Back to GetFilings.com
================================================================================
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, 2001
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
(Exact name of registrant as specified in its charter)
Massachusetts 04-2751645
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20 Industrial Drive East
South Deerfield, MA 01373
(Address of principal executive offices)
(413) 665-8551
(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, 2002, the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Company was $14,054,562. 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 $1.05, which is the
average of the high and low sales prices on February 28, 2002. On such date, the
Company had 16,690,531 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 2002
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 market FiberLeapTM products, which transparently transmit fiber
optic signals over a wireless link between two access points. Using our wireless
products, fiber optic carriers and enterprises can obtain connectivity at fiber
optic data rates and quality of service, but where fiber optic cable itself is
not available or is not economically viable. Our current FiberLeapTM 2006
product is a compact, easily deployed product that enables fiberless
transmission of data, voice and video communication at fiber rates that are
variable from an Optical Cable -3 (or OC-3) rate of 155 Mbps (or Megabits per
second) to an OC-12 rate of 622 Mbps.
FiberLeapTM is a fiber optic network extension product that addresses the "fiber
gap" - the "last mile" connectivity divide between existing fiber optic network
infrastructure and potential revenue-generating subscribers, such as businesses,
institutions, and governmental agencies. These potential subscribers may be
located in buildings that are not connected to a metropolitan Synchronous
Optical Network, or SONET, ring (commonly referred to as an "off-net" building)
or in multiple buildings in a private enterprise or campus environment. Our
FiberLeapTM products could also be used to connect cellular telephone towers
with the existing fiber optic network infrastructure (a connection commonly
called "cellular backhaul"). We are not addressing the consumer-level, broadband
access market.
FiberLeapTM is designed to integrate directly and transparently into fiber optic
network infrastructure, thereby enabling carriers or enterprises to deploy and
support FiberLeapTM as if it were a length of fiber optic cable. We believe its
simplicity will enable us to address multiple markets, applications, and
customers with a common product, thereby providing market diversification with
multiple areas of opportunity.
We were formed as a Massachusetts corporation in January 1982 under the name
"Millitech Corporation". In 1995, we began to focus the company on the broadband
wireless access industry and subsequently developed and produced a large number
of Local Multi-point Distribution System (LMDS) point-to-multipoint outdoor
units for original equipment manufacturers (OEMs). In December 1999, we changed
our name to Telaxis Communications Corporation to reflect our focus on the
wireless industry. Our initial success in the LMDS industry led to the initial
public offering of our stock in February 2000. Due to changing market
conditions, in July 2001, we made the decision to exit the LMDS industry and to
focus all of our resources on closing the connectivity gap in fiber networks.
Since that time, we have restructured our company to address this new
opportunity, FiberLeapTM trial and Beta units have been developed and tested, a
new marketing program has begun, and limited production has begun.
Industry Background
The fiber optic network industry is faced with financial stresses due in part to
the connectivity gap. Major fiber carriers are having difficulty in generating
sufficient revenue to service the debt they incurred as they deployed their core
networks. Their revenue difficulties are partially due to their limited ability
to close the gap between their core network infrastructure and under-served
subscribers that require or desire fiber optic capacity. Carriers typically have
to overcome cost, time, technological, and other barriers when trying to close
the fiber gap.
Given the revenue difficulties faced by fiber carriers, they are limiting their
further capital expenditures. In the current economic climate, it is expected
that further fiber network development, especially at the network edge, will
focus on deployments where new capital expenditures will be closely followed by
new revenue. Connecting new subscribers to existing fiber networks at low
incremental cost would fit well in this market reality. We believe that
FiberLeapTM products are well suited to this market environment as they could
provide fiber network connectivity at the network edge faster and cheaper than
new fiber optic cable.
2
As a result of the capital expenditure reductions by fiber carriers, some
potential subscribers are looking elsewhere to satisfy their connectivity needs.
For example, enterprises are expected to increasingly turn to network
integrators to provide connectivity between their local area networks, or LANs,
and storage area networks, or SANs, as their business conditions improve.
Cellular network operators are faced with similar connectivity issues when they
try to provide backhaul to connect their cellular telephone towers to the rest
of their networks. We expect this issue to intensify as subscribers demand
increasingly data-intensive mobile services.
Overlaying all of these industry trends is the current desire for increased
network redundancy and reduced vulnerability through duplicate and alternative
fiber optic paths, which could potentially be provided by FiberLeapTM.
Fiber Network Connectivity Gap
Industry sources have estimated that over 39 million miles of fiber optic cable
have been laid and over $90 billion has been invested in that process, but less
than 5% of the installed fiber is generating revenue. At the same time, less
than 5% of the estimated 700,000 U.S. commercial buildings with occupancies
greater than 100 people are estimated to be served by fiber. This fiber gap has
arisen largely for two reasons. First, it is expensive and time-consuming to lay
fiber to connect individual businesses to fiber network infrastructure, and the
process of laying fiber is often delayed by the need to obtain rights of way and
permits. Second, there is a shortage of alternative access solutions that would
enable fiber carriers to connect potential customers to the fiber network
infrastructure. As a result, much of the existing fiber network infrastructure
is significantly underutilized.
Private Enterprise Networks
Business, government and institutional enterprise network deployments are
expected to accelerate as economic conditions improve. These deployments will
provide high-speed connections between multiple buildings occupied by the same
or affiliated businesses or other enterprises in a campus or business complex
setting. Given that public fiber network carriers have curtailed their capital
spending programs, enterprises are turning to network integrators to provide
LAN-to-LAN and SAN-to-SAN connectivity. These integrators may be more receptive
to considering alternative methods of providing connections (such as our
FiberLeapTM products) rather than just fiber optic cable. In addition,
high-data-rate next generation fixed wireless LAN systems such as 802.11a could
create additional needs for LAN-to-LAN connectivity that could be met with
FiberLeapTM. The higher data rate capability within the LAN could generate
demand for higher speed connections between LANs. FiberLeapTM could potentially
provide the fiber optic connectivity that may be required by these new systems.
Cellular Backhaul
The need for high-speed connections between cellular telephone towers and the
rest of the cellular telephone network is expected to rise dramatically. Use of
cellular telephones and other mobile wireless access devices is expected to grow
on a worldwide basis. Also, the complexity of cellular signals and amount of
data that needs to be backhauled is expected to increase significantly as 2.5G,
3G and other high-data-rate cellular systems are developed and deployed.
Backhaul data rates required for some individual cells are expected to increase
from 1.5-to-2.0 Mbps for current cellular systems (which can be provided with a
typical T-1/E-1 connection) to 1-to-2 gigabits per second (Gbps) for
high-data-content 3G cells. These speeds are far beyond the capabilities of the
T-1/E-1 connections that are typically used today, thereby providing an
attractive market for FiberLeapTM.
Native Gigabit Ethernet Trend
For fiber carriers that are providing public access services and for businesses
providing and/or using LAN/LAN and SAN/SAN connectivity, extending native
Gigabit Ethernet into metropolitan core networks is becoming a requirement.
Gigabit Ethernet, like SONET, is a standardized method of structuring the
transmission of data over networks. Ethernet protocol, which is currently used
primarily within business Intranet LANs, is being extended from the desktop into
core networks instead of converting data to SONET protocol before entering core
networks. This trend is occurring due to technical and cost advantages inherent
to Ethernet. The lower costs of Gigabit Ethernet equipment are expected to make
it attractive to financially stressed carriers. However, in order for carriers
to take full advantage of lower cost Gigabit Ethernet equipment, they will have
to address the fiber gap between their core networks and the high percentage of
potential subscribers that do not currently have fiber optic connectivity. We
believe that FiberLeap(TM) can enable the
3
advantages of native Gigabit Ethernet to be realized in many cases. We are
currently developing a product that will transmit native Gigabit Ethernet
traffic.
The Desire for Redundancy and Reduced Vulnerability
There is now a greater emphasis on redundancy in networks, including the use of
alternative media in achieving redundancy, plus reduced vulnerability of all
media. In addition, there is greater emphasis on distributed network
infrastructures to prevent single node network failures. This trend could
favorably affect all of the market segments that we are addressing as
FiberLeapTM could provide a redundant path of wireless connectivity rather than
cable-based connectivity.
Strategy
Our objective is to be the leading provider of wireless equipment addressing
fiber network connectivity markets worldwide. Our strategies for serving these
markets are to:
Develop and market wireless equipment that is simple and transparent to
fiber optic infrastructure. FiberLeapTM has been designed to provide fiberless
or fiber-like connectivity with a wireless link that can be very easily
integrated into existing fiber networks. The objective is to enable carriers or
enterprises to easily adopt, install, use and support FiberLeapTM as if it were
a length of fiber optic cable. This capability could result in lower cost of
installation, faster speed of deployment, and quicker returns on investment for
carriers or enterprises. It also simplifies our processes of marketing, selling,
distributing, and supporting FiberLeapTM. The simplicity of FiberLeapTM will
also enable us to address multiple markets with a common, standard product.
Focus on high-value market segments where the FiberLeapTM value proposition
is most attractive. Our objective is to enable our sales force to prepare for,
and to close sales for, specifically selected applications where the FiberLeapTM
value proposition is strongest. These applications are those for which fiber
optic cable itself would normally be used given needs for high data rates, but
is not feasible because of physical barriers, higher cost, longer time for
installation, or limited availability. The fiber-like nature of FiberLeapTM
enables us to use fiber optic carrier financial models that are very similar to
those already being used for fiber optic cable to estimate potential revenue
generation. We expect this will emphasize the value proposition of our
FiberLeapTM products and assist in our selling process.
Drive product requirements from the needs of the fiber network connectivity
market as a whole. In the past, we have traditionally developed products on the
basis of specifications provided by OEM customers for vehicular radars and LMDS
point-to-multipoint outdoor units. The result was that our products were
customized to the needs of particular customers and did not have broad market
applicability. With FiberLeapTM, we intend to develop standard products to
satisfy the expectations of fiber carrier and enterprise customers in a broad
range of markets and applications. This strategy is expected to make our selling
process more efficient and to reduce our exposure to fluctuations in specific
market segments without the expense of multiple, tailored products.
Position FiberLeapTM to be the generic brand for its intended application.
FiberLeapTM is being positioned as a piece of equipment that an applications
engineer or installer in the fiber optic network and equipment industry will
select as a "length of cable" to connect two points in a network that would
normally be served by fiber optic cable itself. Our objective is to position
FiberLeapTM as the preferred solution for specific fiber optic networking needs.
Exploit our existing capabilities and experience to maintain superior
product performance, integrity and reliability. Our core capabilities include
the following strengths:
o Millimeter-wave technology extending to the upper reaches of the
millimeter-wave spectrum (30 gigahertz (GHz) to 300 GHz);
o Technology for compact, high-performance, cost-effective antennas;
o Experience in the design and development of millimeter-wave outdoor
units that are highly integrated, compact and robust for use in harsh
outdoor environments;
o Experience and capability in the development and high-volume
production of millimeter-wave outdoor units for LMDS;
o Experience with high-capacity, secure data links for government
agencies; and
o Proprietary, patented and patent pending FiberLeapTM technologies.
4
We intend to exploit these capabilities to develop products with performance,
integrity and reliability that are superior to any competitive product.
Create barriers to entry through proprietary and patented technology. As we
continue to invest in the development of superior products, we will also strive
to develop, maintain and extend a position of competitive superiority by means
of proprietary technology and through patent and other intellectual property
protection where possible.
Outsource manufacturing to the extent appropriate while balancing financial
performance and business risk. We intend to continually evaluate each part,
component, subassembly and final assembly for possible outsourced production in
an effort to maximize our financial gain and minimize business risk. We have an
ongoing and proactive make/buy discipline to consider and reconsider in-house
manufacturing versus outsourced manufacturing of all elements of our products.
Existing and Future Products
The FiberLeapTM product family is being developed to transparently transmit
fiber optic signals over a wireless link between two access points without the
use of traditional modems. Taking advantage of our core capabilities, the
FiberLeapTM product family is being developed to use the large amounts of
unallocated spectrum in the millimeter-wave portion of the electromagnetic
spectrum, generally considered to extend from 30 GHz to 300 GHz. These products
are currently being developed to provide data rates of OC-3 (155 Mbps), OC-12
(622 Mbps), and native Gigabit Ethernet (1.2 Gbps). The use of large amounts of
unallocated millimeter-wave spectrum is the key to enabling FiberLeapTM to be a
simple product, while providing high data rates very efficiently in terms of
dollars per megabit per second.
FiberLeapTM 2006
Our initial FiberLeapTM product, FiberLeapTM 2006, has been developed with
sufficient performance to fill a major portion of the fiber gap being faced by
fiber carriers and enterprises. In third party tests, FiberLeapTM 2006 has been
demonstrated to be transparent to existing fiber networks. We commenced limited
production of the FiberLeapTM 2006 product in the first quarter of 2002.
FiberLeapTM 2006 is a compact, easily deployed product operating in the 60 GHz
millimeter-wave band between 57 GHz and 64 GHz. It enables fiberless
transmission of data, voice and video communication at variable fiber optic data
rates from OC-3 (155 Mbps) to OC-12 (622 Mbps). It is engineered to provide link
distances from 600 meters to 1,100 meters with 99.99% availability, depending
upon prevailing rainfall rates in the geographic regions where it will be used.
The benefit of operating in the 60 GHz millimeter-wave band is that it is
"unlicensed" in the United States - in other words, an operator does not have to
acquire a license from the Federal Communications Commission (FCC) to operate in
that frequency. However, we expect that customers will require FCC "type
approval" of our FiberLeapTM products before commercially deploying (and perhaps
even buying) the products. A third-party laboratory has tested the FiberLeapTM
2006 product for compliance with the FCC type approval criteria. We formally
submitted our type approval application to the FCC in February 2002, and the
formal application process is thus underway. We cannot predict the outcome or
completion date of this process. Further, even if our application is granted
(assuming it is successful), we believe we will have to obtain a waiver from the
FCC of certain portions of the type approval criteria for us to have a
type-approved product with the performance described in this Annual Report on
Form 10-K. We cannot predict when we will be able to obtain this waiver, if at
all.
A FiberLeapTM 2006 product consists of two units, an Access Unit (AU) and a
FiberLeapTM Interface Panel (FLIP). The AU contains the transmitter, receiver,
antenna, and other electronics for one end of a link. The AU is a self-contained
unit connecting to the FLIP with a single cable that incorporates fiber optic as
well as power cables. The dimensions for the AU are 10.3" x 10.3" x 8.0", and it
weighs nine kilograms. The AU is typically mounted on a 4-inch diameter pole on
a rooftop or tower. It can also be mounted on an exterior wall or behind a
window.
The FLIP would normally be installed in the communications equipment room of an
"off-net" subscriber building or an "on-net" building located at the access
point to the metropolitan fiber optic ring infrastructure. The FLIP is a simple
breakout panel that connects in-building fiber optic cables and wires to the
FiberLeapTM AU. It also contains status lights to indicate the health of the
FiberLeapTM link.
5
Future Products
Our product strategy flows from our corporate strategies described earlier in
this section. In particular, our goal is to develop wireless equipment that is
simple and transparent to fiber optic network infrastructure and that is
responsive to fiber network connectivity market needs. Our engineers have a wide
range of tools available, including the use of various operating frequencies, to
address FiberLeapTM product requirements. Operating frequencies are chosen on
the basis of product requirements, technical considerations and regulatory
considerations in the geographic areas to be served by the products. The
millimeter-wave spectrum (30-to-300 GHz), where FiberLeapTM products will
operate, provides over 250 GHz of spectrum that is largely unallocated
throughout the world. Our expertise in developing products operating in these
frequencies provides us flexibility in developing the right product for the
right opportunity. Further, regulatory agencies around the world are actively
advocating the use of these millimeter-wave frequencies. As new technologies and
products are developed, we continue to focus on creating barriers to competitive
entry, including through patent and other intellectual property protection.
Customers
We are marketing FiberLeapTM to prospective customers that need fiber optic data
rates and quality of service, but where fiber optic cable itself is not
available or is not economically viable. Prospective customers include fiber
optic network carriers, enterprises, network integrators, and cellular carriers.
Network integrators include engineer, furnish and install (EF&I) contractors and
OEMs. We expect to serve our customers by means of direct sales and through
channel partners such as network integrators, OEMs and distributors. Selection
of channel partners will depend upon the value added by channel partners and
upon the financial benefit to us and to our partners.
We began our FiberLeapTM marketing activities in mid-2001 and have augmented our
activities as FiberLeapTM Beta links and marketing material have become
available. We have ongoing discussions with numerous prospective customers. The
types of prospective customers currently being pursued, and their potential
applications of FiberLeapTM, are as follows:
o Major fiber optic network carriers - - extensions off their
metropolitan SONET rings to off-net buildings.
o Regional fiber optic wholesale carriers - - extend wholesale service
off their metropolitan SONET rings.
o Regional EF&I contractors - - provide LAN-to-LAN and SAN-to-SAN
connectivity within off-net enterprise environments.
o Major EF&I contractors - - provide enterprise fiber network redundancy
and reduced vulnerability.
o Major enterprises - - provide LAN-to-LAN and SAN-to-SAN connectivity
within off-net enterprise environments.
For the year ended December 31, 2001, we had no sales of FiberLeapTM products
since we were still developing the initial product. Initial Beta units became
available in December 2001. We commenced limited production of the FiberLeapTM
2006 product in the first quarter of 2002. We commenced the limited production
run to validate our manufacturing processes and to enable us to deliver initial
products promptly upon receipt of orders. We currently have no customers for our
FiberLeapTM products.
Manufacturing Operations
We have developed extensive expertise and facilities for automated assembly and
testing of millimeter-wave products. All our manufacturing operations have
recently been consolidated into a single building, and our production flow
lines, work instructions, processes and fixtures have been refined to address
the production needs of FiberLeapTM. Our automated assembly and test equipment,
shop floor control system, data collection and analysis system, and our
enterprise system that were previously developed and used for our LMDS product
line are being adapted for use in our FiberLeapTM production.
All of the FiberLeapTM Beta links and limited production units have been
manufactured in our existing facilities. In the future, we plan to outsource
manufacturing to the extent appropriate while balancing financial gain and
business risk. We intend to continually evaluate, on a case-by-case basis for
every part, component, subassembly and final assembly associated with
FiberLeapTM, whether to make that piece at our facilities or to have that piece
manufactured by a third party. Factors involved in the "Make/Buy" decision
include adequacy of capacity for production, capital expenditure requirements,
maintenance of high quality, cost, and continuity of supply.
Our manufacturing operations include the following facilities and groups:
6
o Module assembly.
o Final assembly for complete FiberLeapTM access units
o Production test for FiberLeap(TM) modules and access units.
o Test engineering for all production test equipment.
o Supply chain management.
o Quality assurance.
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. In some special cases, we
obtain components from a single source or a limited number of sources. At the
present time, we do not have long-term supply agreements with any of these
vendors. We try to maintain good relationships with our vendors to mitigate
risks associated with single or limited sources of supply. From time to time, we
may purchase or commit to purchase extra quantities of selected material due to
anticipated needs or market or vendor developments. However, we try to avoid
unnecessary long-term obligations and the accumulation of excessive inventory.
Marketing, Sales & Customer Care
Our potential customers include fiber carriers, cellular carriers and
enterprises that need connectivity at fiber optic data rates and quality of
service, but where fiber optic cable cannot be readily used. The use of a
wireless link like FiberLeapTM is a new approach to meeting the demand for fiber
network connectivity; and we are a new entrant in the fiber market. As a result,
we are pursuing a highly focused, intense marketing, promotional and sales
program. We are also paying particular attention to applications engineering,
field engineering, and customer care to educate and train key people in
prospective customer organizations on the virtues of FiberLeapTM and its value
proposition.
Marketing
In recognition that FiberLeapTM is addressing the fiber network connectivity
market, we have revamped our marketing approach and capabilities. The primary
objective of our marketing activity is to cause FiberLeapTM to become the "first
choice" product for our customers. Our FiberLeapTM marketing activities began to
intensify in late 2001 after the first FiberLeapTM Beta link was completed and
made available for our marketing activities. Several demonstration links are now
available. Our marketing material and our new Website focused on our FiberLeapTM
products were completed in February 2002.
Focus of our Marketing Program
We are carefully focusing our marketing activities on selected prospects in the
United States. Our marketing activities are targeting both large and small fiber
network carriers, enterprises and other potential customers where our current
product, FiberLeapTM 2006, has the best potential to meet customer needs and
offers a compelling value proposition. The primary applications being pursued at
present are extensions of fiber carriers' metropolitan SONET rings and
LAN-to-LAN and SAN-to-SAN connectivity for enterprises. We are approaching fiber
carriers through direct marketing, while the enterprise connectivity market is
being addressed primarily through network integrators and OEMs. We expect to
apply greater resources to the cellular backhaul market as 2.5G, 3G and other
high-data-rate cellular expansion occurs. We believe that our most fertile
markets are with the numerous carriers, network integrators and enterprises that
have already recognized the "fiber gap" problem and have given serious
consideration to closing the gap with Free Space Optics equipment.
Marketing Aids
FiberLeapTM is being promoted via our new Website; collateral material including
brochures and data sheets; product demonstrations; instructional material and
procedures; product and package labeling; customer seminars; technical
presentations; and product road shows. Our new Website (at www.fiberleap.com and
at www.tlxs.com) offers both product information and instructional material.
Broad-based advertising is not currently a large part of our marketing
activities because we prefer to focus our sales people, demonstration links,
collateral material and funding on more carefully targeted audiences. We may
later pursue trade shows and other broad-based advertising venues.
7
Sales
Our sales force currently includes employees and representatives located in the
Eastern United States. They are compensated with commissions based on orders
booked, in addition to salaries and retainers.
Customer Care
A key element of our sales approach is to be highly proactive in addressing
customer needs in advance of sale and for the duration of customer
relationships. Customer care is considered to be an integral part of the
"product" being sold. We provide customer care in the following areas among
others:
o Applications engineering and solutions o Product documentation and aids
o Field engineering and problem resolution o Training and seminars
o Spares and repairs
Currently, all of these activities are conducted from our South Deerfield,
Massachusetts headquarters. We may establish Customer Care Centers at other
locations depending on the deployments of FiberLeapTM.
Research and Development
The basic goal of our research and development activities is to develop wireless
equipment that is simple and transparent to fiber optic network infrastructure
and that is responsive to fiber network connectivity market needs. We also focus
on creating barriers to competitive entry, including through patent and other
intellectual property protection. We have a multidisciplinary research and
development team consisting of engineers and scientists whose primary
specialties are in microwave engineering and millimeter-wave engineering. Over
the past ten years, we have also developed substantial expertise in developing
millimeter-wave products for use in harsh outdoor conditions. Our research and
development team operates with vertically integrated facilities and an extensive
complement of computer aided design tools and test equipment. These capabilities
enable us to design, develop and validate integrated products, while improving
the balance of product cost, performance, and integrity. We also maintain strong
relationships with the University of Massachusetts, other universities and
various technical organizations to stay abreast of the latest technologies and
trends.
Core Technical Competencies
Our technical core competencies stem from our long experience with
millimeter-wave science, technology and products. That experience has enabled us
to develop the ability to integrate millimeter-wave and microwave circuits and
semiconductor devices with other electronic components into a highly reliable,
robust outdoor unit that enables repeatable automated assembly and testing.
In order to combine millimeter-wave and microwave technologies into an
integrated outdoor unit for FiberLeapTM, we have developed additional expertise
in several areas, including:
o Patented antennas integrated into outdoor unit housings
o Proprietary power amplifiers
o Direct modulation designs
o Microcontroller driven adaptation and telemetry
o Material selection and mechanical assemblies
o Product integrity
Competition
The market for wireless fiber network connectivity equipment is rapidly evolving
and highly competitive. A number of large fiber optic and telecommunications
equipment suppliers, 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
8
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, particularly if we are successful with our FiberLeapTM
products.
The alternative technologies for addressing the fiber network connectivity
market include other high-frequency, high-data-rate millimeter-wave products;
lasers (also called Free Space Optics (FSO)); traditional millimeter-wave
radios; and fiber optic cable itself. At the present time, we know of only three
companies with high-frequency, high-data-rate millimeter-wave products similar
to FiberLeapTM. These three companies are Harmonix Corporation, SierraCom, a
division of Sierra Networks, and Loea, a division of Trex Enterprises. We
believe several other companies are using the 60 GHz frequency for products with
lower data rates than our FiberLeapTM products and others are exploring the
technologies necessary for a high-frequency, high-data-rate millimeter-wave
product. These competitors may have or develop products that are superior to
ours in performance, cost, technological approach, durability, and other
criteria. There are a number of companies developing and/or supplying FSO
equipment, including Canon, Lightpointe, Terabeam, and fSONA. There are a number
of companies developing and/or supplying traditional millimeter-wave radios,
including DMC Stratex, Harris, Alcatel, Ericsson, Nera, P-Com, NEC, and Ceragon.
In addition to these technologies, there are other high-speed solutions (such as
digital subscriber lines, cable modems, and T-1/E-1 dedicated lines) that could
be viewed as competing with our FiberLeapTM products. However, these
technologies provide much lower data rates than our FiberLeapTM products and
serve different markets and therefore do not directly compete. We believe an
element of the success of our FiberLeapTM products will be the proper
positioning and description of the capabilities of our products to minimize the
chance of confusion with other, lower data rate technologies.
Many of these alternative technologies can take advantage of existing installed
infrastructure and have achieved significantly greater market acceptance and
penetration than our FiberLeapTM products. We expect to face increasing
competitive pressures from both current and future technologies in the fiber
network connectivity market, particularly if we are successful with our
FiberLeapTM products.
The rapid technological developments within the fiber network connectivity
equipment industry result in frequent changes to our group of competitors. The
principal competitive factors in our market include price; product performance,
quality, features and inter-operability; ability to manufacture and distribute
products; product availability; relationships with potential customers;
technical support and customer service; and brand recognition.
Intellectual Property
We attempt to preserve and protect our product and manufacturing process designs
and other proprietary technology. 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. We generally require employees,
consultants, business partners, and others doing business with us to sign
confidentiality and nondisclosure agreements on a routine basis. 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 two material United States patents, which relate to our
antenna and access unit design and will remain in force until September 2018 and
2019. In addition, we have six material United States patent applications
pending. We have counterpart patents pending in several 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 an active patent disclosure, application and filing process in
place, with incentive bonuses paid to employee inventors at key steps in the
process.
Employees
On February 28, 2002, we had 79 employees. On that date, we employed 36 people
in engineering, 23 people in our manufacturing operations, 6 people in
marketing, sales and customer service, and 14 people 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 66,000 square feet of facilities comprised of two
buildings in South Deerfield, Massachusetts. One building is used for
engineering and the other for manufacturing. The term of the lease of the two
buildings expires in
9
October 2005. Approximately 15,000 square feet of space is currently unused and
available for future expansion. We expect that our current facilities will be
adequate to meet foreseen needs. To the extent we determine to open customer
care centers, we believe adequate space will be available at customary
commercial rates.
Item 3. Legal Proceedings.
During the period from June 12 to September 13, 2001, four purported securities
class action lawsuits were filed against us in the U.S. District Court for the
Southern District of New York, Katz v. Telaxis Communications Corporation et
al., Kucera v. Telaxis Communications Corporation et al., Paquette v. Telaxis
Communications Corporation et al., and Inglis v. Telaxis Communications
Corporation et al. The complaints also name one or more of the underwriters in
our initial public offering and certain of our officers and directors. The
complaints allege violations of the federal securities laws regarding statements
in our initial public offering registration statement concerning the
underwriters' alleged activities in connection with the underwriting of our
shares to the public. The actions seek rescission of the plaintiff's alleged
purchases of our stock and other damages and costs associated with the
litigation. The complaints have been assigned along with approximately 1,000
other complaints making substantially similar allegations against approximately
300 other publicly-traded companies and their IPO underwriters to a single
federal judge in the U.S. District Court for the Southern District of New York
for consolidated pre-trial purposes. We and our officers and directors deny any
liability and intend to vigorously defend the allegations against us.
On July 26, 2001, we filed a lawsuit in the Superior Court of the
Commonwealth of Massachusetts against a former customer. This lawsuit was
transferred to the United States District Court for the District of
Massachusetts. This suit asserts that Alcatel has failed to honor various
contractual obligations and commitments made to us and sought damages arising
from those failures. This action was settled in March 2002. The principal terms
of the settlement are an immediate, one-time payment of $1.7 million from
Alcatel to us and mutual general releases.
We are 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 our business. While the
outcome of all of the pending and potential claims and legal actions against us
cannot be forecast with certainty, we believe that such matters should not
result in any liability which would have a material adverse effect on our
business.
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, 2001.
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". Before the IPO, there was no established public
trading market for our common stock.
The following table shows the high and low sales 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
Fiscal Year High Low
----------- ---- ---
2001
First Quarter (ended 3/31/01) $2.781 $1.00
Second Quarter (ended 6/30/01) $1.438 $0.52
Third Quarter (ended 9/30/01) $0.73 $0.24
Fourth Quarter (ended 12/31/01) $0.94 $0.20
As of February 28, 2002, the number of stockholders of record of our common
stock was approximately 256.
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 and currently do not anticipate paying
cash dividends in the foreseeable future.
Use of Proceeds from Registered Offerings
On February 1, 2000, the Securities and Exchange Commission declared effective
our registration statement on Form S-1 (File No. 333-87885) filed in connection
with the initial public offering of 4,600,000 shares of our common stock.
We received approximately $71.1 million of net proceeds from the offering. Those
net proceeds are being used for working capital and general corporate purposes.
Pending such uses, 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, 2001, we have applied approximately $49.6 million of the net proceeds from
the offering toward working capital, financing capital expenditures, and funding
operating losses.
Item 6. Selected Financial Data.
Set forth below is certain of our historical selected financial data 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,
-----------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------
(in thousands, except per share data)
Statement of Operations Data:
Sales.............................. $ 1,929 $ 24,753 $ 9,720 $ 2,386 $ 1,733
Loss from continuing operations.... (27,062) (37,634) (8,293) (11,253) (6,712)
Basic and diluted loss per share
from continuing operations....... (1.62) (2.54) (13.68) (22.87) (14.16)
11
-----------------------------------------------------------
December 31,
-----------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------
(in thousands)
Balance Sheet Data:
Total assets....................... $ 29,692 $ 65,538 $ 25,297 $ 14,955 $ 20,059
Long-term debt and capital lease
obligations, net of current
portion.......................... 1,574 3,225 2,385 1,047 1,690
Total liabilities.................. 6,318 15,439 11,925 6,753 9,632
Redeemable preferred stock......... -- -- 47,793 32,793 25,425
Total stockholders' (deficit)
equity............................. 23,374 50,099 (34,421) (24,591) (14,999)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
We are currently developing and marketing FiberLeapTM products, which
transparently transmit fiber optic signals over a wireless link between two
access points. Using our wireless products, fiber optic carriers and enterprises
can obtain connectivity at fiber optic data rates and quality of service, but
where fiber optic cable itself is not available or is not economically viable.
Our current FiberLeapTM 2006 product is a compact, easily deployed product that
enables fiberless transmission of data, voice and video communication at fiber
rates that are variable from an OC-3 rate of 155 Mbps to an OC-12 rate of 622
Mbps.
We commenced operations in 1982 and, prior to 1999, derived the significant
majority of our sales from our millimeter-wave products business segment.
Millimeter waves are electromagnetic waves having wavelengths between one and
ten millimeters and frequencies from 30 GHz to 300 GHz. In August 1999, we
adopted a plan to focus all of our resources on our broadband connectivity
business (then focused on point-to-multipoint outdoor units) 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 broadband point-to-multipoint outdoor unit business. 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 broadband connectivity business.
Due to changing market conditions, in July 2001, we made the decision to exit
the point-to-multipoint outdoor unit business and to focus all of our resources
on closing the connectivity gap in fiber networks. Since that time, we have
restructured our company to address this new opportunity, FiberLeapTM trial and
Beta units have been developed and tested, a new marketing program has been
initiated, and limited production has begun.
For the year ended December 31, 2001, approximately 99% of our sales were to a
customer located in Canada and our remaining sales were to customers located in
the United States. 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. Sales to customers
located outside the United States may continue to represent a significant
portion of our total sales.
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,
----------------------------
2001 2000 1999
----------------------------
Sales......................................................... 100.0% 100.0% 100.0%
Cost of sales................................................. 333.9 119.6 93.0
Charges relating to excess inventory on hand and on order..... -- 71.7 --
Inventory restructuring cost.................................. 257.2 -- --
------ ------ ------
Gross margin (loss)........................................... (491.1) (91.3) 7.0
Operating expenses
Research and development, net............................... 320.1 34.8 50.1
Selling, general and administrative......................... 352.6 36.5 37.2
Other restructuring costs................................... 346.7 -- --
------ ------ ------
Total operating expenses................................. 1,019.3 71.3 87.3
Operating loss................................................ (1,510.4) (162.6) (80.3)
Other income (expense)........................................ 107.5 10.6 (5.0)
------ ------ ------
Loss from continuing operations before income taxes........... (1,402.9) (152.0) (85.3)
Income tax benefit............................................ -- -- --
------ ------ ------
Loss from continuing operations............................... (1,402.9)% (152.0)% (85.3)%
======== ====== =====
12
Years Ended December 31, 2001, 2000 and 1999
Sales
Sales decreased 92% to $1.9 million in 2001 from $24.8 million in 2000. Sales
increased 155% from $9.7 million in 1999 to $24.8 million in 2000. The decrease
in sales from 2000 to 2001 resulted from a decrease in shipments of our planar
products from $23.4 million in 2000 to $1.9 million in 2001 due to reduced
demand for our products resulting from a general industry decline, our
discontinuation of shipments to our former major customer Alcatel, and our
decision to exit our point-to-multipoint outdoor unit product line. The increase
in sales from 1999 to 2000 primarily reflects an increase in shipments of our
planar products to approximately $23.4 million in 2000 from $8.2 million in
1999. Sales in units of our planar products were 565 in 2001, 13,709 in 2000 and
3,755 in 1999.
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 decreased $23.2 million to $6.4 million in 2001
from $29.6 million in 2000. Cost of sales increased $20.6 million to $29.6
million in 2000 from $9.0 million in 1999. The decrease in cost of sales from
2000 to 2001 was attributable to the decreases in sales of our planar products
to Alcatel. The increase in cost of sales from 1999 to 2000 was attributable
primarily to increased shipments of our planar products. Gross margins were a
negative 491% in 2001, a negative 91% in 2000 and a positive 7% in 1999. The
decline in gross margin from 2000 to 2001 was primarily the result of charges
for inventory restructuring cost of approximately $5.0 million in 2001 and the
impact of this charge and the absorption of manufacturing overhead on the lower
sales volume in 2001. 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 were the result of the continuing 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. 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 the third quarter of
2001, we made the decision to exit the point-to-multipoint ODU business and as a
result, we incurred a charge of $5.0 million for inventory restructuring cost to
writedown the value of our remaining point-to-multipoint ODU inventory to its
estimated 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 decreased 30% to $6.4 million in 2001
from $9.2 million in 2000. Our gross research and development expenses were $6.0
million in 1999. The decrease from 2000 to 2001 is attributable to the decrease
in the size of our research and development staff from 72 personnel at the end
of 2000 to 36 at the end of 2001, and to reductions in development material,
capital equipment and related facilities and support costs. These decreases
resulted from the reduction in our product development requirements as our
business with Alcatel declined and the global telecommunications equipment
market continued to weaken. 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. Customer funding of development projects decreased
57% to $266,000 in 2001 from $612,000 in 2000. Customer funding of development
projects decreased 43% from $1.1 million in 1999. Some of our customers have
provided funding to offset our development
13
costs for specific products. Net of customer reimbursements, our research and
development expenses decreased 28% to $6.2 million in 2001 from $8.6 million in
2000 and increased 77% from $4.9 million in 1999.
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 decreased 25% to $6.8 million in 2001 from $9.0 million
in 2000. Selling, general and administrative expenses increased 150% to $9.0
million in 2000 from $3.6 million in 1999. The decrease from 2000 to 2001
resulted from decreasing our number of personnel in these areas from 37 at the
end of 2000 to 21 at the end of 2001, and from decreases in related spending.
The increase from 1999 to 2000 was primarily related to expenditures to support
the Company's growth and operation as a public company. 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.
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 decreased 21% to $2.1
million in 2001 from $2.6 million in 2000. Total other income increased 641% to
$2.6 million in income in 2000 from $484,000 in expense in 1999. The decrease in
total other income from 2000 to 2001 resulted from a decrease in interest and
dividends earned on cash and marketable securities to approximately $1.6 million
in 2001 from approximately $3 million in 2000. Partially offsetting this
decrease was income of $1 million recorded in the fourth quarter of 2001 for the
increase in valuation of a note receivable. 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. Interest expense
decreased to $578,000 in 2001 from $610,000 in 2000 due to the lower outstanding
balances for long term debt and capital lease obligations. Interest expense
decreased from $756,000 in 1999 primarily due to the amortization of $284,000
for a discount on subordinated promissory notes in 1999.
Income Tax Benefit
No tax benefit has been recorded in 2001, 2000 and 1999 due to the uncertainty
in deducting current losses against future taxable income.
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. 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 we completed an initial public offering of
4,600,000 shares of our 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, 2001, we had cash and cash equivalents of $15.9 million and
marketable securities of $5.6 million.
At December 31, 2001, we had approximately $1.2 million in long-term debt, of
which $150,000 is due through June 2003 with an interest rate of 10%, and
$1,059,000 is due through November 2003 with an interest rate of 12%.
At December 31, 2001, we had approximately $2.9 million in capital lease
obligations, which are due through 2005.
Cash used in operating activities in 2001 was $17.2 million compared to $30.4
million in 2000 and $9.6 million in 1999. Cash used in operating activities has
primarily represented funding of our net losses and inventory build to meet
expected future production requirements.
14
Cash provided by investing activities in 2001 was $7.3 million compared to cash
used in investing activities of $17.8 million in 2000 and $2.5 million in 1999.
In 2001, cash provided by investing activities resulted from the sale of
marketable securities. In 2000, cash used in investing activities related to the
purchase of marketable securities and the purchase of equipment. In 1999, this
amount related primarily to the purchase of equipment used in our manufacturing
and research and development activities.
Cash utilized by financing activities in 2001 was $2.1 million compared to cash
provided by financing activities of $69.5 million in 2000 and $16.1 million in
1999. In 2001, the financing activities consisted primarily of repayments of
long term debt and capital lease obligations. 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.
Our 2002 and future cash requirements will depend upon a number of factors,
including the timing and extent of growth in our FiberLeap(TM) product line and
the timing and level of research and development activities and sales and
marketing campaigns, and our ability to generate sales orders while controlling
manufacturing and overhead costs . We believe that our cash, cash equivalents
and marketable securities balances at December 31, 2001 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 our operations and the acquisitions. 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 subject 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, 2001, we had cash and cash equivalents of $15.9 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, 2001, we had marketable securities of $5.6 million which consisted
of municipal and government bonds and commercial paper with maturities through
November 2002. These investments are exposed to interest rate risk and will
decrease in value if market interest rates increase. We believe a hypothetical
increase in market interest rates by 10 percent from the December
31, 2001 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.
We do not own any material equity investments. Therefore, we do not currently
have any direct equity price risk. In the past three years, all sales to
international customers were denominated in United States dollars and,
accordingly, we were not exposed to foreign currency exchange rate risks.
Safe Harbor for Forward-Looking Statements
General Overview
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-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 or any other
subsequent events, and we disclaim any such obligation.
15
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.
Cautionary Statements
In addition to other factors and matters discussed elsewhere in this Form 10-K,
in our other periodic reports and 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 expressed, anticipated or implied in the forward-looking
statements include, without limitation, the following:
o Significant Change in our Business. In July 2001, we announced that we
are going to focus on our FiberLeapTM product line and exit our old
point-to-multipoint outdoor unit product line. As a result, it is
difficult to predict our future prospects in this market based on our
limited history. Many of the cautionary statements contained in this
Form 10-K are particularly relevant in light of this recent decision.
Our future depends on our ability to develop, market, and gain market
acceptance of our FiberLeapTM products. We have limited experience
with this new product line and in the markets the FiberLeapTM products
address. We currently have no customers for our FiberLeapTM products.
We are still in the process of developing our FiberLeapTM product
line. We do not have all governmental approvals necessary for the
commercial sale and deployment of our FiberLeapTM products. There can
be no assurance that we will be successful in developing the
FiberLeapTM product line, obtaining customers for our FiberLeapTM
products, obtaining all necessary governmental approvals at all or in
a timely manner, or addressing the other issues inherent in entering a
new line of business. These issues, together with many of the other
cautionary statements contained in this Form 10-K (including, without
limitation, our having limited capital), could have an adverse affect
on our business, financial condition, results of operations, and
viability as an ongoing company.
o Requirement to Generate Customers. We currently have no customers for
our FiberLeapTM products. There can be no assurance that we will be
able to obtain customers for our FiberLeapTM products at all or in a
timely manner. There are many factors that influence a potential
customer's decision whether or not to buy our products, some of which
are within our control and many of which are not. Potential customers
may request terms of sale that are unacceptable to us. The sales
process may be quite lengthy even if successful. Even if we are
successful in obtaining customers, we may be dependent on only a few
customers due to capacity constraints. These issues could have an
adverse affect on our business, financial condition, results of
operations, and viability as an ongoing company.
o Market Uncertainty. We have limited experience with our new
FiberLeapTM product line and in the markets our FiberLeapTM products
address. We are developing very high data rate products and are
focusing our marketing and sales efforts on only those end-users who
need or desire very high data rate transmission capabilities. This
market is much smaller than the broad-based market of end-users
desiring general broadband access. There may be an insufficient number
of end-users who need or desire (and are willing to pay for) the high
data rate capabilities of our products, particularly given the short
operating range of our products (approximately 600 to 1,100 meters).
Lack of a sufficiently large market could adversely affect our ability
to sell our products at all or at the prices we currently contemplate.
Further, while our products are designed to operate as if they were a
piece of fiber optic cable, they are wireless in nature and therefore
based on a different technology than that typically used in the
markets we are now addressing. This difference could hinder, delay or
prevent sales of our products. Our initial FiberLeapTM product
operates in an unlicensed frequency band at 60 GHz. Customers may be
reluctant or unwilling to utilize products operating in that
unlicensed band given the possibility of interference from other
products operating in that same band. This concern may be particularly
applicable for our products given the very high data rate transmission
capabilities of our products. Also, customers may establish very high
standards for quality, durability, and other criteria for our products
due to the very high data rate transmission capabilities of our
products. We may be unable to meet those criteria at all or on
economic and other terms acceptable to us.
o Limited Capital. Our operations to date have required substantial
amounts of capital. As of the end of December 2001, we had
approximately $21.5 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
16
needs for 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
timing and extent of 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 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 relationships with investors, customers, suppliers
and others.
o Government Approvals. We believe that customers will require "type
approval" of our FiberLeapTM products from the United States Federal
Communications Commission (FCC) before commercially deploying our
FiberLeapTM products. Further, customers may well require this "type
approval" before buying or agreeing to buy our FiberLeapTM products.
We submitted our formal type approval application in February 2002. In
addition to that formal type approval application, we believe we will
need to obtain a waiver from the FCC of certain portions of the type
approval criteria for us to have a type-approved product with the
performance and other characteristics described in this Annual Report
on Form 10-K. We cannot predict the outcome or completion date of this
process. Obtaining those approvals and/or waivers may be a long,
expensive process, even if we are ultimately successful. Delays in
obtaining those approvals and/or waivers could hinder market
acceptance of our products, delay our obtaining customers for our
products and our selling our products, and adversely affect our
ability to market the products given our limited capital. We expect
that failure to obtain or extended delay in obtaining those approvals
and/or waivers would have a material adverse impact on our viability
as an ongoing company.
o Pending Stockholder Litigation. We, as well as some of our directors
and officers, currently are party to four purported securities class
action lawsuits. These lawsuits arose out of the underwriters' alleged
activities in connection with the underwriting of our shares to the
public in our initial public offering in February 2000. The lawsuits
have been assigned along with approximately 1,000 other lawsuits
making substantially similar allegations against approximately 300
other publicly-traded companies and their IPO underwriters to a single
federal judge for consolidated pre-trial purposes. These lawsuits are
at an early stage, and accordingly we cannot predict the outcome.
Defending lawsuits of this nature can be a lengthy, expensive process,
and there can be no assurance that we will prevail. Even if we
prevail, the costs associated with these lawsuits could be
substantial. In addition, these lawsuits could have other adverse
impacts on us such as management distraction, adverse publicity,
adverse reaction from the financial markets, and adverse reaction from
our customers. The difficulties and uncertainties relating to these
lawsuits very likely may be increased and complicated given the large
number of pending similar cases and other parties involved. Although
we currently don't expect these impacts to have a material adverse
effect on our business, financial condition or results of operations,
there can be no assurance as to the ultimate outcome of these
lawsuits.
o Continued Nasdaq Listing Issues. Our common stock is currently traded
on the Nasdaq National Market. One of the requirements for continued
listing is that the price of our stock must remain above $1.00. Our
stock price was below $1.00 for much of 2001 and has been both above
and below $1.00 in 2002. If our stock price remains below $1.00 for at
least thirty consecutive trading days, Nasdaq will commence the
delisting process. There can be no assurance that our stock price will
remain above $1.00. If the delisting process is commenced, we may take
certain actions to attempt to increase the price of our stock. While
there are many actions that may be taken to attempt to increase the
price of our stock, two of the possibilities are a reverse stock split
and a stock repurchase. Any such actions (even if successful) may have
adverse effects on us, such as adverse reaction from employees,
investors and financial markets in general, adverse publicity, and
adverse reactions from customers. There are other requirements for
continued listing on the Nasdaq National Market, such as having a
minimum of $4.0 million of net tangible assets, $5.0 minimum value of
public float, 400 round lot stockholders, and two market makers. There
can be no assurance that we will continue to meet these listing
requirements. Should our stock be delisted from the Nasdaq National
Market, we may have our stock listed on the Nasdaq SmallCap Market (if
we meet the requirements for listing on that market) or traded on the
OTC Bulletin Board. These alternatives may result in a less liquid
market available for existing and potential stockholders to buy and
sell shares of our stock and could further depress the price of our
stock.
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.
17
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 the timing of obtaining customers for our
FiberLeapTM products, the timing and size of orders for our products,
the mix of our product sales, the hiring and loss of personnel, timing
of expenditures for research and development activities, our expected
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.
o Dependence on Key Personnel. Our performance is substantially
dependent on the performance of our executive officers and other key
employees. We no longer have key-man life insurance on any of our
executive officers or other key employees. 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 long-term supply agreements 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. The historical
fluctuation in our business may make current or potential suppliers
unwilling or reluctant to supply components to us in the future at all
or on acceptable terms.
o Difficulties in New Business Lines. We have recently focused on our
FiberLeapTM product line. We may be unable to realize the anticipated
benefits from focusing on this product line. We may be unable to
successfully enter
18
into the new areas of business addressed by our FiberLeapTM products.
We may incur unanticipated costs, liabilities or delays in attempting
to enter those new business areas.
o Difficulties in Developing New Products. We may be unable to develop,
manufacture or supply new technology and new products (including,
without limitation, our current and contemplated FiberLeapTM 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 anticipate. 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 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 or better performing 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, may depend in part on our ability to reduce the per-unit cost
of our products over time. There can be no assurance that we will be
able to keep pace with competitive pricing pressures or technological
developments.
o Delays in Development, Manufacture or Supply of Products. We may not
be able to develop, manufacture or supply our products as quickly as
our customers require or would like. We may have to allocate
production of our products among our customers, to the extent we are
permitted to do so. 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. We expect that a large proportion of
our sales will be made pursuant to contracts that require delivery of
products over several quarters or years. We expect that the prices of
products sold under these contracts, at least initially, will be based
at least in part on our estimate of our costs to develop and supply
these products. We may have limited ability to increase our prices in
the future. 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 Intellectual Property Protection. Our future success will depend in
part on our ability to protect our proprietary product designs and
manufacturing process 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 may 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 expect we will have to indemnify our customers for
expenses and liabilities resulting from claimed infringements of
intellectual property rights 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
our recent focus on our FiberLeapTM products, we have limited
experience with the problems that could arise with these products.
19
o Downturn and Ongoing Uncertainty in Telecommunications Industry and
Larger Economy. In the past few years, the overall economic climate in
the United States has declined. Telecommunication markets specifically
have experienced a severe downturn, which has been highlighted by the
bankruptcy filings of several former prominent telecommunications
companies. Large companies have also reduced the amount of vendor
financing they are willing to extend. Due to this restricted access to
new capital and internal reluctance to spend existing capital, large
and small service providers have limited financial resources to start
or complete infrastructure projects. If these service providers are
unable or unwilling to adequately finance and grow their operations,
they may not order or delay or cancel orders for products such as
ours. In certain situations such service providers may be forced to
cease operations or operate under bankruptcy law protection, which may
cause us losses. Since we expect purchase orders may be received and
accepted far in advance of shipment, we expect at times to permit
orders to be modified or canceled with limited or no penalties. Our
inability to reduce actual costs relating to the modified or canceled
order could materially adversely affect our operating results.
o Continued Demand for Broadband Connectivity and Access. Our future
success is dependent in part upon the continued and increasing demand
for high-speed, broadband connectivity and access, particularly with
regard to the Internet, and 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 Market Acceptance. The fiber optic extension and entire broadband
connectivity and access industry is relatively new, and its future is
uncertain. If significant demand for our products does not develop, we
will not be able to generate significant sales. Many factors will
influence the success or failure of wireless fiber optic extension,
connectivity and 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
appropriate frequencies for service providers to deploy products at
commercially reasonable rates, the availability on reasonable terms of
sufficient site locations for service providers to install products at
commercially reasonable rates, and safety and environmental concerns
regarding broadband wireless transmissions.
o Competition in General. The fiber optic extension and other industries
in which we now operate are intensely competitive, and our failure to
compete effectively could hurt our sales and reduce our margins. A
number of large telecommunications equipment suppliers, as well as a
number of smaller companies, have developed or are developing products
that compete (or could be viewed as competing) with ours. These
competitors may have or develop products that are superior to ours in
performance, cost, technological approach, durability, and other
criteria. Many of our competitors are substantially larger than we are
and have significantly greater financial, sales, technical,
manufacturing and other resources.
o Competing Technologies. A number of competing technologies may be able
to provide high-speed, broadband access or connectivity. These
competing technologies include digital subscriber lines, hybrid fiber
coaxial cable, fiber optic cable, other high-speed wire, laser (also
known as free space optics), satellite, point-to-multipoint wireless,
and other point-to-point wireless technologies. Some of these
technologies may have advantages over our FiberLeapTM products, such
as lower cost, greater range, and greater current market acceptance.
In addition, new products or new technologies may be developed that
supplant or provide lower-cost or better performing alternatives to
our products.
o Difficulties in Distinguishing Our Products from Others. We need to
carefully and clearly distinguish our FiberLeapTM products from the
other competing technologies and products that may be able to provide
broadband access or connectivity. Points of distinction include data
rate transmission capabilities of our products, ease and speed of
installation of our products, markets served by our products, cost of
our products, and value proposition of our products for our customers.
Failure to distinguish our products for our customers, investors and
others could hinder market acceptance of our products, delay our
obtaining customers for our products, force reductions in contemplated
sales prices of our products, and reduce our overall sales.
20
o Dependence on Third-Party Manufacturers. Given our recent focus on our
FiberLeapTM products, we are still developing our manufacturing
approach. We currently expect to rely on independent manufacturers to
provide full turnkey manufacturing of our complete products or
important components of 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. We believe that 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 a third-party manufacturer or
manufacturers.
o Government Regulation. Wireless equipment such as our current and
contemplated FiberLeapTM products is subject to regulation by the
United States and foreign laws and international treaties. Our
products must conform to domestic and foreign requirements
established, among other reasons, 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 generally can be marketed in a specific
jurisdiction only if permitted by specific frequency allocation and
regulations. As we obtain customers in new markets, we may 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 International Issues. We expect to derive a 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 2001, we had approximately
$21.5 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.
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 (or their customers) 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.
o Future Stock Sales. Future sales of common stock by our existing
stockholders could cause our stock price to fall. 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 registration
statements on Form S-8 pursuant to which we registered over 5.0
million shares of our common stock that may be issued pursuant to the
exercise of our outstanding stock options and stock options or other
stock grants 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
21
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 and/or impairment related to goodwill and other
intangible assets.
Possible Implications of Cautionary Statements
The items described above, either individually or in some combination,
could have a material adverse impact on our reputation, business, need for
additional capital, ability to obtain additional debt or equity financing,
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 any
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
FINANCIAL STATEMENTS Page
Report of Independent Accountants................................... 23
Balance Sheets...................................................... 24
Statements of Operations ........................................... 25
Statement of Changes in Stockholders' (Deficit) Equity.............. 26
Statements of Cash Flows............................................ 27
Notes to Financial Statements....................................... 28
FINANCIAL STATEMENT SCHEDULE
Schedule II- Valuation and Qualifying Accounts....................... 47
22
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 (the "Company") at December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2001, 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 accompanying index 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 our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Hartford, Connecticut
February 14, 2002, except for Note 23,
as to which the date is March 21, 2002
23
TELAXIS COMMUNICATIONS CORPORATION
BALANCE SHEETS
(in thousands, except share data)
December December
31, 31,
2001 2000
----------- -----------
Assets
Current assets
Cash and cash equivalents........................................... $ 15,875 $ 27,865
Marketable securities............................................... 5,588 13,158
Trade accounts receivable, less allowance for doubtful accounts
($250 in 2001 and 2000)............................................. 438 2,836
Other accounts receivable........................................... 154 297
Note Receivable, less allowance of $210 in 2001..................... 1,000 --
Inventories......................................................... 129 7,838
Assets held for sale................................................ 1,659 --
Other current assets................................................ 102 486
----------- -----------
Total current assets............................................... 24,945 52,480
Property, plant and equipment, net.................................. 4,668 12,751
Intangible assets, net of accumulated amortization.................. -- 198
Other assets........................................................ 79 109
----------- -----------
Total assets....................................................... $ 29,692 $ 65,538
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable.................................................... $ 169 $ 8,156
Customer prepayments................................................ -- 218
Accrued expenses.................................................... 803 1,770
Accrued restructuring costs......................................... 1,298 --
Current maturities of long-term debt................................ 562 507
Current maturities of capital lease obligations..................... 1,912 1,563
----------- -----------
Total current liabilities.......................................... 4,744 12,214
Long-term debt...................................................... 618 1,180
Capital lease obligations........................................... 956 2,045
----------- -----------
Total liabilities.................................................. 6,318 15,439
Commitments and contingencies
Stockholders' Equity
Preferred stock, $.01 par value; authorized 4,500,000 shares in
2001 and 2000; none issued......................................... -- --
Common stock, $.01 par value; authorized 100,000,000 shares in 2001
and 2000; issued and outstanding 16,630,698 shares (16,734,673
shares in 2000).................................................... 167 167
Additional paid-in capital.......................................... 124,623 124,740
Accumulated comprehensive income.................................... 4 --
Notes receivable.................................................... (3) (331)
Deferred stock compensation......................................... -- (159)
Treasury stock 112,500 shares in 2001............................... (37) --
Accumulated deficit................................................. (101,380) (74,318)
----------- -----------
Total stockholders' equity......................................... 23,374 50,099
----------- -----------
Total liabilities and stockholders' equity............................ $ 29,692 $ 65,538
=========== ===========
The accompanying notes are an integral part of these financial statements.
24
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year ended December 31,
-------------------------------------
2001 2000 1999
----------- ---------- ------------
Sales.................................................... $ 1,929 $ 24,753 $ 9,720
Cost of sales............................................ 6,440 29,610 9,041
Charges relating to excess inventory on hand and on order -- 17,744 --
Inventory restructuring cost............................. 4,962 -- --
----------- ---------- ------------
Gross margin (loss)...................................... (9,473) (22,601) 679
Operating expenses
Research and development, net.......................... 6,174 8,623 4,870
Selling, general and administrative.................... 6,802 9,029 3,618
Other restructuring costs.............................. 6,687 -- --
----------- ---------- ------------
Total operating expenses.............................. 19,663 17,652 8,488
----------- ---------- ------------
Operating loss........................................... (29,136) (40,253) (7,809)
----------- ---------- ------------
Other income (expense)
Interest and other income.............................. 1,677 3,243 272
Increase in valuation of note receivable............... 1,000 -- --
Interest and other expense............................. (603) (624) (756)
----------- ---------- ------------
Total other income (expense).......................... 2,074 2,619 (484)
----------- ---------- ------------
Loss from continuing operations before income taxes...... (27,062) (37,634) (8,293)
Income taxes ............................................ -- -- --
----------- ---------- ------------
Loss from continuing operations.......................... 27,062 (37,634) (8,293)
----------- ---------- ------------
Discontinued operations:
Income from operations of MMWP segment, net of taxes... -- -- 258
Loss on disposition of MMWP segment, including stock
compensation expense of $2,848 for 2000............... -- (1,479) (1,900)
----------- ---------- ------------
Loss from discontinued operations........................ -- (1,479) (1,642)
----------- ---------- ------------
Net loss................................................. $ (27,062)$ (39,113) $ (9,935)
========== ========== ============
Basic and diluted loss per share from:
Continuing operations.................................. $ (1.62)$ (2.54) $ (13.68)
----------- ---------- ------------
Discontinued operations................................ $ -- $ (0.10) $ (2.71)
----------- ---------- ------------
Net loss............................................... $ (1.62)$ (2.64) $ (16.39)
=========== ========== ============
Shares used in computing basic and diluted loss
per share................................................ 16,708 14,816 606
=========== ========== ============
The accompanying notes are an integral part of these financial statements.
25
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(in thousands, except share data)
Common Stock Additional
-------------------------- Paid-in Accumulated Notes
Shares Amount Capital Deficit Receivable
---------- --------- ------------- ------------- -----------
Balances, December 31, 1998 ............. 987,920 $ 10 $ 669 $ (25,270) $ --
Sale of common stock .................... 229,074 2 522 -- (281)
Issuance of preferred stock warrants .... -- -- 140 -- --
Issuance of common stock warrants ....... -- -- 266 -- --
Exercise of common stock options ........ 427,526 4 219 -- --
Exercise of warrants .................... 39,150 -- 19 -- --
Amortization of deferred stock
compensation .......................... -- -- -- -- --
Offering costs .......................... -- -- (780) -- --
Other ................................... -- -- 161 -- --
Comprehensive income:
Net loss ........................... -- -- -- (9,935) --
Unrealized gain on investments ..... -- -- -- -- --
Reverse stock split ..................... (839,798) (8) 8 -- --
----------- -------- --------- ----------- ---------
Balances, December 31, 1999 ............. 843,872 8 1,224 (35,205) (281)
Sale of common stock .................... 4,600,000 46 78,154 -- --
Exercise of common stock options ........ 507,101 5 721 -- (67)
Exercise of warrants .................... 295,295 3 130 -- --
Amortization of deferred stock
compensation .......................... -- -- -- -- --
Offering costs .......................... -- -- (6,330) -- --
Other ................................... -- -- 3,153 -- 17
Conversion of preferred stock ........... 10,488,405 105 47,688 -- --
Comprehensive income:
Net loss ........................... -- -- -- (39,113) --
Unrealized gain on investments ..... -- -- -- -- --
----------- -------- --------- ----------- ---------
Balances, December 31, 2000 ............. 16,734,673 167 124,740 (74,318) (331)
Sale of common stock .................... -- -- -- -- --
Exercise of common stock options ........ 8,525 -- 8 -- --
Amortization of deferred stock
compensation .......................... -- -- -- -- --
Purchase of treasury stock .............. -- -- (99) -- 282
Other ................................... -- -- (26) -- 46
Comprehensive income:
Net loss ........................... -- -- -- (27,062) --
Unrealized gain on investments ..... -- -- -- -- --
----------- -------- --------- ----------- ---------
Balances, December 31, 2001 ............. 16,743,198 $ 167 $ 124,623 $ (101,380) $ (3)
=========== ======== ========= =========== =========
Accumulated
Deferred Common Other
Stock Stock in Comprehensive
Compensation Treasury Income Total
----------- ------------ ---------------- -----------
Balances, December 31, 1998......... $ -- $ -- $ -- $ (24,591)
Sale of common stock................ (225) -- -- 18
Issuance of preferred stock warrants -- -- -- 140
Issuance of common stock warrants... -- -- -- 266
Exercise of common stock options -- -- -- 223
Exercise of warrants................ -- -- -- 19
Amortization of deferred stock
compensation...................... 58 -- -- 58
Offering costs...................... -- -- -- (780)
Other............................... -- -- -- 161
Comprehensive income:
Net loss....................... -- -- -- (9,935)
Unrealized gain on investments -- -- -- --
Reverse stock split................. -- -- -- --
------- ------ ---- ---------
Balances, December 31, 1999......... (167) -- -- (34,421)
Sale of common stock................ -- -- -- 78,200
Exercise of common stock options -- -- -- 659
Exercise of warrants................ -- -- -- 133
Amortization of deferred stock
compensation...................... 56 -- -- 56
Offering costs...................... -- -- -- (6,330)
Other............................... (48) -- -- 3,122
Conversion of preferred stock....... -- -- -- 47,793
Comprehensive income:
Net loss....................... -- -- -- (39,113)
Unrealized gain on investments -- -- -- --
------- ------ ---- ---------
Balances, December 31, 2000......... (159) -- -- 50,099
Sale of common stock................ -- --
Exercise of common stock options.... -- -- -- 8
Amortization of deferred stock
compensation...................... 23 -- -- 23
Purchase of treasury stock.......... 99 (37) -- 245
Other............................... 37 -- -- 57
Comprehensive income:
Net loss....................... -- -- -- (27,062)
Unrealized gain on investments -- -- 4 4
------- ------ ---- ---------
Balances, December 31, 2001......... $ -- $ (37) $ 4 $ 23,374
======= ====== ==== =========
The accompanying notes are an integral part of these financial statements.
26
TELAXIS COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31,
-------------------------------------
2001 2000 1999
-------------------------------------
Cash flows from operating activities
Net loss................................................ $ (27,062)$ (39,113) $ (9,935)
Adjustments to reconcile net loss to net cash utilized
by operating activities:
Depreciation and amortization.......................... 3,401 3,644 2,808
Non-cash restructuring costs .......................... 9,400 -- --
Loss (gain) on disposition of MMWP segment............. -- (1,369) 1,900
Non-cash compensation expense.......................... 34 3,161 290
Loss (gain) on the disposal of property and equipment.. 84 (5) 21
Provision for excess inventory on hand and on order.... -- 17,744 --
Changes in assets and liabilities
Accounts receivable................................... 1,816 64 (1,198)
Other accounts receivable............................. 143 (297) --
Note receivable....................................... (1,000) -- --
Contracts in progress................................. -- -- 40
Inventories........................................... 637 (13,486) (6,557)
Other current assets.................................. 384 (361) (28)
Accounts payable and accrued expenses................. (6,297) (360) 2,721
Customer prepayments.................................. (54) (67) 328
Income taxes payable.................................. -- -- (2)
Accrued restructuring costs........................... 1,298 -- --
------------ ----------- ------------
Net cash utilized by operating activities............. (17,216) (30,445) (9,612)
------------ ----------- ------------
Cash flows from investing activities
Purchase of marketable securities....................... (22,167) (24,529) --
Sale of marketable securities........................... 29,741 11,371 --
Proceeds from sale of discontinued operations........... -- 1,990 --
Additions to property and equipment..................... (459) (6,342) (2,409)
Proceeds from sale of assets held for sale.............. 102 -- --
Reduction (addition) to intangible and other assets..... 30 (246) (104)
------------ ----------- ------------
Net cash provided (utilized) by investing activities.. 7,247 (17,756) (2,513)
------------ ----------- ------------
Cash flows from financing activities
Proceeds from note payable.............................. -- -- 2,000
Net (repayment) borrowing under line of credit.......... -- (500) 500
Proceeds from capital lease obligations................. 569 -- --
Proceeds from long-term debt............................ -- -- 2,401
Proceeds from note receivable........................... 46 -- --
Repayments of long-term debt and capital lease
obligations............................................. (2,644) (2,716) (1,217)
Issuance of common stock upon exercise of options and
warrants................................................ 8 792 242
Issuance of redeemable preferred stock.................. -- -- 13,000
Issuance of common stock................................ -- 78,200 --
Stock issuance costs.................................... -- (6,330) (833)
Repayment of notes receivable........................... -- 17 --
------------ ----------- ------------
Net cash (utilized) provided by financing activities.. (2,021) 69,463 16,093
------------ ----------- ------------
Net (decrease) increase in cash and cash equivalents..... (11,990) 21,262 3,968
Cash and cash equivalents at beginning of period......... 27,865 6,603 2,635
------------ ----------- ------------
Cash and cash equivalents at end of period............... $ 15,875 $ 27,865 $ 6,603
=========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during period for interest.................... $ 573 $ 555 $ 361
Non-cash investing and financing activities:
Equipment acquired under capital leases................ 807 3,474 1,164
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 --
Unrealized gain on investments......................... 4 -- --
The accompanying notes are an integral part of these financial statements.
27
TELAXIS COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Description of Business and Summary of Significant Accounting Policies
We currently develop and market FiberLeapTM products, which transparently
transmit fiber optic signals over a wireless link between two access points.
Using our wireless products, fiber optic carriers and enterprises can obtain
connectivity at fiber optic data rates and quality of service, but where fiber
optic cable itself is not available or is not economically viable. Our current
FiberLeapTM 2006 product is a compact, easily deployed product that enables
fiberless transmission of data, voice and video communication at fiber rates
that are variable from an OC-3 rate of 155 Mbps to an OC-12 rate of 622 Mbps.
We commenced operations in 1982 and, prior to 1999, 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
connectivity business (then focused on point-to-multipoint outdoor units) and to
dispose of the millimeter-wave products 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.
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. All of our outstanding preferred stock
converted into common stock upon the closing of our initial public offering on
February 7, 2000.
Due to changing market conditions, in July 2001, we made the decision to exit
the point-to-multipoint outdoor unit business and to focus all of our resources
on closing the connectivity gap in fiber networks. Since that time, we have
restructured our company to address this new opportunity, FiberLeapTM trial and
Beta units have been developed and tested, a new marketing program has been
initiated, and limited production has begun.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. On an ongoing basis, the Company evaluates its
estimates, including its allowance for bad debts, allowances for excess or
obsolete inventories, the net realizable value of its assets held for sale, its
liability reserve for warranty obligations, its liability related to
restructuring activities, long-term contracts and its deferred taxes valuation
allowance. Actual results could differ from those estimates.
The Company's critical accounting policies and methods include revenue
recognition, inventory valuation, and recognition of income taxes, primarily due
to their estimation processes. Each of these policies is discussed further
below.
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.
28
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, 2001, all of the
Company's securities will mature within 12 months.
The carrying value of the Company's investments by major security type,
consisted of the following (in thousands):
Description 2001 2000
------------ -----------------------
Auction Rate Preferred................... $ -- $1,003
Municipal Bonds.......................... -- 2,000
U.S. Government Securities............... 5,588 10,155
-----------------------
$5,588 $13,158
=======================
Revenue Recognition
Sales under short-term contracts and for stock items are recognized when
deliveries are made and title passes to the customer. 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.
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.
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.
Under the Company's millimeter-wave business which was disposed of in February
2000, fees under certain contracts were increased or decreased under cost or
performance incentive provisions which measured actual performance against
established targets or specific criteria. Incentive fee awards or penalties were
included in sales or cost of sales at the time the amounts were reasonably
determined.
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, 2001 and 2000, 100% and 75%,
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.
Comprehensive Income
Comprehensive Income (loss) is defined as changes in equity other than from
transactions resulting from investments by owners and distributions to owners.
The company's comprehensive loss for the year ended December 31, 2001 consisted
of its reported net loss attributable to common shareholders, and unrealized
gains on marketable securities and totaled ($27,058). For the years ended
December 31, 2000 and 1999 comprehensive loss equaled net loss.
29
Research and Development
The Company incurs costs in the research and development 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 $626,000, $1,788,000, and $1,156,000 are
recorded net of the associated customer funding of approximately $266,000,
$612,000, and $1,068,000 for the years ended December 31, 2001, 2000, and 1999,
respectively. Significant terms of customer-funded research and development
arrangements from our point-to-multipoint outdoor unit business included
granting the customer a non-exclusive, royalty-free right and license to use and
distribute the product and its related sales and technical literature developed
by the Company under the agreement. The Company is not obligated to repay any of
the funds received under these contracts.
Inventory Valuation
Inventories are stated at the lower of cost (standard cost, which approximates
actual) or market. The Company recorded charges of approximately $7,072,000 in
2001 and $17,744,000 in 2000 to adjust inventory to its expected net realizable
value. As of December 31, 2001 and 2000, the Company had recorded inventory
reserves of $172,000 and $1,640,000, respectively, to reserve for obsolete
inventory.
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 consisted of the following (in thousands):
2001 2000
----------------------
Proprietary technology.................. $ 0 $ 216
Less: accumulated amortization......... 0 (18)
----------------------
$ 0 $ 198
======================
Due to the company's restructuring activities in July 2001, the unamortized
balance of intangible assets was determined to have no remaining estimated net
realizable value.
30
Impairment of Long-Lived Assets
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.
Recognition of 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. As of December
31, 2001 and 2000 a full valuation allowance has been recorded due to the
uncertainty of realization of the Company's deferred tax assets.
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 provided for a similar one for two
adjustment on their conversion and exercise amounts and prices, respectively.
The financial statements and footnote disclosures related to this split have
been adjusted accordingly.
Earnings Per Share
Earnings per share has been computed by dividing the loss from continuing
operations, 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,
---------------------------------
2001 2000 1999
---------------------------------
Historical:
Loss from continuing operations............... $ (27,062)$ (37,634)$ (8,293)
========== ========== ==========
Weighted average shares of common stock
outstanding................................... 16,708 14,816 606
========== ========== ==========
Basic and diluted loss per share from
continuing operations........................ $ (1.62)$ (2.54)$ (13.68)
========== ========== ==========
Loss from discontinued operations............. $ -- $ (1,479)$ (1,642)
========== ========== ==========
Weighted average shares of common stock
outstanding................................... 16,708 14,816 606
========== ========== ==========
Basic and diluted loss per share from
discontinued operations...................... $ -- $ (0.10)$ (2.71)
========== ========== ==========
Net loss...................................... $ (27,062)$ (39,113)$ (9,935)
========== ========== ==========
Weighted average shares of common stock
outstanding................................... 16,708 14,816 606
========== ========== ==========
Basic and diluted net loss per share.......... $ (1.62)$ (2.64)$ (16.39)
========== ========== ==========
31
Derivative Instruments
Effective January 1, 2001 the company adopted FASB Statement No. 133 "Accounting
for Derivative Instruments and Hedging Activities" as amended. The statement
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires recognition of all derivatives at fair value in
the financial statements. Implementation of the standard did not have a
significant effect on the Company's financial statements.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. SFAS 141 is effective for the
Company's year beginning January 1, 2002. The company does not believe the
impact of adopting SFAS 141 will have a significant effect on the Company's
financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS 142 changes the accounting for goodwill and other intangible assets. The
standard requires that goodwill and other intangible assets with indefinite
lives no longer be amortized; however, such assets must be evaluated at least
annually for impairment. SFAS 142 is effective for the Company's year beginning
January 1, 2002. The company does not believe the impact of adopting SFAS 142
will have a significant effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which will be effective for the Company's year
beginning January 1, 2002. SFAS 144 supercedes the guidance under SFAS 121 with
respect to accounting for impairment of long-lived assets as well as changing
the presentation and accounting for certain operations that may be discontinued
by an entity. The company does not believe the impact of adopting SFAS 144 will
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.
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 presented 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.
As a result of the sale, the Company received proceeds of $2.0 million and a
subordinated note on the principal at 12%. The principal was 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 was due. Interest was 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 had fully reserved this subordinated note, included in
other assets, at December 31, 2000. In February 2002, the Company negotiated the
early repayment of this note and, accordingly, as of December 31, 2001 reduced
its valuation allowance to reflect the amount of the note to be repaid.
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.
Sales for the MMWP segment were $0, $770,000, and $8,312,000 for the years ended
December 31, 2001, 2000, and 1999, respectively. The provision for income taxes
was $0, $0 and $0 for the years ended December 31, 2001, 2000, and 1999,
respectively.
3. Restructuring Charges
In July 2001 the Company's Board of Directors approved the Company's plan to
exit its point-to-multipoint product line. In connection with this decision the
Company recorded an $11.6 million restructuring charge for the year ended
December 31, 2001.
Restructuring charges consist of the following (in thousands):
Year ended
December 31,
2001
---------
Workforce reduction........................$ 1,248
Excess facility costs...................... 700
Contract settlement costs.................. 1,128
Write-down of leasehold improvements,
equipment and intangible assets............ 3,611
---------
Other restructuring costs 6,687
---------
Inventory writedown........................ 7,072
Reduction in inventory commitments....... (1,557)
Reduction in warranty reserve.............. (388)
Customer funded inventory.................. (164)
---------
Inventory restructuring cost 4,962
---------
$ 11,649
=========
Restructuring charges include the curtailment of certain research and
development activities through facility consolidations, production and
production support workforce reductions and contract settlement costs. Workforce
reduction charges included the cost of consultants and the cost of severance and
related benefits of approximately 58 employees affected by the restructuring
activities. Contract settlement costs include the Company's estimates to
withdraw from certain contracts. Certain leasehold improvements, equipment and
intangible assets determined to be impaired as a result of the restructuring
activities were written down to their estimated net realizable value and are
included on the balance sheet as assets held for sale.
In connection with the restructuring activities, the Company also determined
that certain components in inventory had been adversely impacted by the
restructuring activities. Accordingly the company recorded an inventory related
restructuring charge of approximately $5 million for certain excess and obsolete
raw material, work-in-process and finished goods. In accordance with Emerging
Issues Task Force 96-9, "Classification of Inventory Markdowns and Other Costs
Associated
32
with a Restructuring," all inventory adjustments are recorded in inventory
restructuring cost as a component of cost of sales for the year ended December
31, 2001.
Of the $11,649,000 in restructuring costs, $9,400,000 relates to non-cash
writedowns to net realizable value of the Company's inventories, fixed assets
and other assets and $2,249,000 relates to cash paid or to be paid for workforce
reductions, excess facility costs and contract costs. During 2001, $951,000 was
paid for such costs.
Remaining accrued restructuring costs at December 31, 2001 consists of
approximately $642,000 for facility consolidations, $202,000 for workforce
reduction charges and $454,000 for contract terminations.
4. Inventories
Inventories consist of the following (in thousands):
December 31,
----------------
2001 2000
------- -------
Finished goods......................$ -- $ 1,405
Parts and subassemblies............. 126 4,960
Work in process..................... 3 1,473
------ --------
$ 129 $ 7,838
====== ========
5. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
December 31,
-------------------------
2001 2000
----------- ------------
Machinery and equipment.............$ 10,070 $ 15,952
Furniture and fixtures.............. 813 820
Leasehold improvements.............. 1,958 2,117
Equipment under capital leases...... 4,586 6,624
----------- ------------
17,427 25,513
Less accumulated depreciation ...... (12,759) (12,762)
----------- ------------
$ 4,668 $ 12,751
=========== ============
The net book value of all equipment under capital leases was approximately
$1,395,000, $3,728,000 and $1,677,000 at December 31, 2001, 2000 and 1999,
respectively.
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
approximately $3,358,000, $3,515,000, and $2,482,000, respectively.
6. Accrued Expenses
Accrued expenses consist of the following (in thousands):
December 31,
---------------
2001 2000
------ -------
Accrued payroll, commissions and related expenses......$ 556 $ 1,071
Accrued warranty expense............................... 25 412
Accrued contract costs................................. -- --
Deferred revenue....................................... -- 94
Accrued liabilities on discontinued operations......... -- --
Other accrued expenses................................. 222 193
------ -------
$ 803 $ 1,770
====== =======
7. 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.
33
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.
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 14). The warrants were recorded at their fair 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.
8. 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 14). 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 14). 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).
9. Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31,
------------------
2001 2000
------------------
Uncollateralized subordinated note, due June 2003,
monthly principal payments of $8,333 with interest at
10% (see Note 14)...................................... $ 150 $ 250
Collateralized equipment notes, due April 2003 and
November 2003, monthly principal and interest payments
of $48,612, with interest at 12%....................... 1,059 1,487
-------- --------
1,209 1,737
Less unamortized debt discount........................... (29) (50)
Less current portion..................................... (562) (507)
-------- --------
$ 618 $ 1,180
======== ========
The maturities of long-term debt outstanding are as follows (in thousands):
December 31,
2001
---------
2002.................................................$ 583
2003................................................. 626
2004................................................. --
---------
$ 1,209
=========
34
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, 2001 and 2000, $1,059,000 and $1,487,000, 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 14). 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 $20,940 and $17,196 during 2001
and 2000, 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 14). 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
$2,028 during 2000 and 1999, respectively. The Company also extended the
duration of the lender's outstanding Class A preferred stock warrants to June
2003 (see Note 14).
The subordinated notes contain various covenants. In 1999, the lenders
permanently modified certain covenant requirements. The Company was in
compliance with all revised covenants as of and for the year ended December 31,
2001.
10. Leases
The Company leases its operating facility and certain equipment under operating
and capital leases which extend through 2006. Certain leases include renewal
options.
Future minimum annual lease payments under these lease agreements at December
31, 2001 are as follows (in thousands):
Operating Capital
Year ending Leases Leases
------------ -------------------
2002...........................................$ 630 $ 2,107
2003........................................... 624 880
2004........................................... 651 120
2005........................................... 531 2
2006........................................... 150 --
2007........................................... -- --
----- -------- --------
Future minimum lease payments..................$ 2,587 $ 3,109
==========
Less amount representing interest.............. (241)
----------
Present value of net minimum lease payments.... 2,868
Less current portion........................... (1,912)
----------
Long-term portion.............................. $ 956
==========
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 $614,000, $581,000, and $650,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
11. Incentive Compensation Plan
The Company maintains an incentive compensation plan, the details of which are
established on an annual basis at the Board of Directors' discretion. The
Company recorded compensation expense of approximately $518,000 for the year
35
ended December 31, 2000. No compensation expense was recognized under this plan
for the years ended December 31, 2001 and 1999.
36
12. Income Taxes
The provision for income taxes consists of the following (in thousands):
Year ended December 31,
-------------------------------------
2001 2000 1999
-------------------------------------
Continuing operations:
Current tax expense (benefit):
Federal................................. $ (6,826) $ (8,212) $ (3,071)
State................................... (1,742) (2,095) (551)
---------- ----------- -----------
(8,568) (10,307) (3,622)
---------- ----------- -----------
Deferred tax expense (benefit):
Federal................................. 6,826 8,212 3,071
State................................... 1,742 2,095 551
---------- ----------- -----------
8,568 10,307 3,622
---------- ----------- -----------
Income tax benefit related to continuing
operations................................... -- -- --
---------- ----------- -----------
Discontinued operations:
Current tax expense:
Federal................................. $ -- $ -- $ (508)
State................................... -- -- (148)
---------- ----------- -----------
-- -- (656)
---------- ----------- -----------
Deferred tax expense:
Federal................................. -- -- 508
State................................... -- -- 148
---------- ----------- -----------
-- -- 656
---------- ----------- -----------
Income tax expense related to discontinued
operations................................... -- -- --
---------- ----------- -----------
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,
----------------------------
2001 2000 1999
----------------------------
Federal Statutory rate.............. (34.0)% (34.0)% (34.0)%
State taxes, net of federal effect.. (6.3) (6.3) (6.0)
Other............................... 0.0 0.0 0.3
Change in valuation allowance....... 40.3 40.3 39.7
------- ------- --------
0.0% 0.0% 0.0%
======= ======= ========
37
The tax effects of temporary differences that give rise to deferred tax assets
(liabilities) at December 31, 2001 and 2000 are as follows (in thousands):
2001 2000
--------------------- ---------------------
Current Noncurrent Current Noncurrent
-------- ------------ ---------------------
Inventory reserves.................... $ 9,162 $ -- $ 8,963 $ --
Reserve on assets held for sale 1,126 -- -- --
Restructuring reserve................. 523 -- -- --
Vacation liability.................... 137 -- 248 --
Warranty.............................. 10 -- 166 --
Allowance for doubtful accounts....... 101 -- 101 --
Deferred stock compensation........... 32 -- 21 --
Deferred revenue...................... -- -- 38 --
Other................................. 123 164 148 (85)
Investment (173) -- (173)
Property, plant and equipment......... -- 1,605 -- 58
Tax credit carryovers................. -- 1,664 -- 1,272
Net operating loss carryforwards...... -- 25,618 -- 19,202
------- ------- ------ -------
Gross deferred tax benefit............ 11,214 28,878 9,685 20,274
Valuation allowance................... (11,214) (28,878) (9,685) (20,274)
------- ------- ------ -------
$ -- $ -- $ -- $ --
======= ======== ======= ========
At December 31, 2001, the Company has approximately $64,663,000 ($46,327,000 in
2000) of net operating loss carryforwards and $746,000 ($540,000 in 2000) of
investment and research and development tax credit carryforwards available for
federal income tax purposes. There are approximately $60,223,000 of net
operating losses ($41,888,000 in 2000) and approximately $880,000 in investment
and research and development tax credit carryforwards available in 2001
($732,000 in 2000) for state tax purposes.
Net operating loss carryforwards expired in 2001 and will continue to expire
through 2021. It is possible that the net operating loss carryforward amounts
that may be used in a single year may be limited.
13. 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. 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.
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.
38
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.
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.
14. 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
Price Price Price
Number of Per Number of Per Number of Per
Shares Share Shares Share Shares Share
------ ----- ------ ----- ------ -----
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
Converted......................... (14,000) 6.50 -- -- 14,000 6.50
------- ---- ------- ---- ------ ----
Exercisable at December 31, 2000.. -- -- -- -- 912,521 1.08
Granted........................... -- -- -- -- -- --
Exercised......................... -- -- -- -- -- --
------- ---- ------- ---- ------ ----
Exercisable at December 31, 2001.. -- $ -- -- $ -- 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 9). In addition, 200,000 common stock
warrants were issued during the year ended December 31, 1999 in conjunction with
the bridge financing (see Note 8).
The outstanding common stock warrants have exercise prices of $1.00 and $6.50
and expire as follows:
Expiration
Number of Warrants Date
--------------------- --------------
14,000............................. June 2003
630,464............................ September 2006
268,057............................ July 2007
39
15. 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 5,060,334 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, 2001, 1,183,143 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.
The aggregate stock option activity for these plans is as follows:
Weighted
Number of average
Shares exercise
price
---------------------------
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
Granted................................................. 2,018,500 .54
Exercised............................................... (8,525) 1.00
Canceled or expired..................................... (906,141) 4.46
------- ---------
Balance, December 31, 2001 (1,794,826 exercisable)...... 3,877,191 $ 3.20
========= ====
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------------------- -----------------------------------
Number Weighted Average
Outstanding Remaining Number Weighted
At Contractual Life Weighted Average Exercisable at Average
Exercise Price 12/31/01 (years) Exercise Price 12/31/01 Exercise Price
- --------------------- ------------ ------------------- ----------------- ---------------- ------------------
$ .33 - $ 0.81 1,884,685 9.4 $ .52 515,452 $ .52
$ 1.00 - $ 2.50 1,364,776 7.5 $ 1.40 890,546 $ 1.34
$ 4.47 - $ 6.83 309,127 8.2 $ 6.05 134,463 $ 5.73
$ 8.00 - $ 12.60 163,346 8.0 $ 11.05 107,900 $ 11.15
$ 28.50 - $ 31.28 58,531 7.9 $ 30.49 40,879 $ 30.74
$ 40.25 89,228 8.2 $ 40.25 39,306 $ 40.25
$ 61.50 7,500 8.1 $ 61.50 3,000 $ 61.50
The weighted average contractual life of options outstanding at December 31,
2001 is 8.3 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 deferred stock compensation for the
difference between the fair value of the stock and the
40
purchase price at the time of this transaction. For the years ended December 31,
2000 and 1999 respectively, the Company recognized approximately $45,000 and
$58,000 in compensation expense. In September 2001, the Company reacquired the
112,500 shares, forgave the remaining principal outstanding under the note, and
made a one-time payment of $47,000 to the former officer.
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:
Year ended December 31,
----------------------------------
2001 2000 1999
----------------------------------
(in thousands, except per share
data)
Net loss:
As reported............... $(27,062) $ (39,113) $ (9,935)
Pro forma................. (28,248) (40,939) (10,533)
Net loss per share
As reported............... (1.62) (2.64) (16.39)
Pro forma................. (1.69) (2.76) (17.38)
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:
2001 2000 1999
------- ------- -------
Risk-free interest rate.............. 4.97% 5.54% 6.12%
Expected life........................ 6 years 6 years 6 years
Volatility........................... 100% 100% 28%
Dividend yield....................... -- -- --
The weighted average fair value of those options granted in 2001, 2000 and 1999
was $0.26, $3.92 and $3.17, respectively.
16. Common and Preferred Stock Reserved
As a result of the outstanding stock warrants, outstanding stock options, and
options issuable under stock option plans, the Company has reserved 5,972,856
shares of common stock at December 31, 2001, 4,372,881 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 years ended December 31, 2000 and 2001.
17. Stockholder Rights Plan.
On May 16, 2001, the Board of Directors of Company (the "Board") approved a
stockholder rights plan (the "Plan"). As part of the Plan, on May 16,2001 the
Company declared a dividend of one preferred stock purchase right ("Right") for
each outstanding share of common stock to stockholders of record as of May 31,
2001. Each Right entitles the holder to buy one one-thousandth (1/1000) of a
share of a new series of preferred stock at an exercise price of $10, subject to
adjustment. If a person or group acquires 15 percent or more of the Company's
outstanding common stock, holders of the Rights (other than the acquiring person
or group) will be able to purchase, in exchange for the purchase price , the
preferred stock equivalent to shares of the Company's common stock having a
market value of twice the purchase price. In the event of a subsequent merger or
other acquisition of the Company, holders of Rights (other than the acquiring
person or group) may acquire, upon payment of the purchase price, shares of the
acquiring entry (or an affiliate) having a value of twice the purchase price.
The rights will expire on May 18,2011 unless earlier redeemed by the Company.
Holders who, as of May 18,2001, hold 15 percent or more of the Company's common
stock will not trigger the rights unless they exceed an ownership level equal to
the percentage of the Company's common stock beneficially owned by that person
on May 18, 2001 plus 1 percent of the Company's common stock outstanding on May
18, 2001.
18. 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 connectivity segments. As a
result of this decision, the Company now operates in only the broadband
connectivity segment. Products of the broadband connectivity segment used to
include point-to-multipoint outdoor units(hubs and customer premises equipment)
and now include our FiberLeapTM products(access units and interface panels).
41
The broadband connectivity segment's sales by country are (in thousands):
Year ended December 31,
-------------------------------------
2001 2000 1999
-------------------------------------
United States................................ $ 20 $ 1,020 $ 1,156
Canada....................................... 1,909 22,999 8,560
Other countries.............................. -- 734 4
-------------------------------------
$ 1,929 $ 24,753 $ 9,720
=====================================
The Company's research and production facilities and accompanying long-lived
assets are located in the United States.
Sales to one customer comprised 99%, 93%, and 88% of total broadband
connectivity segment revenues in 2001, 2000, and 1999, respectively. No other
single customer's sales exceeded 10% of total broadband connectivity segment
revenues.
19. 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 75% (60% in 2000 and 1999) matching of
employee contributions, up to a maximum of $2,500 ($2,000 in 2000 and 1999). 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 $244,000, $235,000 and $236,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
20. Related-Party Transactions
The Company had sales to a stockholder of approximately $0, $186,000, and
$1,355,000 during 2001, 2000, and 1999, respectively. 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 sold and licensed its contraband detection technology to a limited
liability company (``LLC'') established and partly owned by a former
stockholder/employee in 1996. In return, the Company received a promissory note
receivable of $250,000 and a 19.9% interest in the LLC. At all times, 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 subsequently 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
remaining outstanding amount of the $250,000 note receivable and 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. The
Company is currently negotiating another restructuring of that transaction.
42
21. 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 liability which would have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
22. Selected Quarterly Financial Data (unaudited)
The following tables present unaudited quarterly financial information for the
quarters ended December 31, 2001 and 2000 (in thousands, except per share data).
Quarter Ended
--------------------------------------------
March 31, June 30, Sept. 30 Dec. 31,
2001 2001 2001 2001
--------------------------------------------
Sales............................... $ 522 $ 968 $ 431 $ 8
Cost of sales....................... 2,086 2,137 1,472 745
Inventory restructuring cost........ -- -- 4,962 --
Charges relating to excess
inventory on hand and on order.... -- -- -- --
Gross margin (loss)................. (1,564) (1,169) (6,003) (737)
Loss from continuing operations..... (5,103) (4,442) (14,983) (2,534)
Income (loss) from discontinued
operations.......................... -- -- -- --
Net loss............................ (5,103) (4,442) (14,983) (2,534)
Basic and diluted loss per share
from continuing operations........ (0.30) (0.27) (0.90) (0.15)
Basic and diluted income (loss) per
share from discontinued operations -- -- -- --
Basic and diluted net loss per share (0.30) (0.27) (0.90) (0.15)
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)
23. Subsequent Event
43
In March 2002, the Company settled the pending litigation against Alcatel that
Telaxis had commenced in July 2001. The principal terms of the settlement are an
immediate, one-time payment of $1.7 million from Alcatel to Telaxis and mutual
general releases. The gain related to this settlement will be recorded in the
Company's first quarter ended March 31, 2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
44
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 2002 Annual Meeting of Stockholders
(the "2002 Proxy Statement") is hereby incorporated by reference.
Item 11. Executive Compensation.
Information appearing under the caption "Executive Compensation" in our 2002
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 2002 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 2002 Proxy Statement is hereby incorporated by
reference.
45
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 and Financial Statement Schedule
See Index to Financial Statements under Item 8--Financial Statements and
Supplementary Data.
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, 2001.
46
TELAXIS COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 2000 and 2001
(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
- -------------------------------------------- --------------------------------------------------------------
1999
Inventory reserve.......................... $ 2,233 $ 420 $ (625) $ (231) $ 1,797
Allowance for doubtful accounts............ 368 104 (415) -- 57
Note receivable allowance.................. -- -- -- -- --
Deferred tax valuation allowance........... 9,521 4,278 -- -- 13,799
------------- ---------- --------- -------- ----------
$ 12,122 $ 4,808 $ (1,040) $ (231) $ 15,653
============= ========== ========== ======== ==========
2000
Inventory reserve.......................... $ 1,797 $ 1,895 $ (2,052) $ -- $ 1,640
Allowance for doubtful accounts............ 57 193 -- -- 250
Note receivable allowance.................. -- 1,210 -- -- 1,210
Deferred tax valuation allowance........... 13,799 16,160 -- -- 29,959
------------- ---------- --------- -------- ----------
$ 15,653 $ 19,458 $ (2,052) $ -- $ 33,059
============= ========== ========== ======== ==========
2001
Inventory reserve.......................... $ 1,640 $ -- $ -- $ (1,468) $ 172
Allowance for doubtful accounts............ 250 -- -- -- 250
Note receivable allowance.................. 1,210 -- -- (1,000) 210
Deferred tax valuation allowance........... 29,959 10,133 -- -- 40,092
------------- ---------- --------- -------- ----------
$ 33,059 $ 10,133 $ -- $ (2,468) $ 40,724
============= ========== ========== ======== ==========
47
EXHIBIT INDEX
Exhibit
Number Description
- ------------ -------------------------------------------------------------------
3.1 Restated Articles of Organization of the Company, as amended.**
3.2 Certificate of Vote of Directors Establishing a Class or Series of Stock.+
3.3 Amended and Restated By-laws of the Company.+
4.1 Form of certificate evidencing ownership of Common Stock of the
Company.**
4.2 Rights Agreement by and between the Company and Registrar and Transfer
Company, as Rights Agent dated as of May 18, 2001.*****
4.3 Terms of Class One Participating Cumulative Preferred Stock of the
Company.*****
4.4 Form of Right Certificate.*****
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 2001 Nonqualified Stock Plan of the Company.+
10.8 Employment Agreement by and between the Company and John L. Youngblood
dated as of December 19, 2000.****
10.9 Employment Agreement by and between the Company and Ransom D. Reynolds
dated as of December 19, 2000.****
10.10 Employment Agreement by and between the Company and Dennis C. Stempel
dated as of December 19, 2000.****
10.11 Employment Agreement by and between the Company and David L. Renauld
dated as of December 19, 2000.****
10.12 Employment Agreement by and between the Company and Kenneth R. Wood
dated as of December 19, 2000.****
10.13 Employment Agreement by and between the Company and Stephen L. Ward
dated as of July 17, 2001.+
10.14 Lease by and between the Company and O'Leary-Vincunas LLC dated
November 1, 2000.****
10.15 Fourth Amended and Restated Registration Rights Agreement dated
September 17, 1999.*
10.16 Registration Rights Agreement by and between the Company and Boston
Federal Savings Bank dated August 20, 1999.
10.17 Purchase Agreement by and between the Company and Massachusetts
Technology Development Corporation dated June 1988.*
48
Exhibit
Number Description
- ------------ -------------------------------------------------------------------
10.18 First Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated December 28,
1988.**
10.19 Second Amendment to the Purchase Agreement by and between the Company
and Massachusetts Technology Development Corporation dated June 17,
1999.**
10.20 Form of Indemnification Agreement, a substantially similar version of
which was entered between the Company and each of Mssrs. Doyle,
Paladino, Norbury, Youngblood, Renauld, Reynolds, and Stempel on
September 18, 2000, between the Company and Ms. Armitage on October 31,
2000, between the Company and Mr. Ward on July 17, 2001, between the
Company and Mr. Amit on September 11, 2001, and between the Company and
Mr. Goldwasser on December 18, 2001.***
23.1 Consent of PricewaterhouseCoopers LLP.++
________
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 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.
**** Incorporated herein by reference to the exhibits to Form 10-K filed
with the Commission on March 28, 2001.
*****Incorporated herein by reference to the exhibits to Form 8-K filed
with the Commission on May 21, 2001.
+ Incorporated herein by reference to the exhibits to Form 10-Q filed
with the Commission on August 10, 2001.
++ Filed herewith.
49
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 29, 2002
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 March 29, 2002
-------------------------- Officer and Director
John L. Youngblood (principal executive officer)
By:/s/ Dennis C. Stempel Vice President, Chief March 29, 2002
-------------------------- Financial Officer
Dennis C. Stempel and Treasurer
(principal financial
and accounting officer)
By:/s/ Albert E. Paladino Director March 29, 2002
--------------------------
Albert E. Paladino
By:/s/ Raphael H. Amit Director March 29, 2002
--------------------------
Raphael H. Amit
By:/s/ Carol B. Armitage Director March 29, 2002
--------------------------
Carol B. Armitage
By:/s/ Allan M. Doyle, Jr. Director March 29, 2002
--------------------------
Allan M. Doyle, Jr.
By:/s/ Ralph A. Goldwasser Director March 29, 2002
--------------------------
Ralph A. Goldwasser
By:/s/ David A. Norbury Director March 29, 2002
--------------------------
David A. Norbury
50