October 15, 1999 (File No.
333-87885).
*** Incorporated herein by reference to the exhibits to Amendment No. 2
to Form S-1 filed with the Commission on December 21, 1999 (File No.
333-87885).
**** Incorporated herein by reference to the exhibits to Form 10-Q filed
with the Commission on November 14, 2000.
***** Filed herewith.
+ Incorporated herein by reference to the exhibits to Amendment No. 3
to Form S-1 filed with the Commission on January 11, 2000 (File No. 333-87885).
Certain portions of this Exhibit have been omitted pursuant to a request for
confidential treatment filed with the Commission.
++ Incorporated herein by reference to the exhibits to Form 10-Q filed
with the Commission on November 14, 2000. Certain portions of this Exhibit have
been omitted pursuant to a request for confidential treatment filed with the
Commission.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Telaxis has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Telaxis Communications Corporation
By: /s/John L. Youngblood
---------------------
John L. Youngblood,
President and Chief Executive Officer
Date: March 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Telaxis
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By: /s/John L. Youngblood President, Chief Executive Officer March 27, 2001
--------------------- and Director
John L. Youngblood
By: /s/Dennis C. Stempel Vice President, Chief Financial March 27, 2001
-------------------- Officer, Principal Financial Officer
Dennis C. Stempel and Principal Accounting Officer
By: /s/Albert E. Paladino Director March 27, 2001
---------------------
Albert E. Paladino
By: /s/Carol B. Armitage Director March 27, 2001
--------------------
Carol B. Armitage
By: /s/ Allan M. Doyle, Jr. Director March 27, 2001
-----------------------
Allan M. Doyle, Jr.
By: /s/ Robert C. Fleming Director March 27, 2001
---------------------
Robert C. Fleming
By: /s/ David A. Norbury Director March 27, 2001
--------------------
David A. Norbury
51